Hope Bancorp Inc (HOPE) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2007 Center Financial Corporation Earnings Conference Call.

My name is Shameka and I will be the operator for today.

At this time, all participants are on a listen-only mode.

We will conduct a question and answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Ms Angie Yang, Investor Relations for Center Financial.

Please proceed.

Thank you, Shameka.

Good morning everyone.

Thank you for joining us today for Center Financial's 2007 third quarter investor conference call.

Before we begin, please recognize that certain statements that will be made during this call may not be historical fact.

They may be deemed therefore to be forward-looking statements under the Private Securities Litigation Reform Act of 1995.

Many important factors may cause the Company's actual results to differ materially from those discussed in, or implied by, any such forward-looking statements.

These risks and uncertainties are described in further detail in the Company's filings with the SEC, including the Form 10Q for the quarter ended September 30, 2007 which was filed this morning.

Center Financial undertakes no obligation to publicly update or revise its forward-looking statements.

This call will be one hour in duration.

Chief Financial Officer Lonny Robinson will begin with an overview of the financial results for the quarter.

Center Financial's Chief Executive Officer Jae Whan Yoo will then provide some comments on the operational progresses made to date.

And, then we will open up the call for a question and answer session.

Jason Kim, Center's Chief Credit Officer, is also here with us as usual and will participate in the Q&A session.

Now I would like to turn the call over to Lonny Robinson.

Lonny.

Thank you, Angie.

Good morning everyone, and thank you for participating on our call today.

As both our third quarter earnings' release and form 10Q were filed earlier this morning, I will only discuss selected items that highlight our overall operating performance of this quarter.

Let's start our discussion with loan growth.

We continue to see strong loan demand, as evidenced by the growth in our loan portfolio during the quarter.

Net loans at September 30, 2007, increased to $1.72 billion.

This is up by $104 million or 6% from the preceding quarter.

On a year over year basis, net loans increased 18%.

Obviously we had a very robust quarter of new loan production.

For the 2007 third quarter we originated $315 millions in loans, including new loans and renewals.

Of this total loan production in the quarter, approximately 35% represented purely fixed rate, roughly 17% was a hybrid form of fixed rate and 48% was variable rate.

This compares with 53% fixed, 12% hybrid, and 35% variable in Q2 of 2007.

So we are pleased to see the moderate increases in variable rate lending.

As we said last quarter, we have been pushing the hybrid loan versus the pure fixed rate loans and we are pleased to see that we have had some success there.

Overall, at the close of the third quarter, purely fixed loans made up 45% of our total loan portfolio, hybrid loans 14%, and 41% is variable rate.

In the preceding second quarter, fixed rate and hybrid loans together represented 55% and variable 45% of our loan portfolio.

At September 30, 2007, approximately 70% of our total loan portfolio was commercial real estate and roughly one-third of this is owner-occupied.

Of our commercial real estate loan portfolio, commercial real estate construction loans represent only 3% of our total loan portfolio.

And, to give you some additional color on this very small piece of the pie, we have less than a handful of commercial residential real estate construction loans that total approximately $22.6 million currently.

As you know, this not our main area of focus and, in fact, represents a couple of lending deals that were executed on the basis of existing long-term relationships.

Given the concerns in the current market, I think it is important to note that these loans are all in highly populated urban areas and we have no exposure to construction lending in the Inland Empire.

And considering the quality of these borrowers on these loans and our stringent underwriting standards, we are fully confident in the on-going performance of these loans.

And while I am sure you are all aware, I will just spell it out and make it absolutely clear that Center Financial is not a residential mortgage lender subprime or otherwise.

And to date, we have not seen any real impact on issues in subprime mortgage lending on our borrowers.

Moving on to our SBA department where in the 2007 third quarter we funded approximately $20 million in SBA loans during 2007 third quarter.

As we discussed earlier in the year, we have taken a more strategic stance on our policy of selling SBA loans to the wholesale market for an immediate gain.

Instead of enacting these types of transactions on a regular quarterly basis as we have in the past, we are being more opportunistic and selective in considering such transactions.

We will that it is somewhat gratifying to see that others in the market have followed suit based on the same rationale.

