Hope Bancorp Inc (HOPE) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter Center Financial Corporation earnings call.

My name is Ann and I will be your coordinator for today's call.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

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

We will be facilitating a question-and-answer session following the presentation.

I would now like to turn the presentation over to Angie Yang, Investor Relations for Center Financial.

Please proceed.

Thank you Ann.

Good morning, everyone and thank you for joining us today for Center Financial's 2009 fourth-quarter investor conference call.

Before we begin, please recognize that certain statements made during this call may not be historical fact and may be deemed, therefore, to be forward-looking statements under the Private Securities Litigation Reform Act of 1995.

Many important factors may cause the Company's actual results to differ materially from those discussed in or implied by any such forward-looking statements.

These risks and uncertainties are described in further detail in the Company's filings with the SEC.

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

Now, as usual, we have allotted one hour for this call.

Center Financial's President and CEO, Jae Whan Yoo, will begin today with some introductory comments.

CFO Lonny Robinson will then provide some additional color and details for the Company's 2009 fourth quarter.

J.

W.

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

As usual, Center's Chief Credit Officer, Jason Kim, is also here with us and will participate in the Q&A session.

Now, I'd like to turn the call over to J.W.

Thank you, Angie.

Good morning, everyone and thank you for joining us today.

Yesterday afternoon, we announced financial results for Center Financial's 2009 fourth quarter.

These results were relatively in line with the preliminary data that we had pre-released in conjunction with our capital raise announcement on December 30.

I think we all agree that 2009 was the most difficult operating environment for community banks since the Great Depression.

But our team here worked very hard through the last minute of the last day of the year and ended 2009 on a very high note.

As I'm sure all of you know, we completed the private placement of a mandatory convertible noncumulative and non-voting perpetual preferred stock Series B on December 31, raising $73.5 million in new capital.

A preliminary proxy statement has been filed and we expect to receive shareholders approval at a special meeting of the shareholders to be held on March 21, right before the annual 2010 first quarter.

Prior to this raise, on November 30, we also completed our private placement of a common stock raising gross proceeds of $12.8 million.

Collectively, these two transactions brought in $82.8 million of new capital to Center Financial, which I will note is the first capital raise since the Company began trading on NASDAQ.

This transaction significantly boosted our capital ratios.

Our total risk-based capital ratio at December 31 was 17.6%.

Q1 risk-weighted capital ratio equaled 16.38% and our Tier 1 leverage capital ratio was a very strong 12.4%.

We were very pleased that both of these transactions were considerably oversubscribed by both the institutional investor base and the Korean American community.

This exemplifies the market's and our local communities' overconfidence in Center Financial and its leadership.

It signals strong support for all of the prudent actions that we have taken over the course of the year.

Importantly, our board and management further aligned our interest with (inaudible) of our shareholders by also participating in both transactions.

This participation disclosed our long-term commitment to the organization.

Now, in preparation for the planned capital raise, we completed a detailed loan review which is a so-called deep dive loan review by another independent party outside of our semiannual external loan review.

Altogether with our own quality internal stress testing, we have more than extensively reviewed our portfolio for potential problem areas.

We followed up aggressively with the proactive identification and prudent resolutions in certain cases.

With organic growth having gone through such extensive reviews, we believe that this new capital not only ensures there is sufficient capital to address the potential impacts from the economy but also positions us to seek opportunistic growth transactions.

Now, going back to our financial results, for the 2009 fourth quarter, we posted a net loss of $24.5 million.

A number of items contributed to this loss as we previously guided.

The first is a $22.6 million provision for the quarter.

This provision was based on the findings from the detailed loan review (inaudible) deep dive independent loan review.

The review was designed to be consistent with heightened regulatory standards in the current environment.

Based upon the regulatory and economic environment today, we thought this approach was appropriate.

In addition, as part of our aggressive efforts to put credit behind us, we further heightened the risk ratios in our methodologies.

We believe the more tightened methodology properly accounts for the ongoing challenges, including the dynamic recovery pace of the economy and the job market.

