Hanmi Financial Corp (HAFC) 2014 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Hanmi Financial Corporation second-quarter 2014 conference call. Just a reminder, today's call is being recorded for replay purposes. At this time, all participants are in a listen-only mode. Following the presentation, the conference will be open for questions.

I would now like to introduce Ms. Christina Lee, First Vice President of Investor Relations and Corporate Strategy. Please go ahead.

Thank you, Lorie, and thank you all for joining us today. With me to discuss Hanmi Financial's second-quarter 2014 earnings are C. G. Kum, our President and Chief Executive Officer; Bonnie Lee, Chief Operating Officer; and Mark Yoon, Chief Financial Officer. Mr. Kum will begin with an overview of the quarter and Mr. Yoon will then provide more details on our operating performance and give you credit quality. At the conclusion of the prepared remarks, we opened 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 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 provision contained in 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 of certain risk factors affecting our business. This morning, Hanmi Financial issued a news release outlining our financial results for the second quarter of 2014, which can be found on our website at Hanmi.com.

I will now turn the call over to Mr. Kum.

Thank you, Christina. Good afternoon, everyone. I want to thank all of you for joining our earnings call today. This morning we reported that our second-quarter 2014 income from continuing operations grew quarter over quarter 4.9% to $11.5 million or $0.36 per diluted share, which represented 23.4% growth on a year-over-year basis.

Second-quarter net income totaled $11 million or $0.35 per diluted share. These results continue to demonstrate improving core earnings power of our franchise.

During the second quarter of 2014, we achieved solid loan growth and deposit growth. Loans grew 8.1% to $2.3 billion and deposits grew 7.7% to $2.54 billion from a year ago. The loan growth quarter over quarter was $79 million, representing a 3.6% increase.

The new loans generated was $172 million, comprised of $92 million in traditional commercial real estate loans, $44 million in owner-occupied commercial real estate loans, and $31 million in C&I loans. The latter represents our emphasis on a business banking strategy to diversify our loan portfolio.

As of June 30, 2014, the C&I loans represented 9.8% of the total loans outstanding as compared to 8.6% at June 30, 2013. The aforementioned business banking strategy, combined with our focus on growing our core deposits, have enabled us to increase non-interest-bearing deposits to account for 36% of the total deposit base compared to 31% a year ago.

In addition, due in part to growth in non-interest-bearing deposits, we have been able to maintain a net interest margin above industry averages. Year to date, our net interest margin was 3.98%, which is unchanged from the first half a year ago. Quarter over quarter, however, the current low rate environment caused 8 basis point decline in net interest margin to 3.94%.

With the improving credit quality, we recorded a negative provision for loan losses of $3.9 million, bringing the total reverse provision for the first half of the year to $7.2 million. Even with the negative provisions for this year, our allowance for loan losses remains strong at 2.21% of gross loans.

During the second quarter, we hired a highly experienced chief credit officer with the leadership skills to further enhance our credit risk management. He brings the expertise we need to expand into new markets with the acquisition of Central Bancorp.

During the second quarter, two initiatives were implemented to improve the core banking franchise. We streamlined our operations by reducing our staff levels by 7%, which added one-time costs of $375,000 to the second quarter expenses. We are also in the process of closing one branch for which we will incur one-time charges of $130,000 in the third quarter.

During the second quarter, we also completed the sale of our insurance subsidiaries. Going forward, we expect to save approximately $1.8 million per year from these efforts. These strategic initiatives are positioning us for future growth and the pending acquisition.

At the end of June, we filed our bank merger application with the federal and state regulators. We are pleased to report that on July 17, 2014, the Federal Reserve Bank of San Francisco approved our application to acquire United Central Bank, a wholly-owned subsidiary of Central Bancorp Inc. The close of our transaction is subject to approval by California Department of Business Oversight and satisfaction of closing conditions. We anticipate a closing prior to the end of the third quarter.

As we disclosed in a prior news release, Central Bancorp continues to make progress in lowering its classified assets. As of end of June, Central Bancorp's classified assets totaled $167 million. In preparation for the acquisition, an integration team comprised of employees from both organizations has been activated. A comprehensive strategy to combine the two organizations as quickly as possible has been developed and will be executed as soon as the transaction is final.

In conclusion, I am pleased to report the ongoing improvement in our core earnings capacity, continued strength in asset quality, and successful implementation of initiatives to streamline our operations. I am also pleased with the prospect of an earlier closing of the Central Bancorp transaction.

With that, I would like to turn the call over to Mark Yoon, our Chief Financial Officer, to discuss the operating results in more detail. Mark?

