Hanmi Financial Corp (HAFC) 2010 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Hanmi Financial Corporation second-quarter 2010 conference call. My name is Elisha, and I will be your coordinator for today. (Operator Instructions). I would now like to introduce Mr. David Yang, Investor Relations and Corporate Planning Officer. Please proceed, sir.

Thank you, Elisha, and thank you all for joining us today. With me to discuss Hanmi Financial's second-quarter and year-to-date highlights are Jay Yoo, our President and 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 our financial performance, and J.H. Son 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.

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-Qs. 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 second 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 afternoon, everyone, and thank you for joining us today. We reported a second-quarter loss of $29.3 million or $0.57 per share, largely as a result of a $37.5 million provision for credit losses. The second quarter represents a substantial improvement over the loss in the first quarter of $49.5 million or $0.97 per share. Then our provision for credit losses was $58 million.

Asset quality in the second quarter improved with nonperforming loans and delinquent loans both declining from first-quarter levels. I will leave the details of our asset quality improvement for J.H. Son, our CCO, to discuss with you.

Our progress in the second quarter should be measured not by the June 30 numbers, but rather by the most recent news in which we announced today the successful completion of our rights offering and the registered direct offering. The enthusiastic response we received from current shareholders, board members, employees, friends, and the investment community was most gratifying. Thank you to all the investors who have chosen to place their trust and funds with our bank. In total we raised $47.3 million dollars from existing shareholders in the rights offering and $72.7 million dollars in the registered direct offering, giving us $120 million dollars in gross proceeds. This sum well exceeds the $100 million that was the minimum needed to close and satisfies one of the key requirements of Hanmi Bank's regulatory order from the California DFI.

Tomorrow, we will hold our annual stockholder's meeting where we believe we will receive the approval needed to complete the $210 million additional capital based on the Securities Purchase Agreement with Woori Finance Holdings, one of the largest financial groups in Korea. This transaction, which is pending regulatory approval, which will bring in capital sufficient to explore new opportunities and should close in the third quarter.

In addition to raising new capital, we continue to focus on fully complying with regulatory actions to improve asset quality and sustain liquidity. As we noted last quarter, 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.

Since we have now gained positive momentum from our successful capital raising efforts, Hanmi is ready for positive change. We believe that change can only come if we learn from our past mistakes and strive to become one of the best performing banks.

We will build from within and continue to maintain effective risk management with particular focus on sound credit underwriting, review and monitoring system. But foremost, we will strive to attract our former customer base by introducing highly differentiated products to meet the changing financial needs of our customers.

Once the Woori investment is completed, we will be able to gain competitive advantage with access to Woori's infrastructure and global network and allow us to upgrade our level of service that we provide to our customers. Once again, Hanmi will regain stability and subsequent growth, which will reflect positively in the investment community.

Today is a new day for Hanmi and a key turning point which we owe to our customers and shareholders. We would like to ask for your continuous support and interest so Hanmi can once again become the leading Korean-American bank and beyond. Thank you.

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

Thank you, Jay. Good afternoon everyone. In addition to the success of our stock offerings announced today, I'm glad to report that our liquidity risk is well subdued with $440 million cash and marketable securities as of June 30. Consequently, we are gaining momentum to reduce our reputational risk, which is a major source of competitive advantage in community banking. In the second quarter, loans and total assets decreased $179 million and $103 million, respectively. As discussed at the last call, these reductions were designed in advance for credit quality management, through sale of non-performers in addition to routine loan amortization and charge-offs. In the second quarter of this year, we sold $76.6 million in notes and $3.3 million in OREO, on a net book value basis.

On the liability side, the 2010 marketing slogan "Competition with Superior Service" continue to increase our core deposits while reducing wholesale funding and rate sensitive deposits. Our non-time deposits increased to $1.14 billion dollars, representing 44% of total deposits at this second quarter-end, as compared with $1.06 billion and 32% a year ago. During the same 12 month period, time deposits decreased by $789 million. I'd like to point out that we had no brokered deposits now as compared with $432 million a year ago and these are the primary reason of deposit decrease. Borrowings from Federal Home Loan Bank were also reduced to $154 million as compared with $211 million a year ago.

