Hanmi Financial Corp (HAFC) 2009 Q2 法說會逐字稿

Good morning and welcome to Hanmi Financial Corporation's 2009 second quarter 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, August 6, 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 such -- by words such as will, may, should, could, expect, plans, intends, anticipates, believes, estimates, predicts, potential or continue or the negative of such terms. Although we believe that the expectations in the forward-looking statements are reasonable based upon our current judgment, we cannot guarantee future results, levels of activity, performance or achievement. These statements involve known and unknown risks, uncertainties and other risk factors that may cause our actual results, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statements.

Such statements are subject to certain risks, uncertainties, many which are difficult to predict and generally beyond the control of Hanmi Financial. According to actual results may differ materially from those expressed or implied or projected by the forward-looking information and statements. Hanmi undertakes no obligation to update any forward-looking statements in the future. For additional information on factors that could cause actual results to differ materially from those anticipated, results other than expectations expressed in forward-looking statements, please see the Company's filings with the SEC.

Representing the Company today are Jay S. Yoo, Hanmi's President and Chief Executive Officer, Brian Cho, Executive Vice President and Chief Financial Officer and 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. Good morning, everyone, and thanks for joining us today.

First, I would like to remind you that all references we are making regarding the fourth quarter financial results will reflect the statement we announced today. We decide to restate our first quarter operating results and amend our Form 10-Q as a result of the findings during the risks and regulatory examination. Our decision indicates our long-standing commitment to ensuring that the loan loss provisions fully reflect economic realities of the day. It requires as well a more differential approach in applying our current methodology to greater than anticipated credit issues in this continued recessionary economy. Such an approach involves substantial shoring up the activities of and the more proactive management of problematic loans by downgrading and modify the loans to substandard, regardless of their performance.

As a result, the first quarter allowance for loan losses was increased by $21 million and the first quarter net loss will be widened to $17.2 million or $0.37 per share. We reported today a second quarter net loss of $9.5 million or $0.21 per share, compared to a net loss of $17.2 million or $0.37 per share in the prior quarter. As we said in this morning's press release, these results point to the continuing recession and the effect on a growing number of our customers. As John Park, our Chief Credit Officer, will report in more detail the effects of the recession are evident in growing delinquencies and an increase in the number of nonperforming loans.

The recession debt began in late 2007 and still very much results, and it continues to have an adverse effect on many southern California businesses. Especially hard hit have been the small to middle sized businesses that comprise a large percentage of Hanmi's customers and dominate the loan portfolio. It is clear that the commercial real estate market has suffered for the deterioration since we spoke with you three months ago. This is evident in the further deterioration in the quality of the loan portfolio. With no quick end to the recession in sight, we continue to diligently monitor loans with the aim of address problem credits in a timely fashion.

Hanmi, like so many financial institutions, continues to be affected by the ongoing recession and we cannot yet say that the worst is behind us. We believe that our liquidity is more than adequate to meet our needs into the foreseeable future. Further enhancing liquidity and improving our loan ratio is a reduction of $160.4 million in the loan portfolio in the second quarter.

But there is some good news. We recently entered into a secured purchase every month with an investor for a total of $11 million in investment capital. The initial investment amount of $6.9 million is in an escrow account. We expect to close the initial investment in the near future upon receiving the necessary regulatory consent. The remaining $4.1 million investment is expected to close by the end of September. Furthermore, we remain in active negotiations with another client institutional investor, regarding a considerably larger infusion of equity capital.

Finally, I would again point to the fact that Hanmi's stock is now stronger than it has been in recent memory. With the appointment of William Stolte in April and Charles Kwak in July, we now have a Board with eight members. Seven of them are independent, each of whom is highly qualified and experienced. Together, they constitute a group that will serve Hanmi well as we address the challenges facing today's banking industry. I will now turn the call over to Brian for the review of our operating results. Brian.

Thank you, Mr. Yoo. Good morning, everyone. As usual, I will discuss key issues and related strategies.

