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Hanmi Financial Corporation (NASDAQ:HAFC)

Q3 2008 Earnings Call Transcript

October 23, 2008 4:45 pm ET

Executives

Jay Yoo - President and Chief Executive Officer

Brian Cho - Executive Vice President and Chief Financial Officer

John Park - Executive Vice President, Chief Credit Officer

Analysts

Ella Blister

Elana - Merrill Lynch

Hugh Miller - Sidoti & Company

Brian - KBW

Sean Ryan - Sterne, Agee & Leach

Operator

Good afternoon. Welcome to Hanmi Financial Corporation 2008 Third Quarter Results Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). This conference call is being recorded today, October 23, 2008.

This call may contain forward-looking statements, which are made under the SEC's Safe Harbor rules for forward-looking statements. Forward-looking statements relate to the Company's future operations, prospects and businesses, and are identified by words such as "may," "will," "should," "could," "expects," "plans," "intends," "anticipates," believes," "estimates," "predicts," "potential" or "continue," or the negative of such terms.

Although we believe that the expectations reflected in the forward-looking statements are reasonable based upon our current judgment, we cannot guarantee future results, levels of activity, performance or achievements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statements.

Such statements are subject to risks and uncertainties, many of which are difficult to predict and are generally beyond the control of Hanmi Financial. Accordingly, actual results may differ materially from those expressed and/or implied or projected by the forward-looking information and statements. Hanmi undertakes no obligation to update any forward-looking statements in the future.

For additional information on factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements, please see the Company's filings with the SEC.

Representing the Company today are Jay Yoo, Hanmi's President and Chief Executive Officer; Brian Cho, Executive Vice President and Chief Financial Officer and John Park, Executive Vice President and Chief Credit Officer.

I'll now turn the call over to Mr. Yoo. Please go ahead, sir.

Jay Yoo

Thank you. Good afternoon everyone and thank you for joining us today. When I spoke with you at the end of July, I alluded to the fact that Hanmi, like its peers, faced a number of serious challenges in the months ahead. Little did any of us know just how serious those challenges would be. Nonetheless, we are able to report considerable progress in the third quarter.

Net income was $4.3 million or $0.09 per diluted share compared to non-GAAP net income of $1.8 million or $0.04 per diluted share in the second quarter. The second quarter non-GAAP number you will remember related to the $107 million non-cash goodwill impairment charge that was obtained by the decline in the market value of our common stock. I refer you to the reconciliation table that appears in today's release.

When we last spoke, I noted that we were in the process of addressing two critical areas. One was strengthening and centralizing the loan underwriting and approval processes. The other was the strengthening of existing partnerships and procedures regarding the monitoring of loans. These are really two sides of the same coin and on both counts we have made considerable progress. Here we believe that the best defense is a good offense, a good reason to believe that we are making progress in enhancing asset quality. As John Park, our CCO will explain in more detail, we have seen improvements in both delinquent loans and non-performing loans.

New loan production in the third quarter was modest, in particular due to the weakness in demand that mirrors the weak economy and in part due to our bank debt that is selective in accepting new loan applications.

We won't identify potentially troublesome loans to ensure that they never make it onto our books. Similarly, we are rigorously monitoring existing loans, especially in cases where the review process brings to slight weaknesses, which if not addressed in a timely fashion will jeopardize the status of the loan downstream.

I have said this before, but it is worth repeating. No single factor is more important for the management and the board than improving credit quality. A close second, however, is improving the efficiency of the bank's operations. Here too are making considerable progress. The previously announced reduction in head count has been completed and has effected to result in annual savings of $4 million to $5 million, which will begin to be realized in the first quarter. With approximately 10% fewer employees, we have also consolidated office space and will benefit from a slight reduction in these expenses.

In short, we are leaner and more tightly focused organization than we were just three months ago. With the addition of John Park as CCO in the beginning of September, we finally have first rate senior management team in place; [John] Brian Cho, our Chief Financial Officer; Joon Hyung Lee, our Chief Marketing Officer; John [Hutching] our Chief Risk Officer and Greg Kim, our Chief Administrative Officer.

