Hanmi Financial Corp (HAFC) 2018 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Hanmi Financial Corporation's Second Quarter 2018 Conference Call. As a reminder, today's call 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 2018 earnings are a C.G. Kum, our Chief Executive Officer; Bonnie Lee, President and Chief Operating Officer; and Ron Santarosa, Chief Financial Officer.

Mr. Kum will begin with an overview of the quarter, Ms. Lee will discuss loan and deposit activities 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-Qs. 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 2018, which can be found at 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 second quarter results. In a highly competitive environment, our performance in the quarter was driven by strong loan and lease growth, stable asset quality and careful expense management.

Here are some highlights for the quarter. Net income was solidly higher on both a sequential quarter and year-over-year basis. Importantly, we have been diligent in carefully managing expenses and as a result, noninterest expense declined nearly 1% from the prior quarter and more than 2% after excluding merger and integration costs. Production of new loans and leases was exceptionally strong. Loan and leases receivable grew nearly 3% on a linked-quarter basis and nearly 12% from a year ago.

We have been able to achieve this growth while applying our normal conservative underwriting standards. Overall, asset quality remains excellent. Deposits were up 4% on an annualized basis and nearly 4% year-over-year, primarily driven by growth in time deposits. However, the flattening of the yield curve, along with strong competition, has resulted in pressure on our net interest margin. And finally, to augment our organic growth, during the quarter, we announced the acquisition of SWNB Bancorp, Inc., which will significantly expand Hanmi's presence in attractive markets throughout Texas as well as provide access liquidity to help fund future growth.

Looking in more detail at our second quarter results, we reported net income of $15.5 million or $0.48 per diluted share. On a linked-quarter basis, net income per share increased by $0.02 or nearly 5% compared to the first quarter of 2018. Compared to the second quarter last year, net income per share increased by nearly 8% or $0.03 per share primarily due to the growth of core sustainable earnings generated by the expanding portfolio of loans and leases along with lower taxes resulting from the tax reform legislation enacted by Congress late last year.

It is important to note, net income in the second quarter of 2018 was impacted by approximately $400,000 or $0.01 per share relating to merger and integration costs associated with our announcement to acquire SWNB. Overall our asset quality metrics have remained consistently strong.

Nonperforming loans were $15.8 million or 35 basis points of loans, unchanged from the prior quarter. With continued decline in OREOs, we now have 8 properties in our portfolio with a total combined basis of $280,000. NPAs are now down to 30 basis points of assets.

We recorded net charge-offs for the second quarter of $59,000, while our allowance for loan losses was 70 basis points of loans and leases at quarter-end.

Even as we generated double-digit loan growth on an annualized basis for the quarter, we continue to maintain our commitment to conservative disciplined credit underwriting. For the second quarter 2018, consistent with prior quarters, the weighted average loan-to-value and debt coverage ratios on new commercial real estate loan originations were 46% and 1.7x, respectively.

Before turning it over to Bonnie, I'd like to briefly highlight our acquisition of SWNB announced during the quarter. As of March 31, SWNB had approximately $411 million in total assets, $261 million in loans and $347 million in deposits across 6 retail branches in strong Asian banking communities in Texas.

We believe this transaction will significantly bolster our market share in attractive high-growth Texas banking markets. Furthermore, SWNB has a strong portfolio of assets with an excellent credit profile and an attractive deposit base. Notably, with a loan-to-deposit ratio of 75%, SWNB transaction will bring over surplus deposits and securities totaling approximately $200 million that we plan to immediately deploy into loans as we grow and scale the Hanmi franchise.

As previously announced, this transaction will be accretive to earnings per share in 2019 with modest dilution to tangible book value. In terms of next steps, the SWNB shareholder meeting to vote on the transaction has been scheduled for August 16. All regulatory applications have been filed and merger and integration activities are currently underway and on schedule. We expect the acquisition to close early in the fourth quarter.

Overall, this transaction is an important milestone for Hanmi and a great opportunity to build on our track record of successful M&A transactions, which have enhanced shareholder value over the years.

With that, I'd like to turn the call over to Bonnie Lee, our President and Chief Operating Officer, to discuss the second quarter loan and lease production results and deposit gathering activities. Bonnie?

