Hanmi Financial Corp (HAFC) 2018 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Hanmi Financial Corporation First Quarter 2018 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, Dana, and thank you all for joining us today. With me to discuss Hanmi Financial's first quarter 2018 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 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 first quarter of 2018, 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 2018 first quarter results. Hanmi continues to deliver strong financial performance even in today's highly competitive banking environment. Let me take a moment to briefly summarize the key highlights from the first quarter.

Net income expanded nicely on both a sequential quarter and year-over-year basis. Loans and leases receivable increased 2.5% on a linked-quarter basis, which represented 10% increase on an annualized basis and were up 12% from a year ago. Importantly, we have been able to achieve this solid growth in loans and leases while maintaining our disciplined underwriting standards and excellent asset quality.

Net interest margin of 3.7% in the first quarter held relatively steady after adjusting for benefits in the prior quarter from prepayment fees. This is a good result considering the extremely competitive environment in which we are operating. Deposit gathering activities were bolstered by growth in noninterest-bearing demand deposits, which increased 3% from the prior quarter and nearly 9% from a year ago. Noninterest expense increased just modestly compared with prior quarter despite the seasonal impact of elevated payroll taxes and employee benefits in the first quarter. And finally, our board announced a 14% increase in our first quarter dividend to $0.24 per common share. In fact this was the fifth increase in our dividend since 2013, and during this time, the dividend has grown more than 240%.

Looking in more detail at our first quarter results, we reported net income of $14.9 million or $0.46 per diluted share. On a linked-quarter basis, net income per share increased by $0.10 or 28% compared to the fourth quarter of 2017, which included a onetime revaluation adjustment of $3.9 million to reduce our deferred tax assets as a result of the recently passed tax reform legislation. Compared to the first quarter last year, net income per share increased by 7% or $0.03 per share primarily due to the growth of core sustainable earnings generated by the expanding portfolio of loans and leases.

I'd like to point out that net income in the first quarter of 2018 relative to the fourth quarter was negatively impacted by approximately $0.04 per share related to two events. These included the $428,000 loss from the sale of and the exit from Community Reinvestment Act or CRA mutual funds that were acquired as part of our 2014 acquisition of Central Bancorp, Inc. as well as de minimis prepayment fees in the first quarter.

Turning to loans and leases receivable, our portfolio expanded by 10% on an annualized basis in the first quarter and 12% from a year ago. New loan and lease commitments booked in the first quarter of $281 million, excluding residential loan purchases, represents a 17% increase as compared with production in the first quarter last year and 5% increase on a linked-quarter basis. This is very strong result in what is typically our seasonally weakest quarter of the year for loan and lease production.

Our Commercial Equipment Leasing Division continued its exceptionally strong performance in the quarter. First quarter lease production of $55 million increased 5% from the prior quarter and 39% from the first quarter last year. I'm pleased to report that this was the best quarterly result since we completed the acquisition of this business in the fourth quarter of 2016.

In addition to being a nice complement to our focus on business banking to diversify the Hanmi loan portfolio, the newly generated leases for the quarter had a weighted average lease yield of 5.5%. This weighted average yield on new production is higher than the fourth quarter 2017 figure of 5.29%. This portfolio continues to generate a higher yield than the other loan categories as the weighted average yield on new organically generated loans for the first quarter was 4.91%.

I continue to be pleased with the ongoing success of our C&I lending effort, which is benefiting from previous investments to extend our reach geographically with a coast-to-coast footprint and into new areas of focus such as specialty and entertainment lending. During the first quarter, C&I commitments booked totaled $62 million, which was 35% higher on a year-over-year basis and 11% higher on a linked-quarter basis. As of the end of the first quarter, the balance of C&I loans outstanding excluding leases was up 2.6% on a quarter-over-quarter basis and was up 29% on a year-over-year basis. Due in part to the strength of our C&I and Commercial Equipment Leasing Division, the diversification of our portfolio continues to improve. At the end of the first quarter, CRE loans comprised 71% of our portfolio compared with 76% a year ago. We expect CRE loans as a percentage of the total portfolio to continue to decline throughout the year.

Looking ahead in the second quarter and beyond, our loan and lease pipeline remains healthy, and we are confident that we can generate double-digit growth in loans and leases for the full year. I'm also confident that the SBA loan production, which typically slows in the first quarter, will ramp back up to the $40 million per quarter level.

