David Yang – IR and Corporate Planning Officer
Jay Yoo – President and CEO
Brian Cho – EVP and CFO
J. H. Sohn [ph] – SVP and Chief Credit Officer
Julianna Balicka – KBW
Hanmi Financial Corporation (HAFC) Q4 2009 Earnings Call Transcript January 28, 2010 1:30 PM ET
Welcome to the Hanmi Financial Corporation’s 2009 fourth quarter earnings conference call. My name is Regina, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator instructions) As a reminder, this call is being recorded for replay purposes.
I would like to introduce Mr. David Yang, Investor Relations and Corporate Planning Officer.
Welcome to Hanmi Financial Corporation’s 2009 fourth quarter earnings conference call. Thank you for joining us today.
With me today to discuss Hanmi Financials’ fourth-quarter highlights are Jay Yoo, our President and Chief Executive Officer; Brian Cho, our Executive Vice President and Chief Financial Officer; and J. H. Sohn [ph], our Senior Vice President and Chief Credit Officer.
Jay will start out the call with an overview of the quarter, Brian will then discuss financial performance, and J. H. will conclude with a review of credit quality. At the conclusion of the formal 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 quite different from those expressed or implied by our forward-looking statements, which involve risks and uncertainties. The speakers on this call claim the protection of the Safe Harbor provisions contained in the Securities Litigation Reform Act of 1995 for some factors that may cause our results to differ from our expectations. Please refer to our SEC filings, including our most recent Form 10-K and 10-Q. In particular, we direct you to the discussion in our 10-K of certain risk factors affecting our business.
This morning, Hanmi Financial issued a news release outlining its financial results for the fourth quarter of 2009. Please visit our website at www.hanmi.com to obtain a copy.
After comments by management this morning, we will open up this call to your questions.
I will now turn the call over to Jay.
Thank you, David. Hello everyone, and thank you for joining us today.
I would first like to inform you that we have appointed J. H. Sohn as our permanent Chief Credit Officer, pending regulatory approval.
As has been the case for several quarters now, and despite making progress on several fronts, our fourth-quarter financial performance was affected by a challenging economic environment and the decline in commercial real estate market.
We reported a fourth-quarter loss of $35.9 million or $0.70 per share, largely as a result of a $77 million provision for credit losses; and a loss of $122.2 million for year 2009 or $2.57 per share.
Although challenging, 2009 was a year of (inaudible) change for Hanmi. Looking beyond our bottom line fourth quarter and full-year loss, we made progress in executing our strategic plan to reposition Hanmi for consistent, significant, and long-term profitability. We have successfully deleveraged our balance sheet to improve our capital portfolio [ph], to withstand the impact of the current economic environment. Further, we have substantially improved the liquidity. Our core deposits significantly grew last year, enabling us to reduce reliance on corporate funding.
We continued to diligently deal with credit issues, especially in the fourth quarter, we proactively identified program loans and provided adequate reserve for them or charged them off. With many economists predicting on economy recovery in 2010, we are hopeful that Hanmi will report major improvements in financial performance as the current year progresses. However, with approximately 78% of our low end portfolio collateralized by commercial real estate, much will depend on the extent to which the (inaudible) anticipate improvement in the economy as a whole.
In the meantime, we continue to work on our loan portfolio, so we can begin to see decline in non-performers and net charges in the near future. Most recently, to enhance credit risk management, we have reorganized our credit department by segregating the duties. Most notably, we have stripped off the duties of loan monitoring and loan review. The key function of our loan monitoring department will be to identify potential program loans, while our (inaudible) department will (inaudible) problem loans. Further, on the direction of our new CCO, J. H., one million will be devoted to providing training in various areas of credit for junior run officers, to improve and prepare the bank for future or any growth.
Our main purpose during the first half of 2010 will be to fully comply with regulatory actions by maintaining capital efficacy, improving asset quality, and sustaining liquidity. To date, we have submitted on schedule all of the plans and policies stipulated in the regulatory actions, and we believe we have substantially complied with all provisions. Our highest priority during the next few months is to successfully raise capital to maintain satisfactory capital ratios.
Let me briefly discuss our capital raising project. The minimum capital injection mandated by the regulators is $100 million, likely to rise in 2010 and others are putting off the tangible equity to cash flow ratio to above 9%. We are working to raise sufficient capital in the coming months. Very strong capital will not only satisfy the regulatory ratio requirements, but will also allow us for salary fee momentum for growth.
Throughout 2010, we will diligently work to further strengthen our business competitively, mainly by focusing on employee training and education, to improve our skill sets, to gain competitive advantage amongst our peers. We will equally emphasize internal control, risk management, and cost exercise efforts. Our goal is to regain our position as the foremost Korean-American bank in the country.
I will now turn the call over to Brian for details of our operating results.
Thank you, Jay. Good morning, everyone.
