Hope Bancorp Inc (HOPE) 2010 Q2 法說會逐字稿

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  • Operator

  • Good day, ladies and gentlemen and welcome to the second quarter 2010 Center Financial Corporation Earnings Conference Call.

  • My name is Eric and I will be your audio coordinator for today.

  • At this time all participants are in a listen-in mode and we will facilitate the question-and-answer session at the end of the presentation.

  • (Operator Instructions)

  • Operator

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

  • I would not like to turn your presentation over to Ms.

  • Angie Yang, Investor Relations.

  • Please proceed.

  • Angie Yang - SVP - IR

  • Thank you, Eric.

  • Good morning everybody and thank you for joining us today for Center Financial's 2010 second quarter investor conference call.

  • Before we begin please recognize that certain statements made during this call may not be historical facts 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 their forward-looking statements.

  • Now, as usual, we have allotted for this call.

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

  • Our Interim CFO, Doug Goddard, will then review some financial details for the Company's 2010 second quarter financial results, including the April FDIC-assisted acquisition of former Innovative.

  • Center's Chief Credit Officer, Jason Kim, will then comment on asset quality before J.

  • W.

  • makes closing remarks.

  • We will then open up the call for a question-and-answer session.

  • I would now like to turn the call over to J.W.

  • Jae Whan Yoo - President, CEO

  • Thank you, Angie.

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

  • This morning we announced the results for Center Financial's 2010 second quarter.

  • Following a return to profitable operations in the preceding first quarter, we delivered another profitable quarter with a net income of $7.5, equal to $0.17 per diluted common share.

  • As we have previously stated, the collective actions taken in 2009 were designed to accelerate our return to profitability and to growth, and we are very pleased that we have achieved our second profitable quarter despite the ongoing challenges in our core markets, as well as the sluggish economic recovery.

  • A number of important factors contributed to Center's strong earnings for 2010 second quarter.

  • First and foremost is the FDIC-assisted acquisition of the former Innovative Bank on April 16, 2010.

  • We were able to capitalize on this opportunity, in large part because of our positional strength in terms of capital.

  • As noted in our news release, we estimated our total risk-based capital ratio at June 30, 2010 to be approximately 18.85% and the tier one leverage capital ratio to be approximately 13.5%.

  • These ratios are certainly well above the required guidelines and the strongest among our core peer group.

  • We recorded a bargain purchase gain of $5.9 million related to this acquisition and that is a net of equity appreciation instrument cost of $1.4 million.

  • The acquisition was immediately accretive to our earnings, so this was unusually a strong contributor to the profitable quarter.

  • Secondly, we have made good progress in ramping up our SBA lending.

  • According to the SBA's report for the first nine months of their fiscal year ended June 30, 2010, Center Bank was the leading Korean American bank in terms of SBA loan originations.

  • In fact, we are ranked number two in the metropolitan LA area.

  • During our 2010 second quarter we originated $27 million in SBA loans and recognized a $1.2 million in gain in negative SBA loan sales.

  • This is one area of lending that we would expect to contribute to a return to growth in our loan portfolio.

  • Another factor, but one that is harder to quantify, is the improvement in our overall operating performance.

  • An increased based of interest earning assets, reductions in our cost of deposits and improved efficiencies have all contributed to the enhanced operating performance.

  • And the last, but not the least, the lower levels of provisioning required it to maintain adequate reserves certainly had a positive effect on our profitability and the year-to-date.

  • With that, let me pass it over to Doug to review the more detail of our operating performance.

  • Doug?

  • Douglas Goddard - Interim CFO

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

  • I would like to begin today with an update on the FDIC-assisted acquisition.

  • The systems integration of the former Innovative Bank with Center Bank is moving along on schedule and will be completed next month.

  • This was timed to follow our systems conversion which was just completed last week.

  • Of the four former Innovative Bank branches we have elected to keep the three branches in Northern California and will be closing the one Los Angeles-based branch in the Fashion District next month.

  • Notices have already been sent to customers that there accounts will be transferred to one of two Center Bank branches that located within several blocks.

  • Given the inaccessibility of the branch's location, the significantly larger than needed size and the close proximity to existing branches, we believe we can better service these new customers in our existing locations.

  • In the Northern California area, we will be reducing the lease space for the Oakland main branch significantly, as the corporate offices are obviously no longer needed.

  • We are also planning to relocate our Santa Clara branch to a location that is more heavily concentrated with Korean American-owned businesses.

  • For the 2010 second quarter the former Innovative Bank operations contributed pretax earnings of $1.4 million.