It remains the case, however, that optimizing operation efficiency is always a work in progress. In particular, credit monitoring and risk management system will be at the top of the list, followed closely by a program to deal the deposit base. The good news is that our own hope in deposit growth loan at the recent financial turmoil appears to have a steady life.

In any case, we still have adequate access to FHA advances and other borrowings as we continue working to rebuild core deposits. In this environment, liquidity remains our foremost concern, just as it is for virtually all financial institutions. With the deterioration of the credit markets and weakness in the overall financial sector, we are monitoring our capital adequacy and our ability to address economic challenges, outpace most financial institutions in the United States. In particular, we continue to evaluate that will enable us to enhance our capital ratios, including potential participation in the US Treasury Department's capital purchase program.

Our goal is two-fold. First to provide a cushion that will ensure that we remain well capitalized. Second, and no less important to ensure that we remain competitive in the marketplace in which not all financial institutions will survive. There will be winners and the losers. Our aim is to ensure that Hanmi is among the winners.

With that, I will turn the call over to Brian. Brian?

Brian Cho

Thank you, Mr. Yoo. Good afternoon, everyone. As noted by Mr. Yoo, we made considerable progress in the third quarter of 2008 with the net income over $4.3 million as compared with the prior quarter's $1.0 million non-GAAP net income.

In the third quarter, our total assets and gross loans decreased to $3.77 billion and $3.35 billion as compared with $3.85 billion and $3.35 billion, respectively at the prior quarter end. These changes were consistent with our strategy focusing on the quality loans. However, the 5.5% decrease in our deposits to $2.8 billion was beyond our plan and was the direct result of the lack of depositors' confidence on the overall financial market. This deposit reduction increased our loan-to-deposit ratio to 117% from 111% at the prior quarter end. This is well above our stated goal of 105%.

We expect that it will take some time for depositors to regain full confidence in the safety of their deposits with community banks and we are currently addressing regulatory issues through utilization of wholesale funds. As a result, the Federal home loan banker borrowings increased to $585 million at September 30 compared to $500 million three months ago. And the broker deposits including our fixed treasury deposits also increased to $255 million from $195 million.

We also consider selling some of our loans in an ordinary fashion as soon as the secondary market is normalized. SBA loans first of course. As of September 30, we had a total of $89 million SBA loans in inventory today consisting of $29 million, 7A guaranteed proportion and $50 million 504 program loans.

In addition to these definitive solutions, we expect that our improved financial results in this quarter validate our directions in coming months appropriate to overcome the challenges we are currently facing and deliver some comfort to depositors in our niche market.

We also believe that the opening of two new branches, which typically have been a vital source for garnering deposits will benefit us. We opened our branch in Northridge, Northwest of Los Angeles in September and we will open another branch in Diamond Bar, East of Los Angeles in December.

Another point to help our deposit base is our brand name value as a leading Korean-American bank in connection with the (inaudible) program for South Korea to be implemented in January 2009. Several researches indicate that this program could double or triple the South Korean travelers to the United States, and thus would increase tourists spending by more than $3 billion.

For 2006 market profile report by the US Office of Travel and Tourism indicated that more than 41% of such visitors' destination was California. The said increase in tourist spending therefore will benefit Korean-American business and Korean-American banks in our niche market in Southern California. Our branch network is well positioned for capturing spending from South Korean travelers and related business opportunities. We are currently developing products and services targeted for such purpose.

Moving on to net interest income and margin. The third quarter net interest income was $35.6 million compared to $34.1 million in the second quarter, an increase of $1.5 million. Ever since we are showing our debt slightly decreased by $26.9 million to $3.63 billion in the third quarter. Similarly, average interest bearing liabilities decreased by $15.1 million to $2.84 billion.

In the third quarter, the earlier rate cuts by the Fed continued to decrease both yields and cost of funds. The yields on interest bearing asset was 6.51% during the third quarter, a decrease of 5 basis points compared to 6.56% in the second quarter. So, yield on the loan portfolio decreased by 10 basis points to 6.68% from the prior quarter's 6.78%.

The cost of interest bearing liabilities was 3.34% in the third quarter, a decrease of 27 basis points compared to 3.61% in the preceding quarter. The cost of interest bearing deposit decreased by 27 basis points to 3.43% from the prior quarter's 3.7%.

