Hanmi Financial Corp (HAFC) 2017 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Hanmi Financial Corporation's Third Quarter 2017 Conference Call. As a reminder, today's call is being recorded for replay purposes. (Operator Instructions)

I would now like to introduce Mr. Richard Pimentel, Senior Vice President and Corporate Finance Officer. Please go ahead.

Thank you, Darren, and thank you all for joining us today. With me to discuss Hanmi Financial's third 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. 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 our 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 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 1955. 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.

Today, Hanmi Financial issued a news release outlining our financial results for the third 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 third quarter results.

Let me briefly share some of the key highlights. Loans and leases receivable increased 3% in the quarter and were up 9% for the 9 months of 2017. Hanmi's net interest income for the third quarter was up 4% quarter-over-quarter and 13.5% on a year-over-year basis. Net interest margin excluding acquisition accounting remained stable at 3.76%.

Furthermore, the strong growth in earning assets, coupled with careful expense management, resulted in a nice improvement in our third quarter efficiency ratio. As a result, earnings were solidly higher on a both linked-quarter and year-over-year basis. Further, Hanmi's earnings continue to represent superior returns on both average assets and average equity basis. And finally, all of the credit quality metrics continue to remain favorable.

Looking at our third quarter results in more detail. We reported net income of $14.9 million or $0.46 per diluted share, with a return on average assets of 1.18% and return on average equity of 10.73%. Net income was up by $0.01 compared to the prior quarter as interest income from the growth in our portfolio of loans and leases more than offset lower noninterest income, while noninterest expense remained stable. Compared to the third quarter last year, net income per share increased by $0.05. Again, this was primarily due to higher interest income from the expansion of loans and leases receivable along with noninterest expense remaining relatively flat year-over-year.

Our bottom line performance is clearly being driven by the growth of core sustainable earnings generated by the expanding portfolio of loans and leases. Net interest income before provision for loan losses is up 4% from the second quarter and 13.5% from a year ago.

The increase in revenue, coupled with our ongoing focus on expense management, helped improve our efficiency ratio to 53.33% in the third quarter, which is 141 basis points better than the prior quarter and a 539 basis point improvement compared with the third quarter last year.

To further improve efficiencies going forward, during the third quarter, we consolidated 2 Southern California branches with expiring leases.

Turning to loans and leases receivable. Our portfolio expanded by 3% in the third quarter and 9% on a year-to-date basis for 2017. Our portfolio is 18% higher than a year ago. This growth was driven by new loan and lease production of $220 million in the third quarter and $929 million over the past 12 months.

I continue to be pleased with the ongoing success of our C&I lending team, which is benefiting from investments made earlier in the year to extend our reach both geographically, particularly in New York, and into new areas of focus, most notably specialty and entertainment lending.

During the third quarter, C&I loan production was more than 30% higher on a year-over-year basis and represented 20% of total new loan production in the quarter. As of the end of the third quarter, C&I loans outstanding excluding leases was up 5.3% on a quarter-over-quarter basis and was up 14% on a year-over-year basis.

Similar to recent prior periods, we continue to be impacted by high level of payoffs in a highly competitive environment. During the third quarter, payoffs and amortization figure of $145 million outpaced $131 million in the prior quarter. That said, our loan and lease pipeline remains healthy looking ahead to the fourth quarter, and we are confident that we can generate low-teens growth in loans and leases for the full year.

Turning to deposits. Total deposits quarter-over-quarter generally remained flat. But what is of note is growth in the core deposit categories of noninterest-bearing demand deposits, which increased 2.6%; and retail CDs, which increased 3.7%, to offset the 6.5% decrease in CDs greater than $250,000. Compared to the third quarter last year, deposits increased 14% primarily due to the strength of Hanmi's retail branch network, as money market and savings accounts and retail deposits -- excuse me, retail time deposits increased 24% and 15%, respectively.

Over the last 12 months, all financial institutions have been challenged with the rising cost of deposits and a flat yield curve environment. Even in this difficult environment, I'm pleased to report that Hanmi has been able to maintain an acceptable net interest margin. For both the second and third quarters of 2017, excluding acquisition accounting, Hanmi has been able to maintain a net interest margin of 3.76%. Further, the 8 basis point decline in the net interest margin, excluding acquisition accounting, from first quarter to second quarter of 2017 were primarily attributed to the additional interest expense associated with the $100 million sub-debt that was issued late in the first quarter of 2017.

And finally, we remain consistent in our credit standards, and asset quality is strong. Nonperforming loans excluding PCI loans stand at 14.7 -- excuse me, $14.6 million or 35 basis points of loans. Net charge-offs for the third quarter of 2017 were $1.5 million, but primarily consisted of a $1.3 million charge-off of one commercial loan.

