Hope Bancorp Inc (HOPE) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Q3 2008 Nara Bancorp earnings conference call. (OPERATOR INSTRUCTIONS). Thank you. I would now like to turn the conference over to Mr. Tony Rossi of the Financial Relations Board. Please go ahead, sir.

Thank you, operator. Good morning everyone and thank you for joining us for the Nara Bancorp third quarter 2008 earnings call. Joining us this morning from management are Ms. Min Kim, Chief Executive Officer, Mr. Alvin Kang, Chief Financial Officer.

Before we begin, I would like to make a brief statement regarding forward-looking remarks. The call today may contain forward-looking projections regarding future events and the future financial performance of the company. We wish to caution you that such statements are just predictions. Actual results may differ materially as a result of risks and uncertainties that pertain to the company's business. We refer you to the document the company files periodically with the SEC, specifically the company's most recent 10-Q and annual report on form 10k as well as the safe harbor statement in the press release issued yesterday. These documents contain important risk factors that could cause actual results to differ materially from forward-looking statements. Nara Bancorp assumes no obligation to revise any forward-looking projections that may be made on today's call. With that I would like to turn the call over to Ms. Kim?

Thank you, Tony. Good morning and thank you for joining us today.I am going to provide a brief overview of the third quarter of 2008 and then I will turn the call over to Al Kang, our Chief Financial Officer, who will review our financial results. Following Al's remarks, I will conclude with a discussion of our outlook for the remainder of 2008. We earned $0.19 per share in the third quarter, compared to $0.33 in the same quarter last year. While this is lower than last year, it's a notable improvement from the $0.09 this year we earned in the second quarter. Sequential quarter improvement is attributable to a few factors. First, our net interest margin increased by 5 basis points with a Fed holding interest rates stable during the quarter. We had the benefit of some deposits repricing downward while loan yields stayed relatively flat.

Second, our non-interest expense declined by about 6% as we are doing a better job of enhancing efficiency throughout the organization. Third, our securities perform yield remains healthy and we did not report any write-downs as we did in the second quarter. The portfolio substantially consists of GSE mortgage backed securities and we do not foresee any potential impairment. And fourth, our provision for loan losses was approximately $3.5 million lower this quarter. Al will more about our credit trends a little later in the call.

With the economy downturn and the turmoil in the financial market creating unprecedented challenges for banks, we have responded by taking a very conservative approach through our operations and we are placing the highest priority on managing our strong capital and liquidity positions.

In the current environment, our focus is primarily on gathering core deposits from our incentive compensation through our marketing campaign, for our crisis strategy, we have focused our entire organization on bringing in core deposits. We were very pleased with the results of our efforts in the third quarter as we increased core deposits by $74 million. This enabled us to allow some runoff in non-core deposits including reducing our balances on the brokered CDs by $17 million.

Although it is difficult to quantify, I think we also benefited from the deposit to trends in the light of the heightened concern about some financial institutions and our strong capital position that is very appealing to our customers. Turning to loans, we have heightened our underwriting criteria quite a bit throughout this year. Some of the changes we have made are requiring higher levels of equity, stronger cash flow, and greater management experience on the part of borrowers. We are also being more selective about certain industries that we believe are showing some stress. This stricter underwriting criteria along with a lower demand due to the slowing economy is resulting in reduced loan production.

The combination of our successful deposit gathering and our lower loan production had a positive effect on our liquidity and capital positions during the quarter. Our loan to deposit ratio dropped from 110% to 108% during the quarter, while all of our capital ratios improved with our total risk based capital exceeding 13%. Maintaining our strong capital ratio and improving our liquidity will continue to be among our highest priorities going forward.

At this point, I'm going to turn the call over to Al who will review additional financial results for the third quarter. Al?

Thank you, Min. I will begin my discussion with some color on our net interest margin. On a GAAP basis, our net interest margin was 4.02% in the third quarter of 2008. Compared to 3.97% last quarter, an increase of 5 basis points. With interest rates remaining stable during the quarter, we benefited from some deposits repricing downward while the yields on loans remained relatively stable.