Net interest margin improved by 15 basis points to 3.9% from 3.75% in the prior quarter. As we expected, the continuing depository pricing from the earlier rate cuts by the Fed benefited us in the absence of additional rate cuts in the third quarter. However, given our slightly asset sensitive balance sheet and the consensus of a further rate cut, we do not expect much help from the fed for the time being. The 50 basis point rate cut early this month is expected to low our loan yield more than our deposit cost. The result will be some compression on our margin, maybe by 20 basis points or so in the first quarter. Of course, the effect will be reversed as our deposits continue to be priced.

Now, let's talk about non-interest income component. As previously announced, the Lehman bankruptcy made us to recognize $2.4 million OTTI on the corporate bond issued by Lehman and $1.1 million loss on [day] activity relationship with Lehman. Such losses will determine based on the fair market valuation of the Fed positions at $0.14 per dollar in occurrence with FASB 157.

In addition, in line with our conservative investment philosophy, we sold another corporate bond position at a loss of $483,000 and also recognized another $212,000 OTTI charges on a CRA equity fund investment. With these losses from the investment transactions that do not represent our core operation, our expense ratio deteriorated in the third quarter to 54.3%. Without such market related losses, we actually made meaningful improvements in the operational efficiencies. Now, I will discuss about that.

Non-interest income decreased by $4.3 million to $5.3 million in the third quarter from the prior quarter's $9.7 million. Such decrease was mainly caused by full aforementioned OTTI charges and our corporate bond paid loss an overall $3.1 million. Our decision to defer productivity loan sale in an anticipation over the secondary markets recovery explains the moderate of the remaining decrease.

Turning to non-interest expense. In the third quarter, it was $22.2 million compared to $129.4 million in the second quarter. Excluding the $107.4 million non-cash operating income, the operating overhead in the second quarter was $22.1 million. Also excluding the aforementioned derivative related loss, the third quarter operating overhead was actually $21.1 million, $1 million less than the prior quarter's $22.1 million.

Our continuing cost of savings effort throughout the year effectively controlled our overhead across the board, especially for restructuring which I mentioned, resulting in a meaningful reduction in salaries and employee benefit and we expect on annual savings of $4 million to $5 million when compared with expense level before the structure. The sequential quarterly savings of 12% in data processing is also notable.

Lastly, we estimated the effective tax rate in 2008 at 27% as compared with 38% in 2007. Such decrease was the result of the fact that the 2008 tax exempt income as a percentage of taxable income will be much higher than that over 2007.

I will now turn the call over to John Park, our new CCO, to provide an overview of our loan portfolio and related credit profile. John?

John Park

Thank you, Brian. Let me turn first to the subjects of non-performing loans and delinquent loans. Non-performing loans were $111.9 million or 3.34% of growth loans at September 30, 2008 compared to non-performing loans of $112.2 million or 3.34% of growth loans at June 30, 2008.

Total non-performing loans at September 30th, the majority are three types, 44% were construction loans, 40% were C&I loans and 10% were SBA loans. Delinquent loans were $102.9 million or 3.48% of total growth loans at September 30, 2008 compared to delinquent loans of $138.4 million or 4.12% of total growth loans at June 30, 2008.

We also saw a positive trend in classified loans, which were $144.2 million at September 30th compared to $159.5 million at June 30th. The third quarter provision for loan losses was $13.2 million, a considerable improvement over the $19.2 million recorded in the second quarter.

Charge-off net of recoveries at September 30 were $11.8 million compared to $8.2 million at the end of the second quarter. The allowance for loan losses at September 30th was $63.9 million or 1.91% of total loans compared to $63 million or 1.88% of total loans at June 30th.

There are three problem loans which we have spoken in the past, which deserve mentioning. First is the condominium project in Northern California, which is expected to be completed within the next week or two. This certainly will eliminate the construction risk. We have ordered a new appraisal on the property since the most recent appraisal based in March of this year when the economy and the real estate market was stronger than they are now. That too is expected to be completed within a week or two.

Our carrying value on the property is currently $30.7 million and if we were to sell it in today's market, we do anticipate some loss. A more likely scenario and a more attractive one would allow the builder to convert it to a rental property until the market recovers or improves. We will be in a better position to make a decision once construction is complete and the new appraisal is received.

