Hanmi Financial Corp (HAFC) 2007 Q4 法說會逐字稿

Good afternoon. Welcome to Hanmi Financial Corporation's 2007 fourth quarter and full-year 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)

This conference call is being recorded today, February 12, 2008. This call may contain forward-looking statements which are made under 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 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 actual results, levels of activity, 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 and/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 the anticipated results or of the expectations in the forward-looking statements please see the Company's filings with the SEC.

Representing the Company today are Chung Hoon Youk, Hanmi's Chief Credit Officer and Interim Chief Executive Officer, President; and Brian Cho, Executive Vice President and Chief Financial Officer. I will now turn the call over to you, Mr. Youk. Please go ahead, sir.

Thank you, good afternoon, everyone. Thank you for joining us today for a discussion of our 2007 fourth quarter and full-year financial results. With me is Brian Cho, our Chief Financial Officer. At the outset, let me see that in the fourth quarter we ended what was an exceedingly challenging year for Hanmi.

As you have seen in today's press release, you have both GAAP and non-GAAP numbers in order to clarify the role of two impairment charges, as well as expenses associated with the retirement of our former CEO. None of this is related to the operating performance of the bank. As noted in the release, the impairment charges consists of a $102.9 million write-off of goodwill and other-than-temporary charge of $1.1 million related to to the decline in value of a CRA paper securities.

The goodwill impairment charge was occasioned by the decline in the market value of our common stock. Certainly the biggest single factor affecting fourth quarter operating income was a $20.7 million provision for credit losses. In the fourth quarter, economic conditions in the market in which our borrowings operate continues to deteriorate and the levels of loan delinquency and default experienced by the bank continued at the higher than historical level.

In response the bank has increased its allowance for loan losses and significantly expanded its portfolio monitoring activities well beyond the normal level of portfolio level monitoring (inaudible) to identify potential weaknesses in performing loans. For loans without identified weaknesses we have created individual action plans to mitigate to the extent it is possible such weaknesses.

This intensive effort resulted in part in additional downgrade in the classification of loans, primarily to (inaudible). We will continue our intensive monitoring of the loan portfolio until the bank's credit risk profile returns to a normalized level. The first quarter provision for credit losses reflects the increased migration of loans into more risk rated categories and increases the net charge-offs and non-performing loans during the quarter.

We also increased our allowance for loan losses. Our allowance coverage ratio significantly increased to 1.33% of gross loans at the end of 2007 as compared with 1.07% three months earlier and 0.96% a year ago. Many of us believe that such coverage is adequate to absorb the probable loan losses in our portfolio at year-end, although it largely depends on the economy and its impact on our (inaudible) borrowers. We are hopeful that improvement in credit quality will occur during 2008 in part from our focus on conservative credit policy during this part of the economic cycle.

Like others in the industry, Hanmi has been obviously affected by intense competition for both loans and deposits, and also by an interest rate environment that continues to put pressure on net interest margins, a point that Brian will address. Suffice to note that neither of these conditions is expected to change in the near term.

Accordingly, we believe it is imperative that we concentrate on our core business of identifying and meeting the diverse needs of small and medium-sized businesses. It is interesting in this market that Hanmi effectively established itself as the largest Korean/American bank in the country.

Current expectations are that we will see modest growth in assets in 2008. We are determined, however, that this not come at the expense of credit quality or quality of earnings. Above all we seek stability, stability in our asset base, stability in operating results and stability in various metrics on which we and our competitors are judged.

With that, I will now ask Brian to address the financial results in some detail. Brian?

Thank you, Mr. Youk, and thank you everyone for joining us today. On a GAAP basis, we reported a fourth quarter net loss of $100 million, or $2.51 per share. For the year, a net loss of $60.5 million, or $1.27 per share. The number sounds very surprising, but, such losses were mainly caused by three unusual non-recurring items attributable largely to macroeconomic forces beyond our control.

If you measure our [productivity measures] without out these unusual items, on a non-GAAP basis, in the fourth quarter we realized net income of $4.7 million compared to $17.3 million in the fourth quarter of 2006. For the full year, again, on a non-GAAP basis we realized operating income of $44.1 million compared to $65.6 million in 2006. Those three items were shown on the non-GAAP (inaudible) table in the press release.