During the quarter, the average yield on our interest earning asset declined by 9 basis points from 6.87% to 6.78%. While our cost of funds declined by 16 basis points, from 3.10% to 2.94%. However, with the recent 50 basis point cut in the fed's fund rate we once again expect to see compression in our net interest margin due to the deposit lag effects as well as a continuation of a highly competitive marketplace for deposit pricing.

Our non-interest income was $4 million in the third quarter, which was a decline of 32% from the same period last year. The decline was due to a decrease in SBA loans sold and a reduction in the average sale premium. As we have indicated in prior quarters, we have tightened our underwriting criteria in the SBA lending business, which has reduced our loan originations and, therefore, our volume of loans sold as well.

Our SBA loan originations were $6.9 million during the third quarter, down from $58.5 million in the same period last year. We sold $5.8 million of SBA loans during the third quarter of 2008, compared to $43.1 million in the same period last year. The average sale premium on these loans declined by 129 basis points from the prior year.

As a result, our net gains on sales of SBA loans declined by 88%, from $2.2 million last year, to $268,000 this year. Within our other non-interest income categories, our service fees on deposit accounts were $1.9 million, an increase of 3% from the third quarter of 2007. The increase is primarily attributable to a new deposit fee structure that was put in place over the past year.

Other income and fees remained essentially flat year-over-year. Our non-interest expense declined by 4% from the prior year. The decline was primarily due to lower salaries and benefits expense, as bonus accruals are lower this year and we are also allowing some attrition in the company in order to manage down our FDE count.

Our operating efficiency ratio was 48.6% in the third quarter of 2008, compared to 47.0% in the same period last year. The increase in operating efficiency ratio was due to the lower revenue resulting from our reduced net interest margin and lower gains on sales of SBA loans.

Moving to the balance sheet, our growth loans were $2.10 billion at September 30, 2008, decline from the $2.12 billion at June 30, 2008. The decline is primarily due to lower loan production that Min mentioned previously. New loan production was $106 million in the third quarter of 2008, compared to $146 million in the second quarter of 2008. Our total deposits were $1.95 billion at September 30, 2008, an increase of 3.8% annualized from the $1.93 billion at June 30, 2008.

During the quarter, our deposit gathering efforts enabled us to generate increases in core deposits. This was partially offset by a decline in jumbo CDs as we chose not to aggressively compete for jumbo CDs last quarter. Our success in gathering core deposits enabled us to reduce our balances of brokered CDs by approximately $17 million in the quarter.

I would also like to briefly discuss our alternative funding sources. These currently include $200 million of California state Treasurer's deposits that are secured by investment securities and $350 million in (inaudible) advances, that have-- expected average remaining term to maturity of 3.7 years. We consider these alternative sources to be highly stable and very cost effective. The remaining alternative funding consists of $226 million in brokered CDs which represents just 8.7% of our total assets at September 30, 2008. We believe this could be a very manageable amount.

In addition to what is currently on our balance sheet, we also have the ability to access up to another $1 billion in cash. Given the cost position of our liability and our access to additional liquidity sources, we believe we have excellent liquidity and a very stable funding mix, which is particularly valuable in this environment.

Turning to asset quality, we conducted the most comprehensive loan review in the history of the company during the third quarter. We individually reviewed every real estate loan greater than $1 million, every commercial term loan greater than $500,000, and every commercial line of credit greater than $500,000. This review covered approximately 2/3 of our loan portfolio.

As part of this review, we visited properties and businesses, obtained updated financial statements and credit reports and analyzed current debt coverage ratios. This effort was designed to identify loans that are currently performing but have the potential to deteriorate in the future, if economic conditions do not improve. Following this review, we identified approximately $66 million in loans that warrant closer monitoring. These identified loans consist of 16 real estate loans, totaling $46.7 million, six commercial lines of credit totaling $16.5 million four commercial term loans, totaling $3.2 million. As a result of this deep dive into our portfolio, we believe we have a good understanding of our exposure to potential credit deterioration.

