Hope Bancorp Inc (HOPE) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2007 Center financial Earnings Conference Call.

My name is Melanie and I'll be your coordinator for today.

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

We will conduct a question and answer session at 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 ma'am.

Thank you, Melanie, and good morning, everyone.

Thank you for joining us today for Center Financial's 2007 fourth 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.

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

As usual, this call will be one hour in duration.

Chief Financial Officer Lonny Robinson will begin with some highlights with the financial results for the quarter.

Center Financial CEO Jae Whan Yoo will then provide some comments on the operational progress that's 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 and will participate in the Q&A session.

Now I'd 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.

Since you should all have our fourth quarter earnings release by now, I will only discuss selected items that highlight our overall operating performance this quarter.

Let's start our discussion with loan growth.

Net loans at December 31st, 2007, grew to $1.79 billion.

This is up 4% on a linked-quarter basis and up 16% year over year.

We originated $174 million in loans, including new loans and renewals during the final quarter of 2007.

Of the total loan production in the quarter, approximately 37% represented purely fixed and 10% was a hybrid form of fixed-rate and variable rate loans equal to about 53%.

This compares with 35% fixed, 17% hybrid, and 48% variable in Q3 2007.

So we are pleased to see the trend continue from the preceding quarter where the demand is rising for variable-rate loans.

Overall, at year end, our loan portfolio includes 60% of fixed and hybrid loans and 40% variable-rate loans.

As of December 31st, 2007, approximately 70% of our loan portfolio represented commercial real estate loans, of which a third is owner occupied.

Commercial real estate construction lending -- construction lending accounted for less than 4%.

While the CRE concentration is higher than we'd like it to be, I will note for the record here that Center Financial has a pristine track record of not a single loss from the CRE loan in our history.

Moving on to our SBA department, we originated approximately $21 million in new SBA loans during the 2007 fourth quarter, totaling nearly $100 million for the full year.

During the whole of 2007, we did not sell any of the guaranteed portion of our SBA loans to the wholesale market.

We did, however, sell some un-guaranteed portion for a gain on sale of $618,000, posted in the 2007 second quarter.

For 2006, we posted a gain on sale of $719,000 in the fourth quarter or $3.3 million for the full year.

While it is challenging to walk away from these gains, we are strategically keeping them on our books for greater long-term profits, particularly in light of the current environment, where the premiums have narrowed significantly.

We believe it is the prudent thing to do.

We will, however, be opportunistic and consider a sale when the right circumstances are in place, for example, if we saw a growing concentration of hotel-motel loans that exceeded our internally set diversification limits in the portfolio, we may elect to sell a portion of that portfolio.

Now, moving on to what most of us have been focused on these days, asset quality.

I am pleased to say that Center Financial's asset quality metrics have held steady, unlike many of our peers in the banking sector.

Total non-performing assets at year end amounted to $6.6 million or $3.9 million, net of SBA guaranteed portion.

This compares with the same level at the close of the 2007 third quarter or $4.2 million net of SBA guaranteed proportion.

Non-performing assets as a percent of total loans and OREO was 0.37, as of December 31, 2007, compared with 0.38 as of September 30, 2007, and 0.21 as of December 31, 2006.

During the 2007 fourth quarter, we charged off $1.3 million, or $3.6 million for the full year.

Charge-offs related to our B2B or scoring-based express loan program, product amounted to $235,000 for the fourth quarter and represented 40% of the total charge-offs for the year.

As we mentioned last quarter, we tightened the scoring criteria on new B2B originations across the board and we discontinued underwriting certain lines of credit through this expedited program, which is where about 80% of non-performing B2B loans occurred.

While we continue to have some delinquencies in this portfolio, it is a very small piece of our overall portfolio, approximately $31 million in total.

And we are quite comfortable that we now have a good handle on the situation.

As most of you know, we typically file our 10-Qs with the SEC in conjunction with our earnings release.

As this is the year end, it will be mid-February before our Form 10-K is audited and filed.

As such, I wanted to update you on the level of impaired loans, which we have reviewed each quarter since Q2 2007.

As of December 31, 2007, impaired loans totaled $3.3 million, down $500,000 from $3.8 million at September 30, 2007.

We recently completed our semi-annual external loan review here at Center, and I am pleased to report that we had no downgrades, but actually had two upgrades of loan classifications.

Over the course of 2007, our outside consultants reviewed 40% of the total loan portfolio.

With that said, we are gratified that we have not experienced the significant credit downturns that many of our banking peers have reported.

We continued to adequately provision for loan losses inherent to our business.

Given the current environment and uncertainty surrounding a potential recession, we deemed it appropriate to increase our allowance for loan losses to 1.13% of gross loans from the 1.12% level over the past year.

