Center Financial Corporation Q1 2008 Earnings Call Transcript

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 |  About: Center Financial Corporation (CLFC)
by: SA Transcripts

Center Financial Corporation (NASDAQ:CLFC)

Q1 2008 Earnings Call

January 31, 2008 12:00 pm ET

Executives

Angie Yang - IR

Lonny Robinson - CFO

Jae Whan Yoo - CEO

Jason K. Kim - Chief Credit Officer

Analysts

Brett Rabatin - FTN Midwest

Chris Stulpin - D.A. Davidson

Don Worthington - Howe Barnes Hoefer and Arnett

Julianna Backlicka - EBW

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Center Financial Corporation Earnings Call. (Operator Instructions).

I would now like to turn the call over to your host, Ms. Angie Yang, with Investor Relations for Center Financial. Please proceed, ma'am.

Angie Yang

Thank you, Tawanda, and good morning, everyone. Thank you for joining us today for Center Financial's 2008 first 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 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.

As usual, this call will be one hour in duration. Chief Financial Officer Lonny Robinson will begin with an overview of the selected highlights for the company's first quarter financial results. President and CEO Jae Whan Yoo, will then provide some comments on the operational progresses before we open up the call for a question and answer session. As usual, 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.

Lonny Robinson

Thank you, Angie. Good morning, everyone and thank you for joining us today for our 2008 first quarter call. I will just go over selected items that highlight our overall operating performance for the quarter since many of you have already reviewed our earnings news release and to note that our 10-Q is being filed as we speak.

I'll start off with loan growth. I am pleased to report that Center Bank team delivered another strong quarter and originated $148 million in new loans and renewals during Q1 of 2008. Net loans at March 31st, 2008 grew by nearly $60 million from year-end 2007, amounting to $1.85 billion. This is up 3.2% on a linked quarter basis and up 17% year-over-year.

This rate of growth in the current environment is a bit higher than we had anticipated, as we are currently experiencing significantly lower levels of payoffs. We believe, there are a couple factors that are contributing to this effect. First, the conduit market has all but disappeared. Second, the credit crunch that is impacting the whole industry is making it more difficult to obtain credit. And finally, the illiquidity of potential competitors actually creates a less competitive market for these loans, which has worked to our advantage.

Of the total loan production in the quarter, approximately 18% represented purely fixed rate. And just 4% was hybrid form of fixed rate. Now, for the second quarter in a row, the majority of the new loans booked were variable rate, amounting to about 78% of the first quarter's new loan production. This is up significantly when compared with 53% of loans originated being variable rate in Q4 of 2007.

As of March 31st, 2008, approximately 65% of our loan portfolio represented commercial real estate loans, of which approximately a third is owner-occupied.

Commercial real estate construction lending accounted for about 4% of the total loan portfolio. The overall CRE concentration is still a large part of our loan portfolio and we are looking at a number of strategic ways in which we may mitigate our exposure to the CRE market.

As you should all be aware, the market demand for SBA loans has dropped significantly in recent quarters. And this is reflected in the overall reduction of new SBA loans originated in our first quarter of 2008. We originated $14.4 million in SBA loans, as compared with approximately $21 million in new SBA loans during the 2007 fourth quarter.

During the 2008 first quarter, we sold $12.2 million in SBA loans to the wholesale market and recorded a gain on sale of loans of $330,000. As you may recall, beginning a year ago, we implemented a new strategy of retaining our variable rate SBA loans on our books rather than selling them regularly each quarter to the wholesale market.

While we are not walking away from this long term strategy, we are mindful that we are operating in a different environment today. Specific to Center Financial, as well as to most of our direct peers, we have experienced significant growth over the years resulting in the concentration of commercial real estate loans in our portfolio.

And as you are all aware, currently, it's a very difficult deposit-gathering market, which means that deposit growth has not kept up with growth of loans. As such, the company is considering additional sales of up to $100 million of loans over the course of the second and third quarter of 2008.

In addition, to reducing the company's commercial real estate loan concentration risk, the loan sale would provide the company with added liquidity and capital resources, which, certainly, are a value in today's environment. This strategy is a part of our overall efforts to optimize our balance sheet and manage our liquidity.

Now, moving on, I am happy to report on what has been one of Center's strength in the current market, our asset quality. I am pleased to report that Center Financial, again, maintained consistently high levels of asset quality. Non-performing assets, at the end of the first quarter, were relatively at the same levels as of December 31st, 2007.