Our non-performing loans were $30.5 million or 1.45% of total loans at September 30, 2008. This compares to $25.2 million or 1.19% of total loans at June 30, 2008. The increase is primarily due to a $7 million commercial line of credit secured by real estate that was classified as non-performing net of charge-offs, and the transfer of two non-performing loans to OREO. We are being very aggressive in our remediation efforts, which include exploring loan sales, initiating foreclosures and developing workout agreements.

Our delinquencies increased to $43.8 million at September 30, 2008, from $33.0 million at June 30, 2008. The increase was primarily attributable to two loans. The first is a $7 million commercial line of credit relationship that I previously mentioned. This loan was less than 90 days delinquent but the borrower decided to file for chapter 11 bankruptcy when another financial institution demanded payoff on an unrelated outstanding loan by that bank. We provided a specific reserve or $4 million against this loan in the third quarter, based on our recent appraisal.

The second is a $3 million commercial real estate participation loan. This borrower has fallen into technical default because of a liquidity covenant violation. We received a current appraisal on the property in September, which indicated that the collateral value has held up well and there is no loss anticipated on this loan.

Net charge-offs were $6.3 million or 1.9% of average loans during the quarter. This compares to $4.9 million or 93 basis points of average loans during the second quarter of 2008. The third quarter total includes the following two large charge-offs.

First, a $1.5 million charge-off related to a CRE construction loan and second, $1.3 million related to a commercial business loan to a clothing manufacturer. As I mentioned, our provision for loan losses was $6.2 million in the third quarter. This provision reflects the increase in special mention in classified assets following our loan review, the increase in delinquencies and the higher level of charge-offs over the past few quarters, which in turn increased the loss factors used in determining the quantitative loss reserve.

At September 30, 2008, our allowance for loan losses was 1.33% of gross loans receivable, compared to 1.32% at June 30, 2008. The allowance covers coverage to non-performing loans was 91%, compared to 111% at June 30, 2008. The inclusion of the $7 million impaired commercial loan into non-performing status impacted this ratio. However, we believe several large impaired loans may be revolved during the fourth quarter that should reduce the level of non-performing loans.

Additionally, excluding impaired loans and their related reserves, the allowance coverage on non-impaired loans was 77 basis points, compared to 76 basis points at June 30, 2008. Given the weakness in the economy, we expect to see continuing stress in our loan portfolio. However, following extensive the loan review that we conducted in the third quarter, we believe our potential losses are manageable and we are expecting our provision for credit losses to stabilize or perhaps even trend lower going forward.

That being said, it is very difficult to predict the occurrences of one-off type credit issues, such as the instance in the third quarter where our borrower who was current on all of our loans was forced into bankruptcy due to the actions of another lender. If these types of one-off issues continue to occur, then it is possible that our credit costs will exceed our current expectations. Now I'll turn the back over to Min.

Thanks, Al. At this point, we would like to reaffirm our guidance for 2008.

For the full year, we continue to expect fully diluted earnings per share to range between $0.62 and $0.67. We expect that operating environment will remain challenging for generating higher levels of earnings in the near future. The two biggest challenges will be credit costs as the economy continues to weaken and the reduction in our net interest margin that we expect. We intend to continue taking a very conservative approach to our management. We expect flat to modest loan growth in the fourth quarter and any growth would be primarily funded through continued increase in core deposits.

This approach will enable us to maintain strong capital and liquidity position until economy -- economic conditions improve. While we are taking a cautious approach this year, we are still investing strategically in areas that will position us well for the future. We have a number of efforts under way to improve and expand our East Coast franchise.

We have relocated our branch in New York to a more desirable location and we are in the process of developing new branches in New Jersey and New York. In particular, we see good deposit gathering opportunities on the East Coast and we believe these new branches will help to further our progress in improving our deposit mix. Now we will be happy to take any questions you might have. Operator please open up the call.

(OPERATOR INSTRUCTIONS) . Your first question comes from the line of Brett Rabatin with FTN Midwest.

I wanted to ask, first, last quarter you indicated classified loans were $32 million. Do you have an updated number for that for 3Q?

Sure. On the special mention category, $38.4 million.

Okay.

And substandard, $44.5 million. (inaudible) $7.3 million. The total classified loans are $90.3 million.