And, we believe rightfully so in the current environment in which the premiums have been squeezed by some 25% to 30%.

So, if you think about the long-term profitability of these loans, we think it is easy for you to appreciate our decision not to sell any SBA loans this quarter for immediate gain on sale, which of course would have added to our bottom line earnings in the current period.

Moving on to credit quality.

I am pleased to report that Center Financial's credit quality's held relatively stable from the preceding second quarter and remains sound in the midst of widely publicized credit downturn.

Non-performing loans was 0.38% of total gross loans as of September 30, 2007 compared with 0.37% as of June 30, 2007.

Total non-performing loans at the close of the 2007 third quarter equaled $6.6 million or $4.2 million net of the SBA guaranteed portion.

As noted in our news release this morning, one non-performing SBA loan totaling $791,000 in the Denver area that was discussed last quarter was brought current during 2007 third quarter.

However, in accordance with our accounting guidelines and policies, this loan will not be reclassified as a performing loan until after a six month cure period of continued performance.

Nevertheless, we are obviously pleased to see this result.

On the other hand, as we discussed last quarter, we have identified one small area of potential weakness in our loan portfolio.

This portfolio relates to our scoring-based express loan program, also know as Bank2Business, or B2B.

As of September 30, 2007, our B2B loan portfolio totaled $34 million, which obviously is a very small piece of our total gross loans of $1.7 billion.

Non-performing B2B loans at September 30, 2007, totaled $783,000.

We have quickly taken a number of corrective measures that are now effectively in place.

First, we tightened scoring criteria on the new B2B loan originations across the board.

Second, we discontinued underwriting lines of credit through this expedited program, which appears to be where most of the non-performing B2B loans have occurred.

Year-to-date net charge-offs equal $2.2 million.

Total charge-off from the B2B portfolio accounted for $1.2 million for the nine months ended September 30, 2007, or 53.6% of net charge-offs.

We continue to adequately provision for loan losses inherent to our business and our allowance for loan loss was upped to 1.13% of gross loans.

Given the current credit downturn expectation in the market, we deemed it appropriate to increase it slightly from the past year.

Now moving on to deposits, cost of funds and net interest margin.

We expect to see our cost of funds to increase in the coming fourth quarter as deposit costs and wholesale funding costs remain highly competitive.

The August credit disruptions ended the excess liquidity environment in place and as a result, the spreads on financial instruments have widened dramatically.

Banks were facing pressure on interest margins even before the Fed rate cut in September, as demand for low yielding fixed rate loans continued and competition for deposits intensified.

Deposit gathering has become an industry-wide challenge and banks have been forced to compete by aggressively pricing their deposits.

We have chosen to stay away from this highly competitive deposit market and rely on other borrowings for now at a relatively lower cost to fund the majority of our growth.

Although the September rate cut may relieve pressure on the money markets we anticipate a 10 to 12 basis point margin compression in the fourth quarter.

Forty percent of our loans, that is our variable rate loans, will reprice immediately.

However, because of the maturity, timing of deposit and the lagging rates on these deposits we will not expect to see a reduction in deposit cost until the fourth quarter and maybe the fuller effect in the first half of 2008.

Unfortunately the subprime market correction continues and competition for deposits has further intensified.

This pricing is being lead by the mainstream banks which are paying up for deposits with advertised rates of 5.5% still available.

As such, we expect our cost of funds to rise moderately in the fourth quarter before coming down in the beginning of 2008.

Now I would like to discuss briefly our core fee income.

Since early in 2006, we experienced a continued decline in core fee income, and we attribute this to the closure of accounts that jeopardize our full compliance with BSA regulations.

With the MOU now lifted, we would have expected to have reached the floor on this already.

We are currently analyzing these trends carefully and hope to share with you our findings next quarter.

Until such time we have taken remedial actions to reverse this trend, we do not anticipate core fee income will be increasing in the near term.

With that I would like -- now I would like to turn the call over to J.W.

for his remarks.

Thank you Lonny, and thank you all for joining us today.

Perhaps the biggest news during the quarter was that we announced the signing of tentative agreement to acquire First Intercontinental Bank.

We believe that First Intercontinental provides an ideal [on track] from which we can leverage Center as a great network into the Southeast and East Coast.

