Center Finance F4Q07 (Quarter End 12/31/2007) Earnings Conference Call Transcript

Feb. 4.08 | About: Center Financial (CLFC)

Center Financial Corporation (NASDAQ:CLFC)

Q4 2007 Earnings Call

January 31, 2008 12:00 pm ET

Executives

Angie Yang – Investor Relations

Lonny D. Robinson – Chief Financial Officer & Executive Vice President

Jae Whan Yoo – President & Chief Executive Officer

Jason K. Kim – Chief Credit Officer

Analysts

Brett Rabatin – FTN Midwest Research

Christopher Nolan – Oppenheimer & Company

Donald Worthington – Howe Barnes Hoefer & Arnett

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2007 Center Financial earnings conference call. My name is Melanie and I’ll be your coordinator today. At this time all participants are in a listen only mode. We will conduct a question and answer session at the end of this conference. (Operator Instructions) As a reminder this call is being recorded for replay purposes. I would now like to turn the call over to Ms. Angie Yang, investor relations for Center Financial. Please precede ma’am.

Angie Yang

Good morning everyone. Thank you for joining us today for Center Financial’s 2007 fourth quarter investor conference call. Before we begin please recognize that certain statements that will be made during this call may not be historical fact, they 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 in 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 publically update or revise its forward-looking statement.

As usual this call will be one hour in duration. Chief Financial Officer Lonny Robinson will begin with some highlights of the financial results for the quarter. Center Financial’s CEO Jae Whan Yoo will then provide some comments on the operational progress its’ made to date. Then, we will open up the call for a question and answer session. Jason Kim Center’s Chief Credit Officer is also here with us and will participate in the Q&A session. Now, I’d like to turn the call over to Lonny Robinson.

Lonny

Good morning everyone and thank you for participating on our call today. As you should all have our fourth quarter earnings release by now I will only discuss selected items that highlight our overall operating performance this quarter. Let’s start our discussion with loan growth. Net loans at December 31, 2007 grew to $1.79 billion, this is up 4% on a linked quarter basis and up 16% year-over-year. We originated $174 million in loans including new loans and renewals during the final quarter of 2007. Of the total loan production in the quarter approximately 37% represented purely fixed and 10% was a hybrid form of fixed rate and variable rate loans equaled about 53%. This compares with 35% fixed, 17% hybrid and 48% variable in Q3 2007. Though we are pleased to see the trend continue from the preceding quarter where the demand is rising for variable rate loans. Overall, at year end our loan portfolio includes 60% of fixed and hybrid loans and 40% variable rate loans. As of December 31, 2007 approximately 70% of our loan portfolio represented commercial real estate loans of which a third is owner occupied. Commercial real estate construction lending accounted for less than 4%. While the CRE concentration is higher than we’d like it to be I will note for the record here that Center Financial has a pristine track record without a single loss from a CRE loan in our history.

Moving on to our SBA department, we originated approximately $21 million in new SBA loans during the 2007 fourth quarter totaling nearly $100 million for the full year. During the whole of 2007 we did not sell any of the guaranteed portion of our SBA loans to the wholesale market. We did however sell some unguaranteed portion for a gain on sales of $618,000 [inaudible] 2007 second quarter. For 2006 we posted a gain on sale of $719,000 in the fourth quarter or $3.3 million for the full year. While it is challenging to walk away from these gains we are strategically keeping them on our books for greater long terms profits particularly in the light of the current environment where the premiums have narrowed significantly, we believe it is the prudent thing to do. We will however, be opportunistic and consider a sale when the right circumstances are in place. For example, if we saw a growing concentration of hotel/motel loans that exceeded our internally set diversification limits in the portfolio, we may elect to sell a portion of that portfolio.

Now moving on to what most of us have been focused on these days, asset quality. I am pleased to say that Center Financial’s asset quality metrics have held steady unlike many of our peers in the banking sector. Loan non-performing assets at year end amounted to $6.6 million or $3.9 million net of SBA guaranteed portion. This compares with the same level at the close of the 2007 third quarter or $4.2 million net of SBA guaranteed portion. Non-performing assets as a percent of total loans and OREO was .37 as of December 31, 2007 compared with .38 as of September 30, 2007 and .21 as of December 31, 2006. During the 2007 fourth quarter we charged off $1.3 million or $3.6 million for the full year. Charge offs related to our B to B or scoring based express loan program product amounted to $235,000 for the fourth quarter and represented 40% of the total charge offs for the year. As we mentioned last quarter we tightened scoring criteria on the new B to B originations across the board and we discontinued underwriting certain lines of credit through this expedited program which is where about 80% of non-performing B to B loans occurred. While we continue to have some delinquency in this portfolio, it is a very small piece of our overall portfolio, approximately $31 million in total and we are quite comfortable that we now have a good handle on the situation.