Okay. And was the review that was done during the quarter, was that pre-Bonnie departing or was that post or can you talk about the timeline of the review?

Bonnie was here when we conducted that.

Yeah, we began our baseline review starting from August. So the whole review process was performed under her leadership.

Okay. And then I wanted to ask if you addressed it and I missed it, my apologies, but the involvement in the TARP, how are you looking at the TARP and, A, I'm assuming you will elect to be involved and if you are going to be, what would you be looking to receive, possibly in the lower or higher end of the allowed capital?

We think that we most likely will participate in that program and we see that there are far more benefits than negatives on the program.

Sure.

We haven't really decided the amount that we're going to request, but it's a range between 1% to 3% of the adjusted assets and I think most banks will probably go for the maximum.

Okay. And then just lastly, I wanted to circle back around to the credit review and I'm curious, as you look through loans that would be to retail oriented shopping centers and restaurants and that kind of thing, what level of sales depreciation caused you to downgrade the loans. I know a lot of these -- particularly these retail CRE loans tend to have lower loan to values, but obviously the consumer is weak. I'm curious what inflection points you were using to downgrade loans.

The majority of our identified potential problems through this baseline review was more of owner occupied properties or single tenants, so based on that service coverage is below our guideline, then we identified as a potential problem loan that may require close monitoring going forward.

Okay. So if I understand correctly, the review was more of the owner occupied commercial real estate?

No, which includes all retail street malls, apartments and all type of real estate worth $1 million or more.

Maybe we can follow up offline about the review. Thanks for the color.

Okay.

Your next question comes from the line of James Abbott with FBR Capital Markets.

Hi, good morning to you.

Good morning.

Good morning. I was wondering if you could -- my question is similar to Brett's, where I'm looking at basically EBITDA coverage on -- and you did mention in your response to Brett that you wanted to make -- if the debt coverage ratio was below your guidelines, you put it up for review. Can you remind us of what your guideline is and -- ?

Service coverage requirement was 1.2.

It was below 1.2, it made the $66 million list?

Yes.

Okay.

Well, the cut was based on size. So we looked at everything that was over $1 million.

Right. So everything over $1 million with the debt coverage ratio of 1.2 or less is now on that list of $90.3 million classified loans?

Yes.

Okay.

No, It's on that list of $66 million loans. Those were -- the $66 million loans are not on our watch list. Those were loans that we reviewed that had the potential to migrate to our watch list.

But of the $66 million, about $30 million is already included in part of our watch list in the third quarter.

Okay. Okay. Thank you. That's a good clarification. And then -- so maybe turning to -- can you give us some sensitivity as to how much is between 1.2 debt coverage and maybe 1.3 debt coverage, and then also some color -- I don't know if that's something you have readily available, but also a look at what the financials that were used for that were. Were they trailing financials? And how were they -- how much of a haircut, if any, did you apply to forward-looking revenues from those firms?

We were provided with the most current rent rolls on the properties and it was either as of December 31 of '07 or March '07 -- I mean '08 or June '08. So relatively it was the very most current financial statement of each property and it was either by most current rent roll or their current income statements. So that service coverage calculation was pretty much up-to-date based on their most current rental income from their properties.

Okay. Are you seeing -- I'm assuming most of those owner occupied commercial real estate properties are actually businesses that just happen to be secured by real estate. Is that a correct assumption?

Well, from our commercial real estate portfolio, about 60% is owner occupied and the remaining, 40%, is retail strip malls. So which includes the whole collection. On the owner occupied property, is about 42% from our total real estate loans and the remaining is non-owner occupied.

Okay. And most of the review I think was -- you said earlier, most of the review was owner occupied commercial real estate as opposed to non-owner occupied?

No, all commercial real estate loans worth $1 million or more.

Oh, okay.

Which includes all owner occupied properties, all non-owner occupied properties with $1 million outstanding loan balance at the time of the loan review.

Okay. And then -- and so if you were to -- because rents are coming down a little bit, or correct me if I'm wrong but the data that I'm showing from the LA and Orange County areas is the rents are generally coming down recently, if you were to apply a 5% or 10% discount, what would that $66 million number have been? Would it have been $100 million? $150 million? $200million?

