Hanmi Financial Corporation (HAFC) Q4 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the Hanmi Financial Corporation Fourth Quarter 2012 Conference Call. As a reminder, today's call is being recorded for replay purposes. [Operator Instructions] I would like to introduce now Mr. David Yang, Vice President and Corporate Strategy Officer.

Thank you, Chris, and thank you, all, for joining us today. With me to discuss Hanmi Financial's fourth quarter and 2012 highlights are Jay Yoo, our President and Chief Executive Officer; Mark Yoon, Senior Vice President and Interim Chief Financial Officer; and JH Son, Executive Vice President and Chief Credit Officer. Mr. Yoo will begin with an overview of the quarter and year-to-date results, and Mr. Yoon will then provide more details on our financial performance and credit quality. At the conclusion of the prepared remarks, we'll open the session for questions. And today's call will include comments and forward-looking statements based on current plans, expectations, events and financial industry trends that may affect the company's future operating results and financial position. Our actual results could be different from those expressed or implied by our forward-looking statements, which involve risks and uncertainties. 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 and full year of 2012. This can be found on our website at hanmi.com. I will now turn the call over to Mr. Yoo.

Thank you, David, and good afternoon, everyone. 2012 was a great year for Hanmi Bank, and I want to start by thanking all of our team members, customers and shareholders for their loyalty and support. Our first quarter profits were more than double the earnings we recorded a year ago, bringing our 2012 full year net income to the highest level in Hanmi's history. We are excited to see our loan portfolio growing due to valuable [ph] work of our lending team and the continuing improvement in our asset quality, thanks to a bank-wide effort. First quarter earnings were $14 million, up 154% from $5.5 million in the first quarter a year ago and up 5.3% from $13 million in the third quarter of 2012. Earnings for the full year were $90 million compared to $28 million in 2011. This includes the $47 million in benefits from the reversal of deferred tax asset valuation allowance. For 2012, pretax operating net income increased 49% to $43 million from $29 million in 2011. This solid profitability was achieved from improving asset quality, operating efficiencies and contributions from our SBA loan originations and sale. Earnings per share also improved in the quarter, growing to $0.44 from $0.42 in the third quarter and $0.22 from a year ago. For the full year, we earned $2.87 per share compared to $1.38 per share in 2011. Asset quality continues to make positive progress with nonperforming assets dropping to $38 million from $53 million over a year ago. As a percent of our total assets, nonperforming assets were at 1.32% compared to 1.91% a year ago and 1.59% at the end of the third quarter. We are now at the point where asset quality is no longer an issue and we can return to growing our franchise. This past December, we celebrated our 30th anniversary, ringing the closing bell at NASDAQ and hosting a gala event to mark the beginning of the next 30 years. The celebration was truly a high point, allowing us to share our story with our supporters in the community and beyond. We are also pleased that, in the fourth quarter, all regulatory orders were lifted and Hanmi is no longer constrained by any limitations. Earlier this month, we announced that we are exploring strategic alternatives for a possible business combination, merger of equals or sale transaction. This process reflects our proactive efforts to stay ahead of the race in the increasingly competitive market, coupled with a prolonged slow economic recovery. We believe that exploring strategic options is a necessary step for our future. However, there is no guarantee that we'll complete a strategic transaction. Now I would like to illustrate 2 important business goals we have set for 2013. First, with the continuing economic uncertainty, our primary business focus is to strengthen our operating efficiency while deploying our excess cash through quality loan production. I believe this is the basis for our organic growth and profitability in this new normal environment. Second, we'll increase our marketing and sales competitiveness by retaining, training and rewarding talented employees. As a result, we'll be able to offer the highest standard of customer service and product offering to our customers, enabling us to become the premier financial service provider in our market space. Overall, it's an exciting quarter and a great year for Hanmi. It is my sincere hope that Hanmi continues to progress as a community bank that grows with the community through service and dedication. With that, I will turn the call over to Mark to provide more details on our operations and credit quality. Mark?

