Hanmi Financial Corp (HAFC) 2017 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Hanmi Financial Corporation Second Quarter 2017 Conference Call. As a reminder, today's conference is being recorded for replay purposes. (Operator Instructions) I'd now like to turn the conference over to Mr. Richard Pimentel, Senior Vice President and Corporate Finance Officer. Please go ahead.

Thank you, Matt, and thank you all for joining us today. With me to discuss Hanmi Financial's Second Quarter 2017 Earnings are C. G. Kum, our President and Chief Executive Officer; Bonnie Lee, Chief Operating Officer; and Ron Santarosa, Chief Financial Officer.

Mr. Kum will begin with an overview of the quarter, and Mr. Santarosa will then provide more details on our operating performance and credit quality. At the conclusion of the prepared remarks, we will open up 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 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 afternoon, Hanmi Financial issued a news release outlining our financial results for the second quarter of 2017, which can be found on our website at hanmi.com.

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

Thank you, Richard. Good afternoon, everyone. Thank you for joining us today to discuss Hanmi's 2017 second quarter performance.

It was another good quarter for Hanmi, driven by strong loan and lease growth, stable asset quality and solid earnings expansion. Here are some highlights for the quarter.

Loans and leases receivable increased 3.3% in the quarter and were up 18% year-over-year, driven by strong loan and lease production. In fact, second quarter new organic loan and lease originations jumped 38% from the prior quarter and nearly 5% from a year ago. Importantly, we have been able to generate this loan growth while maintaining disciplined underwriting standards and not at the expense of increased risk. In addition, net income increased on both a linked-quarter and year-over-year basis, as solid growth in net interest income more than offset a modest increase in expenses. And even though expenses overall were marginally higher, improvements in core non-interest expenses, top-line revenue from growth in earning assets and SBA gains helped improve Hanmi's efficiency ratio by 22 basis points in the quarter. We continue to optimize the leverage of our deposits by maintaining a loan-to-deposit ratio in the 95% range. And finally, Hanmi remains very well-capitalized. The bank's regulatory capital ratios remain very strong, and we are well positioned to continue growing in a safe and sound manner.

Looking in more detail at our second quarter results. We reported net income of $14.5 million or $0.45 per diluted share, which resulted in a favorable return on average assets of 1.19% and return on average equity of 10.65%. On a linked-quarter basis, net income per share was up by $0.02 compared to the first quarter, as interest income from the growth in our portfolio of loans and leases more than offset an uptick in noninterest expense from non-core line items.

Compared to the second quarter last year, net income per share increased by $0.01. This again was primarily due to a higher interest income from the expansion of loans and leases receivable, which more than offset last year's significantly higher negative provision for loan loss and PCI gains.

Overall, I'm quite pleased with the improvement in core sustainable earnings driven by the growth in loans and leases. To this point, net interest income before provision for loan losses is up 2% from last quarter and 8% from a year ago. In addition, the increase in revenue helped improve our efficiency ratio to 54.74%, down 22 basis points from the prior quarter and down 172 basis points compared with the second quarter last year.

Turning to loans and leases receivable. Our total portfolio grew more than 13% in the second quarter on an annualized basis and is up more than 18% from a year ago driven by new loan and lease production of $279 million in the second quarter and $873 million over the past 12 months.

In the second quarter, purchase loans were $39 million and primarily consisted of single-family residential loans. However, we continue to be impacted by elevated level of payoffs in an intensely competitive environment, as the second quarter payoffs and amortization figure of $131 million exceeded the first quarter figure of $118 million.

Looking ahead to the remainder of 2017, our loan and lease pipeline remains healthy, and we are confident that we can generate low teens growth in loans and leases for the full year.

While second quarter loan production was strong across all loan types, I'm particularly encouraged by the success of our C&I lending team. During the second quarter, we saw meaningful contributions from new lending officers hired early in the year to expand our C&I capabilities into California and New York markets. Thanks in part to their activities, C&I loan production was more than 3x higher on both a linked-quarter and year-over-year basis and represented 21% of total new loan production in the quarter. In fact, our C&I loan balance at the end of the second quarter was 10% higher than the prior quarter and up 19% from the second quarter last year. In addition, total commercial line of credit commitments was up 4% from the prior quarter and 10% from a year ago. These new teams are also expected to contribute higher level of non-maturity deposits in the second half of the year.