Total NPAs amounted to $6.7 million or $4.1 million net of the SBA guaranteed portion. Non-performing assets, as a percent of total loans in OREO was 0.36%, as of March 31, 2008, improving modestly from 0.37%, as of December 3t, 2007.

During the 2008 first quarter, we charged off $954,000. As a percent of average loans, NCOs, net charge-offs, were 0.05% or 0.20% on an annualized basis. Particularly, in light of the fact that we're operating in a downward credit cycle, we are pleased that Center Bank has been able to maintain such high levels of asset quality, consistently each quarter over the last year.

We just completed our exit meeting last week for our annual review with the regulators. And while we haven't received our final exit memo as yet, we are pleased with the tone of the discussions.

We continue to adequately provision for loan losses inherent to our business. To account for the more challenging operating environment, we felt it was appropriate to increase our reserves going into the year and increase our provision to 1.16% of gross loans, up from 1.13% at the end of 2007.

Now, on to deposits and cost of funds. We continue to face a challenging deposit-gathering environment, as evidenced by a decline in our non-interest bearing deposits. While period-end balances from December 31st, 2007 and March 31, 2008, only declined by $6 million from an average balance perspective, the decline was more pronounced in excess of $20 million.

However, the company has been able to take advantage of some lower cost broker deposits, which increased our total deposits by 6% from year-end 2007. This, of course, does have an effect on the mix of our deposits. Non-interest bearing deposits, as a percent of total deposits, equaled 21% at March 31st, 2008, which is down from 23% at December 31st, 2007.

The recent interest rate reductions of 300 basis points over the last two quarters will effectively lower our cost of funds, which was down by 18 basis points from December 31st, 2007, as there is a lag time between the rate reductions and the resetting on our deposits.

We expect to see continued improvements on our cost of funds over the next couple of quarters as deposits are re-priced to include the full impact of the rate reduction.

Now, moving on to our net interest margin. We are quite pleased at the compression of our NIM in 2008 first quarter was actually to a lesser extent than what we experienced in the 2007 fourth quarter, and lower than what we guided on our last conference call. A number of factors contributed to this.

First, the variable rate loan portion of our portfolio is now 39%, compared with 40% at the end of 2007. As such, a slightly smaller portion of the portfolio re-priced downward, so that creates a little less pressure.

Second, some funding strategies that we put in place in the first quarter helped to lower our cost of funds. So, we're seeing some relief there as well.

Furthermore, we had approximately $500 million of time deposits that came up for renewal in the first quarter. The bulk of these deposits were re-priced at significantly lower cost to the bank given the 300 basis point reduction in rates since these deposits were originally taken. This probably mitigated close to 10 basis points of the NIM compression.

Now, keep in mind, that with where interest rates are currently, we are just about at the floor with which we can lower rates on deposits. So, any further reduction in rates will not likely have this positive effect in supporting our NIM.

As we mentioned last quarter, with the lagging effect of lower cost of core deposits on the horizon and the associated positive effects on our cost of deposits, we expect our NIM will begin to recover gradually, beginning in the second quarter. Factoring in the four rate reductions through the first quarter, we begin the current second quarter at a NIM of just below 3.6%.

And just to update you on our liquidity. Total available liquidity as of March 31st, 2008, was a $110.4 million, including excessive cash holdings or balances in due from banks, overnight fed funds sold, money market funds and un-pledged available for sale securities.

At March 31st, 2008, the company had a total of $369 million of available funding sources, not including our ability to purchase wholesale broker deposits.

With that, I will turn the call over to J.W. for his remarks.

Jae Whan Yoo

Thank you, Lonny for your financial review and thank you all for joining us today. Overall, we are pleased with our performance in the first quarter, particularly in light of the very difficult operating environment we are currently experiencing. In particular, we believe Center's track record of delivering consistently strong levels of asset quality is a testament to our conservative credit culture.

We firmly believe, we are the soundest and perhaps the most conservatively managed financial institutions, serving the Korean-American community in the Southern California market. And we are confident that this leadership will lead to greater opportunities down the road.

Despite what is being seen as a pronounced economic decline, the Center Bank team delivered another quarter of strong quality expansion in our loan portfolio. While our pipeline is down about 20%, relative to a year ago, it is unchanged from the levels we saw in the 2007 fourth quarter.

