Hanmi Financial Corp (HAFC) 2015 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Hanmi Financial Corporation's Third 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 third 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 will 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-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 our financial results for the third 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. Thank you for joining us today to discuss our 2015 third quarter results.

Hanmi's strong third quarter performance is the best evidence yet that our profitable growth and expansion strategy is taking hold following last year's acquisition of Central Bancorp, Inc. Let me briefly summarize the highlights:

Year-over-year earnings are up sharply. We remain extremely focused on improving operating efficiencies and enhancing long-term profitability across the enterprise. In addition to cost reduction initiatives implemented in the first half of the year, during the third quarter we completed the closure and consolidation of four branches that will produce significant expense savings in future periods.

Total loans are significantly higher, thanks to the successful repositioning of our balance sheet that includes the positive impact of deploying securities from the CBI acquisition into higher yielding loans.

Loan production was excellent in the third quarter due to strong growth in our core California markets and meaningful contributions from our expansion efforts -- namely our operations in Texas and Illinois along with our new Healthcare Banking Group. Importantly, we're achieving this growth while maintaining our conservative underwriting standards and improving overall asset quality.

And our ongoing focus on a relationship-driven, high-touch banking strategy is driving a low cost deposit base with higher demand deposits.

Looking more closely at our third quarter results, we reported net income of $14 million, or $0.44 per diluted share. Compared with the third quarter of 2014, net income was up 52% from a year ago after adjusting for the CBI acquisition bargain purchase gain and merger and integration costs recognized in 2014.

On a linked-quarter basis, I am pleased to report that the net income for the third quarter was the same as the second quarter of 2015. As a result, the return on average assets of 1.38% for the third quarter is almost identical to 1.39% generated in the second quarter.

As much of our loan production occurred late in the third quarter, the benefits of higher loan totals will be more pronounced in the fourth quarter. In addition, we had one-time charges associated with the third quarter branch closures and consolidations, as well as expense related to our corporate re-branding effort.

While the re-branding campaign will continue through the fourth quarter, we expect advertising and promotion expense to fall back beginning next year. Adjusting for one-time charges associated with the branch closures, the efficiency ratio for the third quarter was 55.6%. Net loan totals are up 6% quarter-over-quarter, driven by new loan production for the quarter of $306 million. Our new operations in Texas and Illinois, coupled with our new Healthcare Banking Group, made solid contributions to our loan production in the third quarter, generating more than 20% of production. We expect efforts in these areas to continue to gain momentum as we move forward.

Loan production in the third quarter consisted mainly of $231 million of commercial real estate loans and $40 million of SBA loans. In addition, we generated $31 million in C&I loans. C&I loan production was nearly two-times higher than the third quarter last year and reflects our ongoing emphasis on business banking to diversify our loan portfolio. In addition, our C&I loan balance at the end of the third quarter of $281 million represents an increase of 7.8% and 19.2% from the second quarter of 2015 and the third quarter of 2014, respectively. C&I loans now represent 9.2% of our loan portfolio.

Our loan pipeline for the fourth quarter remains robust as we expect year-over-year net loan growth to be in the low-double digits. Deposit growth for the third quarter was strong, driven by 5% growth in demand deposits for the quarter. Overall, total deposits reached $3.5 billion and demand deposits now comprise 31.7% of total deposits.

And finally, we continue to emphasize credit quality. Loan to value ratios on new commercial real estate loan originations for the third quarter averaged 48.7%. Non-performing loans, excluding PCI loans, fell to $23.9 million, or 0.79% of loans, a 20 basis point improvement from the prior quarter. We experienced year-to-date net recoveries of 7 basis points and recorded negative provisions in each quarter of 2015. Our allowance for loan losses now stands at 1.52% of loans at the end of the third quarter. Our focus on disciplined underwriting and credit quality continues to be a top priority at Hanmi.

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

Thank you, C. G. and good afternoon everyone. I will discuss our financial results for the third quarter of 2015 in more detail. Third quarter net interest income, before the provision for loan losses declined 3% to $36.0 million from $37.1 million for the preceding quarter, primarily due to a $1.5 million decline in acquisition accounting amortization and the $605,000 special FHLB dividend received in the preceding quarter, which were partially offset by the improved mix of earning assets and an additional day in the current quarter. And as C. G. noted in his remarks, much of our third quarter loan production occurred towards the end of the quarter, so the full benefit of this strong growth will be realized in the fourth quarter. Compared with the third quarter last year, net interest income improved 15.8%, principally due to higher earning assets arising from the CBI acquisition.

