Hanmi Financial Corp (HAFC) 2007 Q2 法說會逐字稿

Good afternoon and welcome to Hanmi Financial Corporation's 2007 second-quarter 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 is being recorded today, July 26, 2007.

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

Such statements are subject to certain 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 the factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements, please see the Company's filings with the SEC. I would now like to 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 2007 second-quarter financial result. With me is Mike Winiarski, our Chief Financial Officer, who will address our financial performance in some detail.

Overall, we are pleased with the results of the second quarter. Net income for the quarter was $15.3 million, up 17.4% from the previous quarter. Diluted earnings per share was $0.31, an increase of 19.2% from the first quarter.

The loan portfolio increased by $139 million during the quarter, an increase of 4.8% from the first quarter; and our pipeline is good. As a result, net interest income before provision for credit losses increased $525,000 or 1.4% compared to the first quarter.

We achieved a healthy increase in net interest income even though the net interest margin narrowed to 4.51% from 4.61% in the previous quarter. However, the margin shrank only 7 basis points, not 10, if prepayment penalties are excluded.

We continue to be pleased with our SBA loan production. During the quarter, we sold $35.6 million in SBA guaranteed loans, generating $1.8 million in income, compared to $30.7 million and $1.4 million, respectively, during the first quarter.

Later this year, we plan to sell some unguaranteed SBA loans. As we have been selling the guaranteed portion of the loans, the unguaranteed portion has accumulated. For portfolio balancing reasons, we like to sell the unguaranteed loans at least once a year.

We have been able to achieve these good results without any adverse impact on credit quality. In fact, delinquent loans actually fell to $32 million by the end of the quarter from $37.3 million at the end of the first quarter. As a share of gross loans outstanding, the delinquent ratio actually fell to 1.05% from 1.28% sequentially.

Nonperforming loans increased by $3.1 million to $22.6 million at midyear compared to $19.5 million at the end of the first quarter. This number includes $1.9 million claim to the SBA. Obviously, we have high hopes of getting reimbursed from the SBA fairly soon.

Net charge-offs remained about the same. The provision for credit losses was cut in half to $3 million from $6.1 million during the first quarter. Of the $3 million provision, $663,000 was due to the increase in the loan portfolio of the $139 million mentioned earlier.

As mentioned during the first-quarter conference call, we are cautiously optimistic that the first-quarter credit problems were temporary hiccups with no pattern or trend. We are doing everything we can to keep our asset quality sterling.

In the credit department, we have hired a senior credit person with decades of credit experience to assist in originating, structuring, and monitoring non real estate credit. In the production area, loan origination and monitoring are in the process of being centralized by district in order to increase efficiency and quality. As you can see, we continue to be very serious about credit quality.

On deposits during the second quarter, DDAs dipped slightly; but low-cost deposits increased and CDs remained basically stable. Growing core deposits continues to be a challenge. However, we are very excited about a new product we launched in June called Bonus Checking. We pay interest on checking accounts if certain conditions are met. For example, the customers must have at least 10 debit card transactions per month. This generates income for the bank, offsetting the interest cost. So far the results have been gratifying in gathering new core deposits.

Increasing the branch network in Southern California is another way of acquiring core deposits. Earlier this year, we opened a branch in Fullerton. A branch in Rancho Cucamonga will open later this summer. Another one in Beverly Hills will open either late this year or early next year. With an expanded footprint, our ability to attract low-cost deposits should increase.

Finally, in the second quarter we purchased 923,800 of our shares, spending $15.8 million. Of the $50 million authorized by the Board, we have $26 million left. We want to maintain our well-capitalized regulatory status and be prepared for opportunities to deploy capital to expand our business when they present themselves.

We remain focused on actively managing our capital and, more broadly, shareholder value. I will now ask Mike to address our first-quarter financial results in greater detail. Mike?

Thank you, Sung, and good afternoon, everyone. Thank you for joining us. Hanmi's earnings for the second quarter were $15.3 million or $0.31 per share diluted, up $0.05 per share from the first quarter when we earned $0.26 per share donated. Our return on average assets was 1.61% for the second quarter. Our return on average equity was 12.4%.

Second-quarter operating results reflect three themes. First, credit quality statistics returned to the trend lines we have been experiencing over the past 18 months, which drove a decrease in the provision for credit losses from $6.1 million in the first quarter to $3 million in the second quarter.

Second, strong growth in our loan portfolio, which was up $139 million or 4.8% in the second quarter and $191 million or 6.7% year-to-date.