We have a proven track record of lending prowess in a conservative credit culture over our 21 year history in Southern California.

Entering new geographic regions, particularly high growth niche markets, like (inaudible - highly accented language) will help ensure that Center Financial is able to build an even stronger franchise and will be better able to serve the banking needs of customers across the country.

I'm pleased to report that we are making good progress with the pending acquisition and we expect to file our registration statement related to this transaction in the first half of November.

Now, you may recall that Center Financial and First Intercontinental jointly announced the appointment of Sang Pil An as Executive Vice President and Chief Operating Officer of First Intercontinental Bank effective this week.

Due to certain unforeseen personal circumstances Sang Pil regretfully advised me that he will not be able to make the transition after all.

In addition to entering Southeast for growth we also announced the signing of a lease for a new service branch right in our own backyard.

Center Bank's Diamond Bar branch is expected to open during the first quarter of 2008.

Its location next to an upscale Korean/American grocery store makes it ideal for capturing a growing population of affluent Asian Americans in the San Gabriel area.

Additionally, our second full branch in Seattle is scheduled to open next month.

As previously announced we also will be relocating our Oxford branch to a new, more desirable and convenient location in the heart of Koreatown and that is expected to open during the first quarter of 2008.

We are thrilled to be returning to an expansion mode to supplement our organic growth.

None of this would have been possible without the dedication and the tireless efforts of our entire team.

As you may have seen in our news release, I am pleased with the successful remediation of the mature (inaudible - highly accented language) under own control.

Our CFO, Lonny, has been a valuable, and also to me personally, and to Center Financial as well, (inaudible - highly accented language) as our entering CFO.

I can confidently say without doubt, that we have the strongest CFO in our niche market.

Drivers growth are interwoven into the success of any business and during this time of renewed energy at Center Bank I am delighted to see our newly structured management team work so well together with the common vision of a building organization for accelerated growth in years to come.

Looking ahead, we along with all of our peers certainly have challenges that we need to cautiously navigate through, namely the irrational [divergent] market and anticipated margin compression if the Fed continue to lower rates, will pressure our earnings growth.

Despite this headwinds, we are quite optimistic about the prospect in 2008 and beyond.

Time and time again, the Center Bank team has proven their ability to go out and generate new loan production.

Our pipeline remains strong and is at similar levels as last quarter, though we expect to see another strong showing in the fourth quarter.

While our lending team has been the engine of our growth, it is our conservative credit culture that enables the Center Bank engine to continue running smoothly.

With that, let's open up the call to take your questions.

Operator, would you please explain the technical elements for the Q&A session?

(OPERATOR INSTRUCTIONS).

You have a question from the line of Brett Rabatin of FTN Midwest.

Please proceed.

Good morning everyone.

I wanted to start off with, while everyone is focused on asset quality, could you guys walk us through past due trends.

I know the past two quarters the past dues have only been about $2 million i.e.

loans, 38 on past due.

Was there any increase in that during 3Q and could you discuss -- you obviously mentioned the Bank2Business product.

Was there any other risk migration trends that you saw during the third quarter?

Yes, Brett.

In terms of our active quality loan properties, we don't have issues regarding the quality.

However, we did notice a weakness in our B2B lending unit.

As Lonny had mentioned, B2B lending unit is a scoring based model that we started four and a half years ago.

B2B lending unit represents loans under $200,000.

And, the second quarter of this year we had timed the scoring system model and in the third quarter we discontinued completely on the business lines of credit.

After careful evaluation of the portfolio which represents $34 million or 2% of our quarter loan portfolio, we found that the 53% of total charge-off in B2B lending unit represents $1.16 million, which represents 53% of our total charge-off this year.

So, going forward those lines of credit under $200,000 will be manually underwritten by our loan officers, obtaining financial and pursuing a traditional mode of lending, though we expect that loans under $200,000 will have minimum delinquency going forward.

So you are saying that you don't expect the $34 million that you already have on the balance sheet to have any further impact on charge-offs going forward?

Is that a fair assessment, or are you saying that going forward your new underwriting will keep the new loans from having issues the old portfolio did?

Yes.

