Hanmi Financial Corp (HAFC) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Hanmi Financial Corporation's second-quarter 2011 conference call. At this time all participants are in listen-only mode. (Operator Instructions).

I would like to introduce Mr. David Yang, Investor Relations Officer. Please proceed.

Thank you, Melanie, and thank you all for joining us today. With me to discuss Hanmi Financial's second-quarter highlights are Jay Yoo, our President and Chief Executive Officer; Mark Yoon, Senior Vice President and Deputy Chief Financial Officer; 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 JH 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 second quarter of 2011, which can be found on our website at Hanmi.com. I will now turn the call over to Jay.

Thank you, David. Our second-quarter profits mark our third consecutive quarter we were profitable, and further demonstrate that our recovery is underway. We earned $8 million, or $0.05 per diluted share in the second quarter. For the first half of the year, we generated net profits of $18.4 million, or $0.12 per diluted share.

Both the quarter and the year-to-date profits are significant improvements from the net loss of $29.3 million, or $0.57 per share in the second quarter of 2010, and $78.7 million, or $1.54 per share in the first half of 2010.

With the second-quarter profits added to our capital levels, Hanmi Bank has now exceeded the 9.5% tangible equity ratio called for in our regulatory order. We believe we have complied substantially with all of the regulatory requirements.

The other major event that happened in the second quarter was our follow-on offering after we terminated the SPA with Woori Financial. Although the offering was fully subscribed and there was excess demand for our stock, our Board of Directors was not satisfied with the pricing offered and did not believe it to be in the best interest of our shareholders to consummate the offering at that time. With our recent strong profitability and the capital we raised last year, we had the flexibility to make that decision.

We are evaluating our capital adequacy again, given the level and nature of the risks to which we are exposed. With the result of the capital adequacy assessment, our Board will determine whether we will need additional capital. If and when we determine that raising capital is in the best interest of the Company as well as our shareholders, we will decide on a target capital amount, type of offering and timeline, all after careful consideration.

I also want to comment briefly on our business alliance with Woori Financial. Hanmi has maintained a friendly and close relationship with Woori in the past two years. Going forward, our relationship with Woori continues to be one that can benefit both companies. I believe the current alliance will allow us to stay more competitive in our marketplace, so that we can provide our customers with more diversified products and services that we are working to develop in collaboration with Woori.

Last quarter we indicated that our asset quality was continuing to improve. Although we made progress on credit quality for the year, during the second quarter our nonperforming assets bumped up 3.5% compared to the prior quarter, but are down 7.7% from the beginning of the year and are down 40% from a year ago. Over the next one or two quarters, we plan to pursue a more intense note sales strategy, further reduce nonperforming assets, and get the proceeds redeployed into performing loans or security investments. J.H. will be giving a recap of credit metrics shortly.

Our new branding and marketing campaign has gotten off to a great start. In just the first seven weeks of the promotion, we opened over 2000 accounts, of which about 450 are new customers. Many of our former customers are also returning to bank with us once again. We are pleased with the strong reception that this new campaign is receiving.

We have also started to see emerging demand for SBA loans. With our new and reorganized SBA team, our second-quarter SBA loan production is beginning to gain energy after very little activity last year. While the demand for new loans is still influenced by the weak recovery, our renewed efforts to generate new loans and the loan production momentum we have built in our marketing platform is designed to contribute to profitability for the remainder of this year and into next year's.

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

Thank you, Jay. Good afternoon, everyone. As for the overall balance sheet, we ended the second quarter at $2.7 billion in total assets, $2.1 billion in gross loans, and $2.4 billion in deposits.

On-balance sheet liquidity remains strong, with cash and cash equivalents at $199 million and investment securities at $391 million. Our securities portfolio was down $148 million during the quarter, but up $200 million year over year. In the second quarter, $102 million of bonds were called, $96 million of securities sold, and $12 million of principals paid. These reductions were partially offset by $56 million of new purchases and $6.7 million of positive fair value adjustment. $96 million of securities sold at a weighted YTM of 3.1% and a weighted modified ratio of 4.4. Also, $56 million of securities purchased had a weighted YTM of 2.0% and a weighted duration of 1.6.

To minimize price impact from rising rates, we implemented a risk minimization plan where we sold higher duration securities and purchased lower duration ones. The continued downward shift in the yield curve resulted in favorable prices for the securities sold. We will continue to stay on the short end of the yield curve.

