Hanmi Financial Corp (HAFC) 2009 Q1 法說會逐字稿

Good day and welcome to the Hanmi Financial Corporation's 2009 first quarter 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, April 28, 2009.

This call may contain forward-looking statements, which are made under the SEC's Safe Harbor rules for forward-looking statements. Forward-looking statements relate to the Company's future operations, prospects, and businesses and are identified by words such as may, will, should, could, expects, plans, intends, anticipates, believe, 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, level of activity, performance, or achievements. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, level of activity, performance, or achievements to differ are from those expressed or implied in 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 predicted by the forward-looking information and statement. 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 other expectations expressed in the forward-looking statements, please see the Company's filing with the SEC. Representing the Company today are Mr. Jay S. Yoo, Hanmi's President and Chief Executive Officer; Mr. Brian Cho, Executive Vice President and Chief Financial Officer; and Mr. John Park, Executive Vice President and Chief Credit Officer. I will now turn the call over to Mr. Yoo. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us. Today we reported a first quarter net loss of $5.2 million or a loss of $0.11 per diluted share, compared to net loss of $3.8 million or a loss of $0.08 per diluted share in the prior quarter. The decline in operating performance replaced a decline in overall economy that has persisted for the past 12 months. The problems that we and our competitors have faced are familiar to all of you, and I will not repeat them here.

The disappointing first quarter results were due to two factors in particular. First, was a sharp decline in asset yield, following the [feds 75 basis point] rate cut in December, whereas liability costs were essentially unchanged. This lead to a decline $7.4 million or 24% in net interest income before provisions for credit losses.

Second was continued pressure on our loan portfolio that required a provision for credit losses of $25 million, only slightly less than that of the prior quarter. In this environment, credit monitoring and risk management remain our first highest priorities, and we've continued to (inaudible) in provisioning for credit losses where appropriate.

Before turning the call over to Brian and John, I would note in passing three items that I expect [to improve on this] performance. First, as mentioned in today's press release, is the use of third parties to assist the banks in [quality assess] testing the entire loan portfolio, [including] loans within the portfolio, and re-appraising properties where appropriate.

Second, is further streamlining of the bank's operations. More precisely, we have reduced headcount by 16, including some senior officers, in February. We have suspended operations of four of our less productive loan production offices, and we have combined our three branch (inaudible) into two. Third, is the recent enhancement of the Board of Directors with the addition of three new members. Together, they bring extensive experience in the banking industry, notably, experience in meeting expectations and the requirements of bank regulators. With that, I will turn the call over to Brian.

Thank you. Good morning everyone. Since our release contains a detailed discussion, I will briefly discuss our current status in the key areas of your concern and our strategy [hereto]. (inaudible), this a continuing concern in the banking industry.

At the last call in January, I reported debt in the fourth quarter of 2008, our planned utilization of wholesale funds relieved our (inaudible) crunch, and our [strategic productivity] in 2009 is to replace such wholesale funds with customer [deposits]. With that said, our (inaudible) strategy, we continue (inaudible) campaign, launched in December with our promotional [cd] product, and we were able to replace much of our wholesale funds with customer deposits.

At March 31st, our total deposits increased sequentially by $126 million or 4%, to [$3.2] billion. (inaudible), the broker deposits, excluding (inaudible) and the Federal Home Loan Bank Borrowings, declined to $554 million and $313 million respectively, compared to [28, 18 and 423, three] months earlier. On March 31st, our net loan to deposit ratio was 101% compared to 107% at December 31st.

Future availability of our Federal Home Loan Bank borrowings increased to $422 million, compared to $261 million at the last quarter end. With available Federal Home Loan borrowings and our line of credit (inaudible) we were able to miss our (inaudible) in the foreseeable future. This (inaudible) in management had an adverse effect on our net interest margin.

With the (inaudible) campaign, we offered cds, [failing] interest rates, (inaudible) up very expensive compared to the wholesale funds. As a result, we were not able to lower our cost of funds in this declining rate environment, and our average cost on interest bearing liabilities in the first quarter was essentially unchanged at 3.25%. On the other hand, our [own assets yielded] continued to decline, following the feds target rate cut last December to essentially 0%.

The average yield in the first quarter therefore, decreased by 80 basis points to 5.12% from the prior quarter's 5.92%. For this reason, our net interest margin was compressed to 2.46% in the first quarter, from the prior quarter's 3.34%. Such compression was somewhat greater than we had anticipated. We however expect to see [minimal] margin expansion as the majority of our high cost promotional time deposits mature in the middle of this year. Those deposits (inaudible) each market are more reasonably priced and we expect those maturing time deposits will be replaced at rates substantially lower than current rates.

Turning to the asset side of the balance sheet, we remain very selective both in the [contraction] of new loans and in the [venue] of existing loans. Accordingly, our gross loans decreased by $44 million to $3.32 billion at the end of the first quarter, from $3.36 billion at the last year end.

