Hope Bancorp Inc (HOPE) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2008 Center Financial Corporation Earnings Conference Call.

My name is Erica, and I will be your coordinator for today.

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

We will be facilitating a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Ms.

Angie Yang, Investor Relations for Center Financial.

Please proceed, ma'am.

Thank you, Erica, and good morning, everyone.

Thank you for joining us today for Center Financial's 2008 second quarter investor conference call.

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

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 Securities and Exchange Commission, including Center Financial's second quarter Form 10-Q filed this morning.

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

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

Center Financial's President and CEO, Jae Whan Yoo, will begin this morning with introductory comments and a summary of these second quarter results.

Financial Officer Lonny Robinson will then provide some color and detail on selected highlights.

JW will then provide closing remarks before we open up the call for a question-and-answer session.

As usual, Jason Kim, Center's Chief Credit Officer, is also here with us and will participate in the q-and-a session.

Now, I'd like to turn the call over to Jae Whan Yoo.

JW?

Thank you, Angie.

Good morning, everyone, and thank you for joining us today for our 2008 Second Quarter Conference Call.

Overall, we are very pleased with the many positive trends in our second quarter.

We believe these result exemplify the solid progress we are making with our strategic goals as we have shared with over the last year.

As you all know quite well, the current banking environment is vastly different from a year ago.

As such, we'll focus more of our discussion today on the sequential trends of our results rather than compare with year-ago results, as we believe this provides a better perspective on Center Financial's current performance, or you might say our performance in spite of the very challenging banking landscape.

Before Lonny goes over a more detailed discussion of these results, also like to provide a summary overview of highlights for the second quarter.

Over the past year, much of the focus of financial institutions has been on asset quality.

I am proud to say that Center continued its track record of maintaining healthy asset quality levels.

We believe this is a true testament to Center Financial's historically conservative credit culture and philosophy.

Because losses are inherent in the nature of banking businesses, we do expect to experience some deterioration while we are in the current credit environment.

But as you can see from our result, it has been well contained.

The consistency with which we've been able to maintain our asset quality underscores Center Financial's leadership as the safest and soundest financial institution serving the Korean-American community in the Southern California market.

Last quarter, we also discussed our thoughts on strategically managing our balance sheet and prudently lowering cost in light of anticipated declines in business activity, and we have followed through our intentions.

During the second quarter, we executed the sale of certain loans to the wholesale market, which had the intended impact of lowering our CRE exposure and contributing to a reduction in the percentage of a fixed-rate loan in our portfolio.

This action also had a positive impact on our capital position, which certainly remains well above regulatory guidelines for well capitalized institutions.

Benefiting from a core deposit marketing campaign initiated during the quarter and aggressive stance on not paying up for competitive CDs and our overall funding strategies, we saw a positive shift in the mix of our deposits with core deposits up considerably as a percentage of total deposits.

In addition, our overall cost of deposits declined significantly when compared with the end of 2008 first quarter, which contributed to a faster than expected recovery in our net interest margin.

As expected, the moderate downsizing of our staff early this quarter as well as other prudent cost-containment measures led to a noticeable reduction in our non-interest expenses.

All of these factors contributed to an increase in net earnings as well as improvement in the Company's efficiency ratio, return on average assets, and return on average equity versus the first quarter of 2008.

So again, we are very proud that the strategies that we have put in place has contributed to the positive second quarter results.

With that, I'll pass it on to Lonny to provide a more detailed overview of color behind this story.

Lonny?

Thank you, JW, and good morning, everyone.

Since our release was distributed late yesterday and our Form 10-Q filed early this morning, I'll just spend some time this morning going over selected items that highlight our overall operating performance for the quarter.

Let's begin with asset quality.

Total non-performing loans amounted to $8.7 million, or $5.9 million net of the SBA guarantee as of June 30, 2008.

This is up from $6.7 million, or $4.1 million net of the SBA guarantee portion at March 31, 2008.