  • We expect the planned changes in our branch network will result in further improved operational efficiencies and we should see the benefits beginning at the current third quarter.

  • Overall, we are pleased with the relative success we have had in maintaining the deposits of the former Innovative Bank.

  • We initially had some runoff of the high rate timed deposits, as we expected when we lowered the interest rates, but we have retained substantially all of the core deposits of these branches.

  • We believe Center's prominence as a leading, healthy Korean American bank will eventually enable us to grow deposits in this new geographic market.

  • Now moving on to our overall results, let me review some highlights for the 2010 second quarter.

  • Our net interest margin expanded 12 basis points, benefiting from continued reductions in our cost of deposits.

  • This, plus a larger asset base led to a 6% sequential increase in pre-provision net interest income.

  • The sharply higher levels of total non-interest income, due largely to the bargain purchase gain, along with our continued focus on cost containment, led to a significant improvement in our efficiency ratio.

  • For the second quarter of 2010 the efficiency ratio was 43% compared with 49% for the preceding quarter.

  • So our pretax, pre-provision income for the current second quarter increased 165% sequentially from the preceding first quarter, obviously not a level that we would expect to continue absent any significant non-core gains.

  • Moving on to deposits, total deposits as of June 30, 2010 increased by $175 million from March 31 levels.

  • We continued to roll off higher rate deposits during the quarter as they matured.

  • Our demand deposits increased by more than $37 million due to our organic growth and the FDIC-assisted transaction, and they represent 22% of the total deposits on June 30.

  • Our Jumbo timed deposits continue to decline and accounted for less than 28% of total deposits at the end of the 2010 second quarter.

  • Our cost to deposits declined by 11 basis points from the 2010 first quarter to just 1.19%.

  • Now moving on to loan production, during the second quarter new loan origination and renewals totaled $124 million, of which approximately 75% were variable rate loans.

  • Given the $55 million note sale, our hesitation to renew certain CRE loans and paydowns, our legacy loan portfolio declined by more than $47 million from March 31 levels, all of which is reflected in the reduction in our commercial real estate portfolio.

  • As a percentage of total loans, our CRE portfolio accounted for approximately 65% of total loans, which is lower than our direct peers.

  • We are focusing on SBA and CNI lending as part of our efforts to minimize the CRE concentration in our portfolio.

  • With that, let me turn the call over the Jason to discuss the asset quality.

  • Jason?

  • Jason Kim - Chief Credit Officer

  • Thank you, Doug, and good morning everyone.

  • Let me begin with some color on our note sales during the quarter.

  • As reported in the news release we negotiated $55 million in note sales at an average 6.7% discount to the principal amount.

  • Of the $55 million in notes sold approximately $30 million came from our non-accrual bucket and $4 million from our past due 30 to 89 days.

  • This leaves about $21 million which reflects loans that were actually current.

  • Given some trends in certain industries that we expect will begin to stress certain borrowers in the near future, we elected to take early action and sell certain notes before they became problem loans.

  • Early action has been our mantra at Center Bank in working through this credit cycle and we believe it has key to our stronger position today in terms of being able to absorb credit costs while working through the challenging market and delivering profitable operations.

  • This early action also differentiates Center Bank from our peers in that we have been able to sell these notes at an average discount level that is much lower than our peers.

  • And I would like to point out that this discount is relative to the principal balance of the carrying value.

  • Non-performing loans decreased to $67.5 million from $70.4 million at March 31.

  • Commercial real estate loans accounted for 79% of non-accrual loans at June 30 while construction and CNI loans represented 4% and 14% respectively.

  • New non-accrual inflows during the quarter totaled $27 million, of which $23.5 million is CRE related, mostly in office, mixed used industrial building and retail shopping.

  • We do not have any non-accrual gas stations or car wash loans as we have not been lending to this market in the last several years.

  • We are encouraged to see a significant slowing in new inflows of loans past due 30 to 89 days, which amounted to just $4.7 million during the 2010 second quarter.

  • And from March 31 to June 30, 2010 loans past due 30 to 89 days declined to $11.6 million from $28.8 million.

  • Now, net chargeoffs for the 2010 first quarter amounted to $7.6 million and represented 1.6% of average loans on an annualized basis.

  • And as we alluded the last quarter, we had significant recoveries of $2.9 million during the quarter.

  • Again, early action as well as prudent provisioning contributed the recovery levels.

  • We are also encouraged by the overall improving performance in our portfolio with delinquent loans declining by $20 million to $79 million at June.

  • It is difficult to give you this color without tangible numbers at this point, but if positive trends for several larger loans currently on non-accrual status continue, we could see more meaningful improvement in our delinquencies by yearend.