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

While total deposits grew sequentially and year over year, we have seen a steady decline in our non-interest-bearing deposits to total deposits, which equal 23% at December 31, 2007, down from 27% at December 31, 2006.

This trend underscores the extremely challenging deposit gathering market that we are operating in.

The less-than-favorable mix of DDAs further pressured our net interest margin, which declined 27 basis points from the immediate preceding quarter.

The primary driver of this decline was the 100-basis-point reduction in the Fed funds rate between September and December of 2007.

With each reduction, the variable-rate portion of our loan portfolio, currently 40%, repriced downward immediately.

As you all know, the FOMC reduced the rate by 75 basis points on January 22nd and by another 50 basis points yesterday.

We estimate that these reductions will have further immediate impact on our net interest margin, a little more than 30 basis points compression in the first quarter of 2008.

But with the lagging effect of lower cost of deposits on the horizon, we expect our NIM will recover gradually in the following quarters of 2008 as our time deposits mature and reprice downward.

Now, before I turn it over to J.W., I wanted to comment on the OTTI impairment posted in the fourth quarter.

I'm sure that most of you have already run into other banks that have recently written off an OTTI impairment, so I will not take the time to go over it in details.

I do want you to know, however, that following the impairment, those securities have been sold, so we obviously do not expect any further impairment related to the Fannie Mae perpetual preferred stock.

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

for his remarks.

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

2007 has been a year filled with many successes.

These include the coming together of a seasoned, extremely cohesive senior management team tolead Center Financial into its next phase of growth.

We also improved our overall internal controls and the reporting lines through a restructuring of our organization, duties, and responsibilities.

These changes gave way to the termination of our BSA-related MOU just four months in my first term as President and CEO.

As a result, we are excited about returning to our steady pace of expansion that would support our continued growth.

We opened our second full-service branch in Seattle this past November, the first branch opening in nearly two years.

And we are pleased with the initial success we have had bringing in new deposits without the use of a steep introductory rate.

In addition, we look forward to relocating our Oxford branch to a new, larger and more convenient location in the heart of Koreatown.

Center Bank's new Diamond Bar branch will open next to a high-end Korean-American grocery store, which positions it well for attracting the growing population of affluent Asian Americans in the San Gabriel Valley

Also, both of these openings are slated for the first half of 2008.

Operationally, as Lonny reviewed with you, the Center Bank team, supported by a group of regional directors, continued to work diligently and generated solid levels of loan production to add more than $250 million in net to our loan portfolio during 2007.

At the same time, we stayed on the front lines of the credit environment and maintained strong asset quality levels.

On the flipside, the banking environment has been in a state of tremendous turmoil since the subprime mortgage crisis and the credit and liquidity crunch first hit the market.

As a result, many financial institutions have been adversely impacted on many fronts, whether it's market valuation declines, deteriorating asset quality, impairment write-offs and others.

These factors, combined with our efforts to rebuild and to strengthen the Center Financial organization, have strained somewhat our earnings in 2007.

However I am confident that the investment we have made will lead to even greater profitability for our organization and will ultimately provide greater value for our shareholders.

As we look forward to 2008, we are planning to implement a number of initiatives and marketing campaigns to enhance our ability to gather core deposits and increase our liquidity.

We are also planning for controlled levels of quality loan growth, as well as a stronger focus on managing our portfolio concentrations.

Due to the growing proportion of fixed-rate loans in our loan portfolio, as well as because of the growing concentration of CRE loans, you can expect that we may go back to the wholesale markets on a selective basis, but not on a regular quarterly schedule, as we have done in the past.

With Center Bank's historically prudent, conservative credit culture and the strongest leadership team in our market, we believe the challenges of the current market actually present numerous opportunities for our organization.

In summary, 2007 was a year of building and strengthening the Center Financial organization in preparation for our next phase of growth.

To say the least, I'm excited about Center Financial's prospect and look forward to sharing with you all of our achievements.

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

(OPERATOR INSTRUCTIONS).

And our first question comes from the line of Brett Rabatin with FTN Midwest.

Go ahead.

Good morning, J.W.

Good morning, Lonny.

Hi, good morning, Brett.

Hi, Brett, how are you doing?

Lonny, did I hear you correctly that you -- what was that margin guidance you gave for the first quarter?

We're looking at approximately 30 basis point decline with the cuts that occurred, the 75 and the 50 that occurred yesterday.

That's what I thought you said.

It looks to me like you're going to have about $1 billion of loans repricing in 1Q and only about $350 million or so of CDs.

Is that a fair assessment?

Yes, and a lot of that's going to be repricing.

