Hanmi Financial Corp (HAFC) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Hanmi Financial Corporation's third-quarter 2011 conference call.

As a reminder today's call is being recorded for replay purposes. At this time all participants are in listen-only mode. (Operator Instructions) I would now like to introduce Mr. David Yang of Investor Relations Officer. Please proceed, sir.

And thank you all for joining us today. With me to discuss Hanmi Financial's third-quarter highlights are Jay Yoo, our President and Chief Executive Officer; Lonny Robinson, Executive Vice President and Chief Financial Officer; and J.H. Son, our Executive Vice President and Chief Credit Officer.

Jay will begin an overview of the quarter and Lonny will then discuss our financial performance and review 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 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 press release outlining its financial results for the third 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. Good afternoon, everyone.

Before we begin the call, I would like to introduce Lonny Robinson as our Executive Vice President and Chief Financial Officer. Lonny is an excellent addition to our senior management team. His 25 years of banking experience and deep ties to the local as well as mainstream community make him the ideal person for Hanmi.

In addition, I would like to inform you that we have formed a new corporate strategy department and appointed our former Deputy Chief Financial Officer, Mark Yoon, as our Chief Strategy Officer. This new department will primarily focus on building our middle- to long-term bank model, including a creative marketing and sales campaign that is sustainable in the new regulatory environment.

In the third quarter we are very pleased to report our fourth consecutive quarter of profitability, showing a substantial recovery since the 2008 financial crisis. We generated net earnings of $4.2 million, or $0.03 per diluted common share, and $22.6 million, or $0.15 per diluted common share, year-to-date. Both the quarter and year-to-date profit show significant improvements when compared to a net loss of $93.3 million or $1.24 per common share in the first nine months of 2010.

With the contribution of third-quarter profits to capital our total risk-based capital and tangible equity ratios for the Bank are at 14.71% and 10.63%, respectively. Our bank's tangible equity ratio exceeds the 9.5% regulatory requirement. Based on our accomplishments so far, we believe we are substantially in compliance with all of the regulatory requirements.

In regards to our capital adequacy, we continue to perform quarterly capital stress tests to ensure that our capital levels are commensurate with our risk profile. With improved asset quality, continued profits, and strong capital ratios, we are constantly monitoring and evaluating various options available.

Our asset quality continued to show solid improvements, with non-performing assets reduced substantially from $168 million to $96 million for the quarter, down 43% and down 56% from $215 million a year ago. As a percent of gross loans, non-property loans were at 4.71% compared to 7.91% last quarter and 8.13% a year ago. Lonny will be giving more details on our credit metrics shortly.

Despite continuing softer demand on new loans, our proactive marketing and sales efforts helped our lenders identify high-quality loan production and advances, which totaled $115 million for the quarter and $217 million for the year-to-date. As a result of our new and reorganized SBA team, we are also seeing increasing demand for SBA loans with $53.3 million for the quarter and $79.4 million year-to-date in production of SBA loans.

Year-to-date we sold $18 million SBA loans in the secondary market for a net gain of $1.6 million, and we anticipate selling more loans in the coming quarters, which should continue to positively impact profitability and efficiency.

As we continue to work through and overcome our current hurdles, many challenges rise ahead for us with regulatory uncertainty, consolidation in our marketplace, and the fragile economy. As we have in the past, we adapt to our challenging environment and capitalize on opportunities that present themselves. We will identify new markets, products, and services that will give us a market advantage.

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

Thank you, Jay. Good afternoon, everyone, and thank you for that warm welcome. I am very happy to be back in the Koreatown section of Los Angeles and look forward to working with the Hanmi team.

Our balance sheet continues to improve in quality. We ended the third quarter at $2.7 billion in total assets, $2 billion in gross loans, and $2.4 billion in total deposits. Our investment securities portfolio increased $24.7 million to $416 million for the quarter. Our net loans receivable were down 4% in the quarter and 13% year over year.

Although our SBA originations are increasing, most of this production will be sold into the secondary market. We continue to market problem loans through note sales. This effort has had a substantial positive impact on our asset quality as a whole.

Total deposits declined $45 million in the third quarter, but our core deposits increased as a result of demand deposits and retail time deposits increasing $20 million and $13 million with an offsetting reduction of $46 million and $29 million for jumbo CDs and money market accounts, respectively.

We have initiated a marketing campaign that has been successful in attracting new core deposit customers. We are also focusing on the reduction of higher cost CDs to improve our overall deposit mix. We anticipate further improvement in overall funding costs in the next few quarters as higher cost CDs mature and we replace them with core and lower cost time deposits.

