Hanmi Financial Corp (HAFC) 2009 Q4 法說會逐字稿

Welcome to the Hanmi Financial Corporation's 2009 fourth-quarter earnings conference call. My name is Regina, and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions). As a reminder, this conference call is being recorded for replay purposes.

I would like to introduce Mr. David Yang, Investor Relations and Corporate Planning officer.

Welcome to Hanmi Financial's 2009 fourth quarter earnings conference call. Thank you for joining us today. With me today to discuss Hanmi Financial's fourth quarter highlights are Jay Yoo, our President and Chief Executive Officer; Brian Cho, our Executive Vice President and Chief Financial Officer; and [J.H. Son], our Senior Vice President and Chief Credit Officer. Jay will start off the call with an overview of the quarter, Brian will then discuss financial performance, and J.H. will conclude with a review of credit quality. At the conclusion of the formal remarks, we will open the session for questions.

In today's call, we will include comments and forward-looking statements based on current plans, expectations, events and financial industry trends that may affect the Company's future operating results and financial position. Our actual results could be quite different from those expressed or implied by our forward-looking statements, which involve risks and uncertainties. The speakers on this call claim the protection of the Safe Harbor provisions contained in the Securities Litigation Reform Act of 1995. For some factors that may cause our results to differ from our expectations, please refer to our SEC filings, including our most recent Form 10-K and 10-Q. In particular, we direct you to the discussion in our 10-K, of certain risk factors affecting our business.

This morning, Hanmi Financial issued a news release outlining its financial results for the fourth quarter of 2009. Please visit our website at www.hanmi.com to obtain a copy. After comments by management this morning, we will open up this call to your questions. I will now turn the call over to Jay.

Thank you, David. Hello, everyone, and thank you for joining us today. I would first like to inform you that we have appointed J.H. Son as our permanent chief credit officer pending regulatory approval. As has been the case for several quarters now, and despite making progress on several fronts, our first quarter financial performance was affected by the challenging economic environment and the declining commercial real estate market.

We reported a first quarterloss of $35.9 million, or $0.70 per share, largely as a result of a $77 million provision for credit losses, and a loss of $122.3 million for year 2009, or $2.57 per share. Although challenging, 2009 was a year of positive change for Hanmi. Looking beyond our bottom-line first quarter and full-year loss, we made progress in executing our strategic plan to reposition Hanmi for consistent, significant and long-term profitability.

We have successfully deleveraged our balance sheet to improve our capital [profile] to withstand the impact of the current economic environment. Further, we have substantially improved liquidity. Our core deposits significantly grew last year, enabling us to reduce reliance on wholesale funding.

We continue to diligently deal with credit issues, especially in the first quarter, we proactively identified problem loans and provided adequate reserve for them, or charged them off. With many economists predicting an economic recovery in 2010, we are hopeful that Hanmi will report measurable improvements in financial performance as the current year progresses. However, with approximately 78% of our loan portfolio collateralized by commercial real estate, much will depend on the extent to which the CRE market mirrors the anticipated improvement in the economy as a whole.

In the meantime, we continue to work on our loan portfolio so we can begin to see decline in nonperformance and net charge-offs in the near future. Most recently, to enhance credit risk management, we have reorganized our credit department by segregating the duties. Most notably, we have split up the duties of loan monitoring and loan review. The key function of our loan-monitoring department will identify potential problem loans while our (inaudible) department will replace problem loans.

Further, under the direction of our new CCO, J.H., ongoing efforts will be devoted to providing training in various areas of credit to junior loan officers to improve and prepare the bank for future organic growth. Our main focus during the first half of 2010 will be to fully comply with regulatory actions by maintaining capital adequacy, improving asset quality and sustaining equity.

To date, we have submitted on schedule, all of the plans and policies stipulated in the regulatory actions and we believe we have substantially complied with all provisions. Our highest priority during the next few months is to successfully raise capital to maintain satisfactory capital ratios.

Let me briefly discuss our capital raising project. The minimum capital injection mandated by the regulators is $100 million by July 31, 2010, in order to bring up the (inaudible) equity capital ratio to above 9%. We are working to raise sufficient capital in the coming months. Having strong capital will not only satisfy the regulatory ratio requirements but will also allow us to steadily rebuild momentum for growth.

Throughout 2010, we will diligently work to- for the same thing, our business competitiveness, mainly by focusing on employee training and education to improve our skill set to gain competitive advantage amongst our peers. We will equally emphasize internal control, risk management and cost [actions] effort. Our goal is to regain our reputation as the foremost Korean-American bank in the country.

I will now turn the call over to Brian for details of our operating results.

Thank you, Jay. Good morning, everyone. Let me begin with our 2010 operating strategy. With our capital management plans, we downsized both our loan (inaudible) by 16% and 10% respectively, and (inaudible) with the SEC to pursue various capital raising options. We will be flexible and persistent in our efforts to raise capital to improve our financial strength. Recognizing that, the balance sheet deleveraging is only short-term solution. We have formulated a robust capital-raising plan and we will make every effort to raise necessary capital in a timely manner.