Higher retail time deposits in the quarter helped increase total deposits by 4.3% compared to the prior quarter and 18.7% compared to the second quarter last year. In spite of the increase in retail time deposits in the quarter, non-maturity deposits at the end of the second quarter still represented more than 68% of total deposits as compared to 64% a year ago. I'd like to mention that our growth in deposits over the past 12 months more than fully funded our loan and lease growth over the same period.

As it is the case with our peers, we are challenged with rising cost of deposits. Since the Fed announced 3 rate hikes starting December 14, 2016, Hanmi's cost of deposits have risen 12 basis points. And finally, our asset quality metrics remained strong as nonperforming loans, excluding PCI loans, stand at $16.5 million or 41 basis points of loans, and we recorded net charge-off recoveries in the second quarter of $184,000. At quarter-end, our loan -- excuse me, our allowance for loan losses stood at 83 basis points of loans and leases as compared to 84 basis points for the prior quarter-end. In terms of underwriting, the weighted average loan-to-value and debt coverage ratios on new commercial real estate loan originations for the second quarter were quite strong at 59% and 2x, respectively.

Before turning it over to Ron, I'd like to mention that our Board of Directors declared a 10.5% increase in our common stock dividend to $0.21 per share. This dividend will be paid on August 16 to shareholders of record as of July 28. The increase in our quarterly dividend reflects Hanmi's continued strong financial performance and our board's confidence in the bank's future growth prospects. In addition, this represents an annualized dividend yield of 2.94% based on yesterday's closing stock price and further demonstrates our commitment to enhancing stockholder value.

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

Thank you, C. G., and good afternoon, all. Let me begin by reviewing our net interest revenues and net interest margin in more detail.

Second quarter net interest income increased 1.9% or $824,000 to $43.2 million from $42.4 million in the first quarter. This increase reflects the growth of our loan and lease portfolio, where the portfolio average increased $70.2 million or 1.8%, and interest in fees on the portfolio increased $2.6 million or 5.7%.

Offsetting this increase, of course, was the full quarter effect of the $100 million, 5.45% subordinated notes issued at the end of the first quarter as well as the increase in deposits and related interest expense.

Subordinated debt averaged $116.9 million for the second quarter, up 277.5% from $31 million for the preceding quarter, and the related debt interest expense increased $1.3 million. Subordinated debt includes the $100 million of notes issued in the first quarter and $26 million of trust-preferred securities we assumed in the 2014 acquisition. Average interest-bearing deposits for the second quarter increased 10% from the first quarter, and the related deposit interest expense also increased $1.3 million.

Looking at our net interest margin for the second quarter. It was 3.81%, down 8 basis points quarter-over-quarter primarily because of the 11 basis point full quarter impact of the subordinated notes. Improved earning asset yields increased the net interest margin by 8 basis points while the increase in the average balance in the rate paid on interest-bearing deposits decreased the margin by 9 basis points.

Compared with the 2016 second quarter, net interest income grew 8% and reflects the solid loan growth we've achieved over the past 12 months as well as last year's acquisition and commencement of the Commercial Equipment Leasing Division. Year-over-year, average loans and leases increased 19%, with this portfolio at 86% of average interest-earning assets compared with 82% for the year-ago period.

Net interest margin on the other hand declined 21 basis points, principally because of the impact of acquisition accounting as well as the $100 million 5.45% subordinated notes.

Turning to noninterest income. The second quarter benefited from higher levels of SBA sales as well as gains from the sales of securities. Gains on the sales of the guaranteed portion of SBA loans rose to $2.7 million on sales of $32.4 million of loans compared to the first quarter where gains were $1.5 million on sales of $19.6 million of loans. The average premium on SBA loans sold was 9.8% higher than the previous quarter at 9%.