Another property worth mentioning is a low income housing project in Los Angeles that is in voluntary bankruptcy. Our carrying value is $16.8 million against which we have reserved $4.9 million. Here in fact there is little to report.

As we have noted in the past, there are a number of entities involved here and we do not expect a resolution in the near future. On a positive note, the C&I loan secured by five car washes in California with a carrying value of $24.2 million has been restructured and is now current with accrued interest paid through September 30th. That is to say, it is no longer delinquent. With another five months of satisfactory performance, it will no longer be classified as non-performing.

Based on a new appraisal, the reserve only at $3.6 million has been reduced to $1.1 million. These problem loans points at time not so long ago when both the credit market and the economies were a lot stronger than they are now. They also point the need for Hanmi to concentrate on this core business, which is serving the need of small-to-medium size businesses in Southern California. They point as well to the need for extremely rigorous procedures regarding the underwriting and monitoring of loans.

For this end, for example, we have removed Lending Authority from the branches and consolidated at three district loan centers, both pre-funding and post-funding reviews, right now more rigorous than ever, and we expect any time these and similar measures will lead to significant improvement in asset quality. In the meantime, we continued to work diligently to identify and appropriately classify all potentially problematic loans. This remains as the work in progress.

But in the near term, we expect to see further deterioration in the retail sector probably for at least the next two or three quarters as the economy continues to slow. This will likely affect some of the loans already in the portfolio. The same is true of the commercial real estate sector.

In summary, and while we are optimistic that we will see continuing improvements in the overall quality of the loan portfolio, the likelihood of a projected recession suggests that these improvements will be incremental and will take some time to achieve.

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of [Ella Blister] You may proceed.

Ella Blister

Hi, guys.

Jay Yoo

How are you?

Ella Blister

Good. How are you?

Jay Yoo

Good. Thank you.

Brian Cho

Fine.

Ella Blister

I was just wondering if you have a core EPS number for Q3?

Brian Cho

In the EPS, $0.09?

Ella Blister

A core number excluding all of your charges such as your Lehman expenses?

Brian Cho

The expenses are different types and I would indicated in investment securities related to the losses all together, I may say $4.2 million, so we are talking about $0.06, so nine plus six, $0.15.

Ella Blister

About $0.15?

Brian Cho

That's right.

Ella Blister

Okay, thank you. That's all I have.

Brian Cho

Thank you very much.

Operator

Our next question comes from the line of Erika Penala with Merrill Lynch. You may proceed.

Brian Cho

Hi Erika.

Elana - Merrill Lynch

Hi, this is actually Elana, I'm sitting in for Erika.

Brian Cho

Okay.

Elana - Merrill Lynch

I just have a really quick question. So I know that you talked earlier about your deposits. I was wondering if you could provide a little bit more color on the inflow and outflow trends. Looking at your earnings release it looks like the outflows is for more your expensive deposit products or could you just kind of confirm and elaborate on these trends?

Brian Cho

Well, there is of course more outflow than inflows. And the time deposit decreased a lot and so I may say from both expensive time deposits because such deposit also has more than $2 million aerially concern about the safety of their deposits. So, those are the two main part I have been looking out officially they offer the promotional rate higher than usual rate. Does that answer you?

Elana - Merrill Lynch

Yeah. I guess I also was wondering that I didn't see a DDA average balance on the press release. I was wondering what sort of -- was there an inflow and outflow in that deposit category?

Brian Cho

Well, credit deposits in previous also probably about 15%. The average balance appears from margin analysis on our -- based on our earnings release and -- but the main decrease was made in the part of time deposits. Time deposits, we have a total balance over $1.4 billion. September the last year it was about $1.7 billion. So, main reduction was made in that area and CDI decrease was relatively small. And money market accounts have increased. It is presented in our earnings release, it is part of the composition on page 9.

The DDA decrease -- I have the numbers for nine months period from last year-end was about -- $40 million decrease, which represents about 6.7%. And money market accounts increased by 34% and jumbo time deposits decreased by 54%. So the time deposit increased by 140%. So jumbo time deposit decreased (inaudible). And the smaller time deposits because of the Fed concern increased dollar. And so the change of core deposits is relatively small and it is stable indicating our brand name value still remains in the market.