In 2010, our balance sheet management will be focused on liquidity preservation instead of capital ratio management. With this change in our strategic focus, we will reduce our long-term debt until the capital is raised, while preserving our deposit base to maintain a sufficient level of liquidity. This year, given department-wide restrictions by our newly enacted FDIC regulations, we will launch new deposit products with flexible and innovative features.

In addition, we continue to enhance the quality and level of customer service. These programs are working very effectively so far and we are able to preserve our deposit base and attract new customers without compromising our margin. On the asset side, we will continue to sell nonperforming assets whenever the market is available. In addition, we will maximize the (inaudible) including credit lines from Federal Home Loan Bank and the Fed discount window. I will now discuss our financials for the quarter.

During the fourth quarter of 2009, our total assets decreased by $295 million to $3.2 billion at year-end. The majority of the decrease was attributable to the reduction in gross loss in investment securities, [$558] million and $73 million, respectively. Much reduction was preplanned and implemented through (inaudible), in addition to natural (inaudible) and loan charge-offs.

There was a similar decrease in total deposits, a decrease of $243 million to $2.8 billion at year-end. Both were (inaudible) such decrease was mainly derived from the $169 million reduction of brokered CDs and that our traditional deposit account base was steadily increased over the last year with the success of our core deposit campaign.

Federal Home Loan Bank borrowings slightly decreased to $154 million, leaving us additional borrowing capacity of $416 million at the year-end of 2009, for future use. While total interest income decreased by $2.5 million with regulatory reduction of [only] assets, we were able to increase our net interest income by $1.9 million in the fourth quarter with our well-designed market- deposit marketing and pricing. As a result, out net interest margin was expanded by 46 basis points to 3.46% for the past quarter.

This margin expansion resulted from the fact that most of the expensive promotional time deposits (inaudible) for low cost deposits in the past two quarters, and thus, we consistently enforced our selective lending strategies to improve our loan yield. We expect that this trend of margin expansion will continue for a while with the help of declining deposit rates [seen by the month] in our niche market.

Let me now briefly summarize all the components of the income statement. Details can be found in the [news release]. Noninterest income slightly declined substantially due mainly to the decrease of (inaudible) income, reflecting the slow business of our customers. In the past two quarters, we sold some loans and securities, and from such sales we recognized net gains in the amount of $1 million in the first quarter and $864,000 in the third quarter this year.

Although the sale of (inaudible), we will continue the benefit non-interest income stream. Our planned asset sales could cause fluctuation in noninterest income, depending on the status of the secondary market. Non-interest expense also declined as well. We believe certain expenses necessary to address credit issues and (inaudible) continue to be (inaudible).

Our cost savings effort, however, will continue this year, especially for discretionary expenditures, over which we have control. Lastly, we recognized a tax benefit of $27.5 million on our fourth-quarter pre-tax loss of $63.4 million. After we recognized a [provisional] loss of $45 million against our (inaudible) assets at the third-quarter end, new IRS revenue procedure 2009, page 51, became effective.

This new procedure includes a provision giving an additional tax relief by extending the annual carry-back period to the preceding five years, only for the 2009 federal income tax purpose, from the usual three-year period. With this change, we were able to recognize tax benefits of $31 million for our 2009 operating loss. Also, we (inaudible) in the fourth quarter.

I will now turn the call over to our CCO, for discussion of the loan portfolio and our efforts to enhance credit quality. J.H.?

Thank you Brian. As today's financial results indicate, the erosion in credit quality persisted in the fourth quarter when we reported our record provision for credit losses of $77 million. This reflects both the continuing deterioration in the commercial real estate market and the bank's commitment to establish reserves sufficient to cover anticipated losses within the loan portfolio. As we pointed out last quarter, we will continue to be committed to conservative grading methodology.

Let me now go over the numbers relevant to asset quality. At year-end, approximately $94 million in loans were newly added to [NPR]. Of these, approximately $62 million or 67% was C&I loans and $31 million or 33% were real estate loans. On the other hand, about [$15] million came off the NPR list by either charge-off, pay-off, or bringing loans back to accrual status. The net result is approximately $45 million increase in NPR over the past quarter.

Also, from the total NPR over $219 million, $74 million or 33.8% is current or less than 30 days past due. Out of the current NPR less than 30 days past due, $35.7 million became nonaccrual from accrual status due to collateral shortfalls with a negative cash flow. And from that $35.7 million, $7.9 million was restructured and identified as troubled debt restructured loan.

In addition to NPR, delinquent loans also increased. As of December 31, delinquent loans were $186.3 million, or 6.6% of total gross loans, compared to $151 million, or 5.07% of total gross loans as of September 30. A major factor here was on increasing delinquencies among owner-occupied business property loans and SBA loans. The quarter-to-quarter increase in delinquencies within these two loan categories was approximately $18 million and $13.5 million, respectively.

