Hanmi Financial Corp (HAFC) 2012 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Hanmi Financial Corporation third-quarter 2012 conference call. As a reminder, today's call is being recorded for replay purposes. At this time, all participants are in a listen-only mode. Following the presentation, the conference will be open for questions.

I would like to introduce Mr. David Yang, Vice President and Corporate Strategy Officer.

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

Mr. Yoo will begin with an overview of the quarter and year-to-date results 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.

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 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 its financial results for the third quarter and first nine months of 2012 which can be found on our website at Hanmi.com.

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

Thank you, David, and good afternoon, everyone. For the third quarter of 2012, we continue to [face] profitability from our core banking operations and made substantial progress with the successful turnaround strategy we put in place more than two years ago. We tripled our earnings in the third quarter compared to our year ago, generating $13.3 million in net income or $0.42 per share.

As noted last quarter, our success in returning to profitability started the reversal of the deferred tax asset valuation allowance in that period. Additional DTA valuation allowance of $4.9 million was released in the quarter which accumulates for a total $57.9 million for the nine months of the year.

Year-to-date net income totaled $76.4 million or $2.42 per diluted share including a net tax benefit of $47.7 million, which added about $1.52 per share to earnings.

Our return to profitability over the past two years is a significant accomplishment and a reversal of the DTA variance in allowance is the final constant in our future ability to generate earnings and continue building franchise value.

Our pretax income for the third quarter was up 47% to $12.6 million from the $8.6 million earned in the second quarter and tripled to $4.2 million from the third quarter a year ago. Pretax net income was $28.7 million in the first nine months of 2012, up 23% from the same period last year. We are pleased with the steady improvement in our price as well as the ongoing improvement in asset quality, improving operating efficiencies, and contributions from our SBA loan origination and (inaudible).

Asset quality continues to improve with non-performing assets dropping to $45.1 million from $78.3 million a year ago as a percent of total assets, non-performing assets were at 1.59% compared to 2.91% a year ago and 1.62% at end of the second quarter. We are continuing to make excellent progress on credit quality and remain focused on resolving the problem asset we still have.

To summarize, Hanmi had a really good quarter and an excellent year so far. We remain focused on maintaining strong capital levels, producing quality core earnings and improving credit metrics. We appreciate the hard work of the Hanmi team and the support of the investment community.

With that, I will turn the call over to Lonnie to provide more details on our operations and credit quality. Lonnie?

Thank you, Jay, and good afternoon, everyone. With strong operating profits augmented by the net tax benefit, our third-quarter and year-to-date results were pretty good. Last quarter we reversed $53.1 million for our DTA valuation allowance with an offsetting tax expense of $5.9 million, which generated a net tax benefit of $47.2 million. This quarter, we took another $4.9 million in DTA valuation allowance reversal and generated a tax benefit of $644,000 as a result of a provision to return and other adjustments and certain tax credits.

Next quarter we expect to reverse another $5.4 million which will basically offset the fourth quarter tax provision and will bring the total DTA valuation allowance reversal to $63.4 million for the full year. The net result is that we will recover a total of $2.01 per share in book value for the year.

At the end of the third quarter, our tangible book value per share was $11.52, up 8.1% from a year ago. As Jay said, this event is important not just for its addition to profits and book value but also as an indicator that our turnaround is sustainable. And as I said last quarter, in 2013, we expect to have a normalized tax provision at approximately 39% of pretax income.

Our core operations continue to show improvement particularly in asset quality and efficiencies. We saw some compression in our net interest margin in the quarter, reflecting the excess liquidity we have on the balance sheet.

Asset quality has really come a long way this year. Our ratio of classified assets to Tier 1 capital plus loan loss reserves improved again this quarter, coming down to 28.6% at the end of September from 32.2% at the end of June and 83.2% a year ago.

Both our operations and balance sheet are steadily improving. We ended the quarter at $2.84 billion in total assets, $1.89 billion in net loans and $2.36 billion in total deposits and an eighth consecutive quarterly profit.

Our SBA loan originations were $34.8 million for the quarter and $111.2 million for the year. Because we sell most of our SBA loans in the secondary market to generate fee income, we sold $21.3 million with a $1.8 million gain in the quarter compared to the sale of $65.2 million with a $5.5 million gain in the second quarter and an $18.1 million with a $1.6 million gain in the year-ago quarter.

During the second quarter, gain in sales was magnified from the sales of previous quarter's production of $30.9 million with a $2.6 million gain. Year-to-date SBA sales totaled $86.5 million, generating a gain of $7.2 million.