Thank you, Jay, and good afternoon, everyone. As Jay said, we have a lot to celebrate, starting with the solid fourth quarter performance. Our full year profits were boosted by the DTA valuation allowance reversal of $47 million, which translated to an increase of $1.50 per share in tangible book value for the year. At year-end, our tangible book value per share was $11.97, up 33% from a year ago. As we have said in the past, the reversal of DTA valuation allowance is a strong indicator that our profitability is sustainable. Going forward, we expect to have a normalized tax provision at approximately 39% of pretax income. Both our operations and balances are steadily improving. We ended the quarter at $2.9 billion in total assets, $2 billion in net loans and $2.4 billion in total deposits. One of the most important highlight is the solid loan growth, which was up 4.9% in the quarter and 7.4% year-over-year. We said last quarter that our objective is to bring loan growth up to 10% in 2013. While we are seeing a solid pipeline for commercial loans and our lenders are out proactively calling on customers, it is still a pretty competitive market, so we think our loan growth for 2013 will be around 8%. Our SBA loan originations were $44 million for the quarter and $155 million for the year. Because premiums on SBA loans are attractive, we sell most of all of our SBA loans to generate fee income. We sold $27 million in SBA loans, generating a $2.7 million gain in the quarter compared to the sale of $21 million, with a $1.8 million gain in the third quarter and sold $40 million of loans for a $2.9 million gain in the year-ago quarter. For the full year, SBA sales totaled $114 million, generating a gain of $9.9 million, double the gains of $4.5 million generated a year ago. We sold $9.7 million in other notes during the fourth quarter and $106 million for the entire year. These figures included $8.2 million and $42.3 million NPLs for the fourth quarter and the full year, respectively. Note sales generated $1.2 million in losses in the fourth quarter compared to $0.5 million in losses in the third quarter and $2.5 million in losses in the year-ago quarter. In 2012, note sales generated $9.5 million in losses compared to $6 million in losses a year ago. In the past 3 years, we have sold more than $386 million in other notes, which allow us to reduce NPLs, keep foreclosed real estate balances low and improve credit metrics quickly. This strategy served us well in the turnaround phase but will be a smaller part of our future strategy due to the fact that our loan portfolio is now performing well. Reflecting the proactive strategy we've deployed with note sales and our efforts to continuously review and monitor our loan portfolio, asset quality continues to improve. Our ratio of classified assets to Tier 1 capital plus loan loss reserves improved again this quarter, coming down to 22% from 29% at the end of September and 66% a year ago. As most of you know, 40% is generally accepted threshold for healthy banks. Our deposit mix also continued to improve, with core deposits growing to $1.8 billion, up $257 million from a year ago. Year-over-year core deposits enhanced with $86 million increase in demand deposits and $126 million increase in money market and NOW accounts. We ended the fourth quarter with 30% in TD accounts and 59% in low-cost transaction deposits. Focusing on the income statement. We generated $26 million in net interest income for the fourth quarter of 2012 compared to $24 million a year ago. Higher levels of average interest-earning assets helped offset the 18 bps drop in yields from a year ago. Our cost for interest-bearing liability is also down 18 bps in the quarter and 53 bps from a year ago to 0.83%, which also boosted top line revenues. With interest-earning assets up and deposit cost continuing to decline, our NIM improved for both the quarter and the year. Fourth quarter NIM grew 17 bps in the fourth quarter and 20 bps year-over-year to 3.86%. For the year, our NIM was up 9 bps at 3.77%. Over the coming quarters, we should maintain or normally