Hope Bancorp Inc (HOPE) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Nara Bancorp's third-quarter 2009 earnings conference call.

(Operator Instructions).

This conference is being recorded today, Friday, October 16, 2009.

I would now like to turn the conference over to Leslie Loyet of the Financial Relations Board.

Please go ahead, ma'am.

Thank you, Brandi.

Good day, everyone, and thank you for joining us for the Nara Bancorp's third-quarter 2009 conference call.

Joining us today from management are Ms.

Min Kim, Chief Executive Officer; Mr.

Alvin Kang, Chief Financial Officer; Ms.

Bonnie Lee, Chief Operating Officer; and Mr.

Mark Lee, Chief Credit Officer.

Before we begin, I'd 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.

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 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 on today's call.

With that, I'd like to turn the call over to Ms.

Min Kim.

Please go ahead.

Thank you, Leslie.

Good morning and thank you for joining us today.

I am going to provide a brief overview of the third 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 have some concluding remarks before we open up the call to your questions.

We were pleased to return to profitability for the third quarter, as we recorded net income available to common stockholders of $0.11 per share.

Contributing factors were the improvement in our net interest margin over the second quarter, along with a lower loan loss provision.

While the provision for loan losses increased to $8.5 million this quarter, compared to $6.2 million a year ago, the provision was significantly less than the $19 million we recorded in our second quarter.

The current economic conditions in our marketplace continues to present challenges to us.

During the third quarter, inflows into early-stage delinquencies increased by more than $25 million from the end of our second quarter.

The jump in early-stage delinquencies was mainly due to five loan relationships involving two carwashes, three motels, and a dry cleaning business.

Our aggressive approach to remediating problem loans resulted in higher levels of nonperforming assets.

We firmly believe this is the best course of action to clear our balance sheet of a problem asset.

After growing deposits by 28% in the first six months of the year, which substantially improved our liquidity position, we took steps to slow our deposit growth rate to 2% in the third quarter.

We accomplished this with a decreased deposit pricing in all categories.

We ended the third quarter with a loan-to-deposit ratio [of] 86%.

Quarter loans grew 2% year over year, largely due to net loan growth of $52 million during the quarter.

As we expected it, the economic downturn has reduced loan demand as well as the number of borrowers that meet our tighter underwriting criteria.

We continue to be selective in underwriting, but given our success in raising core deposits and our strong capital positions, we feel that we have ample liquidity to fund new loans.

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

Thank you, Min.

Let me begin with a discussion of our net interest margin.

On a GAAP basis, our net interest margin was 3.14% in the third quarter, compared to 2.94% in the second quarter, an improvement of 20 basis points.

One year ago, our net interest margin was 4.02%.

Over the past 12 months, market interest rates declined as the targeted Fed funds rate fell 175 basis points.

At the same time, our interest-earning assets repriced downward faster than our interest-bearing liabilities.

Meanwhile, our average interest-earning assets increased 26% year over year.

With the substantial growth in deposits in the first half of the year, our liquid asset investments increased.

The increased investment in lower-yielding liquid assets, plus the lag in deposit re-pricing, were the primary drivers of the year-over-year compression in our net interest margin through the second quarter of 2009, which turned around in the third quarter as we anticipated.

We were able to redeploy liquid investments into higher-yielding assets, and the cumulative effect of lower deposit rates helped to improve our margin.

We did see another sequential increase in the average yield on the loan portfolio.

It was 6.28% following the yield of 6.20% in the second quarter.

This was 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 51% of the loan portfolio at September 30.

Going forward, we anticipate further margin expansion.

First, we expect to continue to ship our holdings of lower-yielding liquid assets into higher-yielding loans and investments, as attractive lending or purchase opportunities present themselves.

Second, we expect to see lower deposit costs as the lag effect of lower deposit re-pricing continues with each pricing change.

Our weighted average cost of deposit has declined to 2.2% from 2.7% one year ago.

Third, our net interest margin will benefit from the gradually increasing loan yields in the existing variable-rate loan portfolios.

Our non-interest income was $4.9 million in the third quarter, which was an increase of 22% from the same period last year.

This was mainly due to net gains on sales of securities available for sale.

There were no such gains in the third quarter a year ago.

Our non-interest expense increased by 5% over the prior year.

This was primarily due to a $554,000 increase in FDIC insurance premiums following the higher assessment rate imposed by the FDIC starting with the second quarter of 2009.

In addition, credit-related expenses, including loan collections and OREO expenses, increased $787,000 as we vigorously pursued resolution of our problem assets.

