Hanmi Financial Corp (HAFC) 2015 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Hanmi Financial Corporation's Second Quarter 2015 Conference Call. As 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 opened 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, Rob, and thank you all for joining us today. With me to discuss Hanmi Financial's Second Quarter 2015 earnings are C. G. Kum, our President and Chief Executive Officer; Bonnie Lee, Chief Operating Officer; Ron Santarosa, Senior Executive Vice President, Corporate Finance and Strategy; and Michael McCall, Chief Financial Officer.

Mr. Kum will begin with an overview of the quarter, and Mr. McCall will then provide more details on our operating performance and credit quality. At the conclusion of the prepared remarks, we'll open the session for questions.

In today's call, we may 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 provisions 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 2015, 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 us today to discuss our 2015 second quarter results. Our second quarter results reflect the early success of our expansion efforts and improving profitability across the enterprise. Our net income for the second quarter grew significantly and was driven by our ongoing initiatives to improve operating efficiencies and reduce expenses. While the net growth in our loans reflected a high level of payoffs, our organic loan production was up sharply on both a linked quarter and year-over-year basis.

In addition to the strong financial results, the second quarter provided a glimpse of the opportunities that lay ahead as we expand into new markets. Our loan pipeline entering the third quarter is 37% higher than the pipeline we had entering this quarter. The platforms we have in place in key markets across the country will allow us to expand our brand, and grow our customer base and generate long-term sustainable growth.

After successfully completing the integration of Central Bancorp into Hanmi's system in the first quarter, we were able to begin lending and deposit generating activities in Texas, Illinois, Virginia and New Jersey and opened two additional loan production offices in New York and Georgia during the second quarter. With an expanding team of experienced lenders in place, the second quarter included initial contributions in new loan production from these new markets. Overall, I am quite pleased with our expansion efforts.

To coincide with the commencement of activities in our new markets, we've recently unveiled a new corporate logo and re-branding effort. The new logo is inspired by our desire to honor our heritage along with our commitment to serve more diverse customers as we expand our reach both geographically and culturally throughout the U.S. In addition, we are also rolling-out an advertising campaign to raise awareness and support our new branding efforts throughout our regions.

Now, moving on to our second quarter results. We reported net income of $14 million, or $0.44 cents per diluted share. Net income increased by 27% on a quarter-over-quarter basis and was driven by a $4.6 million reduction in non-interest expense, or nearly 15%, compared to the prior quarter. This was due to the integration of CBI into Hanmi and the closure of three legacy CBI branches, along with our ongoing initiatives to improve operating efficiencies and reduce expenses. As a result, our efficiency ratio improved to 56.2% from 65.6% for the prior quarter.

So far in 2015, we have cut non-interest expense by nearly $10 million from the fourth quarter 2014. While we made good progress through the first half of the year, we expect further improvements. We have announced plans for the closure and consolidation of four additional branches in Illinois and Virginia and we will further streamline operations with staffing reductions that will result in additional expense savings beginning in September.

During the second quarter of 2015, we achieved strong loan production, along with improvement in our overall deposit mix. New loan production for the second quarter was comprised of $208 million in organic loan production and $21 million of loan purchases, primarily comprised of residential mortgage loans, for a total of $229 million. Compared to the second quarter of last year, organic loan production increased 81%. As I noted earlier, our new operations in Texas and Illinois made solid contributions in the second quarter, and we expect production in these markets to continue to increase as the year progresses. Overall, the loan pipeline entering the third quarter is strong.

In addition to our nationwide geographic footprint across nine states, we also recently announced our expansion into the healthcare industry with the creation of our Healthcare Banking Group. Our mission here is to provide banking and financing solutions to the healthcare industry including healthcare systems, medical professionals and an array of other healthcare-related service providers. To lead this group, we have brought on-board a seasoned team with strong relationships and deep ties in the healthcare marketplace. Our efforts here will enable us to continue to expand the Hanmi brand and to generate new customers in this growing industry. We expect this group to contribute immediately in the third quarter with a meaningful level of loans and deposits.

Our overall deposit mix continues to improve. During the second quarter, total deposits declined slightly, due in part to the maturity of higher rate CDs and branch closures. However, noninterest-bearing deposits now comprise 31% of our total deposits as of the end of the second quarter, an improvement from 30% of total deposits in the prior quarter.

