Hanmi Financial Corp (HAFC) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hanmi Financial Corporation's First Quarter 2010 Conference Call. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to introduce the presentation over to your host for today's conference, Mr. David Yang, Investor Relations & Corporate Planning Officer. Please proceed.

Thank you, and thank you all for joining us today. With me to discuss Hanmi Financial's first quarter highlights are Jay Yoo, our President & Chief Executive Officer, Brian Cho, our Chief Financial Officer, and J. H. Son, Chief Credit Officer. Jay will start out 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 first quarter of 2010, which can be found on our website at Hanmi.com. I will now turn the call over to Jay.

Thank you David. Good morning, everyone, and thank you for joining us today.

As has been the case for several quarters now and despite making progress on several fronts, our first quarter financial performance was again affected by the challenging economic environment and the declining commercial real estate market. We reported a first quarter loss of $49.5 million dollars, or $0.97 cents per share, largely as a result of a $58 million dollar provision for credit losses.

Our focus this quarter has been to raise capital in order to return the Bank to well-capitalized levels. Our efforts to work with investors to complete their due diligence are on-going, and we hope to announce something fairly soon. Until that time, we hope you will understand that we cannot answer any questions in this regard beyond what we say here today, and we thank you for your understanding.

Let me briefly discuss our capital raising project. The minimum capital injection mandated by the regulators is to raise $100 million dollars by July 31, 2010, in order to bring up the tangible equity capital ratio to above 9%. We are working, however, to raise significantly more than the minimum amount. Having strong capital will not only satisfy the regulatory ratio requirements, but will also allow us to steadily build momentum for growth.

We believe that we have a solid opportunity to raise additional capital from investors, who have shown strong interest in our franchise. While there can be no assurances that such capital will materialize, or that it will do so in a timely manner, we continue to pursue the expansion of existing relationships and forging of new ones.

Any new capital commitments that we are able to raise may require regulatory and shareholder approval, depending on the structure of the deal. If so, we anticipate a shareholder vote through a special meeting or at our regularly scheduled annual shareholder's meeting, which is tentatively scheduled near the end of the second quarter. We will keep you informed of our progress.

In addition to diligently pursuing new capital, we are also focusing on fully complying with regulatory actions to improve asset quality, and sustain liquidity. 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.

Maintaining strong liquidity is another high priority for us, because it instills confidence in our customers, helps maintain core deposit levels, and provides flexibility in meeting our cash requirements. With the continuing support of our customers along with the diligent effort of our employees, we have been successful in preserving our liquidity. Brian will expand on this issue later.

We are also continuing to aggressively address the problem assets in our portfolio, as well as further strengthen our loan monitoring and credit review activities. I will leave further discussions to JH. I am very proud of the work our team has accomplished in such a short time and under difficult circumstances. I will now turn the call over to Brian for details of our operating results. Brian?

Thank you, Jay. Good morning everyone. As we discussed in the last call, with Jay also mentioning this earlier, liquidity preservation was an issue for us as a consequence of deposit rate restrictions imposed by the new FDIC regulation. Yet, we are pleased to report that our current deposit base is very loyal to Hanmi, after last year's planned deposit migration. And, we kept our deposit base intact, even with the lower deposit costs. The $99 million decrease in the first quarter didn't come from our core deposit base, but rather from the brokered deposit that matured in the quarter.

At the end of the first quarter, brokered deposits decreased by $134 million to $63 million. Our deposit marketing programs discussed in the last call, in fact, increased our demand deposits by providing superior customer services across the board. We have also kept rate-sensitive depositors, with our feature-enhanced time deposit products.

In addition to strong levels of liquid assets and a stable deposit base, we maintain sufficient contingency funding sources, advance lines from the Federal Home Loan Bank and the Fed Discount Window. As of March 31, the additional borrowing capacities from those lines were $377 million and $239 million, respectively.

On the asset side, following our 2010 balance sheet management strategy, we further downsized our loan portfolio in the first quarter by 5%, which brought loans down by 19% year over year. This 5% or $136 million quarterly reduction was helped by the sale of $34 million dollar worth of NPLs, in addition to the routine amortization and charge-offs. This loan reduction, coupled with a $19 million reduction in securities, decreased our total assets to $3 billion dollars at the first quarter end.

Until the business environment is stabilized, we will continue to sell illiquid assets such as non-performing loans whenever the market is available. Our note sales department launched for this purpose has made good progress and sold $34 million in notes, and $4 million in OREO in the past three months.

