Hanmi Financial Corporation (HAFC) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you, for standing by. Welcome to the Hanmi Financial Corporation First Quarter 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, April 19, 2012. I would now like to turn the conference over to Mr. Henry Hong, [ph] Investor Relations Officer. Please go ahead, sir.

Thank you. And thank you all for joining us today. With me to discuss Hanmi Financial's first quarter 2012 highlights are Jay Yoo, our President and Chief Executive Officer; Lonny Robinson, Executive Vice President and Chief Financial Officer; and JH Son, Executive Vice President and Chief Credit Officer. Mr. Yoo will begin with an overview of the quarter, and Mr. Robinson will then provide more details on our financial performance and review credit quality. At the conclusion of the prepared remarks, we'll open the session for questions. In today's call, we'll 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 risk and uncertainty. 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 over certain risk factors affecting our business. This morning, Hanmi Financial issued a news release outlining its financial results for the first quarter of 2012, which can be found on our website at hanmi.com. I will now turn the call over to Mr. Yoo.

Thank you, Henry. Good afternoon, everyone. We made a good start with 2012, generating our sixth consecutive quarterly profit. We are also pleased with the increase in total assets, loans and deposits this quarter after several years of deleveraging our balance sheet and being defensive. We are celebrating our 30th anniversary and it feels great to have a good start for the year. We could not have achieved this notable turnaround without our dedicated employees, our patient shareholders and our loyal customers. One of the initiative we started this year is the Hanmi Neighbor Volunteer Service Program to serve our community's youth, healthcare and education groups. As I mentioned in the release, we are taking this opportunity to return a small part of support given to us by our customers and our community. This program will also further build our station in our market. Our first quarter net income was $7.3 million or $0.23 per diluted share. Profits for the first quarter of 2012 were up 33% from the prior quarter when we earned $5.5 million or $0.22 per diluted share. In the first quarter last year, we earned $10.4 million or $0.55 per share, reflecting a higher level of only assets, no provision for credit losses and no losses on sale of loans. In the first quarter of this year, we booked a $2 million credit loss provision and incurred $2.4 million in losses on the sale of loans. Our per share results also reflect a higher number of shares outstanding both from quarter-to-quarter and year-over-year. And all periods have been adjusted for the 1-for-8 reverse stock split, which became effective on December 19, 2011. Asset quality continues to improve substantially with non-performing assets growth include $51.5 million from $127.4 million a year ago. As a percent of total assets, non-performing assets were at 1.86% compared to 4.42% a year ago and 1.91% last quarter. We are not confident with the cringing [ph] of our loan portfolio yet, but we believe it will be accomplished in 2012. I am very proud of my colleagues who have accomplished so much over the course of the last few years and we are looking forward to the coming year with more enthusiasm. With that, I'll turn the call over to Lonny to provide more details on our operations and credit metrics. Lonny?

