Hope Bancorp Inc (HOPE) 2009 Q1 法說會逐字稿

Good morning ladies and gentlemen, thank you for standing by.

Welcome to the first quarter 2009 Nara Bancorp earnings conference call.

During today's presentation all parties will be in a listen-only mode.

Following the presentation, the conference will be open for questions.

(Operator Instructions).

This conference is being recorded today, Tuesday, April 21st, 2009.

I would now like to turn the conference to our host, Mr.

Tony Rossi of Financial Relations Board.

Please go ahead, sir.

Thank you, Operator.

Good morning everyone, and thank you for joining us for the Nara Bancorp first quarter 2009 conference call.

Joining us this morning from management are Ms.

Min Kim, Chief Executive Officer, Mr.

Alvin Kang, Chief Financial Officer, and Ms.

Bonnie Lee, Chief Operating 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, and actual results may differ materially, as a result of risks and uncertainties that pertain to the Company's business.

We refer to you the documents the Company files periodically with the SEC, specifically the Company's most recent 10-Q and Annual Report on Form 10-K, 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 the 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.

Min Kim.

Ms.

Kim?

Thank you, Tony.

Good morning, and thank you for joining us today.

I am going to provide a brief overview of the first quarter of 2009, 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 2009.

As expected, we continue to see elevated levels of credit costs in the first quarter, as the recessionary conditions are having a negative impact on our borrowers.

The businesses that show the most weakness in our portfolio this quarter were car wash, gas station, and hotel/motel.

We continue to take a very aggressive approach to managing our problem assets.

We have reformed an asset quality management task force, comprised of senior officers, and have assigned each member the responsibility for monitoring and resolving major problem loans.

This has relieved some of the burden on our special asset group, and should help bring about quicker resolutions.

One of the remediation strategies we are employing, is identifying borrowers that still have fundamentally healthy businesses but are seeing temporary declines in cash flow, due to the weaker economic conditions.

In these cases, we are working with our borrowers to restructure, or modify the loans to relieve some of the near term pressure they are facing.

The typical loan modification consists of a temporary deferment where the borrower will make interest-only payments for a period of three to six months, in order to qualify for the loan modification, the borrower must provide a cash flow projection, and demonstrate the ability to service the debt after the temporary deferment.

In some cases, we are also receiving additional collateral, or an affiliate guarantee.

As of March 31, 2009, we had a total of $58 million in modified loans.

The average modified loan amount is approximately $600,000.

We believe this proactive approach of working with the borrowers under stress, will ultimately help mitigate our potential loss.

Al will provide more analysis about our asset quality later in the call.

As we indicated on our last call, our primary focus during the economic downturn is managing our balance sheet, maintaining strong capital levels, and improving our liquidity and financial flexibility.

I am pleased to say that we made substantial progress in this regard during the first quarter.

We increased our core deposits by $274 million during the quarter.

This was primarily due to some attractive checking and CD products that we are offering, as well as our successful marketing campaign targeting non-Korean American customers.

The deposit cost in the non-Korean American markets are generally lower than the Korean American market, so we are very excited about our success in this area.

We took advantage of the strong growth in core deposits to reduce our balance of brokered CDs.

Despite running off brokered CDs, we still reduced our loan to deposit ratio from 108% last quarter to under 100%.

This improvement will provide us with improved financial flexibility going forward.

Some of the improvements in the loan to deposit ratio was the result of our more conservative approach to lending.

This approach entails limiting our exposure to certain industries, implementing tighter underwriting criteria, and setting new policies for loan pricing.

This has an effect of limiting our loan production during the first quarter.

However, with the progress that we have made in deleveraging our balance sheet, we believe we can be somewhat more accommodating to borrowers going forward, which should have a positive impact on our loan production, without compromising our stronger underwriting criteria.

At this point, I am going to turn the call over to Al, who will review additional financial results for the first quarter.

Al?

Thank you, Min.

Let me start with our net interest margin.

On a GAAP basis, our net interest margin was 3.19% in the first quarter of 2009, compared to 3.71% last quarter, a decline of 52 basis points.