The increase from March to June was a result of the following additions; one construction real estate loan in the amount of $2.2 million and trade finance loans of $2.3 million.

These additions to our non-performing loans were offset by a decline in non-performing SBA, consumer, and commercial loan categories.

The non-performing construction real estate loan represents a participation loan that went non-accrual in the second quarter.

A partial charge-off of $201,000 was recorded in the second quarter.

After a full evaluation, we found that no additional impairment reserve was necessary as of June 30.

The non-performing trade finance loans represent one loan relationship for which an impairment reserve of $627,000 was recorded at June 30.

One of these loans is also guaranteed under the Export Working Capital Program through which the SBA provides a 90% guarantee, which equates to $822,000.

As JW mentioned, losses are inherent in the business of banking, but the banks that are managed with a conservative lending philosophy and stringent underwriting policies will undoubtedly be able to weather the storm.

With non-performing assets as a percent of total loans of 0.48% at the close of the second quarter, Center Financial remains well poised as having the best asset quality in a Korean-American space and is certainly ahead of its current industry averages.

As we cautiously and conservatively navigate the adverse credit environment, we continue to adequately provision for loan losses.

Reflecting the current expectations for a prolonged period of a challenging credit condition, we again increased our provision to 1.18% of gross loans, up two basis points from 1.16% as of March 31.

Moving on to loans, we continue to see steady demand for loans, albeit at lower levels than a year ago.

However, we are being more selective and cautious than ever, and we are refraining to a greater degree as to the extension of new CRE loans.

Center Bank originated $148 million in new loans and renewals during the second quarter, same level as in the first quarter of 2008.

Of total loan production in the quarter, approximately 78% represented variable rate loans, with just 22% being fixed rate and hybrid forms of fixed-rate loans.

As of June 30, 58% of our total loan portfolio was comprised of fixed-rate loans.

Interestingly, our commercial loans increased by nearly $20 million over March while all our other loan categories reflect reductions, underscoring our focus on increasing our CNI loan portfolio.

With approximately 69% of our loan portfolio tied to commercial real estate, we are looking at strategic ways in which we can mitigate our exposure to the CRE market.

Last quarter, we mentioned the potential sale of up to $100 million of our CRE portfolio.

During the second quarter of 2008, we sold SBA loans of $25.6 million and $11.1 million in non-SBA real estate loans and posted a gain on sale of loans of $630,000.

We also experienced a significant uptick in payoff levels of nearly $40 million over and above what we expected for the quarter.

We are also projecting elevated payoffs in the third quarter.

Given these factors, we believe we will be able to reach our targeted reduction in our CRE portfolio through an additional sale of approximately $20 million, to be completed over the course of the third and fourth quarters of 2008.

As you should all be aware, the market demand for SBA loans has dropped significantly industry wide, and Center Financial is no exception in this regard.

During the second quarter, we originated $11 million in new SBA loans, which is down from the $14.4 million originated in the first quarter.

Looking forward, we do not see any near-term catalysts that would change these current trends.

Given the higher than usual level of payoffs and the strategic sale of loans, our net loan levels as of June 30 declined sequentially by approximately $55 million to $1.82 billion.

The reduction this quarter is relatively in line with our management team's balance sheet strategies for low single-digit growth for 2008.

Now, moving on to deposits and cost of funds.

Our funding strategies and deposit marketing campaigns resulted in a positive shift in our deposit composition.

Non-interest bearing demand deposits at the end of the second quarter were up by more than $21 million over March.

As a percentage of total deposits, GDAs constituted 23% as of June compared with 21% as of March.

The money market accounts and NOW deposits at quarter end rose by nearly $38 million over the first quarter, reflecting increases in retail and broker deposits.

On the other hand, time deposits in excess of $100,000 as of June 30 declined by approximately $78 million from the end of the first quarter.

This reduction represents a strategic run-off of higher cost time deposits, which we believe maximized the benefits of our planned sale of loans.

