Hope Bancorp Inc (HOPE) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2011 Center Financial Corporation earnings conference call.

My name is Chanel and I will be your operator for today.

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

Later, we will conduct a question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms.

Angie Yang, Investor Relations for Center Financial.

Thank you, Chanel.

Good morning, everyone, and thank you for joining us today for Center Financial's 2011 second-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, including certain statements or responses to inquiries regarding the proposed merger of equals between Center Financial and Nara Bancorp.

The closing of the proposed transaction is subject to regulatory approval, the approval of the shareholders of both Center and Nara, and other customary closing conditions.

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's President and CEO, Richard S.

Cupp, will begin today with introductory comments.

Our interim CFO, Doug Goddard, will then review our 2011 second quarter financial results in more detail.

Our Chief Credit Officer, Jason Kim, is also here with us and will participate in the question-and-answer session.

With that, let me turn the call over to Dick Cupp.

Thanks, Angie.

Good morning, everyone, and thank you for joining us again today on our quarterly conference call for the second-quarter earnings.

Many of you may recall that on our last earnings call I closed my comments with 3 words to describe Center Bank's position, steady, sustainable and improving.

Our second quarter further solidifies this position as we delivered another quarter of steady, consistent and sustainable improvement in the overall condition of the bank, whether we are looking at capital, asset quality, management, earnings, liquidity or sensitivity to market risk.

Obviously we will have Doug Goddard, our CFO, discuss in more detail the specific results of the second quarter, but let me first make some brief comments overall about the results.

First of all, asset quality continues to steadily show some improvement on numerous fronts.

While our total non-covered, non-performing loans net of SBA guarantees picked up by less than $2 million to $36 million, we did see declines in most all other metrics when comparing June 30, 2011, with March 31.

Next, loans past due 30 to 89 days declined 40% from March 31 to just $6.1 million.

That is a great indication that things will continue to improve as it's often a predictor of future portfolio health.

Performing TDRs declined 4% to $19.1 million.

Other real estate owned was nominal at just $133,000 versus just a bit more than that at the prior quarter.

REO has been a non-event for the bank during the past 2 quarters.

Non-covered net loan charge offs moderated to $6.4 million from $7 million and even our covered nonperforming assets declined 36% to $10 million.

These steady, positive trends are supporting stabilizing and improving earnings stream.

We have now posted 6 consecutive quarters of earnings, clearly demonstrating our sustainability and moving us closer and closer to a successful merger with Nara Bancorp.

With that as back drop, I will pass it over to Doug for his further review.

Doug.

Thank you, Dick, and good morning, everyone.

As usual, I will just comment on selected highlights here of some of our quarterly results to allow more time in questions and answers.

Dick mentioned consistency in his comments a minute ago and you can certainly see that in our net income line items.

For the second quarter of the year here net income totaled $4.9 million.

After preferred stock dividends, net income available to common shareholders amounted to $4.1 million or $0.10 per diluted common shares.

These numbers are substantially the same as the first quarter of 2011.

However, you may recall that in our first quarter we had of $3.8 million gain on the sale of loans, primarily SBA loans, which included both the recognition of deferred gains on loans that were sold on transfer during the fourth quarter of last year as well as the loans from the first quarter that were sold and delivered in that timeframe through a change in the rules and documentation on SBA loan sales.

Taking this in to consideration and eliminating that benefit in effect getting 2 quarters worth of sales and 1 in fourth quarter of last year, we can see clear improvement in our earnings power the second quarter versus the first quarter.

The second quarter's $1.8 million gain on sales was more of a run rate that we would anticipate going forward.

Based on our expectations to sell approximately $20 million of our SBA loan production on a quarterly basis.

During the current quarter was sold $20 million of SBA loans at an average weighted premium of 9.35%.

All in all, our second quarter was a clean quarter with no significant or unusual line items.

The merger-related costs during the quarter amounted to $200,000, which is down from $437,000 in the first quarter.

During the quarter, and as a result of our steady profitability, we took a further reduction in our deferred tax asset valuation allowance which was reduced by approximately $1.7 million from the March 31, 2011 level.

This reduced our tax expense for the quarter to just $285,000.

Looking at our margins, as noted in our news release, management at Center historically evaluated and reported net interest margins excluding the cash balances on deposit with the Federal Reserve.

Since these deposits have been very low, there was a nominal impact.