We sold $23.6 million in other notes for the quarter and $96.6 million year to date. Note sales generated only $515,000 in losses in the third quarter compared to $5.3 million in losses in the second quarter and $3.1 million in losses in the year-ago quarter. Year-to-date note sales generated $8.2 million in losses compared to $3.5 million in losses a year ago.

In the past three years, we have sold more than $358 million in notes which allowed us to reduce nonperforming loans, keep foreclosed real estate balances low, and improve credit metrics very quickly.

Our deposit mix is also continuing to improve, with core deposits growing to $1.73 billion, up to $208 million from a year ago. Year-over-year core deposits increased with a $73.2 million increase in demand deposits and $108.3 million increase in money market and NOW accounts. Hanmi ended the third quarter with 29.4% in DDA accounts and over 58% in low-cost transaction deposits.

Focusing on the income statement, we generated $24.9 million in net interest income for the third quarter of 2012. While our average interest-earning assets were up slightly year-over-year, our yields were down 22 basis points in the quarter and 38 basis points year-over-year. While our cost for interest-bearing liabilities is also down 11 basis points in the quarter and 38 basis points from a year ago, it is not enough to offset the decline in yields.

Our net interest margin for the third quarter was 3.69%, which was down 15 basis points from the preceding quarter and 6 basis points from the year-ago quarter.

For the first nine months of the year, margin improved 5 basis points to 3.74% from 3.69% in the first nine months of 2011.

With the overall cost of deposits at 61 basis points in the third quarter, there is still a little room for improvement. It will just not be as dramatic as we've seen in the past few quarters.

Yields on interest earning assets were 4.35% in the third quarter and 4.49% year-to-date. Over the coming quarters, we should maintain or nominally expand NIM as we continue to improve the mix of core deposits and with less drag on yields with the improvement in asset quality. We also believe we can boost yields as we see better growth in the loan portfolio and as we begin to deploy excess liquidity.

As we discussed in the release, we did not take a credit loss provision for the third quarter, reflecting continuing improvement in asset quality. Our loan loss provision year to date was $6 million compared to $8.1 million in the first nine months of 2011.

With reserves at 3.38% of gross loans, our reserve position continued to be well above the average of 2.71% reported for the second quarter by SNL Financial for the 328 banks that make up its U.S. Bank Index.

Non-interest income in the third quarter of 2012 was $6.5 million, which was down from the $7.2 million in the preceding quarter and up from the $6 million earned in the third quarter a year ago. Year-to-date, non-interest income was relatively flat at $17.3 million compared to $17.5 million in the year-ago period. The biggest component of the quarterly differences was in gain from SBA loan sales, loss from other note sales, and gains on sale of investment securities.

Going forward, we anticipate that the loss for the note sales will decline while gain from SBA loan sales will continue to contribute to revenues.

Non-interest expense in the third quarter of 2012 was $18.8 million, down 5% from the $19.8 million in the second quarter of 2012 and down slightly from the $18.9 million in the third quarter a year ago. Year-to-date, non-interest expense fell 9% to $57.3 million from $62.8 million in the same period of 2011.

Salaries and employee benefits, our largest overhead cost, they were down 3% in the quarter and up 12% year-over-year.

Year-to-date, compensation expenses rose 6% to the $27.7 million which reflects severance paid in connection with workforce reduction and increased bonus accruals for this year.

We also are seeing significant savings in our deposit insurance premiums and regulatory assessments as well as lower cost of directors and officers liability insurance. The combined savings year-to-date in these two categories totals $1.7 million and is directly related to the improvement on our balance sheet and asset quality.

And the other category where we had big cost savings is our OREO-related expenses, which were down $1.2 million in the first nine months of this year compared to the same period last year and last year we had a $2.2 million expense associated with the unconsummated capital-raising efforts in 2011.

The efficiency ratio for the third quarter of 2012 was 59.81%, an improvement from 61.07% in the second accord and 60.55% a year ago. For the first nine months of 2012, the efficiency ratio was 62.32%, down from 66.63% in the first nine months of 2011.

Let's talk about the loan portfolio and credit quality now. Total classified assets at September 30, 2012 were $131.2 million compared to $143.7 million at the end of the second quarter and $317.1 million a year ago. The continuing improvement in this metric is probably one of the most significant items for measuring our turnaround.

J.H. and his team deserve a lot of credit for the hard work and smart work, too, that they have put in to improve our asset quality.

Non-performing assets including loans held for sale decreased 48% to $49.5 million compared to a year ago. This is a reduction of $46.3 million from $95.8 million a year ago.

Our non-accrual loans include $19 million or 38% which are performing restructured loans that are current and paying on a modified agreement.

Our net charge-offs were $5.9 million compared to $13.4 million during the second quarter of 2012 and $15.5 million during the same quarter a year ago. The allowance for loan losses totaled $66.1 million or 3.38% of total gross loans at the end of September compared to $100.8 million or 5.06% of total gross loans a year ago.

