Hanmi Financial Corp (HAFC) 2006 Q4 法說會逐字稿

Good afternoon; welcome to Hanmi Financial Corporation 2006 fourth-quarter and year-end results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded today, January 30, 2007.

This call may contain forward-looking statements which are made under the SEC's Safe Harbor rules for forward-looking statements. Forward-looking statements relate to the Company's future operations, prospects and businesses and are identified by words such as may, will, should, could, expects, plans, intends, anticipates, believes, estimates, predicts, potential or continue or the negative of such terms.

Although we believe that our expectations reflected in the forward-looking statements are reasonable based upon our current judgment, we cannot guarantee future results, level of activity, performance or achievements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statements.

Such statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond the control of Hanmi Financial. Accordingly, actual results may differ materially from those expressed in or implied or projected by the forward-looking information and statements. Hanmi undertakes no obligation to update any forward-looking statements in the future.

For additional information on factors that could cause actual results to differ materially from those anticipated results or other expectations expressed in the forward-looking statements, please see the Company's filings with the SEC. I will now turn the call over to Dr. Sung Won Sohn, Hanmi's President and Chief Executive Officer. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thank you for joining us today for a discussion of our 2006 fourth-quarter and fiscal year end financial results. With me is Mike Winiarski, our Chief Financial Officer, who will discuss our financial performance in some detail. Before he does that, however, I'd like to make a few comments regarding the current state of our business.

Today we reported strong operating results with a record net income and earnings per share for 2006. Net income rose to $65.6 million for 2006 compared to $58.2 million in 2005. Diluted earnings per share increased to $1.33 in 2006 from $1.17 in 2005. We reported similar performance during the fourth quarter with a net income up by more than 16% to $17.3 million from $14.9 million a year ago. And diluted earnings per share up by almost 17% to $0.35 from $0.30 in the fourth quarter 2005. With this strong momentum I'm confident that 2007 will be another good year as well.

We did, however, experience some softening compared to the third quarter when we reported net income of $17.6 million or $0.36 per diluted share. As you recall, we did recognize non-recurring tax credits of approximately $550,000 in the third quarter while there were some tax-related charges for the fourth quarter. As a consequence pretax income was $28.3 million in the fourth quarter compared to $27.4 million during the third quarter.

Net interest margin declined to 4.59% in the fourth quarter from 4.79% in the third quarter. Our cost of funds rose faster than the yield on loans. Prepayment penalties were another factor. During the third quarter we collected $498,000 in penalties boosting income and margins, whereas during the fourth quarter the penalties were minimal. This does not reflect any underlying trend. And while this type of earnings is not predictable from quarter to quarter, we believe it will be a source of earnings in the future. The prepayment penalties increased the third-quarter net interest margin by 7 basis points.

Net loans increased to $16 million using quarter end figures and $53 million based on quarterly average numbers. Our gross loan production remained substantial during the final quarter of 2006. However, we decided not to compete with the mainstream banks offering extremely low lending rates below 7%. Sometimes the rates were even below 6%. Consequently we had higher-than-expected payoffs. Even though this hurt our loan balances in the short run, we believe it was the right decision for the Bank in the future.

During the quarter we sold about $43 million in SBA loans, including $16 million of unguaranteed loans, further affecting the loan balance. Non-interest income was $10.8 million in the fourth quarter of 2006 compared to $8.8 million in the preceding quarter thanks in large part to a $3.4 million gain on the sale of the SBA loans compared to $1.4 million in the third quarter. With a total of eight loan production offices our SBA department continues to produce excellent results. We plan to open additional LPO offices this year, further boosting production.

In this uncertain economic environment Hanmi's asset quality remains very healthy. The delinquency rate actually fell to 0.68% from 0.84% during the third quarter. Nonperforming loans as a percent of the gross loans remained stable at 0.5% compared to 0.47% during the previous quarter. We are vigilant on asset quality and are doing everything we can to keep it healthy.

Our efficiency ratio is around the target range of 40%. Expense controls were an important contributor to the 2006 results and the trend is moving in the right direction. During the fourth quarter the efficiency ratio was 39.59% compared to 40.14% in the third quarter and 41.59% in the second quarter.