Now, let's review our nonperforming assets, which increased to $67.7 million at year-end.

Of this, $63.5 million represents nonaccrual loans.

Commercial real estate loans accounted for 67% of nonaccrual loans, while construction loans and the C&I loans each represented 13%.

For the most part, utilizations to nonaccrual status during the quarter included one construction loan and a number of CRE loans.

Now, of the new CRE, loans, two relatively larger loans collectively totaling $12.5 million are [correct].

In other words, they are performing, but based on recent reviews, these loans were restructured and we migrated them to nonaccrual status.

Now, part of our (inaudible) on dealing with credit includes strict resolutions once we deemed it appropriate.

During the quarter, we sold $35.4 million of loans through loan sales, including a number of credits that have not yet moved to nonaccrual status.

We had $4.3 million in OREO property.

Total nonperforming assets amounted to $67.7 million at December 31, 2009, or $64.9 million net of the [SDA] guarantee.

Rounding out the risk actions taken during the quarter, total charge-offs for the 2009 fourth quarter amounted to $28.1 million.

CRE-related charge-offs constituted for 59%.

C&I charge-offs representing 30% and construction and real estate charge-offs accounted for 6%.

Now, looking at our delinquency trends, loans 30 to 89 days past due declined to $13.4 million as of year-end, representing 0.87% of the total loans.

Given some of our actions taken in the fourth quarter, we anticipate seeing a slower pace of delinquency inflows going into the new year of 2010.

So looking back at the aggressive steps we have taken throughout the year with regard to credit along with the significant capital raise completed at year-end, we believe we have made great some strides towards returning to profitability in the very near term, and we're certainly looking forward to that.

So with that, let me pass it over to Lonny now to provide you some color on our operational results and then I will come back with some closing remarks.

Lonny?

Thank you, J.W., and good morning, everyone.

Since we pre-released our results and issued the full-year financial results late yesterday, I will just go over some of the more pertinent details.

Aside from the provision, the two other factors that had significantly impact on our bottom line in the fourth quarter included an impairment of goodwill and core deposit intangibles, along with a deferred tax asset impairment.

Our goodwill and core deposit intangible impairment came in as guided at $1.4 million.

I will just remind you that was full impairment and at the end of the year, we have no goodwill or core deposit intangibles on our books.

Our deferred tax asset impairment came in a little higher than expected at $15 million as a result of some true-ing up of certain entries, but this did not affect the P&L and so the resulting net tax provision was still $8 million, as guided.

Now, just a brief comment on loan production, which continued to be at a much more moderate level than in the past, although it did pick up from the first half of 2009.

Loan production was more than offset by continued downsizing of certain portfolios along with the aggressive charge-offs in the fourth quarter.

We continue to refrain from booking CRE loans, as evidenced by the continued reduction in that segment of our portfolio, down $88 million from September 30, 2009.

Our construction portfolio is down slightly with continued paydowns.

These decreases more than offset the expansion in C&I loan category, SBA loans and consumer loans.

For the 2009 fourth quarter, we originated $7 million of SBA loans.

We continued to focus on C&I lending.

But after two years of deleveraging, it will take a little time to build up the pipeline.

C&I lending generally trends to have a longer lead time compared with CRE lending.

With the reduction in our CRE and construction portfolio and growth in other loan categories, CRE loans as a percentage of total loans declined to 65.5% and construction loans represent 1.4%.

Moving on to deposits, (inaudible) deposits as of December 31, 2009 declined by $62.5 million from the September 30 levels.

We continue to roll off some higher-rate deposits, including brokered deposits of $56 million, most of which came from our time deposits.

As a result, time deposits as a percentage of total deposits declined from 49% to just 45%.

I am pleased to report that our non-interest-bearing deposits increased nicely and accounted for more than 20% of total deposits at December 30, compared with 18% at September 30.

We also experienced a 5% sequential increase in money market accounts and an 11% increase in savings deposits.

With the growing contribution of our DDA balances to our total deposits and the 39 basis point reduction in the cost of interest-bearing deposits, we further lowered our overall cost of deposits by 35 basis points to 1.6% for the 2009 fourth quarter.