As a result of our successful balance sheet deleveraging, total interest income declined to $38.1 million, a decrease of 11% from the prior quarter and 21% from a year ago, and interest expenses, however, declined more, to $10.7 million in the first quarter, a 26% drop from the prior quarter and a 57% decline from a year ago. Net interest income was $27.3 million in the first quarter, down just 4% from the prior quarter and up 18% from the first quarter a year ago. The improvement reflects the higher net interest margin, which grew 23 basis points over last quarter and is up 119 basis points from the first quarter 2009. This margin expansion resulted from our new deposit marketing programs, discussed earlier, and the successful migration of the expensive promotional time deposits in the past few quarters. With the help of lowered deposit rate environment in our niche market, we expect that this trend of margin expansion will continue for a while.

The provision for loan losses decreased to $58 million from the December quarter's $77 million. In the first quarter 2009 the provision was $46 million. The elevated provision in recent quarters were mainly caused by the substantial increase of charge-offs, which raised our historical loss ratios used in ALLL valuation analysis. The provision in all respective periods was well above the rate of net charge-offs and this practice increased our reserve coverage ratio to 6.6% of gross loans at the end of the first quarter, far above our peer average ratio.

Let me now briefly summarize other components of our income statement; and details can be found in this morning's release.

Non-interest income fell 11% for the quarter and 17% year over year, reflecting lower service charges on deposit accounts and other fee income, which is a direct result of the overall decline in economic activities. In addition, gains on asset sales were significantly lower this quarter. In fact, gains from sales of investment securities were $210,000 which was only one quarter of the gains booked in the December quarter and one fifth of the gains from a year ago. In this quarter, we could not book the gain on sale of SBA guaranteed loans, due to the three month deferment requirement from a new accounting pronouncement. We, however, continue to sell SBA guaranteed loans at a reasonable premium and will recognize sales gains going forward.

Non-interest expense increased this quarter due, mainly due to the $4 million valuation allowance we provided on the Oakland condo project we foreclosed last year and now valued around $22 million. Once again, expenses necessary to address credit issues and regulatory matters continue to be significant. We are focusing our cost savings efforts on discretionary expenditures over which we have control.

Lastly, we did not recognize a tax benefit other than a small adjustment in the first quarter compared to a benefit of $27.5 million in the December quarter and $17.2 million in the first quarter 2009. After we established a valuation allowance last year against our deferred tax assets, we do not anticipate tax benefits to accrue for any operating losses for the time being. The December quarter benefit was a result of a new tax legislation benefiting the tax year 2009 only.

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

Thank you, Brian.

As today's financial results indicate, deterioration in overall credit quality continued during the first quarter of 2010. The bank's non-performing loans increased by $43 million, or 20%, from $219 million at the end of 2009, to $262 million at the end of the first quarter of 2010. The quarter over quarter increase of $43 million in NPL was the net result of $103 million in newly added loans to the NPL category and $60 million in loans no longer reported as NPLs. Of the $60 million in loans removed from the NPL list during the first quarter, $28 million was due to charge offs, $20 million was due to note sales, $7.1 million was due to pay off or pay down, and $4.8 million became OREO.

Among the newly added NPLs, Commercial Real Estate loans were the most significant, accounting for approximately $86 million or 83% of the total, indicating continued erosion in the real estate market. There were two large CRE loans that have migrated to NPL category during the quarter. A bridge loan in the amount of $33 million, secured by 29 acres of vacant land for a condo project in Northern California and an $8.5 million loan secured by a 130 room franchise hotel located in Southern California. The bank has been actively seeking potential investors for a selected group of NPLs including the two loans we just mentioned. Under the guidance of our Board of Directors and management, a note sales department was created as part of our ongoing asset improvement strategy.

Of the total NPL balance of $262 million, approximately $218 million or 83%/ consisted of CRE loans. Owner-occupied CRE loans made up 44% of total NPLs, with the largest problem areas being motels at 19%, car washes at 7%, and gas stations at 6% of the total NPL balance. Non-owner occupied CRE loans made up 39% of the total NPLs, with Land loans accounting for 18% of the total, retail properties for 12% and apartments for 5%. Commercial and Industrial loans with no real estate collateral accounted for 11% of the total NPLs. On a continuing basis, we are making a diligent effort to apply the most conservative loan grading and prudent charge-off methodologies. During the quarter, some performing CRE loans were reappraised and partially charged off. The non-performing loan balance increased by $23 million, due to the partial charge-offs. In fact, from the total NPL of $262 million, $95 million, or 36%, were current or less than 30 days past due as of March 31.

