Hanmi Financial Corp (HAFC) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hanmi Financial Corporation's fourth-quarter 2010 conference call. My name is Audrey, and I will be your conference moderator for today. (Operator Instructions). I would like to introduce Mr. David Yang, Investor Relations officer. Sir, you may proceed.

Thank you, Audrey, and thank you all for joining us today.

With me to discuss Hanmi Financial's fourth-quarter and 2010 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 off the call with an overview of the quarter, Brian will then discuss our financial performance, and JH 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 fourth quarter and full year 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 very pleased to report that we were profitable in the fourth quarter, the first time we have been in the black in more than two years. Our successful capital raise last year and improved asset quality paved the way to a return to profitability in the fourth quarter.

We earned $5.3 million, or $0.04 per diluted share, in the fourth quarter, which is a significant improvement from the net loss of $14.6 million, or $0.12 per share, in the prior quarter and the $35.9 million net loss, or $0.70 per share, in the year-ago quarter.

For the year, our net loss was $88 million, or $0.93 per share. Our annual loss was also an improvement compared to 2009 when the loss was $122.3 million, or $2.57 per share.

All indicators for asset quality in the fourth quarter improved, with non-performing loans, delinquent loans, and OREOs declining compared to the third quarter and the year-ago periods. The details of our asset quality improvement will be discussed later in the call by our Chief Credit Officer.

The highlight of the year, in addition to turning a profit in the fourth quarter, was a $120 million capital raise completed in July of 2010. This new capital infusion restored our well-capitalized status and helped us to achieve profitability this quarter. We are working with our regulators to complete the requirements to have our regulatory order lifted, but I cannot tell you when that will happen. Our capital ratios are now healthy, and they exceed the levels required for a well-capitalized bank.

Total risk-based capital ratio at year-end increased to 12.2%, compared with 11.6% in the immediate prior quarter-end. At year-end, our Tier 1 leverage ratio was 8.6%, Tier 1 risk-based capital ratio was 10.9%, and tangible common equity to tangible assets was 8.6%.

Capital levels are probably the most important metrics for banks right now, and those ratios should rise incrementally if we continue to book operating profits. Any additional capital we might raise would be used to execute our more aggressive growth strategy.

We understand that Woori Finance continues to work closely with the regulators to achieve approval for the previously-announced transaction. The Woori transaction, which is no longer exclusive, would provide additional capital for growth, either organically or through acquisition. We are also pursuing alternatives with other parties, in case we are not able to complete the Woori transaction.

Now, our increased capital base and strong liquidity allows us to shift our strategy to a moderate growth mode. We are currently putting our best efforts to generating quality loans and bringing back our former customer base that we lost when our viability was uncertain.

As you are aware, two of our peer banks have announced that they will merge. Our niche market has always been a highly competitive space, and we believe change creates opportunities.

The disruption in the market that is a natural part of the merger process will certainly provide opportunities for us. It will give us a chance to talk with new customers about advantages of banking with Hanmi, and it may also offer opportunities for us to hire new people as those organizations consolidate their staffs. With good brand recognition, we will continue to upgrade our customer service and strive to provide innovative bank products that meet our customers' evolving needs. While we wish them well, I can assure you that we'll be working to make the most out of the changes that are coming.

Although we cannot predict our future without consideration of the overall economic cycle, we believe that the 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. Welcome, everyone.

As Jay just mentioned, in the last quarter, Hanmi finally recorded a profit, driven in large part by the substantially lowered loan loss provision. The fourth-quarter $5 million provision represents a 77% reduction as compared with the $22 million in the preceding quarter and 94% reduction compared to the $77 million for the like quarter a year ago.

Our reserve requirement at year-end and the necessary provision in the quarter decreased, as a result of our proactive responses to the problem credits over the past two years, including timely charge-offs and active note sales, leading to fewer NPLs and delinquencies. With those changes, our credit profile has clearly shown a positive trend over the past few quarters.