Third, continued strong competition, which caused our net interest margin to decline 10 basis points, from 4.61% in the first quarter to 4.51% in the second quarter.

I would like to discuss credit quality first, as I believe this is the area of most concern currently. As you recall, our provision for credit losses was $6.1 million in the first quarter. Our loan loss allowance is based on a migration model, and the level of the allowance is driven primarily by loan classifications and the historical loss ratios associated with those classifications.

In the first quarter, a number of large loans -- four in particular -- were downgraded, which caused an increase in provisioning. In the second quarter, the migration into more adverse classification categories slowed. While the level of watch list assets increased 4.6% from the first quarter, the loss severity attached to them declined by a greater amount.

Overall, the allowance for loan losses on the balance sheet increased $663,000 to $32.2 million or 1.05% of gross loans compared to 1.08% at March 31. This represents 142% of nonperforming loans at June 30 compared to 162% for nonperforming loans at March 31. These levels are down slightly from the prior quarter-end, reflecting the lower loss level of loss severity.

Nonperforming assets increased $4.2 million from $19.5 million or 0.52% of total assets at March 31 to $23.7 million or 0.61% of total assets at June 30. This amount includes a $1.1 million other real estate owned property; and $5.2 million of loans backed by government guarantees, including $4.2 million of SBA guarantees.

Delinquent loans decreased $5.3 million from $37.3 million or 1.28% of the portfolio at March 31 to $32 million or 1.05% of the portfolio at June 30, reflecting increased collection efforts.

Recently, there has been considerable concern regarding recent vintages of subprime residential mortgages. Our exposure to single-family residential loans is limited. Our residential mortgage portfolio consists of $89 million of closed-end loans and $28 million of home equity lines of credit, with combined loan-to-value ratios not exceeding 80%.

Our investment portfolio consists of seasoned product. Purchases of mortgage-related securities totaled $56 million in 2005, $4 million in 2006, and zero year-to-date in 2007.

Our construction loan portfolio is made up primarily of low-income, multifamily housing projects, which are 40% of the portfolio; commercial real estate projects, which are 38%; and condominiums which are 17%. Single-family construction loans -- all of which are to be owner occupied -- totaled $11 million or 5% of the construction loan portfolio. All of our construction loans are performing.

We are pleased with the progress we have made in the second quarter in resolving nonperforming assets, but remain vigilant and cautious going into the second half of the year.

During the second quarter, the gross loan portfolio grew by $139 million or 4.8%. The growth came in commercial and industrial loans, which were up $139 million, while real estate and consumer loans were flat. The yield on the loan portfolio declined 12 basis points sequentially to 8.68% in the second quarter. Fixed-rate loans made up 39% of production in the second quarter. At June 30, the portfolio consisted of 34% fixed-rate and 66% prime-based loans.

Turning to the income statement, our net interest income increased $525,000 from $38.1 million in the first quarter to $38.6 million in the second quarter. At the same time, our net interest margin decreased from 4.61% to 4.51%. The yield on the loan portfolio was 8.68% in the second quarter compared to 8.8% in the first quarter.

A portion of the decline was attributable to lower prepayment penalties, which were down $255,000 or about 3 basis points. However, the continuing demand for fixed-rate loans, which carried lower interest rates than prime-based loans in the second quarter, continued to put pressure on the margin. Overall, our yield on earning assets declined 6 basis points from 8.23% in the first quarter to 8.17% in the second quarter, reflecting the pressure on loan yields.

On a linked-quarter basis our total cost of funds increased 4 basis points from 3.79% in the first quarter to 3.83% in the second quarter of 2007. The cost of interest-bearing liabilities increased 5 basis points sequentially to 4.92%. The cost of interest-bearing deposits increased 3 basis points to 4.76%. Our average jumbo CD rate was 5.34% for the quarter, up 1 basis point compared to the first quarter.

DDA balances decreased from $738 million at March 31 to $720 million at June 30, while the average balance of DDAs, which is more significant, increased from $710 million to $721 million. Overall, core deposits at June 30 were unchanged compared to March 31, while we saw quarter-over-quarter growth of 1.2% in average balances.

However, our deposit growth has not kept pace with the net increase in the loan portfolio; and growing deposits, particularly core deposits, remains one of our primary areas of focus for the remainder of the year.

Non-interest income exclusive of gain on sale of loans increased 4% sequentially from $8.6 million in the first quarter to $8.9 million in the second quarter of 2007. We had solid increases in insurance commissions and remittance speeds, offset by declines in trade finance fees and other service charges and fees, which consist largely of late fees on loans.