For the quarter, our demand deposits were at 26.4% of total deposits, which increased from 25.1% at the end of the second quarter and 22.1% from a year ago. Time deposits $100,000 or greater declined by 5% to $833 million or 35.4% of total deposits at quarter end compared to $1.1 billion or 44.6% of total deposits a year ago. I would like to note that there were no broker deposits in the mix this year.

As Jay mentioned, our profitability in the past four quarters has helped us to grow our capital base and our regulatory capital ratios for the Bank, which exceeds the minimum requirements for well-capitalized status.

Focusing on the income statement, we generated $25.2 million in net interest income for the third quarter. While average interest earning assets were down by 7% year-over-year, the 34 basis point drop in the cost of deposits helped to improve our margin. Net interest margin increased to 3.75%, which was up 10 basis points from the prior quarter and up 26 basis points from the year-ago quarter. In the first nine months of the year, NIM was up 11 basis points at 3.69%.

Our cost of funds continued to improve as a result of the repricing of high-cost CDs into current lower rates. Yields on interest-earning assets in the third quarter improved due primarily to interest recovery on loans that have been returned to accrual status exceeding interest income reversal on loans on non-accrual status. Over the coming quarters we are continuing to expect a slight expansion in NIM due mainly to downward repricing of maturing CDs and a better mix of core deposits.

Non-interest income, service charges from deposit accounts were $3.2 million, which was down slightly from the prior quarter and down 6% from the third quarter a year ago. For the first nine months of this year service charges on deposit counts were down 11% from a year ago, reflecting lower NSF service charges as a result of decreased transaction volume and regulatory reforms on these fees.

We recorded a net gain on security sales of $1.7 million on the sale of $25.2 million in securities compared to a net loss of $70,000 from the sale of $95.7 million in securities in the second quarter of this year.

As Jay mentioned, we have really focused on reinvigorating our SBA loan and marketing production, and have originated $53.3 million in SBA loans in the third quarter on top of the $22.3 million in SBA loans in the second quarter, which puts year-to-date originations at $79.4 million. We were successful in recruiting a new SBA team leader last quarter and are quite pleased with the resurgence of our SBA lending. The sale of these loans into the secondary market is expected to augment non-interest income going forward.

Our non-interest expense was $18.9 million, down 17.6% from the second quarter. As you may recall, we expensed $2.2 million of fees related to the termination of our securities purchase agreement with Woori. Year-to-date non-interest expenses totaled $62.8 million, a 16% decrease from the first nine months of 2010. We have focused on prudent expense management and will continue to do so.

FDIC insurance costs were down 42% in the first nine months of 2011 as compared to the year-ago period, reflecting the new lower annual assessment rate that became effective April 1st this year. The increase in the third quarter from the prior quarter reflects the true-up from the finalization of the calculations recently issued by the FDIC.

I will now turn the discussion to the loan portfolio and our efforts to enhance credit quality.

As Jay noted in his remarks, our asset quality has shown steady improvements during 2011. Non-performing loans for the quarter decreased by $71.6 million, or 43%, to $95.5 million from $167.1 million at the end of the second quarter and by $99.2 million, or 51%, from $194.7 million a year ago. The decline in the NPLs for the quarter resulted primarily from the $30.6 million loan sales, $19.2 million short sale, $16.5 million in charge-offs and $9 million in loan upgrades.

Non-performing loans were 4.71% of total gross loans at September 30 compared to 7.91% at the end of the second quarter this year and 8.13% a year ago. The improvement was the result of several factors, particularly our success in selling a number of small packages of non-performing loans at more favorable prices and the overall reduction of new loans migrating to non-accrual status.

We are continuing to take a conservative approach to identifying and classifying NPLs. It should be noted that approximately 53% or $51 million of our non-performing loans are current and paying as agreed. Total delinquent loans 30 to 89 days past due and still accruing interest were $16.5 million, up slightly from the $15.6 million at June 30 and down significantly from the $23.9 million a year ago.

Please note that non-performing and delinquent loan figures include loans classified as held for sale. At September 30 the Bank classified $37.2 million in loans held for sale, of which $17.5 million were NPLs with an additional $19.7 million in SBA guaranteed loans. In comparison, we had $44.1 million in loans held for sale at June 30, of which $19.8 million were non-performing loans.

While overall asset quality improved, our evaluation of the ALLL resulted in a provision of $8.1 million. Our net charge-offs were down 6% to $15.5 million from $16.5 million and down 27% from $21.3 million a year ago, respectively. Of the total third-quarter charge-offs $6.7 million were a partial charge-off of loans with collateral shortfalls and $3 million were in additional charge-offs from loan sales.

Year-to-date net charge-offs totaled $53.6 million compared to $86.6 million in the first nine months of 2010, down 38%.

