Hanmi Financial Corp (HAFC) 2018 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Hanmi Financial Corporation Third 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, Jesse, and thank you all for joining us today. With me to discuss Hanmi Financial's third quarter 2018 earnings are C.G. Kum, our Chief Executive Officer; Bonnie Lee, President and Chief Operating Officer; and Ron Santanrosa, Chief Financial Officer.

Mr. Kum will begin with an overview of the quarter, Ms. Lee will discuss loan and deposit activities and Mr. Santanrosa 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 third 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 third quarter results.

Notwithstanding a very challenging banking environment, Hanmi delivered solid profitability through third quarter of 2018. Here are some highlights for the quarter. Net income continue to grow on both a sequential quarter and year-over-year basis. A key driver of our improvement of the bottom line is our ongoing focus on carefully managing noninterest expense, which declined nearly 2% from the prior quarter. As a result of the lower noninterest expense along with increase in net interest income, our efficiency ratio improved nicely on a linked-quarter basis. Production of new loans and leases increased 8% year-over-year, leading to growth in loans and leases receivable in the quarter of 1% and 9% year-over-year.

Importantly, we continue to maintain our normal conservative underwriting standards, and our overall asset quality remains excellent. Deposits were up 4.2% quarter-over-quarter and 7.3% year-over-year, primarily driven by growth in time deposits. However, rising deposit costs, along with competition for loans, has resulted in continued pressure on our net interest margin.

And finally, during the quarter, we announced and made significant lead purchases under our Board's authorization to buy back up to 5% of our outstanding -- our shares outstanding.

Looking in more detail at our third quarter results, we reported net income of $16.1 million or $0.50 per diluted share. Sequentially, net income per share increased by 4.2% or $0.02 per share. Compared to the third quarter last year, net income per share increased by nearly 9% or $0.04 per share, primarily due to the growth 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 both the second and third quarters of 2018 were impacted by approximately $0.01 per share per quarter relating to merger and integration costs associated with our announcement in May to acquire SWNB Bancorp, which was subsequently terminated in September.

Overall, our asset quality metrics have remained consistently strong. Nonperforming loans were $18.3 million or 40 basis points of loans and have remained in a tight range over the past several quarters. We recorded net charge-offs for the third quarter of $342,000, while our allowance for loan losses held steady at 69 basis points of loans and leases at quarter-end. Importantly, even in today's highly competitive market for loans and leases, we continue to maintain our commitment to conservative disciplined credit underwriting. For the third quarter 2018, consistent with asset quality data from prior quarters, the weighted average loan-to-value and debt coverage ratio on new commercial real estate loan originations were 54% and 1.8x, respectively.

During the quarter, Hanmi announced that its Board of Directors authorized a stock repurchase program of up to 5% or 1.6 million shares of our outstanding common stock. As at the end of the third quarter, Hanmi had invested approximately $11.1 million to repurchase 429,558 shares at the average price of $25.89. Shortly after the quarter-end, we purchased -- we repurchased an additional 70,442 shares at a similar average price per share.

We expect as market conditions allow, to complete the buyback of the remaining shares under the authorized stock repurchase program by year-end. We believe the current share price is not indicative of Hanmi's long-term intrinsic value. The repurchase of our stock highlights are confident in the Hanmi franchise and we see it as a both a timely and appropriate use of our capital resources.

Before turning it over to Bonnie, I'd like to discuss the strategic roadmap for the bank as we look ahead to the remainder of 2018 and into next year.

As I'm sure you're aware, over the past 4 years, Hanmi has successfully generated double-digit annual growth in high-quality loans. However, given this current interest rate environment that has created competition for deposits and a challenging environment to generate well-priced loans that lead our underwriting requirements, we made a strategic decision during the quarter to slow loan growth for the second half of 2018 and to moderate our loan growth expectations for 2019 to a range of 5% to 7%. In addition, a review of Hanmi's cost structure and operating efficiency is currently underway with a goal of lowering noninterest expenses by at least $5 million or approximately $0.12 per share by the end of 2019.