If you look into their nature, you can tell our core foundation was not impaired as much as the [GAAP] numbers suggest. I believe it is necessary to discuss first the nature of those three unusual, non-recurring items to measure reserves from our continuing operations. But I would like to start my discussion with the non-interest income and expense components in relation with such items. The first item is the other-than-temporary impairment charge, [$401.1] million decline in value of preferred securities that we bought a few years ago for CRA credit proposed. We hope to recover this loss in the near future.

Even after the (inaudible) million reduction for the (inaudible) other-than-temporary impairment our non-interest income for the fourth quarter still increased to $9.8 million from $9.5 million in the prior quarter. Although decline of loan premiums decreased somewhat our gains on non-sales in 2007, our non-interest income for the full year was $40 million an 8% increase over 2006 levels. (inaudible) to the contribution of two insurance companies that we acquired just over a year ago.

Miss? Hello? The two other charges are $103 million goodwill impairment and $1.7 million in separation expenses for the (inaudible.) The write-down of goodwill does not affect our tangible (inaudible) and the bank remains (inaudible) and its lending limits is not affected either.

Absent these items, our fourth quarter non-interest expense totaled $21.6 million consistent with the previous quarter level. Again, absent those items, our non-interest expense for the full year of 2007 were $85.4 million representing original increase from $77.3 million for the previous year. Considering original operating expenses from the acquisition of two insurance companies, our expense ratio excluding these non-recurring items was 45% and 44% respectively for the fourth quarter and the year of 2007. These ratios are still higher than they were a year earlier and indicate room for improvement.

Now, let's talk about our margin and funding situation. At the end of 2007 our fixed rate loans increased to 42% of total loans. In addition, the average maturity to time of deposits decreased to slightly over three months (inaudible) while maintaining a relatively high composition of non-interest bearing deposits around 22% of total deposits.

Such changes reduced our (inaudible) exposure in declining rate environment during the fourth quarter of 2007 and our net interest margin for the last quarter was 4.08% only 18 basis points lower than the prior quarter's 4.26% despite the Fed's rate cutting by the total of 1% for the last four months of 2007 and intense competition in our local market.

Our loan portfolio continued to grow in 2007 while the deposit portfolio was essentially flat, reflecting intense funding competition in our local market. (Inaudible) and other borrowings increased to $487 million from $169 million a year ago as we continue to utilize certain borrowings to fund loan growth. (inaudible) demand softening loan growth in the fourth quarter was modest as well. At year end in 2007 total assets of $4 billion were essentially unchanged from the prior quarter end.

Despite our loan growth the fourth quarter net interest income of $37.7 million was little changed sequentially and year-over-year due to [debt] deduction of net interest margin. Second only to the (inaudible) credit quality then is (inaudible) to expand the core deposit foundation that will provide us with stable funding sources, expand the net interest margins of the (inaudible) loan and thereby enhance the bottom line for home loans.

Toward that end, we expect to open at least three new branches in California in 2008 that we anticipate will contribute measurably to growth in core deposits. In addition, we recently launched a deposit campaign and proposed incentive paid program for 2008 an end to expand our core deposit base by weighting heavier points on core deposit growth.

In summary, we have much work ahead of us to return Hanmi Bank to the high standards that our investors expect and deserve. (Inaudible). Credit quality, net interest margin and operating expenses are the top priorities in 2008. We look forward to keeping you apprised of our progress. This is the end of our prepared remarks. Thanks for listening. Miss?

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Brett Rabatin from FTN Midwest. Please proceed.

Good afternoon.

Hi, Brett.

A couple questions related to asset quality. First, given the commentary in the press release and your comments earlier, can you give us a level for the classified loans or special mention, any numbers other than the delinquent loan levels you're indicating in the press release?

Yes, our delinquent loan amount has increased a lot during the fourth quarter, and total delinquent amount at the end of last year was $45 million. It is $10 million less than the end of the third quarter. However, the non-performing loans amount increased to $55 million, a lot more than the end of third quarter.