With continued reduction of loan portfolio, total interest income declined to $36 million, a decrease of 5% from the prior quarter and 24% from a year ago. As a result of higher level of liquid assets, our average yield on earning assets decreased to 4.9%, as compared with 5.13% and 5.09% for the first quarter this year and the second quarter last year, respectively. Interest expense, however, declined more, to $10 million in the second quarter, a drop of 8% from the prior quarter and a 60% decline from a year ago. And the aforementioned changes in our deposit mix has lowered our funding cost as well by 11 basis points to 1.73% in the quarter from the prior quarter's 1.84% and by 146 basis points from 3.19% for the second quarter 2009.

We expect over $0.5 billion worth of time deposits to mature in the second half of 2010. Considering their weighted average cost is 1.85% and the average time deposit rate we are currently offering is around 1.6%, we do expect further decrease in our funding cost. We also expect the improvement in margin going forward as the surplus cash would have been deployed to higher-yielding earning assets.

Let me briefly touch on the other components of our income statement with details available in the morning's release.

Non-interest income fell 5% compared to the prior quarter and 12% year-over-year reflecting lower service fee income following the overall decline in economic activities. Last year's non-interest income also included a significant gain from securities sales. On the other hand, in the second quarter, we resumed to recognize gains from the sale of SBA loans as I discussed at the last call and we expect this SBA loan sales gain continue to contribute to our non-interest income.

Non-interest expense declined this quarter to $24.8 million from $26.2 million in the first quarter and $25.6 million a year ago. The higher non interest expense in the first quarter was caused by a one-time valuation expense for a foreclosed property. Year to date operating expense was up 16% to 51 million from $44 million in the first half of 2009. The higher rate of FDIC assessment and OREO valuation expenses were the main drivers to this increase. Going forward, the necessary professional helps for regulatory issues and asset quality control continue to be a challenge to our cost savings efforts.

Lastly, no tax benefits for any operating losses is recognized this year other than small accounting adjustments after a valuation allowance was established last year against our deferred tax assets.

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

Thank you, Brian. Over the past few years, credit quality has been a growing concern for many banks. In response to the concerns in prior quarters, we have implemented a restructuring of loan departments to streamline the monitoring process and applying stricter loan grading procedures. In addition, we have continued to proactively identify risks in the loan portfolio and determine the appropriate plan of action. While we are still in the process of strengthening our overall asset quality, we have begun to see an improvement in our numbers.

As of June 30th, non-performing loans decreased by $20.1 million to $242.1 million from $262.2 million at the end of the first quarter. Non-performing loans were 9.67% of total gross loans at June 30th as compared to 9.77% at March 31st, 2010. However, it should be noted that approximately 24% or $57.8 million of the non-performing loans were current. As of the end of the second quarter, $114 million, or 47.1% of all non-performing loans, were owner-occupied property loans; $42.9 million, or 17.7%, were non owner-occupied commercial property loans; and $35.8 million, or 14.8%, were land loans. Remaining C&I loans comprised $36.5 million, or 15.1% of the non-performing loan total.

Delinquent loans decreased by $30 million to $206.1 million from $236.1 million at the end of the first quarter. Delinquent loans were 8.23% of total gross loans at June 30th as compared to 8.8% at March 31st, 2010. Of the $206.1 million in total delinquent loans, $21.7 million were loans between 30 to 89 days past due and on accrual status.

The allowance for loan losses totaled $176.7 million, or 7.1% of total gross loans as compared to $177.8 million, or 6.6% of total gross loans, at the end of the first quarter. Despite the slight decrease in allowance total, allowance coverage increased 50 basis points due to the $179.6 million decrease in total gross loans to $2.5 billion at June 30th from $2.68 billion at March 31st, 2010.

The net charge-off totaled $38.9 million for the second quarter of 2010. This marked a $12.5 million increase from the first-quarter total of $26.4 million. The increase was mainly due to $32.6 million in net CRE loan charge-offs during the second quarter, which included $22.1 million in partial charge-off of loans with collateral shortfalls as well as $10.6 million in losses taken from note sales.