Thank you, Mr. Kum, and good afternoon, everyone. I will discuss our financial results for the second quarter of 2014 in more detail, including income statement, loan and deposit growth, net interest margin, and asset quality.

We generated $28 million in net interest income before the credit loss provision in the second quarter, which was virtually even with the first quarter and up 3.1% from the second quarter a year ago. As noted earlier, with overall improvement in credit metrics, we were able to record a negative credit loss provision of $3.9 million in the second quarter, bringing net interest income after credit loss provision to $31.9 million for the second quarter, up 2% from the preceding quarter and up 17% from the second quarter a year ago.

Our net interest margin fell 8 bps to 3.94% from 4.02% in the preceding quarters and by 16 bps from the year ago quarter. The decrease was mainly due to lower average yields on new and renewing loans in the current low interest rate environment.

Our margin continues to be well above the 2.83% above an average posted by the 322 banks, making up the SNL US banking index of the first quarter 2014 and higher than the 3.74% average of the 143 banks in the SNL index for banks with assets of $1 billion - $5 billion.

Noninterest income in the second quarter was $5.1 million compared to $5.8 million in the preceding quarter and $6.7 million in the second quarter a year ago. The quarter on quarter decline in gains was partially offset by higher service charges on deposit accounts and trade finance income.

Gains from sales of securities were down $1.1 million in the second quarter compared to the first quarter and up $61,000 from the second quarter a year ago. Gain on sales of SBA loans contributed $498,000 to second-quarter revenues, which was down $49,000 compared to the linked quarter and down by $1.9 million compared to the year ago quarter.

On the expense side, noninterest expense in the second quarter was $18.6 million compared to $18.3 million in the first quarter, and slightly lower from the second quarter a year ago. Compensation costs were virtually flat quarter on quarter, but up 19% from the second quarter of last year. There are a lot of moving pieces in the compensation category, including the insurance company cost that we're moving to discontinued operation for all periods. I believe we have covered this topic in detail in our earnings release, so let's move on to taxes.

Our income tax provision has been somewhat variable over the past few years. Our second-quarter effective tax rate was 37.4%, which is lower than the effective tax rate of 39.6% for the first six months of 2014, and well below the 41.7% rate we recorded in the first quarter.

The reasons for the decline in the tax rate were attributable to a $400,000 one-time deferred tax benefit from the sale of the insurance businesses and tax benefits to be realized from tax advantaged investments. Excluding the discrete $400,000 tax benefit, our second-quarter and the first six months effective tax rate would have been 39.5% and 40.6%, respectively.

Moving on to the balance sheet, gross loans increased 7.4% to $2.35 billion from $2.19 billion a year ago and increased 3.2% from $2.28 billion at the end of the preceding quarter. Second-quarter new loans totaled $172.3 million, which is up by $12.4 million from the first quarter.

On the deposit side, core deposits were $2.06 billion or 81% of the deposits, up by $260 million or 14.5% compared to a year ago. Year-over-year, our core deposit growth was fueled by $173.9 million increase in demand deposits, which is a 23.6% year-over-year growth rate. Our overall deposits were up by $38.3 million from the preceding quarter and up by $182.9 million from a year ago. The percentage of non-interest-bearing deposits to deposits improved to 35.8% at June 30, 2014, from 33% at March 31, 2014.

On the asset quality side, classified loans at quarter end were down 12.2% to $45.2 million, compared to $51.4 million at the end of the first quarter and were down 49.6% from $89.6 million a year ago. The decline in the second quarter of 2014 mainly reflects $3.3 million in loan upgrade, $6.1 million in repayments, and $2.1 million charge-offs offset by $5.2 million new classified loans.

Now, I would like to turn the call back to Mr. Kum.

Thank you, Mark. With the possibility of an earlier close of the Central Bancorp transaction, second half of 2014 will be exciting and busy times for us. We look forward to combining the two organizations as quickly as possible to begin the process of realizing strategic benefits and to enhance the shareholder value of Hanmi Financial Corporation. Thank you. Christina?

Lorie, let's open the call for questions.

(Operator Instructions) Julianna Balicka, KBW.

A couple of questions to follow up on. One, in terms of the new chief credit officer joining your team and the negative provision that we saw this quarter, how should we think about future trends in terms of how quickly you can reduce your reserve numbers? How thoroughly has the portfolio been reviewed by the new chief credit officer insofar as deciding whether or not there should be any changes to be made or anything like that?