Now, moving on to net interest margin, our fourth quarter NIM increased 15 basis points to 3%.

In addition to lowering our cost of funds and rolling off higher rate maturing deposits, we reduced the level of Fed funds, as planned, and increased our investment portfolio, which generates significantly higher yields then the fed fund market.

The benefits of these conditions were offset in part by an increase in nonaccrual loans during the quarter, which reversed our interest income by $900,000, or 5 basis points.

Now, we have been very successful to date in reducing our core operating expenses and improving on operating efficiencies.

On a sequential basis, our compensation expenses were down by nearly 11%.

At this point, we would not expect any further contraction in this line item.

As we get more comfortable with the economy, we will likely see some moderate increases in compensation costs as we prepare for growth.

Looking at total noninterest expense, it was up by nearly 7% from the 2009 third quarter, but if you back out the $1.4 million goodwill and intangible asset impairment, we would have posted another reduction.

As J.W.

mentioned, as of the year-end 2009, our capital ratio significantly exceeded all regulatory guidelines.

Tangible common equity per share equaled $6.54, reflecting a $12 million common equity capital raise.

Our tangible common equity to tangible assets was 6.01% as of December 31, 2009.

With that, let me turn the call back to J.W.

Thank you, Lonny, for your review.

So, to conclude, it certainly was a tough road this past year, but relatively speaking, we think we managed it well through in what we believe to be the worst level credit cycle for Center Financial.

We significantly enhanced our liquidity and the balance sheet position, as well as our core operating efficiencies.

We continue to make good progress towards return to profitability and growth.

The board and management deeply appreciate the vote of confidence from the investment community and our local Korean-American community.

While we are still navigating through an unknown horizon, we are cautiously optimistic that we are nearing the tide.

With that, let's open up the call for questions.

Operator?

Would you please explain the technical elements for a Q&A session?

Glad to.

(Operator Instructions).

Chris Stulpin, DA Davidson.

Good morning.

Is it fair to assume your provision would generally match your net charge-offs for at least Q1 since you are comfortable with your reserve level?

If so, how much in sequential decline in net charge-offs can we expect from Q1?

Well, I think that's going to be a little tough to predict exactly what the decline is going to be, but our belief is, with the adequate provisioning and the results of the deep dive loan review and reflecting those in the (inaudible) well, we do expect that provisioning to probably normalize down to what we would say maybe not normal economic levels but to levels much lower than they have been in 2009.

We do expect charge-offs to migrate lower as well, but I would hate to guide on any type of levels at this point.

Okay, fair enough.

That helps though.

Thanks.

To what degree do you think you're going to shrink your loan portfolio in 2010, whether it is market-driven or internal decision-making?

Chris, this is Jason.

Let me give you a little color on the deleveraging strategy.

As you recall, in the 2008 -- beginning of 2008, Mr.

Yoo and the management announced a deleveraging strategy.

The real strategy behind this story was Center Financial wanted to address their CRE concentration early on.

When the subprime hit August of 2007, we were concerned about the subprime migrating to commercial real estate.

So we decided to deleverage sell (inaudible) CRE loans in the secondary market with some premium gain.

We had some payoffs, paydown.

All in all in the last two years, we've reduced CRE by $190 million, construction loans by $50 million.

Additionally, in 2006 and 2007, we sold combined SBA unguaranteed.

This is the unguaranteed portion.

You'll recall there is a guaranteed and unguaranteed portion.

We sold $35 million, so by mitigating the sale of unguaranteed portion of $35 million with a very good premium gain, our SBA charge-off was less than $1 million for the whole 2009.

So I think we addressed the CRE concentration and [worked through] these credit assets in 2009 identified problem loans and resolving it early on.

I know those specialty properties like motels, hotels, car wash -- when those problems surfaced, the value could just evaporate very, very fast.

We worked through 2009 quickly.

We were concerned that 2009 and even 2010 would be a much challenging year for commercial real estate.

So I think that differentiates Center (inaudible) really addressing early on and focusing on reducing the CRE.