The allowance for loan losses has decreased to $100.8 million or 4.97% of total gross loans at the end of September compared to $176.1 million or 7.35% of total gross loans a year ago. The allowance for loan losses to non-performing loans improved significantly to 105.5% for the quarter, compared to 65.3% in a prior quarter and 90.4% a year ago. Our non-performing assets to total assets peaked at the end of the first quarter last year at 9.43% and have improved to 3.57% at September 30.

During the third quarter of the year we continued to actively pursue the sale of problem assets at competitive discount rates. We closed the sale of 26 loans with the net proceeds of $27.5 million. For the nine months of the year, we sold 66 loans with net proceeds of $73.1 million. The sale of OREO continued during the third quarter of 2011 with five properties selling for net proceeds of $2 million, bringing the total for the first nine months of the year to $5.6 million in net proceeds.

OREO as of September 30 totaled $289,000 as compared to $1.3 million at the end of June and $4.1 million a year ago, reflecting our strategic and aggressive program to sell loans before they move into foreclosure, and the swift resolution program we have implemented for any loans that do move into foreclosure.

As you can see, Hanmi has had great success in the sale of assets to improve credit quality. We were encouraged by the number and pace of sales during the quarter and expect it to continue.

To recap, we have had marked success in managing credit quality. We have augmented capital during the year through earnings and our operating margins and efficiencies are showing promising signs.

I am looking forward to supporting my new colleagues and the continuing the success that they have accomplished thus far.

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

(Operator Instructions) Joe Gladue, B. Riley.

Good afternoon and welcome back, Lonny.

Thank you, Joe. Good afternoon as well.

I guess I would like to start with a couple of quality questions. I guess you did significantly reduce the level of NPAs and I guess now have a much higher reserve compared to NPAs. Just wondering where is the comfort level with the level of the reserve?

Well, I think it's an interesting question, it's a good question. As you know, right now we have got our NPAs well covered in excess of 100% by our ALLL. We would obviously continue our efforts as far as problem asset resolution into the fourth quarter. We expect to work very diligently like we have in the third quarter.

As far as the reserve coverage, we think we have got adequate coverage where we are at today from that standpoint, but again you have got to watch economic factors and various other types of things that may come into play on that.

In that regard, I guess, can you share with us some of the -- what were the inflows into non-accruals this quarter versus last quarter?

Hi, this is J.H., CCO of the Bank. During the third quarter in flow of NPL were $9.2 million while outflow of NPL were $55.5 million. Outflow is mainly due to sale.

Okay. Can you -- where did performing TDRs stand at the end of the quarter?

TDR - Among the total TDR of $79.9 million, $30 million or 38% is currently at accrual status.

Okay. Let me just ask one more question. I guess now that you have got another quarter of profitability under the belt what are the thoughts on possibility of reversing the DTA valuation allowance?

Joe, that is a good question. One of the things that comes into the evaluation of the deferred tax asset reversal of the reserve coverage is basically the sustainability of profits and at what level can those levels of earnings be sustained at.

Four quarters is obviously a very good track record. It's a good start. I still think we have probably got a couple more quarters of experience before we can really take a position where it may be the case we are bringing some of the deferred tax asset back onto our balance sheet.

Again, we are constantly monitoring it. We are evaluating it as time goes on, and as the earnings -- as we go forward and we are able to demonstrate a certain levels of sustainable earnings then we would then take a position of reversing out the reserve against our deferred tax asset and bringing it back on our books.

But as of today, I don't think we have a position to do that. But we are constantly evaluating it and we will look at it as future quarters rebuild some form of sustainable earnings.

Okay. All right, thank you. I will step back.

Julianna Balicka, KBW.

Good afternoon. Welcome back, Lonny.

Hi, Julianna. Good afternoon, too. Glad to be back.

I have a couple of questions. In terms of the provision expense that you had this quarter, could you walk us through a little bit more in terms of the logic and the flows behind booking that provision versus not having had one for a couple of quarters?

Well, we went through our normal process that we have in place. We have looked at a couple of things. Our qualitative factors I think we had adjusted the economic factors by about 10 basis points for the quarter. Everything else was pretty much static from the qualitative factors.

We did have some additional provisioning for some impairments and then we did have historical loss adjustment on -- I think it was our commercial line of credit pool in that regard. So those were really the components that caused the movement and the need for an additional provision. We still feel that the 4.97% coverage is adequate at this point.

Okay, very good. Then in terms of the loan sales that you had had in the quarter, could you talk about what you are seeing out there from maybe -- who is bidding on them? Are the discounts worse than the previous quarters? Are there a lot of other people selling similar loans? Just maybe a little bit more color around that, specific the bulk sale part.

This is J.H. Son, CCO. Regarding the question, the Bank's non-performing loan buyers continue to be mainly individual investors, small investors and private investment companies. We have not done any bulk sale to minimize our loss.