Yes, no, I understand that, Brian, I'm just--given your commentary, in the press release, about what you're seeing in terms of weaknesses and downgrades and classification of loans, and I know special mention you can have a lot of stuff in there moving in and out, but can you give us any color on those loans?

And then I also didn't quite understand the numbers that you had for the past or the delinquent loans. As I look at the last quarter, if you look at least the regulatory filings you had about 18--sorry, $16.8 million in 30 to 89 past due, and I'm curious to know what goes into that, quote, delinquent loan box?

Actually, I was -- our special mention loans increased to $156 million from $68 million at the end of September '07, and our substandard loan amount increased to $90 million from $59 million, so that our criticized and classified loan amounts has increased during the last quarter.

And in terms of delinquent loans over 30 days past due loan amounts is $21 million. And our total delinquent amount is $45 million.

Okay. The $21 million that is 30 to 89 past due at year end is that the number you're giving me, Brian?

This is Chung Hoon Youk.

I'm sorry.

This is me, Brett.

My apologies. Okay. Let me just move on to a different question. I didn't catch the SBA sales for the quarter. How much, obviously, it looks like you sold $30 million or $35 million this quarter compared to about $17 million last quarter. Can you give me the production and the actual dollar amount of SBA sales?

Our (inaudible) for the fourth quarter is around $30 million in SBA loans and last quarter in first quarter of 2007 we saw about $17 million guaranteed portion. But as you know the SBA loans sales premiums went down a lot.

Right.

So around 5%, whatever, so our gain was limited to around $640,000. And also we have some (inaudible) to push on sale at the end of the year which makes an additional gain of $1.1 million--$1.2 million. So we made a total of $1.9 million, $1.8 million gain on sale of SBA loans.

Okay. Let me just ask one housekeeping issue and I'll get back to the queue, what was, the construction was 233 at the end of the last quarter, how much were the construction loans at the end of the year and then also the SBA portfolio, how much is that? I think it was 269 at the end of the third quarter.

Our construction loan balance at the end of the year was $216 billion.

215 billion?

16 and our loan SBA balance over the end of the last year was $119 million.

$119 million. Okay. Is there a piece--I guess the other piece would be, quote, the international portfolio?

International loans you have 119.

Okay. Maybe we can follow up on a few other things but I'll hop back into queue. Thanks for the answers.

Okay. Thank you.

And from FBR your next question comes from the line of James Abbott. Please proceed, sir.

Yes, good afternoon. I was wondering if you could give us a sense of what--what portion of the major loans that you were able to review?

You discussed in the press release how you were able to go back through the portfolio and look at a lot of the portfolio, and that is the reason why the special mention loans were substantially higher, I guess $156 million. Could you give us a sense as to how much of the portfolio has been reviewed, and what process you used to review it?

Well, actually we reviewed all of the big loans, say $500,000 and more, and that comprised around more than 60% of our total loan portfolio, and we reviewed very closely all the large loans, and based on that review a lot of loans were downgraded to special mention were substandard.

Okay. I guess as a follow-up, then, what was it that--was there a change in what you saw in your customer base, or is it that you have adopted a new or more rigorous standard than you had before?

Actually, you are entering into a down cycle about the general economy. And we reviewed our loans based on the assumptions that our economy will slow down, so that we appraised the loans very conservatively. Based on that we downgraded more than before.

Okay. So there was a change in methodology or a change in your outlook?

Not methodology. Methodology has been the same, but our outlook is different.

Okay. And just to help us understand, had you not changed your outlook, had the outlook remained as it was before, would there have been a substantial change in the special mention loans on their own merits, of loans that may have changed simply because the cash flows of those borrowers became clearly troubled? Or would it have been about the same, I think, you said $68 million, would it have been much different from $68 million had you not changed your outlook?

Well, as I said, that you have to consider the general economic conditions in 2008. You have to consider that. So that our approach was a more conservative than before.