For the first nine months of 2015, net interest income, before the provision for loan losses improved 29.5% to $110.5 million, compared with $85.3 million for the first nine months of 2014, principally due to the increase in interest-earning assets arising from the acquisition.

In the third quarter, Hanmi recorded a negative provision for loan losses of $3.7 million, which was net of a $1.8 million provision for losses on PCI loans. In the preceding quarter, Hanmi recognized a negative provision for loan losses of $2.4 million, which included an $84,000 reversal of impairment reserves on PCI loans. In the year ago quarter, Hanmi recognized a provision for loan losses of $48,000, all of which related to legacy Hanmi loans. Hanmi recorded a negative loan loss provision of $7.8 million for the first nine months of 2015, compared with a negative provision of $7.5 million for the same period in 2014.

Continuing on through the income statement, non-interest income in the third quarter was $13.6 million, compared with $11.1 million and $21.6 million in the prior and year ago quarters, respectively. During the third quarter last year, Hanmi recorded a $14.6 million after-tax bargain purchase gain in conjunction with the CBI acquisition. For the first nine months of 2015, non-interest income increased 6.7% to $35.5 million compared with $33.3 million in the same period last year.

Service charges on deposit accounts were $3.4 million in the third quarter, up from $3.2 million in the prior quarter and up from $2.9 million in the preceding year. Gains on sales of SBA loans were $1.6 million in the third quarter of 2015, unchanged from the prior quarter and up from $1.2 million in the third quarter last year. SBA loans sold in the current quarter totaled $20.6 million, compared to $19.3 million and $14.3 million in the second quarter of 2015 and the third quarter of 2014, respectively. Net gains on sales of investment securities were $2.0 million in the third quarter compared with $1.9 million in the preceding quarter and $67,000 in the third quarter of 2014. We sold securities with a book value of $101 million, $128 million and $10 million in the current, prior and year-ago quarters, respectively.

During the quarter, Hanmi recognized disposition gains on PCI loans of $4.3 million compared with $2.5 million in the prior quarter and no disposition gains in the year ago quarter.

On the expense side of the income statement, non-interest expense was $28.7 million in the third quarter, an increase of approximately $1.5 million compared with the prior quarter.

The higher non-interest expense was primarily related to one-time charges totaling $1.2 million related to employee severance and occupancy expense associated with the branch closures C. G. mentioned.

In addition, advertising and promotion expense increased by $244,000 compared with the prior quarter, primarily due to Hanmi's re-branding initiative. Overall, noninterest expense is expected to decrease in the fourth quarter of 2015 on a sequential quarter basis, as Hanmi begins to realize estimated annual pre-tax cost savings of $2.7 million related to the branch closures.

For the third quarter, the provision for income taxes was $10.6 million, or an effective tax rate of 43.1%, compared with $9.6 million, or an effective tax rate of 40.8%, and $5.4 million, or an effective tax rate of 19.8%, in the prior and year ago quarters, respectively.

The lower effective tax rate in the year-ago period was due to the after-tax bargain purchase gain recorded in that quarter. Excluding this gain and transaction costs, an effective tax rate for the third quarter of 2014 would have been 42.63%.

Moving to our loan portfolio, loans receivable increased 13.5% to $3.05 billion, from $2.68 billion a year ago, and increased 5.8% from $2.88 billion at the end of the preceding quarter. New loan production for the third quarter included $306 million in organic loan production and $36 million of loan purchases, primarily comprised of residential mortgage loans, for a total of $342 million.

Compared with the prior quarter, organic loan production increased 47%, while organic loan production was up 80% compared with the third quarter last year. During the third quarter, we experienced a consistent level of loan payoffs totaling $105.7 million. This was primarily driven by borrowers selling properties 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 somewhat moderated the growth in our loan balances at quarter end.

Total deposits were up by $78.9 million from the prior quarter, primarily due to increases in money market accounts and demand deposits, partially offset by a decline in time deposits. The percentage of non-interest bearing deposits to total deposits was 31.7% at September 30, 2015 compared to 30.9% and 28.6% at June 30, 2015 and September 30, 2014, respectively. The cost of deposits was 44 basis points in the third quarter, unchanged from the prior quarter.

Net interest margin for the third quarter of 2015 was 3.80% compared with 3.97% for the second quarter of 2015 and 3.72% for the year-ago period. The decline in the net interest margin for the third quarter compared to the preceding quarter was primarily due to the 17 basis point decline in the impact of acquisition accounting. Net interest margin, excluding the impact of acquisition accounting, remained unchanged at 3.48% even though the preceding quarter's net interest margin reflected the aforementioned $605,000 special FHLB dividend. For the first nine months of 2015, net interest margin was 3.89% compared with 3.80% for the first nine months of 2014.