Partially offsetting these increases, our salaries and benefits expense decreased 12% from the prior year, primarily due to decreases in bonus expense and a reduction in FTEs to 348 from 378 one year ago.

Sequentially, noninterest expense for the third quarter decreased by 13% from the second quarter.

The difference was mainly due to the special industrywide assessment in the second quarter, of which the Company's share was $1.47 million.

Moving to the balance sheet, our gross loans were $2.15 billion at September 30, up from $2.10 billion at the end of the second quarter.

Yield loan production, including $47.2 million in purchase loans, was 139 point -- $131.9 million in the third quarter.

This is up from $80.5 million in the second quarter, and also from $105.7 million a year ago.

Loan payoff -- paydown, amortization, and line-of-credit changes totaled $60 million in the third quarter, compared to $88.4 million during the second quarter.

Our total deposits were $2.49 billion at the end of the third quarter, an increase of 2% from the second-quarter totals.

We had meaningful growth in money market accounts and retail CDs, while we let our broker deposits run down to $20 million from $301 million at the end of 2008.

Now a few words on credit quality.

Our nonperforming loans increased to $35.5 million in the third quarter, from $30.9 million in the second quarter.

New inflows included four loan relationships aggregating $8.6 million, primarily secured by commercial real estate.

Our nonperforming assets increased by $13.2 million during the quarter, to $84.9 million, or 3.98% of gross loans and OREO.

During the quarter, OREO increased to $4.7 million from $3.8 million at the end of the second quarter.

This was mainly due to one retail building in Georgia that was taken into OREO, totaling $1.3 million.

Accruing restructured loans in the third quarter increased to $44.7 million from $37.0 million at the end of the second quarter.

This was largely due to five commercial real estate loans aggregating $10.8 million that were restructured.

The total dollar amount of loans on our watch list declined again in the third quarter to $144.2 million from the high recorded in our first quarter, which amounted to $174.1 million.

Special-mention loans improved significantly due to loan upgrades based on improved cash flow.

The substandard category declined slightly from the second quarter, but remains elevated at $110 million.

The borrowers that we have previously identified as stressed continued to have problems.

Total delinquent loans, 30 or more days delinquent, increased to $67.9 million in the third quarter, from $42.8 million at the end of the second quarter.

Early-stage delinquencies increased significantly in the third quarter, primarily attributable to five loan relationships aggregating $18.3 million.

The relationships consisted of $10.9 million in loans to a borrower with several carwash businesses, $6 million in loans to three motel operators, and a $1.4 million loan to a dry cleaner.

All of these borrowers have seen revenues fall off due to the economy.

Subsequent to 9-30, we did receive past-due payments on the car wash and dry cleaning business loans.

Our net loan charge-offs for the third quarter were $5.9 million, or 1.1% of average loans on an annualized basis.

This compares to $6.3 million a year ago and $19.2 million during the second quarter of this year.

Charge-offs this quarter included one commercial real estate loan of $1.2 million and one commercial loan of $737,000.

Excluding these two loans, the remaining charge-offs were comprised of 55 loans averaging $71,000.

At September 30, our allowance for loan losses was 2.49% of gross loans receivable, compared with 2.42% at June 30.

The allowance coverage to nonperforming loans decreased slightly to 149% from 163% at June 30.

Excluding the specific allowances of $16 million for impaired loans, the allowance coverage on the remaining loan portfolio was $37.0 million, or 1.81%, of total non-impaired loans at September 30, compared to $37.5 million, or 1.85%, of non-impaired loans at June 30, 2009.

Finally, our capital ratios remain strong.

At September 30, our Tier 1 leverage ratio was 9.95%, our Tier 1 risk-based capital ratio was 13.51%, and our total risk-based capital ratio was 14.77%.

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

Thank you, Al.

As we move into the fourth quarter, we are focused on three main areas.

The first one is remaining aggressive in resolving problem assets.

Second, growing core deposits and remaining strong liquidity and capital.

We believe this strategy positions us well for increasing profitability as economic conditions improve.

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

Operator, please open up the call.

(Operator Instructions).

Dave Rochester, FBR Capital Markets.

Congrats on a great quarter.

I just have a couple of quick questions.

One on the margin, and then on commercial real estate in general.

You guys have some good margin expansion, cost deposits was down.

It seems like, though, CD pricing can decline a whole lot more.

I think the cost was around 270.

Where do you see that going and where are you pricing CDs today?

We think that our CD costs are going to continue to go down, and if we look at our CD pricing, a one-year in the most popular -- term to maturity as well as the dollar amount is -- our rack rate is about 150.

