Hanmi Financial Corp (HAFC) 2011 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Hanmi Financial Corporation fourth-quarter and year-end 2011 conference call. I would like to introduce Mr. Henry Hong, Investor Relations Officer.

Thank you and thank you all for joining us today. With me to discuss Hanmi Financial's fourth-quarter and year-end highlights are Jay Yoo, our President and Chief Executive Officer; Lonny Robinson, Executive Vice President and Chief Financial Officer; and JH Son, Executive Vice President and Chief Credit Officer. Mr. Yoo will begin with an overview of the quarter and year and Mr. Robinson will then present our financial performance and review of credit quality. At the conclusion of the prepared remarks, we'll open the session for questions.

In today's call, we'll 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's. 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 of year 2011 and the full year, which can be found on our website at Hanmi.com.

Now I will turn the call over to Mr. Yoo.

Thank you, Henry. Good afternoon, everyone. 2011 was a year of great transformation for Hanmi. With hard work and dedication, we overcame many challenges and I sincerely thank all of our employees for their great efforts. We have already implemented the steps to continue on the road to profitability. It is now time to implement our growth strategy as we swiftly regain our status as the leading bank in our communities and become the bank of choice, which is Hanmi's new vision for our customers, our communities, and our shareholders.

The bank of choice also extends to the most important component Hanmi has to offer, our employees, who represent Hanmi's core values. I believe our employees have demonstrated their competitive edge with the obstacles we have already overcome as a team and we are well equipped to face the challenges that lie ahead.

We will continue to invest in our employees, encouraging each employee to take on the leadership role in their respective positions at Hanmi. Leadership is a verb, not a noun, and we are very proud of what our employees have demonstrated thus far not only individually but as a team. We are excited about our future.

We were profitable in the fourth quarter, which is significant as this marks our fifth consecutive quarter of profitability, demonstrating that our recovery is sustainable.

As you all know, Hanmi raised $77.1 million in new capital in November of year 2011, and with strong fourth-quarter profits adding to capital, our total tangible common equity ratio is 10.36%, for the Hanmi holding company and 12.48% for the Bank.

We generated net income of $5.5 million, or $0.22 per diluted share for the quarter and $21 million, or $1.38 per diluted share for the year. Profits for 2011 showed considerable improvements when compared to the net loss of $88 million, or $7.46 per share posted in 2010.

I do want to remind you that all per-share results are on a split adjusted basis to reflect the 1-for-8 reverse stock split, which became effective on December 19, 2011.

Our asset quality continues to show significant improvements as well with non-performing assets dropping substantially to $52.6 million from $146.5 million a year ago. As a percent of total assets, nonperforming assets were at 1.91% compared to 2.91% last quarter and 5.04% a year ago. As you can see, we have made great strides in all areas in 2011.

2012 marks Hanmi's thirtieth anniversary and we believe this year will also mark the start of a new beginning. We thank all of our stakeholders, our customers, our shareholders and our employees for their unfailing support during the difficult times. And now together we look forward to an even brighter 2012.

With that, I'll turn the call over to Lonny to provide more details on our operations and credit metrics. Lonny.

Thank you, Jay, and good afternoon, everyone. With an improving balance sheet, we ended the year at $2.74 billion in total assets; $1.94 billion in gross loans; and $2.34 billion in total deposits.

The fourth quarter marked our fifth consecutive quarterly profit, and as Jay noted, we believe our recovery is sustainable and quite possibly gaining momentum.

Our net loans receivable were down 2.2% in the quarter and 11.3% year over year. However, SBA loan originations continue to increase, which is a great source of fee-based income for us as much of this production is sold into the secondary market.

In 2011 we have originated $306 million in loans, including $93.9 million in SBA loan production. Both are a considerable improvement from the previous year. We continue to market loan assets through note sales and this effort has had a positive impact on our asset quality as a whole.

With deposits being the key driver of the franchise value of Hanmi Bank, our core deposits grew $174.5 million to $1.52 billion from a year ago. While total deposits are down for the quarter and the year, the mix of deposits is clearly improving.

Year-over-year core deposits increased with the demand deposits increasing $87.7 million, money markets and NOW accounts up $47.4 million, and retail time deposits up $48.9 million, with an offsetting reduction of $296.5 million for jumbo CDs and savings accounts down $9.3 million.

The marketing campaign we initiated last year has been successful in attracting new core deposit customers. Hanmi ended 2011 with 27% in DDA accounts and over 51% in low-cost deposits and DDA accounts. Growing low-cost deposits and DDA accounts will continue to be our focus in 2012.