Well, I will answer that question from a different vantage point. First of all, we actually have completed just recently our annual third-party credit review of our loan portfolio. We have done this now two times since my arrival, where we have done it once a year. And on a go forward basis, we may break it down into smaller increments.

The penetration level was in excess of 50% of the loans outstanding. There were no material deviations from our grading system. In other words, the portfolio basically checked out the way we have graded it.

As it relates to the negative provisioning process, we evaluate the portfolio on a quarter by quarter basis. We evaluate all the factors. We go through our analysis. And based on the condition of the portfolio, there is a determination as to the adequacy or inadequacy of the ALLL.

In this case, as well as in the prior quarter, it appears that there was a surplus in the reserve and, therefore, we made the decision to do a negative provision. And that is an exercise that we will go through on a quarter by quarter basis.

Okay. Makes sense. And then, also, I wanted to follow up on your changed management in terms of your SBA team recently. And I just wanted to get an update on how the new team is ramping up. You opened an LPO in Virginia, but I mean, as far as increased originations in L.A., et cetera.

Yes. We have -- the second quarter was a time period within which the team was being built and the production potential started to be realized. In the second quarter, the SBA generation was, I think, around $18 million for the quarter.

I think I mentioned in a prior call that it is our expectation that on a quarter to quarter basis, we should be generating somewhere in the $30 million to $35 million a quarter. So obviously, there is a little bit of a catch-up to do. And I believe that in the second half of the year, they will be at the level that I think they can be.

Okay. And a final question and I will step back now. Could you give us a little bit more comment -- color about the CRE purchases in the quarter? Do you anticipate additional purchases, some duration yields?

Yes. Well, first of all -- and I will let Bonnie chime in with some more of the details, but we have historically looked at portfolio purchases to augment the portfolio or the organic growth exercise. And we don't always make it a habit to do so, but when a portfolio comes on the market that we believe fits our credit criteria as well as the interest rate and the duration criteria, we participate in the bidding process. And this was one of those situations where we felt that it met all of the requirements that I just stated. So I will turn it over to Bonnie.

Sure, little bit more detail than the purchase. We purchased 17 commercial real estate loans. Properties are all in California. Most of them are in Southern California as well as some of the properties covered in Northern California, but within our geographic footprint where we have the branch networks.

In terms of different types of property, we had purchased five manufacturing industrial type of owner-occupied types of properties and some of the retail properties, multi-family, medical office. In terms of the rates, the average rates are 4.57% with a loan-to-value -- average loan-to-value less than 52%, and a debt service coverage of 1.84%. And then the term of the notes are anywhere from the 7 to 10 years.

So when we had come across with these purchase opportunities, we looked at the number one -- the credit qualities of these portfolios. So, as I mentioned, in terms of debt service coverage, loan-to-value, the rates have actually contributed positively to our existing portfolio.

Also, as I mentioned earlier, we knew that the SBA team was not going to be fully engaged in the second quarter. As I mentioned earlier, what should have been a normal production rate in the $30 million range, we knew that it was going to be below $20 million. In addition, it turned out that there was about $25 million of loans that should have been booked by the end of second quarter, which, for a variety of reasons, ended up being booked in the beginning part of July.

So -- but, having said all of that, though, as I mentioned and as Bonnie articulated, we look for portfolios to acquire based on the criteria that we have set forth. And one of the primary criteria is the asset quality component. And so, this portfolio met that and we will continuously look for ways by which to enhance the portfolio size by acquisitions.

One of the other reasons why we are looking at these kinds of situations is because, with the acquisition of Central Bancorp, we will be picking up significant line of liquidity that needs to be deployed into earning assets. And, by having these acquisitions of portfolios, we are in position to acquire some assets that enables us to quickly deploy some of the surplus liquidity that we are going to pick up.

Very good. Thank you very much for the color.

Gary Tenner, D. A. Davidson.

Just a follow up on that commercial real estate portfolio purchase. What was the timing of that within the quarter?

Probably, what, it was booked in the month of June. I can't remember what day it was, but it was in the last month of the quarter.

Okay. That's great. And then, C. G., you mentioned the potential for earlier close of the acquisition. I don't know if you specified a more specific timeframe or not (multiple speakers).

Yes. I said third quarter. It could be during the month of August, but we are waiting for the CDBO's approval, and once that is obtained, we are ready to basically go to closing. The main criteria that needs to be satisfied is the $160 million number. But at quarter end, they were at $167 million and so -- and, as we speak, they are very close to hitting that $160 million. So it is quite -- I mean, our closing date is going to be dependent upon the CDBO's approval, and once that is approved, we will move quickly towards the closing.