So there is substantial room for improvement in our CD costs.

And you'd expect to see most of that over the next couple of quarters, I guess?

Yes, we have quite a bit that is maturing over the next couple of quarters.

Let me see if I can give you the dollar amount.

For the fourth quarter, we have about $240 million of CDs maturing, and it carries a weighted average rate of 335.

And then, in the first quarter, we have another $492 million that's maturing, carrying a weighted-average rate of 312.

So, there is substantial room to pick up margin to get the lower CD pricing going forward.

Great.

And on the -- in terms of your excess liquidity, how fast do you expect to employ that or allow that to run off?

Are you thinking that we'll see most of that run off over the next three quarters or so?

I think we will probably see a lot of that run off as CDs mature, and our hope is that our loan production will increase gradually over time, as demand comes back.

Absent that, we would invest excess liquidity into investment securities, but also be mindful of the need to carry very liquid assets on the balance sheet.

Thanks for that.

Finally, just on the CRE site, you've talked about the restructurings.

Can you talk about how those loans are restructured, and then any other activity, loan modification activity that went on during the quarter that isn't captured in the CDR bucket?

Let me try to answer that question.

The commercial real estate loans that we have restructured, what we did is we have provided a interest-only or interest-only -- interest with the modest principal reduction payment schedules.

We did not decline -- we did not reduce the interest rate.

In terms of modest or temporary modifications, I don't have the number by the CRE bucket, but overall in the quarter, we did decline the total number of the modified loans by 77%.

That is due to the -- most of the loans that were temporarily modified graduated, and then went back to regular schedule.

Okay, so the overall amount of modified loans declined 77%?

That is just a temporary modification.

Right.

Great.

All right.

And just finally, you seeing any changes in the cash flow coverage in the commercial real estate portfolio?

And is there much difference in the coverage between the fixed portion and the variable-rate portion?

We are certainly seeing a decline or stress in the debt-coverage ratio.

I do not have the figure based on a fixed versus variable.

All right, guys.

Thank you very much.

Again, great quarter.

Lana Chan, BMO Capital Markets.

A couple of questions.

One, I was wondering -- you were undergoing, I think, your annual regulatory exam during the quarter.

I was wondering if the results are reflected in the third-quarter results?

The regulators are really in the late stages of their exam, and as you know, we -- the regulators prohibit, and it's really our policy not to disclose exam results.

Okay.

And as far as the capital is concerned, I know you filed a $150 million shelf registration recently.

Could you talk about, as you look at your capital ratios and sort of opportunities for growth going forward, whether it be further loan purchases or origination or maybe acquisition opportunities, how you are thinking about that?

I think we described it in our use of proceeds in the S3, and it's those things that you mention.

It's working capital, and organic and acquisitive growth opportunities.

So that's generally what we would use that capital for.

(Operator Instructions).

Aaron Deer, Sandler O'Neill & Partners.

As a follow-up to Dave's question, I was wondering can you give the dollar volume of those modifications that aren't classified officially as TDRs?

100% of the total modified loans are already identified as under our watch list.

Total dollar amounts?

Did you say, Aaron, did you ask for the total dollar amounts?

Yes, please.

Okay, well, total modified loans is $73.1 million.

It was $105 million last quarter.

It was $101 million in the second quarter, and let me give some breakdown under our total modified loans of $73.1 million.

Total TBR is about $57.4 million, and out of $57.4 million, accrual status are at $44.7 million and nonaccruals are $12.7 million, and the remaining $15.7 million are modified loans as a temporary basis, and out of $15.7 million, $11.5 million is on an accrual status and $4.2 million is on nonaccrual status.

So those are the color of our total modified loans.

And then, just, I guess -- I was surprised to see that maybe charge-offs weren't more aggressive in the quarter, especially with the NPAs continuing to rise.

I realize that there is some parameters that are set that define what that charge-off amount might be, but what are your thoughts in terms of trying to hold down nonperforming levels and your willingness to charge things off more aggressively?

The charge-offs -- is a function of impairment calculations.

Every quarter, we go through our impaired loans, and as we update the values of those impaired assets and where is the collateral dependent, we do charge them off.

So that's really the function of the -- our analysis.

Okay.

And then, a number of lenders who have been participants in the SBA business have noted that spreads are back on the sale of those loans.

I'm wondering -- I know you guys have pared back your origination activity there.

Is that something that you'd be looking to pick back up again, and what would be involved to try to get more active in that business?

Well, yes, as the premium increased, we are trying to get back into SBA production.