The decline is partially attributable to the balance sheet management strategies we are employing, which have a negative near term impact on our margin.

To enhance our financial flexibility, and increase our liquidity in the current environment, we have shifted our earnings mix more towards set funds, cash, and investment securities.

The lower yield on these more liquid assets, combined with higher interest costs and retail deposits, contributed to the decline in net interest margin.

But this is a trade-off we are willing to make in the current environment, in order to maintain higher on-balance sheet liquidity.

We were also somewhat surprised by the degree of success we had in attracting deposits during the first quarter, which puts us in the position of having excess liquidity in March, that could not be quickly deployed into higher yielding assets.

This magnifies the negative impacts on the margin this quarter, but sets us up to potentially see nice margin expansion later in the year.

During the first quarter, our yield on interest earning assets declined by 74 basis points, while our cost of funds declined by 31 basis points.

The decline in yield on interest earning assets was attributable to both the asset mix shift I just discussed, as well as the repricing of variable rate loans that adjust on a quarterly basis.

At March 31, 2009, 49% of our loan portfolio was comprised of fixed rate loans, with a weighted average yield of 7.63%.

This mitigated the adverse effect of the fourth quarter rate cut on our adjustable rate portfolio, whereby the yield declined to 4.52% at March 31st, 2009, from 4.65% at December 31, 2008.

Going forward, we expect a more conservative asset mix, to result in additional compression in our net interest margin in the second quarter.

However, we expect an increase in our net interest margin during the second half of the year, which should be driven by the following factors.

First, we should see lower deposit costs as CDs reprice at lower rates, and as we continue to tap into non-Korean American markets, where deposit pricing is lower.

Second, we will prudently shift our earnings asset mix back towards loans and investments with higher yields.

Third, we have new loan pricing in place, that includes floors on variable rate loans.

And fourth, our current loan production is at higher yields than our existing portfolio.

During the first quarter, the weighted average yields on our loan production was 6.50%, which compares to an average yield on our total loan portfolio of 6.01%.

The combination of these factors should result in meaningful expansion in our net interest margin later in the year.

Our non-interest income was $4.4 million in the first quarter, which was a decline of 5% from the same period last year.

The decline was due a decrease in sales of SBA and other loans.

As we indicated on our last call, we have scaled back our SBA lending operations, due to the lack of an attractive secondary market for these loans.

Our SBA loan production was $570,000 during the first quarter, compared to $21.4 million in the same period last year.

We had no sales of SBA loans during the first quarter of 2009.

The only gain on sale we recognized during the first quarter was $387,000, related to the sale of a non-SBA problem loan, that had been written down during the fourth quarter of 2008.

We had two other notable items that impacted our non-interest income in the first quarter of 2009.

We had a $785,000 gain recognized on the sale of $43 million in mortgage backed securities.

The proceeds from these sales were reinvested in securities, with slower prepayment characteristics.

And we had a net valuation loss on interest rate swaps.

Our non-interest expense increased by 6% from the prior year.

The increase is primarily due to a $1.4 million increase in credit related costs, a 12% increase in occupancy costs due to new branch openings, and a 142% increase in FDIC Insurance premiums to $750,000.

These increases were partially offset by a 16% decline in salaries and benefits expense.

The decline in compensation was due to lower bonus accruals, and a reduction in FTEs to 367 at March 31, 2009, from 409 a year ago.

Moving to the balance sheet, our gross loans were $2.09 billion at March 31, 2009, a slight decrease from $2.10 billion at December 31st, 2008.

New loan production was $63 million in the first quarter of 2009, compared to $81 million in the fourth quarter of 2008.

Our total deposits were $2.1 billion at March 31st, 2009, an increase of 8%, or 33% annualized, from the $1.94 billion at December 31, 2008.

As Min indicated, the growth came largely in retail deposits, particularly checking accounts and non-jumbo CDs.

The growth in core deposits was achieved despite additional outflows of deposits, by customers transferring money to Korea to take advantage of the weakening of the Korean Won.

Based on an analysis of wire transfer trends, we estimate the net impact of these transfers was approximately 25 million to $50 million in the first quarter.