Can you repeat your question one more time?

Sure. So I'm just trying to look prospectively because the rents that you have used, which I certainly applaud you for doing what you've done, but the rents that you've used are sort of trailing and if we look forward and say that rents are declining and revenues are declining for these companies or will be declining, at what -- what's the sensitivity that if you were to cut rents by 10%, a lot of those properties that are still performing or not on that $66 million list would actually fall onto the $66 million list and so that's my -- I'm trying to understand how -- what the sensitivity there is.

When we calculated most updated debt service coverage based on the current rental income, we also built in 10 to 20% factor as a sensitivity analysis, as a part of the sensitivity analysis, so which already was built into our debt service coverage calculation at the time.

Okay. So when you say 1.2 debt coverage, you're also applying a 20% vacancy rate to those properties and they're still covering their debt as a 1.2 coverage ratio, is that correct?

Correct.

Okay. Very helpful. And then -- well, you know, I've asked enough questions. I'll stand back. Thank you.

Okay.

Your next question comes from the line of Erika Penala with Merrill Lynch.

Good Morning. Of your income producing commercial real estate, how much is retail?

On the owner -- I mean, the owner occupied or the retail strip malls?

Of the non-owner occupied, of the -- how much of that is retail oriented?

13.9%, about 14% of our commercial real estate portfolio is multiple tenant retail buildings.

Okay. And I guess on the back of James' question, you stressed -- under your review, you stressed these properties for a 20% vacancy rate. What are the vacancy rates now?

I don't have that information with me. It's all case by case. It's very -- various, you know, from each property, so it's hard to tell you the numbers throughout the portfolio.

Okay. And just I wanted to ask a question on the deposit side. You mentioned that you were a beneficiary of flight to quality inflows in the third quarter. I was wondering how you were looking at those flows as we look forward to this quarter and you know, given the fact that the FDIC has raised its insurance.

I didn't get the full question. You're coming in very, very soft. Could you repeat that?

Sure. You mentioned that you were a beneficiary from flight to quality deposit inflows in the third quarter. Now that the FDIC has increased its guarantee and guaranteed all DDAs in essence, are you -- what do you see for deposit volume for the fourth quarter? And do you suspect on the rate side that you will be able to meaningfully take advantage of the Fed rate cut and lower some of your offerings?

Well, with the government insurance programs we'll probably see some stabilizing of the flows between institutions and in terms of the rate cut, we just initiated our rate cut on Tuesday for our deposit rate. The question is whether other institutions would do the same. What we're seeing in the marketplace is actually the non-Korean banks have rates much higher than the Korean banks which is kind of a flipped situation.

And some of the Korean American banks have also cut rates but some of the other Korean American banks have not and in fact, some of the foreign Korean banks have maintained very high deposit rates.

So it's kind of a mixed market and -- so that makes the deposit pricing and estimated deposit costs in the fourth quarter very unpredictable.

And do you sense that we'll see some meaningful margin erosion in the fourth quarter because of that?

Well, I think there will be market erosion for two reasons. One is the 50 basis point cut and our expectation of further rate cuts. I guess now the expectation is close to -- is about 80% or close to 90% for another 50 basis points on October 29th and probably a follow-on cut in December.

But we assume that there would be at least another 50 basis points in cuts, so margin -- the rate cuts would be one thing affected our margin and then just the competitor deposit pricing.

You know, just checking just a few days ago, the bank that -- it seems like there's a lot of competition for deposits, probably because of liquidity concerns and as I said, when you look at the advertising in the marketplace, more of the deposit pricing, the higher deposit pricing of the non-Korean banks. So those two things will probably work together to impact our margin negatively.

Okay. And my last question is I guess a clean-up on the expense run rate. You mentioned that it was lower because of lower bonus accruals. What should we expect for the fourth quarter? I mean, is $14 million a run rate that is sound to assume?

Yes, about $14 million, same as the third quarter.

Okay. I'll step back. Thank you.

Your next question comes from the line of Aaron Deer with Sandler O'Neill.

Good morning, Min, good morning, Al. Also following up Erika's questions, have you looked at what the impact of higher FDIC premiums are going to be on expenses?