Moving on to loan portfolio. Our loan portfolio slightly declined by 3% in the quarter and 16% year over year. Despite our renewed loan origination in force, our loan portfolio slightly decreased due to note sales and charge-offs and a weak loan demand influenced by prolonged slow economic recovery. We have originated a meaningful amount of new loans for the last two quarters when compared to last year. Considering the expected loan demand and economic conditions, we expect the loans to be slightly declined or flat at year-end.

On the liability side although total deposits declined $33 million in the second quarter, our core deposits increased $66 million, with offsetting reduction of $99 million for jumbo CDs. The success of our new marketing campaign coupled with the planned reduction in higher cost CDs contributed to the improvement in our deposit mix. We anticipate further improvement in overall funding cost in the next quarter as the higher cost CDs mature and as we replace these with core deposits.

At June 30, our demand deposits stood at 25.1% of total deposits, which increased from 23.7% at the end of first quarter and 22.3% from a year ago. This continued expansion in demand deposits reflects the core strength of our banking franchise.

As Jay mentioned, our profitability in the past three quarters has helped us grow our capital base, and our regulatory capital ratio for the bank exceeded the minimum requirements for well-capitalized status.

Let me discuss the income statement where we posted $25.5 million net interest income for the second quarter of 2011. While there continues to be moderate declines in interest earning assets over the past few quarters, low cost of funds helped to sustain our margin. Net interest margin held relatively steady at 3.65%, which was down by only 1 basis point from the prior quarter and up 9 basis points from the year-ago quarter. In the first six months of the year, NIM was up 4 basis points at 3.66%.

Our cost of funds in the second quarter was lower, mainly from repricing of high-cost CDs into our current low rates. Yields on interest-earning assets in the second quarter declined, due mainly to interest income reversal on loans on non-accrual status, exceeding recovery on loans that have been returned to accrual status. Over the coming quarters we expect a slight expansion in NIM, due mainly to sales of nonperforming loans, downward repricing 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 credit losses this quarter.

Turning to our noninterest income, service charges on deposit accounts increased 4.4% from the preceding quarter but declined 9% from the second quarter a year ago. For the first half of 2011, service charges on deposit accounts were down 4.4% from a year ago, reflecting our lower NSF service charges, due mainly to a better balanced management by customers and our regulatory reforms on these fees. We recorded a net loss on securities sales of $70,000 on the sale of $96 million in securities.

As Jay mentioned, one of our 2011 strategic focuses is to revive our SBA loan marketing and production. And we originated $19.6 million in SBA loans in the second quarter and $23.3 million year-to-date. We believe the momentum for SBA lending is starting to emerge and sales of these loans into the secondary market is expected to augment noninterest income going forward.

A few words about our expenses. Noninterest expenses increased 9% in the second quarter, primarily as we expensed $2.2 million of fees related to our unconsummated capital-raising efforts. Excluding the nonrecurring expense of $2.2 million, noninterest expenses in fact slightly declined by $395,000. Also, expenses declined to 7.6% from the second quarter a year ago, as nearly all of our expense categories declined, except professional fees related to the unconsummated capital-raising efforts.

FDIC insurance costs decreased 33.5% in the second quarter and 66.2% from the year-ago quarter, reflecting the new lower annual assessment rate effective April 1.

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 connection with the unconsummated capital-raising efforts and OREOs.

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 a mixed result in our asset quality during the second quarter of 2011.

Nonperforming loans increased by $6.8 million to $158.5 million from $151.7 million at the end of first-quarter 2011, and decreased by $83.6 million from $242.1 million a year ago. Nonperforming loans were 7.5% of total gross loans at 6/30/2011, compared to 6.98% at the end of our first-quarter 2011, and 9.67% a year ago. The slight increase was attributable to the following - One, we didn't meet our target nonperforming loan sales in the second quarter, as the market conditions for note sales were temporarily softened during that time. Two, we took a more conservative approach to identifying and classifying collateral dependent loans as nonperforming loans. It should be noted that approximately 48.6% or $76.9 million of the nonperforming loans were current on payments at June 30, 2011.

Total delinquent loans not included in nonperforming loans were $15.6 million, down from $20.7 million at March 31, 2011, and down from $21.7 million a year ago.

Please note that nonperforming and delinquent loan figures include loans classified as held for sale. At June 30, 2011, the bank classified $44.1 million in loans as held for sale, of which $19.8 million were nonperforming loans, with an additional $24.3 million in SBA-guaranteed loans. In comparison, we had $47.6 million in notes held for sale at March 31, 2011, of which $20.9 million were nonperforming loans.

As our overall asset quality has improved, we have reduced the reserves for potential credit losses. The allowance for loan losses has decreased to $109 million or 5.16% of the total gross loans at the end of June, compared to $176.7 million or 7.06% of the total gross loans a year ago.