Turning to asset quality, we saw a decline in net charge-offs relative to last quarter, but they still remain well above our historical levels.

We recorded $8.6 million in net charge-offs during the first quarter.

Two commercial real estate loans and one commercial business loan, accounted for almost half of the charge-offs this quarter.

The remaining charge-offs in the first quarter, consisted of loans to retail businesses and consumer loans, averaging approximately $64,000 per loan.

Our non-performing loans were $41.3 million, or 1.98% of total loans at March 31, 2009.

This compares to $37.6 million, or 1.79% of total loans at December 31, 2008.

The significant in-flows into non-performing loans during the first quarter, included four commercial real estate loans aggregating $6.3 million, and one commercial business loan amounting to $1.7 million.

We have either modified or initiated foreclosure on the real estate loans, and we modified the business loans.

Our total watch list loans increased to $174.1 million at March 31, 2009, from $136.7 million at December 31, 2008.

As Min indicated, the most significant areas of weakness were in loans to car washes, gas stations, and hotels and motels.

As part of the increased resources, we are committing to the credit administration department, we conducted an internal sampling analysis this quarter.

The analysis we conducted was designed to assess the extent of the decline in collateral values in our CRE portfolio, and the decline in debt service coverage in our C&I portfolio.

For the CRE portfolio, we included some loans within the top 10% of our portfolio, and randomly picked accounts that were representative of the rest of the portfolio, from a geographic and property type perspective.

In total, 59 loans were included in the analysis.

We ordered current appraisals on all of them and to-date, we have received appraisals on 37 of those loans, representing $94 million in credit.

The weighted average decline in collateral was 24%.

Given our typical loan to values at origination of 60 to 70%, we still have a good cushion on these loans.

For the C&I portfolio, we used the same type of sampling methodology, and analyzed loans representing about 10% of the portfolio.

For each of these loans, we reviewed the most recent year end financial statements, which are either from December 31 or September 30, 2008.

Based on this sample, the weighted average and debt coverage ratio, declined from 3.0 to 2.0 over a 37 month average time period.

While these borrowers have certainly experienced stress, they still have ample ability to service their debt.

As a result of this analysis, we believe we have a good sense of the health of the portfolio and the level of reserves required.

Our provision for loan losses was $15.7 million in the quarter.

This provision reflects an increase in impaired loans, additional loan downgrades, and higher loss migration factors.

As a result of the provision for credit losses exceeding our net charge-offs, we increased our reserve levels.

At March 31, 2009, our allowance for loan losses was 2.42% of gross loans receivable, compared to 2.07% at December 31, 2008.

The amount of coverage to nonperforming loans was 122%, compared to 116% at December 31, 2008.

Excluding the specific allowance for impaired loans, the allowance coverage on non-impaired loans was 1.48% at March 31, 2009, compared to 1.41% at December 31, 2008.

Despite the net loss we experienced in the first quarter, our tangible common equity remains virtually unchanged at $218 million, due to an increase in the value of our investment portfolio, which positively impacted other comprehensive income within stockholders' equity.

We finished the first quarter with tangible common equity equal to 7.74% of tangible assets, which we believe gives us a strong cushion against any additional losses that may occur.

On a final note, I would like to mention that we included some additional disclosures regarding our asset quality in the press release yesterday.

You can find that at the end of the financial table.

Now I will turn the call back to Min.

Min?

Thanks, Al.

Looking ahead, our expectation is that credit costs will remain elevated in the near term.

However, we believe we have positioned the bank to generate improvements in preprovision earnings going forward.

We believe that our net interest income will increase throughout 2009, as we increase our loan production, and our net interest margin expands.

For the full year, we are expecting loan growth of 5%, all of which will be generated over the remaining quarters.

Our goal is to fund this growth almost entirely with additional core deposits.

While we are highly focused on managing through the current economic challenges, we are also mindful that there will be a recovery at some point, and we intend to fully capitalize on the growth opportunities that will be available.

Accordingly, we are continuing to invest in the business during the downturn, in terms of adding talent, technology, and branches.

We are very pleased that Bonnie Lee is once again part of our senior management team.