Time deposits greater than $100,000 represent 44% of the total deposits at June 30, down significantly from 48% at March 31.

As we mentioned last quarter, because of the lag time between the rate reductions and the resetting of rates on our deposits, we expected to see continued improvements in our cost of funds over the next couple quarters as deposits are re-priced to include the full impact of the rate reductions.

On a sequential basis, our cost of funds declined 53 basis points to 2.93%, which is a bit more significant than we originally anticipated.

This decline underscores our aggressive stance in pricing competitive deposits.

I would like to note that this achievement did not come easy, and I commend our Center Bank team members for working so diligently with the management team to support our overall deposit strategies.

With all the higher rates being offered in the market by both the mainstream and the niche banks, we fully recognize that it is quite a challenge to maintain the deposit base.

Now, the significant reduction in our cost of funds helped our net interest margin rebound at a faster pace than we originally anticipated.

As a result, we enjoyed a 5 basis point sequential increase in our NIM for the current second quarter.

And we expect our NIM to continue to expand throughout the balance of this year as we continue to benefit from the lagging effect of the downward re-pricing deposits, our aggressive management over cost of funds, and a progressively increasing composition of variable rate loans in our portfolio.

With that, I will turn the call over to JW for some closing remarks.

Thank you, Lonny, for your review.

Before moving on to the q-and-a session, I would like to reiterate Lonny's thanks to the Center Bank team members.

This is certainly a very challenging operating environment for community banks.

Their wholehearted dedication and attentive focus on maintaining strong relationships with our customer base is an essential component of our overall strategies.

I thank each and every team member and look forward to working hand-in-hand with team for further strengthening the safest and the soundest bank focused on the Korean-American and other ethnic markets here in Southern California.

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

Operator, would you please explain the technical elements for the q-and-a session?

(OPERATOR INSTRUCTIONS).

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

Please proceed.

Good morning, everyone.

Hey, Brett.

Good morning.

Good morning, Brett.

Quite a few questions, so let me just ask a couple.

First, on the expense base on the personnel side, that number was lower than I expected.

Is, A, is that -- is your trimming of expenses there done and is that a good run rate going forward with what you've got with one or two new branches here the past year?

Yes, we're probably -- the absorption of the two branches of the personnel cost in that quarterly rate is probably in line.

So, we're looking at quarterly salary and employee benefits of about $5.9 million.

I would say that's probably representative for a run rate.

Okay, and then secondly, on net charge-offs that were mostly concentrated in what looked to be small CNI credits, was -- or in commercial, was that one credit or was that a bunch of smaller credits in the second quarter?

Brett, one of the things, and we outlined this in our 10-Q, is that we had one larger charge-off, which is about $971,000 --

Okay.

-- and it was a commercial loan.

And the rest of them were what we've typically seen in our portfolio as we have reported in the previous quarters, it's a lot of small business customers.

Okay, yes, I apologize.

I haven't had a chance to go through your Q thoroughly.

We do explain that in the Q.

Okay, and then obviously improvement in the total risk-based capital ratio by about 30 basis points.

Is the -- do you have -- with the sales you're going to have in the third quarter, are you trying to get to 11% or can you talk about where you want capital ratios to be?

Well, it's always a question about our capital.

We do believe by the end of the year that our risk-based capital may be very near 11% or may exceed it.

Okay, and can you talk about the underwriting and just the SBA business in general?

Did you do any tightening of underwriting standards this quarter for either SBA or the overall loan portfolio?

Well, it seems to be there are a lot of questions about the SBA lending activities.

I mean, as a industry in general, SBA lending demand has declined, and Center Bank as well we have seen a decline.

We have seen an improvement in the SBA delinquency.

We were at $4 million at the end of last year of SBA non-accrual.

First -- at the end of first quarter we were at $3.4 million, and the end of second quarter we reported $2.5 million.