Safety is a top priority at Hanmi and asset quality continues to remain strong. As of the end of the second quarter, nonperforming loans, excluding PCI loans, were $28 million or 0.97% of gross loans, down 7 basis points from 1.04% from the prior quarter. During the second quarter, net recoveries totaled nearly $300,000 marking the third consecutive quarter of net recoveries. In addition, the allowance for loan losses at the end of the second quarter represented 1.77% of gross loans, compared to 1.88% of gross loans in the preceding quarter.

With that, I'd like to turn the call over to Michael McCall, our Chief Financial Officer, to discuss the second quarter operating results in more detail. Michael?

Thank you C. G. and good afternoon everyone. I will discuss our financial results for the second quarter 2015 in more detail.

Second quarter net interest income, before provision for loan losses, declined 1% to $37.1 million from $37.5 million for the preceding quarter as the decline in interest-earning assets offset the improvement in our net interest margin and a $605,000 special FHLB stock dividend. Compared with the second quarter last year, net interest income improved 36.6% principally due to higher interest-earning assets arising from the CBI acquisition.

For the first six months of 2015, net interest income, before provision for loan losses, improved 37.4% to $74.6 million compared to $54.3 million for the first six months of 2014, principally due to the increase in interest-earning assets arising from the acquisition.

In the second quarter, Hanmi recorded a negative provision for loan losses of $2.5 million, which included an $84,000 reversal of impairment reserves on PCI loans. In the preceding quarter, Hanmi recognized a negative provision for loan losses of $2.0 million, which was net of impairment reserves on PCI loans of $414,000. In the year ago quarter, Hanmi recognized a negative provision for loan losses of $3.9 million, all of which related to legacy Hanmi loans. Hanmi recorded a negative provision for loan losses of $4.5 million for the first six months of 2015, compared with a negative $7.2 million in the first six months of 2014.

Continuing through the income statement, non-interest income in the second quarter was $11.1 million, compared with $10.9 million and $5.5 million in the prior and year ago quarters, respectively. For the first six months of 2015, non-interest income increased 87.9% to $22.0 million compared to $11.7 million in the same period last year.

Service charges on deposit accounts were $3.2 million in the second quarter, unchanged from the prior quarter and up from $2.6 million in the preceding year. Gains on sales of SBA loans were $1.6 million in the second quarter 2015, compared with $1.7 million and $498,000 in the prior and year-ago periods, respectively. SBA loans sold in the current quarter totaled $19.3 million, compared to $19.9 million and $6.8 million in first quarter of 2015 and second quarter of 2014, respectively.

Net gains on sales of investment securities were $1.9 million in the second quarter, compared with $2.2 million in the preceding quarter and $364,000 in the second quarter of 2014. We sold securities with a book value of $130 million, a $175 million and $51 million in the current, prior and year ago quarters, respectively.

During the quarter, Hanmi recognized disposition gains on PCI loans of $2.5 million compared with $1.2 million in the prior and no disposition gains in the year ago quarter.

On the expense side of the income statement, non-interest expense was $27.1 million in the second quarter. We made significant progress in the second quarter in reducing non-interest expense by $4.6 million as compared with the prior quarter. This improvement was primarily related to a $1.5 million decrease in merger and integration expenses and $842,000 decrease in salary and benefits associated with the three branch closures C. G. discussed along with a $640,000 decrease in professional fees and a $797,000 decrease in data processing expense. These were partially offset by a $523,000 increase in advertising and promotion expense related to our re-branding initiatives. Compared to the year-ago period, non-interest expense increased by $9 million. The year-over-year increases were primarily due to the acquisition of CBI.

The second quarter, the provision for income taxes was $9.6 million, or an effective tax rate of 40.8%, compared with $7.5 million, or an effective tax rate of 40.5%, and $6.9 million, or an effective tax rate of 37.4%, in the prior and year ago quarters, respectively.

