Hope Bancorp Inc (HOPE) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Nara Bancorp Second Quarter 2009 Earnings Conference Call. (Operator Instructions). This conference call is being recorded today, Thursday, July 23rd of 2009.

I would now like to turn the conference call over to Tony Rossi of the Financial Relations Board. Please go ahead.

Thank you, operator. Good afternoon everyone and thank you for joining us for the Nara Bank Corp's Second Quarter 2009 Conference Call.

Joining us today from Management are Miss Min Kim, Chief Executive Officer; Mr. Alvin Kang, Chief Financial Officer; Miss Bonnie Lee, Chief Operating Officer and Mr. Mark Lee, Chief Credit 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 in the future financial performance of the Company. I 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 you to 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 today.

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 Miss Min Kim. Miss Kim?

Thank you, Tony. Good morning and thank you for joining us today. I am going to provide a brief overview of the second 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.

We recorded a net loss of $0.26 per share in the second quarter of 2009. While the net loss is regrettable, it reflects our stated of strategy of focusing on capital, liquidity and a proactive remediation of problem loans in the current environment rather than making imprudent decisions to enhance near-term earnings.

As expected, in our aggressive approach to remediating problem loans is resulting in elevated near-term credit costs but we believe we are making good progress in clearing our balance sheet of trouble assets and improving the credit quality of the remaining loan portfolio.

While there are still many challenges being presented by the recession, we are beginning to see some encouraging signs of stabilization in our loan portfolio. During the second quarter inflows into early stage delinquencies showed -- or slowed and the total dollar amount of loans on our watch list declined for the first time in more than a year. The borrowers that we have previously identified as stressed continued to have a problem and are migrating through the credit continuum, which resulted in an increase in loans falling into the sub-standard classification.

And we also recorded higher charge offs as some of the impaired loans that we have established this big reserve for in prior quarters have now moved to loss. However, we did not see any significant level of new loans showed up on the watch list during the second quarter. We believe this force of findings of the sampling analysis we concluded, we conducted in the first quarter, which showed that despite some degree of deterioration in their financial performance, our average borrower still had adequate cash flow to service their debts.

The key areas of collateral weakness in the portfolio are carwashes, hotel-motels and more recently multi-tenant retail buildings.

Moving to other priority areas for the Bank, we had another strong quarter in deposit gathering. We increased our core deposits by $328 million in the second quarter, which brings our total growth in core deposits to more than $600 million through the first six months of the year.

The strong growth in deposits is attributable to a continued success campaign targeting non-Korean customers, as well as new customers we have attracted through the opening of our new branch in Fort Lee, New Jersey. Our successful deposit gathering has helped us to further reduce our loan to deposit ratio to 85% at June 30th, which was another key priority for Nara this year.

This improvement will provide us with increased financial flexibility going forward. We continue to be selective in adding new loans. The recession has reduced loan demand and also reduced the number of borrowers that can meet our tighter underwriting criteria. As a result, our loan production continues to be well below historic levels. However, we did have an increase in quality lending opportunities relative to the first quarter and had approximately $18 million more in new low production this quarter.

We are hopeful that this trend will continue and we certainly have ample liquidity to fund any new loans given our success in raising core deposits.

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

Thank you, Min. As we have indicated over the past few quarters, our top priority in the current environment is keeping our balance sheet strong to include substantial on balance sheet liquidity.

To achieve our liquidity goals, we substantially increased our holdings of liquid assets, dramatically improving our liquidity ratios. We believe this provides us with valuable financial flexibility, even if it has a negative near-term impact on our net interest margins.

On a GAAP basis, our net interest margin was 2.94% in the second quarter of 2009 compared to 3.16% last quarter, a decline of 22 basis points. The decline is primarily attributable to a lower yield on higher-levels of interest-earning assets.

Our average balance in the securities portfolio increased by $106 million and our average balance of Fed funds and cash increased by $220 million during the second quarter. The increase investment in these lower-yielding assets was the primary driver of the compression in our net interest margins.

On a positive note, we are beginning to see an increase in the average yield on the loan portfolio, which increased 19 basis points during the second quarter to 6.20%. This is due to higher average rates in our variable-rate loan portfolio and also a slight increase in the percentage of higher yielding fixed-rate loans in the portfolio. Fixed-rate loans represented 50% of the loan portfolio at June 30, 2009 compared to 49% at March 31.