Let me first add some color to the $21 million we added [into our cost portfolio] in our first quarter. We determined that a qualitative (inaudible) to keep pace with the deterioration of our asset quality in this downturn of the economy. We accordingly raised two factors used in the qualitative portion of the reserve, resulting in our $11.7 million increase in the fourth quarter and the remaining increase of $9.3 million was mainly caused by our (inaudible) downgrading or modified loan, as Mr. Yoo addressed.

Since last year, the economy has been a hot topic in this banking industry. To address that issue, we deployed our core-deposit campaign from December last year to early March this year. As we accumulate the ability, we have launched a core-deposit campaign starting in June of this year.

This strategy move was made with Hanmi's 2009 biggest priority in mind. At the expense of (inaudible) we are replacing them with reasonably priced (inaudible) and also existing wholesale funds. Such planned restructuring over our competitive position has been well in progress. While our deposits increased by $218 million to $3.3 billion in the first half of 2009, we decreased (inaudible) by 47% to $432 million from from $818 million at the last year end, excluding [C pack].

In addition, (inaudible) reduced to half, $111 million for the same time period. This planned move on the liability side was a strategy focusing on credit quality in (inaudible). We have and will continue to be very selective in these pending new loans and renewing existing loans, while not impairing profitability. Consistent with this strategy, we made a substantial reduction in loan portfolio. Our (inaudible ) loans decreased by 7% to $3.1 billion and our net loan to deposit ratio has been lowered to 92% at June 30 from 107% six months earlier. As a result, our cash position, including cash equivalence substantially improved and exceeded $380 million at June 30.

Now, I will discuss more about our previously announced deleveraging strategy. As you can tell, in the first half of this year, the loan deduction alone without liability deduction has not (inaudible) the balance sheet deleveraging. Now, we have a team in place, we are able to make many changes in the second half, especially improvements to our net interest margin and ratios.

Let's discuss our net interest margin. As mentioned before, our deposit increase substantially came from the promotional time campaign. These deposits are interest based of 4% or higher and significantly compressed our margin.

However, these have (inaudible) in June and successfully replaced with low cost regulatory deposits. We have already seen an improvement in our average cost of interest bearing deposits, a reduction of eight basis points to 3.37% in the second quarter. In the fourth quarter, we expect a substantial reduction in costs, as approximately $840 million of promotional time deposits will mature. And we will pay below 2% current market rate for them or let them leave. The cash position scheduled with our continuing loan reduction will help us to make these changes possible for the second half of this year.

On the other hand, the loan yield was stable at around 5.46% (sic -- see press release) and we expect it will remain at that level for awhile. Net interest margin in the second quarter was similar to the prior quarters, 2.5%. However, we expect a substantial expansion of the margin in the third quarter because of the deposit cost reduction.

Lastly, let me briefly discuss the status of loan components. Although the income lever has decreased over this prolonged recession, we have seen some positive signs recently. For example, [SDA] secondary market, we sold [$27 million SDA ] loans as our original premiums in July. Also, we spent our core-deposit campaign to help further to increase our capacity related to income which already increased in the second quarter.

As indicated in our earnings release, the noninterest expenses were negatively affected by nonrecurring items, such as FDICs special assessment and OTTI charges in addition to the costs resulting from the enhanced credit delayed procedures. However, when the first of six months of 2009 are compared to the prior years' same period, our cost-cutting efforts have made meaningful progress in the areas under our control, such as salary expenses, professional fees and amortizing expenses. Thank you. Now I will turn the call over to John for our credit.

Thank you, Brian. During the second quarter, we experienced a continued deterioration in the loan portfolio. As we noted last quarter, we continue to use third party analysis to assist us in the ongoing monitoring of problematic credit. Let me address the broader issue of credit quality at the end of the second quarter.

Nonperforming loans increased by $11 million to $167.3 million or 5.3% of total gross loans at June 30, compared to $156.3 million or 4.71% of total gross loans in March 31. I would point out that the first quarter NPLs included approximately $34 million in loans, which are now included in second quarter other real estate owned. I'll come back to this in a moment.