Our balance-sheet strategy to reduce long-term assets, including the sale of nonperformers, continued during the quarter. Our loan portfolio decreased by $127 million in the fourth quarter to $2.8 billion, and total assets also decreased by a little over 2% in the quarter to $2.9 billion.

On a positive note, this strategy helped us to improve our asset quality and liquidity, as we planned. Our liquidity preservation strategy also continued where funds from the note sales were placed into liquid assets. Liquid assets, including cash and marketable securities, increased to $664 million at the quarter-end, eliminating liquidity concerns.

On the liability side, the continuing emphasis on superior service allowed us to build core deposits and, at the same time, to reduce wholesale funds and rate-sensitive deposits. While deposits are down by 2% in the quarter and 10% over the year, the deposit mix and funding costs improved. As of December 31, our demand deposits represented over 22% of total deposits, compared to 20% a year ago. We now have no brokered deposits as compared with $200 million level a year ago.

Let me discuss our net interest margins. In 2010, the reduction of NPAs and the improved deposit mix increased our margin by 71 basis points to 3.55% from the prior year's 2.84%. On a quarter-to-quarter comparison, our loan yield and deposit costs improved, as I anticipated at the last call.

However, as a result of higher level of liquid assets, our average yield on earning assets decreased in the quarter and offset the said benefits from loan yield and deposit costs. We expect that, over the coming quarters, our margin will moderately expand as our sale of nonperformers and repricing of high-cost CDs continue, where investment yields are stable.

Lastly, I will touch on noninterest components briefly. Details are available in the morning's release.

Noninterest income was $6.1 million for the fourth quarter and $25.4 million for the full-year 2010. These numbers are substantially lower than those for the prior-year same periods. Such decreases were mainly caused by our deleveraging strategy over the past years, on top of the slowed business activities during the recession. In addition, the Dodd-Frank Act reduced fee income on deposit accounts for all banks, including us. As we return to expansion, we hope to rebuild the noninterest income base going forward.

Noninterest expense was $21.7 million this quarter, down 10% from the prior quarter. Low OREO-related expenses and professional fees helped reduce overhead costs in the fourth quarter, but such expenses were significant in the earlier quarters and elevated the annual overhead for the fiscal 2010. Therefore, for the full year, operating expenses were up 7% at $96.8 million, from $90.4 million in 2009.

We anticipate reduction of operating expenses over the coming quarters in the absence of significant nonrecurring charges we suffered in the past years. For now, our OREOs were down to a normal level, around $4 million, fully discounted at their fair value, and most assets whose value would be vulnerable to the economic changes have already been taken care of.

I will now turn the call over to J.H. for a discussion of the credit matters. J.H.?

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 and assets, total delinquencies, and provision for loan losses have all decreased during the past three consecutive quarters. Nonperforming loans decreased by $25.7 million to $169 million from $194.7 million at the end of the third quarter and by $50.1 million from $219.1 million at December 31, 2009. Nonperforming loans were 7.45% of total gross loans at year-end, compared to 8.13% at September 30, 2010, and 7.77% a year ago.

It should be noted that approximately 25%, or $43 million, of the nonperforming loans were current in payment at December 31, 2010. At the fourth-quarter end, $68.4 million of all nonperforming loans were owner-occupied property loans, $21.1 million were non-owner-occupied commercial property loans, $26.8 million were land loans, and $19.1 million were construction loans. The remaining C&I loans comprised $30.6 million of the nonperforming loan total.

Total delinquent loans decreased by $37.7 million to $147.5 million from $185.2 million at September 30, 2010, and by $38.8 million from $186.3 million at the end of 2009. The proactive approach to resolving problem credits in 2010 has helped reduce delinquent loans that are not included in the nonperforming loan total to $21.5 million at December 31, 2010, from $41.2 million at the year-end 2009.

Likewise, non-accrual delinquent loans decreased to $126 million at December 31, 2010, from $145.1 million at the end of 2009.

The total allowance for loan losses has decreased significantly, totaling $146.1 million, or 6.4%, of total gross loans at year-end, compared to $176.1 million, or 7.4%, of total gross loans at the end of the third quarter. The total allowance at December 31, 2009, was $145 million.