As our Chief Operating Officer, Bonnie will be responsible for overseeing all business units and operating departments, executing our near term strategies, and managing our day-to-day operations.

In addition to Bonnie, we are also adding Mark Lee, a 20-year veteran in the Asian American banking industry, to our senior management team as a Chief Credit Officer.

With these two additions, we believe we have substantially strengthened the depth and quality of our management team.

We are also moving forward with an expansion of our East Coast franchise.

We have a new branch that is scheduled to open in Fort Lee during the second quarter, and a branch in Great Neck, New York, scheduled to open in the second half of the year.

We anticipate that both of these branches will be particularly successful in attracting new deposit customers.

We believe that the investments we are making now, as well as our commitment to providing top quality customer service, will position Nara Bancorp for sustained growth, and profitability as economic conditions improve.

Now we will be happy to take any questions you might have.

Operator, please open up the call.

Thank you, ma'am.

We will now begin the question-and-answer session.

(Operator Instructions).

Our first question is from Aaron Deer with Sandler O'Neill.

Please go ahead.

Hi, good morning everyone, and welcome back, Bonnie.

Thank you.

I guess if I could begin with the troubled debt restructuring, wondering if you could give some color behind those, in terms of maybe what percentage of the modifications have additional pledged collateral behind them?

And then also can you go through the process of what happens at the end of that temporary modification, and what needs to happen in order for those to be reclassified back as performing?

Okay.

Well, first of all, we do have a total of troubled debt restructuring loans of about $43 million.

And of the 43 million, 31 million is accrual, and 12 million is non-accrual.

The typical terms of the modification on our restructured loans are, we will modify their payment schedules to meet their current cash flow, which covers minimum interest, plus partial principal, and we will extend to more than six months.

Typically, six months to 12 months, based on their projected cash flow, and I would say maybe 10% of our restructured loans may have additional collateral or additional guarantee at the time of modification, and usually we ask them to bring the loans current at the time of loan modification.

And most of our modifications are within the commercial real estate portfolio, and some on small business loans as well.

Okay.

That is helpful.

And then on the non-Korean deposits that you mentioned as being a big contributor to the growth this quarter, can you talk a little bit about your strategy behind how you went about goings after those, and where they are coming from, and maybe how you might convert more of those into operating accounts, versus it looks like a lot of the growth might have been in CDs?

Well, Aaron, for competitive reasons, we may not want to disclose our strategy, but it was mostly non-jumbo CDs and checking accounts, and also money market accounts, and we were very happy to have big success targeting non-Korean markets.

Fair enough.

Then just one more question and I will step back.

With the administration working to restore the secondary SBA market, I wonder what your thoughts are on that, in terms of is that a business you would like to ramp back up again, if we do see an improvement in that market, and if so, how quickly could you do that, and do you think that there are quality borrowers out there available at this point?

Well, I think that there is a lot of opportunity to increase our SBA loan production because of relaxed documentation, and also there are no guaranteed fees, and there are guaranteed portions, the guaranteed percentage of the loan has increased, so we are trying to identify potential borrowers to finance through the SBA program, and we would like to see some progress in that, through that new SBA program.

Okay.

Thank you, Min.

Okay.

Thank you, Aaron.

Thank you.

Our next question is from James Abbott with FRB Capital Markets.

Please go ahead.

Yes, hi, how are you?

Good morning, James.

Good morning.

Real quick follow-up on the restructured loans.

Maybe take us through a little scenario of what would allow you to, or cause you to make the decision to restructure a loan, as opposed to cutting off a loan, when some of the C&I loans have gone bad, you have cut them off, and others you have obviously restructured them.

So take us through a little bit of what the decision making process involves?

We will evaluate each customer separately, and based on their viability of business going forward, if we give them temporary deferment on their payments, and it will be solely based on their viability and the future cash flow after a three to six months period, or longer periods.

And we try to work it out with the borrowers as long as they have a future cash flow projection, and if we have full confidence about their viability of the business going forward, and the full commitment by the borrowers.

If we see there is a strong commitment, then we try to work it out with the borrowers.

