Hanmi Financial Corp (HAFC) 2008 Q1 法說會逐字稿

Good afternoon. Welcome to the Hanmi Financial Corporations 2008 First Quarter results Conference Call. At this time all participants are in 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, April 29, 2008.

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 companies future operations, prospects and businesses and are identified by words such as many, will, should, could, expects, plans intends, anticipates, believes, estimates, predicts, potential or continue or the negative of such terms. Although we believe the expectations reflect in the forward-looking statements are reasonable based upon our clients 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 activity, performance or achievements that differ from those expressed or implied by the forward-looking statements. Such statements are subject to risks and uncertainties, many of which are difficulty to predict and are beyond the control of Hanmi Financial. Accordingly, actual results may differ from those expressed in or implied or projected by the forward-looking information and statement. Hanmi undertakes no obligation to update forward-looking statements in the future. For additional information on factors that could cause actual results to differ materially from those anticipated results or expectations expressed in the forward-looking statement, please see the companies filings with the SEC.

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

Thank you, Operator. Good afternoon, everyone, and thank you for joining us today for a discussion of our 2008 First Quarter results. With me is Brian Cho, our Chief Financial Officer.

This morning, we reported that First Quarter 2008 net income was $2.9 million or $.06 per diluted share. This compares to a net income of $13 million or $0.26 per diluted share in the First Quarter of 2007, and the net loss of $100 million or $2.15 per share in the prior quarter. You will remember that, the prior quarter included non-cash goodwill impairment charge of almost $103 million.

Two factors above all adversely affected First Quarter financial performance. They were also major contributors to last quarters disappointing results. The first, is the continuing complication for the product that is coming from Korean, American, and other ethnic banks. This has been aggravated by the Federal Reserve banks lowering of a short-term interest rate by a total of 200 basis points during the quarter.

The result has been a further deterioration in net interest income, before provision for credit losses, to $34.2 million from $37.6 million in the prior quarter. The decline in net interest income lead to a deterioration in net interest margin, to 3.73% from 4.06% in the Fourth Quarter of 2007. Given the absolute level of current rate, as well as growing concerns regarding inflation, we do not expect to see any further significant cuts in short-term rate, but given the fragile economy, we do not expect to see any near term tightening by the Fed either. And we do not yet see any evidence of a more original pricing of the projects in the market we serve.

We expect to experience continued pressure on margins during the current quarter. The other notable factors affecting First Quarter financial results, is the provision for credit losses. Although lower than in the preceding quarter the $17.8 million provision reflects further deterioration in credit quality. The allowance for loan losses now stands at $53 million or 1.6% of total loans. At year-end 2007, it was $43.6 million or 1.33% of total loans. A year ago, the ratio stood at 1.08%.

Total non-performing loans and delinquent loans, as a percentage of growth loans, were 2.68% and 3.2%, respectively. In the prior quarter they were 1.66% and 1.37%, respectively. Delinquent loans more than doubled to 1.5 - $105.8 million from $45.1 million at the end of 2007. Increase in delinquent loans mostly came from construction loans.

The ratio of delinquent loans to total growth loans, was 3.2% compared to 1.37% in the prior quarter. Given the soft economy and our rigorous approach to evaluating credit worthiness, this ratio may not decrease in subsequent quarters. In any case, we will be relentless in sticking to identify and address suspect loans and work with borrowers before they become seriously delinquent.

The increase in provision for credit losses was accompanied by an increase in non-performing loans and their downward migration on the scale on which we grade loans. Including the construction loans, totaling $52 million, total net non-performing assets were $88.7 million compared to $54.8 million in the prior quarter. I'd like to emphasize that methodology by which we monitor asset quality and evaluate the credit worthiness of loans is unchanged. It remains as conservative as ever. Unfortunately, the market environment is essentially unchanged as well. The economy remains sluggish and there is a very strong likelihood that you're already in or we'll soon enter a recession. Accordingly, our outlook which is a chief factor in my migration of the loan into this classification remains exceedingly cautious.

In addition to our foregoing focus on asset quality, two other areas are essentially important. One is the growth in core deposits. As we have noted in the past, we believe that core deposits are essential ingredient in any program, to support stable net interest margins. With that in mind, we recently opened our 25th full-service branch office located in Beverly Hills, it will be followed by two others, both in Southern California and both expected to be open before year-end.

In addition to growth in core deposits, the other area of special interest is control of our non-interest expense. Brian Cho, our CFO, will address these issues and our financial performance in more detail. Brian, please go ahead.

Thank you, Mr. Youk. How are you, everyone? I will provide a summary on the financial results over the First Quarter.