We have carefully reviewed the $34 million loan portfolio and we-- the lines of credit that are in line right now outstanding any -- everywhere instead are turned out and we are carefully monitoring the portfolio.

But, probably the fourth quarter we have noticed the non-performing loans in the B2B unit represent $780,000, which consists of 50% SBA guaranteed.

So, we are anticipating about $400,000 charge-offs on the identified non-performing loan on B2B unit.

So, in about first or second quarter after I think we - the quality will be maintained.

Okay.

If I heard you correctly, $400,000 is what you expect from what you have assessed in the portfolio.

Yes.

Okay.

And then secondly, I was curious, J.W., to get some impression on your appetite for additional acquisitions.

There is a lot of chatter, I guess, in the market and I know you are looking to grow the franchise and so I am curious if you anticipate additional deals in the next six months and sort of pricing and general appetite, I guess is what I am looking for.

Brett, I think it is tough for me to answer directly.

We are also looking for some opportunity if that is good to the shareholder value, making conservation of excessive competition in this Korean space and also future potential growth of the bank.

Regarding the question of additional acquisition potential over the next six months, I don't have any concrete idea at this point of time, but as I mentioned we are always thinking of any chance if there is a good plus for the future shareholder value.

Okay.

And then just lastly, I am curious-- the loan growth is obviously very strong and liquidity on the balance sheet is getting relatively low, you mentioned $20 million in SBA originations.

What was the total originations for the quarter?

And, I'm assuming loan growth slows, I am curious if you have any thoughts of magnitude of slowing, and just fundings going forward if you are going to be more apt to use FHLB advances, et cetera., as opposed to the higher priced CD market?

Brett, this is Lonny.

Basically, as far as the funding source is, what we are looking at is with the irrational deposit pricing going on by the mainstream banks, we feel that the wholesale opportunities are probably better for us at this point so the Federal Home Loan Bank, it would be a source of that.

We could also -- we have a number of Fed funds lines.

We discuss this in quite a bit of detail in our liquidity section of 10Q.

We also have the broker deposit market that we could also tap as well.

With that being said, we will look for opportunities to grow deposits, retail deposits, where it makes sense from that standpoint.

We feel comfortable at this point in time and again, I point back to our liquidity section in our 10Q which discusses it in more detail with our funding sources from that standpoint.

As far as the loan growth, Jason if you want to address it.

Yes.

In terms of loan growth for the upcoming quarter, we have a strong loan in our pipeline.

However, given the fourth quarter being holiday season, we don't clearly know how much we will be able to book, but the loan growth is singularly strong as compared to the third quarter.

I'm sorry.

Repeat that last part.

The loan growth is similar to the, you expect it to be similar to the third quarter?

I didn't quite catch what you said there.

Our loan pipeline is as strong as third quarter.

Oh, okay, I'm sorry.

Loan pipeline.

Okay, great.

Thanks for all the color.

Your next question comes from the line of Don Worthington of Howe Barnes Hoefer & Arnett.

Please proceed.

Good morning.

A couple of things.

I noticed in terms of the composition of the non-performers, it looks like about $3.2 million increase in SBA.

Anything in particular in there?

I mean, in terms of number of loans or is it just a couple of loans or is it a number of loans?

Yes, the non-performing loans which represents a total of $6.6 million.

Of that, SBA loans represent $4.5 million.

There were two loans, there were originated in Denver, Colorado, which represents $1.8 million.

Of $1.8 million, $791,000 loan account became current in the third quarter and we are monitoring the account based on our guidelines, but they are paying as agreed.

And the other account was for $1 million, for the purchase of a property and the business assets, that we expect significant recovery on that account and we are trying to resolve in this quarter.

If you want a breakdown, the SBA loan origination was mainly from Denver and a little bit of Chicago, but other than that we don't see any delinquencies in other regions of the country.

Okay.

Don, you can see in our 10Q that we actually stratify that geographically for you, from that standpoint.

So we supply a lot of color in the Q, explaining the non-performing assets.

Okay, terrific.

And then, in terms of the professional fees and marketing expenses were down considerably sequential quarter, just kind of curious as to what a run rate might be for those expenses.

More like the third quarter were, do you see it going back up in terms of things like marketing?

I think the marketing expenses, I think they will probably be up slightly for the fourth quarter.