Elana - Merrill Lynch

Great, thank you. I had a quick question about your loans. I know that you mentioned that there you've noticed some weakness within retail credits. Now I was wondering what percent of your owner occupied loans is retail oriented?

Jay Yoo

That portion is -- that represents about 20% of our commercial real estate loans, about 20%.

Elana - Merrill Lynch

20% of your total owner occupied commercial real estate loans?

Brian Cho

Total CRE.

John Park

Total CRE.

Elana - Merrill Lynch

So does that also then include your income producing strip malls?

John Park

Yes, that includes that.

Elana - Merrill Lynch

Okay, great. And also just a quick question on your expenses. Given your restructuring effort and also the non-interest expense to the derivative transaction, what sort of run rate should we expect moving forward, is it that $22 million that you mentioned earlier on the call?

Brian Cho

Yeah, in the second quarter excluding that $1.1 million loss, we are talking about $21 million around. So, that number is probably appropriate to use.

Elana - Merrill Lynch

Okay, great. Thank you. That's it from me.

John Park

Thank you.

Operator

Our next question comes from the line of Hugh Miller with Sidoti & Company. You may proceed.

Hugh Miller - Sidoti & Company

Hi, good afternoon.

John Park

Hi, Hugh.

Hugh Miller - Sidoti & Company

Hi. I was wondering if you could just give us a little bit color, I think you may have touched upon it during your presentation, but on the tax rate in the quarter, and I think you mentioned that you're still anticipating a 38% run rate go-forward, but if you could just give a little bit of color on that?

Brian Cho

Yeah. As I explained the reason, the reason is our income level is much lower than prior year, so taxable income is much less than prior year. But our tax-exempt income, say enterprise and interest exemption, they kind of overlap tax -- the level of tax exempt income remains same, so because of the increase of deduction in calculation of tax rate. So, this year our effective tax rate of 27% will be a proxy for the remaining quarter. And as the -- probably our income level is coming back, then tax rate is going up in accordance with increase of our taxable income to other income.

Hugh Miller - Sidoti & Company

Okay. So, fourth quarter somewhere around the -- that you said, 27, 28%?

Brian Cho

That's right.

Hugh Miller - Sidoti & Company

And then next year probably getting back up towards that 38% level?

Brian Cho

Yeah, it depends on the economy situation and our earnings power.

Hugh Miller - Sidoti & Company

Sure.

Brian Cho

Okay.

Hugh Miller - Sidoti & Company

And I guess can you talk a little bit about the provisioning in the quarter? I know that you obviously had the sequential contraction in the loan portfolio, but give me your commentary regarding your expectation that we're going to have several more quarters of a weak economy there and deteriorating climate for commercial real estate and just -- I guess looking at the coverage ratio as well. Any color, any thought you can give us on how you got to the provisioning for the quarter and what you're anticipating maybe go-forward?

John Park

Well, I think in the 3Q quarter, our loss had been higher than prior quarter, because there was specifically one loan, our participated loan that we written down about $2.6 million. I don't think that's going to incur again. And also, our -- as you noticed, our loan in the second quarter, third quarter had peaked with small business loan program that we instituted about three years ago, and all those loans came to surface. So first, second, and third quarter, I think we are looking at tail-end of that. And also, our commercial real estate loans, we -- our LTV ratio, we had maintained it very conservatively not to exceed 65%. In addition to that, the land loans that we have, even though it's a small portion of portfolio, our average LTV is below 47% and the weighted average is about 37%. So, on that basis, we did write down significant amount in third quarter and our provision I feel is adequate going forward, I do not anticipate any write-down to exceed the level we experienced in the second quarter of this year.

Hugh Miller - Sidoti & Company

So you're anticipating that the charge-offs go forward will be in line or lower than the second quarter of this year?

John Park

Definitely.

Hugh Miller - Sidoti & Company

Okay, that's great color there. And you mentioned that you had the one project that was a little less than $31 million, condo project, I think you mentioned it, and that you are going to hold on to that or if you were to sell it off now, you would anticipate some type of loss. Can you give us any indication on what that could potentially be? But I know that your plans are to wait until the environment improves before you were to do something with that.

