Hanmi Financial Corp (HAFC) 2009 Q3 法說會逐字稿

Good morning, welcome to Hanmi Financial Corporation 2009 third quarter conference call. At this time all participants are in a listen-only mode. Instructions will follow at that time. (Operator Instructions). This conference call is being recorded today, November 5, 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, 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, level 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 to different from those expressed or implied by forward-looking statements. Such statements are subject to risks and uncertainties many of which are generally hard to predict and beyond the control of Hanmi Financial. Accordingly, actual results may differ materially of those expressed or implied or projected by forward-looking information 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 anticipating results or other expectations expressed in the forward-looking statements, please see the Company's filings with the SEC.

Representing the Company today are Jay S. Yoo, Hanmi's Chief Executive Officer and President, Brian Cho, Executive Vice President and Chief Financial Officer. And Charles Kim, first Vice President and Senior Loan Officer.

I will now turn the call over to Mr. Yoo. Please go ahead, sir.

Thank you. Good morning, everyone. And thank you for joining us today. As many of you are aware, (inaudible), our Chief Credit Officer, recently passed away. We have appointed (inaudible) our leader as interim CCO, pending regulatory approval. He will perform the duties of CCO until a permanent appointment is made, but today issues of credit quality will be addressed by Brian.

As discussed in the morning's press release, our third quarter loss of $59.7 million was largely caused by charges of $38.2 million to establish a $44.9 million failures, allowance against (inaudible) and a portion of the (inaudible) assets. It is not a write off of an intangible asset simply an valuation allowance that can be reversed in the future. In absence of this nonoperative charge, our third quarter operating loss is $21.6 million or $0.46 per share compared to a net loss of $9.5 million or $0.21 per share in the second quarter. The (inaudible) $49.1 million provision of credit losses which replaced the impact of the CRE market on our bottles, again resulted in a disappointing quarter. Responding to the ever worsening credit market we have employed various credit quality management program such as independent loan reviews and collateral reappraisals. We have also updated our ALLL methodology and loan assistance to ensure that our allowance keeps pace in this quickly deteriorating credit mark.

On a positive note I will continue collection efforts including our proactive loan workout (inaudible) reduce our delinquent loan level in the third quarter. Delinquent loan were $151 million. 5.77% of total loans at September 30, 2009. Increased by 10% from $178.7 million, 5.6% total gross loan at June 30 of '09. With this reduced delinquency and higher allowance levy the anticipated credit losses in this prolonged economic down time appear to be well deserved.

We also made important and meaningful improvements in our core banking foundation as we had planned early this year. Our (inaudible) strategy as anticipated result any undue liquidity risk. As a result we have substantially improved our net interest margin while reducing our reliance on volatile funds such as broker deposits and the borrowings. Since we last spoke we have also received $6.9 million in equity capital from leading investment and security company of a Korean investor. We remain in active negotiations with (inaudible) regarding a larger infusion of equity capital.

Before I turn the call over to Brian, let me comment briefly on this morning's announcement concerning two regulatory enforcement orders. As detailed in today's release, as well as in our 8K filing with the SEC, there are a number of items that need to be addressed by the bank. For the most part, they deal with capital liquidity and asset quality. In anticipation of our regulatory orders, we have already taken strategic measures to improve the issues of concern by our regulators. We will continue to implement our plan in collaboration with the regulators to meet the requirements of the orders and resolve the issues in a timely manner.

I will now turn the call over to Brian for more details.

Thank you, Mr. Yoo. Good morning, everyone. Let me first discuss items two major items. Test Adjustments and liquidity matter. And I will discuss credit quality side at the end.

In the quarter, we established a valuation allowance of roughly $45 million against our existing ETA. Under the US GAAP, our valuation allowance must be recognized if it is more (inaudible). During our periodic evaluation, we decided to establish a valuation allowance as of September 30 based on (inaudible) three-year loss. This three-year cumulative loss position was resulting from (inaudible) we provided each year. (Inaudible) the aforementioned cumulative loss position. Although this provision increased expenses and reduced our tangible book value, it did not have an effect on our cash flow. We believe the remaining DTA of $12.5 million to be realized in the first quarter of the year.

I will now turn my remarks to liquidity, which we continue to focus on. In 2009, deposits declined by just $78 million. And such decrease were accompanied by far more decrease of the loan portfolio. As a result, our liquidity remains (inaudible) ratio of around 95% as this quarter ends. The compilation of our liabilities continues to shift toward core funds and away from (inaudible) funds. On September 30, 2009, (inaudible) excluding EBITDA decreases to $366 million. Now representing roughly 12% of total liabilities. Also declined for 160 or so. As I spoke three months or so ago, over $800 million high interest (inaudible) has matured and to a great extent they have been replaced with (inaudible). In fact, net interest margin was up by 52 basis points to 3% in the fourth quarter from the prior quarter 6.48%. In the third quarter the average cost of interest bearing (inaudible) sequentially decreased by 6 to 7 DPs for 2.7% and the average yield on the loan portfolio increased by 4 DPs to 5.5%. We expect to see these trends to continue for the time being. Although to a lesser extent.