Our SBA department had a strong quarter with originations of $42.4 million in SBA guaranteed loans compared to $30.7 million in the first quarter. Our sales of SBA loans totaled $35.6 million for a gain of $1.8 million, compared to a gain of $1.4 million in the first quarter.

Our efficiency ratio was 43.6% in the second quarter, the same as in the first quarter of 2007. Our salaries and employee benefits expense decreased 8.3% compared to the first quarter. Because a greater portion of compensation was capitalized as direct loan origination costs, the employers' portion of payroll taxes decreased, and we reduced the level of our accruals for incentive compensation.

There are relatively small increases in most other noninterest expense categories and an increase in the other expenses attributable to increased deposit operation losses and increased amortization and write-downs of our loan servicing assets.

Overall, we believe the second quarter was a solid quarter and are pleased that the credit issues that arose during the first quarter are being resolved. We recognize that we must remain focused on maintaining and improving credit quality; but at the same time, we will be able to continue to move forward with the many initiatives that will allow us to continue to grow in the future. With that, we would be happy to respond to your questions.

(OPERATOR INSTRUCTIONS) Brett Rabatin of FTN Midwest.

Good afternoon. A couple questions for you. First off, I wanted to ask -- I didn't quite -- maybe Mike can explain this a little bit. I didn't quite understand the commentary on -- that went through the watch list increasing; I think the number was 4.6%. But it sounds like you're a little more positive given that the loss severity looks to be lower in the portfolio. I was hoping to get some additional color around that comment, what specifically that entails.

Well, I think goes to the classification -- the levels of the various classification categories.

So maybe stuff moved from a 6 or a 7 to a 4 or 5? Is that a --?

I think there are some loans that made that sort of move.

Okay, so why would that occur? What would be the factor that would cause that?

I think a good example of that would be going through a reanalysis of the borrower's situation. So for instance, if we got updated financial statements which demonstrate that some revenue streams that perhaps were in tough shape in the first quarter had improved for the borrower, then that would be good grounds for an upgrade. So it would be that sort of thing.

Okay, so maybe upgrades based on better information on the individual credit situations?

In may be better information or an improved situation for the borrower.

Okay.

Brett, for example, let's just return to the first-quarter hiccups that we had. At the time we talked about four different loans on the list. One of them was a large loan, asset-based lending. Since then, that loan has been restructured and it's -- well, the payments are current, so we are feeling good about that.

The other one was another asset-based lending. That item, for example, has been upgraded from substandard to special mention. So in this case, obviously, the reserves would decrease.

There is one real estate loan, which went in to OREO. That is in escrow. We hope to close that at the end of August. If that is the case, we could actually record a gain on that transaction. It is not for sure, obviously, but that is a possibility.

So of the four loans that we talked about during the first quarter, two are off the list; and then we have two on the list; and then again, one has been restructured and the other one we are still working on it.

Okay, sounds like you guys have been working hard to work through the things from the previous quarter. So that is --

Yes, we have.

That's good. I wanted to ask you on the fixed-rate production. I thought I heard the number 39%. Is that correct?

That's correct. During the second quarter, the fixed-rate portion of the loan was 39%; and this is up from 34% during the first quarter. This is primarily because of the demand from our customer base.

Okay. I'm sorry I am a little confused, Dr. Sohn. In terms of the current portfolio, how much of the portfolio is fixed versus variable in this (multiple speakers)?

If you look at the total portfolio, 34% is fixed and then 66% is variable. If you look at simply the second-quarter production, not the total portfolio, 39% was fixed and then 61% was variable.

Okay. So the 34% that you mentioned from the previous quarter was the production level that was fixed rate in 1Q?

No, the 34% was the total. And then if you want to look at the first quarter, in the first quarter it was at 30% and 70%. In the first quarter, 30% was fixed and 70% was variable; whereas in the second quarter, 39% was fixed and then 61% was variable.

So it went from 30% to 39%, if you simply want to look at the fixed-rate portion from the first to the second quarter.

Okay. Obviously, the point I'm trying to get at is -- does the portion of fixed-rate loans in the next few quarters from a commercial real estate perspective continue to impact the loan portfolio yield? Or can you give us some thoughts just generally on loan portfolio yields?

First of all let's just look at what has happened in the second quarter and then maybe we can comment on what could happen, I suppose, in the future.

Our loan yields did go down slightly from 8.8% in the first quarter to 8.68%. That is in part because more of the loans are in fixed-rate categories as opposed to variable-rate category.

