Hanmi Financial Corp (HAFC) 2011 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Hanmi Financial Corporation's first-quarter 2011 conference call. My name is Melanie, and I will be your coordinator today. At this time, all participants are in a listen-only mode. We will accept your questions at the end of this conference. (Operator Instructions). I would like to introduce Mr. David Yang, Investor Relations Officer. Please proceed sir.

Thank you Melanie. Thank you all for joining us today.

With me to discuss Hanmi Financial's first-quarter highlights are Jay Yoo, our President and Chief Executive Officer, Mark Yoon, Senior Vice President and Deputy Chief Financial Officer, who will be standing in for our CFO for personal reasons, and J. H. Son, Executive Vice President and Chief Credit Officer. Jay will begin with an overview of the quarter. Mark will then discuss our financial performance, and J. H. will conclude with a review of credit quality. At the conclusion of the prepared 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 press release outlining its financial results for the first quarter of 2011, which can be found on our website, 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 again this quarter, adding to the turnaround that became apparent in the prior quarter. We earned $10.4 million, or $0.07 per diluted share, in the first quarter, which is nearly double what we earned in the prior quarter and a significant improvement from the net loss of $49.7 million, or $0.97 per share, in the first quarter of 2010.

All indicators for asset quality in the first quarter improved with nonperforming loans, classified loans, and OREOs declining compared to both the prior and year-ago quarters. Our successful capital raise last year and the improved asset quality paved the way for our return to profitable operations. We see these results as encouraging and that we are indeed on the right path.

Moving forward, we will continue to work diligently to meet the requirements of our regulatory order with the goal of having all restrictions lifted as soon as possible. We believe we have complied with substantially all of the regulatory requirements.

The capital we raised last year and the continued improvement in earnings brought our tangible equity ratio up to 9.1% at the Bank level. The result is still below the 9.5% ratio requirement of the Final Order. However, all of the Bank's regulatory capital ratios exceed the levels required for a well-capitalized bank. To meet that requirement and to further strengthen our Bank's capital levels for future growth and unexpected events, we are actively considering various alternatives for raising additional capital, including Woori Finance's proposed investment, and we expect to make progress during the second quarter of 2011.

We feel strongly that the worst is behind us from a credit quality standpoint and feel good about our prospects for 2011 and beyond. I would like to emphasize that while the credit quality improvement continues to be important, we are also focused on positioning Hanmi for healthy expansion in the months to come.

The steps we are taking to improve our prospects for growth in both quality loans and core deposits are as follows. First, to revive our stagnated marketing and restore our strong brand identity, we have engaged Shin-Soo Choo of the Cleveland Indians as Hanmi's marketing spokesperson for the next two years. Under the new branding strategy, we have introduced new deposit products tied with Choo's performance, launched multi-media campaigns and scheduled various community events with Choo. Furthermore, we will make performance-based donations to the Choo Family Foundation, a charitable organization for disadvantaged children. We are very glad to be involved in this great mission with Choo and his family.

Second, to continue to improve asset quality and produce good quality loans, we will continue to invest significantly in our capabilities by hiring talented lenders, providing extensive professional training, and enhancing loan origination, review and monitoring procedures.

Third, to diversify our loan portfolio and increase non-interest income, we have recently hired new managers with proven track records for our Private Banking, SBA, and Seattle loan production office. We also plan to realign our consumer loan department to revive residential mortgage and other consumer loans in the near future. These departments will work with our other credit and deposit offerings to build more as well as deeper relationships with our customers.

That being said, there is still a great deal of work ahead of us. We are committed to acting upon the trust and confidence placed in us by our community, and we will work toward restoring long-term sustainable profitability.

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

Thank you Jay. Good afternoon everyone.

As Jay mentioned earlier, Hanmi recorded another profitable quarter driven in large part by improved credit metrics.

As for the overall balance sheet, we ended the first quarter at $2.9 billion in total assets with $2.2 billion in gross loans and $2.4 billion in deposits. On-balance sheet liquidity remains strong with cash and cash equivalents at $170.4 million and investment securities at $539.2 million.

We continued to invest surplus cash into investment securities. Our securities portfolio was up $125.2 million during the quarter and up $425 million year-over-year. Most securities purchased in the first quarter were US agencies, CMO and MBS. In anticipation of rising rates, we are going to stay short.

Our loan portfolio declined 4% in the first quarter and 19% year-over-year. Our loan portfolio deleveraging continued because of our primary focus on loan quality improvement, not loan growth. A further decline in loans is expected to continue into the next quarter or so, due to sales of NPLs and a relatively weak loan demand. If our strategic initiative to add good quality loans supported by improving economy builds momentum, the declining trend of our loan portfolio is likely to stop and grow slightly in the second half of 2011.