In addition, loans past due 30 to 89 days and still accruing declined from 23 basis points of loans to 12 basis points. Finally, our allowance for loan losses was 77 basis points of loans at 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 third quarter were quite strong at 54.5% and 2x, respectively.

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

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

Third quarter net interest income increased approximately 4% or $1.7 million to $44.9 million from $43.2 million in the second quarter. This increase reflects the continued strong growth of our loan and lease portfolio, where the portfolio average balance increased $140.2 million or 3.5%, and interest and fees on the portfolio increased $2.3 million or 4.8%. This increase was partially offset by a $608,000 increase in interest expense on deposits.

Turning to net interest margin for the third quarter, it was 3.79%, down 2 basis points from 3.81% for the second quarter of 2017. Loan interest income as a percentage of average interest-earning assets increased the net interest margin by 1 basis point, while deposit interest expense decreased the net interest margin by 3 basis points.

The average rate paid on our interest-bearing deposits for the third quarter increased to 93 basis points from 88 basis points for the preceding quarter, while the average cost of deposits similarly increased to 66 basis points from 62 basis points.

Since December 2016, the Federal Reserve increased the benchmark federal funds rate 3x or 75 basis points. The bank's quarterly average rate paid on interest-bearing deposits over that same time period increased 19 basis points, representing 25% of the change in the Fed funds rate.

For the 2017 third quarter, the bank's average rate paid on interest-bearing deposits increased just 5 basis points, representing 20% of the most recent change in the Fed funds rates. The average yield on loans and leases receivable was 4.87%, unchanged from the prior quarter. Since the end of the year, however, the bank's quarterly average yield on loans and leases increased 15 basis points, again, representing 20% of the change in the Federal funds rate.

Compared with a year ago, net interest income grew 14% and reflects the solid loan growth we've achieved over the past 12 months, as well as last year's fourth quarter acquisition and commencement of the Commercial Equipment Leasing Division.

Turning to noninterest income. We reported a sequential decrease of 9%, primarily due to a $671,000 decrease in gain on sales of securities, a $613,000 decrease in other operating income, offset by a $439,000 increase in disposition gains on PCI loans.

Included in other operating income is income from the early payoff of leases, which was $672,000 lower in the third quarter. In addition, we had a payment on an acquired fully charged-off loan, or a PCI loan, of $676,000 in the third quarter.

On a year-over-year basis, noninterest income increased 2%, primarily due to a $930,000 increase in gains on sales of SBA loans, partially offset by a decrease in other operating income of $1.1 million. The third quarter of 2016 included a $1 million gain from the sale of a branch facility. Gains on the sales of the guaranteed portion of SBA loans declined slightly to $2.5 million on sales of $32.5 million of loans compared to the second quarter, where gains were $2.7 million on sales of $32.4 million of loans. A year ago, gains on sales of SBA loans were $1.6 million on $24.1 million of loans sales.

The average premium on SBA loans sold was 10.2%, higher than the previous quarter, which came in at 9.8%.

Noninterest expenses for the third quarter decreased $284,000 to $28.7 million from $28.9 million for the second quarter, primarily due to a $535,000 decrease in OREO expense. As a result of the increase in revenue from the growth in earning assets and the decrease in noninterest expense, the efficiency ratio improved to 53.3% in the third quarter from 54.7% in the prior quarter and 58.7% a year ago.

Again, as C.G. mentioned, we consolidated 2 branch offices at the end of the third quarter, in Beverly Hills and Torrance, California. Importantly, asset quality remains strong. For the third quarter, the provision for loan losses was $269,000 compared to the second quarter provision for loan losses of $422,000.

Finally, our tangible book value grew to $16.86 per share, up 2% from the prior quarter. Our tangible common equity ratio remains strong at 10.72%, as do all of our regulatory capital ratios.

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

Thank you, Ron. I'm pleased to report that we reached an important milestone in the third quarter as we exceeded $5 billion in total assets. Looking ahead, we expect our expansion strategy to accelerate with the planned opening of our first New York branch located in Midtown Manhattan later this month. As we look to strategically expand the bank, the demographics of New York City, which has the second-largest Asian population among U.S. metropolitan areas, provides significant opportunities to grow the Hanmi franchise.

Overall, Hanmi turned in another good quarter despite a very competitive market for loan originations and deposit gathering. With the momentum that we have generated, I expect a strong finish to the year. I look forward to sharing our progress when we speak with you again in January. Thank you, and have a nice day.

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

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

Maybe, Ron, one for you on credit, or C.G. You talked about the elevated or the one charge-off in the quarter. Just conceptually, I'm trying to take a thoughtful view on provisioning expense going into next year. You're continuing to grow the loan portfolio low double digits. And the question is, how much of -- is there any much remaining PCI discount in the benefit for the next few quarters? Or should we expect the provision expense to kind of pick up from here given your growth aspirations?