  • With that, let me pass it back to J.W.

  • Jae Whan Yoo - President, CEO

  • Thank you, Jason, for your review.

  • Now, overall with the positive trends in classified and the delinquent loans, as well as in net charge-offs from the levels in 2009, our methodologies for calculating the loans is for loan losses actually calls for deduction in our factors.

  • However, given some inconsistent metrics from the overall economy we have opted to wait for another quarter.

  • In other words, we would like to see a more directionally consistent economic recovery before we cut back into reserves.

  • That said, we believe those actions we have already taken to date put us ahead of credit in terms of being able to walk through with the current credit environment.

  • And this puts us a position of strength from a number of perspectives.

  • First, as evident from our first two quarters we believe we are well ahead of our peers in terms of moving toward more normalized levels of provisioning.

  • This is the key to our ability to sustain profitable operations.

  • Second, since we are in a better position to the credit cycle we are also able to focus on potential opportunities that may arise from the downturn.

  • From our position of strength we plan to be a consolidator in the market if these opportunities do in fact come up.

  • So I am very pleased that we have delivered a solid first half to 2010.

  • Our Board and management team continue to share a strong, but cautious sense of optimism and look forward to keeping you apprised of good news.

  • Before we open the call for questions I would like just to make a comment on how pleased I am that we were able to retain Doug as our new CFO so quickly.

  • He has been a great addition to the management team here and I look forward to introducing him to many of you in the very near future.

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

  • Operator, would you please explain the technical elements for the q-and-a session?

  • Operator

  • Thank you.

  • (Operator Instructions).

  • Your first question of Joe Gladue with B.

  • Riley.

  • Please proceed.

  • Joe Gladue - Analyst

  • Good morning.

  • Jason Kim - Chief Credit Officer

  • Good morning.

  • Angie Yang - SVP - IR

  • Good morning, Joe.

  • Joe Gladue - Analyst

  • Might I start off with a few quick questions on asset quality and then it is just wanted to make sure I heard you right.

  • You say that inflows into 30 to 89 day delinquencies was $4.7 million in the second quarter?

  • Jason Kim - Chief Credit Officer

  • That is correct, Joe.

  • Joe Gladue - Analyst

  • What -- can you -- what was that in the first quarter, just an indication?

  • Jason Kim - Chief Credit Officer

  • First quarter inflow, I don't have that figure, but we were able to sell a number of loans, notes as described in my call, that the $30 million notes sold of the $55 million were non-accrual and $4 million for the past due 30 to 89 days bucket.

  • And $21 million was actually loans that were performing, but we saw serious potential issues, so we were able to sell those $21 million that were actually current.

  • So we do see a notable decline in the inflows into past due, I'm sorry, but don't have that figure that were inflows to the past due in the first quarter.

  • But this is a significant decline compared to the first quarter.

  • Joe Gladue - Analyst

  • All right.

  • And that gets toward total debt restructurings like was a significant increase in that number during the quarter.

  • I just wonder if you could give us a little color on what was going on there.

  • Jason Kim - Chief Credit Officer

  • We did not see any notable increase in the TDR.

  • We just saw a TDR just basically $41 million.

  • That is only about a $6 million or $7 million increase compared to first Q.

  • Angie Yang - SVP - IR

  • But there is only $17 million that is -- $17 million of that is --

  • Jason Kim - Chief Credit Officer

  • Is accruing.

  • Angie Yang - SVP - IR

  • -- is accruing and everything else regarding in the non-accrual.

  • Joe Gladue - Analyst

  • Okay.

  • Jason Kim - Chief Credit Officer

  • Right.

  • Joe Gladue - Analyst

  • Okay.

  • And though it is roughly $10 million that was accruing and you --

  • Jason Kim - Chief Credit Officer

  • $17 million is the performing and accruing our, of $41 million.

  • Joe Gladue - Analyst

  • Okay.

  • Jason Kim - Chief Credit Officer

  • Yes.

  • Joe Gladue - Analyst

  • All right.

  • I have got a couple questions about the Innovative acquisition.

  • You mentioned you are going to relocate one branch and reduce the lease on another.

  • Just wondering if there will be some costs associate with that -- will that show up in the third quarter, fourth quarter?

  • Douglas Goddard - Interim CFO

  • There will be.

  • We haven't got that totally quantified.

  • It is going to probably more, be more the fourth than the third because there are still some transition costs going on in terms of implementing the downsizing, but there will be absolutely more G&A reduction coming and probably another month or two to hit which probably end of third quarter or fourth quarter.