A lot of those CDs that are repricing are coming in off of rates at like 5% plus, and they're going to come in at very low, probably low fours or high threes reprices.

So there's going to be a pretty good reprice.

So we actually remodeled.

We've been modeling the rate cuts constantly in anticipation.

So based on our modeling results, that's where we believe the NIM's going to compress to.

Throughout the year, as the timed deposits start repricing downward, we will see some recovery in the margin.

Now, that's assuming that there's no additional rate cuts and obviously there is discussion of a couple more.

Okay, and then I wanted to discuss the loan growth, obviously stronger than expected and a lot of commercial real estate loans on the balance sheet.

Does the pipeline -- I'm assuming you're going to tell me that you continue to have a strong pipeline, but maybe you -- double-digit loan growth in '08 is not as smart a thing, just given balance sheet management.

Can you give us some thoughts on just where you see the loans growing in the current environment and the margin tradeoff there?

Well, the level of loan growth will not be at the same level compared to last year, given the environment.

But because of such significant rate cuts in the last several months, we are pricing a variable rate with the floor features that we initiated at the beginning of the year, trying to maintain our net interest margins.

But given the environment, we are more focusing on our credit culture and maintaining our highest asset quality.

Okay, and then you mentioned the Fannie, Freddie, whatever you want to call it, writedown.

Was curious if you had any IOs, IO strips related to past SBA production.

Is there anything else in the securities portfolio that you're looking at that may have some softness in the current market?

Brett, as part of our quarterly analysis, we look at impairment throughout our portfolio.

We looked at, obviously, the servicing assets and the investment portfolio, even some of the CRE investments for impairment and any other type of OTTI.

We believe we do not have any other securities of anything of that nature that would require any type of a write-down.

Okay, and then just lastly, the first Intercontinental transaction, that's still on track for 2Q and any thoughts on that update on what's going on with that acquisition?

Brett, we are still working on the deal and there are some issues right now, so we are going through that.

For instance, the departure of some of the senior management of the bank kind of thing.

But I'm not at liberty to disclose in detail at this moment.

Okay.

Well, at least we don't have to talk too much about credit quality, so that's a nice positive.

Thank you.

Okay, thank you, Brett.

Thanks, Brett.

Our next question comes from the line of Christopher Nolan with Oppenheimer & Company.

Go ahead.

Good morning.

Hey, good morning, Chris.

Congratulations on holding it together, the credit quality, in the quarter.

Thank you so much.

Thank you.

A quick question.

You had buybacks in the quarter.

Given the change in the economic environment, should we expect those to continue, given that the press release indicated that you guys will have a remaining authorization.

Chris, we do have the remaining availability to buy back approximately $5 plus-million.

I really think there's going to be probably a reluctance in light of the need for the stressing of capital and obviously the credit culture, the credit crunch and the liquidity that's out there.

So I would say we're probably not looking at any material buybacks at this point.

Great.

And are you guys at liberty to provide an update as to what's going on with KIC?

Oh, KIC?

Yes.

Yes, actually, we also continue to work to resolve the pending litigation issues, but, as I mentioned in the past, we are pursuing in an economically effective way, and we are pretty open for any resolution as soon as possible.

So nothing really to -- any sort of indication of a resolution.

That's correct.

In the first half of 2008 or so?

Yes, hopefully, I'm trying to resolve by the end of December 31 this year.

Okay.

Okay, great.

Thank you.

Thank you.

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

Go ahead.

Good morning, J.W.

and Lonny.

Hi, Don.

Hi, Don, how are you doing?

Good.

In terms of -- getting back to the First Intercontinental acquisition, how is credit holding up at that company?

Actually, when we go through the first round of due diligences, we thought it is not that below our expectation.

But actually we are now working in detail, so as I mentioned earlier, I'm not at liberty to disclose in detail at this point of time.

Okay, and then in terms of commercial real estate market, are you seeing any signs of weakness there in the Los Angeles market, or is that holding up pretty well in terms of values, vacancy rates, things of that nature?

Don, when you see newspaper headlines out there and you see all the weaknesses in the economy.

But, quite frankly, the commercial real estate market in southern California is still holding up pretty well in terms of value.

So I think the value is still sticking with the real estate market here.

Okay, thank you.

Thanks, Don.

(OPERATOR INSTRUCTIONS).

And I'm showing no further questions in queue.

I'll turn the call back over to management for any closing remarks.

Please proceed.

Thank you, Melanie.

Thank you all for participating in Center Financial's 2007 fourth 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 in 2008.

Ladies and gentlemen, thank you for your participation in today's conference.

That does conclude the presentation.

You may disconnect.

Have a wonderful day.