Moving onto the balance sheet, gross loans increased 22.3% to $2.87 billion, from $2.35 billion a year ago, and increased 2.0% from $2.82 billion at the end of the preceding quarter. Second quarter new loan production of $208.1 million increased 54% compared with last quarter and increased 81% compared with the second quarter last year. Purchased loans in the second quarter were $20.6 million compared with $44.0 million last quarter and $57.1 million in the second quarter last year. During the second quarter, we experienced an elevated level of loan payoffs. This was primarily driven by borrowers selling property in our core California markets to take advantage of strong real estate prices, as well as more aggressive credit structures offered by competing regional banks. As a result, this moderated the loan growth at quarter end.

Total deposits were down $112.9 million from the prior quarter, primarily due to withdrawals by depositors investing in real estate, the run-off of rate sensitive CDs and withdrawals at the branches we closed earlier in the year. The percentage of noninterest bearing deposits to total deposits was 30.9% at June 30, 2015 compared to 30.0% and 35.8% at March 31, 2015 and June 30, 2014, respectively. The cost of deposits was 44 basis points in the second quarter compared with 43 basis points in the prior quarter.

Net interest margin was 3.97% for the second quarter, up from 3.89% in the prior quarter and 3.82% in the prior-year period. The sequential quarter improvements in NIM was due to the previously mentioned $605,000 special FHLB stock dividend and an improved asset mix favoring higher yielding loans. For the first six months of 2014, NIM was 3.93% compared to 3.86% for the first six months of 2014. Now, I'd like to turn the call back to C. G.

Thank you, Michael. In conclusion, I am pleased with our second quarter results and our efforts to profitably expand the Hanmi franchise. We continue to make good progress in our mission to connect, partner and grow with our customers. Coming off our strong performance during the first six months of the year, we look forward to even better results for the second half of 2015. Strong loan origination volume, expanded net interest margin and tight expense controls bode well for the future earnings power of Hanmi. I am confident in our abilities to capitalize on the opportunities that lay ahead and look forward to sharing our progress with you again next quarter.

Thank you. Christina?

Rob; let's open the call for questions.

Thank you. Ladies and gentlemen, we will now begin our question and answer session.

(Operator instruction) Julianna Balicka, Keefe, Bruyette & Woods, Inc.

Good afternoon. I have a couple questions please, one in terms of expense management, which is very nice to see this quarter you discussed further branch reductions and some further staffing reductions later on in the year. So could you explain to us, how much dollars of expenses or percentage of savings you are looking to save?

Yes, the -- our third quarter expense reduction initiatives will translate into approximately $2 million in cost saves on an annualized basis. Now that doesn't include the one-time expense associated with severance and expenses of that nature about $500,000. But on an ongoing basis, it will be approximately $2 million.

Okay. And then what about additional cost savings measures you may be implementing or efficiencies you may be implementing in the fourth quarter in 2016.

It's an going endeavor on our part. I mean this, the branch closures are the most significant cost saving initiative. But on an ongoing basis, we continue to look for ways by which to maximize our expense dollars. So you know, we look to shape processes here and there and personnel here and there, but we don't have a formal process or anything that substantive such as the one that I've just mentioned.

Makes sense. And then offsetting expense savings, are there any investments that we should be thinking about that you may be needing to make in the expense run rate related to infrastructure enhancement or anything along those lines?

Well, the only potential investment that we may make, is if we are able to identify and recruit additional banking team or teams and so, our investment in personnel, particularly in the lending side, will continue whether it's to bring in a talented loan officer in one of the region's or bring in a new team like we were just able to do in the second quarter. If that happens, that will obviously have a slight impact to our noninterest expenses, but ultimately those types of investments should translate into additional income whether from a from a loan or fee side.

Okay, very good. And then switching topics and then I'll step back. In terms of the deposit remix that was mentioned, reduction in CDs this quarter growth in core deposits, do you have a target for how much more deposits you are targeting to run off or kind of how much more excess liquidity, you have to reinvest. And also I would have thought that maybe the improvement in the cost of funds might have been more noticeable so maybe some of the reductions happened late in the quarter or could you talk a little bit about those areas.

Okay. A lot of questions there Juliana, so I'll do my best in terms of trying to answer all of them. We believe that we can continue to lower the cost of funds as we continue to improve the mix of our deposits. One of the key areas that will contribute to that will be the healthcare lending division that just joined us. That particular area will come with -- has already started to generate low-cost core deposits in the medical non-interest-bearing DDA category. So, we're hoping that in the second half of the year, there will be somewhere between $20 million to $40 million of non-interest-bearing DDAs that they will generate. And so, how quickly they're able to generate that level of new non-interest-bearing DDAs will impact the cost of funds or cost of deposits for us.