However, our Federal Reserve deposit balances has come up this year considerably and so the reported net interest margin now reflects the impact of these deposit balances and related income.

Our net interest margin came in at 3.21% for the second quarter, up 4 basis points from 3.17%.

Excluding the impact of the Federal Reserve deposits in the calculation and just for comparison purposes, our reported NIM would've been 3.69%, up 20 basis points from our previously reported NIM of 3.49% in the first quarter.

The NIM improvement is primarily attributed to a further reduction in our funding costs.

Our cost of deposits declined another 9 basis points to 0.96% for the second quarter.

This is the result of modest reductions in the average rate across the board for all deposit categories but, more importantly, our non interest-bearing deposits grew as a percentage of total deposits accounting for 25.5% up from 23% at March 31, 2011.

While we also experienced modest increases in the average yields of most of our interest earning assets, particularly in our investment portfolio where yields were up 30 basis points linked quarter, these increases were offset by the impact of the higher Federal Reserve deposit balances which earn only a nominal rate.

Dick also mentioned earlier a strong liquidity position, well, we are clearly at the point now where this is too much of a good thing.

The Federal Reserve balance definitely represents underinvested asset on our balance sheet.

We have a good handle on asset quality and have achieved sustainable earnings, so it is understandable that we are now focusing more of our energies on achieving loan growth.

We are targeting steady, stable levels of loan growth in the low single digit range and we continue to be relatively pleased with the steady activity in our loan pipeline.

During the second quarter we funded $37.3 million in new SBA loans for $86 million year-to-date.

Our SBA loan production remains healthy so we are well on our way to achieving our goal of $150 million in new SBA originations this year.

In all, we originated $86.5 million in new loans in addition to renewals.

As with last quarter, close to 80% of all new loan production and renewals were booked as variable rate loans.

Looking at our deposits, we had another quarter with a positive shift in the deposit mix.

As of June 30, non-interest-bearing deposits, as I mentioned earlier, account for 25.5% of total deposits up from 23% in the previous quarter.

With these positive deposit trends at quarter end, our core deposits accounted for more than 75% of total deposits.

Moving on to capital, our total risk-based capital ratio rose to 20.67% from 20.42% at the previous quarter.

Our leverage capital ratio increased to 13.2% up from 12.85%.

These capital ratios are well in excess of well capitals and really well in excess of any guidelines that anyone could probably come up with for any bank right now, so we have a very strong position on our capital currently.

With that, let me pass it back to Dick.

Doug, thank you for your review.

And before we get into questions I, would just have some closing comments.

Of course, as Andy mentioned, we are here to answer your questions, including Jason Kim as well.

Now, let me first state that with results in front of us, it is clear that Center is continuing to move clearly and steadily in the right direction.

Capital position is robust and continues to strengthen.

Asset quality metrics continue to steadily improve as these positive trends frankly underscore both management and the Board's ability to manage the risk profiles of the bank not just in the past 6 quarters, but going forward.

We have had 6 quarters of sustained earnings performance and each quarter goes by shows, to me, that the sustainability continues to be where we would expect.

The liquidity position is strong.

Okay, Doug, maybe it's too strong from that standpoint but in the past that was certainly something we were willing to live with and work with.

Now we are turning our attention to new loan growth as opposed to just investing assets and fed balances.

Our earnings in capital position strongly supports our sensitivity to market risk as well.

But most important, I think for all of us in the banks and those of us on the phone, our progress continues to support the appropriate preparations for the merger with Nara Bancorp.

And, frankly, it becomes quite clear to me as the months and the quarters go by that the complementary nature of Center and Nara together along with the significant synergies to be achieved on a combination are more evident to me and to us now than ever before.

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

And so, Operator, if you could help us in that regard, that would be terrific.

Sure.

(Operator Instructions) Your first question comes from the line of Chris Stulpin of Raymond James.

Good morning.

Good morning.

What is the balance of your DTA of valuation allowance and how should we think of modeling additional recoveries going forward while understanding there are many factors involved in determining such call back?

That's a great question for Doug.

Go, Doug.

Since you give my caveat first.

We have a little over $7 million left in reserve.

Probably close to $4 million of that would be very hard to recover because it relates to state net operating loss carry forwards.

The rest of that will be driven by our profitability.

If we have a really strong quarter, you could get all of it back.

If we have a quarter like this quarter or like the last 2 quarters, you'd expect to get a comparable amount to what we just got back.

Okay.