As announced on January 3rd, Hanmi Financial Corporation has completed the purchase of two insurance agencies, one wholesale and one retail. The acquisition will help our efforts to cross sell, diversifying Hanmi's sources of income as well as improving services to current and future customers. All our banking clients have insurance needs, just as insurance customers have banking needs. We believe there are multiple synergies in building fee income while better addressing the needs of our growing customer base. Although this is not a large transaction, it will add to fee income and the accretive to the EPS in 2007.

Wealth management is another cross sell opportunity. Beginning in 2007 we have hired people and begun to sell investment-related products. While the bottom-line impact won't be large this year, there is a great deal of untapped opportunity in the Korean and ethnic communities making this a significant source of fee income in the future.

Finally, let me briefly comment on California's real estate. As I had mentioned during the last call, despite dire predictions, we have seen no significant setbacks in housing in Southern California. To be sure, home prices are not rising at a fast clip as they used it. Experts tell us that the market is back to normal from a frenzied pace. While the market could remain lethargic this year, there is a good chance that we could hit the bottom sometime this year.

Hanmi Bank has little exposure to residential real estate. Commercial real estate where Hanmi has more loans has held up very well. With the limited building vacancy rates are low and rents are rising. As long as the overall economic conditions remain healthy, as they have been in Southern California, there shouldn't be major surprises in the foreseeable future. With that I'll now ask Mike Winiarski to address our fourth-quarter financial results in greater detail.

Good afternoon, everyone. Thank you for joining us. Hanmi's earnings for the fourth quarter were $17.3 million, up 16.3% from the fourth quarter of 2005, but down 1.6% from the third quarter of 2006 when we recognized certain non-recurring tax benefits. Pretax income was $28.3 million in the fourth quarter compared to $27.4 million in the third quarter and $24 million in the fourth quarter of 2005, an increase of 3.5% sequentially and 17.9% versus the year ago quarter. Diluted earnings per share were $0.35, up $0.05 from the fourth quarter of 2005 but down a penny from the third quarter of 2006.

Our return on average assets was 1.84% for the quarter compared to 1.72% for the fourth quarter of 2005 and our return on average equity was 14.2% compared to 13.9% for the fourth quarter of 2005 and 15.1% for the third quarter of 2006.

In the fourth quarter we had record pretax earnings despite a very challenging competitive environment. We experienced continued pricing pressure on both loans and, to a lesser extent, deposits and saw a slowdown in the level of demand for loans. Deals were harder to come by in the fourth quarter than in the past. Despite this we grew our loan portfolio $15 million during the quarter after accounting for $43 million in loan sales while maintaining very solid credit quality.

We believe our core deposit space is stabilizing and we've diversified our income streams by acquiring two related insurance agencies earlier this month. Our net interest income before provision decreased from $39.7 million in the third quarter to $38.8 million in the fourth quarter and our net interest margin decreased from 4.79% in the third quarter to 4.59% in the fourth quarter. These numbers are higher than we have reported in the past because we reclassified certain items from non-interest income to interest income.

Specifically with respect to small business administration loans, it has been our practice to carry the retained portion of SBA loans on our books at a discount to reflect their risk profile and fair value at the time of sale. Previously, while loan paid off, we recognized any unamortized discount as non-interest income. In the fourth quarter we began treating this discount accretion as an adjustment to the loan yield and reclassified amounts included in prior periods' income statements as well.

There is diversity in accounting practice with respect to this issue, but we believe that treating it as an adjustment to our loan portfolio yield best reflects the earnings process and therefore we now include it within interest income. After reflecting this reclassification in both the third- and fourth-quarter yields, our yield on earning assets decreased by 11 basis points from 8.29% in the third quarter to 8.18% in the fourth quarter. And the yield on the loan portfolio decreased 12 basis points from 8.89% in the third quarter to 8.77% in the fourth quarter.

Loans made up 86% of average interest-earning assets in the fourth quarter compared to 86.1% in the third quarter. At December 31st the portfolio consisted of 28.1% fixed-rate and 71.9% prime based loans. On a linked quarter basis our total cost of funds increased 13 basis points from 3.62% in the third quarter to 3.75% in the fourth quarter of 2006. The cost of interest-bearing liabilities increased 12 basis points sequentially from 4.73% to 4.85% and the cost of interest-bearing deposits also increased 13 basis points from 4.57% to 4.70%. This continues the trend of slowing increases in deposit costs and the cost of interest-bearing deposits declined 3 basis points in December to an average cost of 4.69% for the month.