The coverage ratio of the allowance to nonperforming loans decreased to 68.8% at June 30, 2011, compared to 82.9% in the prior quarter and 73% a year ago.

Net charge-offs were $16.5 million for the second quarter of 2011, down from $21.6 million in the first quarter of 2011, and down from $38.9 million in the second quarter a year ago. Of the total second-quarter charge-offs, $8 million were in partial charge-offs of loans with collateral shortfalls, and the $1.9 million were in additional charge-offs from loan sales. Year-to-date net charge-offs totaled $38.1 million compared to $65.3 million in the first half of 2010.

During the second quarter of the year, we continued to actively pursue the sale of our problem assets at competitive discount rates. We closed the sale of 21 loans with net proceeds of $17.6 million. For the first half of the year, we sold 39 loans with net proceeds of $45.5 million.

The sale of OREO continued during the second quarter of 2011, with five properties sold for net proceeds of $1.8 million, bringing the total for the first half of the year to $3.6 million in net proceeds. OREO as of June 30, 2011, totaled $1.3 million as compared to $2.6 million at the end of March 31, 2011, and $24.1 million a year ago.

On concluding remarks, I would like to emphasize that our first and foremost priority is to work down nonperforming loans and classify the loans through proactive note sales, and to move delinquent loans through the collection process. With the expectation that NPL market will improve in the coming quarters, we plan to pursue a more intense note sale strategy.

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

(Operator Instructions). Joe Gladue, B. Riley.

Hi, good afternoon. Let me start off with a question or two about the SBA loan programs. I guess first off, when do you expect to start seeing some sales of those loans, and do you have an idea of what sort of premiums you can expect on them?

Yes. As of June 30, we have $24 million guaranteed portion that we can sell right away. So we expect to generate some gains from the selling of SBA loans starting this quarter, and we are looking at about $800,000 per quarter on going-forward basis.

Okay, and do you still need to make any additional hires to get that whole effort moving to where you want it to?

Yes. Basically, we strengthened our SBA team at the beginning of the second quarter, and we are planning to add more resources to SBA loans to generate more SBA loans in the Korean-American market, yes.

I guess still on the topic of, I guess, loans, you have run off some of the some segments of the portfolio by a good amount in recent quarters, particularly construction loans and also some reductions in CRE. Just when do you -- I guess do those reductions slow down? When do you sort of get to a base level that you are comfortable with on those segments of the portfolio?

Well, I guess it depends on how the economy will be recovered. But at the current prolonged slow economic recovery, we believe we still need a couple more quarters to work down our problem assets to a level that is comfortable with us. So we are looking at about two more quarters.

And I will just get one more question in; then I will step back. Your press release and your comments were pretty detailed about the trends in nonperforming assets. Just wondering in the wider, I guess, classified loans what the trends were, and if most of the migration of loans to non-accrual are coming from already classified loans.

During the second quarter and as classified loans inflow was $42 million, while classified loan out in the amount of $45 million, so we continue to eliminate our problem loans.

All right. Thank you.

(Operator Instructions). Julianna Balicka, KBW.

Good afternoon. I have a few follow-up questions if I may. You discussed SBA loan growth already a little bit, and a couple detailed questions there. In terms of originating your SBA loans, are you planning on doing that through your branch network, through LPOs? What is the strategy there?

Well, we have an SBA team as a separate profit center, and also we are utilizing our branch network as well and to identify the potential SBA loan borrowers. And also we have only one NPO production office in Seattle, and also we are getting SBA loans generated from that LPO production office as well.

Are you going to -- outside of Seattle where you already have your office, are you going to allow your team to originate SBA loans out of California -- outside of California?

No.

Okay. And in terms of your other loan originations, can you talk a little bit about what other loans you are originating and what the pipeline looks like for the remainder of the year and for 2012?

We started our active loan generations from this year, and we already generated 7 times than previous years during our first half of the year. So we are concentrating more on generating C&I loans, not doing out-of-state loans at all. So we are concentrating on so-called "know our customer area", such as in LA County, any loans which generate our profit, but we strictly apply our strict loan pipeline policy.

And what kind of pricing are you seeing on new C&I loans?

Currently, the weighted average pricing is Wall Street prime plus average of 2%. That means it's 5.25%.

That's pretty good. And in terms of the borrowers that you are picking up, what was the dollar amount of new originations excluding SBA this quarter, and did the borrowers come from other banks? Were they your existing borrowers taking on bigger loans, or can you give us a little bit of color there, please?

It depends on loan types. So the average dollar amount on C&I loan is $500,000 and CRE average is at $2 million or $3 million. By utilizing our network of 27 branches and as the oldest and largest franchise, strong franchise, so we currently actively lead and solicit our old customers who once our bank.