The coverage ratio of the allowance to nonperforming loans increased to 86.4% at December 31, 2010, compared to 66.2% a year ago and slightly decreased compared to 90.4% in the prior quarter. The quarter-over-quarter reduction in allowance was a direct result in a significant decrease in problem assets, as well as overall gross loans.

The net charge-offs were $35.2 million for the fourth quarter of 2010, down from $57.3 million in the fourth quarter of 2009 and up from $21.3 million in the third quarter of 2010. For 2010 year to date, net charge-offs were $121.9 million, compared to $122.6 million in 2009. Of the total fourth-quarter charge-offs, $29.9 million was in CRE loan charge-offs, which included $10.6 million in partial charge-offs of loans with collateral shortfalls, as well as $14.3 million in charge-offs from loans held for sale and $5 million in losses taken from note sales.

As of the end of 2010, our provision for loan losses decreased by $17 million to $5 million from $22 million at the end of the third quarter and by $72 million from $77 million at December 31, 2009. Despite the quarter-over-quarter increase in net charge-offs noted previously, provisioning expense decreased due to the continuing improvement in remaining asset quality, as well as the reduction in overall gross loan balance.

During the fourth quarter of 2010, we continued to actively pursue the sale of problem assets at competitive discount rates. We closed the sale of 29 notes with a carrying value of $28.6 million. For 2010 year to date, we sold 87 loans with a carrying value of $156.8 million.

Sale of OREO assets continued during the fourth quarter, with five properties sold for net proceeds of $17.1 million. In 2010, OREO sales generated $25.9 million in net proceeds on the sale of 18 properties. OREO, as of December 31, 2010, totaled $4.1 million, down from $20.1 million at September 30, 2010, and $26.3 million a year ago.

In 2011, we expect to see continuing improvements in the bank's asset quality. We will maintain our proactive approach to portfolio management and implement any enhancements necessary to build upon the foundations for a more successful future.

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

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

I have a few questions, if I may, please. They're a little bit all over the place, but to begin with, a little bit more on the asset quality. Of the charge-offs that you charged off, $35 million in your reserves were reduced by $30 million. And I wanted to know what of the $35 million that you charged off was already in the reserves?

The charge-offs were $35 million charge-off amount. The gross charge-off was $37 million. And there was two parts. Many of them were partially charged off already. So, in the -- but some reserve amount is also established before we finally charge off these loans. So, did you find the number?

Most of our charge-offs already is reserved as impaired loans. And partial charge-offs due to collateral shortfalls was $12.3 million, and note sale charge-off is already impaired as NPL loans, as $5 million, and also we charged off $12.5 million held for loan sales. So, we are going to sell these notes sooner or later. That amount is $12.5 million. That means most of it charged off in fourth quarter were already in reserve.

So, I'm not sure, so of all those amounts, what is the dollar amount of charge-offs in the fourth quarter that came from brand-new loss that was not previously reserved? What's that one single number, please?

Let me try, actually. Based on our CCO's explanation, slightly over $12 million was new charge-offs for marked to market loans. So, marked to market for the loans scratched by available for sale for loans, for $12 million plus is brand-new charge-offs.

So kind of following up on this topic, then, in terms of the reserves that are on your balance sheet right now...

I clarify that amount. Out of $37.8 million charged off, $15 million is new charge-offs, so remaining $22.7 million is already reserved as impaired. So, $15 million is the new charged-off amount.

Okay, and then -- thank you. And on the reserves that you have right now on your balance sheet, how do you break that down between specific reserves, quantitative reserves, and qualitative?

At the fourth-quarter end, approximately 13% of the total impaired loan has been set aside for FAS 114, specifically, and a 4.4%, or $89 million of the total gross loans has been reserved for FAS 5. And 1.3%, or $26 million, is Q factor that is a qualitative.

So, $26 million of the reserves right now is qualitative.

Yes.