  • Joe Gladue - Analyst

  • Okay.

  • And just an update on how much cost saves you expect from the acquisition sort of in total percentage or whatever?

  • Jae Whan Yoo - President, CEO

  • In the personal expenses area we already forecasted more than $2.5 million and we expect some more in the facility by reducing one branch in Los Angeles Fashion District area.

  • And also we expect some of the operating expenses because we a head office in Los Angeles, so we can provide some services down here, but that will bring another cost of reduction, so I would say over $3 million.

  • Joe Gladue - Analyst

  • Okay, all right.

  • And I will ask one more before I step back and that is just on if you see any repricing and any, how much further benefit you might see from that in the third and four quarter in regards to cost of deposits?

  • Jason Kim - Chief Credit Officer

  • For Innovative's customers?

  • Joe Gladue - Analyst

  • No.

  • I was really talking in total, but if you want to break it out that would be fine too.

  • Douglas Goddard - Interim CFO

  • I don't have an estimate for that.

  • We repriced the Innovative customers at the acquisition date, so there is not a big movement coming there, other than as we improve the mix, grow more core deposits rather than CDs.

  • We have seen the biggest declines in CDs for the legacy Center Bank branches.

  • I don't see another big move coming.

  • Joe Gladue - Analyst

  • Okay, all right, thank you.

  • Angie Yang - SVP - IR

  • Thank you, Joe.

  • Jason Kim - Chief Credit Officer

  • Thank you, Joe.

  • Operator

  • Your next question comes from the line of Tim Coffey with FIG Partners.

  • Please proceed.

  • Timothy Coffey - Analyst

  • Good morning everybody.

  • Jason Kim - Chief Credit Officer

  • Hey, good morning, Tim.

  • Angie Yang - SVP - IR

  • Good morning, Tim.

  • Timothy Coffey - Analyst

  • Hey, J.W.

  • I have got a question about the Innovative loan portfolio.

  • Are you -- how aggressive are you in seeking paydowns on that portfolio, or do you feel comfortable with where it is at right now?

  • Jae Whan Yoo - President, CEO

  • Yes, there is some decline of loan portfolio because of small SBA loans is going to be paid off because we temporarily tentatively suspended production of new businesses in that area which is called SOHO loans.

  • Maybe, Jason, can you give us some more color on that?

  • Jason Kim - Chief Credit Officer

  • Yes, certainly.

  • As Mr.

  • Yoo mentioned, the SBA SOHO loan is typical, $20,000, $30,000 loans.

  • It has a shorter amortization schedule so we do expect a significant paydown in respect to that portfolio.

  • But overall, the concentration on their portfolio is probably about approximately 50% in CRE and the remaining in CNI and SBA.

  • But we are trying to duplicate our expertise in our SBA lending and duplicate our strategy in applying a promoting the SBA product in Northern California as well as our CNI underwriting.

  • So we have hired a -- relocated our senior lender over there to seek and train our loan products, so we will be able to kind of implement our loan products in Northern California.

  • Timothy Coffey - Analyst

  • Okay, okay, that's good.

  • What about -- what are your expectations for loan growth across the franchise?

  • Jason Kim - Chief Credit Officer

  • Overall, Center Bank and acquired bank in Northern California?

  • Timothy Coffey - Analyst

  • Yes, going forward.

  • Jason Kim - Chief Credit Officer

  • Well, everyone is talking about addressing the CRE concentration.

  • Obviously we have been addressing CRE concentration for two and half years now.

  • And everyone is also talking about CNI and SBA, but as Mr.

  • Yoo mentioned, Center Bank, we have been doing SBA lending for 20 years and in LA area we are number two in terms of ranking.

  • And we originated $21 million in the first, second quarter, but for the month of July we actually already funded $11 million.

  • So it is ramping up.

  • And CNI, we are very, working diligently, but it takes time to really get to know the customer and be able to comfortably originate CNI.

  • But we are seeing a strong and selective CNI in our portfolio, but we do see a CRE monthly reduction in our CRE portfolio of about $5 million.

  • So we are trying to rebalance our portfolio in SBA and CNI, but currently it is the slow, it is a weak economy, but we are being very cautious and implementing SBA is certainly a very secure loan for us going ahead.

  • Timothy Coffey - Analyst

  • And since I have got you here, how much of your CRE portfolio is based in the Inland Empire of the legacy portfolio?

  • How much of it is based in the L.A., the Inland Empire?

  • Jason Kim - Chief Credit Officer

  • 7%, okay.