We believe rightsizing the cost structure of the company and improving operating efficiency are essential elements of Hanmi's future to better position it to manage growth.

Underpinning our cost management initiative is the rationalization of our branch network. At the conclusion of this rationalization process, we will identify for consolidation by early next year approximately 10% of our branches. The branch rationalization process will include such things as measurement of profitability, dependence on time deposit and strategic importance. A key part of our strategy to improve the company's cost structure will also include continued investments in technology and systems to ultimately reduce costs through a significant improvement in operational efficiency.

We recently hired a highly experienced Chief Technology Officer, who will be the architect and have the responsibility for implementing Hanmi's overarching technology strategy. This will include improving technology and systems utilized across the enterprise by our relationship managers in the front end of the business all the way to the back office and administrative support functions. As an example, Hanmi has historically dedicated a significant amount of human capital to regulatory compliance activities. Going forward, we will look to leverage technology in systems to become much more efficient in this area of our operations. We will also look to accelerate the centralization of certain activities, particularly -- particular aspects of our loan underwriting and credit management where we believe we can achieve improved processing fees along with enhanced consistency across the enterprise in adjudicating credits.

And finally, we will look to shift resources to grow areas of the company that generate lower-cost deposits and/or higher spreads. The bank specialty lending division, which focuses on mainstream businesses and the Commercial Equipment Leasing Division, are key areas targeted for additional growth. With that, I'd like to turn the call over to Bonnie Lee, our President and Chief Operating Officer, to discuss the third quarter loan and lease production results and deposit gathering activities. Bonnie?

Thank you, C.G. I will discuss loan and lease production and deposit gathering activities and then turn it over to Ron Santanrosa for additional details on our third quarter financial results. During the quarter, organic loan and lease production totaled $238 million, which increased 8% year-over-year. As A result, our portfolio of loan and leases expanded by nearly 4% during the quarter on an annualized basis and more than 9% from a year ago.

Consistent with our efforts to diversify our loan and lease portfolio, CRE loans comprised 71.5% of our portfolio at the end of the third quarter compared with over 74.1% a year ago. Third quarter production consisted primarily of $130 million of commercial real estate loans, $25 million of SBA loans and $33 million of C&I loans. We also originated more than $64 million of the commercial equipment leases, which was an all-time record for a single quarter.

Newly generated leases for the quarter had a weighted average lease yield of 5.93%, an improvement from the previous quarter's weighted average yield on new production of a 5.76%. This portfolio continues to generate a higher yield than other loan categories as the weighted average yield, the new organically-generated loans for the third quarter, was 5.44%.

Looking ahead in the fourth quarter and beyond, our pipeline remains healthy and supports the annual growth objective range of 5% to 7% that C.G. noted in his remarks. Moving on to deposits. We continue to operate in a highly competitive Asian-American banking landscape for deposit gathering activities. Total deposits of $4.61 billion, increased 4.2% during the third quarter on a linked-quarter basis and 7.3% from a year ago. All of the growth in the quarter came from the time deposits and money market and savings deposits with increase of -- in the quarter of 8.9% and 7.1%, respectively.

As a result of the third quarter loan production and deposit gathering activities, our loan-to-deposit ratio for the third quarter was at 99%, down from 103% in the second quarter. I would now like to turn the call over to Ron Santanrosa, our Chief Financial Officer. Ron?

Think you, Bonnie, and good afternoon, all. Starting with our top line revenues. Third quarter net interest income was $45.3 million, up 0.5%, or approximately $215,000 from $45.1 million for the second quarter and increased 0.9% or $403,000 over the same quarter a year ago. Those increases represent primarily the growth in loans and leases where quarterly average balances grew 3.1% from the prior quarter and 11.2% from a year ago.

Despite the growth in net interest revenue, net interest margin declined 12 basis points to 3.4% during the third quarter and 31 basis points from the third quarter last year.