In terms of deposits, we continue to operate in a highly competitive Asian-American banking landscape for deposit gathering activities. Total deposits of $4.38 billion increased nearly 1% during the first quarter on a linked-quarter basis while deposits have expanded more than 7% from a year ago. Similar to recent prior quarters, growth over the last year is coming from the core deposit categories including noninterest-bearing demand deposit, which are up nearly 9% year-over-year, and retail CDs, which have grown 21% year-over-year. It appears the retail CD market competition has heated up with banks having funding pressures driving up the pricing of CDs at a level not consistent with the fed's interest rate moves. However, our ability to generate core deposits particularly in the noninterest-bearing demand deposit category will allow us to better control our cost of funds.

I'd like to provide some color on our first quarter net interest margin of 3.7%, which compares with 3.79% and 3.89% in the prior quarter and a year ago quarter, respectively. On a linked-quarter basis, approximately 8 points of the 9 basis point reduction in NIM was related to prepayment fees that benefited the fourth quarter. In fact, prepayment fees in the first quarter were only $83,000 compared with a quarterly average of $497,000 over the last 4 quarters. Furthermore, nearly half of the year-over-year contraction in NIM is attributable to the additional interest expense associated with the $100 million sub debt that was issued late in the first quarter of 2017.

Given the competitive market and rising deposit costs, I'm pleased that we have been able to maintain our net interest margin in a relatively tight range over the past year. Hanmi's ability to generate higher-yielding assets, combined with our ability to generate core deposits, will allow us to maintain a strong net interest margin in a challenging environment.

And finally, our asset quality metrics continue to remain strong. Nonperforming loans declined slightly to $15.4 million or 35 basis points of loans. We also recorded net recoveries for the first quarter of 2018 of $85,000. All of the other asset quality metrics have improved quarter-over-quarter.

Finally, our allowance for loan losses was maintained at 72 basis points of loans and leases at quarter-end. Even as we generate loan growth on a double-digit annualized basis, we continue to maintain a culture of disciplined credit underwriting.

In the first quarter of 2018, consistent with prior quarters, the weighted average loan-to-value and debt coverage ratios on new commercial real estate loan originations were 54% and 1.78x, respectively.

Before turning over to Ron, I'd like to reiterate that our first quarter cash dividend increased by 14% to $0.24 per share and was paid on February 23. This represents an annual dividend yield of 3.1% based on yesterday's closing stock price. The increase in our dividend highlights the earnings power of the Hanmi franchise and the board's confidence in our ability to continue to deliver profitable growth to our shareholders.

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

Thank you, C.G., and good afternoon all. First, let's discuss our net interest revenues in a bit more detail.

First quarter net interest income of $44.9 million decreased 3.1% or approximately $1.4 million from $46.3 million in the fourth quarter and increased 6.1% or $2.6 million over the same quarter a year ago. Following a very strong fourth quarter, our first quarter results reflect upward pressure on deposit rates as deposit interest expense increased by $383,000 and borrowing interest expense increased by $316,000 as well on higher borrowings.

Total interest expense for the first quarter was $10.2 million, up 7.6% from the fourth quarter's $9.4 million. The linked-quarter decline in net interest revenue was further compounded by a higher level of prepayment fees experienced in the fourth quarter versus a lower level in the first quarter.

Interest and fees on loans were down 1.2% or $602,000 from the prior quarter but increased 13.7% or $6.2 million from the first quarter of 2017. Our loan and lease portfolio continued to see solid loan growth, up $109.1 million or 2.5% from the prior quarter. Total deposits increased by just under 1% in the first quarter to $4.38 billion from $4.35 billion at the end of the fourth quarter and were up 7% year-over-year from $4.08 billion.

Noninterest-bearing deposits finished the quarter at $1.4 billion, up 3% from last quarter and up 9% from a year ago. Our loan-to-deposit ratio for the first quarter was 101%, up from 99% last quarter.

Since March 2017, the Federal Reserve increased the benchmark fed funds rate 4 times for a total of 100 basis points, including a 25 basis points increase on March 21 of this year.

The quarterly average rate paid on interest-bearing deposits over the same time period increased 27 basis points, representing 27% of the change in the fed funds rates. For the first quarter of 2018, the 8 basis point increase in the average rate paid on interest-bearing deposits represented 32% of the most recent change in the fed funds rate.