For the quarter, our demand deposits were at 27.1% of total deposits, which increased from 26.4% at the end of the third quarter and 22.2% from a year ago. Similarly, time deposits over $100,000 declined 35.1% of total deposits at year end compared to 45.3% of total deposits a year ago.

Focusing on the income statement, $24.5 million in net interest income, which is calculated on a tax equivalent basis, were generated for the fourth quarter of 2011. While average interest earning assets were down by 7.7% year over year, the 33 basis point drop in cost of deposits helped sustain our margin.

Our net interest margin for the fourth quarter was 3.66%, which was off 9 basis points from the prior quarter and up 18 basis points from the quarter a year ago. In 2011, NIM was up 13 basis points to 3.68%.

Our cost of funds continued to improve as a result of repricing of high-cost CDs into current lower rates. Yields on interest-earning assets in the fourth quarter were relatively steady as we return nonperforming assets to producing assets.

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 in the fourth quarter of 2011 was $6.3 million, up 6.2%, or $370,000 from $6 million in the third quarter of 2011 and up 4.9%, or $295,000 from $6.1 million in the fourth quarter of 2010.

Insurance commissions and other operating income increased by $157,000 and $137,000 compared to the third quarter of 2011. Net gain of $2.9 million was recognized from the sale of SBA loans during the fourth quarter of 2011, partially offset by the loss of $2.5 million from the sale of NPLs. As a result, net gain from the sale of loans increased by $312,000 compared to the same quarter a year ago.

For 2011, non-interest income was down 6.1% or $1.6 million to $23.9 million from $25.4 million in 2010. Several factors that contribute to the fluctuations in non-interest income were lower service charges on deposit accounts and net loss recognized from the sale of loans, partially offset by the gain from the sale of investment securities.

During 2011 Hanmi recorded a $1.5 million net loss from the sale of loans which consisted of $2.9 million of impairment adjustments and $6.8 million of direct losses from the sale of NPLs, partially offset by $8.2 million of gains from sale of SBA loans and NPLs.

Non-interest expense in the fourth quarter of 2011 was $21.2 million, up 12.7% signed or $2.4 million from $18.9 million in the third quarter of 2011 and down 2.2% or $486,000 from $21.7 million in the fourth quarter a year ago.

Salaries and employee benefits increased by $1.3 million and other operating expenses, including advertising and promotion, supplies and communication and stock warrant expense, increased by $1 million compared to the third quarter of 2011.

Salaries and employee benefits increased mainly due to holiday bonus paid out to all the employees at yearend of $262,000 and commissions for the fourth quarter of $200,000.

In the third quarter, there was a $389,000 reversal of employee bonus and unused vacation accrued. In addition, severance costs for workforce reduction of 11 staff in December was $220,000. And there was an accrual for unused sick days of $210,000 for the fourth quarter.

The workforce reduction will result in a savings of $1 million on an annual basis going forward. Promotional expenses increased by $258,000 as a result of the marketing efforts focused on developing new customers related to SBA production; customers with low-cost deposits; and DDAs during the fourth quarter of 2011.

There was also an increase of $681,000 in stock warrant expense in the fourth quarter due to the increase in our stock price at year end as compared to the third quarter of 2011. These increases negatively impact the efficiency ratio for the current quarter compared to the prior quarter. For 2011, non-interest expense decreased by $12.8 million or 13.2% to $84 million from $96.8 million in 2010.

Improving operating efficiencies were gained from lower expenses related to foreclosed real estate, OREO, and reduced FDIC deposit insurance assessments and other regulatory costs, partially offset by the $2.2 million in expenses associated with the unconsummated capital-raising efforts earlier last year.

The efficiency ratio for 2011 improved to 67.2% as compared to 73.7% in 2010.

As we discussed last quarter, we are continuing to focus on our SBA loan marketing and production and originated $34.1 million in SBA loans in the fourth quarter on top of the $36.4 million in SBA loans originated in the third quarter, bringing our SBA originations for 2011 to $93.9 million. So we anticipate SBA loan sales will be an important contributor to revenues in the coming year.

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

Nonperforming loans decreased 32.8% during the fourth quarter to $52.4 million. That is a reduction of $25.6 million from $78 million at the end of the third quarter. Further, it was a reduction of $90 million from $142.4 million a year ago. The decline in NPLs over the year resulted primarily from $89.3 million in loan sales.

Nonperforming loans were 2.7% of total gross loans at year end compared to 3.92% at the end of the third quarter and 6.38% a year ago. The improvement was a result of several factors, particularly, our success in the selling of a number of small packages of nonperforming loans at more favorable prices and the overall reduction of new loans migrating to nonaccrual status.