The breakdown on NPLs was as follows; 7.3% were construction loans, 57.7% were C&I loans, including owner/user business property loans, 15.2% were CRE loans, 17.9% were SDA loans and 1.9% were consumer loans. Delinquent loans were $178.7 million or 5.66% of total gross loan at June 30, compared to $164.4 million or 4.95% of total gross loans at March 31. The increase in delinquencies was largely attributable to increases in delinquent business property loans. Given the prolonged recession, we do not expect to see any immediate improvement in this trend in the near future.

The second quarter provision for loan losses was $23.9 million, compared to $46 million in the first quarter. The high provision in the first quarter as Mr. Yoo pointed out, was attributable in large part to the effect of a more conservative grading methodology, whereby any loan that has been modified is automatically classified as substandard and the increased qualitative factor in calculating the allowance for loan losses.

Charge-offs, our net of recoveries for three months ended June 30, 2009 were $23.6 million, compared to $11.8 million for the first quarter. Second quarter charge-offs included approximately 11% in CRE loans, 54% in unsecured business loans and 28% in construction loans. Each metric clearly points to a further deterioration in the loan portfolio as a whole. The allowance for loan losses at June 30 was $105.3 million or 3.33% of total loans, compared to $104.9 million or 3.16% of total loans at March 31, 2009.

Let me now bring up to date on the following problematic loans in the portfolio. The condominium project in Oakland has been foreclosed and is now included in other real estate owned with a carrying value of approximately $25 million. The project which consists of 88 residential and three commercial spaces is now essentially complete. We are looking for a buyer, but in the meantime, we have hired an outside firm to assist us in converting the condos to rental units.

With regard to the low income housing project in Los Angeles, we believe we are making progress. Having reached a settlement with a contractor at a cost of $1.85 million, the property is now out of bankruptcy. An application has been filed for government tax credit that should make the project far more attractive to a potential investor who would then be able to come in and complete the project. We hope to hear from the CRA by the end of third quarter.

Regarding the golf course near San Diego, I noted the last time we spoke that we had put it into receivership with the intention of selling it by year end at breakeven or perhaps for a nominal loss. On a positive note, we have a buyer for the golf course. It is currently in escrow and it's expected to close during the month of August 2009.

I can assure you that we are being diligent in monitoring all problematic loans. We can also assure you that with the increase in qualitative factors in the evaluation of all loans, we will be proactive in provisioning for loan losses in the future. All that said, we face the future with considerable optimism. Although it may be some time before the commercial real estate market recovers, we believe we have the staying power to emerge even stronger when the market does rebound. This completes our prepared remarks. Operator, we are now ready for the Q&A.

Thank you. (Operator Instructions). And our first question will come from the line of Dave Rochester with FBR Capital Markets. Please proceed.

Hi. Good morning, guys.

Good morning.

Question on the loan grading from the first quarter. Would you happen to have the dollar amount of loans that were downgraded as a result of the exam?

There were a couple of issues. One, the main portion is -- as Mr. Yoo stated, that the modified loan, we carried it as a special mention loan. The reason for that was that we felt that it was temporary situation. But in the current environment, that portion has been downgraded and that amount represents -- in terms of additional reserves, that resulted in about $9 million and --

And that's -- the $9 million was the amount of reserves that was allocated to that?

Yes.

Okay.

And in addition to that, we did qualitative adjustment. That was another $10 million -- $11 million for that portion, totaling approximately a little over $20 million.

And the amount of loans that were moved from special mention to substandard was what again?

That amount is -- let's see. During first quarter, we modified about $100 million. The amount we modified in 2008 was about $70 million, so total amount is about $170 million.

Okay. Okay. And the -- would you happen to have the dollar amount of the classified loans? It would be NPAs, plus your substandard loans for the quarter?

You are asking the amount as of June 30, right?

Yes, please.

Classified amount and accrued total of $600 million. That's total on our watch list.

Okay. The watch list, which also includes special mention, you said?

Yes.

Was $600 million and what? I'm sorry.

$603 million.

$603 million. And where was that at the end of the first quarter, since March 31?

Okay. That amount was -- okay. You're -- let me clarify that. You want to know what was classified, right?