Well, the remaining PCI loans are about $8 million to $9 million, in that range.

$8 million.

About $8 million or so, so there's not a lot of room left there. I would say that beginning in the first quarter of next year, it's likely that we will be provisioning primarily to support the loan growth. And at this point, and I think I've said this before, we're probably looking at somewhere in the range of about 50 basis points of loans that we generate.

Okay. Okay, great. And then maybe switching to the margin. You talked about the deposit betas, good color there. How should we be thinking about margins given where the curve is today? Is stability kind of a win for you, guys, given your commercial real estate focus? Or can you -- is there a scenario where if the curve stays like it is today that you could actually eke out a little bit of expansion?

Well, I would say, up until now, maintaining a stable net interest margin has, in fact, been a win. Going forward, obviously, we are hopeful that there could be an eking out of an increase in the net interest margin. Some of that is going to be dependent upon the continued success of the new C&I teams that we brought in, who are currently focused on DDA, noninterest-bearing deposit cultivation, along with C&I facilities. But on the other end of the spectrum, the interest-bearing CDs or interest-bearing deposits, we continue to be under pressure from competition as it relates to that particular category. And we, as I mentioned previously, with the exception of a modest CD campaign that we ran in the second quarter of this year to fund loans from the new people that have joined us, we generally have not run CD campaigns to fund our loan growth. And so if we're able to continue to balance the loan growth with organically generated, let's say, low-cost deposits, then we have a pretty decent shot at maybe maintaining, and if not, perhaps, squeezing out a slight increase. But we are, like everybody, under pressure on the deposit side.

That's helpful. And maybe just a couple of housekeeping. Ron, on the tax rate, how should we be thinking about it going forward? And then did I miss it in your remarks? Was there a branch gain in the quarter? I know you talked about the 2 expiring leases, but I just didn't know if there was a gain in the quarter.

Yes. The branch gain was a year ago, Chris, when we got that property. With respect to the tax rate, I believe a 40% idea is probably fair. It may come in under that, 39% spot, pick a number. But I think a good thumb measure would be 40%.

Our next question comes from Gary Tenner of D. A. Davidson & Co.

This is Matt on for Gary. I just have a couple of questions. In regards to expenses, what do you expect the run rate to be in the next few quarters, given the 2 branch consolidation in 3Q and the New York branch pending for 4Q?

I would say, and Ron, feel free to jump in, but my suspicion is that the third quarter expense figure is probably something that you can use for the subsequent 2 quarters because we got some pluses and minus happening, as you mentioned, Matt, on the branch side. So yes, you wouldn't be far off if you were to use the third quarter number.

And also, in regards to M&A, do you have any prospects of a transaction being announced prior to year-end or over the next 6 months?

Yes.

Any chance it happens to be a small Korean bank up in Washington?

Obviously, I can't respond to that, but our menu of opportunities are fairly broad, and it may include that one institution. But we're also evaluating the specialty finance sector, too, in terms of some products that are complementary to what we do here, which is to service the small business community. So we're looking at community banks as well as other specialty finance companies.

Your next question comes from Matthew Clark of Piper Jaffray.

Just curious on the noninterest expense run rate. You mentioned it could be good for the next couple of quarters, but does that contemplate the seasonal increase that you typically see in the first quarter in the comp line?

That's a good question. I would say that typically...

Probably, I would say -- no, you're correct. It wouldn't make that adjustment. So when you're looking at the third quarter, as C. G. was trying to mention, the fourth quarter, the branch ideas of either consolidating or opening, those will be offsetting. There'll be some advertising and promotion will tick up a little bit. There'll be some other things that offset. So it's a good idea, but then you have to factor into that run rate annual merit increases, the tax bump that occurs in the first quarter, things of that sort.

Got it. Okay, great. And then on -- just curious what the new production yield was in the quarter. I think it was 4.80% last quarter.

For this quarter, it's 4.89%.

Okay, great. And then on SBA, I'm curious what the pipeline looks like going in the fourth quarter. Held up I think probably a little better than expected in the third quarter. I'm just trying to get a sense for what it might look like in the fourth.

I would say that the $35 million that -- it's a repeatable number in the fourth quarter.

Okay. And then a little bit of pressure on the premiums this quarter, not much, but just curious what the outlook there is on the premiums as well.

I'd say it's stable at this point.

Got it. And then last one, just on the loan purchases, I think, more than doubled this quarter to $88 million. Curious what you're buying and kind of the ins and outs of that $88 million, and what your appetite is going forward.

