Hanmi Financial Corp. Q3 2009 Earnings Call Transcript

Nov. 5.09 | About: Hanmi Financial (HAFC)

Hanmi Financial Corp. (NASDAQ:HAFC)

Q3 2009 Earnings Call

November 5, 2009 01:30 PM ET

Executives

Jay Yoo - President and Chief Executive Officer

Brian Cho - Executive Vice President and Chief Financial Officer

Analysts

Julianna Balicka - Keefe, Bruyette & Woods

Operator

Welcome to Hanmi Financial Corporation 2009 third quarter conference call. (Operator Instructions) This conference call is being recorded today November 5th, 2009.

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, anticipate, 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, level 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 certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Hanmi Financial.

Accordingly, actual results may differ materially from those expressed and/or implied or projected by 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 S. Yoo, Hanmi's President and Chief Executive Officer; Brian Cho, Executive Vice President and Chief Financial Officer; and Charles Kim, First Vice President and Senior Loan Officer.

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

Jay Yoo

Thank you, Terry. Good morning everyone and thanks for joining us today. As many of you are well aware, John Park, our Chief Credit Officer recently passed away.

We have appointed John [Auk Sun] our loans division leader as interim CCO pending regulatory approval. He will perform the duties of CCO until a permanent appointment is made, but today issues of credit quality will be addressed by Brian.

As discussed in the morning's press release, our third quarter loss of $59.7 million was largely caused by tax charges of $38.2 million to establish a $44.9 million valuation allowance against the state deferred tax assets and a portion of the federal deferred tax assets.

This is not a write off a tangible asset but simply a valuation allowance that can be reversed in the future. In absence of this non-operative charge, our third quarter operating loss is $31.6 million or $0.46 per share compared to our net loss of $9.5 million or $0.21 per share in the second quarter.

The $49.5 million provision for credit losses, which replaced the impact of the CRE market deterioration on our borrowers, again resulted in a disappointing quarter.

Responding to the ever-worsening credit market, we have employed various credit quality management programs such as independent loan reviews and collateral re-operators.

We have also updated our ALLL methodology and loan-trading systems to ensure that our allowance [especially in] this quickly deteriorating credit markets.

On a positive note, our continued collections effort including our proactive loan workout finally started to reduce our delinquent loan level in the third quarter.

Delinquent loans were $151 million, 5.07% of total gross loans at September 30, 2009, decreased by 16% from $178.7 million, 5.66% of total gross loans at June 30, 2009.

With this reduced delinquency and a higher allowance level the anticipated credit losses in this prolonged economic downturn appear to be well deserved.

We also made important and meaningful improvement in our core banking foundation, as we had planned early this year. Our de-leveraging strategy has provided, as anticipated without any undue equity risk.

As a result, we have substantially improved our net interest margin while reducing our reliance on volatile funds such as broker deposits and borrowings.

Since we last spoke, we have also received $6.9 million in equity capital from leading investment and security companies, Korean Investor. We remain in active negotiations with an affiliate of [Leading] regarding a significantly larger infusion over equity capital.

Before I turn the call over to Brian, let me comment briefly on this morning’s announcement concerning two regulatory enforcement orders. As detailed in today’s release as well as in our 8-K filing with the SEC, there are a number of items that need to be addressed by the bank.

For the most part, they deal with capital, liquidity, and asset quality. In anticipation of our regulatory orders we have already taken strategic measures to improve the issues of concern by our regulators.

We will continue to implement our plan in collaboration with the regulators to meet the requirements or the orders and resolve these issues in a timely manner.

I’ll now turn the call over to Brian for more details of our operating results.

Brian Cho

Thank you, Mr. Yoo. Good morning everyone. Let me first disclose two major items, the capital adjustment and liquidity matters and I will discuss credit quality side again.

In the quarter, we established a valuation allowance of roughly $45 million against our existing DTA, Deferred Tax Assets. Under the U.S GAAP our valuation allowance must be recognized if it is more likely than not that DTA will not be realized.

During our periodic evaluation, we decided to establish a valuation allowance as of September 30 based on the existence of a three-year cumulative loss. This three year cumulative loss position was resulted from significant loan loss provisions we provided this year.

Although, our credit financial forecasts indicate sufficient taxable income will be generated to realize these existing DTAs in the future. Those forecasts were not considered sufficient positive evidence to overcome the observable negative evidence, the aforementioned three-year cumulative loss position.

Although this valuation allowance increased tax expenses and reduced our tangible book value, it did not have an effect on our cash flow. We delivered the remaining net DTA over to $2.5 million to be realized in the fourth quarter of this year.

I will now turn my remarks to liquidity, which we continued to focus on. Year-to-date in 2009, deposits declined by just $78 million and such decrease was accompanied by far more decreases on the loan portfolio.

As a result, our liquidity remains set seperatly with our net loan to deposit ratio of around 95% at this quarter end. The competition of our liabilities continues to shift toward core funds and away from volatile funds.

As of September 30 2009, broker deposits excluding paybacks decreased to $366 million, now representing roughly 12% of total deposits.

And Federal Home Loan Bank advances also declined to $160 million. As I spoke three months ago, over $800 million high interest bearing promotional time deposits has matured and to a great extent they have been replaced with more reasonably priced deposits resulting in the anticipated improvement in our net interest margin.