John Park

Right now we're in the process of updating that appraisal and there are some weaknesses since then. And so, definitely there is going to be a loss if we were to liquidate right now. But as I stated, I think the ultimate position for us at this -- well, number one, the significant improvement that we have made in that project is that construction risk is now gone and that's probably the biggest risk we carried in prior quarters. So that will be completed. And with appraisal update at that time, I think we'll definitely decide what we're going to do, but there might be possibly additional reserves in the fourth quarter with updated appraisal.

Hugh Miller - Sidoti & Company

Okay, excellent color there. And I guess just looking at the reduction that we were seeing during the quarter on an end-of-period basis for both the demand accounts and the interest-bearing accounts, you had mentioned that you were seeing some nervousness with depositors and within the financial institutions and that was causing some of that reduction. Can you give us a sense of what you're seeing so far now in October now that the government has made the plan adjustments to the guarantees for DDA and so on?

Jay Yoo

Yeah. Well, as the government on FDIC extended their coverages up to $250,000 and also one of TD account, the debt coverage is unlimited. So it's only few days overall, so it's too early to tell immediately. But, the feedback I got from a field person is it's much easier to push rate on the security depositors. And so we expect it will come down towards something like that.

Hugh Miller - Sidoti & Company

Are you starting to then see, so far this month, an improvement in demand deposits and also interest-bearing deposits?

Jay Yoo

Well, actually it's very volatile, some day because (inaudible) in connection in the area of larger depositor. So I cannot announce, it's not the time for me to announce it's stabilized or not yet. And also one thing I have to consider is actually the nature of the account, the depositors have some relationship -- business relationship with Korea, and there are currency valuation in Korea. So the Korean currency, Won, is falling down, so to take advantage of investment opportunity, some depositors go for the money over there.

So it depends on the currency translation too. So, actually we -- everybody believe Korean Government and Euro sold at the currency -- Won currency value is at bottom at this moment and we will expect it will recover pretty soon. So as the recovery is made, those monies out of our bank will return, that's what we expect. At this moment actually, I cannot tell you exactly if all this realized or -- because I have seen daily fluctuations. One day we -- I have seen tens of million dollar increase, the following day $2 million decrease, it's too fluctuating.

Hugh Miller - Sidoti & Company

Okay, that's excellent color there. And if you could just talk a little bit about the margin in the quarter, obviously the non-performers seemed to be relatively flat. And then given the reduction in demand accounts, I guess the NIM went up a little bit more than I was anticipating. Could you just give us some color there on what was really fueling that, was there -- you said substantial repricing of some timed accounts that happened during the quarter or what caused the NIM expansion?

Brian Cho

Yeah, as I said, as we have -- you have seen, this NPA relatively is stable and this nine month number changes because of the non-accrual loans. So actually 3.9% we own in the sub-collar represent the current margin. But as I said, (inaudible) cut away by 50 basis points and we are at a sensitive position. And also the competition for the value is very tough in this world. So, deposit of course is not very sensitive to Fed rate cut, but loan pricing is very sensitive on prime-based. So 60% of our loan portfolio is directly changing with changes of rates direct -- immediately. So we are losing about 40 basis points loan yield because of that rate cut. But the savings we may get from depositor account is probably 10 basis points or so, so about 20 basis point rough comparison in the immediate quarter, in fourth quarter.

Hugh Miller - Sidoti & Company

And that 20 basis points, you're looking for that in the fourth quarter of this year or the first quarter of next year?

Brian Cho

Fourth quarter, this quarter.

Hugh Miller - Sidoti & Company

Fourth quarter?

Brian Cho

That's right.

Hugh Miller - Sidoti & Company

Great. Thank you so much.

Brian Cho

Yeah.

Operator

(Operator Instructions). Our next question comes from the line of Julianna Balicka with KBW. You may proceed.

Brian - KBW

Hi, this is Brian actually covering for Julianna.

John Park

Hi, how are you?