Thank you, Jay, and good afternoon, everyone. We are continuing to improve both our operations and balance sheet. We ended the quarter at $2.77 billion in total assets, $1.98 billion in gross loans, $2.36 billion in total deposits and more importantly, our sixth consecutive quarterly profit. While the profit line is not a straight upward sloping line, we remain confident that we have turned the corner on profitability and that our demonstrated success over the past 6 quarters is not by accident but the result of very hard work our team has put into our turnaround. Our net loans receivable were up 3% in the quarter and down 5% year-over-year. Our SBA loan originations were $36.2 million, which is normally a good source of fee-based income for us, as much of this production is sold into the secondary market. However, the sale of the first quarter SBA production did not occur due to a technical issue with the SBA. Consequently, the $2.8 million gain on the sale of SBA loans was not executed in the first quarter. We are also continuing to market loans through small-tone [ph] sales and this effort continues to have a positive impact on our asset quality. We sold $26.1 million in notes for the quarter. In addition, we are continuing to improve the deposit mix in our business with core deposits growing to $1.68 billion, up $223 million from a year ago. Year-over-year, core deposits increased with demand deposits growing $127 million. Money market and NOW accounts are up $47 million. The marketing campaign we initiated last year continues to be successful in attracting new core deposit customers. On the end of the first quarter, with 30% in DDA accounts and 56% in low transaction deposit accounts which include DDAs. We will continue to focus on growing our core deposit base this year. Time deposits over $100,000 declined to 29% of total deposits at quarter end, compared to 40% of total deposits a year ago. Focusing on the income statement. We generated $24.5 million in net interest income for the first quarter of 2012. While the average interest-earning assets were down by 7.5% year-over-year, the 18-basis point drop in the cost of interest-bearing liabilities helped to sustain our margin. Our cost of funds continue to improve as a result of repricing of high-cost CDs into current lower rates. Our net interest margin for the quarter was 3.69% which was up 3 basis points from both the preceding quarter and the year-ago quarter. Yields on interest-earning assets in the first quarter were down 2 basis points and down 19 basis points from a year ago. Over the coming quarters, we continue to expect a slight expansion in NIM due mainly to downward repricing and maturing CDs and a better mix of core deposits and improving asset yields in the second half of the year as a result of deployment of our excess liquidity. Noninterest income in the first quarter of 2012 was $3.6 million, down 43% from $6.3 million in the preceding quarter and down 34% from the $5.5 million earned in the first quarter a year ago. The biggest component of the decline stemmed from the lack of SBA loan sales that I discussed earlier. We recorded a loss from the sale of problem loans of $2.4 million for the first quarter. In the fourth quarter of 2011, we recorded a gain of $2.9 million from the sale of SBA loans, partially offset by the loss of $2.5 million from the sale of problem loans as previously mentioned. Service charges on deposit accounts has largely contributed to noninterest income generating $3.2 million in the first quarter of 2012, in line with the fourth quarter 2011 and up slightly from a year ago. Insurance commissions continue to be generating solid revenues, contributing $1.2 million to first quarter revenues compared to $1.1 million in the fourth quarter and $1.3 million in the first quarter of 2011. Noninterest expense in the first quarter of 2012 was $18.7 million, down 12% or $2.5 million, from $21.2 million in the fourth quarter of 2011 and down 11% or $2.3 million from $21.1 million in the first quarter a year ago. Salaries and employee benefits were lower in the quarter, reflecting the reduction in NIM force -- workforce we implemented late last year. We are also seeing substantial savings from the lower regulatory expenses and deposit insurance, reflecting the improvement in our balance sheet and the banking industry overall. FDIC insurance and regulatory assessments fell 32% to $1.4 million from the $2.1 million a year ago. And the other category with the big cost savings is our OREO-related expenses which generated income of $44,000 in the first quarter compared to an expense of $829,000 a year ago. The efficiency ratio for the first quarter of 2012 was 66.56%, an improvement from 69.03% in the fourth quarter and 66.61% a year ago. As we discussed last quarter, we are rebuilding our SBA loans and marketing production in production and originate $36.2 million in new loans compared to $34.1 million booked in the fourth quarter of 2011. In the first quarter, last year, we did not originate any SBA loans. I will now turn to the discussion to the loan portfolio and credit quality. Total classified loans at March 31, 2012 were $229.4 million compared to $282.4 million at the end of 2011 and $380.1 million a year ago. We are focused on reducing levels of not only nonperforming loans but also classified loans to acceptable regulatory levels this year. Nonperforming loans decreased 60% to $50.2 million compared to a year ago, as a reduction of $74.5 million from $124.7 million a year ago. Nonperforming loans were 2.54% of total gross loans at the end of March. Compared to 5.87% a year ago and 2.7% at the end of the fourth quarter. We are continuing to find selling a number of small packages of nonperforming loans brings better pricing than selling bulk packages of NPLs and that will be our ongoing strategy this year. We are also seeing an overall reduction of new loans migrating to nonaccrual status. Our nonaccrual loans include $14.5 million or 29% of which are performing, restructured loans that are current and paying on a modified agreement. With the improvement in overall asset quality, our provision for credit losses declined to $2 million in the first quarter, down from $4 million in the fourth quarter. We do not book a provision in the first quarter a year ago, which is when the improvement on our asset quality really started to gain momentum. Our net charge-offs were down 25% to $11.3 million from $15.1 million during the fourth quarter of 2011 and down 48% from $21.6 million during the same quarter a year ago. Of the total first quarter charge-offs, $8 million were in partial charge-offs of loans with collateral shortfalls, $4 million in C&I non-collateral type loans and $289,000 were an additional charge-offs from loan sales, offset by recoveries of $1 million. As I mentioned early -- earlier, our provision costs are down from the fourth quarter and we have increased the allowance as a percent of NPLs while reducing it as a percent of gross loans. The allowance for loan losses totaled $81.1 million or 4.1% of total gross loans at the end of March compared to $125.8 million or 5.9% of total gross loans a year ago. We still have AAA well that is well above the 3.02% of average reserves held by all U.S. banks and almost double the 2.15% average reserves held by banks in the $1 billion to $5 billion asset size according to SNL Financial. The allowance for loan losses to nonperforming loans was 161% at quarter end, compared to 172% in the preceding quarter and 101% a year ago. Again, on the SNL data for December 31, 2011, our reserve levels far exceed the 62% coverage ratio for U.S. banks and the 45% for banks in our size range. Finally, our tax situation has not changed from the last quarter but I want to review what we discussed last quarter. As you know, we booked a valuation allowance for our deferred tax asset in 2009 and our provisions or benefits from the taxes have been minimal over the past few quarters. As we see profitability continuing, we believe that we may be able to recover some, not all, of the approximately $79 million deferred tax asset valuation allowance during 2012. We now understand that the full reversal of the reserve on the eligible DTA will occur all in one quarter. To summarize, Hanmi posted a good first quarter to start our 30th year of business. On virtually, every metric, our operations and asset quality are improving. We remain focused on maintaining strong capital levels, producing quality core earnings and improving credit metrics so that we can get our regulatory orders lifted. We believe we are moving closer to full compliance every quarter. We appreciate your time and are happy to have you as investors, customers and/or team members.