During the second quarter of 2010, we actively pursued the sale of problem assets at competitive discount rates. We closed the sale of 31 notes with a net book value of $76.6 million. Included in the note sales were $10.5 million in loans secured by car washes, $16.2 million in gas stations and $40.7 million in motels. We have specifically aimed to reduce concentrations of these higher risk property types.

During the second quarter, provision for loan losses decreased by $20.5 million to $37.5 million from $58 million at the end of the first quarter of 2010. The decrease in loan loss provision was due to the reduction in overall gross loan balance as well as the aforementioned management of high risk and problem assets.

Based on the improvements made during the second quarter of 2010, we expect to see more progress in the management of our loan portfolio. Going forward, we will continue to seek proactive solutions to monitor and strengthen our asset quality. In addition, we will further enhance our procedures for new loan production, including improved underwriting and stricter guidelines for approval. Through our diligent efforts, we hope to lay the foundations for carefully planned and controlled re-growth following our successful capital raise.

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

(Operator Instructions). Julianna Balicka, KBW.

Good Afternoon. I have a few quick questions, please. One, I'm sorry if you repeated some of the numbers on the call, but if you can just highlight what are the new loan originations this quarter?

This quarter we originated $7.4 million for the second quarter.

$7.4 million?

Yes.

That is C&I or CRE?

That was C&I.

C&I? Very good. And what kind of pricing are you originating C&I loans at?

Ordinarily we priced around 5.5 fixed-rate through 6.5 fixed rate. Where it is variable, Wall Street prime plus at 1.5 or 2 points.

Very good. And then in terms of increased line utilization from existing borrowers, do you have any borrowers that are beginning to use their lines draw down on their C&I lines?

Well, it depends on the sector in the community. Especially the hospitality and restaurant business, it is a little bit better recovery in both. So they expand some borrowing from their line.

That is interesting. Okay.

And also, in order to generate property interest income, the bank has taken steps to extend a new loan subject to the strict application of a sound credit analysis, loan policy and guidelines.

Okay. And then in terms of excluding any outflows that you may have in your portfolio that related to some of your credit and capital issues, what is a steady state level that is an ongoing paydown of your portfolio paydowns, payoffs renewal?

Monthly amortization is about $10 million.

Yes, about $10 million.

About $10 million, yes.

$10 million per -- ?

Per month.

Per month. So $30 million per quarter is your ongoing steady-state portfolio turnover?

Yes, the monthly payment amortization.

Okay. And in the call, you referenced that you were going to be competitive again with higher differentiated products. So could you expand a little bit about these differentiated products that you are referring to, please?

Julianna, can you clarify your questions?

Yes, in one of the comments on the call you were saying that you are going to attract back your old customer base using higher differentiated products. And I was wondering if you can define or give me some examples of what this differentiation that you were talking about, just so I can understand it since I am not a banker?

Well, if the Woori investment is completed, then, as I said, we can use their infrastructure and global network.. Then we would develop some kind of high-level service to our customers. So we are developing in collaboration with Woori finance team, and we will apply after the completion of the Woori investment. So I cannot tell the details of the type of the product, but we are developing, okay?

Okay, very good. And then finally, on the credit quality, the $242 million of nonperforming assets, do you have any bulk sales planned now that you have the capital to maybe take on greater losses, or how should we thinking about that going forward in terms of reducing that level?

You know, me, this is Brian. You know me. I am very cheap CFO. So I try to maximize our profit and minimize our potential loss. So actually bulk sale is not on our plan yet, and we have sufficient liquidity and with our capital raise, we earned more time. So it may take time, but we try to negotiate loan by loan to minimize our loss.

How many loans is in this $242 million?

Just a minute, we are figuring out the numbers.

I don't have that information available at this time. Can I get back to you?

That is fine. And then final question, of that $242 million, do you have that breakdown by geography?

Sorry. Most of it -- almost 90% is in Southern California right now.

Okay. Very good. Excellent. Well, thank you very much for taking my questions, and I will step back now.

(Operator Instructions). There are no further questions in the queue. I would now like to turn the call back over to David Yang for closing remarks.

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

Ladies and gentlemen, thank you for your participation in today's conference. Have a great day.

Okay. Thank you, everybody.