Brian - KBW

Hi, good. Just -- a lot of my other questions have been answered already with regards to deposits. But the one we did still have outstanding was with regards to the treasury programs and the capital purchases. Wanted to get your thoughts on the program and if you've talked to regulators about that as well?

Jay Yoo

Right. Before I say this, to avoid any confusion, I have to say this first about our capital level. Despite all challenges we experience, we keep generating operating income. But, Hanmi always remains a well capitalized franchise institution. And our total risk-based capital ratio even further increased to 10.8% from 10.6% at the last year-end. However, we anticipated a prolonged recession period and have evaluated the alternative from the earlier year. However, in light of well recognized challenges facing the credit market and given its fiduciary responsibilities to the company's shareholders, from the beginning of this year our Board explored and will continue to explore various options available to provide sufficient cushion necessary in times of the prolonged recession, or to prepare us for the coming business opportunities.

So direct to answer to your question, we believe [TOP] is a good capital option for any bank and we are releasing the relative information as possible with those alternative options. However, I think it is too early to tell whether we will participate or not since credit platforms have just started to release detailed information. So until the full information is available, we cannot make any decisions. We just continue to explore alternative options and credit capital plan is part of that. Did that answer you?

Brian - KBW

Yeah, I think it does. So have you actually had ongoing conversations with the regulators or that hasn't begun yet, you're still looking at your options first?

Jay Yoo

Well, actually the regulators is not familiar with this program yet.

Brian - KBW

Okay.

Jay Yoo

Okay.

Brian - KBW

Great.

Jay Yoo

Risk-based products.

Brian - KBW

Okay, that answered that question. Thanks.

Operator

Our final question comes from the line of Sean Ryan. You may proceed.

Sean Ryan - Sterne, Agee & Leach

Good afternoon.

John Park

Hi, Sean.

Sean Ryan - Sterne, Agee & Leach

Could you please just talk about the Memorandum of Understanding that you released the 8-K on just a few days ago? And I mean there seemed like a sort of unusually long list of issues that it was addressing and if you could maybe talk about to what extent those may be backward-looking in terms of addressing things -- concerns that emerged maybe under Dr. Sohn's tenure or how many of them are ongoing, how you are addressing those and also whether that has any implications for your decision on whether or not to participate in the capital purchase plan?

Jay Yoo

Well, this MoU is actually informal MoU, and we are required to treat as confidential. But anyway, we filed 8-K. So I cannot discuss more than what we already discussed on the 8-K. And well, actually this MoU was the result of our prior exam, which has been concluded in March. So they'll clear the examination of the prior year 2007. But since then, whole of this year we improved our operational loss in many places. So -- and also we continued to improve whatever points they -- whatever weakness they point out. So until the time we receive this MoU, we substantially complete most of the items they asked to improve.

And in regards with TOP I have no idea and I'm not allowed to discuss either. But I have no idea what kind of relationship between MoU and TOP is the right answer.

Sean Ryan - Sterne, Agee & Leach

Okay. Well, thank you very much.

Jay Yoo

Okay.

Operator

It appears there are no additional questions at this time. I will now turn the call over to Mr. Jay Yoo for closing remarks.

Jay Yoo

Thank you, Nikita. Since I spoke with you three months ago, much has changed. We are now in the midst of a severe credit contraction that comes on the heels of several years of largely unregulated credit expansion. We are all paying the price. The toll expands beyond the financial market. The economy as a whole is now clearly in all stages what is likely to be a prolonged recession. The combination of limited credit and the slowing economy with the stresses it puts on our customers has had a direct effect on Hanmi's financial performance, most recently in our third quarter results.

As we have noted in our remarks this afternoon, those effects can be seen in both our financial and our income statement. But we have also noted a number of areas in which we have seen improvements in our core operations. Moreover, we believe that the second quarter may have represented the low point in the deterioration in asset quality. As we have seen in the past several quarters, we have not yet in particular the positive trends in delinquencies and the hedge. We expect to report further improvement in subsequent quarters.

Again, thanks for joining us today. We look forward to speaking with you when we report our fourth quarter and full year results in February. Goodbye, everyone.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

Jay Yoo

Thank you.

John Park

Thank you.

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Source: Hanmi Financial Corporation, Q3 2008 Earnings Call Transcript
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