As most of you know we typically file our 10Qs with the SEC in conjunction with our earnings release. As this is the year end it will be mid February before our Form 10K is audited and filed. As such, I wanted to update you on the level of impaired loans which we have reviewed each quarter since Q2 2007. As of December 31, 2007 impaired loans totaled $3.3 million down $500,000 from $3.8 million at September 30, 2007.

We recently completed our semi-annual external loan review here at Center and I am pleased to report that we had no downgrades but actually had two upgrades of loan classification. Over the course of 2007 our outside consultants reviewed 43% of the total loan portfolio. With that said, we are gratified that we have not experienced the significant credit downturns that many of our banking peers have reported. We continue to adequately provision for loan losses inherent to our business. Given the current environment and uncertainty surrounding a potential recession we deemed it appropriate to increase our allowance for loan losses to 1.13% of gross loans from the 1.12 level over the past year.

Now moving on to deposits, cost of funds and net interest margins. While total deposits grew sequentially and year-over-year, we have seen a steady decline in our non-interest bearing deposits to total deposits which equal 23% at December 31, 2007 down from 27% at December 31, 2006. This trend underscores the extremely challenging deposit gathering market that we are operating in. A less than favorable mix of DDAs further pressured our net interest margin which declined 27 basis points from the immediate preceding quarter. The primary driver of this decline was the 100 basis point reduction in the FED’s fund rate between September and December of 2007. With each reduction the variable rate portion of our loan portfolio current 40% re-priced downward immediately. As you all know the [inaudible] reduced the rate by 75 basis points on January 22nd and by another 50 basis points yesterday. We estimate that these reductions will have further immediate impact on our net interest margin, a little more than 30 basis point compression in the first quarter 2008. But, with the lagging affect of lower cost of deposits on the horizon, we expect our NIM will recover gradually in the following quarters of 2008 as our timed deposits mature and re-price downward.

Now, before I turn it over to JW I wanted to comment on the OTTI impairment posted in the fourth quarter. I am sure that most of you have already run into other banks that have recently written off an OTTI impairment so I will not take the time to go over it in detail. I do want you to know however, that following the impairment those securities have been sold so we obviously do not expect any further impairment related to the Fanny Mae Professional Preferred Stock. With that, I would now like to turn the call over to JW for his remarks.

JW

Thank you all for joining us today. 2007 has been a year filled with many successes, this includes the coming together of a extremely coy senior management team to lead Center Financial into its next [inaudible] of growth. We also improved our overall inter controls and reporting lines through a restructuring of our organization duties and responsibilities. These changes gave a way to the combination of our BSA related MOU just fourth months into my first term as president and CEO. As a result we are excited about returning to our steady pace of expansion that will support our continued growth. We opened our second full service branch in Seattle this past November the first branch opening in nearly two years and we are pleased with the initial success we have had bringing in new deposits without the use of steep introductory rates. In addition, we look forward to relocating our Oxford branch to a new larger and more convenient location in the heart of Korea Town. Center Bank’s new [inaudible] branch will open next to a high end Korean American grocery store which positions it well for attracting the growing population of affluent Asian Americans in the [inaudible]. Both of this openings are slated for the first half of 2008.

Operationally, as Lonny already reviewed, the Center Bank team supported by a group of regional directors continued to work diligently and generated solid levels of loan production to add more than $250 billion in net to our loan portfolio during 2007. At the same time we stayed on the front lines of the credit environment and maintained strong asset quality levels. On the flip side, the banking environment has been in a state of tremendous turmoil since the subprime mortgage crisis and the credit and the liquidity crunch first hit the market. As a result, many financial institutions have been adversely impacted on many fronts whether it is a market valuation declines, inter re-rating asset quality, impairment write offs and others. These factors combined with our efforts to rebuild and strengthen the Center Financial organization have restrained somewhat our earnings in 2007. However, I’m confident that the investment we have made will lead to even greater profitability for our organization and ultimately provide greater value for our shareholders.

As we look forward to 2008 we are planning to implement a number of initiatives and marketing campaigns to enhance our ability to gather core deposits and increase our liquidity. We are also planning for controlled levels of quality loan growth as well as a stronger focus on managing our portfolio concentrations. Due to the growing proportion of fixed rate loans in our loan portfolio as well as because of the growing concentration of the CRE loans you can expect that we may go back to the wholesale market on a selected basis but not on a regular quarterly scheduled as we have done in the past. With Center Bank’s historically prudent conservative credit culture and the strongest leadership team in our market we believe the challenges of the credit market actually present numerous opportunities for our organization.