Okay. Then just, as you mentioned, the excess liquidity you are picking up with that acquisition and given the forthcoming ramp of SBA production, would you consider portfolio-ing more of the SBA production in the short run just to use some of that excess liquidity? Or should we assume that the bulk of the production will be sold?

Well, it is depending on the SBA secondary market and then what premium from the SBA gains would yield. So we will have to kind of monitor that on a quarter to quarter basis.

Okay. Thank you.

Tim Coffey, FIG Partners.

C. G., how much of the C&I loan growth is from increased line utilization?

We just had a hard time hearing you, Tim. That is the reason why (multiple speakers). For the quarter, we had about $42 million to $43 million in commitments that were booked, of which $32 million actually funded.

Our usage rate is around 42%, 43%. And so there is quite a bit of a commitment that has not manifested in the outstandings. And, as you know, the C&I lines tend to be a bit cyclical in terms of the usage. But, of the $43 million that was booked in commitments, $32 million or $31 million actually funded during the quarter.

Okay. And then, do you have a plan for additional cost saves or ways to streamline the organization beyond what you announced in the press release today?

Well, that will be a part of the integration, the consolidation process. We will look for opportunities to streamline all of different functions and -- but, there won't be a separate initiative. It will be all part of the consolidation process.

Okay. And then, given the transaction with CBI is closing on an accelerated time schedule, is that causing you to change any of your prior estimates or expectations into what fair value markets might look like or ultimately, maybe, perhaps even goodwill on the deal?

Well, first of all, there isn't going to be goodwill. We have already looked at that. And so there won't be a goodwill.

But, to answer the first part of your question, yes, we are having to look at it, because when we did our analysis the loan portfolio was around $720 million or so with classified assets in the $400 million range. Today, that portfolio is around $500 million with classified assets in the $160 million range. And so the portfolio has behaved and performed better than expected.

So we are in the process of reassessing the marks and whether or not there is a bargain purchase gain, or whether or not some of those potential bargain purchase gains should be used to take further marks relative to the loans. Those are all the nice things that we are going to be assessing over the next couple of weeks.

Okay, great. Thank you. That was all my questions.

Don Worthington, Raymond James.

In terms of the non-interest-bearing deposit growth, can you categorize that by, say, new relationships versus increases within existing customer accounts?

Yes. Let me provide a little bit more color into that. The majority of our branches have experienced increase in the non-interest-bearing DDAs. And we do have some new customers as well as the additional deposits coming from existing customers.

And one positive thing, I think, we're actually seeing the result is that we talk about our treasury management department, and that department is contributing to the stickiness of the relationships. And then, part of the deposits are contributing from that particular relationship.

So, to answer your question, it is both new and existing relationships. And we had a small internal campaign in the second quarter where we rolled out new payroll products. And we had our internal campaign, which also contributed to increase in that deposit base.

Although, Don, the growth in non-DDAs, there is a direct correlation to the growth in our C&I lending platform. The business bankers we have joined us have done a superb job of not only growing the loan portfolio, but also bringing in with it the non-interest-bearing DDAs.

The treasury management area that Bonnie referred to will continue to play -- or actually will continue to play -- well, play even a bigger role on a go forward basis, once we have completed the transition to the new treasury platform. And so that will enable us to actually even broaden the ability, on our part, to go out and source new non-interest-bearing DDAs relationships.

Okay. Great. Thank you. And then, are there any other planned strategic changes, either eliminating business lines or adding them?

Well, there's no more business lines for us to shed.

Okay.

But, the -- our focus is growing the core banking franchise. The insurance subsidiary was a nice idea at one time, but it didn't fit with what we were trying to accomplish here, which is basic blocking and tackling associated with relationship banking, generating the variety of loans, and funding it with low-cost core deposits.

And I know that in this environment our deposit base is not rewarded as much by the market. But I am one of those old-fashioned guys that, when you build a solid foundation in the form of a low-cost deposit base, eventually the value of that is going to be reflected in our stock price. And so that is the basic strategy. Nothing sexy, nothing fancy. It is basic go out and get the relationships, make good quality loans, and fund it with low-cost deposits. And so the insurance subsidiary did not fit that model, if you will.

Okay great. All right. Thank you.

Julianna Balicka, KBW.

I'm sorry. My question was asked and answered. It was about the BPO gain.

And we have no further questions at this time. Please continue.

Thank you for listening to Hanmi Financial second quarter conference call. We look forward to speaking to you next quarter.

And, ladies and gentlemen, once again, that does conclude today's conference. I would like to thank everyone for joining us today. You may now disconnect.