We got close to $1.5 million a quarter back each of the last 2 quarters at the run rate of the earnings we have now.

If our earnings improved, the credit metrics improved, you could get the full $3 million plus.

Okay.

Obviously, if things go the other way you could get nothing.

So --

Sure.

Okay.

That's all I have.

Thanks.

Okay.

Your next question comes from the line of Julianna Balicka of KBW.

Good morning.

Hi.

Morning.

Nice to see a very steady quarter.

I have a couple questions please.

On the fair value mark that you had discussed in advance to the merger initially was 7.5% on the loan portfolio.

So although I know that you don't have an updated mark at this point and there still a bit of time before the merger gets finalized, to the extent that the fair value mark that you can break that down for us between interest rate component in the credit component and could you also maybe give us a little bit of updated thoughts as time has gone on in your loan portfolio asset quality is improving, how the credit component of that mark might be changing maybe with charge-offs getting smaller or something like that?

Sure.

I will comment on that.

The credit mark that we gave originally, the 7.5%, was based on the range of 5% to 10% that was provided by a third party based on an overview of our portfolio and the market conditions of the time.

We did not get a split on interest rate versus credit because it was not done in that level of detail, but I have some sort of market indications of that.

All I can really say is that nothing has happened in a couple of quarters since with that it is inconsistent with those assumptions in terms of performance of our portfolio compared to what you would expect for portfolio with that kind of mark, the market has not gotten worse.

The comparable trades, I think it is still a representative range.

Well, if the original mark calculated off your current portfolio at the time to be roughly be $100 million, a little over that, but call it $100 million.

And if you are charging off, say, $7 million a quarter, is it fair to say that if you start off with $100 million and 4 quarters later you might be $25 million less of a marker am I thinking about that wrong?

Well, no, you are not thinking about that wrong, but you are getting in to the dynamics of what goes into the mindset of the market in terms of pricing that portfolio.

I don't think you could take a dollar for dollar reduction, because there is new migrate.

It is based on a percentage of your loans that are classified, percentage of your loans that are nonaccrual and all those sorts of factors.

If those same levels existed at the date of the closure, then I would expect a similar credit mark.

Okay.

Okay.

All right.

That's helpful.

And then kind of a little bit on the topic.

What is the classified asset balance at the end of the quarter please?

The classified loan was $119 million.

As compared to --

Compared to 1 year ago we were at $157 million.

So each quarter we saw steady decline in overall classified loans.

Thank you.

And then a final question and I'll step back, please.

With that $150 million SBA origination for the year goal and your statement about selling about $20 million per quarter, that means you are anticipating to keep about $70 million to grow your loan balances?

Yes.

Okay very good.

Excellent.

I'll step not back now, please.

Your next question comes from Tim Coffey of FIG Partners.

Thank you.

Good morning, everybody.

Good morning.

Dick or Jason, can you guys give me an idea of what you think is attributable for the decline and 30 to 89 day past due loans?

Well I could use the answer to this is aggressive collection efforts.

(inaudible) for me to say that than it is for Jason, but I think as much of that as anything else, it is just a continuation of the appropriate efforts that we are taking to improve the portfolio quality.

Jason, you may have some specifics.

Sure.

Tim, overall, Center has been very proactive in identifying and resolving problematic loans.

For instance, 2009 we sold a number of loans.

Just to give you a ballpark, $133 million problem loans at a discount rate of 22.7% on an individual basis versus 2010 we sold $96 million at a discount of 10% on those problematic loans.

So we have been really proactive in identifying and resolving and that is what we believe we differentiate from other banks.

We address the issues and resolve it and we take that seriously what is the best situation at the bank to address the issue.

So, clearly I think that the overall, the direction of classified loans and past dues and overall delinquency is clearly in the right direction.

Okay.

Staying with the earlier delinquencies, all else equal, do you expect the trend to continue down in the subsequent quarters?

We hope so.

But we can't predict, obviously expectation is just that because the harder you work today, the more it shows up in subsequent results and subsequent quarters.

Okay.

And then, if you could talk a little bit about the change in the presentation of the net interest margin?

Was that done to reflect expectations that hedge funds and cash balances will stay elevated?

That was done because of the AR elevated and the way that we had calculated excluding the fed balances was something we have done internally because I think it is a good measure of comparing how you are actually pricing your loans and investments versus your pricing your borrowings and deposits.

But as that balance gets material to be able to compare with other banks who do include it, we want to show the different calculation also.