It looked like it will probably be at least double what it currently is.

Okay. And then can you give a breakout of your SBA loans by type and also give the outstanding balance of the unguaranteed portion on the SBA portfolio?

Can we follow up offline with you?

Sure. We can do that. That's fine. And then I guess maybe just lastly, sounds like as you went through this review process with the loan portfolio, well, I guess, having done so, can you identify any specific industries, maybe beyond retail which sounds like there's problems, where you're noticing some specific concerns?

Yes. It was single tenant, service related businesses such as car wash business and the single tenant property, so it was mostly those type of properties that shows more stress than multiple retail strip malls.

That's helpful and I'll follow up with you offline for the other. Thank you.

Okay.

Your next question comes from the line of Lana Chan with BMO Capital Markets.

Hi, good morning.

Good morning.

Most of my questions have been answered but I was just curious, given the increase in non-performers and classified loans this quarter, I was kind of surprised that the reserve to loan ratio didn't really go up that much and then when you look at the reserved non performing loan ratio, it actually declined pretty meaningfully. Can you talk about that, or comment on that?

Sure, sure. 50% of our non-performing loans are commercial real estate with about 15 borrowers and all of our non-performing real estate loans are either fully reserved based on the impairment or we don't anticipate any loss based on the most current appraisal value of those properties. So although our allowance to non-performing assets was declined to 90 some percent at the third quarter, we feel very confident that our current allowance reserve level is fully -- adequately reserved for our problem loans.

And is that --

When you look at our reserve levels, if you back out the impaired loans and the related reserves, and you look at the coverage on the unimpaired or non-impaired portfolio, that ratio has pretty much remained the same from quarter-to-quarter, and the -- if you look at the remaining reserves on the unimpaired portfolio, the quantitative reserve is about 23%. Actually, the qualitative reserve is about 77% of the allowance.

And I guess the final point I would make is that we take a pretty aggressive approach in identifying impaired loans. And we do a fair value analysis. So -- and you can see that by the activity that we provide impaired loans pretty readily and we're pretty aggressive in charging off those loans.

So -- and then when you have these large one-off type situations, the allowance to non-performing loans will have a tendency to fluctuate quite a bit. As we indicated, we think that several of these large impaired loans will be resolved in the fourth quarter or perhaps the first quarter of next year. So we feel pretty comfortable.

And also, Lana, about $25 million of non-performing loans are either -- we are in the process of going through foreclosure and we also looking to upgrade to a closed status based on their sustained performance on the workout plan and we also are working on to resolve through on note sales and so on. So we are actively trying to liquidate majority of our non-performing assets.

Just as a follow-up, is there any way to quantify for us how much you've charged down the non-performing loans to, as a percent of the original value?

You mean our reported non-performing loans?

Right.

Our large charge-offs that we mentioned, $1.5 million $1.3 million. Those were part of the charge-offs from our non performing loans impairment.

Are you asking for all impaired loans that are impaired right now, what the total write-down is set against them?

Right, yes.

That's something I think we'll have to --

we'll have to follow up with you later on.

Okay. Thank you.

Your next question comes from the line of Julianna Balicka with KBW.

Good quarter. I have a question for you. On your appraisal process, when you mentioned that you reviewed all commercial real estate loans over $1 million in balances, what percentage of your commercial real estate portfolio does that comprise?

We're looking at it. Do you have any other questions, Julianna?

I have two more questions. And following up on the portfolio review as well, of your loans that are participations with other banks, what share of that review as part of the review process?

Oh, all of our participation loans were reviewed throughout the comprehensive loan review, so it's all covered through our baseline review and Julianna, answering your first question, it represents 50% of our commercial real estate portfolio.

Okay. And so the other 50% is under $1 million each?

Yes.

Okay. And then looking back at and stepping away from this topic and onto loan growth, you said you expect modest loan growth. And when you are looking at flat to modest loan growth, are you looking at your California operations? New York operations? How are you thinking geographically your bank will grow?

Pretty much throughout the whole region. We have no particular focus or, you know, in any of the states or it may be throughout our operations.

Very good. Thank you very much.