Okay, very good. And then in terms of the tax rate, sorry, it looks like you didn't have any tax expense this quarter. So can you give us a little bit more accounting explanation there? Sorry if that is a silly question.

Well, DTA and then net operating loss carry forwards that we are able to absorb to offset any type of earnings that we have at this point from that standpoint.

Julianna, I would like to add one more thing about your discounts you had mentioned about the loan sales. We were more aggressive in our sales this quarter and we did see slightly, slightly deeper discounts than we experienced in the second quarter, but it's really somewhat marginal from what we experienced. But they were slightly deeper.

Okay. And then back on the tax rate then, when will you start actually having a tax rate? Like, when should we start worrying about a tax expense as opposed to a DTA valuation rate capture?

Wow, that is -- we are in an NOL carry forward position and I am not seeing it for the next couple quarters. It's going to be a while before we would see any type of a provision expense from that standpoint.

Good. Finally, in your remarks you were talking about a new approach, so can you -- you just briefly referenced you have a new approach. Could you just talk about that a little bit more, about like what changed in your approach?

I am sorry, Julianna, could you provide some more clarification there?

Sorry, I was writing fast some very quick notes, and I think this was on either or loan originations or loan review for your allowance or something. You said you had a new approach in place. The words new approach struck me from your prepared remarks.

Okay. Well, one of the things we have talked about is we have actually reinvigorated our SBA lending team. And we are very excited about it, because I think we kick started it, we started -- we saw good results in the third quarter. We expect that to continue, to expand from that standpoint.

So strategically I would like to say we are getting back in the banking business and we are doing some lending. So it's high quality, we are still being very conservative in our approach there, but the fact is that we are starting to see some loan production. So strategically, we are pretty excited about that.

Great to see. Thank you very much for taking my questions.

Joe Gladue, B. Riley.

Just a couple of follow-ups. In your remarks you mentioned, and in the press release, that there was more affecting the net interest margin from loans returning to accrual status than from loans migrating to non-accrual. Just wondering if you could give us an idea of how much impact that had, loans returning to accrual.

It was about $1 million.

Actually fixed loan returned to accrual status. The biggest one is a hotel loan of around $5 million in Vancouver area. We returned -- this loan returned to accrual status based on their payments and history for P&I, at least the one year, and with an adequate DCR over 1.2. So it is around -- it's a $519,000 NAIP recognized in income.

All right. And just one other question. Just wonder you give us your outlook for loan growth. I know, of course, the loan sales this quarter caused a big drag on the loan portfolio. Looking forward do you think there can be some growth in the portfolio?

We are excited about some loan production that has come out, but obviously we are still aggressively trying to mitigate our problem assets. We still have $95 million of non-performing loans at this point in time and so we are going to be work at taking them off. So that is going to be working against us as far as actually generating positive loan growth in the loan portfolio.

The area that we are having the most success on loan production is in the SBA arena. The plans there is to sell basically most of that and so that is not going to gain any traction as far as loan portfolio growth. But I do know that we are looking at a good balance of C&I type loans and we are hoping to get some of those on our books. We are sort of looking secondarily at CRE, but we are trying to keep the appropriate portfolio mix as far as production going forward.

And the economy is still fragile. We are excited about doing more production than we have had in recent quarters, but I still think it's going to be probably a net reduction for probably the next quarter.

Okay, fair enough. I thank you. That is all I had.

Julianna Balicka, KBW.

I have a quick follow-up, please. On the repricing downward of the deposits, in the text you had referenced a 1.8% rate. What rate will you be repricing them down to?

Probably the pricing in the case is approximately 1% or less, so that is what we are going to expect to see. We do have a CD bubble, I think we mentioned it coming -- a bucket of high-rate CDs coming due at that 1.8% over the next six months. A good chunk of that comes due in March of 2012 where we will see the biggest benefit from that. But again current rates today are substantially lower than the 1.8% that we had set up and established on that.

And what kind of outflow do you expect from when you are switching the rate like that, so that is nearly 50%?

I expect we will have some outflow from that standpoint, but what we are trying to do is change the composition of our deposit mix to be more core related and hopefully create a better value, because we have got some campaigns bringing in new core deposits and so forth. We are hoping the successes that we have seen in the third quarter will continue into fourth quarter and first quarter and offset any type of an outflow that would happen as it regards to those higher cost CDs.

So what rate are you offering in money markets or retail CDs in the core style deposits?

Around the -- probably about 0.5% range to -- is probably a good benchmark for that.

Okay, very good. Thank you very much.

Ladies and gentlemen, there being no further questions in the queue, this concludes our question-and-answer session. I would now like to turn the call back to Mr. David Yang for closing remarks.

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

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