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

[Operator Instructions] Our first question is from the line of Julianna Balicka with KBW.

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

Okay. We had approximately I think it's $500 million of these high-cost time deposits repriced, most of it being in the March time period. In March itself, in the first quarter. The average cost of this was 1.89%. They repriced in the -- approximately repriced about 80 basis points I think it would be an average center of gravity. I think we did -- we were able to retain approximately 70%, I think, was the number of these deposits. Now some of those deposits did migrate into DDA accounts and money market accounts. So it didn't all -- so some -- so even though we retained it, some of it moved out of time deposits into money markets and DDAs. And so my suspicion would be that some of that money that moved into DDAs may, in the second quarter, due to maybe tax payments or maybe other investment opportunities, may migrate out of the bank as well.

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

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

And our next question is from the line of Joe Gladue with B. Riley.

I guess -- I see -- I wanted to, I guess, touch on the deposit growth, just you had a really strong growth in noninterest-bearing bank deposits in the quarter. Just wondering what was driving that? And if some of that can continue?

Joe, a couple of things. We've been, since I think at some point, third, fourth quarter of last year, we've been really making a focus on getting out and doing business development and bringing in good core deposits. I think as the strength and viability of Hanmi gets out into the marketplace, I think customers are returning to us. And then so, I think we've seen some success there. I'm not going to say that we're going to always be at 30% DDAs, though we'd like that. But I think we are seeing a community come back and banking with us. And I think that's been some of the strategy and plus the fact is we're not nearly as defensive as we have been historically because we've been spending probably 99% of our time dealing with credit issues. So we're out there now trying to develop business, not only in the deposit market, but also on the loan side. So I think we'd like to say it's going to continue, I don't know where it's going to continue to grow at the pace that it has maybe over the last couple of quarters, but we do believe that we're building a good solid base of core deposits.

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

The performing TDRs was 29 point -- $22.9 million, I'm sorry. Yes, $22.9 million.

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

That's -- I would believe that's a correct statement. We are -- we've actually executed the sale of the first quarter loans and obviously, we're still out there producing SBA production. And we do anticipate having other sales of the second quarter loans -- in the second quarter as well. So yes, I think that's a fair comment. I want to talk a little bit about the SBA situation. Because Hanmi is designated as a problem bank by the regulators, we fall under additional scrutiny, so to speak, with the SBA as far as establishing certain escrow accounts, being monitored for certain things and then if we have a minor fallout in a compliance issue whatsoever, they have the ability to limit our sales for a period of time. We ran into that situation early in the first quarter. We've resolved that particular situation and as far as we understand, we're in good standing with the SBA at this point. Hopefully, as we get the regulatory order and if we're successful in getting the regulatory order lifted here, we won't have to go under that those rigors that the SBA puts upon us from that standpoint. And I will also note it's -- we do believe that we were -- even though they said that we're out of compliance, we felt that we were in compliance. But anyway, that's where -- that's basically the way it is.

All right. And I guess you did mention that you've gotten a ruling or a clarification that the [indiscernible] with the DTA valuation allowance will likely occur all in one quarter. Care to venture what, I guess, is to -- when the timing of that might be?