Security transactions for the second quarter resulted in net gains of $938,000 compared with $269,000 in the previous quarter. In the second quarter, we sold $39.2 million of agency home equity conversion mortgages that we assumed in connection with the 2014 acquisition. While in the first quarter, we sold $12.3 million of taxable municipal securities.

Noninterest expenses for the second quarter, before the impact of OREO charges and the last of the merger and acquisition expenses from the commercial equipment leasing division acquisition in the fourth quarter last year, increased $1.1 million or 3.9% quarter-over-quarter. Still, our efficiency ratio for the second quarter improved to 54.74% from 54.95% last quarter on higher net interest revenues and noninterest income. The biggest impact on noninterest expense was the change in the valuation allowances on SBA servicing assets, all of which were included in the other expense category in the income statements.

In the 2017 first quarter, we credited expense $510,000 to reduce previously established valuation allowances. There were no similar credits or charges in the 2017 second quarter. In addition, the other expense category for the second quarter included a loss on the sale of former branch properties of $77,000.

As C. G. mentioned, asset quality remains strong. For the second quarter, the provision for loan losses was $422,000. The non-PCI portion of the loan loss provision was $594,000, while the PCI portion was a negative $172,000. For the previous quarter, the loan loss provision was a negative $80,000, all of which was PCI-related. Finally, our tangible book value grew to $16.59 per share, up 2% from the first quarter. Our tangible common equity ratio remains strong at 10.83% as do all of our regulatory capital ratios.

With that, I will turn the call back to C. G.

Thank you, Ron. We've had a good first half of 2017 that include a strong loan growth, continued stable credit quality and expanding net income. As we look forward to the second half of 2000 [2017], we are challenged by the flat yield curve and intensely competitive environment for loans and deposits. However, the Hanmi franchise, with its dedicated employees and loyal customers, is well positioned to continue to generate strong returns to our shareholders in the second half of the year. I look forward to sharing our continued progress with you again next quarter.

Thank you, and have a nice day.

Matt, let's open up the call for questions.

(Operator Instructions) Our first question comes from Chris McGratty from Keefe & Woods.

C. G., a question on loan growth. It looks like you made a slight adjustment, low teens for the year. In this quarter, the provision was modestly positive, very modest. I'm wondering how we should be thinking about future provision and expectations given the sustained growth that you're going to put on and also the mix shift towards more commercial and industrial balances.

Well, if we're able to generate low-teen growth on an annualized basis, for the second half of the year, I think it's reasonable to expect maybe 50 basis points on new loans generated on a go-forward basis, and that's assuming that we have no surprise as far as asset quality deterioration is concerned. And so far, there are no indications that there are any kind of meaningful level of deterioration in our portfolio.

Okay, that's helpful. And Ron, maybe on the margin, you cited the flat curve that a lot of banks are facing today, and then you've got the fact that your loan-to-deposit ratio is bumping up a little bit higher than average. How should we be thinking about, now that we've got the debt fully in the numbers, the near-term trajectory of the core margin? I assume they'll get repricing on both sides of the balance sheet. I'm just trying to see which one might outweigh the other.

Through the second quarter, you saw that the interest-bearing deposits as a function of interest-earning assets outpaced, I think, by 1 or 2 basis points the growth in the loan portfolio. So looking forward, I would expect to kind of be flat, slightly up, slightly down, depending on how we do as an organization with respect to the mix of the deposit base. Last quarter -- or the second quarter, we had a very large growth in the time products. I think in the looking out, it might be more balanced between DDA, savings and time. So it depends on all of that mix. But all of that said, with that uncertainty of how that mix will turn out, I still see it being somewhat neutral, up 2, down 2, up 1, down 1. It's going to be in that type of range.

Our next question comes from Gary Tenner from D.A. Davidson.

C. G., I just wanted to maybe talk a little bit about kind of the growth outlook. You talked about loans but thinking more along the lines of sort of talent and expansion opportunities. On the past, you've talked about hiring folks in New York, et cetera. Could you talk about where you are there, plans for that market and any recent traction you may have gotten?