As I mentioned earlier, we still have ALLL that is well above the 2.71% of average reserves held by all US banks and 2.04% average reserves held by banks in the $1 billion to the $5 billion asset size according to SNL Financial. The allowance for loan losses to non-performing loans was 148% at quarter end compared to 159% in the preceding quarter and 129% a year ago.

Again, based on SNL data for June 30, 2012, our reserve levels far exceed the 61% coverage ratio for US banks and the 47% ratio for banks in our size range.

To recap, we are pleased with the accomplishments our team has achieved in the past few years and this quarter is further evidence of our success in recurring Hanmi Bank to our health. We still have some work to do on asset quality. But the heavy lifting is pretty much behind us. We are now fully focused on growing high-quality earning assets and improving efficiencies to further build our earnings capacity.

We know we could not have accomplished all that we have done without the hard work of our people and especially without the support of our investors. If you are in the Los Angeles area and you would like to meet with us, please give me a call.

Lastly, we will be ringing the closing bell for the NASDAQ Exchange on December 17 this year in celebration of our 30th anniversary.

Thanks again for your attention and support.

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

(Operator Instructions). Gary Tenner, D.A. Davidson.

Good afternoon. It's actually Matt filling in for Gary. How are you guys doing?

How are you guys looking at the excess liquidity on the balance sheet in terms of what sort of strategies do you guys have going forward into the next quarter as well as 2013?

Matt, that's a good question. One of the things is we have not -- we have actually lowered our deposit pricing and we are still maintaining ample levels of liquidity. Our goal is for the last three quarters, we've been selling notes obviously to clean up the asset quality issue on our balance sheet. We expect those levels to tail off. We're not looking for -- if I was going to pick a number for note sales in the fourth quarter, we've got a couple situations we are looking at but it's probably going to be about $10 million.

So it's going to be a lot less than what we have done. Historically we did have some -- a little higher payoffs this quarter than we had expected. But again, we are looking at some elevated levels of loan production origination going into the fourth quarter and into 2013. So our goal here is to really take the excess liquidity and deploy it in higher-yielding loans. So obviously if we can effectively do that, that would obviously have a more positive impact on our net interest margin and so that's our strategy.

We are expecting to probably originate about $160 million in the fourth quarter in loan production and going forward in 2013, I think we talked about this last quarter, we're expecting about a 10% growth in our loan portfolio, so we think if we are successful doing that, that should help us with our liquidity situation.

Okay, that's helpful. Going on with the loan production guidance, any particular loan categories where you are seeing some pockets of growth going into the rest of the year as well as 2013?

Obviously our bread-and-butter business is commercial real estate lending. There is some movement there. We like to see a little more of a diversification. We are looking at C&I. We are exploring mortgage possibility. We like the SBA loan originations but that's more to sell in the secondary market. The premiums on that product is still pretty strong and we think that's a good place to monetize that particular investment, take the gain on sale.

But for the most part, it's probably going to be still commercial real estate. We would like to do more C&I but that's still a tough business out there. Overall we are exploring a couple avenues there.

Right. Okay. That's all I have. I'll step back, thanks.

Joe Gladue, B. Riley.

Good afternoon. Just wondering if you could give us a little bit of color on sort of what the types of loans are that are flowing into the classified category? And I guess there was a little bit of an uptick in inflows this quarter versus last quarter. Is that -- any trend there or just one or two sizable loans just looking for a little detail?

We've seen over the last couple quarters a nice reduction in our classified loans. I am not sure exactly if there was any one particular item that was a trend or anything. We do expect to see lower levels of classified loans coming into the classified category going forward.

But J.H., is there any particular item that you are seeing?

Good afternoon. This is J.H. Son, CCO of the Bank and I also look at classified loans and most service has $19 million, which is 15% over the total classified loans and followed by a $8.8 million and 10% and also it's (inaudible) of $12.7 million at 10%. So it's the most heavily on beginning its property loan and land loan.

So we are still seeing mostly the business property and in the concentrations that we have seen historically, Joe.

Okay, just wondering again with your strong reserve levels and declining levels of classified assets, is it possible we will see some further quarters with no provisioning?

I can't say for certain that there will be no provisioning, but we do expect to have lower levels of provisioning and I think last quarter, we were at $4 million, $6 million year-to-date. We are thinking that it is going to be lower levels going forward. As we mentioned to your previous question, we expect to see lower levels of downgrades in loans going forward.