But in the case where we don't see the future viability of the business, and know lack of commitment by the customers, then we think that there is no point of deferring the payments through restructuring programs.

At that time, we will decide whether we liquidate the business, or just charge it off at the time.

Okay.

So let me go in a little bit deeper on their ability to survive.

What do you do to determine their ability to, not to survive, I guess, but the viability I guess as you phrase it?

Do you look at where their cash flows are today versus where their cash flows might be if the unemployment rate continues to climb higher?

How do you look at that?

Well, first, we identify what caused their problem with meeting our regular payment schedule, and if it is related to economic conditions, and if we think that there is potential recovery on their sales and income, we try to work with the numbers with the customer, and if we think that there will be potential increase in their sales and net income after three to six months, or even a longer period, then we think that it is a good candidate to work it out as a restructuring term.

And are many of the restructurings based on top line improvements, or is it cost cutting efforts that are driving, in other words, I am trying to figure out how much of this is based on the outlook that the economy might recover or stabilize, as opposed to stuff where management of these companies can actually control cutting costs.

Well our small business borrowers, these are the only income forward for them to live for the whole family, so most of the time they will reduce their personal expenses, such as they will just give up their mortgages, give up their houses, which reduces the substantial monthly payment on their personal cash flow, and also their family members will contribute to work on the business, so that also on the business side they will reduce their overhead expenses.

So they try to come up with every way to reduce their overhead expenses, not only on the business side, but also on a personal level as well.

And most of our customers would like to keep the business, and make sure that they can sustain the business throughout this credit cycle.

Okay.

So more on the expense side is where they are able to restructure themselves, rather than on the top line revenue.

Right.

One follow-up question to Aaron's question is on the collateral, it sounds like these are mostly cash flow based, or unsecured loans.

Is that accurate, or if there is collateral, what was the collateral?

Well, most of our restructured loans are, in terms of dollar amount, it was more of the real estate, and in many cases we already have, most of the cases it is well-collateralized by their real estate, and most of, the case where we take additional collateral is more on the C&I, where we didn't have the collateral, real estate collateral at the time of the loan origination.

So if there is any available collateral from the borrowers, which was not pledged to our loan, we would like to get them at the time of restructuring.

Okay.

That is very helpful.

Thank you again for your time.

Thank you.

Thank you.

Our next question is from Erika Penala with Bank of America Securities/Merrill Lynch.

Please go ahead.

Good morning.

Good morning.

Just wanted to clarify, the amount of commercial real estate loans where you receive new valuation data and rent roll data, was $97 million?

Yes.

Okay.

And could you give us a sense of when you foreclose on a commercial real estate property, how much foreclosure costs usually are?

Also it depends on the location and the deficiency, at the time of, deficiency at the time of the valuation, but historically from our experience it is about 10%.

Okay.

And also I am not sure how actively you have marketed underperforming projects to this, out there in the market, but what is usually the discount that the secondary market is demanding to take the project or the building, the property off of your hands in a foreclosure scenario?

Well, it may vary, it depends on the type of the property, and the locations, and so on.

But I only can speak from our own experience, and during the last quarter, we tried to sell the note on our car wash, which was a very attractive location, and the business was still operating, and there was strong viability of the business, and we sold at 15%.

Okay.

But we are in the process of selling it, but the discount is anywhere from 15 to 20%.

That is what we are seeing in the marketplace, and the vacant land it may be a different story, but that is what we experienced.

Okay.

And I just wanted to follow up to Aaron's question with regard to deposits.

When you went outside the Korean American community to market, were you in the Asian American deposit community, or did you go to a more mainstream?

Mainstream, we went to mainstream.

Have you gotten a sense of how sticky these depositors are?

Yes, we increased our new number of non-Korean customers, approximately 1,500 new customers.

And now our marketing people are trying to cross-sell other deposit products and loan products to these customers.

So our strategy is to strengthening the relationship through cross-selling.

So I think that these are very sticky depositors, and I think that we can leverage more products and services to these new clients.

Okay.

And one last question on the margin guidance for the second half of '09.

Given that the loans and deposit ratio is still close to 100%, and you expect 5% loan growth for the remainder of the year, how much flexibility do you think you have to reprice the deposits downward?