We are continuing to take a conservative approach to identifying and classifying NPLs. It should be noted that approximately 59.4% or $31.1 million of our nonperforming loans are current and paying as agreed.

Total delinquent loans past due 30 to 89 days and still accruing were $13.9 million, down from $16.5 million at September 30, 2011 and down significantly from $21.5 million a year ago.

Please note that nonperforming and delinquent loan figures do not include loans classified as held for sale at December 31, 2011. The bank classified $22.6 million in loans as held for sale, of which $15 million were NPLs with an additional $5.1 million in SBA-guaranteed loans and $2.5 million in other performing classified loans. In comparison, we had $37.2 million in loans held for sale at September 30, 2011, of which $17.5 million were nonperforming loans.

With the improvement in an overall asset quality, our provision for loan losses declined to $4 million in the fourth quarter, down from $1.8 million in the third quarter and $5 million in the same quarter a year ago. For the full year, our provision was down substantially to $12.1 million compared to $122.5 million in 2010.

Our net charge-offs were down 2.6% to $15.1 million from $15.5 million during the third quarter of 2011 and down 57.2% from $35.2 million during the same quarter a year ago.

Of the total fourth-quarter charge-offs, $2.2 million were in partial charge offs of loans with collateral shortfalls, and $6.5 million were in additional charge offs from loan sales. In 2011 net charge-offs totaled $68.7 million compared to $121.9 million in 2010, down 43.7%.

As I mentioned earlier, our provision costs are down substantially for the year, and we have increased the allowance as a percentage of NPLs while reducing it as a percent of gross loans. The allowance for loan losses totaled $89.9 million or 4.64% of total gross loans at the end of December compared to $146.1 million or 6.6% of total gross loans a year ago. We still have an ALLL that is well above the 3.76% of average reserves held by US banks and almost double the 2.46% average reserves held by banks and the $1 billion to $5 billion asset size, according to SNL Financial.

Allowance for loan losses to nonperforming loans proved significantly to 171.7% at year end compared to 129.2% in the prior quarter and 102.5% a year ago. Again, based on SNL data, our reserve levels far exceed the 68.63% coverage ratio for US banks and the 41.46% ratio for banks in our size range.

During the fourth quarter of the year we continued to actively pursue the sale of problem assets at competitive discount rates. We closed the sale of loans with net proceeds of $34.7 million and recognized a net loss of $2.5 million. For the year we sold 108 loans with net proceeds of $107.8 million and a net loss of $3.1 million.

The sale of OREO continued throughout the year 2011 with 16 properties valued at $7.7 million, resulting in a net loss of $671,000. As of December 31, 2011, totaled $180,000 as compared to $289,000 at the end of September 2011 and $4.1 million a year ago, again, reflecting our strategic and aggressive programs to sell loans before they move into foreclosure and the swift resolution program we have implemented for any loans that do not move into foreclosure.

Finally, we'd just like to mention our deferred tax asset situation. As you know, we booked a valuation allowance for our deferred tax asset in 2009 and our provisions or benefits for income taxes have been minimal over the past few quarters.

As we see profitability continuing, we believe that we may be able to recover some although not all of the approximately $80 million deferred tax asset valuation allowance. As is the case with other banks that have gone through the process, the DTA recoveries are typically not a one-time event but rather a series of credits over several quarters. Tax accounting is a pretty specialty area, so I won't try to explain further on this call but I'm available to review the issue as I understand it for anyone who has questions.

To summarize, Hanmi posted a good fourth quarter that contributed to a profitable year in 2011. On virtually every metric our operations and asset quality is improving. And of course, the importance of this last capital raise is significant.

Hanmi Bank will celebrate its thirtieth anniversary this year. In our next 30 years of operations I am confident that the true spirit of our team will clearly show how successful we can be at servicing the needs of our customers and creating value for all our stakeholders. Thank you for your time.

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

We are going to proceed with the Q&A session. Mr. Gladue, your line is open to proceed with your question.

Yes. I guess I -- first off, good afternoon. I guess I'd like to start off with the, I guess, compensation and benefits line, a lot of moving parts in that this quarter and I guess some further going forward. Just wondering if you could help us sort through that and trying to get to a good base run rate for quarterly going forward.

Yes, Joe, this is Lonny. I agree that there was some unusual things moving through back and forth between the third and the fourth quarter and we tried to explain through that.

We do, as we mentioned, expect to have approximately, around $1 million in reduction in compensation going forward. I would say to use a run rate -- a quarterly run rate for salary and employees benefits, I would probably use something around the -- probably the $8.4 million range on a quarterly basis going forward on that because we -- like I said we have some unusual items that were paid out and what have you. So I think $8.4 million would probably be a good level to use on a going-forward basis on quarterly comp.