Net interest margin for the first quarter was 3.7%, down 9 basis points from the prior quarter. The average rate paid on loans and leases was 4.85%, down 5 basis points primarily from prepayment fees. The average rate paid on interest-bearing deposits for the first quarter increased by 8 basis points to 1.05% from the fourth quarter, while the average cost of overall deposits saw a more muted sequential uptick of 5 basis points to 0.73%.

Switching now to noninterest income. The first quarter saw a decrease of 21% to $6.1 million. The primary driver was a $428,000 realized loss on the sale of CRA mutual funds that were mostly holdovers from the CBI transaction. Additionally, SBA loan sales were seasonally lower at $19.2 million loans, down from $27.5 million in the fourth quarter. Changes in servicing income, servicing charges and fees and other operating income accounted for the remaining decrease in noninterest income in the first quarter.

Noninterest expenses for the first quarter excluding OREO, which tends to be lumpy, were relatively steady from last quarter with a 1.1% or a $320,000 sequential increase to $29.7 million. Salaries increased $1.4 million due to annual bonus payouts and payroll taxes. However, this was mostly offset by lower cost for professional fees, marketing costs and other expenses.

The increase in noninterest expense, coupled with the decrease in our noninterest income, resulted in a higher efficiency ratio of 58.4% in the first quarter versus 54.2% last quarter and 55% a year ago.

The effective tax rate for the first quarter was 27.8%. This was down from an effective rate of 53.2% in the fourth quarter, which included additional income tax expenses many banks experienced at the end of the 2017 year stemming from the remeasurement of deferred tax assets.

In the first quarter, our return on average assets and return on average stockholders equity both increased to more normalized levels at 1.16% and 10.65%, respectively. Very importantly, the quality of our asset base continues to be strong with nonperforming assets coming in at $17 million for the quarter or 32 basis points of total assets.

Our delinquent loans to total loans decreased by 4 basis points to just 16 basis points, and nonperforming loans to total loans fell 2 basis points to 35 basis points for the first quarter. Our provision expense increased to $649,000, up from $220,000 at the end of the fourth quarter, and our allowance coverage ratio remained unchanged at 72 basis points.

Lastly, our tangible book value finished the quarter at $16.98 per share, pretty much flat from the $16.96 per share from the prior quarter. Our tangible common equity ratio remains strong at 10.43% as do all of our regulatory capital ratios.

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

Thank you, Ron. Hanmi's performance in the first quarter represents a solid start to the new year. With strong growth in conservatively underwritten loans and leases, excellent asset quality and expanding earnings, Hanmi is well positioned to deliver strong financial results throughout the year. I look forward to sharing our continued progress with you when we report our second quarter results in July.

Thank you for your attention, and have a nice day.

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

(Operator Instructions) Our first question comes from the line of Chris McGratty from KBW.

Ron, maybe start on the margin. I'm interested in any commentary about deposit gathering in the quarter. One of your peers was reiterating the message of competitive nature of deposits. I'm interested if you ran any CD campaigns in the quarter. If so, what the rate and duration were? And how should we be thinking about rising funding costs and a flatter curve as it relates to the margin outlook?

So maybe, C.G., Bonnie might want to take the first part of that question.

Yes, I'll let Bonnie take that.

Sure, this is Bonnie. We haven't really run any CD campaigns. We had a strategy, more of a defensive yet a competitive strategy, where we are looking at our each relationship customer individually and match the competition. When we look at it, it's all about overall profitability.

Okay. And then with respect to the cost of deposits, we did notice a small increase. And as we tried to point out, it appears that the CD deposit pricing is basically running independent of what the fed may or may not do. But as -- C.G. also mentioned that we do have the benefit of a higher-yielding portfolio if -- not only in leasing but in other elements of the portfolio. So we do envision some pressure. Don't exactly know how it's going to play out for the entire year, but I think we have a good chance of being about where we're at.

Okay. Just so I can make sure I understand that right, Ron. The 3.70%, that's kind of where we're going to have a little bit of pressure and hopefully some stability in the next few quarters?

Yes. Let me take a stab at that. The -- I think the 3.70%, we have a pretty good shot at maintaining. And depending on what the Federal Reserve does relative to the future rate increases, we have a chance to move that number up in a hopefully meaningful way. As I tried to mention earlier, we have an ability to generate loans that very few banks have. And because of that, even though we have a fair number of our loans that are in this hybrid pricing structure, we have the ability to, in essence, increase pricing, I would say, with a little bit higher level of elasticity than you might envision for the type of asset liability position that we have. So the leasing portfolio and even the commercial real estate, we think that under Bonnie's leadership and her cracking the whip a little bit more, we can get a better yield, better return on the loans that we're going to be generating.