Let me begin with our 2010 operating strategy. With our capital management plans, we downsized both our loans and deposits by 16% and 10% respectively, and filed the Shelf Registration with the SEC to pursue various cash converging options. We will be flexible and persistent in our efforts to execute that to improve our financial strength. Equalizing debt, the balance sheet deleveraging is the only short-term solution we have formulated our levels to check our raising trends and we have made every effort to raise the necessary capital in a timely manner. In 2010, our balance sheet management will be focused on liquidity preservation instead of capital ratio management. With these trends in our project forecast, we will reduce our long-term assets once enough capital is raised, while preserving our deposit base to maintain a sufficient level of liquidity.
This year, given deposit restrictions by duly inactive SEC regulation, we have launched new deposit products with flexible and innovative features. In addition, we continue to enhance the quality and level of customer service. These programs are working very effectively so far and we are able to preserve our deposit base and obtain new customers without compromising our margin. On the hedges side, we are continuing to sell non-performing assets whenever the market is available. In addition, we have maximized the contingency (inaudible) lines from Federal Home Loan Bank and (inaudible).
I will now discuss our financials for the quarter.
During the fourth quarter of 2009, our total assets decreased by $295 million to $3.2 billion at year end. The majority of the decrease was attributable to the reduction in gross loans in investment securities by $158 million and $73 million respectively. Most of the reduction was preplanned and implemented through sale of our assets, in addition to intangible [ph] amortizations and loan charge-offs. There was a similar decrease in total deposits, a decrease of $243 million to $2.8 billion at year end. (inaudible) such decrease was mainly derived the $169 million reduction of brokered deposits and that our transitional deposit account base was favorably increased over the last few years, with the success of our core deposit campaign.
Federal Home Loan Bank balance slightly decreased to $154 million, leaving an additional balance of $416 million, at the year end 2009 for future use. While total interest income decreased by $350 million due to the reduction of earning assets, we were able to increase our net interest income by $1.9 million in the fourth quarter, with our various designs in marketing and pricing. As a result, our net interest margin was extended by 46 basis points to 43.46% for the fourth quarter. This margin expansion resulted from the (inaudible), for low cost of deposits in the past two quarters. And then, we consistently enforced our selective lending strategy to improve our loan yield. We expect that in general margin extension will continue for a while, with our hold declining in that environment in our niche market.
Let me now briefly summarize all the components of the income statement. Details can be found in this morning's release.
Non-interest income slightly declined sequentially, due mainly to the decrease of deposit fee income, reflecting the (inaudible) of our customers. In the past quarter, we sold some loans and securities and from such ways, we recognized net gains in the amount of $1 million in the fourth quarter and $854,000 in the third quarter. This year, although the (inaudible) loans, we will continue to benefit on the interest income stream. Our planned asset sales will cause flotation in non-interest income, depending on the status of the secondary market.
Non-interest expense also declined as well. We believe certain expenses in the (inaudible), credit issues and regulatory matters continue to be seen. Our quarter savings effort, however, will continue this year, especially for discretionary expenditures over which we are concerned.
Lastly, we recognized a tax benefit of $27.5 million on our fourth quarter pre-tax loss of $63.4 million. Last year, we recognized valuation allowance of $45 million against our (inaudible) assets at the third quarter end. New IRS revenue procedure 2009 page 51 (inaudible). This new procedure includes a provision giving on additional (inaudible), by extending the NOL carry back period to the preceding five years, only for the 2009 Federal income tax proposal from the usual three-year period. We aim to recognize tax benefits of up to $1 million for our 2009 operating loss. Also, we (inaudible) in the fourth quarter.
I will now turn the call over to our CCO, for a discussion of the loan portfolio and our efforts to enhance credit quality. J. H?
J. H. Sohn
Thank you, Brian. Yesterday's financial results indicated the erosion in credit quality persisted in the fourth quarter, when we reported our requisite provision for credit losses over $77 million. This reflects both the continuing deterioration in the commercial real estate market and the bank’s commitment to establish reserves sufficient to cover any losses within the loan portfolio. As we pointed out last quarter, we will continue to be committed to our consumer methodology.
Let me now go the numbers relevant to asset quality. At year end, approximately $94 million in loans were newly added to NPL. Of these, approximately $62 million or 67% was C&I loans, and $31 million or 33% were real estate loans. On the other hand, about $50 million came off the NPL list by either charge-offs, pay-offs, or bringing loans back to accrual status. The net result is approximately a $45 million increase in NPL over the past two quarters. Also, from the total NPL over $219 million, $74 million or 33.8% is current or less than 30 days past due. Out of the current NPL, less than 30 days past due, $35.7 million became non-accrual from accrual status, due to collateral shortfalls with inevitable cash flow. And from that $35.7 million, $7.9 million was restructured and identified as troubled and restructured loan.
In addition to NPL, delinquent loans also increased. As of December 31, delinquent loans were $186.3 million or 6.6% of the total gross loans, compared to $151 million or 5.07% of the total gross loans as of September 30. A major factor here was our increase in delinquencies among owner-occupied business property loans and SBA loans. The quarter-to-quarter increase in delinquencies within these two loan categories was approximately $18 million and $13.5 million respectively.
