Hanmi Financial Corp (HAFC) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Hanmi Financial Corporation's first-quarter 2012 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today Thursday, April 19, 2012.

I would now like to turn the conference over to Mr. Henry Hong, Investor Relations Officer. Please go ahead, sir.

Thank you and thank you all for joining us today. With me to discuss Hanmi Financial's first-quarter 2012 highlights are Jay Yoo, our President and Chief Executive Officer, Lonny Robinson, Executive Vice President and Chief Financial Officer, and J.H. Son, Vice President and Chief Credit Officer.

Mr. Yoo will begin with an overview of the quarter and Mr. Robinson will then provide more details on 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. (inaudible) on this call [claims of protection] of the Safe Harbor provision contained in the Securities and Exchange Commission 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-Qs. 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 the financial results for the fourth quarter of 2012 which can be found on our website at hanmi.com. I will now turn the call over to Mr. Yoo.

Thank you, Henry. Good afternoon, everyone. We made a good start to 2012, generating our sixth consecutive quarterly profit. We are also pleased with the increase in total assets, loans and deposits this quarter after several years of deleveraging our balance sheet and [being defensive].

We are celebrating our 30th anniversary and it feels great to have a good start for the year. We could not have achieved this notable turnaround with out our dedicated employees, our patient shareholders and our loyal customers. One of the initiatives we started this year is the Hanmi Neighbor Volunteer Service program to solve our community's youth, health care and education growth.

As I mentioned in the release, we are taking this opportunity to return a small part of support given to us by our customers and our community. This program we also [volunteered] our expectations in our market.

Our first-quarter net income was $7.3 million or $0.23 per diluted share. Profits for the first quarter of 2012 were up 33% from the prior quarter when we earned $5.5 million or $0.22 per diluted share.

In the first quarter last year we earned $10.4 million or $0.55 per share, reflecting a higher revenue of earning assets, no provision for credit losses and no losses on the sale of loans. In the first quarter of this year, we've booked a 2 million credit loss provision and incurred $2.4 million in losses on the sale of loans. Our [full] year reserves also reflect a higher number of shares outstanding both from quarter to quarter and year over year and all periods have been adjusted for the 1.8 deferred stock split which became effective on December 19, 2011.

Asset quality continues to improve substantially with nonperforming assets dropping to $51.5 million from $127.4 million a year ago. As a percent of total assets, nonperforming assets were at 1.86% compared to 4.42% for year ago and 1.91% last quarter. We are not complete with the closing of our loan portfolio yet, but we believe this will be accomplished in 2012.

I am very proud of my colleagues who have accomplished so much over the course of the last few years and we are looking forward to the coming year with more enthusiasm. With that, I will turn the call over to Lonny to provide more details on our operations and present metrics. Lonny?

Thank you, Jay, and good afternoon, everyone. We are continuing to improve both our operations and balance sheet. We ended the quarter at $2.77 billion in total assets, $1.98 billion in gross loans, $2.36 billion in total deposits and, more importantly, our sixth consecutive quarterly profit.

While the profit line is not a straight upward sloping line, we remain confident that we have turned the corner on profitability and that our demonstrated success over the past six quarters is not by accident but the result of very hard work our team has put into our turnaround. Our net loans receivable were up 3% in the quarter and down 5% year over year. Our SBA loan originations were $36.2 million which is normally a good source of fee-based income for us as much of this production is floated to the secondary market.

However, the sale of first-quarter SBA production did not occur due to a technical issue with the SBA. Consequently, the $2.8 million gain on the sale of SBA loans was not executed in the first quarter.

We are also continuing to market loans through small traunche net sales and this effort continues to have a positive impact on our asset quality. We sold 26.1 million in notes for the quarter. In addition, we are continuing to improve the deposit mix in our business with core deposits growing to $1.68 billion up $223 million from a year ago. Year over year, core deposits increased with demand deposits growing $127 million. Money market and NOW accounts are up $47 million.

The marketing campaign we initiated last year continues to be successful in attracting new core deposit customers on the end of the first quarter, with 30% in DDA accounts and 56% in low transaction deposit accounts which include DDAs. We will continue to focus on growing our core deposit base this year.

[Fine] deposits over $100,000 declined to 29% of total deposits at quarter end, compared to 40% of total deposits a year ago.

Focusing on the income statement, we generated $24.5 million in net interest income for the first quarter of 2012. While average interest earning assets were down by 7.5% year over year, the 18 basis point drop in the cost of the interest-bearing liabilities helped us sustain our margin.

Our cost of funds continue to improve as a result of repricing of high-cost CDs into current lower rates. Our net interest margin for the quarter was 3.69%, which was up 3 basis points from both the preceding quarter and the year ago quarter.