I agree. I agree. I'm not disagreeing with that. I'm just trying to understand how much of the change in your special-mention category was due to the change in the outlook as opposed to a change in specific credits?

It is very hard to tell how to distinguish between borrowers (inaudible) and the general economic conditions. But I think both have have an impact on our downgrade.

Okay. I appreciate the effort to answer. Let me ask another question. Obviously, this is related to the margin, and then I'll jump back into the queue, I'll probably be back at the end for more questions, but what percentage of the loans are variable rate? If you already gave that, I apologize.

What percentage of loans are variable rate, and then also do you have an estimated margin at the end of January just to kind of give us an idea as to how things have changed? Because things changed with the Fed so much during January?

Okay. As I said about 58% of our total loan is variable rate. And including this variable rate loans about $1.8 billion of our total assets is going to reprice within a three-month period. At the other end, on the liability side, about 55% of our time deposits will be repriced (inaudible) within a three-month period, including these time deposits a total of $2 billion of our liability will be repriced within a three-month period.

So what I'm saying is our balance sheet composition (inaudible) in the declining rate environment. And the reason why I'm discussing this balance sheet composition first is really difficult to predict but it is our margin because there are many factors involved in calculating the margins, especially the (inaudible) we know that in January the Fed already cut the rate by 1.25% and our stiff competition in our local market does not allow us to lower our deposit (inaudible) as much as loan end.

So as a result we are losing the margin in the beginning--in the beginning (inaudible) after the Fed lowered the rates. But over time, as our balance sheet liability reprices we are recovering some margins, and so my expectation in the first month of--first quarter after the Fed cut the rate by 1.25%, I'm expecting concentration maybe around 40 basis points, and, but the impact of those rate cuts over the long run. Over the one-year time frame we recover, (inaudible) impact I can say is around 15 basis points for every !% rate cut by the Fed over the one-year time period.

Okay. Thank you. Very helpful. Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Christopher Nolan from Oppenheimer. Please proceed.

Hi, Chris.

Hey, Brian, how are you?

How are you?

Good. The net charge-offs, is that primarily C & I related? Can you give me some sort of composition of what comprises the net charge-offs in the quarter?

It is not just C & I loans. It includes the small business loans, also there is the auto loans and credit cards, so it includes all types of loans, actually.

Okay. So predominantly it is not one particular loan category?

Yes, C&I is the most of all charge-off amount.

Okay. And also the share count declined in the quarter relative to the third quarter. What's this--was there share repurchases?

Could you repeat your question again, Chris?

The share count declined in the fourth quarter relative to the third quarter. I'm just asking if there was share repurchases or something else.

Yes, we bought about $11 million, $12 million worth of shares. That reduced our number of shares by 2 million about, if I remember the number correctly. (Inaudible) share buyback.

Okay. And are there further plans to buy back additional shares?

At this moment we don't have any plans to buy back shares because (inaudible) to support our operation and our continued growth. So we don't have any immediate plan to buy any shares, but in the future if we recover our under normalized operation level then we may revisit this issue.

Great. And finally, what is the balance sheet growth outlook? Are you looking in 2008 looking to slow down the pace of balance sheet growth?

Yes, we expect very moderate growth this year and because of the asset quality problem (inaudible) so that you don't have the plan to increase our asset size a lot this year.

Great. And great. That's it. Thank you very much.

Thank you.

And your next question comes from the line of Erika Penala from Merrill Lynch. Please proceed.

Hi, actually--

How are you?

Doing well. This is actually [Alana Kim] calling for Erika Penala.

How are you? Hello, [Alana.] How are you?

Doing well. How are you?

Fine, thanks.

I guess most of my questions got answered so I only have a couple. I just want to start off with are there any plans for the installment of a new CEO or do you plan on continuing as interim CEO?

Oh, yes, the board of directors of the Hanmi bank is currently conducting a search to fill the position and the board hopes to conclude the search in the very near term and we expect that our search committee will select a new CEO, CEO, before our shareholders' meeting which is scheduled in late May.