Charge-offs have been relatively low, $5.9 million. Most of those charge-offs were related to note sales that we did in the third quarter. We are not expecting doing a lot of note sales in the fourth quarter, probably less than $10 million, so we expect lower charge-offs probably nominal provisioning could possibly be zero but it's going to be much lower than what you have seen in the first two quarters.

This is J.H. Son. If I may add a little bit more color on that, over the past eight quarters, we've seen continued commodity for quantifiable measure of our asset quality as we maintain strict internal control and proactive provision to managing of problem assets, we expect to see a steady and gradual progress towards a strong loan portfolio. As such, we expect to see such good improvements in the figures for our total allowance as well as loan loss provisions in the [picture].

Thank you. I'll ask one more and that is just in terms of your net interest margin and the cost of funding, do you -- what do you see going forward there? Do you still have any levers to pull to help bring down the cost of fundings? I guess are you considering anything like redeeming some of the subordinated debt earlier, or anything like that?

One of the things, redeeming subordinated debt is something we would like to entertain because those borrowings are fairly expensive today but that's something we are exploring. We're not really in a position to do that considering we are still under our order with the FRB and with the MOU at DFI.

As far as funding costs, we've probably got a couple more basis points to go and that's probably about it. Our goal would be to obviously take our liquidity, deploy it in higher-yielding loans, and that would be possibly the way that we could expand the NIM. But like I said in my prepared text here, is that we need to probably focus more on working on the asset side and growing the yields by redeploying the excess liquidity. I think we'd have more success in an expansion that way.

All right, thank you. That's it from me.

Julianna Balicka, KBW.

Good afternoon. To perhaps continue the conversation about the excess liquidity, you had mentioned that you would like to target 10% loan growth next year. Now in the event that loan growth is slower, say, 5% for argument sake, what is your philosophy towards maintaining the cash and equivalents versus redeploying them into securities? What is your thoughts about securities portfolio management?

I guess from a securities standpoint, we do have some room that we could add, add some securities to our portfolio in that regards. I think overall probably we don't get the 5% or we get a 5% versus 10% loan growth, we would deploy a higher percentage to that in the securities portfolio going forward. The average yield at our securities portfolio is about 2.2% to 2.25%. We'd do more of that.

But again, as I mentioned earlier, we did -- we have reduced some of our deposit rates so we're not really trying to really grow that liquidity at this point. We want -- we believe that we can be successful in growing our loan portfolio 10% next year and that's obviously going to be our target. If we are going to -- if we see that that's not happening, we would deploy some of that in the investment portfolio but might let some of it run off, too.

That makes sense, and then in terms of your securities portfolio, you shifted securities from held to maturity to AFS, so are you planning on selling some of those down or is there is any other plans there?

No, it wasn't the intent to sell these particular securities. The held to maturity securities were predominantly municipals and we made a strategic decision here that in the event that these municipals got into a credit situation, obviously some of the municipalities in Southern California have run into some financial problems, we wanted to have the flexibility to sell these securities in the event of a credit situation.

Having them in held to maturity created some hurdles for us and so we made the decision to take all the securities on held to maturity and put them in available for sale and keep as much of our investment portfolio liquid and the ability to sell in the event of a credit situation with a particular security or what have you. It was a consciously discussed situation here.

Obviously from an accounting standpoint, we really can't do much with held to maturity securities in the near future. It's not our intent or philosophy to really have held to maturity securities going forward.

So it was more driven not by the intent to sell securities because we have a lot of liquidity to begin with based on just seeing the numbers that we have, it was more to react to a potential credit situation that may occur in your municipal portfolio. And I'm not saying that any of the municipal securities are in a credit situation that would require us to sell them today, it was just we wanted to provide additional options on that particular portfolio.

That makes sense. Then finally in terms of this excess liquidity, what are your thoughts about portfolioing SBA loans and such in order to be to redeploy the security versus selling it for the gain?

That is definitely discussions that we are having in our [Elko], in our strategic sessions and that's something we can look at. One of the compelling arguments that we like about selling into the secondary market and monetizing those gains is that the premiums right now are very strong and actually have improved even from the second quarter into the third quarter. That's obviously something that we could do. We are talking about it. But at this point in time, we have preferred to go with the gain on sale versus portfolioing.

That makes sense. I will step back, but just a final question, what are the premiums in this quarter? What was the improvement?

Premium currently is over 11%. We generate the average premium ratings 11.1% last quarter.

Right, but we have seen premiums on various products as high as 14%, 15% on the various buckets on the pricing, but the pricing sheets that we have seen recently are showing stronger bids out there.

Interesting. Very good. Thank you very much.

(Operator Instructions). If there are no other questions in the queue, I would like to turn the call over to David for his remarks.

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

Ladies and gentlemen, thank you all for your participation in today's conference call. Thank you, David.