Yields on interest earning assets in the first quarter were down 2 basis points and down 19 basis points from a year ago. Over the coming quarters, we continue to expect a slight expansion in NIM, due mainly to downward repricing and maturing CDs at a better mix of core deposits and improving asset yields in the second half of the year as a result of deployment of our excess liquidity. Bond interest income in the first quarter of 2012 was $3.6 million, down 43% from $6.3 million in the preceding quarter and down 34% from the $5.5 million earned in the first quarter a year ago.

The biggest component of the decline stems from the lack of SBA loan sales that I discussed earlier. We recorded a loss on sale of problem loans of $2.4 million for the first quarter. In the fourth quarter of 2011, we recorded a gain of $2.9 million from the sale of SBA loans partially offset by the loss of $2.5 million from the sale of problem loans as previously mentioned.

Service charges on deposit accounts is the largest contributor to the non-interest income, generating $3.2 million in the first quarter of 2012 in line with the fourth-quarter 2011 and up slightly from a year ago. Insurance commissions continue to be generating solid revenues, contributing $1.2 million to first-quarter revenues compared to $1.1 million in the fourth quarter, and $1.3 million in the first quarter of 2011.

Noninterest expense in the first quarter of 2012 was $18.7 million, down 12% or $2.5 million from $21.2 million in the fourth quarter of 2011 and down 11% or $2.3 million from $21.1 million in the first quarter a year ago. Salaries and employee benefits were lower in the quarter, reflecting the reduction in the workforce we implemented late last year.

We are also seeing substantial savings from the lower regulatory expenses and deposit insurance, reflecting the improvement in our balance sheet and the banking industry overall. FDIC insurance and regulatory assessments fell 32% to $1.4 million from the $2.1 million a year ago. The other category where the big cost savings is our OREO-related expenses which generated income of $44,000 in the first quarter compared to an expense of $829,000 a year ago.

The efficiency ratio for the first quarter of 2012 was 66.56%, an improvement from 69.03% in the fourth quarter and 66.61% a year ago.

As we discussed last quarter, we are rebuilding our SBA loan and marketing and production and originated $36.2 million in new loans compared to $34.1 million booked in the fourth quarter of 2011. In the first quarter last year, we did not originate any SBA loans.

I will now turn to the discussion to the loan portfolio and credit quality. Total classified loans at March 31, 2012 were $229.4 million compared to $282.4 million at the end of 2011 and $380.1 million a year ago. We are focused on reducing levels of not only nonperforming loans but also classified loans to acceptable regulatory levels this year. Nonperforming loans decreased 60% to $50.2 million compared to a year ago as a reduction of $74.5 million from $124.7 million a year ago. Nonperforming loans were 2.54% of total growth loans at the end of March compared to 5.87% a year ago and 2.7% at the end of the fourth quarter.

We are continuing to find selling a number of small packages of nonperforming loans brings better pricing than selling [bulk] packages of NPLs and that will be our ongoing strategy this year.

We are also seeing an overall reduction of new loans migrating to nonaccrual status. Our nonaccrual loans include $14.5 million or 29% of which are performing restructured loans that are current and paying on a modified agreement. With the improvement in overall asset quality, our provision for credit losses declined to $2 million in the first quarter, down from $4 million in the fourth quarter. We did not book our provisions in the first quarter a year ago which is when the improvement in our asset quality really started to gain momentum.

Our net chargeoffs were down 25% to $11.3 million from $15.1 million during the fourth quarter of 2011 and down 48% from $21.6 million during the same quarter a year ago. Of the total first-quarter chargeoffs, $8 million were in partial chargeoffs of loans with collateral shortfalls, $4 million in [C&I] noncollateral type loans and $289,000 were in additional chargeoffs from loan sales offset by recoveries of $1 million.

As I mentioned earlier, our provision costs are down from the fourth quarter and we have increased the allowance as a percent of NPLs while reducing it as a percent of gross loans. The allowance for loan losses totaled $81.1 million or 4.1% of total gross loans at the end of March compared to $125.8 million or 5.9% total gross loans a year ago. We still have an ALLL that is well above the 3.02% of average reserves held by all US banks and almost double the 2.15% average debt is held by banks in the $1 billion to $5 billion asset size according to S&L financial.

The allowance for loan losses to nonperforming loans was 161% at quarter end compared to 172% in the preceding quarter and 101% a year ago. Again, on the S&L data for December 31, 2011, our reserve levels far exceed the 62% coverage ratio for US banks and the 45% for banks in our size range.

Finally, our tax situation has not changed from the last quarter and I want to review what we discussed last quarter.