Average DDA balances declined 1.8% during the fourth quarter from $741 million to $728 million while average money market accounts increased 0.2% from 442 to $443 million. Overall core deposits declined $8.1 million from September 30 to December 31, 2006 compared to declines of $32 million, $34 million and $40 million in the first, second and third quarters of 2006 respectively.

We believe our CD portfolio is close to being fully priced with an average cost of funds for December of 5.30% for accounts with balances over $100,000 compared to 5.31% for the full fourth quarter and 5.22% for the third quarter. Our relatively high level of federal funds sold, which was $46 million at December 31st, also will limit the need to raise high cost funds. At December 31, 2006 our deposit portfolio consisted of 24.7% DDAs and 53% core deposits compared to 25.5% DDAs and 53.1% core deposits at September 30th. Our net loan to deposits ratio was 96.4% at December 31st compared to 94.9% at September 30, 2006.

Our provision for loan losses was $1.6 million in the fourth quarter of 2006 compared to $1.7 million for the third quarter and the allowance for loan losses was $27.6 million at December 31st compared to $28.3 million at September 30th. This represents 0.96% of the gross loan portfolio and 194% of nonaccrual loans at December 31st compared to 0.99% of the portfolio and 210% of nonperforming loans at September 30th.

Nonperforming assets were $14.2 million at December 31st, up $739,000 compared to $13.5 million at September 30th. Delinquent loans were $19.6 million at December 31st, down $4.5 million compared to the $24 million balance at September 30th. For the second consecutive quarter the allowance level reflects better collateral coverage, in other words, a higher level of collateral relative to loan principal than was the case in the prior period. We also are happy to see the decline in the leading indicator like delinquent loans.

Non-interest income increased 22.8% sequentially from $8.8 million in the third quarter to $10.8 million in the fourth quarter. We recognized $3.4 million of being on sale on loans in the fourth quarter compared to $1.4 million in the third quarter. At the same time, service charges on deposit accounts, remittance fees, and other service charges increased sequentially while trade finance fees experienced a seasonal decline. Loan principal sold was $43.3 million in the fourth-quarter compared to $29.9 million in the third quarter and for the first time included a sale of the unguaranteed portion of SBA loans with principal totaling $15.5 million.

Gains recognized represented 7.8% of loan principal compared to 4.6% in the third quarter. The efficiency ratio was 39.6% in the fourth quarter compared to 40.1% in the third quarter while non-interest expenses increased 0.8% sequentially from $19.5 million in the third quarter to $19.6 million in the fourth quarter. We held the line on expenses and saw significant increases only in advertising and promotional expenses which increased $210,000 as a result of normal holiday promotions. Non-interest expenses include $615,000 to recognize our pro rata share of 2006 losses attributable to our investments and affordable housing tax credit partnerships.

As permitted by the Securities and Exchange Commission Staff Accounting Bulletin No. 108, which was issued in 2006 and concerns corrections of immaterial items not recognized in prior periods, we adjusted beginning 2006 retained earnings by $1.2 million to recognize the after-tax amount of such partnership losses not recognized in prior years. Our effective income tax rate for the fourth quarter was 38.9% bringing our full-year effective rate to 38.2%.

Overall in the fourth quarter we continued to execute on our business plan and are very focused on maintaining an appropriate balance between profitability and growth. In 2007 our revenues will be augmented by those of the Chun Ha Insurance Agency which we expect will be modestly accretive immediately. This is part of our ongoing effort to diversify our sources of income and build an organization that offers the broadest productline available to our customers and allows us to grow with them. With that we'll be happy to answer your questions.

(OPERATOR INSTRUCTIONS). Brett Rabatin, FTN Midwest.

Good afternoon. A couple questions for you. First off I wanted to start off with asset sensitivity, Dr. Sohn. Last quarter you indicated a willingness to be asset sensitive and so I'm curious, you did mention asset sensitivity in the press release to some extent. So I was curious to hear your thoughts on the positioning of the balance sheet for interest rates in the next couple quarters.