On the liability side, although total deposits declined $35.8 million in the first quarter, our core deposits increased $105 million with offsetting reduction of $141 million for time deposits greater than $100,000. This decline was attributable to reduction in high-cost promotional CDs and deposits raised from rate listing services. This led to a reduced interest cost. We anticipate further improvement in TCD funding cost in the next quarter when the market rates for TCDs continue to remain at or below the current levels.

At March 31, our demand deposits represent 23.7% of total deposits, which increased from 22.2% in the prior quarter and 21.7% a year ago. This continued expansion in demand deposits reflects the core strengths of our banking franchise. With the recent launch of new core deposit products tied with our new marketing spokesperson's performance, we are optimistic about continued expansion of our core deposit base.

On the capital front, we generated additional capital through improved earnings. As Jay mentioned, our regulatory capital ratio for the Bank exceeded the minimum requirements for well-capitalized status. Our next capital raise, together with the potential reversal of our DTA valuation allowance in the future, would significantly enhance our Bank's capital position.

Let me discuss the income statement, where we posted $26.1 million net interest income for the first quarter of 2011. In the first quarter of 2011, while there was a decline in interest earning assets, low cost of funds and improved yields on interest earning assets increased our margin by 18 basis points from the prior quarter to 3.66%.

Low cost of funds in the first quarter resulted mainly from re-pricing of high-cost CDs with lower rates. Yields on interest earning assets in the first quarter improved due mainly to interest recovery on loans that had been returned to accrual status exceeding interest income reversal on loans on nonaccrual status. Over the coming quarters, we expect a slight expansion in NIM due mainly to sales of nonperforming loans, downward re-pricing of maturing CDs, and increasing core deposits.

Our focus on improving asset quality continues to produce positive results and allows us to make no provision for loan losses in this quarter. Our provision in the prior quarter was $5 million and it was $58 million in the first quarter a year ago. Our credit profile is clearly showing a positive trend.

Turning to non-interest income, service charges on deposit accounts declined 4.2% and 15.7% in the prior quarter and the first quarter a year ago respectively. This decline represents a decrease in NSF service charges due to the continued underlying decline in activity as customers better manage their account balances. We experienced $338,000 net loss on sales of loans resulting from a $2.2 million valuation adjustment made to loans held for sale and a $1.9 million gain recognized from the sale of loans held for sale.

As Jay mentioned, one of our 2011 strategic initiatives is to revive the stagnant SBA loan marketing. Once it gains momentum, we will be able to generate more SBA loans and increase gains from selling SBA loans in the secondary market.

A few words about our expenses -- noninterest expenses slightly declined 3% in the first quarter and 19.7% in the first quarter a year ago. We do not anticipate a significant fluctuation in noninterest expenses over the coming quarters in the absence of significant nonrecurring charges that we posted in past years in connection with OREOs. We expect to realize a reduction in FDIC deposit premiums as the rate has been lowered by 9 basis points starting from April 1.

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

Thank you Mark.

As both Jay and Mark have noted in their remarks, we have seen continuing improvement in our overall asset quality. Total nonperforming loans and assets, total delinquencies, and the provision for credit losses have all decreased during the past four consecutive quarters.

Nonperforming loans decreased by $17.3 million to $151.7 million from $169 million at the end of 2010 and by $110.5 million from $262.2 million a year ago. Nonperforming loans were 6.98% of total gross loans at March 31, 2011, compared to 7.46% at the end of December 2010 and 9.77% a year ago. It should be noted that approximately 35.2% or $53.4 million of nonperforming loans were current on payment at March 31, 2011. At the end of the first quarter of 2011, $66.7 million of all nonperforming loans were owner occupied property loans, $13.8 million were non-owner occupied commercial property loans, $22.5 million were land loans, $23.4 million were construction loans, and $22.3 million were C&I loans. The remaining residential mortgage and consumer loans comprise the $3 million of the nonperforming loan total.

Total delinquent loans not included in nonperforming loans were $20.7 million, a slight decrease from $21.5 million at the end of 2010 and down significantly from $68.6 million a year ago. Please note that nonperforming and delinquent loan figures include loans classified as held for sale. At March 31, 2011, the Bank classified $47.6 million in loans as held for sale, of which $27 million were nonperforming loans with an additional $800,000 in performing but delinquent loans. In comparison, we had $36.6 million in loans held for sale at December 31, 2010, of which $26.6 million were nonperforming loans. At March 31, 2010, the figures were $10.1 million in loans held for sale with $4.9 million in nonperforming loans.