As you know, we booked a valuation allowance for deferred tax asset in 2009 and our provisions or benefits from the taxes have been minimal over the past few quarters. As we see profitability continuing, we believe that we may be able to recover some, not all, of the approximately $79 million deferred tax asset valuation allowance during 2012. We now understand that the full reversal of the reserve on the eligible [DTA] will occur all in one quarter.

To summarize, Hanmi posted a good first quarter to start our 30th year of business.

On virtually every metric, our operations and asset quality are improving. We remain focused on maintaining strong capital levels, producing quality core earnings and improving credit metrics so that we can get our regulatory orders lifted. We believe we are moving closer to full compliance every quarter.

We appreciate your time and are happy to have you as investors, customers, and/or team members.

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

(Operator Instructions). Julianna Balicka with KBW.

Good afternoon. Good quarter.

Thank you.

Thank you.

I wanted to touch a little bit on the CD re-pricing. You mentioned some of the CDs are still coming up for re-pricing in your press release. In terms of the CDs that were repricing in the first quarter that you talked about at the last earnings call, could you tell us how much of those are still with you or and to what rate they repriced? Because it seems like the improvement in city costs was a little light of what we expected so I was wondering whether that will continue into the second quarter or what your thoughts are on that -- the already matured CDs?

We had approximately, I think it was $500 million of these high-cost time deposits repriced most of it being in the March time period in March itself in the first quarter. The average cost of these deposits was 1.89%. They repriced in approximately repriced about 80 basis points I think it would be an average center of gravity. I think we did -- we were able to retain approximately 70% I think it was the number of these deposits. Some of those deposits did migrate into DDA accounts and money market accounts.

So, it did in all -- so some -- so even though we retained it, some of it moved out of the time deposits into money markets and DDAs; and so my suspicion would be that some of that money that moved into DDAs may end the second quarter due to maybe tax payments or maybe other investment opportunities may migrate out of the bank as well.

And margin impact will be fully visible next quarter since it happened towards the end of the quarter and the third month of the quarter?

Yes. I think that is a fair comment. I think just purely, you're just looking at -- say an asset yields stay about the same as they were here in the first quarter you could see my guess is an improvement in NIM somewhere in the 10 to 11 basis points for the second quarter, probably more like 5 to 6 basis points in the third to quarter and 3 basis points in the fourth quarter.

Very good. Thank you.

Joe Gladue with B. Riley.

I wanted to touch on the deposit growth. You had a really strong growth in on interest-bearing deposits in the quarter. Just wondering what was driving that and if some of that can continue.

Joe, a couple of things. We have been since, I think, at some point third, fourth quarter of last year we have been really making a focus on getting out and doing business development and bringing in good core deposits. I think as the strength and viability of Hanmi gets out into the marketplace, I think customers are returning to us and so I think we have seen some success there. I am not going to say that we are going to always be at 30% DDAs though we would like that.

But I think we are seeing the community come back and banking with us, and I think that has been some of the strategy. Plus the fact is we are not nearly as defensive as we have been historically because we have been spending probably 99% of our time dealing with credit issues. So we are out there now, trying to develop business not only in the deposit market but also on the loan site.

So I think we will like to say it is going to continue. I don't know whether it is going to continue to grow at a pace that it has maybe over the last couple of quarters, but we do believe that we are building a good solid base of core deposits.

Okay. I think you may have mentioned a couple of minutes ago what performing TDRs were at quarter end. I -- if you did I missed it. Could you --?

Yes. Performing TDRs was $22.9 million.

I also just wanted to make sure I am clear on the SBA loan sales and the delay. With the loan sales that you didn't take in the first quarter I would assume that your -- I guess is it reasonable to assume that those gains would slide to the second quarter and also in addition you would get gains on any additional originations in sales you do in the second quarter, so we could sort of get a double whammy in the coming quarter?

That's -- I would believe that is a correct statement. We are -- we have actually executed the sale of the first-quarter loans and, obviously, we are still out there producing SBA production and we do anticipate having other sales of the second-quarter loans in the second quarter as well. So yes, I think that is a fair comment.

I want to talk a little bit about the SBA situation. Because Hanmi is designated as a problem bank by the regulators, we fall under additional scrutiny so to speak with the SBA as far as establishing certain escrow accounts, being monitored for certain things. Then, if we have a minor fallout in a compliance issue whatsoever, they have the ability to limit our sales for a period of time.

We ran into that situation early in the first quarter. We resolved that particular situation and, as far as we understand, we are in good standing with the SBA at this point. Hopefully as we get the regulatory order, if we are successful in getting the regulatory order lifted here, we won't have to go under that those rigors that the SBA puts upon us from that standpoint.