We are still liability sensitive, but that liability sensitivity is only about roughly 5%. We have changed the mix of the balance sheet so that we positioned ourselves for an environment where interest rates could be stable to actually rising -- declining rather. And we believe that our balance sheet should not be liability sensitive and we are asset sensitive to the tune of about 5%. And so our goal is to keep it more or less evenly balanced so that we position ourselves for a stable to declining interest rate environment. So I think where we are right now is really a good place to be.

So it sounds like you're not positioning the balance sheet one way or the other, you're just trying to be more neutral so to speak?

Even though my former job was an economist, I do not believe in making a big bet based on the direction of the interest rate. So that we're trying to keep the balance sheet as neutral as possible under the environment.

Okay. And then secondly, I wanted to ask about the SBA loan sales going forward. Any thoughts on continuing to sell the unguaranteed portion and how you might evaluate that portfolio over the next few quarters?

We will continue to sell a significant portion of our guaranteed portion and from time to time we will sell unguaranteed portion and we haven't sold an unguaranteed portion for quite a while. One of the reasons why we sold the guaranteed portion was because really the yield basically is much better than the guaranteed portion. Having said that, our SBA production is going up very nicely and our expectations are it will continue to be the case. So we plan to sell a significant portion of it because we feel that this is an ongoing source of income that we can count on.

Okay. And then just this last question and I'll hop off. The net charge-offs for the quarter, I didn't know if there was any -- and I jumped on the call a few minutes late, but didn't know if there was any color on the $2.4 million of charge-offs during the quarter?

We didn't have any major items or a trend that we can tell you. We did have some -- well, actually more charge-offs than we realized for some of these small loans. For example, we have something called the express business loan, it is based on -- it's actually kind of a formula based loans for a small amount of loans. And we saw meaningful increases in those areas, but other than that we have really not seen any major trend in this area.

I think the other thing that was noteworthy, Brett, is that in the past several quarters we've had some reasonably good amounts of recoveries. For instance, in the third quarter we had about $580,000. This quarter that number was about $160,000 so it's more reflective of gross charge-offs this time around.

Okay, great. Thank you.

Steven Truong, Piper Jaffray.

Just to kind of follow-up on the credit quality question, just wondering about the NPA uptick we witnessed here in the fourth quarter sequentially -- can you talk a little bit about that, please?

Nonperforming assets went up from --

$13.5 million to $14.2 million.

$14.2 million slightly. And again, as I indicated earlier, we do not really see any underlying trend in terms of a deterioration in the credit quality asset quality, that's not what we are seeing. What we are seeing is really somewhat of a random event here and there with the exception of some of the small [EBA] loans that I've mentioned. We did see meaningful increases in charge-offs for very small loans and we are paying attention to that. But other than that, I don't think that really is a meaningful figure as far as we are concerned.

Okay. And then why don't you turn to deposits? When might we see cost competition abate? And we're continuing to see a mix shift from DDAs into higher cost deposits. Can you talk a little bit about the environment here and how you see it going forward?

I think we're reaching the bottom in terms of the mix of deposits. We did see some runoff in DDAs during the quarter, but at the same time we're starting to see some growth in the money market side again. So that's a hopeful sign that we think. If you look at what the cost of funds did, I spent quite a bit of time discussing that, it was -- in the jumbos it was 5.22% in the third quarter, up to 5.31 in the fourth quarter. But it actually came down a little bit by the end of the year so it was 5.30 in December.

So we feel like the cost of the deposit base is stabilizing right around the level where it is right now. My sense is that both we and the competition are not being particularly aggressive at this time in trying to read each other's CD portfolio. So I'm hopeful that we'll be able to hold the line so far as the level of CD costs.

On that score, Steve, we do recognize the importance of DDA and we are putting a great deal of emphasis in gathering our DDAs. For example, if you look at ICPs of our managers, a significant portion -- actually a major portion of the ICP is based on how much DDA did they generate. We are also emphasizing C&I loans as you can see from our trend in 2005 and 2006. Generally C&I loans bring more DDAs as opposed to real estate loans. Also we will be introducing some new products designed to raise core deposits in general and then DDAs in particular. So in this tough environment we are doing everything we can to get more DDAs.