Center Bank has always been a growth orientated organization and we take great pride in fostering a strong face and a lending team, not only to over-service our existing customers, but also to be able to capitalize on the opportunities ahead of us.

However, with the current expectations for an extended decline in general business activity, we believe it is important to proactively tighten our belt to better manage economically our operations for optimal performance in the current environment.

As such, we are now implementing company-wide cost of control measures, including a recent reduction to the number of our total full-time employees, eliminating a total of nine positions. All responsibilities have been reassigned to others within the organization, and we expect these changes will result in reduced salary, employee benefits, and other personnel expenses of more than $1 million on an annual basis going forward. While we deeply regretted parting with these team members, we believe these changes are necessary for the long-term health and prosperity of our organization.

As we move forward in the year, we look forward to continuing our steady pace of controlled growth. We announced last month the opening of our branch in Diamond Bar, which is east of Los Angeles. We also opened our new Oxford branch, which we call now South Western Branch, in a larger and much more visible location.

This summer we expect to open our new regional branch right here in the Mezzanine level of our corporate offices, which would adjoin our building with a newly-opening shopping complex. This branch will represent the new Center Bank concept. And we look forward to having you visit in the near future.

With that, let's open up the call to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Brett Rabatin with FTN Midwest. Please proceed, sir.

Brett Rabatin - FTN Midwest

Hi, good morning, everyone.

Lonny Robinson

Good morning, Brett.

Jae Whan Yoo

Good morning, Brett.

Brett Rabatin - FTN Midwest

I wanted to first get a little more color on this expense savings initiative. The nine FTEs, can you discuss where those were from? And then just any other initiatives you have in place to cut expenses. Will this $1 million savings be the brunt of it or will there be other savings as well?

Jae Whan Yoo

Brett, as part of our overall cost reduction program and also to improve our operating efficiencies, actually we took initiative in this kind of staff reduction program. And I think, as a result of that cost reduction, we expect improvement of holding power of the whole organization and eventually improve the return to shareholders. There was no particular reason why we should that, but, given the current general economic environment, we thought that this is an inevitable action we have to take to improve the overall efficiency of the bank.

Lonny Robinson

Brett, we're looking at it from a standpoint that we anticipate the growth slowing in regards to the economic decline. And so, we've taken a look at our organization from a staffing standpoint and, like I said, made some tough decisions and reassigned some responsibilities throughout the organization. There were some senior level positions eliminated from that standpoint.

As far as other cost containment initiatives, we've looked at, so far, I guess in my year that I've been here, we've looked at reducing some costs in the professional services area, consulting costs and those types of things. And we've been successful there. But we're looking at each line item; each expense category, and we're just going to try to make ourselves a more efficient organization. We think to be stewards to the shareholders; that we've got to return a greater amount of that revenue to the bottomline. So, that's really what we're looking at, Brett.

Brett Rabatin - FTN Midwest

Okay. So, it sounds like its mostly personnel-based, then, correct?

Lonny Robinson

Well, probably for the most part. But, like I said, we're looking at every line item in our financial statement to see where we can get some cost savings.

Brett Rabatin - FTN Midwest

And is it fair to assume there were some production people eliminated?

Jae Whan Yoo

Actually, we eliminated some of the senior positions and also some loan officers' position as well, because, actually, I reserved some of extra loan officer positions in anticipation of acquisition of Atlanta Bank. But, actually, those transactions are terminated and gone. So, I thought this is good time for us to take some action.

Brett Rabatin - FTN Midwest

Okay. That's good color around that. And then secondly, I know your asset quality levels continue to be strong. But I was noticing you have total risk base of 10.25 at the end of the quarter. And I'm curious to hear some thoughts on it and if you've looked at the capital ratios and obviously, you're going to sell. You're going to be, it sounds like, selling up to $100 million in the commercial real estate portfolio. Do you have goals for that ratio? And how are you going to get there?

Lonny Robinson

Brett, that's a good question. We definitely know very well where that level is at the holding company, but definitely as a bank, from that standpoint. Strategically, we started talking about this last November, as far as how we can get some liquidity. As you know, that at the end last year, in December, we had a loan deposit ratio of 113%, which, basically, is a sign that we have some illiquidity in the balance sheet. We do have a concentration of commercial real estate. And, obviously, that has an impact as far as the risk, 100% risk weighting and the risk-based capital ratio.