Going forward, what we're going to do is really continue to focus on C&I and SBA, SBA obviously.

2010, we will be really focusing on 2010 SBA lending.

Given the fact that 90% guarantee, we've been doing this lending SBA lending for 20 years now and 90% guarantee with the premium averaging close to 9%.

This is a very lucrative business and we have a very special team and we train the internal lenders, and 2010 will be very active.

Okay.

So, I shouldn't expect really any robust -- as your CRE basically levels off and your C&I pipeline takes a while to build, it's fair that any loan growth will be tepid in 2010, is my read.

I know you don't give guidance, I just --

I would say "modest" would be probably appropriate.

Okay, thank you very much.

Julianna Balicka, KBW.

Good morning.

I have a couple of questions.

One question -- if you don't mind walking us through a little bit on the DTA valuation allowance, kind of what test drove the allowance?

So we can kind of better understand the mechanics behind this decision.

Looking back on the provisions and charge-offs and reserves that you've had to take over the last couple of years, what could you have done differently in terms of timing maybe of charge-offs or timing of provisions that could have prevented the valuation allowance?

Finally and just to confirm that this means a 0% tax rate should you be posting losses in 2010 quarters?

Julianna, you threw a lot out there in a short time.

I will try to address what I can from that standpoint.

Obviously, the deferred tax asset under FAS 109, you have establish a basis for sustainability and the ability to recognize these timing differences for tax purposes into either in loss carryback periods or in the NOL or carry-forward periods as well.

So what you have to do is basically schedule out and track all your differences between your federal and your state timing differences.

A large difference in our timing difference from tax and the book is obviously the ALLL, the specific charge-off for tax purposes versus a general positioning for book.

So what you have to do is expect those items to be reversing.

You have to look at what gets carried back.

As you understand, Julianna, the state of California has all loss carry forwards so that situation is there is no carryback available for the state of California.

So the state of California, you have to roll that NOL carry forward for period of time.

So when we looked at the timing differences on our carryback, what we were able to carryback and take advantages of, 2007 and 2008, since we are a TARP bank, we don't have the luxury of going back.

I think it's five years is left -- Congress is allowing for federal purposes, so we have to go back two years.

So when we moved all of the items through and looked at what we expect a return to profitability in 2010, we did have impairment.

We had impairment on the state tax, deferred tax asset, and a portion of the federal deferred tax asset from that standpoint.

The question comes into play, could you have planned your -- from a tax planning standpoint, could you have anticipated the type of loss that Center experienced in 2009, back in 2007 and 2008?

And did we have the lost experience to anticipate the type of charge-offs that might have helped us from a tax standpoint as long as you could sustain the tax-deductibility of with the IRS?

I think it would be very difficult to try to opine on trying to predict where you could have stationed those charge-offs versus what actually happened in our portfolio, because charge-offs have to be legitimized with the IRS from that standpoint.

So, I don't know that -- you can do some tax planning in that area, but I don't know.

To some extent, I'm not sure that you can exactly nail that to the wall.

Okay, very good.

That helps.

Then in terms of my model for next quarter, just to confirm, it's going to be a 0 tax rate if it's going to be a loss, as in no tax benefit?

That's correct.

Okay, thank you very much.

Don Worthington, Howe Barnes Hoefner and Arnett.

Good morning, everyone.

A couple of things -- I am just trying to get a little better feel for, in terms of this third-party review relative to the semiannual reviews that are conducted, was it a matter of just going deeper than the typical semiannual review?

I guess what I'm trying to get a handle on, was there problems that were uncovered in the third-party review that weren't in the semiannual reviews?

Or was it more a change in assumptions that led to the larger provision in the fourth quarter?

Don, that's a good question.

I will just give you a little -- the deep dive loan review or the third-party loan review that we had done here in the fourth quarter was really a strategic decision to really try to provide comfort to the prospective investors.

We wanted to bring everything up to date to today's standards.

Obviously, we have an exposure to commercial real estate and it's geographically concentrated as well in Southern California.

So the concern that we had, okay, how are the regulators looking at it today?