Net charge-offs for the fourth quarter were $57.3 million compared to $29.9 million for the third quarter. Most notably, commercial term loan charge-offs totalled $30.3 million, including partial charge-offs from owner-occupied and single-tenant property loans. This past October of 2009, CRE guidance was issued requiring proactive and stringent charge-off purchases in the declining CRE market, including charge-off of collateral-deficient CRE loans with negative cash flows.

We will continue to monitor our CRE loans portfolio and actively manage CRE loans in accordance with CRE [guidance]. As of December 31, the allowance for loan losses was $145 million or 5.14% over total gross loans, compared to $124.8 million or 2.19% of total gross loans, as of September 30.

Historical loan ratios- historical loss ratios, we continue to quantify adequate levels necessary for current (inaudible) increased in the fourth quarter always charge-off amount, thus leading to greater [reserve] for loan losses. On the other hand, (inaudible) reserves decreased, and so did overall increased charge-offs.

The bank is currently in negotiations to sell a couple of larger (inaudible). However, with approximately $41 billion in loans between 30 to 89 days past due- past due on accrual status, we expect a potential increase in NPRs to offset the decrease in (inaudible). As a result, no significant change is expected for the aggregate NPA (inaudible).

Let me briefly go over our restructured loans. In the first quarter, (inaudible) loan totalling $7.9 million were classified as troubled (inaudible) restructured loan. Year-to-date, 12 TDR loans totalling [$33 million] were classified as nonaccrual, nonperforming and the collateral-dependent loans.

One of the large TDR loans is [car wash] business in the amount of $8.5 million. All aforementioned TDR loans are [impaired] and have a specific (inaudible) against them.

In terms of our 2010 outlook, there are no indication of stabilization of- in the CRE market. We will continue to revisit the status of the- our CRE loan portfolio to assess the borrowers' repayment ability. As for C&I loans, the number of payment modification requests, especially for those borrowers involved in retail industries, have not decreased.

As Jay previously mentioned, we have a divide of management of loan review and monitoring department into two departments, to strengthen and improve our credit risk management as well as credit quality. And we are constantly monitoring our watch list, as well as past [past due] loss.

Moving forward, we will increase the number of reviews on our loan portfolio by third-party credit reviewers. We are also conducting consistent re-appraisals on all classified loans, and expanding those (inaudible) re-appraisals to include those loans in the overall average risk groups.

We expect our asset quality to remain a challenge for 2010, with the elevated levels of problem assets, results and the charge-offs. However, we feel we are managing our loan portfolio proactively and have our credit risk profile properly assessed and supplemented with adequate reserves.

This completes our prepared remarks. Operator, we are now ready for the Q and A.

Certainly. (Operator Instructions). You first question today comes from the line of Julianna Balicka with KBW.

Good morning. Thank you for taking my questions. I wanted to find out a few things, if you don't mind. One, can you update us as to the date of your most recent regulatory examination?

Well, Jay just completed the target examination and we are expecting an action meeting very soon.

Very good. And in terms of your deleveraging strategy, which looked to have been pretty effective this quarter, do you have any expectations for ongoing deleveraging in the next two quarters?

Well, on my- as addressed on my prepared remarks, the focus of balance sheet management is shifting to preservation of liquidity for this year because our- we already determined we are going to rely on outside capital (inaudible) from outside source for capital ratio management. So our focus is on liquidity management. So probably our reduction of long-term assets will continue, but much less extent compared to last few years. And (inaudible) we keep- we are going to preserve our deposit base, so to increase our cash in liquid assets. So total assets, we don't expect much reduction in terms of total assets.

Okay, that makes sense. And then you had referenced that you had been turning away some loan renewals. Do you have a sense of what percentage of renewals you denied, or anything like that?

I am J.H. Son. We do not have (inaudible) percentage of renewals that are turned away. However, we are being more (inaudible) in our interest of borrower's credit, especially in our (inaudible) decisions in the future.

Okay. All right, that makes sense. And then finally, and I'll step back and let someone else ask some questions, you mentioned a restructured loan balance and also the 30 to 89 delinquent loan balances in your remarks. And, unfortunately, I was not writing fast enough to write that down, so do you mind repeating that, please?

This is J.H. again. The $186.3 million in delinquency loan includes nonaccrual loans. Over the total delinquent loans, $41.2 million are loans between 30 to 89 days past due, and $145.1 million are loans over 90 days past due along with nonaccrual loans over 30 days past due.

And then do you have the amount of troubled debt restructuring, please?

Yes, troubled loan is- during the fourth quarter of 2009, restructured were verified $47.5 million. As of December 31, the bank had $33 million in loans identified as TDRs.

Very good. Thank you very much for taking my question.

Sure.

Yes.

(Operator Instructions). And if there are no further questions in the queue, I would like to turn the call over to Mr. David Yang for his remarks.

Thank you for listening to Hanmi Financial's Fourth Quarter Earnings Conference Call. We look forward to talking to you next quarter.

That's everybody.

Yes.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.