Thank you, C.G. During the quarter, organic loan and lease production totaled $309 million, which increased nearly 26% from the prior quarter and up 11% year-over-year. As a result, our portfolio of loans and leases expanded by nearly 12% during the second quarter on an annualized basis and 12% from a year ago. Importantly, diversification of our portfolio continues to improve. At the end of the second quarter, CRE loans comprised 71% of our portfolio compared with over 75% a year ago. We anticipate CRE loans as a percentage of the total portfolio will continue to decline.

Second quarter production consisted primarily of $198 million of commercial real estate loans, $30 million of SBA loans and $19 million of C&I loans. We also originated more than $60 million of commercial equipment leases. Newly generated leases for the quarter had a weighted average lease yield of 5.76%, an improvement from the previous quarter's weighted average yield on new production of 5.50%. This portfolio continues to generate a higher yield than other loan categories as the weighted average yield on the new organically generated loans for the first quarter was 5.02%.

In terms of new loan production, our branches in Illinois and Manhattan made solid contributions to our overall production totals. Looking ahead in the third quarter and beyond, our loan and lease pipeline remains healthy.

Moving on to deposits. We continue to operate in a highly competitive Asian-American banking landscape for deposit gathering activities. Total deposits of $4.43 billion increased 1% during the quarter -- in the second quarter on a linked-quarter basis, while deposits have expanded by approximately 4% from a year ago. It is worth noting that our noninterest-bearing demand deposits, as a percentage of total deposits, have remained stable over the last year in a range of 30% to 31% even as total deposits have increased.

Competition in the retail CD market has significantly increased this past quarter as several of our competitors have driven up the pricing of CDs at a level not consistent with the Fed's interest rate moves. However, we are confident that Hanmi's strong core deposit franchise, particularly in the noninterest-bearing demand deposit category, will help mitigate the rising deposit cost.

With that, I would 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, Bonnie, and good afternoon all. Starting with our net interest revenues, the second quarter increased 0.4% to $45.1 million from $44.9 million in the first quarter and 4.5% from the same quarter a year ago. Those increases reflect the growth in earning assets, more specifically, in loans and leases where the quarterly average balance grew 2.4% quarter-over-quarter and 11.7% year-over-year.

Notwithstanding the increase in our net interest revenues, net interest margin declined 10 basis points to 3.60% for the second quarter and 21 basis points from a year ago. As C.G. and Bonnie said earlier, the flattening of the yield curve coupled with stiff competition in our markets, resulted in attracting deposits at higher rates while loan rates changed little. The average rate on loans and leases receivable for the second quarter was 4.88%, up 3 basis points from the first quarter, while the average rate paid on interest-bearing deposits for the first quarter increased 19 basis points to 1.24%.

We funded the second quarter growth in earning assets with time deposits as well as with overnight borrowings increasing our loan-to-deposit ratio to 103% at the end of the second quarter compared with 101% last quarter.

Turning to noninterest income, the second quarter saw a quarter-over-quarter decrease of 1.9% to $5.9 million. Service charges on deposits declined on lower NSF activity and other charges, while servicing income declined on lower servicing assets.

Gains on sales of SBA loans were slightly lower on a linked-quarter basis as sales volumes and trade premiums also declined slightly. SBA loan sales aggregated $19.9 million and $19.2 million for the second and first quarters, while the trade premium averaged 9.3% and 9.4%, respectively. Noninterest expenses for the second quarter were $29.5 million, a decrease of just under 1% from the first quarter. Those results included merger and integration costs for SWNB of $380,000. Without those costs, noninterest expenses would have declined just over 2%.

I'd like to point out that our effort to manage and control expenses has been successful over the last year as evidenced by the 2% growth year-over-year and that noninterest expenses remained within a very tight range over the last 12 months.

Salaries and benefits drove the decline in our noninterest expenses with a $1.2 million decrease quarter-over-quarter.

Salaries and benefits were higher in the first quarter due to the seasonal effect of higher payroll taxes and other benefits. Despite the addition of M&A costs in the second quarter, our efficiency ratio improved to 57.8% from 58.4% in the prior quarter. The provision for loan losses for the second quarter was $100,000, down from $649,000 last quarter.

The effective tax rate for the second quarter of 2018 was 27.5% compared with 27.8% for the first quarter. For the year-to-date, the effective tax rate was 27.7%.