And that figure is including the SBA guaranteed portion.

So, we've seen a improvement in our portfolio, and most of the portfolio -- most of the SBA delinquency came about from Denver, Colorado.

So, about five months ago, we informed to our LPO manager to stop producing the SBA lending until we feel confidence in that marketplace.

Okay, and can you guys give some commentary on just where you're -- if you're seeing any risk migration trends in either the CRE portfolio in general or just the other parts of the portfolio?

You don't have much in construction and a lot of it, I know, is not residential, but just any thoughts on --

Yes --

-- classified and what-not.

Well, CRE, I think, macro perspective, I think the CRE is located in a newly developed communities or populated by the subprime mortgage loans.

Typically, retail shopping center, I think, may have some forward-looking issues, but also a specific type of CRE, such as gas stations and car wash CRE loans, may have some impact, given the soft economy.

And we have very small portions in gas stations and car wash in our portfolio.

Our car wash portfolio only represents $9 million of our portfolio, gas stations $29 million.

So, I think those are -- the banks are -- should be very selective in that prospective CRE portfolio.

Hey, Brett, I'd like to add a couple things beyond what Jason has said.

Overall, our classified assets are down.

Okay.

And our delinquency trends are looking very positive.

We were actually pleased with that.

Not saying that the economy is stabilized or anything like that, but overall we're pleased with where we're at today.

Okay, great.

Congratulations on the quarter.

Thank you very much.

Thanks, Brett.

Brett.

Our next question comes from the line of Donald Worthington with Howe Barnes.

Please proceed.

Good morning, everyone.

Hi, Don.

Good morning.

Hi, Don.

In terms of the expense reduction, you've talked in the past a little bit about specific initiatives, but how much of that was staff reductions?

Actually, compared with the first quarter, we reduced by 14 and we expect more than $1.2 million expense reduction for the third month.

And, Don, when you get a chance to read the 10-Q, in the executive summary we talk quite a bit about the impact of the staff reduction versus the other expense saves.

Okay, terrific.

That'll give you more color.

Okay, I'll take a look at that.

And then any update on the legal front in terms of the litigation?

Well, Don, I fully appreciate the level of concern on this longstanding litigation case.

As you know, since I joined this bank in January last year, resolving the KEIC litigation case has been one of my top priorities.

And like any legal issues, I'm not able to comment in too much detail, but I assure you that we are working very hard to resolve the matter as quickly and efficiently as possible.

My personal goal is to affect an economic and reasonable resolution by the end of this year at the latest.

I would say at the latest by the end of this year.

Would it be good enough to answer for you?

Yes, that's great, thank you.

And then what about the -- in terms of the First Intercontinental issue?

Frankly, we don't worry that much on that, but we are working on that, too, very hard.

And I think it's going to be resolved maybe -- Lonny, what do you think about --

Well, I think -- we actually discuss this in our 10-Q.

We've updated the disclosure in regards to the litigation there from that standpoint.

We're proceeding through the process.

Obviously, we've filed our counterclaim, which we disclosed, against them and -- on the claim for the breakup fee, and we're just moving through the legal process.

And as everybody knows, legal processes take time.

But we are make -- we are moving through that process.

And so nothing significantly new to report, but we believe, as we say in our Q, that we have meritorious defenses and actually have a claim against them.

Okay, great.

Thank you and congratulations on the quarter.

Thanks, Don.

Thank you, Don.

Our next question comes from the line of Anna Balicka with KBW.

Please proceed.

Good morning.

(multiple speakers)

I have a question.

What is in you your AOCI?

The mark that's in there right now.

Could you repeat that question, Julianna?

Yes.

Did you -- sorry, can you hear me?

Yes.

Yes, my question is what is the mark that's currently in your AOCI account?

Julianna, you're going to have to explain to me.

Oh, sorry.

I'm looking at your balance sheet and it looks like there is an accumulated other comprehensive loss of $1.4 million, and I was wondering what security that's related to.