Yes. We've been successful in terms of hiring new people, not only in the markets that we have previously mentioned, which are New York and California, but we've also recently had opportunities to bring in some people in the Texas market. But as specific to the East Coast, we have a branch that's in the process of being remodeled, the facility is in the process of being remodeled. We think that by end of October, thereabouts, that it will be available, fully functional, if you will. And as we get closer to that opening date, we will be ramping up our recruiting efforts to attract more talent. So once we have a depository -- a deposit-gathering facility in New York, New Jersey corridor then we will be -- we will then have more latitude in terms of bringing on producers. And so I'd suspect that in the fourth quarter is when we will have some -- hopefully, some nice announcements to make in terms of pickup of banking teams that way. Complementing that, here in California, we've been in discussions with some mainstream bankers to continue the process of joining our team to augment the core competency or core capabilities in the Asian sector. And so we hope that in the second half of the year that those recruiting efforts will bear fruit.

And are those bankers in California traditional commercial bankers? Or is there any specialty niche behind it?

I'd say traditional, commercial bankers more on the community banking side, but we're obviously -- we have and we will continue to emphasize people who can generate more of the C&I types versus CRE.

Okay. And then finally just on that New York branch, is that in Manhattan? Or is that in an outer lying area?

Yes, it's in Manhattan. Actually, it's right in the heart of -- what is now the New York's Korea town. And it's in a location that has now become more of a Korean-American banking center, and so we're going to be right in the thick of things.

Our next question comes from Tim Coffey from FIG Partners.

C. G., I want to follow up on the margin question from a bit earlier to kind of just look at loan yields, you mentioned on the call towards the end about competition, the flat yield curve. And then you also mentioned in the press release kind of indicating that you acquired or brought in some higher-quality loans. So is it right to kind of infer that you could see some pressure on your loan yields in the near term?

Well, I mean, we've had pressure on the loan yield for some period of time because of the hypercompetitive environment that we're in. But at the end of the first quarter, the average coupon for the portfolio as a whole was 4.74% and at the end of second quarter was 4.87%. And so we're moving up nicely, obviously, not as high as I would like, but we're competing very well. So the issue for us isn't so much the new -- the coupon on the new loans that we're generating as much as the payoff of the loans in our portfolio that are generating higher coupon. And so unfortunately, the payoffs that I'd mentioned in my presentation involve coupons that are higher than the ones that we're able to generate. And I think by any standards, if you can generate new coupon -- new loans in the range of about 4.80%, which is what we're generally able to do now, we should be doing fairly well. But unfortunately, the -- given the competitive market, the -- particularly, the bigger banks, once again migrated to our space, and they're taking out our better yielding loans. Bonnie, is there something you want to add?

Yes, just to add, so C. G. mentioned the payoffs, higher coupon payoffs are -- like in the second quarter the average coupon payoffs was at 4.97%, which is higher than what we booked at 4.87%, the book rate that was mentioned.

That was actually my next question. Looking at the kind of the cost of deposits, given -- you gave a good color on where they've gone up in the last 6 months, are you -- do you see that pace continuing? Or do you see it leveling off here?

Well, my sense is that it's going to level off. And one of the reasons why -- and by the way, I hope I'm correct, but the reason why I think that is that the new banking teams have not really gotten traction on moving over the deposits as we speak. We have bankers that are actively in the process of moving over these deposits that are not rate-sensitive deposits, and they go with the C&I relationships. So I'm very hopeful that starting in the third quarter and beyond, that the non-maturity deposits or the gathering activities as it relates to non-maturity deposits will kick into gear. But offsetting that though, in our space here in Koreatown and in some of the other markets, competition for deposits is very fierce and particularly on the time side, that's the reason why we've been recruiting and we've been emphasizing deposit gathering in the non-maturity categories.

And then my last question has had to do on the SBA production in 2Q versus 1Q. Was the 2Q level kind of where you think you can be? Or is it -- where the level you can be is somewhere in between 1Q and 2Q?

That's a good question because the -- my sense and my hope is that -- I'm not sure that we could maintain, as I said, that high of a level, but I think fairly high. So Bonnie?

Yes, I think the -- actually, it will be more fair to look at the first half versus the second half of the year. So we think we can replicate the first half production in the second half of the year.