  • Timothy Coffey - Analyst

  • Of our entire loan portfolio, yes.

  • Jason Kim - Chief Credit Officer

  • Okay.

  • And you probably answered this throughout your comments, but just so I can get it in terms of overview, have you given any kind of color on the changes of volume wise in classified assets over the last two quarters?

  • Jason Kim - Chief Credit Officer

  • Well, second quarter we did see a reduction in classified assets.

  • We did see a notable decline in delinquency, so the trend that we are seeing is positive, certainly.

  • And that is what we are seeing in our portfolio.

  • Our portfolio is behaving even better.

  • But again, going back to your Inland Empire portfolio, we sold a number of notes last year and many of the loans that were came out from the Inland Empire in construction loans.

  • So we are seeing positive trends, notes sold this year.

  • It is basically a metropolitan area.

  • That is why we are seeing a very minimum discount compared to last year.

  • And this year the overall value of underlining collateral non-performing loans, the value has certainly been notably improved.

  • And, Tim, actually we have become very good at it in note sales.

  • We have been doing it for two years.

  • We have a number of local investors and we get multiple bids and we have a complete process of note sales and certainly this reflects 6.7% discount compared to some of the other banks who are seeing a notable higher discount, so early action, early action from the past couple years to really tackle the credit has been a differentiating avenue for Center Bank.

  • Timothy Coffey - Analyst

  • Certainly.

  • Okay, thank you.

  • I was going to comment in the discount that you took on those note sales was definitely admirable.

  • Doug, do you have an idea of what the accruable yield was from the acquisition of Innovative Bank?

  • Douglas Goddard - Interim CFO

  • I do have an idea.

  • I am going to have a 10-Q out in a few days where we will lay that out.

  • I probably would rather defer to that rather than estimate it here for you.

  • It is not out of line with what you would expect the yield to be on a normal portfolio.

  • The yield didn't change that much from the coupon rates on the loan.

  • Timothy Coffey - Analyst

  • Okay, fair enough.

  • Thank you very much.

  • Those were all my questions.

  • Angie Yang - SVP - IR

  • Thank you, Tim.

  • Jason Kim - Chief Credit Officer

  • Thank you, Tim.

  • Jae Whan Yoo - President, CEO

  • Okay, thanks Tim.

  • Operator

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

  • Please proceed.

  • Julianna Balicka - Analyst

  • Good afternoon.

  • Jae Whan Yoo - President, CEO

  • Hey, Julia.

  • Angie Yang - SVP - IR

  • Hi.

  • Julianna Balicka - Analyst

  • I have a couple quick questions please and welcome to Center, Doug.

  • Douglas Goddard - Interim CFO

  • Thank you.

  • Julianna Balicka - Analyst

  • Jason, I know you talked about the inflows to non-accrual during your remarks.

  • I was having a hard time hearing.

  • Do you mind repeating that number please?

  • Jason Kim - Chief Credit Officer

  • Yes.

  • Inflows to non-accrual was $27 million.

  • Outflow of non-accrual was $30 million for the second quarter.

  • Julianna Balicka - Analyst

  • And what was the inflow to 30 to 89 delinquent?

  • Jason Kim - Chief Credit Officer

  • $4.7 million.

  • Julianna Balicka - Analyst

  • $4.7 to 39s?

  • What was that last quarter to 39s, to 30 to 89?

  • Jason Kim - Chief Credit Officer

  • That was a question that Joe brought up, but I don't have that figure but the first quarter was much higher.

  • Julianna Balicka - Analyst

  • Yes.

  • Jason Kim - Chief Credit Officer

  • Yes, much, much higher.

  • Angie Yang - SVP - IR

  • And I don't remember that number, Julianna, but if you look at our 30 to 89 days December 31 to 3/31 there was an increase there.

  • Julianna Balicka - Analyst

  • Okay.

  • Well so, okay, okay, excellent, very good.

  • And then I have a question.

  • On the new loans that you are originating, the SBA and CNI lending, have -- can you discuss pricing a little bit?

  • What kind of pricing are you originating in CNI loans this year?

  • Jason Kim - Chief Credit Officer

  • Well, SBA we could have a higher yield, typically Wall Street Journal prime plus two and up, so SBA loan is prime plus to two to two and half, typically.

  • And CNI we are seeing a, well, a prime, mostly general prime plus a one and half with a lower tick of 5.25%, 5.5% floor rate.

  • Julianna Balicka - Analyst

  • Okay.

  • And then, on the CRE loans that are coming up for renewal just naturally, to a certain degree you are not focusing on CRE loans, but to the degree that you are renewing your CRE loans, how is that pricing of fixed rate loans changing for you guys?