The bank's total delinquency, as of the first quarter of 2010, was $236 million. The total delinquency includes $167 million in loans already noted as NPLs. The remaining delinquency between 30 to 89 days totaled $69 million, which is a $28 million increase over the prior quarter figure of $41 million.

Net charge-offs for the first quarter of 2010 was $26 million. This was a $14 million increase over the $12 million in net charge-offs during the first quarter of 2009. However, net charge-offs decreased by $31 million, as compared to the $57 million during last quarter of 2009. Recoveries in the first quarter of 2010 have increased to $3.7 million from $859,000 in the fourth quarter of 2009, through effective collection activities.

Unsecured C&I charge-offs totaled over $13 million during the first quarter of 2010. In addition, C&I charge-offs for both owner-occupied and investor loans totaled $13 million as well.

As of the first quarter 2010, the total allowance for loan and lease losses was $178 million or 6.6% of total gross loans, compared to $145 million or 5.1% of total gross loans at the end of prior quarter. The increase in total allowance is attributed mostly to the increase in FAS 5 general reserves. Due to the increase in charge offs during the past few quarters, our historical loss rates, which are determined by charge-off migration analysis, increased substantially.

All non-accrual loans over $100,000 were impaired and specific reserves were determined, based on FAS 114 impairment analysis. The total outstanding balance of impaired loans was $255 million for the first quarter of 2010. We then impaired reserve over $27 million.

We expect our asset quality to remain a challenge throughout this year. However, we feel we are managing our loan portfolio proactively and have our credit risk profile properly assessed and supplemented with adequate reserves.

Thank you for your attention and now I will open the call for questions.

(Operator Instructions) Your first question comes from the line of Juliana Balicka with KBW.

I have a couple of questions. The first one -- can you talk about the loan sales that you've been doing this quarter in terms of what kind of discounts? I'm sorry if you mentioned it earlier. What kind of discounts you are seeing and who are the buyers and what kind of demand and competition is there out there for problem or potential problem loan sales?

I would say [potentially] on non-performing loans, with the discounts, average over 15%, but not more than 20% right now.

And how do you think that's going to develop over the rest of the year, as it seems like a lot of other banks are kind of trying to get into the business of note sales? Or do you think it's fairly--

--answer to your further questions. Let me qualify our stance a little bit. We are actually offering 15% to 20% discount on our NPL loan book. However, those loans, we already provided in impaired reserve or principal was already reduced by partial charge-offs. So when J.H. started talking about discounts, he was talking about from the original note amount. So, our accounting loss is very negligible, around 3% to 4%. OK?

OK, all right. That makes sense.

So we are focusing on saleable OREO asset and real assets to secure the problem loans, so we are trying to avoid giving additional discounts beyond loan loss reserves allocated for respective loans. We are determined the amount of discount to be given on a case by case basis.

OK, very good. And then in terms of asset sensitivity, as reprice, is there a certain-- I assuming you have some floors, so how far do rates have to rise before you start receiving the benefit of asset sensitivity?

Yeah, some of our loans are having the floor, and the floor is usually, what, 5% to 6%, in this, so-- but the loans-- the balance of the loans which have the floor is about $450 million. However, about $200 million out of that, their floor is too low, and which is already lower than current interest rates. So, about 10% of our loan portfolio, so about $250 million, $270 million of loans, they are subject to floor protection for the borrower so they are, average about 6%, 6.25%. So the borrowers have room of maybe about 0.5% to 0.75% additional interest increase.

In terms of SBA, what are you noticing in the market as a whole?

SBA market was quite active market now and in the first quarter of this year, we actually sold SBA guarantee portion of $3 million to $4 million. The premium rate is still obtained at around 8% level. OK? But as I said on my speech, the FASB 166 required a deferment of 3 months for the buyer's recourse option. So in the first quarter of this year, we could not record any accounting gain, but it was carried over into the second quarter.

And then in the second and third quarter, do you anticipate originating a higher amount than selling higher, or is this going to be a fairly steady run rate?

Probably our production of SBA loans, we actually emphasize on this product, of course, so we have seen some steady growth of the production. But in fact, because you know, Korean-American banks all love this product so there are heavy competitions in the community.

Right. Very good. Excellent. Thank you, and I'll step back now.

And at this moment, there are no questions in queue.

Thank you for listening to Hanmi Financial's first quarter conference call. We look forward to talking to you next quarter.

Thank you all for your participation in today's conference call. This concludes the presentation and you may now disconnect. Have a great day.