(Operator Instructions) And our next question comes from Don Worthington from Raymond James.

In terms of the loan portfolio, have you seen any weakness in loans related to the retail sector?

Well, we don't have much in the way of exposure to retail sector. But to clarify, our exposure to the retail sector as it relates to that, we have a 0 exposure to box retail type of operation from a commercial real estate standpoint. We do have some exposure to those clients in the C&I portfolio who are in that chain of suppliers as it relates to the garment industry. But we have not seen any material erosion because, as I like to say, whether people are -- whether the outlet is a brick-and-mortar or through the electronic means, these retailers are still going to need product. And our customer base is primarily in that supply chain as far as anything from dyers of clothes to the stitchers to manufacturers. And so we've had some, I would say, credits that we're watching, but we have not had anything manifest at any kind of material deterioration as we speak.

Okay, great. And then in terms of the growth in the retail CDs, was there any deposit campaign that you were conducting? Or was this kind of a normal course of business from your customers?

So we had mentioned about the competitive CD market. So what we have -- the strategy that we implemented the last couple of quarters is that we look at the relationship and try to retain our existing CD customers, mature CDs. So on average, on a given quarter, we were able to retain about -- I would say about 60% on average. But this quarter, we were able to retain about over 90% of the maturing CDs. And we're realizing that there are banks that are offering CD rates above 1.35%, even as high as 1.50%. We look at all those relationships and come up with a strategy to retain existing customer base versus try to offer higher rates and then go and spend the money and time to recruit some new deposits. So that's the strategy that we work on that.

So we don't -- as you know, we don't actively or aggressively run CD campaigns. And as Bonnie mentioned, it's much more for defensive purposes. But given the strong loan demand that we had in the second quarter and given the lag that we anticipated as it relates to deposit gathering by the new people, we did run a modest campaign. And periodically we will do that, but that's not part of our DNA. Our core competency is, in essence, generating relationship-oriented deposits. And then so we'll see how the second half goes, but I don't see us changing that behavior in any significant way.

Okay, great. And then lastly, in terms of the expenses, professional fees and advertising expense were up linked quarter. Where would you see those items in terms of like a forward run rate?

Yes. So Don, you'll notice that for advertising, we typically have a low period in the first quarter of each year, and then we step up in the second quarter and then kind of stay at about that level through the fourth quarter. So that's how I would look at advertising. You could see that over the last couple of years. With respect to professional fees, that was just a small lift to -- related to some audit and tax work. So that should -- that part won't repeat itself.

Our next question is from Matthew Clark from Piper Jaffray.

Just curious, on the core loan yields that were up pretty meaningfully linked quarter, just curious how much in the way of prepayment penalty income might be in there, interest recoveries if any, just trying to get a comparison from first to second.

I don't think it's a meaningful level.

Okay. So largely a repricing in new production, okay. And then just on SBA, obviously, settling a bit more here in the second quarter. How should we think about that pipeline and related production and margins going forward?

The -- as Bonnie mentioned earlier, you have to kind of look at that in totality, over the 6 months or the first half. But I think -- hopefully, in this case, I hope I'm also wrong, but I think there might be a slight decline from the second quarter, but there's also a possibility that we'll be able to maintain the second quarter production in the third quarter. But I think it's more -- I believe that there could be a slight decline in the 7, 8 productions for the third quarter. The premium income however has been staying at a very attractive level. For the second quarter, the premium level was at 9.8%, which is up from a little over 9% in the first quarter, so that's holding up fairly well.

Okay. And then on M&A, anything new to report on that front, increased appetite for any types of businesses or anything...

Our focus is primarily whole bank acquisition at this point. We are evaluating opportunities to partner with some of these companies from California to the East Coast and, hopefully, we could do something. And I know you've heard me say this for a while, but we are very disciplined in the way we evaluate acquisition opportunities and -- but I'm keeping busy doing that right now.

This concludes the question-and-answer session. I'd like to turn the floor back over to management for any closing comments.

Thank you for listening to Hanmi Financial's second quarter 2017 results conference call. We look forward to speaking to you next quarter.

Thank you. This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.