  • Where is the new loans at right now?

  • Jason Kim - Chief Credit Officer

  • We only have CRE maturities for 2010 remaining is only $5 million, so and 2010 we are, CRE maturities $52 million, so entire basically 95%, 94% of the CRE maturity is 2011 and beyond, so we don't have that issue for the maturities.

  • Julianna Balicka - Analyst

  • Excellent.

  • And then, in terms of the line utilization of your CNI customers, is there a ratio they keep track from?

  • What is the percentage of right center and how has that -- how does that compare to historically?

  • Jason Kim - Chief Credit Officer

  • Well, I look at the off balance sheet commitment outstanding in first Q and second Q.

  • Relatively there is no notable changes, so --

  • Julianna Balicka - Analyst

  • Okay, very good, thank you very much.

  • I will step back now.

  • Angie Yang - SVP - IR

  • Thank you.

  • Jae Whan Yoo - President, CEO

  • Okay, thank you.

  • Operator

  • The next question comes from the line of Don Worthington with Howe Barnes Hoefer.

  • Please proceed.

  • Don Worthington - Analyst

  • Thank you.

  • Good morning.

  • Jason Kim - Chief Credit Officer

  • Good morning, Don.

  • Angie Yang - SVP - IR

  • Good morning, Don.

  • Don Worthington - Analyst

  • A couple things.

  • Would you anticipate going on SBA sales going forward similar to this last quarter?

  • Jason Kim - Chief Credit Officer

  • Don, we are not going to sell any more SBA loans in the near future.

  • We plan -- we are rebalancing our loan portfolio through SBA loans, so with the paydown, natural run down rate on CRE loan we are carrying the higher yield SBA loan product in our portfolio, so you are not going to see any SBA loan sales for at least a couple quarters.

  • Don Worthington - Analyst

  • Okay, thanks.

  • And then, in terms of the charge offs of the quarter, how much of that was related to the note sale?

  • Jason Kim - Chief Credit Officer

  • The note sales for the second Q was $3.7 million on a note sale of $55 million, so 6.7% of sales.

  • Don Worthington - Analyst

  • Okay.

  • And then do you have any like target CRE concentration you are trying to get to, or is it just a matter of allowing a lot of those to roll off and replacing them with the CNI?

  • Jason Kim - Chief Credit Officer

  • Don, we have been addressing the CRE constitution for two and half years.

  • We are near there.

  • Because of the natural rundown rate we have pretty much addressed the concentration now.

  • That is pretty much the color that I could give you right now.

  • Don Worthington - Analyst

  • Okay.

  • And then, lastly, J.

  • W., you talked about growth opportunities or potential acquisitions.

  • Would you go outside California for an acquisition, or just pretty much in the markets you are in now?

  • Jae Whan Yoo - President, CEO

  • Well, certainly if there is a good opportunity outside of California we would definitely want to pursue that opportunity, but right now we are more concentrated in Southern California at this point of time.

  • But again, we have some share work expansion plans.

  • So, for instance, in the East Coast, New York, Georgia, if some opportunity pops up, definitely we like to go in.

  • Don Worthington - Analyst

  • Okay.

  • All right, thank you.

  • Jae Whan Yoo - President, CEO

  • Thank you, Don.

  • Operator

  • Your next question comes from the line of Joe Stieven with Stieven Capital Advisors.

  • Please proceed.

  • Joe Stieven - Analyst

  • Good morning, J.W.

  • Jae Whan Yoo - President, CEO

  • Hi.

  • Good morning, how are you?

  • Joe Stieven - Analyst

  • Just fine.

  • Most of my questions have been answered, but just let me ask you one question on the Innovative.

  • Have you guys done a full systems conversion yet, or when will you be doing the full systems conversions for Innovative?

  • Jae Whan Yoo - President, CEO

  • Okay.

  • Actually, we are planning to complete the system conversion by August 16.

  • So far it is going very smoothly.

  • Joe Stieven - Analyst

  • Okay.

  • And from a customer perspective, J.

  • W.

  • has it sort of been in line with sort of your hopes when you guys did the transaction?

  • Jae Whan Yoo - President, CEO

  • Frankly speaking, most of existing customers are concentrated in Korean communities and very small portion of Chinese market.

  • I would like to expand the market to non-Korean market area.

  • In other words, in terms of the nature of our potential customers in California and also Korean communities are scattered around Bay area, so we don't have to concentrate on Korean community.

  • So we would like to expand to some other ethnic and expansion market as well.