How should we be looking at it today from that standpoint?

So we asked this firm to come in and look at 75% of our CRE portfolio and obviously look at all of the relationships, and did look at a sampling of our C&I portfolio as well.

We took the approach of what the regulators were looking at today.

If you understand some of the metrics that they are looking at, they are really not giving a lot of credit to the guarantors' liquidity and availability of that liquidity.

So, they looked at basically how the regulatory -- regulators would come today and evaluated it.

We wanted to have that done so we could really get a flavor for where the portfolio was.

Some positive things did come out from the review.

I think they were pleased with our advanced rates on CRE; they like that.

They also indicated to us that they had an expectation when they came in here of seeing losses of approximately double of what they found.

So that was pleasing to us.

Nonetheless, we still had a healthy loan-loss provision that we had to book here in the fourth quarter.

But we wanted to get ourselves -- we wanted to address our -- the inherent losses in our portfolio.

We felt this was probably the most appropriate way to do this from that standpoint.

Yes, we did find some -- they did find some things from our standpoint, but for the most part, we actually identified them.

It was just basically interpretational differences of what the valuation would be.

They look at appraisal haircuts fairly significantly deeper than what maybe they really need to be, but at the end of the day, we felt it was appropriate.

Okay, great.

That's great color.

Then in terms of the SBA activity, would you be planning to sell any loans into the secondary market, given that premiums have come back to historical levels?

Don, you know, the markets -- the secondary market for the SBA is back and it is obviously very attractive.

One of the things that we want to look at initially is starting to grow organically our loan portfolio.

The SBA program provides us an opportunity to build balances.

My guess is, initially, that we probably will refrain from doing sales at this point in time unless the pipeline really picks up substantially.

We have plenty of liquidity on our balance sheet today; we would like to deploy that in higher-yielding assets.

One of those assets that we think we're going to be successful going into 2010 is SBA loans.

So with that being said, I would say initially we are probably going to keep the money in the portfolio.

Okay, great.

Thanks a lot.

(Operator Instructions).

Bill Dezellem, Tieton Capital Management.

Thank you.

I would like to circle to your 30 to 89-day delinquency trend.

From your standpoint, is there any trend that is more telling of the future than that 30 to 89-day delinquency trend?

Well, 30 to -- let me give you the figure for the 30 to 89 days to start with.

Our past due 30 to 59 totaled $11.3 million and 60 to 89 days totals $2 million.

We have been seeing a contained past due for the last couple of quarters, and I think that's the direction that we are seeing right now.

Bill, I think we are cautiously optimistic.

That is sort of a precursor; that's the pipeline that moves into nonaccrual, and obviously problem loans from that standpoint.

But the last couple of quarters, we have been sort of watching that.

Like you said, we believe, as you do, that it is a precursor and we are cautiously optimistic that we think it is improving.

Do you believe that there is any data point that is more of a precursor than that 30 to 89-day delinquency trend?

I'm sure there's other factors you could look at, but I'm saying, if you want to see something that is feeding your problem loans, that is definitely your delinquency, your early delinquency.

So the fact that you rose in the first half of the year and then declined dramatically in the second half of the year, including the fourth quarter, that should be an indicator that maybe there is better than even odds that you are past the worst of your problem loans troubles, at least in this cycle?

Is that an interpretation that you would concur with?

Bill, I would like to have that crystal ball and be able to predict the fact that we could say that with certainty.

One of the things is I use the term "cautiously optimistic".

I think it is still safe to say that.

Something else we look a -- we quote the 30 days to 89-day.

Something that J.W.

has been monitoring I think since December or November of 2008 is what we call "day-one delinquency.

So we look at the very real early delinquency.

It's amazing.

That trend is an indicator as well from that standpoint and it has been declining.

So I would say that, like I said, we are cautiously optimistic with that.

I wish I had a crystal ball to say with certainty that we think were over the worst of it.

We have actually tried to manage to the fact that we wanted to get our credit issues addressed and get them behind us so we could really get back to growing the bank organically and doing things that we excel at.

Thank you.