While the flattening yield curve and robust competition has kept average yield on our loan and lease portfolio relatively constant over the last year, the cost of attracting deposits, especially time deposits, has continued to put pressure on our net interest margin.

Average interest-bearing deposits increased 3.2% from the prior quarter, while the average rate paid increase 23 basis points. Time deposits, as a percentage of total deposits, increased to 37.5% at the end of the third quarter from 35.9% at the end of the prior quarter.

Looking at noninterest income for the third quarter, we saw a 4.5% improvement from the second quarter to $6.2 million. This increase reflects higher levels of deposit service charges and servicing income, partially offset by lower gains on SBA loans. SBA gains were $1.1 million for the third quarter, down from $1.4 million for the second quarter.

Turning to noninterest expenses, excluding OREO, we had a 0.6% increase from the prior quarter to $29.4 million. Embedded into these results where merger and integration costs of $466,000 related to the transaction to acquire SWNB Bancorp, Inc., which we terminated in September. We do not expect any of these costs to continue in the fourth quarter.

OREO benefited this quarter from a $481,000 recovery of an expense on a former foreclosed property.

Given the increase in net interest income and noninterest income and the continued sequential decline in noninterest expense for the third quarter, our efficiency ratio improved 152 basis points to 56.28% from the prior quarter. The effective tax rate for the third quarter was 28.0% and 27.8% for the first 9 months of 2018. This was up slightly from the 6-month effective tax rate of 27.7%.

Return on average assets was 1.17%, the same as last quarter, while the return on average stockholders' equity increased 10 basis points to 10.91%. Our tangible book value increased to $17.31 per share from $17.20 per share last quarter.

And lastly, our tangible common equity ratio remains very strong at 10.15%, as do all of our regulatory capital ratios. With that, I will turn the call back to C.G.

Thank you, Ron. Hanmi delivered solid third quarter results highlighted by continued growth in earnings and excellent asset quality. During the quarter, we made key strategic decisions that will support future growth in a safe and prudent manner and to revise the cost structure of the company to be more productive and efficient.

A key part of this strategy is to moderate loan growth given where we are in the credit cycle and the highly competitive environment for loans and deposits.

In addition, rightsizing of a cost structure and continued commitment to technology to gain operating efficiency will improve shareholder returns for 2019 and beyond. I look forward to sharing our continued progress with you when we report our fourth quarter and full year results in January. Thank you.

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

(Operator Instructions) Our first question is coming from the line of Chris McGratty with Keefe, Bruyette & Woods.

C.G., last quarter, you talked about the cost plan and reiterated in the notes, it was a little bit less than $5 million, I'll call it was something like $0.06 to $0.08. I'm interested, now that you've kind of got a little bit further in the planning process, or Ron, a question for you. How should we be thinking about when you get to the kind of a normalized run rate, and what that run rate of expenses might be?

Well the -- as to the cost save process, we think that by the end of the first half of next year, we should have maybe 50%, 60% of the dollars that are targeted basically achieved. And so I'd say, sometime in the third quarter of next year, is when you'll have a more accurate run rate reflecting the revised cost structure of the company.

Okay, so if I just follow that up, you were 28.5% this quarter, backing out the one-timers. Is it the right way to think about that grow, that perhaps at 1% to 2% for inflation near term and then cut 5% off of that? Is that a fair kind of map?

That would be a fair start, Chris.

Okay. And then maybe a second derivative of the slower loan growth. You talked about the buybacks and you're hoping to complete the rest by the end of the year. Your capital levels are still very strong. How should we think about incremental buybacks beyond what's authorized given kind of deploying in the loan growth and the capital accumulation that's still pretty high?

Well, and I think -- first of all, we -- I don't have a definitive answer for you at this point. One of the aspects that we need to study further is the impact of CECL. And so by end of this year, we will have a first cut of the capital requirements, if any, that the new CECL program may generate. And so once we have that number, and once we can start to fine tune that number, that will determine -- and obviously, with all the environmental factors that we need to assess at that point in time, we'll make a determination along with the Board of Directors as to what, if any, further repurchase that we may undertake.