However, it may take some time to build a pipeline, and also, because of the underwriting requirements, there [is sense] to have less borrowers who qualifies under SBA guidelines.

However, we are actually looking for SBA productions within our marketplace.

Okay.

And then, can you tell me -- how active have you been with doing customer combinations, where -- whereby you might take a property from a distressed borrower and try to facilitate the sale of that to another customer who is in a stronger position?

And if you have been doing that, can you talk a little bit about how those notes are underwritten, if there is losses taken in that process, or how that works?

Sure.

During the third quarter, we had a total note sale of four notes with about $8.6 million, and the average discount was about 30%.

We continue to work on our larger problem loans for potential note sale, and so far we had a lot of positive feedback, not only from our existing customers but a lot of our potential buyers.

So this is the one -- one strategy that we are aggressively pursuing to resolve and get rid of our problem assets from our balance sheet.

So, just to clarify, those four note sales were situations where you worked within -- with another, stronger borrower to secure an existing problem loan?

Let me give a little more color to that.

One particular case was a borrower that had a large deposit relationship, had a wherewithal to carry the note to the end, whereas other cases, they were not borrowers.

So there are non-borrowers.

So, this is not something that we facilitated, necessarily, with that particular buying entities or individuals.

Chris Stulpin, D.A.

Davidson & Co..

Thank you.

Regarding your provision and I guess your reserve, I know your reserve, your coverage ratio is quite healthy at the moment, but what are your thoughts on maybe building that up even further, your reserve to loans and reserves to NPLs, given, of course, your loan portfolio and potential losses in that portfolio over the next several quarters?

I guess what I'm trying to do here is find out where you think your provision is going to go in the next quarter or so?

That there is a big DIP-linked quarter?

There is a big dip?

On the provision?

I'm sorry, in the provision -- 19 million, down 8.5.

Maybe I misspoke.

I meant to say provision.

I thought you were talking about the allowance.

The allowance actually went up.

Well, let me give you some information on the components of the reserve, and then we can talk about what all that means.

If you think of the reserve as three components, first is the specific reserve.

Then you have the quantitative reserve and qualitative reserve, those latter two being what's called FAS 5 or general reserve.

And at September 30, our total reserves were, say, rounded, $53 million.

Of that, our specific reserves were close to $16 million, and the remainder or the general reserves made up approximately $37 million.

And then, if you break down the general reserves, about $8.9 million of that was quantitative, and the remainder, or approximately $28 million, was qualitative.

So if you compare the numbers to June 30, June 30 our specific reserves were about $12.8 million and our quantitative general reserves were $18.2 million.

And our qualitative reserves were about $19.3 million.

So overall, we increased about -- close to $3 million, and you can see that the quantitative reserves actually went down from $18.2 million down to $8.9 million.

And the reason for that decline is that we looked into the portfolio -- we decided to get more granular on trying to track the loss history by loan types within the portfolio.

So whereas before we had a large commercial real estate plat, we -- or type, we broke that down into eight separate commercial real estate loan types.

As an example, we broke it down between multifamily residential, specialty retail, warehouse, hotel/motel, which is a concentration for us, gas station, and the car washes.

So we had eight different categories.

And then, on the commercial business loan side, we broke it down into three loan types -- term loans and businesses, trade finance, and lines of credit.

So, by doing this granularity, we actually had a better tracking of loss history by these loan types, and what that analysis showed was that actually, because we used larger buckets in the past, we were attaching a much higher loan loss history and loss reserve to the non-impaired portfolio because of the types of buckets that we were using.

So, we actually had, if you will, excess quantitative reserves to the tune of about $8.6 million.

And -- so, and you can see that we actually increased our qualitative from $19.3 million to $28.1 million, and so, we -- even though our quantitative declined, our qualitative increased, so that overall, our coverage remains basically the same.

So -- I don't know, this may be kind of a roundabout way, but I think if -- going back to the general question, if we look at our watchlist loans, most of our increases, nonperforming assets, increases in delinquency really is coming from the watchlist loans.

And it's not that we have a whole big amount of previously -- or unidentified problem loans flowing into a problem-loan category.

So on that basis, we think that we maybe have reached a trough.

We don't know.

But we feel fairly comfortable with our process and, you know, our level of charge-offs, and even though the nonperforming assets, nonperforming loans, and delinquencies may be increasing, these are really coming from previously identified and classified problem loans.

If I can just add one more thing on the qualitative factors, the fact that we have increased the qualitative factor reserve is in a recognition that the CRE cycle in this -- CRE quality in this credit cycle -- we are still in the early stage, so we wanted to make sure that we identify and recognize that where the potential deterioration could come.