Okay . Great. And I guess another question is I know that in 4Q you made a concerted effort to clean up your balance sheet and the credit quality issue. What kind of loan loss assumptions do you have for 2008? I mean, I would expect that you would imagine--expect it to go down from current levels but how much of that do you expect to go

Well, I believe 1.33% coverage ratio we will maintain at year end, is kind of high compared to our (inaudible) our concerted effort to clean up our balance sheet?

Right. Like what do you expect for your NCO rate for 2008?

The net charge-off last year was $23 million, and this year we cleaned up all the problem loans a lot, last year, so that, but that depends on the condition of the economy. So unless there is a quick turnaround of our general economic conditions, we don't--we don't expect the higher charge-off this year.

And if you expect it not to be quick?

Excuse me?

And if you don't--if you don't expect the economic condition to turn around quickly?

The--I mean that if the economic conditions go--slow down total, then, it will be different. But right now you don't expect any higher charge-offs this year.

Okay. And my last question is basically there have been a lot of talks or rumors about South Korean investors being interested in entering the U.S. market? I just wanted to know have you guys had discussions or interests at all in having discussions with the South Korean investors?

Actually you do not see any significant signs or developments from Korean commercial banks. I know that Korean commercial banks has a very strong capital base and they want to go global, so that they may have very -- that the high interest to come to the United States and their first target will be the Korean community bank. However, until now as far as I know there have been some rumor, but the rumor I think is kind of unfounded or groundless at this time.

Okay. Thank you very much for your time.

Thank you.

And your next question comes from the line of Don Worthington. Please proceed, sir.

Hi, Don.

Couple things. Last quarter the Company mentioned a fairly large non-performer related to the City of Los Angeles. What is the status of that particular project?

Actually that is a very large loan and it is good to say that the loan was made current at the end of last year. They paid all of the delinquency interest, so that the loan was made current. And we are working very diligently through the City of L.A. and the borrowers to resolve the problems and we hope that we can resolve the problems as soon as possible.

Is that loan still in the non-performing balance?

Yes.

Okay. Okay. And then general changes in strategy, I think under the former CEO the approach was to try to generate more fee-based income, do more C & I lending than real estate lending.

Is the Company going to continue along that path or do you envision any changes, more of a concentration in real estate as in the past, or not?

Well, actually the general direction will be the same as before. However, we put more emphasis on risk management so that in the past they focused on expansion and growth, but from now on you have more focus on improvement in asset quality, efficiencies and enhancement (inaudible) of our operations.

Okay, great. Thank you very much.

Thank you.

And from Sidoti & Company your next question comes from the line Hugh Miller. Please proceed, sir.

Hi. You guys had mentioned that roughly 58% of your loans were variable rate as of the end of the year. Can you talk about the variable rate loan production during the fourth quarter?

Actually during the fourth quarter our variable rate was, say, 59% versus 41% fixed rate loans. So there has been very little change in the fourth quarter.

Okay. And within the variable rate loans that you do have, can you talk about what percentage may have floors in them and what percentage of that may actually be at the floor currently?

At the end of last year, you have only the 2% of loans having the floor rate. However, beginning from this year you have a plan to increase flow limit on our variable loans, so that on our decreasing interest rate environment you can have a better the yield on that.

So you said small percentage, 2%?

Yes, 2%.

Okay. And can you just give a touch more color on the impairment that was taken on the CRA preferred security? You mentioned that you anticipated that you will recapture that charge but can you talk a little bit about what caused it?

It is the structure of their Company and (inaudible) value of that securities. On the other hand, they gave us a proposal (inaudible) where we are able to hold that security at face value four years later.

That is the proposal and you got the copy, we got the draft to sign. So once we signed, they signed and there is binding terms. That's why we hope to recover such loss. We didn't for years.

Okay. And one last question. I think someone had tried to touch upon it with regards to your charge-off expectations as we headed into 2008. Obviously, some of that will be dictated by the general economy. I didn't catch the answer you had mentioned. Can you give us a sense of your expectations for 2008 relative to this year's loan charge-offs?

The--I estimate that our charge-off this year will be less than last year. As I said before, we cleaned up all the problem loans at the end of last year, so that we expect that our charge-offs this year will be less than last year.