Since our release contains a detailed discussion, I will focus on a few key areas. As Mr. Youk mentioned, our priorities this year will be credit quality management, growth of low cost deposits and close attention to non-interest expenses. As we planned in the first three months this year, our loan growth was marginal. We don't increase over 19 million or .6% over year-end 2007.

In looking at the asset side of the Balance Sheet, our concern in the current environment is more with enhancing credit worthiness. Put another way, we are far more interested quality than quantity. As we have stated before, we are anticipating that growth in 2008 will be modest at best. Our attention will be more on deposit side, which increased by $26 million or slightly less than 1% in the First Quarter.

Our primary focus here is gathering low cost core deposits and that is deposits that will fund at low production and enable us to achieve greater margins. This takes diligence and it takes time, and although we are confident of the outcome, we do not expect to see significant results in the immediate future.

In focusing our attention on the liability side, we stick to reduce our loan deposit ratios and there for, reduce our reliance on borrowings. The ratio of growth loan to deposits was 109% at the First Quarter end and our goal is to lower this ratio below 105% by the end of this year. Through a combination of moderate quality loan growth and the accumulation of low cost core deposits. In the meantime, our capital level remains very strong, our capital indicator continues to exceed the level as well capitalized within the regulatory guidelines. We believe our operating income levels continues to be enough to maintain HedgeCap capital levels, to insure the safety and soundness of the bank, in these challenging times.

Our net interest margin for the First Quarter was 3.73%, a 33 basis point decrease from the prior quarter margin over 4.06%. As you guessed, our margin compression was a result of the Fed's continued rate cuts. The relative impact combined with continued pricing competition in our niche markets. And it also affected as well by unusually high development of outward interest. Net reduction of over $1.2 million, caused by the third increase of non- accrual loans by $34 million in the First Quarter.

For the First Quarter of 2008, average interest earning assets were $3.69 billion, essentially unchanged from the prior quarter. The yield however dropped by 69 basis points to 7.08%, absent the 1.2 million interest reversal just mentioned, the yield would be 7.17%, a 60 basis points less than the prior quarter of 7.77 %. The average cost of deposits was 4.26% for the quarter, a decrease over 39 basis points from the prior quarter. The average cost of borrowings also decreased by 108 basis points to 4.33%, from the prior quarters 5.39%. The provision credit losses, was 17.8 million.

Net charge off was 7.3 million for the First Quarter. As Mr. Youk has mentioned the increase in the provision for credit losses also reflects increase in non-performing loans and delinquent loans. Non-interest income for the First Quarter totaled 9.8 million, essentially unchanged from the prior quarter. Now, let's talk about [INAUDIBLE]. It lost 49% in the First Quarter, way higher than 44% a year ago. Non-interest expense decreased by $103 million for the First Quarter, compared to the prior quarter of $153 million, which includes the quarterly impairment charges over $103 million. Excluding such non-cash included impairment charge, the operating non-interest expenses, essentially remains flat.

We are now seeing vast rooms for improvement in our operational opportunity, and it will be the focal point of our management initiative for the rest of the year.

We don't have much control over some expenses yet, but the expenses will increase for our intensified credit monitoring procedure and premise expenses also increased when we expand our branch network. However, we also know some expenses were not recurring, isolates the end of financial promo period, such as the equity evaluation services. We also expect the marketing related expense will go down, with our conservative growth score and the level of profit-sharing budget, will be adjusted down in this motive-come-to market environment.

In addition, we already started to review various vendor relationships including data processing services and expect to realize a meaningful reduction in these areas in the latter part of this year. This is the end of our prepared presentation and now we will open the floor for questions.

Thank you. Ladies and Gentlemen, (OPERATOR INSTRUCTIONS). Your first question comes from the line of James Abbott with FBR. Please proceed.

Hi, Mr. Youk, how are you?

Fine, how are you, Jim?

Good. How are you, too Brian. A couple of quick questions. Did you you mention that you had done some reappraising of your construction loans, I couldn't understand that quite if that's what you mentioned.

Oh, yes. For the construction loans, normally appraise in new appraisal order we didn't notice any problems in the construction loans.

And did you pro actively reassure praise your portfolio this quarter?

Oh, yes.

Okay, so the entire construction portfolio has been reappraised then?

No, not all of them but either they appraised a new appraisal or you can get the market value by using the market data. So that whenever you notice any problems, you normally place a new operator; however other than that, normally you get the market value by using the market data.

Okay. And how many, what percentage of your construction, tell us the dollar amount of your construction loans again and what percentage of those are on either 30 days past due, all the way through non-accrual?