As a result, we increased the qualitative factor that's associated with the CRE portfolio.

I hope that answers some of your question.

(Operator Instructions).

Don Worthington, Howe Barnes Hoefer & Arnett, Inc..

Just a couple of other things.

In terms of the loan purchases, the $47 million, were these whole loan purchases or participations, and what types of loans were they?

These were not participation purchased.

We purchased 100% of the -- each relationship, and the majority of the purchases were multifamily residential.

And we also bought a couple of church -- religious-related industry financings.

Okay.

And then, in terms of gains on sales of securities, should we look for more of that activity going forward?

I think we will probably have additional gains, but I don't know that we're going to have the same level that we had in the second quarter.

Third quarter, I'm sorry.

Joe Gladue, B.

Riley & Co.

I think most of my questions have been answered.

But just one detail.

Did you mention what the -- your special-mention loans were?

What the dollar amount was?

Let me give you that.

You know, Joe, I think there was a breakdown under our attachment.

But let me give you the color.

Total special management is [a] $30.7 million, substandard is $110.6 million, and doubtful is $2.7 million.

All right, (multiple speakers).

I guess I'm just wondering how the New York market is comparing to, I guess, the bigger California market, how's both loan demand and asset quality trends that you're looking.

In terms of asset quality, they seem to be doing much better than California.

So in terms of delinquency and classified asset loans and nonperforming assets, there are -- they contribute less than the California market.

Dan Oxman, JAM Equity Partners.

Can you discuss generally your charge-off methodology?

Are most of your charge-offs whole loan or partial loan, which I guess may be an NPL to OREO?

Charge-offs -- it's a combination of both.

Sometimes it may be a complete charge-off as we recognize there is no loss of the recovery potential at the moment.

And then, whatever we do recover, we take it as recovery.

But the typical charge-off would be more of an impairment, partial charge-off.

As we update our valuation -- values on our collaterals each quarter, and we'd go through our impairment analysis, if it's collateral dependent and we are going through foreclosure, that's the time -- at that moment, we would take the charge-off.

Does that answer your question?

Follow-up question from the line of Aaron Deer, Sandler O'Neill & Partners.

Sorry about all the questions.

But just follow-up on -- can you tell me what the dollar volume is of commercial real estate renewals that are coming up in the fourth quarter, as well as in 2010?

And then, on the recent renewals that you guys have had, have you run into any cases where the LTV has exceeded 100% or debt service coverage was less than one?

Let me try to give you a little color on that.

For the remainder of 2010, we have 81 loans (multiple speakers)

2009 or 2010?

I'm sorry.

Actually, I don't have the number on 2009, but I do have a 2010 number.

81 loans totaling $74 million matures, averaging about $914,000 each.

For 2011, I have -- there are 214 loans totaling $204 million, averaging $951,000 each.

For the loans that we have seen or the renewals, we have not seen a case where -- to my recollection, I don't think we have seen a over 100% loan-to-value situation.

The DCR is under stress, but we would not consider outright renewal if the DCR is not more than a one.

I don't recall specific cases right now, but that is the basic color.

And Aaron, for the remainder of 2009, total dollar amount is about $53 million is coming due for renewal.

That's great.

Thanks, Min.

Thanks, everyone else.

I appreciate it.

Follow-up question, Chris Stulpin with D.A.

Davidson & Co..

Just one more quick question.

What are your top three or five CRE relationships as far as dollar amount?

I'm not sure if you mentioned that last quarter or not.

Just one second.

This is more of a combination.

Let me give you our top three or five relationships.

And first relationship, total outstanding balance is about $17 million with six different businesses and properties.

So it's multi-collateral, not only CRE, and the second-largest borrowing relationship is -- actually, this is [$22.8] million and this is two properties with multiple borrowers as the guarantors.

And the third largest borrowing relationship is about $18 million, also this is a combination of the commercial real estate and multiple businesses.

And another one is $16 million.

This is one church loan that we recently financed.

You said 60?

So those are the typical average loans -- total outstanding loan balance that we consider.

I'm sorry, thanks.

But you said 16 or 60?

16.

Okay, thank you.

I appreciate it.

At this time, there are no further questions.

I would like to turn the call over to Ms.

Min Kim for any closing comments.

Thank you for joining us this quarter and we will look to speak with you next quarter.

Thank you.

Thank you, ladies and gentlemen.

This concludes the Nara Bancorp third-quarter 2009 earnings conference call.

If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325, followed by passcode of 417-1948.

ATT would like to thank you for your participation and you may now disconnect.