expand NIM as we continue to add quality new loans, reduce our cash drag and improve the mix of deposits. As we discussed in the release, we did not take a credit loss provision for the third and fourth quarters, reflecting continuing improvement in asset quality. Our loan loss provision for 2012 was $6 million compared to $12 million in 2011. With the reserves at 3.09% of gross loans, our reserve position continues to be well above the average of 2.53% reported for the third quarter by SNL Financial for the 327 banks that make up its U.S. bank index. Noninterest income in the fourth quarter of 2012 was $7.5 million, which was up from the $6.5 million in the prior quarter and up from the $6.3 million earned in the fourth quarter a year ago. For the full year, noninterest income was up 4% to $24.8 million compared to $23.9 million a year ago. The biggest component of the quarterly differences was gain from SBA loan sales, mainly offset by losses from other note sales. Going forward, we anticipate that the loss from the note sales will decline while gain from SBA loan sales will continue to contribute to revenues. Noninterest expense in the fourth quarter of 2012 was $19.5 million, up 4% from $18.8 million in the prior quarter and down 8% from $21.2 million in the fourth quarter a year ago. For 2012, noninterest expense fell 8.6% to $76.9 million from $84 million in 2011. Salaries and employee benefits, our largest overhead cost, were up just under 0.8% in the quarter and down 2.2% year-over-year. In 2012, salaries and employee benefits rose 4.1% to $37 million, reflecting severance paid in connection with workforce reduction, higher benefits cost and increased bonus accruals for this year. Our deposit insurance premiums and regulatory assessment, though up in the fourth quarter, reflect a year-to-date true-up adjustment of $300,000, but are significantly lower from the year-ago quarter and for the full year, are down 33% from 2011 levels. OREO-related expenses also improved in 2012, falling to $344,000 from $1.6 million in 2011. Our professional fees were up in the quarter, reflecting the strategic exploration we embarked on in the fourth quarter. And in 2011, we had a $2.2 million expense associated with unconsummated capital raising efforts. The efficiency ratio for the fourth quarter of 2012 was 57.7%, an improvement from 59.8% in the third quarter and 69% a year ago. For 2012, the efficiency ratio was 61.1%, down from 67.2% in 2011. Finally, I'd like to dig a little deeper into our credit quality. Total classified assets at year-end were $101 million compared to $131 million at the end of third quarter and $283 million a year ago. As I mentioned earlier, the continuing improvement in this metric is considered to be one of the most significant items for measuring our turnaround. Our strategy of selling notes help us generate these improved numbers far more quickly than we could have accomplished with just the collections and foreclosure efforts. Nonperforming assets, excluding loan held for sale, decreased 28% to $38 million compared to year ago. This is a reduction of $15 million from $53 million a year ago. Our nonaccrual loans include $23 million or 61% of which are performing loans. Our net charge-offs were also down at $3.2 million compared to $5.9 million during the third quarter of 2012 and $15 million during the same quarter a year ago. The allowance for loan losses totaled $63.3 million or 3.1% of gross loans at year-end compared to $89.9 million or 4.6% of gross loans a year ago. The allowance for loan losses to NPLs was 170% at year-end compared to 172% a year ago. Again, based on SNL's data for September 30, 2012, our reserve levels far exceed the 62% coverage ratio for U.S. banks. As Jay mentioned, we have started the process of looking into making great progress into a bright future. Where the process will take us is still unknown but we are focused on exploring all the alternatives and looking for new opportunities. We are excited about 2013 and look forward to a fast paced and interesting year. Thanks again for your attention and support.