Now, I'd like to turn the call back to C. G.

Thank you, Michael. Having recently celebrated the one year anniversary of the completion of the acquisition of CBI, it gives me great pleasure to see the fruits of our efforts over the past year manifested in the strong third quarter results we reported today. Given the solid growth we are seeing in our core California markets, the ongoing success of our expansion efforts, continued credit quality and our sharp focus on cost containment, we have created a platform to drive profitable growth at Hanmi in the quarters and years ahead. Thank you for your attention this afternoon and I look forward to updating you on our progress again next quarter.

Thank you. Christina?

Rob, let's open the call for questions.

(Operator Instructions).

Kelly Motta, Keefe, Bruyette, & Woods, Inc.

I was wondering if you could provide more color on the contribution from the Healthcare Banking Group in terms of DDAs for the quarter and if you had expectations for the remaining part of the year and going into next year?

When they arrived last quarter, or I should say, tail end of the second quarter and we announced it as part of the second quarter results, the expectation that I communicated was roughly about $50 million in loans and $50 million in DDAs. On the loan side, they are a little further ahead, they generated commitments of about $35 million as of the end of third quarter. On the DDAs, they are still running fast to get all the accounts signed up. But by the end of this year, I think those two targets of 50-50 are achievable.

And then in terms of loan production from Texas and Illinois this quarter, is there a way you could break out the contribution from these markets and kind of your expectations for that going forward?

The Texas market is producing at a little faster clip than the Illinois is, principally because of the fact that the Texas branch network is a little bit more mature, in terms of its positioning and the personnel. So for the third quarter, they generated in the range of $35 million. Illinois was less than that. I think it was in about the $4 million range for the third quarter. For the fourth quarter, we expect both operations to individually generate somewhere in the range of $30 million to $40 million per region.

Matthew Clark, Piper Jaffray.

Can you just give us the rate at which new money, new loans were going on the books? I think your core loan yield was down 2 basis points. Just curious what the rate was on the new production this quarter?

Well, first of all, as far as the core yield is concerned, we actually are maintaining that. The new loans that are generated for the quarter is yielding at a level that's comparable to what we've been generating in the prior quarters. And so as an example, before or excluding the SBA loans, we're generating new loans in the range of about 420 and that does not include the purchase portfolio. So, that level of yield is somewhat consistent -- has been consistent for the last three to four quarters.

And then in terms of SBA gains going forward, it looks like you did about $40 million of production this quarter. Just curious whether or not we might see a step-up in terms of the realized gains or are you thinking you're going to hold this one six next year?

Yes, Matt, for the third quarter, the $40 million number includes $11 million of SBA 504s and $29 million of the 7As. I think I stated in the past that we want to generate somewhere in the range of about $120 million to $160 million year-over-year. The volume being dependent upon the economy in the market and competition and all that. We think that we're going to be in that range of $120 million to $150 million. The premium income continues to become a little bit more challenging. We generated for the quarter a 10.2% premium. That's a little bit lower than the prior quarter at 10.9% and we expect that due to competition that the premium income may actually even come down further as we go into 2016.

Having said that, though, we have a very seasoned and experienced SBA team spread out throughout the country in various different offices and locations. And so we are fairly comfortable that the volume and the premium income in 2016 is going to be comparable to 2015.

And then can you just remind us what the remaining -- thinking through the core, the core margin and the reported margin and just the remaining discount accretion expected to come through income over the next couple of years? And then I assume it's fair that we should continue to see some core margin expansion as you continue to redeploy the excess liquidity into loans, but just curious on your thoughts on the reported margin as well, whether or not we might see return to maybe more normal accretion in the upcoming quarter versus this past one?

Well, let me start with the core margin. I'm, I would say, pleased and maybe somewhat surprised that we've been able to maintain the origination yield at the level that we have been able to. So, that's good news.

On the liability side, we have as a result of the assessment of our former CBI branches, as you know, we have closed down several performance CBI branches, as well as re-assessing the clientele, the business model, and in particular the deposit base that go with the or that have come with the CBI portfolio. We are at this point focused on over the next year to year-and-a-half looking for ways by which to lower the cost of funds coming out of that particular region.