Let me now briefly summarize noninterest income and expense. (inaudible) increase the in the third quarter. We believe that this recovery of the secondary market will continue to benefit our noninterest stream going forward. On the other hand, total noninterest expenses sequentially decreased in the third quarter in the absence of nonrecurring items. We believe our continuing effort effectively manage this area across the board. We will carefully monitor areas where we have control such as advertising expenses. Certain expenses however will continue to be seen in the current business environment. They are expenses necessary to address regulatory issues and credit issues.

Now, let's discuss about credit losses and our credit quality. The $49.5 million in the third quarter reflects a continuing deterioration of the credit market (inaudible). Our reserve increased to roughly 125 million. 4.19% of total loans at September 30. A portion of them can be explained by $13 million loans charged off in the quarter. And $16.4 million increase in the FAS114 reserve in connection with the increase of the loans. Our loans increased by $43 million in the quarter, due to the weakened market. As Mr. Yoo mentioned all year, our delinquent loans decreased by $27.6 million in the third quarter to $151 million September 30th. However, (inaudible) loans increased slightly in the same quarter by $7.3 million to $174 million. Such increase were mainly due to our principal loan program which often involves loan modification and TDR loans. Also mentioned various ledgers to address the continuing deterioration of the loan portfolio.

Before we take your questions let me add some color about such programs. During the quarter we essentially completed existing commercial loans. The proposal program is to reassess (inaudible). In this program we reviewed approximately 46% in total of commercial loan portfolio. This process included financial analysis, devaluation of the underlying credit crunch and assessing borrower's intention and ability for repayment (inaudible). In addition we are continuously tightening our lending policies and procedures to improve lending practice and loan monitoring. These activities are also focused on timely identification of problem area credit and appropriate (inaudible) plans. Another program to share with you is the (inaudible), previously (inaudible) project in the first quarter was focused on the single operated property loans. The current (inaudible) project is for the elected commercial loans that caused above average increase.

Now, this completes our prepared remarks. We are now ready for the Q&A.

(Operator Instructions). Ure first question comes from the line of Julianna Balicka of KBW. Please proceed.

Good morning.

Good morning.

I have just a few questions. Maybe if you could give us a little more color and background as to why the investment negotiations are continuing presumably all the way through July 2000 of next year. What's causing a delay? Because I thought that they were presumably going to be finished by the year end. Or maybe I'm wrong about that. But if you could give us a little more ideas as to what is going on in terms of regulator approvals and whatnot on both the Korean and American side.

Well, as we have previously stated we are in actual negotiation with a consortium Korean distribution investor. But we still have to talk to the regulators for getting their approval. Actually we have satisfactorily completed (inaudible) and active discussion about the right size and proper structure which we may get approval from the Fed. That's why it is taking more time than we originally planned. But they gave us sufficient time by July 31 next year. We believe that this project will be completed within the given period.

That's good to see. How are the South Korean regulators approaching this transaction?

We understand the South Korean regulators are very positive and the only concern that we see is Fed approval in the US.

Very good. And in terms of the second investment or leading investment, is there a time frame on when that will close?

Well, as you know the first investment $6.9 million was already invested in September and the second investment the 5%, $4.1 million is scheduled to be invested by November 30. But at this moment I assume that will be delayed.

Is there a reasonable time line and why is it being delayed?

Well, at this moment as we discussed we are actually trying to figure out the right size of the investment (inaudible). There is a chance of combining over 4.1 million. Maybe this combined together with the other transfer, the main one.

That makes sense. I appreciate that. I will step back now and let other people ask some questions.

(Operator Instructions). There are no additional questions in queue. I would now like to turn the call over to Mr. Yoo for his closing remarks.

Thank you. We understand that there are still many challenges ahead of us. The biggest challenge is the credit quality of our loan portfolio. Consequently we are continuously taking all necessary steps to limit further deterioration in the asset quality. And also, with our various initiatives, capital raising efforts and the core focus on the fundamentals of banking. I believe that we see measurable improvements in our asset quality liquidity position and capital levels in the first quarter of 2010. Again, thank you for joining us today. We look forward to speaking with you when we report our fourth quarter results early next year. Goodbye, everyone, and have a great day.

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