  • Joe Stieven - Analyst

  • Okay, thank you.

  • Jae Whan Yoo - President, CEO

  • Okay.

  • Thank you.

  • Angie Yang - SVP - IR

  • Thank you.

  • Operator

  • Your next question comes from the line of Brett Rabatin with Sterne, Agee.

  • Please proceed.

  • Brett Rabatin - Analyst

  • Good morning.

  • I wanted to ask a little more color on the portfolio of loans that you sold.

  • If you could, give us a little more breakout on the non-accrual rate versus the accrual rate in terms of discount.

  • Do you have any additional color on the various -- well, I am assuming there was a disparity between those two pieces.

  • Jason Kim - Chief Credit Officer

  • Certainly.

  • On the note sales that we sold involved stake in land, retail, hotel.

  • Within the 6.7% aggregated discount the discounts were a little bit higher for hotel/motel loans and retail as well.

  • Brett Rabatin - Analyst

  • Okay, so what were those discounts on those pieces, if you have that?

  • Jason Kim - Chief Credit Officer

  • I have it.

  • We sold one large retail at par that was a larger credit, but one other retail we sold at 13% discount.

  • That was the highest one.

  • Angie Yang - SVP - IR

  • In terms of principal balance.

  • Jason Kim - Chief Credit Officer

  • In terms of principal balance.

  • Brett Rabatin - Analyst

  • That was the biggest discount loan you sold?

  • Jason Kim - Chief Credit Officer

  • On a retail and on a hotel discount was 20%.

  • But the other ones we sold larger, like I said, larger retail we sold at par and industrial discount was also very minimum.

  • Brett Rabatin - Analyst

  • Okay.

  • Were any of the performing loans either at par or premium?

  • What was the best situation you had?

  • Jason Kim - Chief Credit Officer

  • The best situation was a performing loan, but we did see a potential credit issue coming about, so we were able to sell that, but that was -- we sold that at par, and we also sold hotel/motel, hotel loans, we sold that one also at a 1% discount.

  • Brett Rabatin - Analyst

  • Okay.

  • And could you give us an average vintage of, or do you have any kind of vintage information on what you did sell?

  • Jason Kim - Chief Credit Officer

  • Vintage, typically 2006, 2005 and 2007, those were the years.

  • Brett Rabatin - Analyst

  • Okay.

  • And then a question maybe for J.W., I have heard the comments regarding not expecting necessarily yet normalized provisioning, but hopefully that that trend would evolve at some point.

  • I was curious, J.W., maybe if you might give your thought on what a normalized profitability might be for Center Financial and not necessarily in a certain timeframe, but just kind of your thought on what Center Financial might get to on a profitability basis and then if capital could be maybe levered a little more from here even if the economy did get better.

  • Jae Whan Yoo - President, CEO

  • Actually, it is very hard to respond because of uncertainty of the general economic situation.

  • But as far as near-term forecast basis is concerned the Center Bank is in a better position in a sense that we have enough capital ratio, for instance, total risk based capital of more than 18%.

  • And our investor dollars are calculating for A2PR has been very conservative and, as I mentioned earlier, we think we -- to very conservative in calculating by waiting for another quarter to see some directional consistency in the crest by the offset and non-performing assets.

  • So it might be very confusing to you, but I would say that normalized the situation will be at a function of more the general market situation, but relatively speaking we are much better than the others in this sense.

  • I don't know whether I can respond to you.

  • Brett Rabatin - Analyst

  • Okay.

  • Jae Whan Yoo - President, CEO

  • It is very hard because those are beyond our control.

  • But the one positive thing is we took a lot of positive actions last year, and even before 2009 we initiated a deleveraging strategy, so in terms of quality of assets we are in a better position to manage the situation.

  • Brett Rabatin - Analyst

  • Okay.

  • No, that is fair.

  • I just thought maybe you wouldn't mind sharing some of what your goal would be for 2012 or 2013 or whenever you think the credit environment might be as your would view it normal, but thank you for the color.

  • Jae Whan Yoo - President, CEO

  • Okay.

  • I am sorry, very unclear and confusing.

  • Operator

  • (Operator Instructions).

  • Your next question comes from the line of Bill Dezellem with Tieton Capital Management.

  • Please proceed.

  • Bill Dezellem - Analyst

  • Thank you, a couple of questions.

  • First of all, in the press release you mentioned that you were going to spend more time on acquisitions and I am curious if that implies that you see more FDIC-assisted deals coming down the pipeline.

  • Jae Whan Yoo - President, CEO

  • Yes, I think you are right.