Okay, that's good color. If I can just slip one more. The slower balance sheet growth should, provide, perhaps, a little bit less pressure on the fundraising, I guess, would you agree, what kind of that opinion that the rate of NIM erosion might perhaps flow as you kind of moderate the growth of the balance sheet?

Yes. I mean, not only the -- on the depository side, but also as we become little bit more selective on the lending side, that should help ease the pressure on the net interest margin.

Our next question is coming from the line of Gary Tenner with D.A. Davidson & Company.

Some of my questions were asked, but if you could just repeat C.G., I don't think I caught it, the expectation for the branch consolidation, did you say 10% of your branches by the first quarter or did I mishear that?

Yes, you're correct. We -- our goal is to have the process completed and the cost saves realized by the end of the first quarter of 2019.

Okay. So that -- those -- the branches themselves are a pretty decent chunk of the cost save initiative in general?

Yes, yes, yes. That's the reason why, as I mentioned, earlier to Chris' question, we think that there's a pretty good chance by the end of the first have, we will have a significant part of the cost save number, if not identified, actually have executed upon.

Okay. And then just I wanted if you could comment brands that reported, obviously, and you guys have a lot of pressure on SBA premiums, just your outlook as it relates to maybe fourth quarter and into '19 on production, and what the opportunities are there?

Yes, the -- this area has been challenging for us as well as everybody else, as you know. From a volume standpoint, it looks like what we did during the quarter was roughly about $24 million to $25 million of the 7(a) loans and the premium income was roughly in the range of about 7.4%. This particular product is where we're finding a lot of competition. And it's been somewhat of a surprise to us in terms of the lower volume, but that lower volume is predicated upon the -- our desire not to compete for some of these high-risk credits. What we're finding more and more. As you know, there are many banks that add to this particular space within the last couple of years. And so many of them are have a much higher risk tolerance that we do. And so as an example, we have not done any of the projection-based financing or commercial real estate loans that are 7(a) guaranteed. And we're finding that many banks are doing that and, which is kind of unusual, particularly at this point in the credit cycle. But we have chosen to walk away from those, I should say, opportunities, but potentially, potential problems and that's impacted the volume. But the environmental factor was the other component in that. And a rising long-term rate environment, the premium income will naturally come down. And so you have to just pedal faster to try to maintain the kind of premiums that we have held -- we've had in the past. Going forward, I think, the range of about $25 million per quarter 7(a) is a reasonable expectation. And premium income, your guess is as good as mine, it's all a function -- it's quite a bit of a function of competition and also the long-term interest rate environment. But I think it's safe to say something in the 6% to 7% range on a go-forward basis wouldn't be too far off the mark.

Just to be clear, no desire or appetite to kind of staff up more just to chase the fee income?

No, no, that's not us.

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

Just wanted to follow-up a little bit on the deposit flows. Looked like during the quarter, noninterest-bearing accounts decreased and time deposits increased. Was there any shift from one to the other? Or if not, the reason for the reduction in DDA?

I would -- I'll let Bonnie provide more color, but my sense is that it's a cyclical component that impacted the DDA balances. I don't think I saw anything significant operationally in terms of shift from DDA to the interest-bearing DDA's. I think it's more cyclical.

Yes, let me just add a little bit more color to that. There is a seasonal -- somewhat of a seasonal effect. And when we track actually those customers that are contributing larger deposits -- average deposit balances. So it's a part of the normal fluctuation and it's individually tracked. So it's not that the deposits are -- there is attrition from the DDA component to other deposits, interest-bearing category.

Okay, great. And then in terms of the increase in time deposits, did you run any special deposit campaigns during the quarter?

We ran a savings deposit campaign, not so much on the CD, we are more on the defensive strategy than the offensive because there are still banks that are wanting CD rates above 2.45%, 2.5% on a one year money.

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

Thank you for listening to Hanmi Financial's third quarter 2018 results conference. We look forward to speaking to you next quarter.

Thank you. Ladies and gentlemen, this does concludes today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.