Our return on average assets and return on average equity both increased in the second quarter to 1.17% and 10.81%, respectively. Last, our tangible book value increased to $17.20 per common share at the end of the second quarter, and our tangible common equity ratio remains strong at 10.35% as do all of our regulatory capital ratios.

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

Thank you, Ron. Hanmi's solid first half results were driven by strong loan and lease growth, continued stable credit quality and good expense management. While this management provides a tailwind -- excuse me, while this momentum provides a tailwind, we anticipate a challenging operating environment for the back half of the year as a result of the flat yield curve environment and strong competitive pressure for loans and deposits.

On a positive note, Hanmi's reenergized SBA team has built a strong pipeline of SBA 7(a) loans for the third quarter and beyond. We are currently targeting for the third quarter, 7(a) production of $45 million to $50 million, and a target of $40 million to $50 million for the fourth quarter.

In addition, in conjunction with the closing of the SWNB acquisition, we will reevaluate our branch network and other cost-trimming opportunities to be more efficient and profitable in 2019. I look forward to sharing our continued progress with you when we report our third quarter results in October. Thank you.

Matt, that concludes our prepared remarks. We would now like to open the call for questions.

(Operator Instructions) Our first question is from Gary Tenner from D.A. Davidson.

So I guess I'll start with your last comment, C.G., just regarding the SBA team and the kind of outlook there, that was a big delta in terms of I think where estimates were this quarter or at least our expectations for this quarter and where you came in, safe to assume that the majority of that production would be slated to be sold for the back half of the year?

Yes. I mean, we sell all of the 7(a) loans that we generate. But to give you a perspective on the delta between the second quarter and the projected production for the third quarter, it has to do with the fact that we lost $13 million in loans, specifically to Wells Fargo. Wells Fargo, U.S. Bank and Chase are out there offering 25-year fixed rate SBA 7(a) loans. And so we lost $13 million. So when you look at that in the context of $30 million that we generated for the second quarter, the delta relative to the third quarter projected production is not as big.

Okay. All right. And then, obviously, in the industry, and in your niche particularly deposit costs are going to be an ongoing and increasing issue, do you have any sense of, from the competitor front, the specials that kind of ran up the retail CD prices that Bonnie discussed. I mean, are your competitors -- is this ongoing, are they in and out of the market? Or is it sort of up into the right type of phenomenon on the retail CD side right now?

I'd say today, the competition is much broader. It used to be almost exclusively our Korean-American friends. But today, the competition involves, as an example today, I was looking at Bankrate.com, the Citizens Bank out of Rhode Island has got a 2.5% CD promotion going on. And so the promotion within the Korean-American space has, I think, slowed down, much more so than -- as compared to, I should say, the mainstream market. But the good news there is that our largest market, which is Southern California, we're -- we don't seem to be as impacted by what's going on in the mainstream. So I guess long-winded way of saying, I think the competition has slowed down somewhat as it relates to the CDs.

Our next question is from Matthew Clark from Piper Jaffray.

Can you give us a sense for the rates, the CD rates that are maturing here in the second half? What those rates are? And what their -- you expect them to reprice into?

Bonnie?

Sure. We are -- for the second quarter, actually, let me just go through that, we had about $360 million CDs that were maturing at 1.23%, they matured. And we retained above 80% as the average weighted cost at 1.87%. And we are expecting about the similar in terms of what's maturing coming into the third quarter.

Okay. Okay, great. And I guess, what's your current CD promotion rate right now, I guess, kind of a lead promotion in terms of rate and duration?

So the rates there, we are offering to our CD customers. It ranges anywhere from 2% to 2.3%. We've looked at each relationship and we evaluate the CD rate for each customer.

But our primary product that we are marketing right now is our premier savings rate -- savings account, excuse me. And we have not promoted this account in the past rather than to promote money market which has a kind of a rising tide negative impact to the other money market clients. We chose to, for the first time in a while, go after the savings account. And that rate is, I believe, 1.85%.

1.8%.

1.8%, excuse me. 1.8%. And so we're going to market the heck out of that one. And that will have not only impact of maybe reducing our reliance on the CDs, but the -- we -- our highest cost of funds in the second quarter was the borrowing cost from the FHLB, which is about -- which is 1.9%. So we're hoping that we can swap out the 1.9% borrowing from FHLB with the lower cost premium -- premier savings account if I can say it.