As an example, within the next six months, we are looking at roughly about $130 million from certificates of deposits that has about a weighted average cost of about 180 basis points, which is significantly higher than the certificate cost that we have in the legacy Hanmi or for that matter in some of the other regions. And so we're focused on replacing or eliminating roughly about $130 million of those CDs within the next six months. And so just looking forward, that means that for entire 2016, there will be about $255 million of CDs that are going to be maturing with a higher than normal cost, as far Hanmi standards are concerned, as far as CDs are concerned.

In the fourth quarter of this year, we have roughly about $63 million of these types of CDs that has average weighted -- weighted average cost of about 180 basis points. And so, we think that those are low-hanging fruits, if you will, looking at fourth quarter and in 2016 in terms of attacking these higher cost CDs and replacing them with market CDS, which here in our markets and based on our relationship banking, we think that we can drive our cost down by at least 80 basis points net of the discount that we took as part of the purchase accounting for the CDs.

So based on all of that, I guess it's a long-winded way of saying Matt, I agree with you about the core margin either being sustained or maybe upticking a little bit in the future periods. As far as the purchase portfolio is concerned, as you know, the accretable yield there is somewhat of an unpredictable and volatile number, depending on the velocity of the pay-downs, relative to the original expectations that went in with determining the discount. And so you'll see a quarter to quarter sometimes a significant variation as far as the accretable yield component is concerned as we experience, I would say, a different level of payoffs from the non-PCI portfolio.

And then it's just the tax rate, can we return to a more normal 40% or so going forward?

Yes, we will.

Bob Ramsey, FBR Capital Markets.

I just want to quickly follow up on, I guess, Matt's questions about margin. I know you talked about the opportunity to re-price some of the CDs. I know the purchase accounting on acquired deposits is a contributor to margin here today. And I think that tends to run off quicker than the loan accretion piece does. Can you remind me sort of when that piece of the accretion sort of finishes amortizing?

It's about another two and a half years.

On the time deposit?

Yes.

Okay, that's longer than I would guess. And then, if I understood you guys correctly, you said that in the fourth quarter of this year, you have $63 million of CDs that you expect to re-price 100 basis points lower. And that 100 basis points is the financial impact to your income statement, right? That's considering your cost after the mark to where you expect to be able to re-price it to, right?

Actually what I said was 80 basis points net of the discount accretion on the CD, and we either will re-price them at market, which would generate an 80 basis point save to us or we would just eliminate some of these CDs and expect that the other efforts like the Healthcare Banking Group and some other parts of the Bank to replace them with DDAs. And so we believe that at a minimum, we can generate an 80 basis point savings off of the $63 million, and perhaps maybe more than that depending on how we're able to replace the cost of funds.

Shifting gears, talk a little bit about expenses, if we could, I know you guys said that in the fourth quarter the expectation is for expenses to be down on an absolute basis. Just wanted to be clear, are we talking about the -- I know you highlighted there was a $1.2 million of one-time charges in this quarter. So, if we kind of start at 27.5, is that the base to think about improvement from there-?

Yes. That's a good starting point. And as Michael mentioned earlier, we should start to realize upon the $2.7 million of the cost saves, the $2.7 million being on an annualized basis. So, if you divide that by four, that's a good starting point for savings in the fourth quarter of this year.

Having said that though, where we are today, as you may recall, we recruited the Healthcare Banking Group, as well as higher additional lenders for other parts of the organization, primarily in Texas and to some extent Illinois. Those groups, as they continue to ramp up will offset the investments that we have made, but there is going to be a little bit of a time lag as far as the investment in the production infrastructure and vis-a-vis the income that will be generated by the investments.

And then just on a couple of the individual expense items, I guess, the advertising line was sort of a little bit higher than we were thinking it would be this quarter. I know you all talked about some of the branding piece in there, how should we think about advertising and promotion, maybe on an annual basis, I get it can sort of fluctuate quarter-to-quarter, but how should we think about that line?

Well, as you mentioned, I mean, we have started the rebranding process. Therefore the bulk of the increase for the quarter was attributable to the rebranding effort, which included the hiring of consultants and changing of the signs and so on. In terms of the actual advertising budget, I'll let Bonnie speak to that.

We did have a little bit elevated expense in the advertising, but it should be normalized in the beginning of the next quarter. Actually beginning of the first quarter next year.

You're probably looking at roughly about a $2 million a year for advertising and promotional expense.

So, $2 million a year is a good run rate in the future and then you sounded like that the expense doesn't really come down in the fourth quarter. So, the fourth quarter will look similar to this one?

Correct.