All right, thanks for that additional color. And then lastly, I wanted to ask you about the strategic outlook with regards to branch openings, acquisitions and LPOs? Thanks.

We were able to get rid of our MOU by the regulator, so we are in a fortunate position to be able to open branches. We did receive permissions to open more branches and we're in the process of doing that. We will be opening a branch in orange County in a place near Fullerton and also we decided to upgrade our branch in San Francisco. And every year we plan to open about three or four more branches. And so that will be a part of our ongoing effort.

The most difficult part actually is finding the right real estate and once we find the right real estate we will be opening again, as I said, three to four branches hopefully in 2007 and 2008. As far as M&As are concerned, we are continuing to look -- obviously in Southern California, the Bay area, the New York City area including New Jersey and Atlanta. Obviously we do not have anything to report to you as a moment. But M&As, that is our strategic effort to really grow the Bank not only organically but also threw branch expansion as well as by making some acquisitions and the future.

Thanks very much.

James Abbott, FBR.

Good evening. Some follow-up questions I guess. Maybe to start with on the credit quality side, could you give us a total amount -- I don't know if you have it at your fingertips -- but small business express loans that you talked about and how much you have in total balance there? And then also maybe some historical performance metrics on that, NPAs, net charge-offs, any color you can give us on that would be helpful.

Mike Winiarski is going to try to get those numbers if he can find it here. But we're not talking about really large amounts of our portfolio, it's relatively really small but he'll get those numbers. In terms of our outstanding balance of nonperforming assets, in the December quarter or the final quarter it was $14.2 million and in the third quarter it was $13.5 million. A year ago, which was December 2005, it was $10.1 million. Now when you look at the December 2005 to December 2006 quarter, the percent change is pretty substantial, about 40%, but again, we are talking about pretty small numbers compared to our loan portfolio of almost $3 billion.

I would say by any yardstick this is pretty minuscule. So I don't think this is really worrisome. In addition, our delinquency loans, which is really the best leading indicator of asset quality, has actually declined to 0.68% from 0.84% and a year ago it was 0.85%. So any way we look at it, I have really no reason to believe at this point that our asset quality is worrisome. In fact, it is quite healthy and our expectation is that it will remain so. Mike, do you have that number?

James, we don't break out the portfolio balances of the express business loans, but on a production basis for 2006, they made up a little under 3% of our production for the current year. So hopefully that will give you a gauge of the extent of the issue.

Okay. So not a lot of potential risk from that portfolio?

No. And then also, we are getting on top of that to make sure that problem does not grow.

Okay. Then another question was related to the expense outlook. You talked about a couple of things. One in your conference call comments that you're planning on hiring or have hired recently in the fourth quarter some wealth management employees. And then also you talked about in the press release reversal -- not reversal of bonus accruals but lower levels of bonus accruals. Could you answer whether there were reversals of bonus accruals in the fourth quarter? And if not, then what sort of a run rate of expenses should we expect in the first quarter since there's a little bit of -- I shouldn't say noise, but maybe some moving parts going on?

I'll let Mike answer the bonus numbers. But in your comment on the wealth management employees, currently we have four employees, three production people and then that one manager. Clearly initially there will be more salary expenses than income. However, according to our budget it should generate net income I can't tell you how much but, again, this would be a net increase to our fee income, therefore the bottom line for 2007 so it will not be a negative drag.

There were no reversals of the bonus accrual, James. The amount that we accrued in the fourth-quarter was about $250,000 lower than in previous quarters but there was no need to reverse any previous accruals.

Okay. So we'll expect that to return in the first quarter of '07 I guess plus some normalized growth like do you also increase management annual incentive -- or not incentive increases, but just management compensation, cost of living adjustments and those kinds of things in the first quarter?

Our raises take effect April 1st.

James, by the way, on the wealth management production employees, as I pointed out, we have three representatives plus a manager. Our hope and expectation is that we will hire more people as the year goes on. So at the end of the year we will have more than three plus one.