Okay, great. And then C.G., I mean, we can obviously, run our own numbers, but I guess based on kind of the repricing within your loan portfolio that you expect and given the deposit pricing pressure, I guess, any desire to, kind of, talk about the margin outlook here, at least in the second half?

Well, I was going to turn that over my CFO, but he's not looking very enthusiastic. So the -- let me, kind of, try to answer it this way. The -- our interest income is rising at a little bit faster rate currently -- it will rise at a faster rate in the third quarter than in the second quarter, principally, because of the fact that we have had the 3% increase quarter-over-quarter in terms of loan growth. And we are also now promoting within -- in the -- within the bank a focus on higher loan rates. And so there's a lot more, I would say, discipline as it relates to how we price loans and leases. And then conversely on the deposit side, much more emphasis on the premier savings account. And as I mentioned earlier, it's been our -- it's not scientific, but our perception is that the velocity of the movement as it relates to the interest rates on the liability side seem to have slowed down. And so if our perceptions are correct, I think the conservative view should be that the bank like us will continue to face a little bit more of the margin pressure. But I don't think it's going to be anywhere near significant as the contraction that we express -- we experienced from second -- excuse me, from first quarter to second quarter.

(Operator Instructions) And our next question is from Chris McGratty from KBW.

C.G. or Ron, the repricing of the loan portfolio, I think it was 3 basis points higher in the quarter, certainly the flat curve is a big factor there, but lots -- a lot less of an expansion rate than some of your peers. I'm wondering where new production rates were in Q2 versus Q1? And maybe any expectation for that to improve at all in the back half of the year? Is it really just as simple as if the curve stays as flat that we're not going to see much improvement on the assets?

Well, I think, If I recall, I think, Bonnie had mentioned the 5.02% -- 5.02%, right, Ron?

Volume, that's right. And that was up from about 4.91% on average for the first quarter.

Right. And the -- what we have done is create an internal requirement of -- on the -- as it relates to commercial real estate, we want to see a pricing minimum of prime plus 0.25%, which would be 5.25%. And then the management having the authority to price it upwards or downwards relative to 5.25%. So that's our primary commercial real estate product. On the leasing side, we have put a similar program in there to where we'd like to see a 1.25% spread over prime. Now, these are than existing prime rates, because the prime rate is moving fairly rapidly, we don't want to get tied up with making our forward commitment on a loan by giving a fixed number. So what we're saying is prime plus 0.25%, then existing prime plus 0.25% at the time of the close, and similarly for the leases, we're seeing, then existing prime rate plus 125 basis points. And once again, management has the ability to and authority to price it above it or below it, but we're pushing now that, kind of, disciplines -- discipline in a challenging environment like today.

Okay, that's good color. Maybe on the expenses, I'm trying to get an estimate, this quarter is, obviously, very, very tight on the expenses. The magnitude of what you might be considering with kind of after the closing of the branches. Will this serve to mitigate -- seems like a portion of the top line pressure for this year? Or just trying to get a sense of magnitude of what we might be thinking about?

Chris, you're talking about not the Southwest transaction, you're talking about the other ideas, correct?

Yes, the other like the legacy bank. How do you offset some of the top line pressures in the next year?

Yes, so we're looking at nothing draconian, but in the range of about $0.06 to $0.08 a year, as far as a cost save is concerned, you could move up and down depending on further analysis that we will do. But we look at the branch system first, particularly evaluating them on the basis of their ability to generate lower-cost deposits. In other words, ones that are highly dependent upon the high-cost CDs as a primary deposit generator, those will be the ones that we'll be taking a closer look at it. And then the overhead structure that we think that we need to reevaluate given the organization that we will be after the Southwest National Bank transaction. But at this point, we're targeting somewhere in the range of about $0.06 to $0.08 a year as a starting point and then we'll see where it goes.

Great. And then lastly, Ron, on the tax rate, how should we be thinking about the back half of the year?

Still about 27.5% to 30% -- I'm sorry, 28%.

(Operator Instructions) And if there are no further questions, 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 2018 results conference call. We look forward to speaking with you next quarter.

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