It's a big number, the cash balance, if you're comparing it another bank that has it in, you need to include it.

Okay, okay.

That makes sense.

So it had nothing to do with expectations for level of those balances going forward?

No, we have a lot of liquidity, as Dick mentioned, there have been good reasons for that.

We don't want to go to not having a lot of liquidity, but we do think that we have more than we need and it is an opportunity to improve our margin to deploy some of that.

It is going to be a focus for us.

Okay.

And then, Doug, what is the appropriate run rate for the merger cost going forward?

I think this is a pretty usual quarter, if anything could be typified as usual in this world.

But in earlier quarters we had larger things like to go back to last year there was an actual pretty intensive due diligence process and fairness opinion and things like that.

I think the current quarter is probably representative of just you have got to keep a lot of things going and between now and the merger.

Okay.

Good.

Those were all my questions.

Thank you.

Your next question comes from Joe Gladue of B.

Riley.

Hi.

I guess I had a question about the other non-interest expenses.

It looks like they were up about $116,000 from the first quarter, a sizable percentage increase.

Just wondering what was behind that.

Well I don't think I have one item to point to.

There were some REO costs in there that was as much of a fluctuation as anything.

But I don't attribute that to any trend.

There's a certain ebb and flow to those numbers and plus or minus $100,000 or $200,000 is about what I would expect.

I think the REO expense is probably the biggest fluctuation that I can remember.

Okay.

And on asset quality, I'm just wondering if you could give us; A, what were inflows to nonaccrual versus first quarter and, B, if you could just give us a little color on what were the loans that were migrating to nonaccrual in the second quarter?

Well, there were a couple of those that were mark downs and paid -- held for sale in the first quarter that were executed in the second quarter.

Aside from that, we do not have any note sales in the second quarter.

There were a couple of CRE loans, 1 was an office building, 1 is a car wash and 1 CNI credit that was migrated in to nonaccrual.

Aside from that, it has been very steady in terms of flow.

Okay.

And most of those nonaccruals, is that from loans that were, I guess, already classified assets or were there anything that was new and unclassified coming in?

They were all classified and obviously were delinquents too.

Okay all right.

That's all I had.

Okay thanks.

(Operator Instructions) You have a follow-up from Miss Julianna Balicka of KBW.

Good morning.

Thank you for ask letting ask a follow-up.

On the hedge funds balances, I know that you want to redeploy them in to loans and you had pointed to a low single-digit loan growth.

But outside of loan growth, should we be expecting a redeployment of the fed funds into some other investment securities?

Well, yes, is there any risk in the treasury market?

I think that's -- no, we are not going to do anything dramatic to change our --

(inaudible multiple voices)

We are looking to do anything to change our risk profile.

It is more, there is going to be one or 2 little off things.

We have some FHLB advanced maturities coming up which are at pretty nasty rates that we will allow to pay off.

We will push harder on any wholesale funding source or high rate deposits to be more aggressive.

So we may see some shrinkage on that side which will actually yield some positive spread but, no, I'm going to go invest $200 million in the investment market.

There is not just that much opportunity out there.

And you actually just alluded to what was going to be my second question.

In terms of reducing some of your higher cost fundings, could you kind of run through what the upcoming maturities are on CDs and FHLB's, et cetera?

Well, just about $25 million this quarter, next month actually, in FHLB.

I don't have a CD number in front of me.

We don't have any -- we have got the normal, about a quarter of our CT portfolio rolls every quarter.

It is pretty much a 1-year ladder, so there's no unusual spike.

I'm not seeing the difference between what is rolling off and what we are putting on.

We see a lot of CDs coming in at between 1.3% and 1.4% in terms of maturities.

And even though they are really cool customers, we are giving exception pricing, dropping that at least a 25%.

Boy, I wish I had a number for you in terms of maturities.

I may have to get back to you on that.

And what is the point of the runoff that you were alluding to that is pretty much the $25 million FHL leases or any other section of funding that you would likely to just run down?

There isn't anything else up there with significant maturities, so no.

Okay very good.

Excellent.

Thank you very much.

Those were my questions.

Thank you.

Ladies and gentlemen, that concludes the Q&A session.

I would now like to turn the call back over to Angie Yang.

Thank you all for participating in Center's 2010 second quarter conference call this morning.

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

Thank you.

Ladies and gentlemen, that concludes today's conference.

Tank you for your participation, you may now disconnect.

Have a great day.