Okay, okay. I've got one housekeeping item and one sort of big picture question. The demand deposits declined, could you give us a sense as to why? I know that emphasizing demand deposits has been a key component of the strategy all year long. And so maybe there was a large depositor that left or something in the quarter, or was it more granular? And then on the housekeeping item, I was wondering if you could give us the dollar amount of amortization fee income, amortization for the third and the fourth quarter?

There's nothing noteworthy in the movement of the DDAs, no particular large customers leading or any of that kind of thing. It was spread across the branches fairly broadly. It was disappointing obviously; we've been emphasizing this, but that's been the reality throughout 2006.

James, as you well know, in this rising interest rate environment people do not want to keep their money in non-interest bearing DDAs. And so we've done some modeling and the numbers that we are seeing is, number one, expected and in our case actually we are holding out pretty well.

And then James, I assume that your other question about the amortization had to do it the reclassification that we made?

Correct. I was just trying to get the absolute dollar amounts amortized in each quarter so that I can sort of begin to track that.

Sure. $538,000 in the third quarter and $310,000 in the fourth quarter. Actually making this change caused our net interest margin decline to be a little bit larger than it otherwise would have been.

Correct, okay. Thank you very much.

(OPERATOR INSTRUCTIONS). Don Worthington, Howe Barnes Hoefer & Arnett.

Good afternoon. A couple things. In terms of the loan growth and kind of the outlook going forward, are you still seeing the type of competitive rates that you mentioned in your presentation and should we look for the loan growth rate to increase in Q1 versus the fourth quarter?

The couple of facts in the marketplace that I'm sure you are quite familiar with, first of all there aren't as many transactions in the marketplace as there used to be; that seems to be a fact for all of us, both small, large and medium [mainstream] banks combined. And number two, there is more intense competition for loans. In our case right now we are facing competition not so much from other Korean or Chinese banks, but really from mainstream banks. Mainstream banks, they are getting very, very aggressive and, as I mentioned in my text, in some cases lending rates are below 7% or even 6% and so those are really tough situations.

In our case, however, we are hoping -- obviously in the fourth quarter the loan balance of growth was not as high as we expected, but that does not mean that we are going to extrapolate that. During the first quarter we are redoubling our efforts and I think basically we need to grab market share. We have introduced new products and we will be doing some new things, making more calls and do some innovative things so that we can gain a bigger share of the market.

So again, without giving you specific numbers I'm hoping that in the first quarter our loans will be growing at a faster pace than we did in the fourth quarter of 2006.

Okay, great. Thank you. Then just a clarification, Dr. Sohn, on the three to four offices that you would like to open each year, is that including the LPOs or with the LPOs be in addition to three to four branch openings?

LPOs would be in addition. And again, we may open two to four LPOs in 2007 and then three to four branches in 2007 rather. Actually we like to open -- we could I suppose open branches at a faster pace, but obviously it costs money so that we have to pace ourselves.

(multiple speakers) such an issue with the LPOs. Their fixed costs are much, much lower than a branch.

LPOs are much more economical.

And then I guess lastly, would you envision building the reserve ratio up over time given kind of the shift in mix to more C&I lending?

The allowance for loan losses is based on a model, so-called a migration model, and this is actually based on past history and experience. We cannot really tinker with that very much at all so that we are pretty much relying on what the model tells us. However, we can modify the model if we have good reason to do that and we are continuing to look at the model carefully to see that it's giving the right numbers and right signals to reflect our concerns or optimism regarding loans in the future. And so at the moment we have really not decided to do anything but the point is that it is not really discretionary, it is based on the model that we have been using for a long time.

Okay, thank you.

Chris Nolan, Oppenheimer.

Can you give us an update on the share repurchase program, has there been any activity on that front?

No, we have not really had any -- as you know, our Board has authorized $50 million to purchase shares. And since the Board has authorized that share repurchase last I believe April, our prices have been going up and up and up. And so we have not really seen any need to purchase shares. At the moment we have not really purchased any. However, in 2007 we hope and we do expect to buy back some. We have not decided exactly how much.

The ratio of tangible equity to assets in the fourth quarter, according to my calculations, is around 7.8% which is reaching a new high over the last couple years. You're starting to get to a -- do you anticipate that this ratio will continue to grow in 2007 where you'll continue to accumulate excess capital?