We do have an anticipated branch opening in our Seattle, our second location, which is going to open probably the latter part of November.

So, we will be investing some marketing dollars in that, in that respect, from that standpoint.

So, I do expect an increase there.

The accounting and legal expenses, when we looked at the -- we did not incur the legal cost that we anticipated for the third quarter.

But, I caution you there because we are moving forward with some activity for the KEIC litigation and it will probably have increased costs in the fourth quarter.

The other component in the professional expenses that went down is we-- when we were talking about with the accounting costs it appears that we are going to have a reduction from the commensurate period from last year and it is just due to some efficiencies that we are generating here in that process.

And, it doesn't look like, from an accounting standpoint, that we are going to incur the costs that were incurred previously.

It may be additional accounting work, and what have you, from that standpoint.

I think that accounting costs will continue to be favorable.

Legal costs will be up a little bit.

Marketing costs up a little bit as well.

Okay.

Thank you.

And then, in terms of, you mentioned the litigation.

Any more you can say about where that is?

I think, not particulars, but the judge was appointed finally and he likes to move forward with this litigation procedure.

Last Friday they had a status conference.

So, I think there seems to be sort of a moving forward, but as I mentioned in the past, if there is any way we can resolve this in an economically effective way, I'm trying to do that.

But, at this point in time, no particular progress.

Okay, J.W.

Thank you very much.

Your next question comes from the line of Manuel Ramirez of KBW.

Please proceed.

Good morning.

On the deposits, could you talk about the decline in non-interest bearing deposits?

Specifically, whether or not going back and looking through those number if you identified anything specifically.

And, maybe more generally, talk about how effective some of the promotions in new products you were running earlier this year were in generating new deposits.

We have had some success in generating core deposits.

Our demand deposits, as you are aware of, have declined here in the last couple of quarters, from that standpoint.

We are looking at some situations there that we are trying to look at it from an account reduction.

I don't think we have seen reduced accounts but some of the balances are lower, from that standpoint.

And, we are evaluating them.

Can I tell you for sure, Manny, that the demand deposit accounts are going to re-establish themselves where they were maybe in the first quarter of '07?

I don't think I can say that.

I will say that it seems like it is a very tough market out there right now and DDA's are very difficult to obtain.

I believe we can hold the level that we are at, but actually to re-establish back in March, I don't think that's going to happen.

And then, the decline in money markets on the period ending basis, was that the result of reducing rates on some of those commercial accounts?

Well, we did finish the promotion called the Hanmi Plus here in July and some of that is a result of that, from that standpoint.

I would say overall, we are not focusing on that product right now so it is not really a product that is growing and there has been some decline in it.

And then, could you -- I apologize, I didn't catch all of your commentary on the margin, but did you specifically discuss what you are saying on CD rates today, kind of after the Fed cut 50 basis points and before perhaps another 25?

What I actually -- what we are seeing out there is there is still some very aggressive timed deposit pricing out there.

We talked about the mainstream banks offering 5.5% and it is impacting not only, I think it is a nationwide phenomenon, but also affecting our peers as well and we are seeing some pretty aggressive pricing out there from that standpoint.

We have lowered, probably on average, our timed deposit rates anywhere from 35 to 50 basis points, depending on where it is.

We are presently not competitive in the retail timed deposit market, at this point.

And, I am not looking to grow retail deposits in the fourth quarter.

Okay.

I guess I am a little surprised that you would expect a more material decline in funding costs in the fourth quarter, if that is the case, if you are lowering your rates on retail fees 35 to 50 basis points.

And then, on the wholesale side, that is really just driven by market rates, presumably rather than what Countrywide is advertising in the LA Times.

Can you go into that in a little bit more detail?

Yes.

Our timed deposits, we are talking for the next quarter, which is the next three month period.

A lot of our timed deposits are repricing, probably a three to six month window.

And, as I mentioned previously, I don't think we are going to see any significant improvement in our cost of timed deposits until probably first quarter 2008, where we start seeing the impact of resetting of the timed deposits that are rolling over and renewing, from that standpoint.

The fact that we are not successfully growing retail deposits is not actually having an influence on that as well.