Okay, that works. That makes sense. And if I can just switch gears for a second and I will step back. On the NPA loan sales, you reference in your remarks and in the press release that the market was a little bit weak for problem loan sales, and then you are hoping that it will come back in the second half of the year.

So I was wondering if you can maybe kind of give us a little bit more color why you considered the market to be weak, what kind of pricing you were seeing, and why you think it will get better going forward?

Actually, in the first half of 2011, our target was around $70 million to eliminate these nonperforming loans. But we had only $45.6 million note sale in Q2. So we have not done any bulk sale to avoid the deeper discount. But currently the note sales market is a buyers' market, so we seriously consider to sell in bulk sale. So we can accelerate our note sales by using this bulk sale.

In the prior quarters and -- I mean before the second quarter when we had discussions with potential investors, we could pretty much close the deal in a timely manner and the discount was not that great. But in the second quarter, we tried to move out two largest in NPLs, but we are not successful. And the investors, the potential investors we entered into negotiations backed away, and we noticed that the market was flooded with more supply than demand.

And also in terms of a discount rate, during the first half of the note sale, we only had a 2.5% discount rate to net active principal balance, but approximately 38% of the total principal balance prior to charge-offs. But in case we start in bulk sales, we consider a little deeper discount such as 40%, like that.

In the second quarter we had a discount around about 40% similar to our first quarter from unpaid balances. So like Mr. Son said, if we sell NPLs in bulk sales and because we have utilized individual sales to investors out there. But we expect some more discount in the coming quarters as we sell more loans with the bulk sale approach.

That makes sense. Can you provide us an update on what is going on with your regulatory examination, regulatory order? I know you met the capital requirement and you are meeting a lot of the other requirements. Can you maybe give us an update on a timeline or what your expectations are?

Well, we cannot comment about the examination result or when it took place. But our first and foremost priority is to lift the current regulatory enforcement actions as soon as possible, which entails two things. One is we need to improve our asset quality, and through the proactive sales of NPLs and classified loans.

And then two, obviously we have to maintain strong capital levels. So as Jay mentioned, we are working on the capital adequacy assessment, and based on the results from the assessment we will determine whether we need additional capital. If and when it is determined necessary, our Board will decide when we are going to raise and how much we are going to raise, as well as offering type.

So did you feel that you needed the capital that you tried to raise earlier in the quarter, or was that just opportunistically just testing out the market?

Well, when we terminated Woori SPA on June 15, basically from beginning of this year we planned the public offering in case the Woori SPA is terminated. So after termination, we immediately announced the offering and we went out to the market, but unfortunately, market was not cooperative.

So our Board was not satisfied with the pricing offer, so we rejected the deal. So it was not opportunistic; it was a planned strategy. So I cannot make more comments about our future capital raise at this point in time.

Okay, that's fair. Thank you very much for answering all of my questions. I appreciate that.

Joe Gladue.

I did have a couple of follow-up questions on expenses. You did say that you don't expect a lot of fluctuation in operating expenses going forward, but just wondering the reduction in compensation expenses from the first quarter to the second quarter, is that a sustainable level going forward?

Yes, the run rate is sustainable, and the slight decline to the salaries and employee benefit is due to the severance payments we made in the first quarter. So we believe the current -- the platform right now in terms of number of employees, I think we can accommodate up to $3.5 billion total assets.

And I guess just on the reduced deposit insurance premiums, is that -- again, is that a good run rate going forward, or was there any sort of catch-up to equalize first-quarter stuff?

No, it is going to be that level. I guess it is depending on the volume of deposits we are going to have on our balance sheet. Effective April 1 because of Dodd-Frank Act, we used 22 DPs to deposits, and it used to be much higher than that. So for the two, maybe four quarters, we see that the current -- the run rate for FDIC costs pretty much stayed the same.

Okay. I guess just one or two quick questions on margin. There was a reduction, I guess, about 30 basis points in the yield on C&I loans. You mentioned in the press release and in your comments that some of the yield decline was just due to interest reversals on non-accruals. Is that what was driving the decline in the C&I?

Yes, correct.

And you also mentioned you do have some CDs maturing in the quarter. Do you know -- I guess just wondering what the magnitude of those CDs maturing in the third quarter would be?

In third quarter, I think about $180 million of CDs will mature, and the fourth quarter about $140 million.

All right. That is all I had. Thank you.

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

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

You are welcome. Ladies and gentlemen, thank you for your participation. That does conclude the presentation. You may disconnect. Have a wonderful day.