Bonnie Lee and her team continue to focus on generating core deposits as part of our just fundamental way in which we generate loans or the way we practice relationship banking. So we believe that that 31% number will improve in the second half of the year. We do not have a target as far as what we're striving for but I'm comfortable in saying to you that I think you'll see an improvement in that 31% non-interest-bearing DDA number, improvement in the second half of the year.

Did I miss anything there?

The aspect of the run-off, do you have a target dollar amount of deposits that you want to run-off higher cost CDs or anything like that we should be thinking about?

During the second quarter, we had about $220 million CDs that matured and we were able to retain about 56% of those CDs at about 78 basis points. So, one step ahead that we went out was at the rate of 1.12%. So, going into the 3Q, we have about $290 million of CDs with average rate of 97 basis points. So if we successfully retain at a lower rate with the same experience as 2Q, then we should be able to improve the overall deposit costs and be able to -- we would have some of the run-offs, but overall I think in terms of overall core deposit to the overall deposit ratio would improve.

Okay that makes sense. Thank you very much for that color.

Timothy Coffey, FIG Partners.

Good afternoon everybody.

Good afternoon.

Excuse me, the payoff and pay down and loan pay downs you experienced this quarter was it broad-based by product type or was it typically (inaudible) the product?

You sounded kind of muffled there Tim, but I think your questions if I understood them correctly had to do with the nature of the payoffs that took place in the second quarter, is that correct?

The product type.

Product types, primarily in the commercial real estate category. I mean, obviously, that makes sense, because high percentage of our loan portfolios are in commercial real estate. So I would say primarily if not almost exclusively in the CRE side.

Okay. And have seen any these trends that would suggest that would continue into the next couple of quarters?

Once again Tim I'm having a hard time hearing you, could you repeat that question?

Yes. Do you see any trends right now that payoffs could continue into 3Q?

The second quarter, the level of payoffs that we experienced in the second quarter was unusually high in relation to the previous several quarters. I personally thought that we were beyond the level of payoffs that we experienced in the second quarter of this year. So I remain hopeful that the third quarter number is going to be lower than what we are experiencing in the second quarter. As Michael mentioned in his presentation, the primary sources of the reduction seem to be coming from people divesting their real estate along with national banks that are trying to steal our market share, with 10-year fixed-rate loans at 3.5%, which we won't touch, along with loan to value that seem to be north of 80%. So based on those kinds of specs we're just not going to do it, but as the rates start to, as we notice the rate start to rise then they don't seem to be as active with that kind of a program, so I remain hopeful that we won't have as much backdoor leakage of our portfolio.

Alright, thank you. Those were my questions.

Alright. Thank you.

(Operator Instructions) Don Worthington, Raymond James.

Good afternoon, everyone.

Good afternoon Don.

In terms of gains on securities sales would you expect more of those going forward?

I don't think so. We mined some of those gains in the second quarter because as you know, we've had a fairly sizable portfolio and also in a rising rate environment or what was expected to be a rising rate environment, we thought that some of the book gains were going to dissipate, so we took the gains. I think some of those opportunities are still there, in our portfolio right now, and we'll look at them, we'll evaluate them as we go out into the quarter, but it's not going to be an extended process. I would say, you know, I certainly don't expect us to do it in the fourth quarter. There may be an opportunity in the third quarter, but we'll see how the rate environment treats our portfolio.

Okay, thank you. And then how about gain on sale of SBA? Do you expect the SBA volumes to pick up some?

Well, the answer is I expected the volume to pick up and in fact it has picked up. But the concern is as follows: SBA is basically running out of money in its 7A program. And in fact they have been sending out bulletins and notices to all the banks that they are literally almost tapped out and while the SBA administration has approved additional dollars into the program, the appropriations have not been made and so, banks like ours, we are rushing to get everything into queue so that they will honor the 7A's. But having said that, the good news for us is based on everything that's in the queue, which means that the SBA will honor it, we're on track to generate the same level of the gains that we took in the second quarter. Now if SBA opens up its doors to additional guarantees in the third quarter, then we expect the premium income to be higher because we have a much stronger pipeline in the third quarter as it relates to 7A. But just based on what we believe we'll be able to fund and be able to sell off in the secondary market, we will not be any worse off than what we did in the second quarter and if SBA is able to get it's appropriations approved, then we should be able to report higher gains in the third quarter.