$89 million is (multiple speakers)

General [to general].

$89 million is the general reserve, right?

Yes, ma'am.

Okay. So the difference is specifics.

Yes, right. $29 million.

Okay, and then $29 million is specific.

Yes.

Very good. And in terms of the securities -- jumping a second to the securities, you had redeployment into higher-yielding securities versus previously in cash. What kind of securities have you been buying?

Well, our philosophy of investment management is for liquidity management purpose instead of profit-taking. So, our transaction of investments is very conservative. Meaning, we are investing in government secured -- government-guaranteed securities, such as U.S. agency-sponsored bonds, or asset-based security pool, and so on.

Okay. And in terms of the first quarter, with the cash amount that you have on your balance sheet right now in Fed funds and in cash, what is your target in terms of redeploying that back into securities and/or loan growth, should it materialize?

Well, as I said last time, the lending market in our niche market is not very active at this moment. So, although we try to reactivate our marketing activity, I cannot guarantee we need more -- we are purchasing more loans than the charge-offs or we take it off from the portfolio. So, we don't need much use or much need of funding.

So, certainly we are -- but as you know, the investment market is not very attractive at this moment, either. So, either over short-term or midterm note is very low, so we are deploying our money into short-term to midterm U.S. guaranteed securities for a while, and maybe ticking up a little bit over the yield, and not too much.

Okay, That makes sense. And then, if I can jump back to asset quality for a second, what were the inflows to non-accruals this quarter, please?

During the fourth quarter, the impaired inflow is $34 million, and it's out, it's $41 million.

And what are the accruing troubled debt restructurings?

Let me see. Accrual TDR is $47 million, or 63.5% to total TDR.

And then, in your press release, you talked about problem loans -- excuse me, nonperforming loans that you marked for sale. What is -- are there any accruing loans that are held for sale that are...

Not -- only nonperforming loans.

Actually, there are SBA loans available for sale in the amount of $8 million, around. $10 million, around.

$10 million support SBA loans, and it's -- $26.6 million is notes for sale. All notes available for sales are nonperforming loans.

Okay, that makes sense. In terms of the OREO sales that you sold this quarter, what was the discount off of carrying value?

Actually, note sales... We -- our discount rate was -- is 10.6% to net carrying value, but it's 30% to book value.

30% of book and 10.6% to net carrying after the charge-off from this quarter or before the charge-off for this quarter?

He's reporting to contract amount.

Contract -- before partial charge-offs. So, from the carrying value, yes, 10% is the right number.

Okay. Okay. And are these -- that's a probably a little bit better discount than I've seen from other banks. So (multiple speakers) that's good to see. Is that -- are those loans in the greater Los Angeles area? What's the geography?

Geography is around 80% in state of California, and out of state is around 20%.

And the California loans, is that in metropolitan LA or is that in -- further out?

Mostly in southern California, metropolitan.

Metropolitan. Nice to see the better discounts.

Thanks.

Thanks.

In terms of the SBA loan sales, I'm sorry, I did not catch, what were the premiums this quarter? And -- or I guess the gains on loan sales this quarter came from last quarter's sales, right?

Okay, well, actually we made active sales in the first half of last year. And in the third quarter and fourth quarter, because of the slowed lending market in this town, we tried to -- in order to accumulate our loan portfolio. we have not sell any SBA loans.

So, the gain we recognize in the fourth quarter, that's the carryover from the second-quarter sales. So, based on our activity in the second quarter, the premium we had collected was slightly over 11%, and I have seen the similar premium level at this time.

And do you have any plans for selling these loans at all, or are you going to continue to keep them?

It depends on the level of lending activity we can achieve in this year.

Okay. That's right, because they are yielding assets right now, right?

Yes.

Okay. I think those are all of my questions. That pretty much covered -- that I had outstanding. Thank you very much for letting me ask me so many questions.

Thank you.

Thank you.

And if there are no other 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 conference call. We look forward to talking to you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. And thank you, David.

Thank you, Audrey.

Thank you, everybody.