I will also note is we do believe that we were even though they said we were out of compliance, we felt that we were in compliance. But, anyways, that's where -- that is basically the way it is.

All right and I guess you did mention that you have gotten a ruling or clarification that the reversal of the DTA valuation allowance will likely occur all in one quarter. Care to venture a guess as to what the timing of that might be?

I expect it to happen in 2012. It could be any of the quarters in 2012. It could be second, third or even the fourth quarter. We basically -- I think just when you think back of the reserve on a deferred tax asset, in other words removing the deferred tax asset from your balance sheet, it starts with a cumulative three-year loss which, obviously, we triggered back in 2009.

Now there is no bright line guidance in regards to how you bring that particular asset back in. The one thing we did learn this quarter from our external auditors is that it is more of an all or nothing situation, that it won't come back in on a partial basis as we were initially guided by them.

So we do have an understanding it will come back all in one quarter. I expect it to happen in 2012. We do expect those levels to be probably a little bit higher than the $55 million that we have been guiding to. We think that number could somewhere be somewhere in the $60 million to $65 million range as we get more precision working through the analysis that we have been performing from that standpoint.

So I think that is good. But I do expect it to happen in 2012. I can't pinpoint a quarter. It takes more than just quarters of consistent earnings. I mean, it does take core earnings, a track record of core earnings. They evaluate your credit metrics. They evaluated your pro-forecasted earnings going out five years and your ability to use your deferred tax benefits.

So, a lot of things that go into play there and banks that have been successful in getting them may have had certain unique situations that may have been able to recapture them, say, in four or five quarters or whatever the case may be. Each situation is unique. We are working with our accountants on this. We believe it will occur in 2012.

And I will ask just one final question. Just like to get some color on the loan pipeline and expectations for loan growth going forward.

Okay. That is a good question. We did have a little bit of growth and one of the things I caution the growth in the first quarter we did purchase $67 million in single family residential mortgages, and that was outside of the production. And keep in mind we didn't sell the SBA loans this quarter either.

We do expect the second quarter -- because we are continuing to work with resolving and reducing classified loans, problem loans -- we do expect second quarter to be probably flat is our guess at this point. We are seeing increasing pipelines. We are encouraged. The market is still very, very tough out there. But again we are out there really trying -- I say beat the bushes and try to pick up new business.

But we expect the second quarter to be fairly flat. We do expect growth in the third and fourth quarter as we basically start reducing our efforts as far as getting the classified loans down to what we would call an acceptable regulatory level. So we do expect to see some growth in the third and fourth quarter and our guess is probably the end of the year approximately 5% growth is sort of what we're thinking.

All right. Thank you.

(Operator instruction). Gary Tenner with D. A. Davidson.

Good afternoon. Just a couple of questions. Regarding as you look out long term in terms of capital management, when you do recover at the DTA you are going to be sitting on a pretty sizable treasure trove of capital, if you will. I just wanted to get a sense of where your priorities would be in terms of using that capital or returning capital to shareholders in that period of time.

Good question. One of the things is, obviously, we have to resolve our regulatory order before we can actually have a lot of options available to us as far as deploying the capital that we get. Because at some point, when we get the deferred tax asset, that is additional tangible equity out there from that standpoint.

Once we get the regulatory order lifted, I think there are opportunities to look at -- we have got some troughs out there that may make sense to repay them. Again that is something we would explore. There is a possibility depending on where -- you have got your gamut of items if you are not going to be able to deploy the capital; and in organic growth or some sort of acquisition strategy there's obviously ways of maybe getting capital back in the firm and something on that nature.

But we really, we really can't have that discussion until we get the regulatory order lifted. So once we do there are, I think there's opportunities in the marketplace for organic growth. There might be some opportunities for some acquisitions, but our focus is really getting the regulatory order lifted and then, basically, we can really get in more detail about what we can do with the excess capital.

Okay and then just one follow-up. I am getting to a classified asset ratio number for you guys of right around 39%. Is that the correct number or maybe give me what the correct number is if I am off on that.

You mean as of right now?

Yes, as of the end of the quarter.

No, our classified assets is around 50 --.

53.4%.

Yes. 53.4% right now.

Okay. 50 -- okay I will double check my math on that. Okay. Great. I'm glad I asked. Thanks. I appreciate it.

Thank you, Gary.

(Operator Instructions). I am showing no further questions in the queue at this time. Please continue with any closing remarks you may have.

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

Ladies and gentlemen, this concludes the Hanmi Financial Corporation's first-quarter 2012 earnings conference call. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 with the access code of 453-1652. ACT would like to thank you for your participation. You may now disconnect.