Description

CALIFORNIA CENTER BANK (CLFC)

Price Projected Sept. 30 3rd Quarter Net Interest P/E Sept.
2001 EPS BV P/BV Margins Quarter
ROAE

Korean
CLFC
10.10 1.22 8.24 122% 4.58% 9 14.2%

Korean
HAFC
13.75 1.35 8.12 170% 4.40% 10 18.0%

Korean
NARA
16.50 1.93 9.68 170% 5.25% 11.5 23.6%

Chinese
CATY
58.85 4.69 26.53 221% 4.30% 12.4 19.46%

Chinese
UCBH
28.92 1.51 8.76 330% 3.74% 19 19.96%


All the above Asian-American banks are very cheap, except UCBH Holdings. They have some of the highest net margins in the banking business specifically because much of their deposit base is in non-interest bearing accounts. This population feels much more comfortable putting money with their own kind and is not very concerned in getting the best rate, or for that matter any rate of return on their money.

If you go back in history these banks have averaged 15-20% return of equity. What company or business averages a 15-20% return on equity and sell at less than 10X earnings and only 122% of book value?

CLFC is cheap for two major reasons. One, and probably the main reason, is that the company has added five new branches, from 6 to 11, since April. Obviously this almost doubles their bank size and it initially increases their assets and deposits by 35%. This will temporarily hurt earnings. Non-interest expense rose from 3.9M to 5.2M quarter to quarter in Sept. and from 11.5M to 14.1M in the nine months. On approximately 6M shares this is 1.3M or .21 per share pretax or .13 after tax and for nine months 2.6M or .431 pretax or .26 after tax. (Note: I have note included an item of other comprehensive income, which includes unrealized gaines on securities available for sale) Comparing same store or same branch sales could have produced .40 vs. .37 for the quarter and 1.20 vs. 1.03 for the nine months. Most banks have showed lower earnings due to the interest rate decline but CLFC normalized apples to apples with branches opened more than one year have held up well. When will earnings really turn up? Second half of next year when profits from the new branches will begin. There is no reason to believe that at that time they won’t be earning their 20% return of equity and I doubt it will be selling at 9X earnings.


If they are, they will probably be acquired at a substantial premium. The second reason it is cheap is because they had an acquisition offer of 17.00 + earnings till closing date which was expected to be the 4th quarter of 2001. 17.00 + earnings of 5.5M or $.91 per share over the last 9 months would have equaled $17.91. I believe there were some arbitrageurs who bought the stock for the ultimate takeover and have dumped the stock, causing the declines. I do not know why the deal was cancelled but Hanmi Bank was going to pay 2.3X book value which on Sept. 30th would equal 18.95. This is what Hanmi Bank thought it was worth unless they found something in their due diligence that changed their mind. If anyone knows why the deal was cancelled I would be interested in your thoughts.


1998 1999 2000 Projected 2001 using
3 month ended Sept. 30
earnings for Dec. Quarter


Earnings 3.8M 5.1M 8.4 7.5M

EPS .63 .85 1.40 1.25

ROE 13.18% 15.80% 21.53% 17.50%



As the company has gotten bigger I think the 2000 return on equity will be the norm after the new branches become profitable. Please note that this stock is on the bulletin board but does trade and I believe meets the requirements to go on NASDAQ.

Catalyst

Catalyst: Excellent basic growth story whose earnings and book value will start showing their substantial historical growth in the second half of next year.