Okay, great, thanks.

Scott Valentin, FBR Capital Markets.

Good afternoon and thanks for taking my question. Just with regard to the margin, on a core basis, so excluding the accretable yield, it looked like margin increased fairly dramatically. I am just wondering, you had kind of the balance sheet, I won't call it restructuring, but the balance sheet adjustments where cash and investments came down, loans went up and some high cost deposits or some interest bearing deposits ran off. I am just wondering if that benefit margin obviously on a core basis, the 20 basis points, wondering if there's more of that to go in the back half of the year or if that impact was fully reflected in your current margin, maybe. Also I saw loan yields were up linked quarter two on a core basis.

No, I think that's a sustainable trend. I mean, all of the things that you just mentioned Scott are things that we've been working on and as part of our management of our liquidity, the rebalancing of the assets and liabilities. And so, we think that the activities that are reflected in our NIM are sustainable. But having said that though, until the rates go up, we're going to be under pressure just like everybody else. But I think either on a core, on a gross basis, the level that we are at in terms of NIM, I think is sustainable at least through the end of the year.

Okay, that's helpful. And then on kind of the overall provision level, you had a net negative provision again this quarter, credit quality improved. I mean do you see -- a reserve for loans I think is 1.77% now, still a pretty high level, a very high level relative to peers. I mean do you foresee more negative provision expense going forward and maybe what level do you guys feel comfortable with letting the reserves fall to as a percent of loans?

When you exclude the PCI and the non-PCI loans, that is to say the loans purchased from -- as part of the United Central or the CBI transaction, that coverage ratio is actually even higher at 1.86%. And given the profile of our asset quality in terms of -- I mean you name it charge-offs, non-performing loans, classified passes, all of that, it's -- we are relatively high at this point. But we go through the process of discipline of evaluating our ALLL on a quarter-by-quarter basis. And based on that, decision is made as to whether or not there is a need for provision or as it has happened over the last couple of quarters, whether there's a need to do a negative provision. My intuition tells me that I think there will be at least one, maybe two quarters of negative provisioning, just based on what we're seeing as far as the asset quality trend is concerned. So we'll see what happens. In terms of a kind of a normalized level of ALLL coverage ratio, speaking for a bank or from a perspective of bank of our size with the kind of asset quality, statistics that we have, I think it's reasonable to expect that a bank like ours with that kind of profile should be in the range of about 130 to 140 coverage ratio, assuming that the economy is healthy, if you will. And so, who knows when we are going to get there, but answering a hypothetical question with a hypothetical situation, I think it's about 130 to 140 proposition.

Okay. That's very helpful. I appreciate it. And then one final question on the operating expense. I think in the past, you had talked about I think it was achieving mid-50s kind of efficiency ratio by the end of the year, I guess by fourth quarter. Is that still a goal or does the expense initiatives in the third quarter now kind of improve that goal?

Well, we're pretty much there, Scott, I mean at 56% for the second quarter. So I am very optimistic and hopeful that this type of trend is sustainable through the end of the year. So, it's our goal to get there by the end of the year. I frankly would have been happy with the high-50s, but given the improvement my staff has made with their focus and discipline on the expense management, I think that mid-50 number is definitely within our sights.

Okay. Alright and one final question just on M&A I know CBI's closed, you integrated in the first quarter, you have capital, just wondering where you stand on looking for acquisitions?

You know, just coincidentally, just over the last month or so, the inquiries from potential sellers have increased and still I would say that there are pricing expectations that are a little bit out of line with reality, but I continue to, along with my staff, evaluate those opportunities and, as you mentioned we have excess capital. And so it's one of those things that's not lost on me or my staff that we have to figure out ways by which to deploy that surplus capital. Long winded way of saying, yes, we are actively looking at opportunities and we remain hopeful that something positive will happen hopefully this year.

Okay, thanks very much.

(Operator Instructions) We have no further questions in the queue at this time. Please continue.

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

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.