So, we made the decision that over the next couple quarters that we would like to sell up to $100 million, not only to preserve capital to help us with our liquidity and to take some of that concentration risk off the table in regards to commercial real estate. One of the things that we definitely have focus on that and that's going to be our efforts here from that standpoint, so, the sale is really predicated on a number of factors; liquidity, capital preservation. Obviously, we were taking assets off the book. We have more capital to asset ratio, which will affect our risk-based capital. And the other thing that's going to play into it, too, is we're also looking hard at our fixed rate versus variable rate mix in our loan portfolio. So, with this strategic move, we're going to try to address a number of issues.

Brett Rabatin - FTN Midwest

Okay. And then just, lastly, I missed the SBA sales for the quarter. And it sounds like, from what I gleaned from the commentary that you might still consider doing that on an ongoing basis, maybe a little bit of a change from what you did in the past.

Lonny Robinson

No, I think overall, the SBA loan sales were partially predicated on our overall strategy of doing a sale to raise some liquidity from that standpoint. And we do evaluate it every quarter and we're not going to try to abandon that. But, we believe here in the last couple of quarters that really the environment has changed and we really need to focus on capital and liquidity and that's really what predicated the sale.

Brett Rabatin - FTN Midwest

So, how much were the sales this quarter?

Lonny Robinson

$12.2 million.

Brett Rabatin - FTN Midwest

$12.2 million. Okay. Well, great. Thanks for the color and congrats on the results in a tough environment.

Lonny Robinson

Thanks, Brett.

Jae Whan Yoo

Thank you, Brett.

Operator

And your next question comes from the line of Chris Stulpin with D.A. Davidson. Please proceed, sir.

Chris Stulpin - D.A. Davidson

Good morning.

Jae Whan Yoo

Good morning, Chris.

Lonny Robinson

Hi, Chris, how are you doing?

Chris Stulpin - D.A. Davidson

Good. I came in 12 minutes late to the conference call and I apologize if you went over this. But, were there any shares repurchased in the quarter?

Lonny Robinson

Chris, we did announce in the year-end conference call that we had basically had no plans of repurchasing shares. And we did not buy any.

Chris Stulpin - D.A. Davidson

Right.

Lonny Robinson

And if you get a chance, I know our 10-Q just has been filed, get a chance to review it, that we are announcing that we are not going to repurchase any shares. And that program will terminate on, I believe, May 24th. And the fact that we want to preserve capital in this environment, and for some of the questions that we already answered in this call, the strategy was we do not want to repurchase shares at this point.

Chris Stulpin - D.A. Davidson

Okay. I figured that was the case. I just wanted to make sure; I just wanted to clarify that was still the case.

Lonny Robinson

Not a problem, Chris.

Chris Stulpin - D.A. Davidson

Okay. I think Brett answered my other question or two. So, I'm pretty good. Thank you very much.

Jae Whan Yoo

Well, thank you, Chris.

Lonny Robinson

Thanks, Chris.

Operator

And your next question comes from the line of Don Worthington with Howe Barnes Hoefer and Arnett. Please proceed.

Don Worthington - Howe Barnes Hoefer and Arnett

Good morning, everyone.

Jae Whan Yoo

Hi, good morning, Don.

Lonny Robinson

Hi, Don, how you doing?

Don Worthington - Howe Barnes Hoefer and Arnett

Good. In terms of the loans held on the balance sheet for sale, can I assume those are CRE loans, then?

Lonny Robinson

Yes, we did a reclassification. And you'll see more color in the 10-Q about this. Yes, we identified loans that we believe are eligible for sale, that meet the criteria that we're looking to basically address liquidity, CRE concentration and from that standpoint. And basically, they were CRE loans, yes.

Don Worthington - Howe Barnes Hoefer and Arnett

Okay. And then was there anything in the margin pertaining to interest recoveries this quarter?

Lonny Robinson

In regards to what, non-performing loans coming to turn or anything like that?.

Don Worthington - Howe Barnes Hoefer and Arnett

Yes. Right.

Lonny Robinson

Jason?

Jason Kim

In terms of non-performing, we have one account that is satisfying our cure period for six months. We are just waiting for updated financials. They have satisfied the six months of prompt payments. So, that account is about $750,000.

Don Worthington - Howe Barnes Hoefer and Arnett

Okay.