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

[Operator Instructions] And our first question comes from the line of Julianna Balicka with KBW.

Congratulations on getting all the regulatory orders lifted. Could you tell us when was the hold co regulatory orders resolved?

Well, we had reached an agreement with FRB San Francisco, and then it was lifted in December 4, so no strings attached. MOU with the DFI was fully lifted in October last year.

Excellent. And I wanted to ask you just a housekeeping question on -- the cost of your subordinated debentures in the quarter went from 3.88% last quarter to 1.46%. Was there a repricing or anything going on there?

Well, there is actually a little bit of adjustment for the prior quarter's accrued interest payments, so it was a $320,000 accounting adjustment we made in the fourth quarter.

So going forward, that will be reversed, you'll be back up in that 4 -- 3-something percent range?

2 point -- around 2 point -- I will say about 3.2%, yes.

Very good. And in terms of the -- you talked about the NIM improvement this quarter, and the strong NIM improvement really does stand out. In terms of what your expectations are next quarter and also in the coming year in terms of further ability to improve the NIM from redeployment, et cetera, what kind of NIM expansion would you be comfortable with? And alternatively, at what point do you think you'll start seeing the NIM pressure just because you've exercised all the cleanup levers, so to speak?

Yes. So we -- as I mentioned earlier, we expect to grow our loan portfolio at around 8%. That will kind of increase our loan portfolio by maybe $160 million or $170 million, so I think it's the volume. In fact, it is important to grow loans to offset declining margins, and then we're going to reduce the cash drag in the form of $170 million we have with FRB account, running on just 25 bps. So we are expected to decrease to a large extent as possible and deploy into higher-yielding loans. And then we are expecting to reduce investment securities to some extent, so we deployed in the total amount of about $106 million [ph] to $170 million [ph] in 2 loans, and then also we're going to change the limit of our deposit mix going forward. But as you know that last year, 2012, we had very high-cost promotional CDs mature in the first quarter and the second quarter, and that was about $500 million, and they're fully matured. Now 2013, we're going to have a full impact of the cost saving from the high-cost deposits -- the maturity of high-cost promotional CDs, so we're going to have some meaningful reduction in the cost of deposits. So that will improve us -- our NIM to about 10 bps or 15 bps. So we're looking at maybe around 4% -- a little bit over 4% NIM for the entire 2013.

That makes sense. And in terms of the new loans that you are making, what kind of pricing are you seeing on those loans relative to the yields that you have already on your books? I mean, what's the link quarter decrease that you're noticing in the marketplace?

The weighted average rate that we experienced in the last few quarters was about 4.7% to 4.75%, and mostly the TD secure real estate loans.

This is JH. I'd like to color -- add a little bit more on the subject. The income of the mix between fixed rate and variable rate applied to the total loan originated in 2012, 61% was from the fixed rate and 38% was from variable rate. The rate -- average interest rate was 4.8% on fixed rate and 4.33% on variable rate, putting in weighted average interest rate, 4.62%. And there you saw -- another answer to your second question regarding interest rate trend. Because the market has been characterized by low loan demand for quality loans and high competition among peer banks, interest rate applied these days has been dropping for new loan customers. In fourth quarter, weighted average interest rate on the new loans was a 4.52%, which was reduced by 22 basis points compared to 4.74% on the prior quarter. The average level of interest rate to new loans was marked between 20 basis points to 30 basis points quarter-over-quarter in 2012.

[Operator Instructions] Our next question comes from the line of Scott Valentin with FBR Capital Markets.

Just with regard to the provision expense, you've taken no provision now for a couple of quarters and credit is getting better and your reserve levels are very high. I'm just wondering how you're thinking about provision levels going forward and maybe what the ultimate goal for reserves to loans is.

Well, we're just taking a very conservative level of HPL [ph] because we believe that there are still uncertainty in the economy, especially this regional economy here, L.A. and Orange County. So we don't expect that we're going to -- there is a chance that there will be maybe negative loan loss provision. But then again, we're not sure. It's depending on how the uncertainties are going to be reduced. And so I think the level we are looking at is pretty similar to maybe 2012, but it's also subject to changes due to the changes in the macroeconomic and microeconomic factors.

As you know, HPL [ph] figures are presently analyzed quarterly, and we cannot comment at this time any reversal for the future, so. Anyways, I emphasize that based on strict risk management over credit qualities, even if the economy improve and has been stabilized, we anticipate steady level of allowance and lower provision in 2013.

Okay. That's helpful, okay. And then just with regard -- you mentioned the strategic review that's ongoing, is there a time frame for that? Do you think it will be resolved in 2 or 3 months, if that'll be resolved or completed sooner?

Well, we cannot make a comment on the time, how long it's going to take to make the decision. We're still reviewing it. Every -- all the possibilities are on the table. And our board's going to make the best strategic solution. And so when -- once we make a decision, we will make an announcement at appropriate time.

Okay. And then one final question. With the regulatory agreements being lifted, you have plenty of capital, you're very well reserved. Just wondering in terms of, you have the preferred -- the subordinate debt outstanding, with a decent cost to it, relative to other -- maybe other cost of capital, just wondering if you have any plans to put the excess capital to use in some fashion.

Well, definitely, we -- as part of the balance sheet management, we are considering within the EPS but it's subject to regulatory approval. So we are considering that so we don't know yet when we will be able to pay that off. But certainly, it's on the table for consideration.

[Operator Instructions] Mr. Yang, there are no further questions at this time.

Thank you for listening to Hanmi Financial's Fourth Quarter Conference Call. We look forward to talking to you next quarter.

And ladies and gentlemen, this concludes the Hanmi Financial Corporation Fourth Quarter 2012 Conference Call. You may now disconnect.