Although modest, such a substantial reduction in gross loans points to the fact that a program to de-leverage the balance sheet has already begun. In subsequent quarters it is likely that we will see further contraction in the loan portfolio as we continue to curtail underwriting of new loans and allow attrition of existing loans. As [we already knew], only the strongest of maturing credits with better pricing. Depending on conditions in the secondary loan market and the banks' capital requirements in the coming months is, we may consider further de-leveraging the balance sheet through the [sale of a] portion of the loan portfolio.

What about capital? We are currently well capitalized, and we believe our earnings power is adequate to cover the anticipated credit cost. However, in light of the ever deepening recession, and its possible effect on our customers, we continue to monitor the capital markets and review alternatives for additional capital to provide a [suction] cushion should that be necessary. This de-leveraging strategy will help our efforts to (inaudible) such cushion in our [capital].

Now, let me touch a little on the non-interest portion of the P&L. The first quarter non-interest income increased by $1 million to 8.4, as compared with the prior quarter's 7.4 million, due mainly to our $1.2 million gain on the sale of investment securities. On the other hand, our non-interest expenses decreased by $2.8 million in the first quarter compared to the prior quarter.

Although such [potential] (inaudible) reduction does not represent recording over the savings as discussed in the release, it does validate our commitment to expense control. Compared to $21.6 million a year ago, we have made a $3.3 million reduction in this area. Such year to year reduction reflects the progress of our cost cutting efforts, such as [one addition] restructures, and we will continue to work diligently toward this end on an ongoing basis.

I will now turn the call over to John Park, who will provide an overview of the loan portfolio. John?

Thank you, Brian. As we have already made clear in today's remarks, the deterioration in credit quality during the first quarter mirrored the continuing deterioration in the economy. Non-performing loans were $130.1 million or 3.98% of gross loans at March 31st, compared to $121.9 million or 3.6% of gross loans at December 31st.

The breakdown on NTLs was as follows. 29.7% were construction loans, 41% were C & I loans, including owner/user business property loans, 10.9% were CRA loans, 16.5% were SBA loans, and 1.9% were consumer loans. Delinquent loans were $164.4 million, or 4.95% of gross loans at March 31st, compared to $128.5 million or [3.8]% of gross loans at December 31st. The biggest increase in delinquencies was attributable to a number of CNI loans totaling $21.7 million.

The first quarter provision for loan losses was $25 million, compared to $25.5 million in the fourth quarter. The high provision is attributable to an increased number of downgraded loans reflecting the worsening economy, and a higher provision rate, due to the elevated level of charge-offs we experienced in 2008.

Charge-offs, net of recoveries, at March 31st were $11.8 million, compared to $18.6 million at the end of 2008. The biggest contributor to charge-offs was a $3.8 million unsecured CNI loan, and the remaining charge-offs were mostly in a number of loans to small customers whose businesses continue to be affected by the recession. The allowance for loan losses at March 31st was $83.9 million, or 2.53% of the total loans, compared to $75 million or [2.11]% of total loans at December 31st, 2008.

Let me take this opportunity to bring you up to date on a couple of problematic loans we have discussed in the past. First is a condominium project in Oakland, California. When we last spoke with you three months ago, we noted that we hoped to find a buyer for the recently completed project within the first or second quarter. This has not happened, and given the state of the economy, the anticipated sale has been delayed.

Regarding the low income housing project here in Los Angeles, we believe we can see the light at the end of the tunnel. This, as you may recall, has been tied up in an involuntary bankruptcy. Working in cooperation with the general contractor, our intention is to get the project out of bankruptcy and reapply for the tax credit, which would once again make this project attractive to investors.

Finally, there is a privately-owned golf course near San Diego. This loan, against which we have reserved $960,000 to date, remains delinquent. Concerned that the course was deteriorating through lack of adequate maintenance, we recently put it into receivership, a move that appears to be well-received by the members of the golf club. We are working very aggressively to liquidate this asset.

Now returning to the loan portfolio as a whole, virtually all metrics point to the fact that we experienced further deterioration in credit quality during the first quarter. When we spoke in January, I expressed some optimism that in 2009 the loan loss reserve as a percentage of total gross loans would not be appreciably higher than the 2.11% experienced in 2008, which itself was a significant increase over the 1.33% reported at the end of 2007. In any event, at March 31st, the allowance for loan losses had risen to 2.54% of total gross loans. It is apparent that our optimism was premature.

It is equally clear that the economy as a whole has deteriorated in the last three months. We see it, for example, in the rise in delinquent loans. Absent any reason to expect a near-term improvement in the economy, we anticipate this trend will continue through the balance of the year.

As Mr. Yoo mentioned, we have engaged an outside firm to stress test the entire portfolio on a quarterly basis to help us gauge potential issues in a highly stressed environment. Be assured that we will continue to be aggressive in both in charging off loans and in established reserves, as circumstances may require.

In addition, we have retained a third-party credit review firm to validate management's assessment in a segment of the loan portfolio that is of particular concern. More specifically, a review was performed on the business property loans. Although the final report has not yet been received, there will no doubt be some adjustment in loan grade. However, we believe that the additional reserve requirement will be manageable, based on the collateral support.

As a part of an ongoing credit monitoring process, we continue to update appraisal values in a weak industries. The need for additional reserves for the first quarter 2009 was occasioned by the result of this re-appraisal process. We will continue with this program in the current economic environment.