As asset quality has improved, we had reductions in reserves for potential credit losses. The allowance for loan losses has decreased significantly, totaling $125.8 million, or 5.79% of total gross loans at the end of March 2011, compared to $146.1 million, or 6.44% of total gross loans, at the end of December 2010.

The total allowance was $177.8 million, or 6.63% of total loans a year ago. The coverage ratio of the allowance to nonperforming loans increased to 82.9% at March 31, 2011, compared to 67.8% a year ago and slightly decreased compared to 86.4% in the prior quarter.

Net charge-offs were $21.6 million for the first quarter of 2011, down from $35.2 million in the fourth quarter of 2010 and down from $26.4 million in the first quarter a year ago. Of the total first quarter charge-offs, $15.1 million were in partial charge-offs of CRE loans with collateral shortfalls and $1.7 million were in additional charge-offs from loan sales.

During the first quarter of the year, we continued to actively pursue the sale of problem assets at competitive discount rates. We close the sale of 18 loans with a carrying value of $27.2 million. Last year, we sold 87 loans with a carrying value of $156.8 million. The sale of OREO continued during the first quarter of 2011 with three properties sold for net proceeds of $1.8 million. OREO as of March 31, 2011 totaled $2.6 million as compared to $4.1 million at the end of December 2010 and $22.4 million a year ago.

In 2011, we expect to see continuing improvements in the Bank's overall asset quality. In addition, we will actively pursue expansion through quality loan production and innovative marketing in a collective effort to achieve ongoing profitability and the reemergence of Hanmi as the leading bank in the Korean American community.

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

(Operator Instructions). Julianna Balicka, KBW.

Good afternoon. I have a couple of quick questions. I'm sorry if you mentioned it in your prepared remarks. On the continued core deposit campaign, what kind of rates are you offering on that?

Our current market rates are around 1% for TCDs for one-year maturity. Money Market is up slightly below the 1% but it's offering at -- in the range of 0.8% to 0.9%.

Great, very good. Thank you. Then I have a couple more quick questions. What happens if you get to the 9.5% TCE that's mandated by the final order organically without an additional capital raise?

So your question is about how are we going to reach the 9.5% tangible equity ratio with organic growth?

No, I'm saying what if you make enough money next quarter or two quarters from now to get to 9.5%? Do you still have to raise capital, or is that -- or are those two separate decisions?

That's -- it's really not separate decision here. I mean we, as Jay mentioned in his speech, we are going to raise the capital to strengthen our balance sheet, as well as to prepare for unexpected events. Although I want to emphasize that, without additional capital, we believe we will be able to reach 9.5%. But then again, our economys still vulnerable to external economic shocks. And so -- and also we have to prepare for future organic growth in the second half of 2011 or next year, so I think we believe -- we still believe that additional capital is required.

Very good. Then I don't know you mentioned this already but what are the classified assets at the end of the quarter please?

Our classified assets as of March 31, 2011, was $380 million, but excluding loans held for sale was $345 million.

So $345 million without loans held for sale?

Yes.

Then in the table where you show the loans held for sale, the SBA line, the $19 million of SBA, are those troubled loans held for sale that are SBA or are those just regular SBA loans for sale?

All SBA held for sale is guaranteed held for sale to the secondary market. That means it's a clean loan. The other-$34.8 million were problem loans to be sold at discount. All SBA loans are clean loans with a guaranteed portion.

Right. That's what I wanted to make sure, what was a problem loan and what wasn't. Okay, very good. Finally, what kind of investments are you purchasing these days in terms of yields and durations?

Yes, since last year, in anticipation of rising rates, we have purchased the short to midterm government agency securities, mostly callable agencies and step-ups and MBS and CMOs. Their weighted average yields are from about 2% to 3%, maybe slightly over 3%.

Okay. Then last question and I'll step back please, if I may? What was the balance of the brokered time deposits, and what was the balance of the funds raised from rate listing services at the end of the quarter, please?

We don't have any broker deposit at March 31, but we do have $127 million, the funds raised from Internet rate listing services.

How much was that at the end of the year?

At the end of the year, it was $170 million.

So it was down from --

We didn't have a broker deposit at December 31 either.

I got it. Perfect. Very good. Those are all of my questions. Thank you very much for taking my call.

Ladies and gentlemen, we show no further questions at this time. I would like to turn the call back over to Mr. Yang for closing remarks. Please proceed sir.

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

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.