So, this lagging impact that where you see an immediate impact on our variable rate loan portfolio from a prime rate going down 50 basis points with the Fed cut, you do not see a corresponding reduction in timed deposits.

There is generally a lag there.

We have actually modeled our numbers.

When we say that we are anticipating a 10 to 12 basis point reduction that is what our model is telling us.

And, it is really-- we are not really seeing a significant improvement in our timed deposit cost until the first quarter '08.

Okay, great.

And then, the last thing is on the SBA loan sales.

It sounds like we should assume zero going forward as a base case.

Has the declining premiums in the market influenced your decision as to what the appropriate level of production is after all -- for most of the banks in your peer group it has been an originate to sell model, and I assume that is kind of how the profitability of the businesses have been geared over time, so perhaps level of originations makes sense, or the spread is so good relative to other assets that you will originate as much as you can, if you have to keep it on the balance sheet.

Manny, as far as the pricing out there, we have talked about it in our call here, but we also talk about it in our 10Q, is that there has been what we feel is a pretty significant hair cut as far as this whole credit situation that you are seeing.

The premium's being paid 25% to 30% down from those levels.

And, from that standpoint, I think although we made the decision in the first quarter to evaluate how many opportunistic situations that may be special premiums or special pricing or those types of circumstances, we did not see anything like that in the third quarter.

And, as I understand right now, it is still the same landscape as far as premium on SBA loans.

I think you are going to see that type of pressure until we see this whole credit situation resolve itself, from that standpoint.

As far as SBA loan production, Jason, you want to give any color on that?

J.W., you can give better color on that.

I think actually during the third quarter our SBA loan production was $20 million which far below than we expected.

Those actually are kind of change of responsibility in managing SBA area.

So that might contribute some reason for that.

But, I think after realignment of our SBA loan production in August and the managers are more dedicated to that area, I think it can be picked up.

Jason has been a long-time outstanding SBA manager, and he got a promotion to Chief Credit Officer.

I think that is part of the reason.

I think he will continue to help regenerate SBA loans for this bank.

So, I think it will pick up.

Manny, we still like the spreads on the SBA loan product, but we have this little transition issue in regards to added impact on our origination.

So, from a pricing standpoint we still like the product.

Okay, but for our purposes we should assume no gain on loan sales.

I would say that is safe.

Okay, thanks.

(OPERATOR INSTRUCTIONS).

Your next question comes from the line of Christopher Nolan of Oppenheimer and Company.

Please proceed.

Good morning.

The tax rate was a little bit higher than recent quarters.

Should we still assume about 38% tax rate for coming quarters?

In the third quarter, there was a, we obviously get our federal return and our state returns are filed and we do a true up based on items from the return to the provision.

There was a slight impact from that.

Also, we are seeing a -- in regards to the option expense permanent difference, a little bit of an increase there.

That is actually driving up the effective tax rate.

So, I would increase that slightly from what we have seen in previous quarters.

Okay, great.

And, given the weakening outlook for the economy in general, I know that the reserving methodology has to a certain degree some subjective portions to it related to economic growth.

Should we anticipate that the ratio of reserves to loans will actually start creeping upward in coming quarters?

Well, as you have seen in our evaluation, and obviously there is -- we talked a lot about how we do our migration and qualitative analysis in the FAS5 and the FAS114 evaluations, and from that standpoint.

And, this quarter through our analysis we saw a bias to some credit quality weakening and so we did trend upward to the 1.13.

We will consistently model it and monitor it going forward.

I'm saying, if you continue to see a continued weakness in the economy, if the economy does weaken as it is possibly anticipated, I would think there would be some adjustment, maybe a bias to the upside rather than downside.

Okay, great.

And finally - I'm sorry.

I just said bias to the upside versus -

Okay, great.

And finally, can you -- what sort of cap rates are you seeing in interest rates commercial real estate deals in your markets?

We are seeing about 6% to 6.5% right now.

Okay, so no major change last couple of quarters.

No.

Okay.

Thank you very much.

There are no further questions at this time.

Thank you, Shameka.

Thank you all for participating in Center Financial's third quarter conference call this morning.

On behalf of the entire Center Financial team, we appreciate your continued interest and look forward to your ongoing support.