Okay. And then maybe while I have you, Ron, on the expenses. I think last quarter, you said flat, and that's exactly where they came in. The $30 million run rate, is that a modest inflation off of that number, is that fair?

Yes, I believe so.

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

You sort of answered the question, I think, at the end, Ron -- or C.G., excuse me, with the outlook for keeping the margin at 3.70% or maybe a bit better. But can you just remind us sort of over time where your prepayment penalties tend to be? Understanding that there's going to be some volatility there. But I guess, is the $1 million in the fourth quarter unusually high and -- or is this quarter just unusually low? Or is the truth somewhere in the middle?

Well, you're right in that the fourth quarter number, the actual figure was $964,000, and that was unusually high. That followed the third quarter figure of $793,000. So for the year last year, we averaged slightly under $0.5 million. And so the prepayment penalty is an unpredictable number obviously, and frankly, I was a bit surprised of the level of prepayments that we had in the second half of the year. Going forward, in what I believe to be a rapidly rising rate environment, the -- I don't think that we're going to have a high level of prepayment penalty. Having said that though, the flip side is the more the loans that we have generated will stick in our portfolio. And so whether the income comes from -- as I said, going forward in 2018, whether the -- whether there's a prepayment penalty or there's a higher loan value or loan totals in our portfolio, we're going to be just fine. But the -- it's hard for me to think that the 2018 is going to have a high level of prepayment penalty given that the rates have already started to move fairly significantly in a category like commercial real estate. So we may not get the prepayment penalty, but more of the loans that we generate is going to stick on our books.

Okay. And then just as a follow-up, I know that over time, you guys have been interested in pursuing M&A opportunities. Can you talk about kind of where things stand there, where the -- what the activity is out there and the discussion levels, and whether perhaps the improvements in the tax rates and the higher interest rates, are these all things that are conspiring to slow down potential M&A opportunities for you?

I don't want to say conspiring to slow it down. I would say that the smaller institutions are concerned with the impact of the kind of interest rate environment that we all have been experiencing. And so I made a mistake a little while ago of signaling that there was a deal imminent, and it didn't happen for reasons that were not in our control. But let's just say that we've been very active in discussions with interested parties. And given where we are in terms of the stock price and frankly given where we are relative to the clean position of the organization from regulatory or whatever viewpoints that you want to look at us from, we're looked at as one of the potential partners by quite a few potential sellers out there.

(Operator Instructions) Our next question comes from the line of Don Worthington from Raymond James.

So in terms of loan purchases, would you expect the -- kind of the run rate to be at a similar amount that was purchased in Q1? I know you had kind of an outsized purchased last quarter, but...

Yes, we did. We did, and that was because we thought that there was going to be a large relationship that was going to get paid off. I would say that the -- given the pipeline that we have of potential organically produced loans, it will be at the level that we did in the first quarter, maybe even less.

Okay. Okay. And then in terms of the tax rate, what's your outlook there?

Don, this is -- yes. So Don, again, I expect between 27% and 28%. We're closer to the 28 side, so I think we'll still be around between those 2 marks. I'm not sure exactly where the decimal point will come in at each quarter.

Okay. And then, Ron, what was the rough dollar amount of the seasonal salary and benefits number in the first quarter?

Of what, the $1.4 million? Pretty much if I compare it to the fourth quarter, I would say probably about 80% of that increase, maybe 75% of that increase, kind of reflects the year-end incentives, the incremental taxes, the incremental benefits.

Our next question comes from the line of Gary Tenner from D. A. Davidson.

Just had one quick follow-up. As you talk about the margin and maintaining it around 3.70%, maybe pushing it a bit higher, does that contemplate any additional change in the earning asset mix? Any additional runoff of securities to replace them with higher-yielding loans, or is that a similar mix as we have today?

Yes. I don't think we're -- our book -- our security book is not that big, so we're not expecting any significant change to that particular portfolio. So in terms of a mix, it might be leaning a little bit more towards leases and C&I than CRE. But other than that, I don't expect a significant change in the mix over the next couple of quarters.

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

Thank you for listening to Hanmi Financial's First Quarter 2018 Results Conference. We look forward to speaking with 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.