In summary, 2007 was a year of building and strengthening the Center Financial organization in preparation for our next phase of growth. To say the least, I’m excited about the Center Financial prospects and look forward to sharing with you all of our achievements. With that let’s open up the call to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Brett Rabatin with FTN Midwest. Go ahead.

Brett Rabatin – FTN Midwest Research

Lonny, did I hear correctly – what was that margin guidance you gave for the first quarter?

Lonny

We’re looking at approximately a 30 basis point decline with the cuts that occurred, the 75 and 50 that occurred yesterday.

Brett Rabatin – FTN Midwest Research

That’s what I thought you said. It looks to me like you’re going to have about $1 billion re-price in one Q and only about $350 million or so of CDs. Is that a fair assessment?

Lonny

Yes. And, a lot of that is going to be re-pricing and a lot of those CDs that are re-pricing are coming in off of rates like 5% plus and they’re going to come in at very low fours or high threes re-pricing so it is going to be a pretty good re-price. We’ve actually been modeling the rate cuts constantly in anticipation so based on our modeling results that’s where we believe the NIM’s going to compress to. Throughout the year as the timed deposits start re-pricing downward we will see some recovery in the margin. Now, that’s assuming that there’s no additional rate cuts. Obviously, there is discussion of a possibility of a couple more.

Brett Rabatin – FTN Midwest Research

I wanted to discuss the loan growth obviously, stronger than expected and a lot of commercial real estate new loans on the balance sheet. I’m assuming you’re going to tell me that you continue to have a strong pipeline but maybe double digit loan growth in 08 is not as smart a thing given balance sheet management? Can you give us some thoughts on where you see the loans growing in the current environment and the margin trade off there?

Jason

Well, the level of loan growth may not be the same level compared to last year given the environment. But, because of such significant rate cuts in the last several months we are pricing a variable rate with full features that we initiated at the beginning of the year trying to maintain our net interest margin. But, given the environment we are more focusing on credit culture and maintaining our highest asset quality.

Brett Rabatin – FTN Midwest Research

Then you mentioned the Fannie/Freddie whatever you want to call it write down. I was curious if you had any IO strips related to past SBA production or anything else in the securities portfolio that you’re looking at that may have some softness in the current market?

Lonny

As part of our quarterly analysis we look at impairment throughout our portfolio. We looked at obviously, the servicing assets and the investment portfolio, even some of the CRA investments for impairment and any other type of OTTI. We believe that we do not have any other securities of anything of that nature that would require any type of a write down.

Brett Rabatin – FTN Midwest Research

Then just lastly, the First Intercontinental transaction is that still on track for 2Q and any thoughts on an update on what’s going on with that acquisition?

JW

We are still working on the deal and there are some issues right now so we are work through that. For instance some departure of senior management of the bank but, I’m not at liberty to disclose in detail at this moment.

Operator

Our next question comes from the line of Christopher Nolan with Oppenheimer & Company. Go ahead.

Christopher Nolan – Oppenheimer & Company

You had buybacks in the quarter, given the change in the economic environment should we expect those to continue giving that the press release indicated that you guys still have remaining authorization?

Lonny

We do have the remaining availability to buyback approximately $5 million plus. I think there’s really probably going to be a reluctance in light of the need for the stressing of capital and obviously, the credit crunch and liquidity that is out there. So, I would say that we’re probably not looking at any material buybacks at this point.

Christopher Nolan – Oppenheimer & Company

Are you guys at liberty to provide an update to what’s going on with TIC?

Lonny

TIC?

Christopher Nolan – Oppenheimer & Company

Yeah.

JW

Actually, we also continue working to resolve the pending litigation issues. But, as I mentioned in the past, we are pursuing an economically effective way and we are pretty open for any resolution as soon as possible.

Christopher Nolan – Oppenheimer & Company

So nothing really as to any sort of indication of resolution first half of 2008 or so?

JW

Hopefully, I’m trying to resolve by the end of December 31 this year.

Operator

Our next question comes from the line of Don Worthington with Howe Barnes Hoefer & Arnett. Go ahead.

Donald Worthington – Howe Barnes Hoefer & Arnett

In terms of getting back to the First Intercontinental acquisition, how is credit holding up at that company?

JW

Actually, when we go through the first round of due diligence we saw that it is not that below our expectation. But, actually we are now working on in detail, as I mentioned earlier, I’m not at liberty to disclose in detail at this point in time.

Donald Worthington – Howe Barnes Hoefer & Arnett

In terms of commercial real estate market, are you seeing any signs of weakness there in the Los Angeles market or is that holding up pretty well in terms values, vacancy rates, things of that nature?

Jason

Don, when you see a newspaper headline out there and you see all [inaudible] in the economy but, quite frankly the commercial real estate market in southern California is still holding up pretty well in terms of value. I think the value is still sticking with the real estate market here.

Operator

[Audio ends]

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!