Going forward we expect to gradually transition to a less conservative asset mix, which should have a positive impact on our net interest margin. Specifically, in the second half of this year we expect out net interest margin to be positively impacted by the following factors. First, we should see lower deposit costs as CDs re-price at lower rates and as the lower re-pricing of money market and savings accounts also take effect. Second, we expect to see gradually increasing loan yields in the existing portfolio and third, we expect to shift our holdings of lower yielding liquid assets into higher yielding loans as attractive lending or purchase opportunities increase.

The combination of these factors should result in meaningful expansion in our net interest margin later in the year. Our non-interest income was $3.8 million in the second quarter, which was an increase of 14% from the same period last year. Our non-interest income last year was negatively impacted by a $1.7 million other than temporary impairment charge on a non-agency asset backed security. Excluding this charge, our non-interest income declined 25% year-over-year. The decline was primarily due to a $633,000 valuation difference in interest rate [slough].

As we have previously indicated, we significantly scaled back our SBA lending operations. We had $2.9 million in SBA loan originations during the second quarter but no SBA loan sales. However, we did sell a non-SBA problem loan during the quarter that resulted in a net gain of $523,000. This represented the bulk of our net gains on loan sales this quarter.

Our non-interest expense increased by 13% from the prior year. The increase is primarily due to a $2.2 million increase in FDIC insurance premiums. Approximately $1.5 million of this increase was related to the one-time assessment fee.

Our salaries and benefits expense decreased 12% from the prior year, primarily due to decreases in bonus expense and a reduction in FTEs from 410 to 368 over the past year.

Our occupancy expense increased 16%, primarily due to the addition of new branches, and finally, our professional fees declined 29% from the prior year, primarily due to lower legal fees.

Excluding the FDIC assessment, non-interest expense was $14.4 million for the second quarter of 2009 compared to $14.5 million for the same quarter last year.

Moving to the balance sheet, our gross loans were $2.08 billion at June 30, 2009, a slight decrease from $2.09 billion at March 31, 2009. New loan production was $81 million in the second quarter of 2009 compared to $63 million in the first quarter of 2009. However, payoffs and pay downs exceeded loan production.

Our total deposits were $2.44 billion at June 30, 2009, an increase of 16% from the $2.10 billion at March 31, 2009. We had very strong growth across all our core deposit categories, which has enabled us to run off approximately $139 million in broker deposits.

The other assets and other liabilities categories on our balance sheet increased by approximately $37 million and $100 million respectively during the second quarter, which is attributable to securities sold or purchased pending settlement.

Turning to the asset quality, as Min mentioned, we are seeing loans that have been on our watch list for a number of quarters advance to the charge off stage. We had charge offs during the second quarter on 73 loans averaging $266,000 and aggregating $19.4 million. Within these charge offs there were four large commercial real estate relationships totaling $9.2 million and two commercial loans totaling $2.6 million. The remaining $7.4 million of charge off primarily consisted of loans to retail businesses, small retail businesses, averaging approximately $110,000 per loan.

Our non-performing loans were $30.9 million, or 1.48% of total loans, at June 30, 2009, down from $41.3 million, or 1.98% of total loans at March 31, 2009. There were 30 loans totaling $5.9 million that flowed into the non-performing category in the second quarter. Substantially all of these loans were on our watch list prior to entering the quarter. The most significant of the new inflows were three commercial real estate loans totaling $3.5 million. Excluding the three loans mentioned above, the remaining inflows to non-performing loans averaged $88,000.

Our total watch list loans declined to $170.2 million at June 30, 2009 from $174.1 million at March 31, 2009. As Min indicated, this is the first time in more than a year that the dollar amount of our watch list loans declined on a sequential quarter basis. Our provision for loan losses was $19.0 million in the second quarter. The level of provision reflects our charge off in the quarter as well as additional loan downgrades and higher loss migration factors within the portfolio. The majority of the provision went towards our general reserves this quarter.

At June 30, 2009 our allowance for loan losses was 2.42% of gross loans receivable, the same percentage as at March 31, 2009. The allowance coverage to non-performing loans increased to 153% from 122% at March 31, 2009. As a result of most of the provisions, this quarter being allocated to the general reserve, our allowance coverage on non-incurred loans has increased. Excluding the specific allowances for impaired loans, the allowance coverage on non-impaired loans was 1.85% at June 30, 2009 compared to 1.48% at March 31, 2009.

Despite the net loss we experienced in the second quarter our capital ratios continue to be very strong. At June 30, 2009 our Tier 1 leverage ratio was 10.50%. Our Tier 1 risk based capital ratio was 13.37% and our total risk based capital ratio was 14.63%.

Now I'll turn the call back to Min. Min?