Well, Julianna, that's what I thought you were talking about, but it basically relates overall to a decline in the portfolio value over the last couple quarters.

From that standpoint, it's related predominantly to one security.

It's a trust preferred security.

And is there any danger this will become another contemporary soon?

Or?

Well, we're monitoring it very closely.

We've been following it.

At this point in time, we don't believe it's an OTTI issue, but I can't predict in the future.

As the economy continues to deteriorate, I can't make a prediction on that.

But at this point in time, we have determined that it is not an OTTI issue.

Okay, very good.

And I have -- I think most of my other questions have been answered.

Yes, thank you very much.

Very good quarter.

Thanks, Julianna.

Thank you very much, Julianna.

(OPERATOR INSTRUCTIONS).

Our next question comes from the line of Brett Rabatin.

Please -- with FTN.

Please proceed.

Yes, I just wanted to follow up on the loan sales that you did during the quarter, the -- I believe it was -- what was that, $11 million in CRE?

Yes.

And you're expecting $20 million or so this quarter, correct, and from the CRE portfolio, not SBA, correct?

Right.

The $20 million -- it's actually going to occur in the third and fourth quarter, Brett.

So we'll probably do $11 million in the third quarter and then probably the balance of it in the fourth quarter.

And I didn't see it, but -- and maybe it's in the Q, but were the SBA loans -- or the CRE loans, were they essentially sold for par during the second quarter?

Well, we had a slight profit on those sales.

And one of the things to keep in mind is we are a relationship bank, and so we retain the servicing on these loans as well.

Okay.

But we were able to get a slight premium on them.

Okay, and is the market still pretty good?

And I'm assuming these loan sales are in the hospitality type?

It was a combination, Brett, hospitality as well as multi-use properties.

And do you guys have that sector of the CRE portfolio from an exposure perspective close to where you want it?

Right, right.

And so --

Yes, I think second half will be mostly in the hospitality folio.

And just to give you a little color on the premium gains, on $11 billion sale we receive a premium of $198,000.

-- Okay, and are the prospects for bids for the CRE portfolios, I mean, do they still look pretty good?

Are you able to -- and I don't know who you're selling them to, but I'm guessing that market could tighten up on the second half of the year.

Right, the secondary market, they're tightening up because of their liquidity as well.

But we initiated the sale beginning of second quarter, so we had a much lead to begin with.

So, I think that came -- that played really well for us.

Brett, we expect slight premiums on the sales in the third and fourth quarter as well.

Okay, great.

Good color, thank you.

Our next question comes from the line of Joe Gladue, B.

Riley.

Please proceed.

Just a couple of questions on some of the expense items and, I guess, what to look for going forward.

The legal fees were up a good bit during the quarter.

I'm just wondering if you expect them to kind of stay up there going forward while you work through some of these legal issues or is there a sort of a one-term aberration?

Legal fees are continued to be higher than we obviously would like them, but due to the KEIC litigation and now some of the Atlanta litigation, I would expect the legal expenses to probably run on a quarterly basis about $750,000.

And, I guess, looking a little further down on the non-interest expenses, the other expenses were down a good bit sequentially, $375,000 or so.

Just -- it's probably in the Q, I haven't seen it yet, but is there one major thing driving that?

In the first quarter, we had some small operating claims that we had paid.

It is outlined in the Q in a fair amount of detail.

And then we had actually write-down an OREO property in the first quarter, which we sold here right at the end of the first quarter.

And so that -- there was a loss of about $68,000 there, and there was some operating loss settlements of about $225,000 that were in the first quarter that we didn't have in the second quarter.

All right.

That answers that, thank you.

That's all I had.

Thank you, Don.

Joe.

Oh, Joe.

There are no further questions.

I would now like to turn the call back over to management for closing remarks.

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

Thank you for your participation in today's conference.

This concludes the presentation.

Everyone have a great day.