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

Good morning.

Good morning, Don.

Couple questions on your liquidity discussion. When you talk about the $200 million from the state of California, is that an outstanding amount or is that an available amount?

That's the outstanding amount.

Okay. And then within the $1 billion that you mentioned from other sources, does that include -- have you set up a facility with the Fed?

Yes.

Okay. So that's included in the billion? Okay. That's all I had. Thank you.

Your next question comes from the line of Chris Stulpin with D.A. Davidson.

Hi, good morning.

Good morning, Chris.

Hi, hi. Most of my questions have been answered. And I came in probably I'm guessing halfway through the phone call. But sounds like you're seeing deterioration as expected in your C&I category for the most part this quarter, especially compared to last. When do you see that migrating or have you seen it migrating over to your CRE bucket or if not, to a larger degree, when do you expect that to happen? If you could give me some color there, I would appreciate it. Thank you.

Chris, your question is when do we expect a deterioration in C&I to start hitting the CRE portfolio?

At a greater degree.

Well, it seems like the C&I problem is continuing. It's probably and what we've been discussing for the past several quarters. We haven't, as yet, seen a systemic problem with the CRE. It continues to be these one-off price situations but the individual credits are a lot larger. But, you know, if the downturn continues on a prolonged basis, then CRE is probably going to be impacted.

Naturally. I didn't know if you had any -- okay. That works. Thank you.

Your next question comes from the line of James Abbott with FBR Capital Markets.

Hold on for one second.

James, before I answer your question, I need to clarify one of Julianna's questions regarding percentage of our portfolio was reviewed on the commercial real estate. I gave her 50% which is a number of borrowers represents 50% but in terms of the dollar amount it was 74% coverage. So I would like to make a clarification.

Okay. James, go ahead with your question, please.

Okay. Thank you. That's very helpful as well. How do you look at the reserve to net charge-off ratio? In other words, the reserve to loans relative to the net charge-off, the run rate of net charge-offs, that's a ratio that looks somewhat thin for Nara at this time. Do you look at it at all?

Well, we look at it but it's not something that drives anything.

And has the -- another question. Has the 77 basis points of reserves for performing loans, has that changed much compared to, say, a couple years ago?

I think if you go back to 2007, that ratio obviously is going to be much higher because the level of non-performing loans was significantly lower.

Okay. And then lastly, the last exam that Nara had by the regulators, how long ago was that?

July.

Well, in July.

July, August.

I think you discussed that on the last conference call. Thank you very much.

Thanks.

Your next question comes from the line of Erika Penala with Merrill Lynch.

Thanks for taking my call again. I just wanted to clarify. You mentioned that 42% of our commercial real estate exposure is owner occupied. Of that 42%, what's the percentage that is reliant upon retail cash flows versus, you know, a doctor's office or some sort?

Let me give you more color on the description of our owner occupied properties. Hotel, motel industry takes about 20% from our owner occupied, from the core portfolio, and gas station takes about 14% and car wash takes about 3% and religious facility takes about 4%. So those are the significant concentrations in terms of type of industry.

Under owner occupied or of total commercial real estate?

Of total commercial real estate.

Okay. And then the 14% that you gave me earlier on the retail side, that's 14% of income producing or 14% of total commercial real estate is multi tenant strip malls?

14% is from the total real estate portfolio.

Okay. And a follow-up question on -- you mentioned that you're looking to loan sales for disposition. I mean, are you looking to bundle some of these owner occupied notes? And if so, what is the demand for it and what is the discount requested by -- if there is such demand?

Well, I don't remember --

we didn't make any statements.

We didn't make any statement that we will be --

The statement on sales of loans is really the problem asset. If there is somebody that's willing to purchase an impaired loan, we would do that. But not in the performing portfolio. And virtually there is no market for loan sales even on performing loans in this environment.

Okay. Thank you for taking my question.

We have no plan for loan sales of our performing assets.

Okay. Thanks.

At this time, there are no further questions. I'll turn the conference back over to the management board for closing remarks.

Once again, thank you for joining us today and we look forward to speaking with you next quarter. Thank you.

This concludes today's conference call. You may now disconnect