Yes. The primary purchases that we make every quarter is in the single-family resi side from that one financial institution that we have been buying loans from. In the third quarter, that institution had some difficulty delivering. And so we expanded that and went to another party that we have done business with. And so the primary focus as far as purchasing resis are concerned is to, in a sense, provide diversification of our loan portfolio. And also, at the same time, we're always trying to guesstimate as far as the runoff of the resi portfolio is concerned. In the third quarter, we were a little bit off in that we -- that it didn't run off as quickly as we had thought. So the net increase was primarily due to the fact that we had a small opportunity to purchase another resi portfolio, combined with the fact that the resis did not run down as much as we thought it would in the third quarter. But it's a very -- I would say it's the same program that we replicate every quarter.

Our next question comes from Don Worthington of Raymond James.

I just have a couple more minor questions. In terms of the gain on sale of the piece of OREO, what was the gross gain in the quarter?

It was basically flat. We went out at pretty much our carry. The carry was $2.4 million? Yes, about $2.4 million. So just about that idea. So no appreciable gain or loss.

Okay, all right. Great. And then in terms of Houston exposure, any update in terms of any impact from the hurricane there?

Actually, minimal. We've -- our credit admin staff working with our Houston lending staff have combed through our loan portfolio. And furthermore, our equipment leasing division did the same thing. And so far, to date, we have had one request for loan modification. But beyond that, we're not seeing any significant numbers in terms of portfolio deterioration. And obviously, we're probably going to need a little bit more time to truly get to the bottom of it. But so far, based on the thorough work that our Commercial Equipment Leasing Division, along with our lending staff, have done on our respective -- on the 2 portfolios, it seems that the risks are very modest.

Our next question comes from Tim Coffey of FIG Partners.

C.G., you're coming up on a year, I believe, on owning the lease receivables business, and I'm wondering how that -- how you feel that's going.

It's going well. It's going well. They've been generating good quality leases. The -- I've been very happy with the -- not only the volume, but the yield has been holding up fairly well. I wish we can squeeze a little bit more out of it. It's coming in a little bit under 6%. And also, the loss rate has been below what we had initially projected. It's -- for the 12 months that we've been -- we've had this particular operation, the actual losses are coming in at about 59 basis points. So yes, I'm pleased with what's been happening. It's been a nice add-on to our franchise.

The originations this past quarter from that business, right around $40 million, pretty much in line with what you thought SBA and C&I. Are you inclined at all to expand that business a little bit more, add more resources to it?

Yes, absolutely. Even though we added $40 million or so in new volume, the actual portfolio increase was only 5.7%, that being that this particular product rose off pretty quickly. And so, yes, I would like to see, I would say, a little bit more scale as far as this particular product is concerned. And so hopefully, in 2018, we can get this particular situation to the next level. Now we've had, as you mentioned, 12 months experience in history. And therefore, hopefully, we can leverage that in 2018.

And then the payoff that you saw out of that business during the quarter, how big was that loan?

Loan? No. I was just referring to the equipment lease.

Yes, I'm sorry. I think you had an early payout from a lease?

No, no, no. Oh, no. Those are, again, just to get into kind of lease accounting. Again, those are recorded on a net investment. So the gross receivable less unearned income. And so when a lessee pays off, they owe us the entire gross receivable. So you get the previously unrecognized unearned income, you get an influx of that. So it was -- not a single idea, just several ideas, if you will. So that can create some variations in other income, but that's the phenomenon. You're getting the immediate recognition of unearned income.

Yes. But to, I think, what Tim is heading with is that the -- or actually, the point that I was trying to make is that the leases have been paying off quicker than we had thought. I think we had initially put the average life of around 6-plus years. It turns out that these leases are paying off on average around 4 years. And so the churn within this portfolio is a little bit higher than what we had expected. That's why when they booked 40, all 40 don't -- is not reflected in the net growth of the portfolio.

Okay. And is this a product that you'll be able to roll out to the entire footprint? Or is this still pretty much in Southern California?

This is a -- no, the footprint is entire U.S. Where there's an upside to this particular product is that we really haven't gotten traction as far as organic growth of this particular product within our footprint of branches on the customer base. So that's where Bonnie and the leadership of commercial equipment leasing are going to, in a sense, mine that opportunity in 2018. And that's -- without doing anything further, that in it of itself should generate some, hopefully, meaningful growth.

(Operator Instructions) Our next question comes from Matthew Clark of Piper Jaffray.

Just a quick follow-up on the other income category. That $600,000 drop, I think, from the prior quarter from a decline in the early payoff of leases, just curious if that was something unusual or not.

No. I think, Matt, it's going to be lumpy. It just happened that the second quarter had a bit more of the acquired contracts, which had a deeper discount associated with them or a deeper unearned income, if you will. So I expect to be lumpy. I don't think it's going to be as lumpy as we experienced in the second, but it just depends on which contracts are getting paid out.

We have no further questions in queue at this time. Please continue.

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

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