Right. Which I -- but you just gave the watch list which included special mention as well as substandard and NPA. Is that right?

Right. Okay.

Okay. And that amount is fine. That's great.

Okay. March 31, that amount was $492 million.

Okay. Great. And just one last one real quick here. You had mentioned the -- some color on the Oakland property. Appreciate that. You talked about converting that from condos to apartments. Is that right? Did I hear that right?

Yes. We are in the process of doing that until the property is sold.

Okay. And in terms of the valuation, have you already marked that to what an apartment valuation would be versus a condo valuation at this point?

Yes. Yes.

Okay. Great. And, sorry, just one last one real quick. I know you guys are -- had mentioned you were in discussions with another potential investor. Do you have a sense for -- up to what amount -- up to what dollar amount of capital you're willing to raise at this point?

Actually, we are still in discussions. There's no number that is coming out yet. However, one thing we are sure is the amount is going to be enough to solve any problem we potentially have. It will satisfy every interested party.

Okay. Great. Thank you.

Thank you.

Thank you.

Our next question will come from the line of Chris Stulpin with DA Davidson. Please proceed.

Thank you. I just tried to get out of queue because the prior analyst just asked two of my questions. But maybe I do want some clarity here. Your TDRs or your restructured loans at quarter end was $170 million. Is that correct?

That is quarter end as of March 31, 2009. That is correct.

Okay. March 31. And what is it as of June -- the end of June -- end of second quarter?

We had additional $60 million in modified loans. As it stands now, we have about $230 million in modified loans.

Okay. With modified loans.

Yes. It is the total modified loans.

Okay. How much is not TDR?

TDR is a portion of them and do you have a number?

I do not have that exact number. I did not pull that number.

Modify the loans as substandard, so we don't have a number for now.

Okay. That's fine. Okay. Thank you very much. I appreciate you taking my call.

Thank you.

And our next question will come from the line of [Julianna Bulica with KBW]. Please proceed.

Good morning or good afternoon.

Good morning. Hi, Julianna.

Hi, how are you?

Fine.

I just wanted to follow up a little bit on the -- you made some comments about turning away renewals. Do you have a sense of what percentage of your renewals you're turning away? How many more -- what can we expect the next couple of quarters in terms of portfolio reductions as a result?

Okay. Actually -- we actually see some migration for the month of June because the -- the promotional time (inaudible)in the beginning of June. Out of the total $183 million matured in June, about 70% of them were transferred into other types of deposit accounts with Hanmi maturity. If you consider funds, (inaudible) loan rate from CD (inaudible) And, yes, that is the majority of this promotional time will originally come from or came from our existing customers. And we expect -- we have about slightly over $1 billion promotional time deposit bearing the interest rate of 4% or higher.

And in the second -- in the third quarter, July, August, September, $840 million out of them, so slightly over 75% of them, will mature. And we continue to deflate them with our regular deposits which is bearing 2% or lower interest rate. But as I addressed on my script, we needed some downsizing of our balanced ship, so we will let some of them leave. Our target is just to recapture around 80% of them and it seems to be going as planned.

Very good. And then on the loan side, you talked about letting some loans run off at renewal due to tightened standards. I was wondering if you have some sense of how much you will let the run off happen on the asset side?

We are projecting to decrease the remaining of the year about $50 million per month reduction.

Actually, our planning committee and funding committee (inaudible) numbers. All I can say -- clearly state is during the first half of the year, our (inaudible) downsizing the loan portfolio. But in the same period, our deposits continued to increase. In the second half of the year, our deposit decrease is (inaudible) well planned now and loan decrease is less than the deposit decrease. In the first half of this year, we decreased our loans by over $20 million, so probably around the same level in the second half, also.

Very good. Excellent. Thank you very much for the color.

Thank you.

At this time we have no further questions in queue. I would now like to turn the call back over to Mr. Yoo for any closing remarks.

Thank you, Lacey. Okay. Thank you for joining us today. We look forward to speaking with you when we report our third quarter results in October. Good-bye, everyone.

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