Okay. And I guess I'd like to move on after that a little to some of the asset quality numbers. First, I'll ask you to repeat one number; I think you'd mentioned how much of the loans held for sale were I guess on nonaccrual status.

That was $15 million.

Okay. And could you give us the number for -- and I guess trends in troubled debt restructurings, I guess particularly performing troubled debt restructurings?

This is JH, CCO of the bank. Hi. At December 31, 2011, there were $64.8 million ,and during the fourth quarter, 29 loans were newly added (inaudible) and 30 loans were taken off from the previous quarter with the payoffs mostly through a note sale.

We sold TDR notes of [$20.4 million] (Company corrected after the conference call).

Okay, all right. And I guess one other question on I guess asset quality is inflows to nonaccruals, is that continuing to slow down; I guess what was it, inflows in the fourth quarter versus third quarter?

As it's shown in our trend, during the whole year of 2011, the inflows of NPLs were $104 million while outflows of NPLs were $160 million which resulted in net outflow of $56 million. And also inflow of NPLs has been stabilized.

And moving on, I'll ask a little bit about loan demand and are you seeing any indications that overall loan demand is picking up any?

In general, loan demand is weak on this current economic lackluster environment. But as our CFO has noted in his remarks, there are over $300 million loan originations in 2011, which was significantly improved as compared to $58 million of loan origination a year ago.

In 2012 we will continue to increase earning assets, which focus more on increase SBA loans and selling for gain. And the bank will complete $25 million mortgage purchase transaction from secondary market by the end of this month. So we continued to marketing our new loan originations through our infrastructure to engage more growth and regain, our regional market share as to all the Korean American banks in the country.

Okay. Thank you. I'll step back and let someone else have a shot.

Julianna Balicka, KBW.

I have a couple of follow-up questions. On the SBA origination and loan sale component, it said that it would be an increasing contributor to 2012 revenues. Do you have any targets for SBA origination levels, targets for SBA loans sale levels, any premium trends that you're seeing in the market right now and what you're expecting for the next year? So any more specific metrics you can give us around that, please.

This is JH, CCO. We believe that SBA loan program is an attractive business line that our bank excels in. We expect that we can generate several millions of gain from sales per quarter, in 2012, so we are eager to marketing our SBA program for new loans.

Julianna, I met supplement what JH said. We've really just gotten back into the SBA production here over the last, more so fourth quarter, but at the end of last year. We're ramping up and we're really focusing on bringing that production in and we're having some success. And I think quarterly targets of $3 million gain on sale is realistic based on what we're expecting. Premium seems to be still pretty firm in the marketplace.

10%.

10%. And so we're still thinking it's a very viable program and historically, we've done very well at it.

Very good. And then second follow-up question, if I may, also on the loan side, can you talk about any trends that you are seeing in trade finance right now at Hanmi and also in your markets?

Trade finance? As you know, we believe that the passage of free trade agreement with Korea, we will accelerate the growth of our [trade finance business in our international department. The department is currently contacting, exporter and importer in America. So we are waiting for the marketing results which will make difference] (Company corrected after the conference call).

Excellent.

Julianna, we haven't seen a whole lot yet, but we're expecting it to come forward. Obviously, we're very excited about the free trade agreement between South Korea and the US, and we do expect expansion of export/import. But as of today, it is really -- it's just starting to trickle. We expect it to build up here probably I would say, maybe more like second quarter.

That makes sense. Very good, thank you. And then a final question and I'll step back, you mentioned this $25 million purchase loan transaction that you are going to be completing at month end. Could you tell us a little bit more about what kind of loans, what markets, some metrics around those?

Yes, it's a single-family package. The customers are University -- California schools, professors. Very high quality. It's an ARM product and it has an index that pretty much falls [11th district coffee] and it seems very attractive. The pricing seems to be reasonable.

And these pull that we are looking at, these group of loans historically have had no defaults. And again, it's very high-quality. It's a program offered through the state of California for the university professors.

And also you have the recourse.

We have recourse, too, yes.

Okay, very interesting. Thank you very much.

Joe Stieven, Stieven Capital.

First of all, good afternoon and nice quarter. Lonny, I would like to ask you a little question on the DTA. Without going into too much detail, I think by our estimates we had done some analysis that approximately $60 million of the $80 million is what could come back on some time in the near future, especially as the company remains profitable. Can you comment on that? That's question number one.

All right, Joe, and again thank you, and good afternoon.