Joe, I expect it to happen in 2012. It could be any of the quarters in 2012. It could be second, third or even the fourth quarter. We basically -- I think when you think back of the reserve on the deferred tax asset, in other words you're moving the deferred tax asset from your balance sheet, it starts with the cumulative 3-year loss which obviously, we triggered back in 2009. Now there's no bright-line guidance in regards to how you bring that particular asset back in. The one thing we did learn this quarter from our external auditors that it is more of all or nothing situation, that it won't come back in on a partial basis as we were initially guided by them. So we do have an understanding it will come back all in one quarter. I expect it to happen in 2012. We do expect those levels to be probably a little bit higher than the $55 million that we've been guiding to. We think that number could somewhere be -- somewhere in the $60 million to $65 million range as we get more precision working through the analysis that we've been performing from that standpoint. So I think that's good. But I do expect it to happen in 2012, I can't pinpoint a quarter. It takes more than just quarters of consistent earnings. I mean it does take core earnings, a track record of core earnings, they evaluate your credit metrics, they evaluate your forecasted earnings, going out 5 years and your ability to use your deferred tax benefits. So a lot of things that go into play there and banks that have been successful on getting them may have had certain unique situations that may have -- they may have been able to recapture them, say in 4 or 5 quarters or whatever the case maybe. Our -- each situation is unique. We are working with our accountants on this. We believe it will occur in 2012.

Okay. Now just one final question. Just -- I guess I'd like to get color on the loan pipeline and expectations for loan growth going forward.

Okay. That's a good question, Joe. We did have a little bit of growth, and one of the things I cautioned the growth in the first quarter, we did purchase $67 million in single-family, our residential mortgages, and that was outside of the production. And keep in mind we didn't sell the SBA loans this quarter either. We do expect the second quarter because we're continuing to work with resolving and reducing classified loans, problem loans. We do expect the second quarter to be probably flat. It's our guess at this point, we are seeing increasing pipelines. We are encouraged. The market is still very, very tough out there. But again, we're out there really trying, like I said, beat the bushes and try to think up a new business. But we expect the second quarter to be fairly flat. We do expect growth in the third and fourth quarter as we basically start reducing our efforts as far as getting the classified loans down to, what we would call, an acceptable regulatory level. So we do expect to see some growth in the third and fourth quarter and our guess is probably at end of the year, approximately 5% growth is sort of what we're thinking.

[Operator Instructions] Our next question is from the line of Gary Tenner with D.A. Davidson.

Just a couple of questions. Regarding kind of as you out long-term in terms of capital management, when you do recover the DTA, you're going to be sitting on a pretty sizable treasure trove of capital, if you will, and just wanting to get a sense of kind of where your priorities would be in terms of using that capital or returning capital to shareholders in that period of time?

Good question, Gary. One of the things is, obviously, we have to resolve our regulatory order before we can actually have a lot of options available to us as far as deploying the capital that we get because at some point, when we get the deferred tax assets that's additional tangible equity out there from that standpoint. And once we get the regulatory order lifted, I think there are opportunities to look at. We've got some out some troughs out there that may make sense to repay them again, that's something we would explore. There's a possibility depending on where -- I guess your gambit of items. If you're not going to be able to deploy the capital and organic growth or some sort of acquisition strategy, there's obviously ways of maybe giving capital back in the firm and something on that nature. But we really can't have that discussion until we get the regulatory order lifted. So I mean once we do, there are -- I think there's opportunities in the marketplace for organic growth and there might be some opportunities for some acquisitions. But our focus, Gary, is really getting the regulatory order lifted and then basically we can really get more detail about what we can do with the excess capital.

Okay. And then just one follow-up. I'm getting to a classified asset ratio number if you guys -- right around 39%. Is that the correct number? Or maybe give me what the correct number is if I'm not right on that.

You mean as of right now?

Yes, as of the end of the quarter.

Our classified assets is around...

53.4%.

Yes, 53.4% right now.

[Operator Instructions] And I'm showing no further questions in the queue at this time. Please continue with any closing remarks you may have.

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

Ladies and gentlemen, this concludes the Hanmi Financial Corporation First Quarter 2012 Earnings Conference Call. If you'd like to listen to a replay of today's conference, please dial 1 (800) 406-7325 or (303) 590-3030 with the access code of 4531652. ACT would like to thank you for your participation. You may now disconnect.