That's a fair question. We are over capitalized according to any measure or yardstick and so why are we doing that? I used to teach this in colleges and there are basically two reasons for using excess capital. Number one is if you want to do some M&As you might need some cash. And as I indicated earlier, we are continuing to look, especially now that MOU is out of the way, we might need some cash for that reason, so that's one of the reasons. And again, as I pointed out, our Board has authorized to buy up to $50 million in Hanmi Bank stock.

So we may decide to do -- hopefully we will do a combination of both. Obviously M&As, everything has to come together and we don't have it yet, but I think we probably will buy back some shares.

Finally, on the M&A front, or at least the strategic outlook, how do you envision in terms of the overall size of deals? Are you looking to do relatively small privately owned type franchises or are you looking possibly for a large strategic type of transaction?

A don't think we are really ruling out any possibilities. There are, as you know, two types of acquisitions. One is, as you call it, strategic acquisitions to grow new markets for example. And a cost cutting acquisition which could be in California and that was the case, Hanmi (indiscernible) the acquisition. So other than saying we are obviously keeping our options open, looking at everything, I really do not wish to get into details.

Understood. Okay, thank you very much.

(OPERATOR INSTRUCTIONS). James Abbott, FBR.

I'm sorry, that was my question was on the share buyback. I couldn't remove myself from the queue in time. Thank you.

Thomas Monaco, Morgan Stanley.

Just a question on I guess the level of loan sales versus your loan originations.

Are you talking about specifically SBA I assume, right?

Yes, SBA and versus your origination.

Well, in 2006 our origination was almost $200 million in SBA loans which was pretty close to our targeted budget. And actually we ended up selling less than what we budgeted for in 2006, but the important thing is the fact that we have a great deal of confidence that our SBA production has been going up very nicely and will continue to rise nicely in 2007.

As a result we think it is a very steady, reliable source of income in coming years. And so that's why we feel more confident in selling a bigger share of our SBA loans as we go along. And in 2006 we sold close to 55% of the loan originations.

What about in the fourth quarter?

Of 2006?

2006, yes.

In 2006 the total sales were $43.3 million, of that $15.5 million was the unguaranteed portion. So as Dr. Sohn said earlier, we'll be doing that from time to time but certainly not in each quarter. But if you look at what the pattern has been over the past several quarters, we've sold anywhere from 20 to $30 million in SBA loans on an ongoing basis and that's probably a reasonable level of activity to anticipate going forward provided that the market stays the way it is today.

Okay, I guess what I'm trying to get at is your level of loan sale gains this quarter seems to -- it's up to say 140% on a linked quarter basis. Is that sustainable, the $3.4 million, or is that very lumpy or how should we look at that?

I think a big contributor of that was the sale of the unguaranteed portion where the premiums were significantly higher than that. For the guaranteed portion our gain as a percentage of principal sold, that ranged anywhere from 4.5% to 5.5% on a weighted basis per quarter. So I think that's a realistic level to anticipate going forward.

So 3.4 is a realistic number to look at going forward?

No, the 5.5 -- 4.5 to 5.5% of principal.

Okay, great. Thank you.

Brett Rabatin, FTN Midwest.

I just had a follow-up on the margin. I remember last quarter that the prepayment penalties added about 4 basis point. Do you guys have a number for that for the fourth quarter?

I think it raised the margin by 7 basis point, not 4 basis points in third quarter of 2006.

Okay. So it was 4 basis points in the previous quarter? I'm sorry, 7.

7. It was $492,000 in the third quarter, Brett. For the fourth quarter it was $6000.

Okay. Great, thank you.

This concludes our Q&A session. I'll turn the call back over to management for closing remarks.

Thank you. In closing I would repeat my earlier suggestion that the solid results of the fourth quarter reinforce our belief that we are on the right track in terms of positioning the Bank for another record result in 2007. Our cautious optimism is founded not only on our efforts at expanding on this footprint as well as the new initiatives mentioned earlier. Again, I thank you for joining us today and I look forward to speaking with you again next quarter.

Ladies and gentlemen, thank you for joining us on today's call. You may now disconnect your phone lines.