We recognize that the $80 million is -- and I think we've already talked about this a little bit -- that is not going to be able to be fully recaptured or the full valuation reversed. We do think it is probably -- and I'm going to buffer myself here, say it is $55 million to $60 million is going to be eligible. We are in process of going through -- evaluating the analysis for this right now and that is sort of where we think it's going to be.

We're cautiously optimistic that we could start seeing some recovery of this in 2012, possibly as early as the first quarter. But again, we're still working with our accountants and doing the various analysis that needs to be done.

A lot of people think just because you have so many consecutive quarters of profit that that basically allows you to recapture your DTA and reverse the valuation allowance on it.

It's a little bit more than that. What it involves you know is in addition obviously, you have to have -- return to what I would call stable profitability, I think we're demonstrating with five quarters of profits. And I think for the most part it is pretty good core earnings and I think it will continue to improve going into 2012.

You've got to look at your forecasted earnings going forward -- what kind of credit losses are we going to experience in 2012, possibly 2013? So there's a number of factors we have to look at. There's a lot of moving parts here.

But I think short answer is if you want to think about a number, it's probably at $55 million to $60 million.

And can I ask another question?

Yes, Joe.

Looking at the improvements that you've seen in your nonperformings, it appears that most other banks have been taking down their reserves let's say, a little bit more aggressively than you guys have and you have left yours very high. Again, is that sort of just because of your previous regulatory relations? And I've got to believe that those should be improving dramatically for you guys. Can you comment about those concepts?

Joe, yes, I'd like to put a little color on that. Obviously, we've gone -- 2011 basically we called a transformational year, but 2010, and 2009 and before that, we've had some very, very difficult years. And we've had to establish substantial levels of allowance. And we've been under a regulatory order for over two years now.

And one of the things that we have to be able to address is to work with our regulators and be able to demonstrate we have proper coverage. We believe we are very adequately covered in today's environment. As we noted in our discussion and our presentation today that we are well above the average banks. Even though the nonperforming loans are coming down, we still do have some elevated levels of classified loans overall.

With that being said, we're making a lot of progress of getting there. Our goal is one, to get out of this regulatory order some time in 2012; we're expecting the second half of the year for that to happen. What we want to be careful is not get aggressive in just charging off but be very prudent in how we provision here.

The regulators -- we're pleased with the capital raise. We do have what we believe a very good process of identifying classified loans. And we think we have -- I don't want to say conservative -- but it's a very prudent and wise approach to our provisioning.

We think long term that's going to pay dividends to our shareholders because of what we've done. Because if we've properly evaluated our problem loans, there's going to be less provisioning in the future, would be my guess.

Okay. Thank you and congrats to everybody.

(Operator Instructions). Joe Pavelich, Snyder Capital Management.

A quick question. You mentioned you expect average earning asset growth in 2012. Just curious what kind of range you expect. And then had a question on NIM, how much of a drag was excess liquidity on NIM in the fourth quarter and what's a good range for NIM for 2012? Thanks.

Okay. The average earning asset growth -- we, obviously, we believe we have one to two more quarters of probably note sales to get us in a position from our classified asset levels. So we're not expecting a whole lot of growth in the first two quarters, but we are anticipating and knock on wood, if we get the economy starting to kick in, in the second half of the year, we could get some growth in -- I would say modest growth, I don't know what, 4%, something like that, maybe, going forward. But it is going to have to depend a lot on the economy. We are seeing some opportunities in our marketplace. We are now viewed as a stronger institution. We've revitalized their lending team. So we think we've got some momentum going because we haven't really been out there aggressively lending until -- actually, we're just starting it up right now in 2012.

To guide a little bit on the NIM, our liquidity -- we have substantial liquidity and it is definitely a drag on our NIM. I think our liquidity ratio is over 25%. But it did have an impact on our NIM for the fourth quarter. I'm going to say it probably had -- probably 5 to 6 basis points I think would be probably realistic to look at as far as that going.

Going forward as we talked in our news release, we do have like $440 million in what we call high-cost promotional CDs at an average cost of 1.89%. Those are going to mature here over the next six months. And $250 million of that matures in March. So what we do expect to see is -- and again, not looking at a whole lot of expansion of NIM from the asset side but just looking at it more from the cost of deposit side, we think we could probably pick up 5 basis points in the first quarter and possibly as high as 12 basis points in the second quarter due to those higher-cost deposits repricing.

So again, another thing that we're looking at is trying to take some of this liquidity and put it into earning loans and obviously, that would have an impact on improving NIM as well.

Great. Thanks.

(Operator Instructions). At this time there are no further questions in queue. I'll turn the call back over to Mr. Henry Hong for closing remarks.

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

Ladies and gentlemen, that concludes today's presentation. All parties may now disconnect. Good day.