I don't expect the demand for fixed-rate loans to be subsiding significantly, if at all, in coming quarters. If that is the case, it is very important for us to maintain margins or prevent margins from shrinking by heavily emphasizing the production of core deposits.

That is one of the reasons why we have been introducing -- we have introduced this new product called Bonus Checking. The deposit generation is very important in our managers' incentive compensation plan. And we are doing a number of other things, including opening branches, to generate core deposits.

So if your question is about the direction or the volume of fixed-rate loans, it will continue to be very important in the future. That is where the demand is coming from, number one. And number two, margins are under pressure, and we're tried to offset that margin by generating more core deposits and some other measures.

Okay, that is great color. This last quick question, mentioned again you're going to sell some unguaranteed portion of SBA loans in the second half of the year. Do you have a sense of the magnitude you might be interested in looking to put to the secondary market? Or any thoughts on volume?

At the moment, we do not; and we will cross that bridge when we come to it. However, we have a fair amount of unguaranteed SBA loans, $127 million. What portion of it we are going to sell, we do not know that yet.

But again as I pointed out in my remarks, we'd like to sell some of that for portfolio-balancing reasons. Also by nature, SBA loans are higher risk; and that is why the government guarantees them. So that is another reason why we might want to sell some of it.

So either in the third or the fourth quarter, we want to sell some unguaranteed portion instead of a guaranteed portion, so the mix might change. We like to do that every year.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS) Manuel Ramirez with KBW.

Good afternoon. A couple of questions on credit. One is, could you break down for us the composition of losses in the quarter between, say, three buckets -- commercial real estate; traditional C&I; and then your SBA portfolio?

Then secondly, on nonaccruals maybe you could talk a little bit about what the inflows and outflows look like. It didn't sound like there was a lot of movement, but I just want to confirm that.

We have our Deputy Chief Credit Officer, Jane Kim, is here. Jane, would you like to say something?

On the composition of losses, they tended to be in the C&I arena. We don't have too many commercial real estate related loans that are in the loss arena yet.

As for the nonaccrual loans, the increase that we kind of saw in the first quarter has sort of slowed down. The ones that are being put on now tend to be of the smaller loans. Really the kind of mom-and-pop shops that are seeing maybe some difficulties. But there are no significant items in there.

So there were no significant inflows or outflows this quarter?

Right.

Okay, so on the net charge-offs, you don't have the number, the dollar amount, in front of you?

The net charge-off dollar amount is similar to the first quarter.

Right, but the breakdown between C&I and SBA?

(inaudible)

Okay. Then the final question on your core deposit push on rolling out new products like, as you said, the Bonus Checking product. What are your expectations for new deposit money as a result of any initiatives you have here in the third or fourth quarter?

We are cautiously optimistic. Let me just talk about this Bonus Checking, which I personally am very excited about. This is one of the best products that we have introduced in a long time. That is my personal view.

We have introduced this product less than a month ago. So far, we have about $7.5 million in new deposits. Of course, not all of that is new money; some of that is reshuffling from existing accounts. We think about one-third of that is new money. We have gathered 100s of accounts, and the average account balance is over $7,000. So that you can see it is a pretty good product.

We think that this will give us a significant, hopefully, increase in deposits in the core deposit area during the second -- during the third quarter.

Okay, terrific. Thank you.

[Brian Rapp], Paradigm Capital Management.

I know you already talked about the unguaranteed portion in U.S.A.; you can't disclose the amount that you're looking at. But looking back on the amount that we sold the one time previously, and I think it was about a 12% premium, should we expect that same kind of premium on the sale we're going to make for this upcoming portion that you're going to sell?

We obviously would not know until we sell the product in the marketplace during the second half of the year. But traditionally, I guess, what we found the last time was when you include everything, the premium on unguaranteed portion is actually better than the guaranteed portion. So that is how much I can say. Mike, do you have any additional comments that you can make?

Not really.

All right, sticking with the SBA originations, I know you guys are tentative to give guidance, but in the first quarter, you gave some guidance for fiscal year '07 of about $214 million in originations. Looking at it so far the first half, we have got about $70.5 million originated. Should we lower our guidance for originations for the year, or are we still looking at $214 million?

Originations of what, the -- ?

SBA.

SBA? Oh, I think we are right on track. For the year as a whole, we like to have a 240 to $260 million range of production. So far we are pretty much on budget.

If you look at SBA production, it picks up really during the summer, and we are feeling that right now. Then it slows down through the end of the year and then early in the beginning of the year. So yes, we are still expecting SBA loan production to be up significantly from last year. Last year was about $200 million, and this year, as I said, will be somewhere between 240 to $260 million, in that range.