And then professional fees also still seem a little bit elevated. Is there any room for improvement on that line?

Yes, there will be. That line item includes the legal expenses and most of that are attributable to the portfolio that we picked up from PCI. So as we continue to generate the successes in terms of lowering of the problem assets, that number will come down. Furthermore because of some weaknesses that we have had in the special assets area, as it relates to former CBI, we have inherited and we have retained consultants and those consultants in all likelihood will be gone at the end of this calendar year, so that will also create another source of saves. So you should expect starting in the first quarter of 2016 a reduction as far as professional fees are concerned.

The other question, if we could just sort of think a little bit about growth, I know you guys highlighted a lot of the loan growth was kind of back-end loaded this quarter and I guess also this quarter, you all did continue to bring down the securities book. You've talked about wanting to be 15% of assets, and looks like you're kind of there on an end of period basis, not quite on average. But in the fourth quarter, is it fair to think that the average earning asset growth will still be something less than the loan growth is, at least on an average basis, some of the loan growth is funded by securities to clients?

Yes. I don't think you'll see the balance sheet expand commensurate with the expected growth in the loans for the fourth quarter.

And then next year will the loan growth be more the driver of loan growth, because I think the securities book will be kind of more right size by that point?

Yes, and if we do the things that we have done and we're capable of doing, you'll continue to see growth in our deposit base and therefore that would be a source of liquidity on an ongoing basis to support the loan growth for Hanmi.

Last question and I'll hop out. I appreciate all the time. But the gains on sales of purchase credit impaired loans and securities both were pretty big contributors to earnings and profitability this quarter. Just curious, have you all sort of worked through much of what you think you'll sell on the PCI book or is there more to come? How are you thinking about fourth quarter in terms of both loan sales and security sales?

Well, first of all, we have not sold any of the PCI loans. Those are the reductions that you've seen as a result of the basic workout successes. And so we will -- based on that, it's hard to predict how much in the way of reductions we're going to get from the problem or PCI loans, but that portfolio is becoming smaller every month, just because of the way my staff has been able to generate workout successes. And so I would suggest that the -- what you saw in the third quarter is probably, it's safe to say it's repeatable in the fourth quarter.

Don Worthington, Raymond James and Associates.

Just taking a look at, looked like there was a linked quarter increase in FHLB advances. What type of term were those and the purpose for taking them down?

They're overnight advances.

We were getting a lot of loan bookings, bookings towards the end of the quarter, and we weren't sure whether or not there was going to be a short-term liquidity issue or not. So, we as an abundance to caution, we took down some FHLB overnight advances, which were paid back shortly after the quarter ended. We may consider during the quarter, additional FHLB advances, depending on the rate that's available out there for us, but at this point in time what we did was primarily driven by the concern for liquidity at the end of the quarter.

And as you said they are already gone, already paid.

Correct.

And then in terms of reserves or the negative provision, is there kind of a target of where you'd like to see the reserve percentage or how much more we might expect in terms of reserve releases?

Well, it's hard for me to predict that because we are required by, I would say, the accountants and whatnot to assess our reserves on a quarter-by-quarter basis. Having said that though, we continue to see improvements in our asset quality, whether it's in non-performing category, whether it's in a classified loan category or past due. And so, I think it's safe to assume that for an organization like ours, which build up its reserve back in the dark days that as we continue to move out into the future, there is a high likelihood that we will continue to have reserve release. It's hard to predict what the ideal level of loan loss reserve might be. I think I've said in the past, maybe for a bank like ours with good asset quality, given the economy, the kind of economy that we have, maybe somewhere in the range of maybe about 130 to 135 may make sense, but there are lot of other things than my own subjective opinion that enter into it, but I think at this point somewhere in that range is probably not out of line Don.

Gary Tenner, D.A. Davidson.

Just a couple of questions. I was wondering if you could tell us what the remaining discount is on both the PCI and non-PCI loans?

Gary, for the PCI loans at September 30, it was $3.1 million and for the non-PCI loans, it was $14.4 million. It's on page -- we added that to page 10 of our earnings release.

Okay. My apologies, I guess I missed it. And then the other question was just regarding the growth in Texas and Illinois that you highlighted. Were any of the loan purchases in the quarter allocated to those markets, or are they all in California?

Yes. We didn't purchase any loans in Texas or Illinois. As mentioned previously, they were all residential loans, originating in California and with properties near a branch economy.

There are no further questions in the queue at this time, please continue.

Thank you for listening to Hanmi Financial's third 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 we thank you for your participation.