Well, I think we have a lot of flexibility in that.

There still is quite a bit of a deposit lag that is going on, and so we should continue to see deposit pricing coming down for the rest of the year.

Okay.

Thanks very much.

Thank you.

Our next question is from Don Worthington with Howe Barnes Hoefer Arnett, please go ahead.

Good morning.

Good morning, Don.

Couple things.

One I guess it is for Min.

Are you seeing any deterioration in credit quality out of the East Coast operation?

No.

I think I have been questioned many times.

Their portfolio seems to be doing better than the West Coast, and for example, on commercial real estate, their delinquency represents only 30% of our total delinquency.

So relatively, they are doing much better than West Coast.

Okay.

And then in terms of gains on security sales, do you expect any more of that going forward?

We are not planning on anything that really is a fact and circumstances situation, and it is more from a balance sheet restructuring, or if we see any indications of changes in prepayments, for instance, that may trigger sales.

But we are not projecting any gains going forward.

Okay.

Thanks, Al.

That is all I have.

Thank you.

Thank you.

Our next question is from Julianna Balicka with KBW.

Please go ahead.

Good morning.

Good morning, Julianna.

I have a couple follow-up questions on the TDR, and also one, in your comments you mentioned four factors that will contribute to margin expansion, and I am sorry, I didn't catch the first one, if you wouldn't mind repeating that, right before the shift from investment securities into loans?

The first one was that we should see lower deposit costs as the CDs reprice, and lower rates and as we continue to tap into non-Korean American markets where deposit pricing is lower, that was the first reason.

On the TDRs that have been previously questioned, my question is for the ones where you have the interest-only payments for those modified loans, have you reduced the interest rates on those loans, or is it just simply same interest rate that they have had before?

We have not reduced the interest rate.

It is more of interest of a reduction on payments.

Very good.

And then of the, is it $43 million, of the $43 million restructured loans, how much of those are CRE versus C&I?

CRE represents about 64%, which includes SBA, and the remaining are C&I.

And then what kind of properties are in that CRE?

Mostly car wash, gas stations, motel, hotels, they contribute most of the balance.

Very good.

Thank you very much.

(Operator Instructions).

Our next question is from Lana Chan with BMO Capital Markets.

Please go ahead.

Hi, good morning.

Good morning, Lana.

I just wanted to follow-up again on the modified loans.

I think I understand what happens on the commercial business loans, but on the commercial real estate, if you are modifying a loan, and based on the new collateral values that you are seeing, and the sampling that you got back with the new appraisals, do you take write-downs on those loans while in front of the modifications, or is that possibly a later on event?

We don't necessarily do that if it is a troubled debt restructuring, then in the case where we have a new appraisal, and we do an impairment analysis, if there is an indicated diminution in value of below the loan amount, then we would take a write-down.

And in your sampling, I guess you received $97 million back of the CRE loans, but that seems to be a pretty small amount of your total exposure.

Are you planning on expanding that sampling size over the next few quarters?

Well, we didn't get all of the appraisals back, and so what I gave you was just our progress to-date.

Our total sample on the CRE side was 59 loans, and approximating about $160 million, and we received 37 of the appraisals back for 94.

Okay.

But that would be on a portfolio of almost 1.5 billion?

Yes.

Okay.

About 10%, and then the C&I portfolio, it was the same thing, about 10% of the portfolio.

That one has been completed, and so the results I gave you really represented the full portfolio.

Okay.

And on the net interest income guidance, you said that you expect that to increase for the rest of '09.

Do you expect that to increase in the second quarter, even with the margin coming down further?

No, I think by year end, we should see some margin expansion, but we expect second quarter to have a slight compression, and then we will pick back up in the third and fourth quarter.

Okay.

Thanks, Al.

Thank you.

I am showing no further audio questions.

I will turn it back to management for any closing remarks.

Once again, thank you all for joining us today.

We look forward to speaking with you next quarter.

Ladies and gentlemen, this concludes the first quarter 2009 Nara Bankcorp earnings conference call.

You may now disconnect.

Thank you for using ACT Teleconferencing.