Hanmi Financial Corp (HAFC) 2010 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Hanmi Financial Corporation's third-quarter 2010 conference call. I would now like to introduce Mr. David Yang, Investor Relations and Corporate Planning Officer. Please proceed.

Thank you and thank you all for joining us today. With me to discuss Hanmi Financial's third-quarter and year-to-date highlights are Jay Yoo, our President and Chief Executive Officer; Brian Cho, Executive Vice President and Chief Financial Officer; and J.H. Son, Senior Vice President and 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. 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 Forms 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 third 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 are all experiencing challenging times, but these challenges also bring new opportunities. Our successful capital raise in July and the improvement of our asset quality substantially improved our third-quarter results.

The net loss for the quarter decreased to $14.6 million, or $0.12 per share. This included a $22 million provision for loan losses. We posted a net loss of $49.5 million and $29.3 million, respectively, for the first and second quarter of this year. So, this quarter's result represents a continuing improvement in quarterly operational results.

All indicators for asset quality in the third quarter, improved with nonperforming loans and total delinquencies, both declining compared to prior quarters. The details of our asset quality improvement will be discussed later in the call by our CCO.

The highlight of the third quarter was the successful completion of the $120 million capital raise, which returns the capital ratios of the bank to meet the threshold for being considered well capitalized. We are grateful for the response from our shareholders, board members, employees, and the community. 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 from existing shareholders in the rights offering and $72.7 million in the registered direct offering, providing us $120 million in gross proceeds.

Now that we have the capital, we expect to finalize our strategic plans and other compliance efforts by year-end.

We also expect to complete an additional capital raise of $210 million based on the Securities Purchase Agreement with Woori Finance Holdings. Our future strategic partner is well equipped with a global network and wide variety of financial resources. I believe that with this competitive advantage, Hanmi will be able to provide our market with greater convenience and utility.

We are now developing in conjunction with Woori Finance new products and services that will be launched upon the closure of the Woori transaction.

In the fourth quarter, we will continue our efforts to improve asset quality through the sale of nonperforming assets and proactive response to problem loans. On the other hand, our sufficient liquidity allows us to shift our strategy to a moderate growth mode.

We are currently putting our best effort to generate quality loans and to bringing back our former customer base that we lost when our viability was uncertain. Although we cannot predict our future without consideration of the overall economic cycle, we believe that our successful execution of our plans will ultimately be rewarding for our stakeholders who have shown patience and support throughout. Thank you.

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

Thank you, Jay. Good afternoon, everyone. With our improved capital position, we are pleased that our liquidity remains strong and credit risk has been well managed in the third quarter.

With our capital raise in July, our total assets increased by $53 million in the quarter. In particular, our highly liquid assets, cash and net marketable securities, increased by $166 million to $608 million at this quarter end. This increase was mainly driven by our liquidity preservation strategy, where funds from the capital raise and note sales were placed into such liquid assets.

Our strategy to reduce long-term assets, such as for-sale nonperforming assets, continued during the quarter. This strategy reduced our loan portfolio by $109 million in the third quarter, and more importantly, helped us to improve our asset quality and liquidity. Our CCO will discuss more details on the asset quality.

On the liability side, the continuing emphasis on superior service over higher rates allowed us to build core deposits, such as demand deposits, and reduced wholesale funds and rate sensitive deposits.

For the past nine months, our deposit mix and funding costs are greatly improved, while deposits are down by $222 million. As of September 30, our demand deposits represent over 22% of total deposits, which increased from 20% at the last year-end.

The $200 million brokered deposits we had nine months ago are now all gone, and FHLB borrowings remain at the $150 million level. As a result of higher levels of liquid assets, our average yield on earning assets slightly decreased in the quarter. And as a result, the net interest margin was down a bit by seven basis points to 3.49%.

For the year-to-date comparison, however, our margin increased by almost 1% to 3.58% this year, as compared with 2.65% for the first nine months last year. Such margin expansion mostly came from the savings in average funding cost, which decreased roughly by 1% to 1.67% this year from 2.65% a year ago. We expect more margin expansion over the coming quarters as our sale of non-performers and repricing of maturing CDs continue.

Now let me briefly touch on other components of the income statement. The details are available in the morning's release as usual.

Non-interest income was around $6.5 million and $20 million, respectively, for the third quarter and first nine months of 2010. These numbers are a lot less compared to the same periods last year. Such decreases were mainly caused by our deleveraging strategy of the past years.

Decrease of fee income and loan sales gain are in line with the reduction of our portfolios. Such a decrease was also caused by the slowed business activities of our customers during the recession.

We would like to remind you about the changes Jay mentioned earlier; the planned expansion of our product and services, and our strategic changes toward a moderate growth are believed to bring some increase in non-interest income in the near future.

Non-interest expense was about $25 million this quarter and $76 million year to date, which were higher than the prior year's same periods. Such increases were mainly caused by OREO-related expenses, FDIC insurance premium, and securities impairment charges, as discussed in the release.