Okay. That's good. Do you have a sense of a target where that range might be?

It is pretty hard to estimate that at this time, but depending on the economic situation, the numbers can vary, so that at this time I'm not in the position to estimate the charge-off amount this year.

Okay. Thank you so much.

Thank you.

And you have a follow-up question from the line of Brett Rabatin from FTN Midwest, please proceed.

Thanks, I wanted to ask a follow-up on credit. I just wanted to see if you had a number for, was there any specific reserve allocated for the non-performing loans you have, or just credit quality, in general? Do you have a specific reserve for some allocated, for some credits that you see weakness in?

Yes, our total on reserve amounts at the end of last year is $43 million and there is a (inaudible) reserve for clean loans $50 million and total, the reserve for criticized and classified loans are $50 million. And the reserve for homogeneous loans that includes the consumer loans, $1.4 million, and you also have qualitative adjustment set aside for the qualitative adjustment of $7 million. And the reserve for impaired loans is $4 million, so that altogether it comes up with $43.6 million.

Okay. That's fantastic color on that. And the other thing I wanted to follow up on was, expense levels. I know we had some noise this quarter.

Is it fair to assume a $22 million or $23 million run rate for expenses, will there be some items that make that number higher or lower? I know you are planning on opening some branches this year. Can you comment on the expense base going forward?

The number you have thrown $22 million around that sounds very reasonable to me. But if you said the additional branch openings may increase some operating expenses and it's hard to figure out.

Okay. And I didn't catch, you mentioned I think three. I didn't catch if you had any plans, yet, for where those might open. Are there pockets that you see as more attractive--I know you don't want to give too much information to competitors--but do you anticipate those being in Southern California or might they be elsewhere?

Those three branch locations I mentioned is in Southern California.

Okay. Great. Thank you for all the color.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes as another follow-up from James Abbott from FBR. Please proceed.

Hi, again.

Hi, Jim.

Thanks for taking the follow-up question. Could you give us a sense on the net charge-offs? I'm looking in terms of the borrower profiles, and can you give us a sense as to if there's a common thread, that ties some of these credits together?

Is it manufacturing, is it service related? Is it mortgage banking related? Not that I expect that you guys do a lot of that. But is there any theme that you can tell us about?

From the record of our charge-off loans a lot of loans came from C & I loans. The commercial term loan has the highest charge-off amount. Other than that, we have a charge-off from international loans. Those are the two areas where we had the most charge-offs.

Would you mind giving us the dollar amount on C & I and the international?

Okay. During the fourth quarter our total charge-offs on commercial term loans was $5.9 million. And international loans has $3.8 million charge-offs.

Okay.

And those are the majority of our loans charged-off during the last quarter.

Okay. Thank you, and on the C & I loans, what is--what would you say is the average size there, and is there any industry that that is in? Are they secured by accounts receivable, inventory, equipment, and to what industries are they made to?

Like I said, the commercial term loans so the loan was made to mostly to retail (inaudible) so that I mentioned that I cannot think of any particular industry or size of the loan that has been charged-off.

Oh, these are mostly backed by real estate, then?

No, it is a commercial term loan, it is secured by the business property, business asset, like goodwill, like the inventory (inaudible).

Okay. I'm sorry. Yes.

Okay.

All right. And it is mostly retail you say?

Yes, that's right.

And that answers that question for me. And the other question that I had was on the reserve to performing loans, and I think you may have mentioned that in the prior question?

Okay.

The reserve to performing loans. You mentioned what the reserve allocation is to non-performing assets and substandard and classified, but how much is it to performing loans?

On average for the clean loans, the well-performing loans, our reserve rate is 50 basis points, and the (inaudible) loans it is an average 2%. For substandard loans we reserve roughly 10%. For doubtful loans our reserve ratio is 50%. On average.

Wonderful. Thank you, again, for the color. Thank you, again.

Thank you.

We have no further questions in the queue. Thank you for your participation in today's conference, ladies and gentlemen, this concludes the presentation, and you may now disconnect. Have a great day.

Okay. Have a great day.