Then next, relative to your net interest margin going forward, the net interest income, it appears as though maybe it bottomed, and it appears as though the margin potentially bottomed.

Would you concur with that assessment, or do you see something coming that could cause a hiccup there?

Bill, I do expect modest improvement in our NIM over 2010.

I do expect the -- as we start taking some of that liquidity and deploying it in the loan portfolio and obviously still deploy it in the investment portfolio, we are going to pick up benefit on the income side, interest income side.

I'm not expecting to have -- I'm expecting to have more moderate migration of nonaccruals if the past-due levels are a true indicator of that.

So we expect the income side to at least stabilize from that standpoint because, keep in mind, in 2009, every quarter we were knocking off approximately 9 -- hundreds of millions of dollars a quarter as a result of nonaccrual migration.

So we think (inaudible) is going to work.

The other thing we're finding is there has been a pretty nice "Flight to Quality" happening in our space, and we are benefiting from some very nice deposit customers.

We have been able to manage those costs fairly well.

So, we do expect contribution to the NIM from both sides of the equation and modest improvement throughout the year.

Then finally, I'd like to circle to your cash and marketable securities, which as of the end of the year totaled approximately $600 million.

If quality borrowers were to come to you, how much of that $600 million would you be willing to convert to loans?

I guess said another way is how much liquidity do you want to keep on the balance sheet and not put it into loans?

Bill, I would say, if you find those (inaudible) borrowers, please direct them our way.

(laughter)

We would like to deploy a fairly significant portion of that, but realizing that we're still in a fairly uncertain economy, we keep a level of liquidity that can manage any type of unexpected issue that could come up from that standpoint.

but of the $600 million that you throw out there, I would say we could easily deploy $400 million of that fairly quickly, you know, without feeling too bad from a liquidity standpoint.

We would like to see -- you know our loan/deposit ratio is down.

I think it is approximately less than 85 today.

That loan/deposit ratio, we'd like to get that back above 90, maybe closer to the 94-95 level.

So we believe, with the way the balance sheet is positioned today, that we could do that if the customers were there.

Understood, recognizing that is a big "if".

Your spread, it appears, just on average between the securities and cash, and loans is approximately 2%.

Is that a reasonable spread to consider based off of new loans and redeploying those assets?

Where I'm going with the thought process, and then I will get out of the queue here, is if you take $400 million and simply multiply it times the 2% improvement in yield, that's an extra $8 million that would go to net interest income without changing anything other than converting cash and securities to loans.

I would think that is a logical thought process.

Yes, I would basically concur with you.

Great, thank you.

Joe Stieven, Stieven Capital.

Good morning.

Unfortunately, I joined a little bit late, so I hope I am not asking a topic that you already touched on.

But can you just talk about the potential or what you are guessing about on FDIC-type transactions?

Thanks, guys.

Well, Joe, I think we've got something that is in the full control of the regulators, so it would be very difficult for me to comment.

But (inaudible) as we indicated, we are going back to growth mode after almost a three-year sort of deleveraging situation.

As far as any opportunities arise in terms of -- in answer to value of organization and increasing our own potential, I would definitely look into that opportunities.

But it is difficult to mention anything at this point of time.

Okay, okay.

I appreciate it.

Julianna Balicka, KBW.

I have just a very quick question.

I'm sorry if I missed it, if you mentioned in your prepared remarks.

Do you have the dollar amount of your impaired and non-impaired loans and associated reserves?

The breakdown?

The dollar amount -- you want -- we have impairment reserves of $2.7 million.

The impaired loans underlying those reserves are --?

For those ones that have been identified, there's $22 million that have identified that have reserves, and then we have $55 million of impaired loans that have no reserve.

Okay, thank you very much.

(Operator Instructions).

We have no further questions at this time.

I would now like to turn the conference back over to Angie Yang for closing remarks.

Thank you all for participating in Center Financial's 2009 fourth-quarter conference call this morning.

On behalf of the entire Center Financial team, we appreciate your continued interest and look forward to your ongoing support.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation and you may now disconnect.

Have a good day.