We have total of 53 construction projects with a combined outstanding balance of $215 million, out of our 53 projects, you have five problem loans now and the combined amount is $59 million now.

Okay, so a little over $10 million, $12 million per loan on average.

That's right.

And are those, what are your five largest loans? Could you give us just the dollar amounts and maybe the type?

The biggest problem loan is the $28 million, which is the condominium project in Northern California. The second biggest one is the $17 million construction project, which is the low income housing project that's the tax credit project. That is in Los Angeles area. The other, third largest one is the retail shopping mall project, having $6.5 million of the loan and the other one is the office building construction project in Portland, Oregon and smallest one is the loan in California about $2 million.

And those are your largest five loans total or those are the five construction loans that are on non-performing?

That's the five largest construction loans.

Okay. And those are all non-performing at this point?

Four loans are non-performing and one loan is not non-performing and we expect that that loan will be termed out pretty soon.

And that's the low income housing I assume?

No, no, that's a $6.5 million retail shopping center project.

Okay, that's still performing. And are those, what are the five largest loans on the total loan portfolio as a whole?

On the total loan portfolio, other than construction project, we don't have big loans. Mostly other loans are smaller loans. The balance is mostly on the $500,000.

Okay. All right, thank you. I actually have other questions but I'll let others chime in and if they aren't answered then I'll come back and you'll see me at the end. Thanks again.

Okay, thank you.

Your next question comes from the line of Brett Rabatin with FTN Midwest. Please proceed.

Hi, everyone, how are you?

How are you, Brett?

Good. Wanted to first ask the exit review with the regulators, has that happened yet and/or are they still there?

They are still here. We are expecting the exit meeting pretty soon and they started examination in the middle of last month, but we expect that our exit meeting will be done pretty soon.

Okay, it seems like they've been longer than they typically have a month long review process and they've obviously been there longer than that. Has their extended stay been a focus on the construction loan portfolio or reviewing commercial Real Estate that you have or can you give some color on they're still being there?

No, that is not the reason. The major reason to stay longer is because of the shortage of their manpower.

Oh, okay. And then secondly, I didn't quite understand the comments on capital and I know you have I think it's 10.8% total risk-based. I'm curious if that's a number you want to move higher, if so how do you get there and just was hoping for some a additional clarity on your capital levels.

Well, in terms of the regulated capital guideline, as I said we are well capitalized and for level ratio and risk ratio, we maintain (inaudible - background noise) margin for well capitalized institution. And as you just mentioned for total risk-based capital ratio, open margin we maintain, maybe around 10.5 now, so around 50 basis point of the minimum requirement. But our operating income level for of course last quarter and this quarter because of the impairment charge and unusually high loan loss provision, our income level is very low and our ROA is around .5% or .4% around, but we are anticipating better ROA in the future quarters and we are used to that provision, I hope, but of course it all depends on the economy status.

And then our operating income is into support our operation and our capital level and especially, the growth anticipation we have is very conservative now, so any amount left over after dividend, will fully support our growth. In that sense, our capital level is active now and our operating account is strong enough to support our operation.

Okay, and then lastly, wanted to address deposit funding. It sounds like I know you've had some promotions and from what I hear it sounds like the environment has gotten a little less competitive, maybe so more rationality in the market. Can you talk about ,you mentioned I think, it sounds like you want to get your loan to deposit ratio a little lower going forward.

Yes.

Can you you talk about, Brian, what you might do with your borrowing levels going forward and just give us some color on where you see the opportunities here in the next quarter with the CD rates now under 4% for the group and just if the Balance Sheet shrinks any or I know you're focused on expenses.

Okay. Well, as you all know, the competition for deposit is still intense and competition has lessened a little bit compared to the competition we had last year.

Right.

But still there are competition very intense in this time , okay? So we try to rely on deposit campaign and we are going to launch a new promotional product to gather some core deposits like federal rates we may offer for money-market accounts and that kind of a promotion will go with our Marketing. And so we are going to in our plan, we are going to increase deposits maybe double amount of loan growth and then our growth is very conservative so we are talking about low one digit or low single digit growth rate, but the deposit growth is going to be a lot higher than loan growth. And so if we proceed with our plan as we design, then we believe we are are going to lower our borrowing line at least $100 million, at the end of last year our use of borrowing was about $500 million and it was lower than now around $415 million. I'm talking about federal home income advance and [INAUDIBLE]. I believe we are able to lower this borrowing below $400

Okay, great. Thank you.

Uh-huh.

Your next went comes from the line of Erika Penala with Merrill Lynch. Please proceed.

Good morning, gentlemen.

Good morning.