  • Actually, our Board and management have discussed about those kinds of issues and we decided to follow and pursue the FDIC-assisted transactions first.

  • We understand the trend of assisted transactions is getting smaller than before, but we try to get it if our chance is occurring.

  • Bill Dezellem - Analyst

  • And would you please update us as to where the bank is at with the memorandum of understanding with the FDIC and how that may or may not interrelate with your assisted transaction pursuit?

  • Jae Whan Yoo - President, CEO

  • Okay.

  • Generally speaking that is something that is out of control of the bank, but as was the case in the Innovative Bank acquisition the Center Bank was the first exception case that we were allowed to participate in the bidding process even though we are under MOU.

  • This kind of situation will be continued, at least on a selective basis, so we already indicated to regulators what we wanted to do, which area we wanted to get in, so if there is a chance I am pretty sure we will have another opportunity to be elected, invited on a selective basis.

  • Bill Dezellem - Analyst

  • And so the MOU is, you are still under that at this point and you do not have any indication as to when that might be lifted?

  • Jae Whan Yoo - President, CEO

  • I think I can give you some color on that.

  • What they mentioned to us is under the current economic situation, they have never lifted any MOU cases within six months.

  • But we understand we try our lot of proactive actions in complying with the MOU provisions and they commented on our quick and very right action, so I would answer your question by saying that kind of a comment from, positive comment from the regulators.

  • Bill Dezellem - Analyst

  • Thank you, and then my final question for now is how much of the $2.9 million recovery that you had this quarter was as a result of loans that were part of the $55 million sale?

  • Jason Kim - Chief Credit Officer

  • $2.6 million.

  • Jae Whan Yoo - President, CEO

  • Including the others, total $2.9 million recovered.

  • Jason Kim - Chief Credit Officer

  • We had a recovery of $2.6 million.

  • Angie Yang - SVP - IR

  • $2.9 million.

  • Jason Kim - Chief Credit Officer

  • $2.9 million.

  • Jae Whan Yoo - President, CEO

  • Yes.

  • Jason Kim - Chief Credit Officer

  • And a recovery.

  • We --

  • Angie Yang - SVP - IR

  • Of the note sales.

  • Jason Kim - Chief Credit Officer

  • Of the notes.

  • Jae Whan Yoo - President, CEO

  • Okay, let me address that.

  • Basically we have a lot of experience in selling the notes and we will fortunately bring under the very competitive bidder the, so we were able to get more than $2.6 million the recovery from certain transactions.

  • And also we are trying to get the recovery from other transactions which are related to our sale, a total $2.9 million for the second quarter.

  • Bill Dezellem - Analyst

  • So to make sure that I am clear and understand, you had $2.9 million of recovery in the quarter and $2.6 million of that $2.9 million was associated with the loans in the $55 million sale.

  • Jason Kim - Chief Credit Officer

  • Yes.

  • Jae Whan Yoo - President, CEO

  • That is correct.

  • Bill Dezellem - Analyst

  • Great, thank you both.

  • Operator

  • You have a follow-up question from the line of Joe Gladue with B.

  • Riley.

  • Please proceed.

  • Joe Gladue - Analyst

  • Yes, hi.

  • I just wanted to get a little more color on the asset side of the balance sheet.

  • First off, you still have a lot of liquidity in Fed funds and such.

  • Just wondering if you think you will hold on to that for awhile or have somewhere to deploy it.

  • And a second part is just the idea when non energy issues might even offset the paydowns and they go off a bit and see how your portfolio, so you might see some growth in the loan portfolio.

  • Jason Kim - Chief Credit Officer

  • Well, the loan portfolio as we continue to promote the SBA and CNI, there will be a growth, but the growth organically will not be material as we see a continued paydown in the CRE portfolio.

  • Joe Gladue - Analyst

  • Okay.

  • Angie Yang - SVP - IR

  • But we, Joe, looking currently looking at ways of diversifying our portfolio outside of just in ramping up the SBA sales, so depending on how fast we take any action like that, we are looking for ways to deploy that liquidity and ways to increase that organic growth of the loan portfolio because we like, everyone knows that the expectation is in the single low digits for that.

  • Joe Gladue - Analyst

  • All right, thank you.

  • Operator

  • You currently have no more questions in queue at this time.

  • I would like to turn the call over for closing remarks.

  • Angie Yang - SVP - IR

  • Okay.

  • Thank you all for participating in Center Financial's 2010 second 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.

  • Operator

  • Ladies and gentlemen, thank you for your participation in today's conference.

  • This concludes our presentation.

  • You may now disconnect.

  • Have a good day.