Lonny Robinson

But as far as recovery of interest in the first quarter, probably nothing significant, Don.

Don Worthington - Howe Barnes Hoefer and Arnett

Okay. Thanks. And then, I guess, lastly, any update on the litigation front either the KEIC or the First Intercontinental?

Jae Whan Yoo

Don, unfortunately, I don't have the liberty to mention in detail. But, as I mentioned in the past, we like to try to our best to resolve in a reasonably economic manner if there is a chance.

Don Worthington - Howe Barnes Hoefer and Arnett

In both cases?

Lonny Robinson

Well, the Atlanta litigation is rather recent. And we have some discussion in the 10-Q and I know you haven't had a chance to review it yet. But, basically, we're going to file a counterclaim against the other bank demanding liquidated damages, which they've done against us. And we believe we have meritorious defenses against their claim.

Don Worthington - Howe Barnes Hoefer and Arnett

Okay. Great. Thank you.

Lonny Robinson

Thank you, Don.

Operator

(Operator Instructions). Your next question comes from the line of Julianna Backlicka with KBW. Please proceed.

Julianna Backlicka - EBW

Good morning.

Lonny Robinson

Hi, Julianna.

Jae Whan Yoo

Good morning, Julianna.

Julianna Backlicka - EBW

Hi, how are you?

Jae Whan Yoo

Fine.

Lonny Robinson

I'm good. How about you?

Julianna Backlicka - EBW

Good. I have two general questions. One, you said that you were expecting slowing growth. And I was wondering if you are able to quantify that? Meaning that, if I build in the $100 million of loan sales, are we looking at down balances, flat balances, something along those lines?

Lonny Robinson

Well, if you're comparing it over through the end of the year, Julianna, is that your question?

Julianna Backlicka - EBW

Sure, end of the year, yes.

Lonny Robinson

Okay. I would say, in anticipating the $100 million in sales and if we're successful in doing that up to $100 million, we're probably going to be slightly larger than we are right now, but not much. We'll probably be able to recapture most of the sale. But we're not looking for much growth. We're not forecasting a whole lot of growth for the rest of the year.

Julianna Backlicka - EBW

Okay. That makes sense. And then my second area of questions is in terms of delinquency trends, what are you seeing? And also, a little bit more color on the commercial loans that are in NPL status, what kind of industries or any concentrations, any patterns? And then you had mentioned that $750,000 loan that's about to exit the cure period. Is that a commercial loan or a SBA loan?

Jason Kim

Okay. There were a few questions, so, let me try to capture the first one.

Julianna Backlicka - EBW

Yes.

Jason Kim

In terms of non-performing loan, we are flat compared to previous quarter. However, the impaired loans have jumped to $11.2 million, largely two accounts. Number one; relates to one CNI loan. The borrower has two related accounts totaling $3.2 million. On a $3.2 million, one account is a straight finance for $1.2 million. That has 90% SBA guarantees, because the borrower exports goods to Asia. So, SBA supports 90% guarantee. So, our exposure on that is going to be $120,000.

And another account is a line-of-credit for $2 million. That is supported by the free and clear single family residence located in Santa Monica, which is an upscale town in the Westside. Recent appraisal came out at $1.4 million and recent pay-for business asset at court hearing, where the business' asset was $475,000. So, we would recover significantly on this account.

The other impaired loan is a $2.5 million condominium construction project. Three banks are involved in this finance. Lead bank has a significant exposure and we're just waiting for the lead bank to evaluate different option at this point. So, that three accounts related to the increase in impaired loans.

Julianna Backlicka - EBW

Okay.

Lonny Robinson

Julianna, I might add in the 10-Q, as you know, we talk about impaired loans and we provide a lot of color there. That should help you out.

Julianna Backlicka - EBW

Yes.

Lonny Robinson

From that standpoint, we do have about $11 million in impaired loans, of which about $3.6 million of them are SBA loans, from that standpoint. And we did provide specific reserves of about $1.1 million on them.

Julianna Backlicka - EBW

Great. Thank you very much.

Operator

And at this time, there are no additional questions in queue. I will now turn the call over to Miss Angie Yang for the final remarks.

Angie Yang

Thank you all for participating in Center Financial's 2008 first 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 during the year.

Operator

Thank you for joining today's conference. This concludes the presentation. You may now disconnect and have a wonderful day.

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