I wanted to follow-up on the $28 million non-performing construction project that was a condo. First, where in Northern California is this project?

It is in downtown Oakland.

And what is the difference between the appraisal value at origination and the appraisal value that just came in?

There is around 20% difference from the original appraisal value.

Okay, and how much of this condo is pre-sold currently?

They don't sell the condo yet, because the construction is still in progress. After completion of the condominium, they want to put it on the market, so they don't get any pre-selling yet.

So the developer would like to sell it to another developer? Or you were saying that they tnt do a pre-sale of the units.

No. We expect the completion of the project in the Second Quarter and after completion of the project, they have several options. They can sell on the market. They can sell-through auctions, or they can make a big discount to sell it right away so that after completion of the project, we'll make me and developer will make decision.

Okay. And what was the original LTV of this loan?

The original LTV was around 80% when you first approve the loan.

Okay. And also how much have you already written down this loan to? If at all?

Actually, we did not write up any portion of the loan yet because other than this collateral, the construction project, you have additional collateral for this loan to strengthen our position. And from the collateral of other, there is the building, it's very sizeable, the average amount so that based on our new operator, you don't have to write-off any part of our loans yet.

Okay, and does this happen to be a participation?

Oh, yes. You have around $7 million participation from other lenders.

Okay. And going, refocusing on C & I and Commercial Real Estate, you mentioned that trouble in your construction book accounted for the elevated credit metrics in the quarter, but are you seeing some trouble in your Commercial Real Estate or C & I portfolios?

For the commercial Real Estate, our position is still strong. You don't see any weakening sign on our commercial C & I portfolio. However, C & I loans, I think that includes all the commercial and business loans. You have the problem loans in this area and most of the problem loans other than construction loans, comes from that C & I loans.

Okay. And also, following up on another question, if the current economic downturn turns out to be deeper or longer than you are anticipating, if you look at your tangible capital levels, is there a floor in which you say perhaps it's time to sure up capital with a capital raise or do you think about it in that sense?

Well, we actually, it's the time to identify the alternative funding sources including private capital. It's actually, yeah, of course, we have to prepare and continue to plan in every situation, so that's what we are doing now, so we try to identify every possible alternative. That's what we are doing.

Okay, and one last question and I'll step aside. Have you thought of or would it even work in terms of consolidation among any of the large Korean American banks?

Well, there's lots of rumors around town and including the acquisition, possible acquisition from the Korean bank from Korea, but we have not seen any concrete development in anything. So at this stage it's a rumor.

Okay, thank you for your time.

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

Hi, Julianna

Hello, how are you?

Fine.

Fine thank you.

I have a couple follow-up questions because most of the topics have already been broached on the call. Of the 215 million construction portfolio, what is the geographic break down?

Most of the project are in Southern California and we have one larger loan in Northern California, but we don't have any of the exposure in the Inland Empire. As we know the inland empire has the most serious Real Estate problems but you don't have any exposure in the Inland area.

Okay.

And you have four out of State construction projects.

Okay. Good. And then of the I know you said that your problem loans are 59 million in construction, right? So those are non- performing, right so of the 106 million delinquent loans, how much of those are construction and how much of those are C & I?

As we mentioned, out of total of $109 million of delinquent loans, the construction loan is around $59 million and other than that, most of the other delinquent loans come from SBA loans and international loans and commercial term loans.

They are small in size.

Yes. The average size is pretty small other than construction loans.

And are there particular C & I industries that you're keeping a closer eye on maybe tightening underwriting or anything like that, restaurants, gas stations, whatever?

You don't have any particular industry, we are closely watching on, but we have some concentration in the gas station, college and the hotel/motel business and those are the areas that we are closely watching now.

Great and then one final question is in terms of your reserves? What is the dollar amount of the qualitative factor in there?

The out of total loan loss reserve of $53 million, our qualitative reserve is around $8.2 million, so the feature accounts for around 15% of our total loan loss reserve.

Great. Thank you very much.

Okay, thank you.

You have a follow-up question from the line of Brett Rabatin. Please proceed.

Hi. Could you also give us the color on the SBA, international and C & I portfolios with the dollar amounts of those were?

Can you repeat your question again, please?

I'm just trying to figure out what the dollar amount of the SBA, international, and C & I loans were broken out from - the SBA typically I think SBA international last quarter was like 238 million and so I was just hoping to get that number broken out of the C & I portfolio.

I'm sorry Idon't have the number, but our total SBA loan portfolio is $141 million.

Okay.

End of March, and international loans $102 million, and what else do you want?