In fact net interest margin was up by 52 basis point to 3% in the third quarter from the prior quarter’s 2.48%. In the third quarter the average cost of interest-bearing deposits sequentially decreased by 67 basis points to 2.7% and the average yield on the loan portfolio increased by 4 basis points to 5.5%. We expect to see these trends to continue for the time being although to a lesser extent.

Let me now briefly summarize non-interest income and expense since the detailed analysis is already given in the morning's release. Our non-interest income sequentially increased in the third quarter with gains recognized from the sale of SBA loans.

We believe that this recovery of the secondary market for the SBA-guaranteed loan will continue to benefit our non-interest income stream going forward.

On the other hand, total non-interest expenses sequentially decreased in the third quarter in the essence of non-recurring items. We believe our continuing effort effectively managed this area across the board.

Overhead controls remains our utmost priority and we will carefully monitor areas where we have a control, such as advertising spends and personnel expenses.

Certain expenses however will continue to be seen to count in the current diminishing bottom line. They are expenses necessary to address regulatory issues and credit issues.

Now, let's discuss about provision for credit losses and our credit quality. The $49.5 million provision in the third quarter reflects a continuing deterioration of the credit market especially the CRE market. With this large third quarter provision, our reserve increased to roughly $125 million, 4.19% of the total loans at September 30.

Such large provisions can be explained by $40 million loans charged off in the quarter and $16.4 million increase in the Fed's (inaudible) reserve in connection with the increase impaired loans. Our impaired loans increased by $43 million in the quarter due to the weakening CRE market.

As Mr. Yoo mentioned earlier, our delinquent loans decreased by $37.6 million in the third quarter to $151 million at September 30. However, non-performing loans increased slightly in the same quarter by $7.3 million to $174 million.

Such increases were mainly due to our proactive loan work out program, which often involves loan modification and TDI loans, as I also mentioned various measures to address the continuing deterioration of the commercial loan portfolio.

Before we take your questions, let me add some color about such programs. During the third quarter, we substantially completed a review of existing commercial loans. The purpose of this program is to reassess their current status as well as to calculate the accuracy over our loan grading system.

In this program, we reviewed approximately 46% in our commercial loan portfolio. This process included financial analysis, reevaluation over the underlying collateral, assessing borrowers intention and ability for repayments and [citation] if deemed necessary.

In addition, we are continuously tightening our lending policies and procedures to improve lending practice and loan monitoring. But these revisions are also focused on timely identification of problematic credits and appropriate workout plans.

Another program to share with you is the new appraiser. Our previous new appraisal project in the first quarter was focused on those single purpose property loans.

Our current new appraisal project is for the selected commercial loans that go above average interest.

Now this concludes our prepared remarks. Terry we are now ready for the Q&A.

Question and Answer session

Operator

(Operator Instructions). Your first question comes from Julianna Balicka - KBW. Please proceed.

Julianna Balicka - Keefe, Bruyette & Woods

I have just a few question mainly if you can just give us a little bit more color and background as to why the investment negotiations are continuing presumably all the way through July 2000 of next year.

What's causing it delay because I thought that they were presumably going to be finished by the year-end or maybe I'm wrong about that? But if you can just give us a little more ideas as to what's going on in terms of regulator approvals and what not on both the Korean and the American side?

Jay Yoo

Well, as we have previously stated we are in active negotiation with a consortium of Korean investor, but we still have to talk to the regulators for getting their approval. Actually we have satisfactorily completed our mutual due diligence are in active discussion about the right size and the power structure, which we may get the approval from the Fed.

That's why it’s taking more time than we original planed. But as the regulatory gave us sufficient time, by July 31 next year, we believe that this project will be completed within the given period.

Julianna Balicka - Keefe, Bruyette & Woods

And how are the South Korean regulators approaching this transaction?

Jay Yoo

Well we understand the South Korean regulators are very positive and they are only concerned with Fed approval in the U.S.

Julianna Balicka - Keefe, Bruyette & Woods

And in terms of the second tranche of the leading investment, is there a timeframe on when that will close?

Jay Yoo

Well, as you know the first investment of $6.9 million was already invested in September and the second investment of 5%, $4.1 million, is scheduled to be invested by November 30. But at this moment I assume that would be delayed.

Julianna Balicka - Keefe, Bruyette & Woods

And is there a reasonable timeline and why is it being delayed?

Jay Yoo

Well at this moment as (inaudible) discussed, we actually tried to figure out the right structure and the right size of the investment, together with the Fed and the regulators. So in that process there is a chance of combining the [special] constraints of $4.1 million, it’s a small amount, maybe this combined together with the other tranche, the (inaudible)one.

Operator

(Operator Instructions) There are no additional questions in queue. I would now like to turn the call over to Mr. Yoo for his closing remarks.

Jay Yoo

Thank you Terry. We understand that there are still many challenges ahead of us. The biggest challenge is the credit quality of our loan portfolio. Consequently, we are continuously taking all necessary steps to limit further deterioration in the asset quality.

And also with our various initiatives, capital raising efforts and the core focus on the fundamentals of banking, I believe that we'll see major improvements in our asset quality, liquidity position and capital levels in the fourth quarter and 2010.

Again, thank you for joining us today. We look forward to speaking with you when we report our fourth quarter results early next year. Goodbye everyone and have a great day.

Operator

We appreciate your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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