This completes our prepared remarks. Candace, now we are ready for the Q&A.

Thank you. (Operator Instructions). Our first question will come from the line of James Abbott of FBR Capital Markets. You may proceed.

Hi. Good afternoon.

> Hi, James.

> I was wondering if you could take us through the inflows and outflows of the non-performer. In other words, I'm trying to get a sense, drill down, if I can, on how many of your nonperforming loans from December were cured or sold during the first quarter, and then how much was the new inflow, and just trying to get a sense of how things are flowing there? Okay.

First quarter, the biggest adjustment, biggest credit is that car wash deal which was $24 million, and that has been taken out of non-approved status, because of based on their performance in September of last year. That's the biggest. But as a whole, we are seeing increase, even with that reduction, we did see deterioration in the credit. So other loans are small loans that we're seeing continued weakness in the total picture.

And are you seeing many loans at all curing yet or not? Is it just not much - - everything's kind of moving into the non-accrual status but it's not curing at this point? We are aggressively negotiating on certain, in significant dollar amount loans. Even though we have not seen the result in the first quarter, I anticipate a significant improvement in the second quarter. Will that be through the sale of such loans to third parties, or would it be resolution through the borrower?

Mostly it will be sale to third parties.

Okay. And just to follow that path, how large of a discount would it be? So when they initially hit non-accrual status you take a charge-off, and 10%, 20%, 30%, perhaps, I don't know what the number would be, and then you're now negotiating. What sort of discounts are you facing when you're negotiating with third parties?

Okay. When we take it in non-accrual, at that time, like you said, either we charge it off or we make adequate reserves for each credit. And based on what we're discussing now, we will take additional discount from where we were, and the discount we're looking at probably additional 10%, and most of them not to exceed 15% of where we are now.

Okay. Okay. That's 's helpful. Thank you. That's all for now for me.

Thank you.

Our next question will come from the line of Julianna Balicka of KBW.

Good morning.

Good morning, Julianna.

Hi, how are you. I was hoping you could give us a little bit more color on the stress testing process. What kind of assumptions are you using by different portfolios, how are you approaching testing the CNI portfolio, and who's the third-party provider?

Our third-party provider, I don't know if I'm at liberty to mention that.

That's fine, I'm more interested in the assumptions.

Okay. The assumptions, well, they are using three factors in stress-testing. Let me just refer to my note here. It's based on debt service coverage ratio, loan-to-value and FICO scores. And also this is based on their assumption that historical experience from 1992 and forward on their database. So the final result was that, under our static scenarios, at this point capital appears adequate. But on the severe case, obviously our credit, I mean total credit, I mean total capital, would be severely impacted.

And in the stress case level of the debt service coverage and LTVs, what kind of change do those ratios did they build in?

It varies by the loan product. Since we stress-tested everything, total portfolio, that ranged from - - this is our actual data, it ranged from 1.1 and some loans up to 2.2 coverage. And on LTDs, it ranged from 65% up to 80%. And on the FICO score it ranged from 660 up to 740.

All right.

Those are the assumptions that we had used.

Very good. And then I had a follow-up also on reappraisal. What dollar amount has been reappraised so far?

Okay. What we have done so far is about $340 million that we have reappraised. And our priority has been on more risky portfolios, such as land, hotel, gas stations, condos, those segments have been our priority.

Very good. Thank you very much. I'll step back for now.

Thank you.

Our next question will come from the line of Don Worthington of Howe Barnes Hoefer & Arnett. You may proceed.

Good morning.

Hi Don.

A couple things, this one I guess is probably for Brian. In terms of the NIM compression in the quarter, how much of that in terms of basis points was due to interest reversals?

Interest reversals for the the new non-accrual loans, we're talking about 720,000. So for an annualized basis, about $3 million, [explaining] about 8 basis point. Okay. Then in terms of the special promotion CDs, what was the rate that you offered on that? Okay. Our promotional CD, typically 4% or 4.2% and they are six months term. Six-month term, okay.

So (inaudible) will mature in the middle of this year, as I addressed. So we are going to have meaningful margin expansion in those times.

And then the last question, this is probably more for John, in terms of the CNI portfolio, how much of that is secured by real estate in terms of these owner-user type loans?

The breakdown on CNI, probably about 70% to 80%. Okay. Great. Thank you. A range of 70% to 80%, yes.

Okay, thanks.

(Operator Instructions). Our next question will come from the line of Chris [Gilpin], of D.A. Davidson. You may proceed. Hello, Chris, your line is open.

Yes, I'm sorry, apparently you can't hear me, I just tried to get out of queue, both of my questions were just asked. Thank you very much.

Thank you, sir. And this concludes the question-and-answer portion of today's conference. I will turn the call back to Mr. Yoo for any closing remarks. Sir?

Thank you, Candace. Again, thanks for joining us today. We look forward to speaking with you when we report our second quarter results in July. Good-bye everyone and have a great day.

Good-bye.

Thank you, sir, and thank you for your participation. You may now disconnect. Have a great day.