Thanks, Al. Looking ahead we are cautiously optimistic that the asset quality problems have leveled off. If the encouraging trends we have seen in early stage delinquencies and watch list loans continues, then we could see lower levels of credit costs going forward. In addition, as Al discussed, we are well positioned to see improvement in our net interest margin during the second half of the year.

We still intend to maintain a different defensible posture with our foremost priorities being aggressive, aggressive problem asset management and to maintain strong capital and liquidity position. However, we believe we may be in a position to go for an offense a bit more in the second half of the year and deliver improved profitability while still maintaining a [fortress] balance sheet.

Now we will be happy to take any questions you might have. Operator, please open up the call.

(Operator Instructions). Our first question comes from the line of Joe Gladue with B. Riley.

I guess first off I would like to say thank you for putting those -- the spot rates in the Press Release for the loan yields and funding costs. That's very helpful. My question I guess relates to the balance sheet. You had a little over 15% in growth in total assets during the quarter but -- and I guess a lot of that was due to the deposit generation you had but, of course, you didn't have I guess a really profitable place to deploy them.

Just wondering what the outlook is for the total balance sheet going forward. Are you going to continue to grow deposits even though loan demand is weak and just are you going to become a little more aggressive in granting loans or are you going to cut back on growing the balance sheet in total?

Well, there are a couple things, Joe. We are or we have significantly reduced our pricing on deposits so we expect that the deposit inflow will taper off and we have put a lot of emphasis on loan production. We see a buildup in our loan pipeline and we expect that to come in during the second half. And we've also, as you saw, invested quite a bit into investment securities as a temporary measure to sop up some of that excess liquidity.

And we're also looking at potential opportunities to purchase loans so overall we're working both sides of the balance sheet to try to make better use of the liquidity that we do have.

Okay let me just follow up on what you said your decreasing deposit pricing. Are you -- do you see that as a -- is that something that's generally going on in the market or are you going to be decreasing deposit prices more than I guess your competitors out there? Just wondering where you stand right now.

Well, I think it depends on the institution and where they stand on their own liquidity situation but I think overall prices, our deposit pricing has come down and I think if once everyone has their liquidity to where they want it then perhaps the pricing in the Korean marketplace will get closer to mainstream.

Julianna Balicka with KBW.

I was wondering if you can refresh our memory on what's going on on the modifications that you have in performing loans? I noticed that you give us some detailed breakouts in the -- not the quality but that one category if you can maybe give some color, the modest modifications services.

Well, in terms of modified loans, overall we're seeing the loans performing as agreed. We're not seeing a significant further re default in the loan types.

And what is the dollar amount of that?

Julianna, to answer your question we have a total troubled and restructured loans of $48.4 million and of the $48.4 million $37 million accrual and $11.4 million are non accruals and so they are $11.4 million is already included part of our non-performing loans.

And but the $37 million is broken out on the schedule in the back page where you have your -- you know what, let me follow up off line with the exact number but I think the re default is exactly what I was looking for as well.

And then I have a second question. looking at your -- at the buildup of watch list with the trend is very encouraging but also looks like substandard balances themselves are building up so what kind of outlook do you have for that resolution of that $112 million, $112.6 million?

Well, most of our substandard loans are real estate loans and it's a combination of owner occupied properties and a couple of multiple tenant retail strip malls and they have -- they are collateralized by the real estate and a majority portion of our subs are secured by real estate so we may see some more additional migration down to the doubtful or a loss category going forward but at this point most of those loans are performing loans and we have adequate coverage in terms of loan loss reserve.

And what is the dollar amount of performing loans in your watch list? Sorry again.

Let's get back to you on that, Julianna.

Yes, Julianna, I don't have the numbers with me. We will get back to you off line.

Absolutely. Thank you. I'll step back now.

(Operator Instructions). Aaron Deer with Sandler O'Neill.

Just a real quick follow up to Joe's question, you mentioned purchasing loans. What type of loans would you be looking to purchase and what kind of discounts do you think are available in the market that would make those attractive?

Well, the what we're looking at right now are multi-[centerman] loans.

But we don't expect to purchase at discount, probably at par, but these are very -- have a very attractive loan yields with strong debt service coverage and strong collateral coverage so we are very selectively picking to purchase good asset quality from a lot of different institutions.

And these are -- would be coming from banks who are just looking to downsize their own portfolios? Is that correct?

That's correct.

That's right.

Okay great. Thanks for your help.

All right and then, Management, it looks like there are no further questions. I'll turn it back over to you for closing comments.

Once again, thank you all for joining us today. We'll look forward to speaking with you next quarter.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation and thank you for using ACT Conferencing. You may now disconnect.