Net charge-offs for the fourth quarter were $57.3 million, compared to $29.9 million for the third quarter. Most notably, commercial term loan charge-offs totaled $30.3 million, including partial charge-offs from owner-occupied and single-tenant property loans. This past October of 2009, CRE payments was issued, requiring proactive and stringent charge-off practices in the declining CRE market, including charge-off of collateral deficient CRE loans with negative cash flows. We will continue to monitor our CRE loans portfolio and actively manage CRE loans in accordance with CRE guidance.
As of December 31, the allowance for loan losses was $145 million or 5.14% of the total gross loans, compared to $124.8 million or 4.19% of total gross loans as of September 30. These particular loss ratios, which I use to quantify adequate levels necessary for current reviews, increased in the fourth quarter, along with charge-off amount, thus leading to a greater allowance for loan losses. On the other hand, inflammatory jobs decreased, as a result of our increased charge-offs. The bank is currently in negotiations to sell a couple of larger OREOs. However, with approximately $41 million in loans, within 30 to 89 days past due, plus still on accrual status, we expect that the potential increase in NPLs to offset those decreases in OREO accounts. As a result, significant change is expected for the aggregate NPL products.
Let me quickly go over our restructured loans. In the fourth quarter, a loan totaling $10.9 million were classified as troubled debt restructured loan. Year-to-date, 12 TDR loans, totaling $33 million were classified as non-accrual, non-performing, and collateral-dependant loans. One of the large TDR loans is a (inaudible) business in the amount of $8.5 million. All aforementioned TDR loans are (inaudible) and have a specific (inaudible) to them.
In terms of our 2010 outlook, there are no indications of stabilization in the CRE market. We will continue to revisit the status of our CRE loan portfolio to assess the repayment of credit. As for C&I loans, the number of payment modification requests, especially for those borrowers involved in retail industries have not decreased. As Jay previously mentioned, we have divided our management to run review and monitoring department into two departments, to strengthen and improve our credit risk management, as well as credit quality. And we are constantly monitoring our watch list as well as past-grade loans.
Moving forward, we will increase the numbers of reviews on our loan portfolio by third-party credit reviewers. We are also conducting consistent re-appraisals on all crucified loans and expanding the scope of the operations to improve those loans into other average list groups. We expect our asset quality to remain a challenge for 2010, with the elevated levels of problem assets, reserves, and the charge-offs. However, we feel we are managing our loan portfolio proactively and have our credit risk profile properly assessed and supplemented with adequate reserves.
This completes our prepared remarks. Operator, we are now ready for the Q&A.
(Operator instructions) Your first question today comes from the line of Julianna Balicka with KBW.
Julianna Balicka – KBW
Good morning. Thank you for taking my questions. I wanted to find out a few things, if you don't mind. One, can you update us up to the date of your most recent regulatory examination?
Well, they just completed the target examinations, and we are expecting an Exchange meeting very soon.
Julianna Balicka – KBW
Very good. And in terms of your deleveraging strategy, which looked pretty effective this quarter, do you have any expectations for ongoing deleveraging in the next two quarters?
Well, as I said on my prepared remarks, while the focus over balance sheet management is shifting to preservation of liquidity for this year, because we already determined we are going to rely on capital rate from outside sources for capital ratio management. So our focus is on liquidity management. So probably our reduction of long-term assets will continue, but to a lesser extent compared to last year and the liability side, we are going to preserve our deposit base, so to increase our cash and liquid assets. So total assets, we don’t expect much to this option when it comes over to the last year.
Julianna Balicka – KBW
Okay, that makes sense. And then, you had referenced that you had been turning away some loan renewals. Do you have a sense of what percentage of renewals you denied or anything like that?
J. H. Sohn
I am J. H. Sohn. We do not have any percentage of the renewals that are turned already. However, we are being more conservative in our areas of our lost credit, especially in our renewal decisions in the picture.
Julianna Balicka – KBW
Okay, all right, that makes sense. And then finally and then I will sit back and let someone else ask some questions. You mentioned a restructured loan balance and also the 30 to 89 delinquent loan balances in your remarks, and unfortunately, I was not writing fast enough to write that down. So do you mind repeating that please?
J. H. Sohn
This is J. H. again. So the $186.3 million in delinquency loan improved interest non-accrual loans. Of the total delinquent loans, $41.2 million are loans between 30 to 89 days past due and $145.1 million are loans over 90 days past due, or loans which are non-accrued on over 30 days past due.
Julianna Balicka – KBW
And then do you have the amounts of troubled debt restructuring, please?
J. H. Sohn
Yes, troubled loans, during the fourth quarter of 2009, we restructured our bottom line to $47.5 million. As of December 31, the bank had $33 million in loans identified as TDRs.
Julianna Balicka – KBW
Very good. Thank you very much for taking my questions.
You are welcome.
(Operator instructions) And if there are no further questions in queue, I would like to turn the call over to Mr. David Yang for his remarks.
Thank you for listening to Hanmi Financials fourth-quarter earnings conference call. We look forward to talking to you next quarter.
Ladies and gentlemen, thank you for your participation in today's conference call. This concludes the presentation and you may now disconnect. Have a great day.
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