For now, our OREOs were fully discounted at their fair value, and we don't expect significant expenses or losses for these properties anymore. The FDIC insurance premium decreased in the third quarter, and we expect it will further decrease as our sufficient capital and liquidity improve our risk category.

These being said, we anticipate the reduction of our non-interest expense over the coming quarters, although some additional expenses will be necessary to comply with the newly-enacted Dodd-Frank Act.

I will now turn the call over to J.H. for a discussion of the loan portfolio and credit matters. Thank you, everybody.

Thank you, Brian. As both Jay and Brian have noted in their remarks, we have seen continuing improvement in our overall asset quality.

Total nonperforming loans, total delinquencies, and provision for loan losses have all decreased for consecutive quarters since the first quarter of 2010.

Nonperforming loans decreased by $47.4 million to $194.7 million from $242.1 million at the end of the second quarter. Nonperforming loans were 8.13% of total gross loans at September 30, as compared to 9.67% at June 30. It should be noted that approximately 17.2%, or $33.4 million, of the nonperforming loans were current at the end of September.

As of the end of third quarter, $90.8 million of all nonperforming loans were owner-occupied property loans, $31.1 million were non-owner-occupied commercial property loans, and $29.7 million were land loans. The remaining C&I loans comprised $31.2 million of the nonperforming loan total.

Total delinquent loans decreased by $20.9 million to $185.2 million from $206.1 million at the end of the second quarter. Delinquent loans on accrual status increased to $23.9 million at September 30, 2010, from $21.7 million at the end of the second quarter.

However, delinquent loans on accrual status decreased by $17.3 million from $41.2 million at September 30, 2009.

The net charge-offs reduced to $21.3 million for the third quarter of 2010. This marked a $17.6 million decrease from the second-quarter total of $38.9 million. The decrease was mainly due to improvement in overall asset quality. Of the total third-quarter charge-offs, $11.4 million was in net CRE loan charge-offs, which included $9.7 million in partial charge-offs of loans with collateral shortfalls, as well as $2.5 million in losses taken from note sales.

During the third quarter of 2010, we continued to actively pursue the sale of problem assets at competitive discount rates. We closed the sale of 12 notes with a carrying value of $26.3 million, as well as four OREOs for $2.8 million.

As of September 30, our provision for loan losses decreased by $15.5 million to $22 million from $37.5 million at the end of the second quarter. The decrease in loan loss provision in expense was due to the improvement in asset quality, as well as the reduction in overall gross loan balance.

The allowance for loan losses was stabilized, totaling $176.1 million or 7.4% of the total gross loans as of September 30, as compared to $176.7 million or 7.1% of total gross loans at the end of the second quarter. The coverage ratio of the allowance to nonperforming loans increased to 90.4% at September 30, compared to 73% at the prior quarter-end and 71.5% a year ago.

The continuing signs of progress have been a positive indicator that the Bank's asset portfolio has begun to stabilize. We will continue to implement enhancements that will further strengthen the bank's asset quality and lay the foundations for a more successful future.

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

(Operator Instructions). Julianna Balicka, Keefe, Bruyette & Woods.

I have a few questions, please, if I may. First, a couple of number questions just to fill out the release. One, what is your average and your end-of-period share counts?

I'm sorry?

Your average, your end-of-period share counts. I did not see that in the release. It's possible my computer cut it off.

152 million shares.

At the end?

Yes, as of September 30.

What was your average for the period?

Average for the period? 123 million shares, around.

Very good. And then, in terms of some of -- some filling in some asset quality numbers, what is your accruing troubled debt restructurings -- accruing TDRs?

Accruing TDRs? Could you hold one second? Because we have to dig into our papers

At the end of the third quarter, we have $46.2 million as classified TDR loans.

And these are the accruing TDR?

Yes, accrue -- non-accrued, $10.3 million is on non-accrual and $36.2 million is accrual status right now.

$36.2 million, very good. Then, what is your loans held for sale?

Held for sale is $9.7 million.

$9.7 million as of 9/30?

Yes.

Very good. And then, I was wondering if you can maybe give us a little bit more sense of timing on where the reinvestment approval stands. I know that I saw that in the DFI -- California DFI approved it in August. So, if you can maybe fill us in on what's going on with that process?

Yes. Thank you for that question, Julianna. We are still waiting for the regulators' approval. As you said, one good news is that we've got the approval from California DFI, and now we understand Woori Finance is actively working on to follow-up and respond to the supplementary inquiries from federal reserve board and Korea finance supervising commission.

But however, we cannot anticipate exactly when the approval process will be completed.

Well, in advance of that, maybe you can talk about -- in advance of this approval, what kind of actions are you and Woori working on already internally at Hanmi in order to prepare? And maybe you can talk a little bit more about the products you are developing? Maybe a little bit about are there any policies you're changing, updating? Maybe you are -- are you already kind of anticipating merger integration, so to speak?

As Mr. Yoo already mentioned on his remarks, we are actually -- we are already working with Woori, to develop some products and services that utilize their abundant global network, and also great resources that we don't have.

Such as?