Okay, and then I know Manuel referred to the programs that you guys -- especially the Bonus Checking -- that you put in place. I know previously you guys talked about different kinds of incentive programs for employees with boosting your deposits. Obviously you saw the first -- second quarter was a little slow in deposit growth.

I was wondering, are you satisfied so far with the other programs they have in place? Can you give some color on the incentive programs, how you see those going forward, if they might boost deposits?

I think so. Incentive compensation program has a deposit component in it. That is as important as loan production. For example, we had a meeting today and then we told our troops, our managers, that deposit generation, especially core deposit generation, is as important as the loan production in the incentive compensation system.

So we are constantly reminding our employees the importance of core deposits, and then what that means for our balance sheet and the net income. So I think that will continue to be a major item for them.

The other thing that I had mentioned was of course the Bonus Checking. Then third, we are opening more branches; and as we open more branches that increases our ability to generate more core deposits.

Also, if you look at Hanmi for the last couple of years or so, C&I loans have been growing at a faster pace than real estate -- commercial real estate. Generally, if you have C&I loans, you are more likely to generate core deposits than real estate, which is kind of more like a onetime transaction.

So these are some of the things that we are doing, but you can be sure that I am going to put a great deal of emphasis on the generation of core deposits for the second half of this year.

Okay. Just one final question, with regards to -- I know last quarter, you guys said you hired some loan production officers that were looking to not just the deposits growth but looking for loan growth. Can you talk a little bit about how those officers have been going? If they have been meeting to what your expectations were for loan growth? Just are you satisfied with how that has been going?

Yes, we have right now six to 11 BDOs, business development officers. I say six to 11 because it depends what do you exactly mean by BDOs. Anyway, our intention is to increase that number. Those employees right now have been productive, and we are pretty satisfied with their performance. That is one of the reasons why -- actually, the main reason why -- we want to increase that number of BDOs.

By the end of the year, I am hoping that from six to 11, to perhaps increase by another five or six, even 10. So this is one of the ways that we are generating more loans.

By the way, when we talk about the BDOs -- and for that matter LBOs and SBA -- we are also asking them to get more deposits, even though their primary job is to get more loans. If they do get deposits, they are going to be compensated for deposits. So they will be getting both loans and deposits.

All right, thanks a lot, guys. That's all I have got.

(OPERATOR INSTRUCTIONS) Brett Rabatin with FTN Midwest.

I just had a follow-up on the expense side. I know there was a little noise this quarter. But I am curious to hear. You have rolled out some technology, mobile phone banking and that kind of stuff. Are there any technology expenditures that will impact expenses going forward?

It seems like a lot of banks are really focused on, to the extent they can, managing expenses lower in the present market just given that revenues are harder to come by in the current environment. So I was just curious for any broad comments on that as well.

We're certainly taking a very hard look at any kind of spending proposal that surfaces in the bank. So in terms of the technology, there are certain things that we feel we need to do to execute our strategy, and we will be spending money on those things. But we will be doing that very selectively. So I don't see that as a significant outlie at this point in time.

I guess the other thing I would point out is that our contract with our core processor is coming up for renewal in February 2009. So we need to put all this in context. For that reason, I think we will keep a pretty tight rein so far as technology spending goes in the immediate future.

Okay. Then just one last quick question on enterprise lending and that sort of thing. Is it fair to assume that the tax rate is going to stay about 38%? Or did you guys have any investment this quarter that might show up with some benefit in the next few quarters?

I don't anticipate any significant changes in the level of enterprise (inaudible) tax credits.

Okay.

So we will pretty much stay at the run rate.

Okay, thank you.

James Abbott with FBR Capital Markets.

Actually this is just a housekeeping question. Most of the other questions I had were answered. But on the FDIC fees in 2008, I am asking every company. So I don't know if you have that available, or --?

I don't have a number available (inaudible).

Okay, should we --?

Please feel free to give us a call, anybody that is interested in that information. We will answer that question.

Okay, all right. Thanks. That's all I had.

At this time we have no more questions in queue. I would like to turn the call back over to Dr. Sohn for closing remarks.

In closing, we are diligently pursuing opportunities to gather deposits and grow loans in ways that produce both interest income and non-interest income. This expansion will come through the operating of new products and services as well as through the addition of new branches.

In seeking to maximize growth and total return to our shareholders, we will never compromise credit quality. Indeed, monitoring and maintaining credit quality has been and will continue to be a primary consideration for Hanmi.

With that, I thank you for joining us today and we look forward to speaking with you in another three months.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.