Oh, I'm sorry, I didn't quite phrase the question correctly. I was looking for those two pieces out of the C & I portfolio and then also was hoping to hear, is there any land exposure that's held in the CRE portfolio or domiciled in the CRI portfolio?

Oh, yes, around $50 million loan for land development.

Okay. All right, and then I was just curious to hear any thoughts on an update for the CEO search. How that was going and if you anticipated the Board making a decision in the next few months.

Oh, yes. The Board of Directors is still conducting a search to fill the position, and we are searching for a new CEO not just locally, we're looking globally and nationally, and they will conclude the search before the shareholders meeting which is scheduled in late May.

Late May, okay.

Uh-huh.

And then just lastly, going back to the construction portfolio, were there any large construction projects in Northern California?

Just one.

Just one?

Uh-huh, in Oakland area.

Oakland, okay. There's not any in San Jose?

Oh, yes, I'm sorry. We have one in San Jose area. But that's not the problem loan. That's a performing loan there.

Okay. Great. Maybe we can follow-up after the call. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS). You have a follow-up question from the line of James Abbott. Please proceed.

Yeah, hi. A follow-up question on the margin. So the core margin would have been you add back that $1.2 million and that would be about 383 core net interest margin when you exclude the reversal of accrued interest. Is that about right?

That's right.

Okay. Could you give us a sense as to where it was in March on a comparable basis? Was the margin substantially below that 386 level on a core basis?

Almost one million interest reversal was made in March and the March margin was around 3.5%, but excluding that one million interest income reversal, the margin is going to be around 3.8 to 3.9, so it's about the same margin.

Okay. And all right, so but your guidance is for the margin to continue to compress in the Second Quarter.

A little bit.

A little bit, okay. So you would --

Ten basis points more or less.

Ten basis points from the 373?

That's fine.

Okay. And I think that was -- Oh, and the last question I had was there any pressure or is there any pressure, from the regulators on the growth of of loans? Have they suggested to you that you slow loan growth down or have they suggested that you improve the loan to deposit ratio?

Well, liquidity appears one of the main concerns and it is towards the softer financial market. Although, the loan to deposit ratio may indicate a level of a core funding and our ratio was what 109% at the end of the First Quarter, but the loan to deposit ratio, the total provision the regulatory risk exposure, so I may not say the 109% ratio indicates risk under 100% as long as our liquidity level is well monitored and well liquidity to plot plan is carefully followed.

Before it is proposed, we are monitoring our liquidity and the level of our borrowings on an ongoing basis and continuously, we measure the reliabilities of our alternative funding sources as I discussed previously, and as required by our liquidity plan. And so for our monitoring procedures and our preparation of contingency line and our development of alternative funding sources, I think that it's pretty well prepared. So I don't expect any criticism on them.

So you don't expect any but you haven't had any criticism yet either?

Yeah. There's no surprise for this region.

Okay. All right, thank you.

I cannot discuss in detail about the region.

Your next question comes from the line of Don Worthington with Howe Barns Hoefer & Arnett. Please proceed.

Good morning.

How are you, Don?

Good. Just a couple things I notice there was a small gain on sale of securities in the quarter.

Yes.

And whether you planned any additional activity of that sort?

Well, it depends on what the market situation. So we try to balance our liquidity position and portfolio maximization. So in the First Quarter, we like to enter some more liquidity and market situation in our decision. The gain on sale of security is better than additional interest income at that moment, so we still have liquidity coming to sell some of the portfolio, about $ 25 million and we enjoy about 600,000 gain on sale of securities. It all depends on the market situation in the future quarter.

Okay.

But we always measure between immediate gain or extra interest income.

And what types of securities were those that you sold?

They were various, mostly triple A, U.S. Agency sponsored , or very secured and very strong securities, so there's no, of course we have some CMO's and MBS, but the underlying securities for those are all U.S. Agency sponsored securities, or triple A, so we don't worry about

Okay. All right, thank you.

Okay.

Ladies and Gentlemen, that concludes the Q & A session for today. I'd like to hand the call back over to Mr. Youk for closing remarks.

Thank you. In closing, I'd like to emphasize that although our core business remains solid, our bottom line performance continues to reflect a challenging macroeconomic environment. Notably on narrowing spreads between the yield on loans and the cost of deposits attributable in part to interest rate cuts by the Fed. While our long term outlook, these are in the business environment in Southern California is optimistic, the near term outlook is still uncertain. It mandates that we remain both proactive and extremely conservative in applying the criteria you use to assess the credit risk.

In the coming months, credit quality will continue to be our number one focus. Again, we thank you for joining us today and we look forward to speaking with you in another three months. Goodbye. Thank you.

Goodbye.

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