Such as wire transfer and opening a Hanmi account in Korea, in Seoul, Korea, and also, it's still in developing stages. So I cannot state in detail for competitive reasons.

Of course.

However, we plan to utilize their global network with the Korean immigrants in various areas in the world. So that kind of things are on the table.

Okay, very good. Are you making any changes or any sort of things on the back end, as opposed to products, in terms of policies, underwriting, credit administration?

In this SPA (Securities Purchase Agreement), we have the conduct of business provision, which we are required to discuss with Woori in some material changes.

So, for material transactions, if any, we are discussing with them, but they are still prospective investors, not shareholders yet, so they don't have any influence on our policymaking or management role at all. So, they just play as a consultant role. That's the right expression I can put.

Very good. That's good clarification. Appreciate that, and then, maybe if we can then jump -- switch direction, maybe you talk a little bit about the originations from this quarter. What kind of originations did you have this quarter? Maybe talk a little about the SBA lending efforts. That seems to be a popular topic this week.

Well, this quarter, we still -- we are about to reactivate our loan production. So well, it usually takes time to increase our production levels to the normal stages. So, our origination number was not material, but let me have our CCO to clarify more.

The banks will continue to place a priority in improving the bank's asset quality by proactively resolving problem loans in a timely manner.

However, the bank was encouraging new loan production to financially sound customer, who will be subject to strict credit analysis and policy and procedure guidelines.

Production focus will be toward SBA loans in order to take advantage of government guarantee, as well as prospect of generating external income from selling those guaranteed portion in the secondary market. As you know, after the Congress renewed the stimulus incentives for SBA loans on October 1, there has been significant increase of SBA loan demand for the refinance of existing business property loans and construction loans due to the increase of SBA loan amount to $5 million. So, the bank expects an increase of SBA loans for the rest of the years.

Let me add a little bit comment on his remarks to avoid some mislead. The thing is, yes, we expect some substantial increase in SBA loan production.

But as you know, SBA 7(a) loan production is for, say, so remaining balance at the bank is not material, first of all.

And then, although our president says what we're about to change to moderate growth mode, so we are reactivating our loan production. However, we have to stick with our credit crunch/credit quality control strategy. In that sense, we are very stringent in applying our lending policy to new borrowers.

So, in other words, we are going to be very picky in loan origination. On the other hand, we will continue our sales of non-performers. So, probably we are selling more loans than those we sold in second quarter, and a lot more in the fourth quarter. So as a result, I don't expect any increase in our loan balance during the fourth quarter of this year.

That's very helpful, actually. That was going to be my next question about loan sales. And then, in terms of thinking about balance sheet size, you were on a deleveraging strategy. You're moving back into growth. Should we expect any balance sheet changes from investments or funding sites outside of the loan portfolio development?

Well, as I just mentioned, I expect that our loan portfolio still go down.

Right, but I'm saying, should we think about any further deleveraging from the investments paying off some higher cost deposits or fundings, or is (multiple speakers)

Okay. Actually, over the past two quarters, I keep saying we that are not pure balance sheet deleveraging anymore. We try to increase our deposits, so we try to accumulate funds.

But our deleveraging strategies only apply to our long-term assets or non-earning assets. So, we are selling nonperformers, in principal, as your debt strategy will continue.

However, we don't want to compromise our liquidity for whatever reasons, so we try to keep our accumulating funds in the immediately sellable or disposable assets, which is what securities portfolio. So, probably our securities portfolio will increase for a while.

And we actually have more than sufficient funds available at this moment, and we are in the transition time from the fund we collected from note sales and capital raise, putting into marketable securities. And those monies are not going into loan portfolio yet. Do you follow?

Yes. That makes sense. Actually, it's very helpful. And a couple more quick questions, and then I will step back. One, you just kind of reminded me in terms of accumulating liquidity, what are your plans -- or, in terms of the deferred interest that you have on your trust preferreds, are you able to start -- now that you've downstreamed capital, are you able to start paying down again or what are you thoughts in that regard?

Are you talking about interest on trust-preferred securities?

Yes, that was a couple of years ago you started to defer, right?

Right, we started to defer interest. Well, actually, I think every holding company is paying the interest on their trust preferred from the dividend that they collect from their subsidiary banks.

But as you know, we are not able to -- we means Hanmi Bank is not able to pay dividend to their parent company, Hanmi Holding Company -- financial Corp.. So, while in principle the Company has no fund to pay interest on trust preferred until Hanmi Bank starts to pay dividend to the parent, so, for the time being, I cannot say when exactly. For the time being, we have no plan to renew our interest payment on trust.

And then, final question, and I will step back. What were the inflows to non-accruals this quarter, please?

Non-accruals is, let me see -- $13.7 million.

$13.7 million is the inflows? Yes.

$13.7 million in loans, newly added to the NPL category.

Excellent. Thank you very much. Thank you very much for letting me ask all these questions. I'll step back now. I appreciate your time.

If there are no other questions in the queue, I would like to turn the call over to David Yang for his remarks.

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

Thanks, everybody.

Thanks, everyone.

See you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference call. Thank you, David. Have a good day. You may now disconnect.