Hanmi Financial Corporation
Q3 2018 Earnings Call Transcript

Published: 23 Oct 2018

[Operator:]

Ladies and gentlemen, welcome to the Hanmi Financial Corporation's Third Quarter 2018 Conference Call. As a reminder, today’s call is being recorded for replay purposes. At this time, all participants are in a listen-only mode. Following the presentation, the conference will be opened for questions. I would now like to introduce Mr. Richard Pimentel, Senior Vice President & Corporate Finance Officer. Please go ahead.

[Richard Pimentel:]

Thank you, Jessie. 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 Santarosa, Chief Financial Officer. Mr. Kum will begin with an overview of the quarter, Miss. 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 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.

[C. G. 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 for the third quarter of 2018. Here are some highlights for the quarter

[Bonnie Lee:]

Thank you, C. G. I will discuss loan and lease production and deposit gathering activities and then turn it over to Ron Santarosa 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 loans and leases expanded by nearly 4% during third 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 $113 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 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 5.76%. This portfolio continues to generate a higher yield than other loan categories as the weighted average yield on 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 time deposits and money market & savings deposits with increases 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 99%, down from 103% in the second quarter. I would now like to turn the call over to Ron Santarosa, our Chief Financial Officer. Ron?

[Ron Santarosa:]

Thank 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 3.48% 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 yields 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 increased 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 non-interest 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 non-interest expenses, excluding OREO, we had a 0.6% increase from the prior quarter to $29.4 million. Embedded into these results were 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 non-interest income and the continued sequential decline in non-interest 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 nine months of 2018. This was up slightly from the six 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.

[C. G. Kum:]

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, right sizing of the 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 continue progress with you when we report our fourth quarter and full-year results in January. Thank you.

[Richard Pimentel:]

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

[Operator:]

Thank you. Ladies and gentlemen we will now begin our question and answer session. [Operator Instructions] Thank you. Our first question is coming from the line of Chris McGratty with Keefe, Bruyette & Woods. Please proceed with your questions.

[Chris McGratty:]

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

[Ron Santarosa:]

Well, as to the cost save a 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 more accurate run rate reflecting the revised cost structure of the company.

[Chris McGratty:]

Okay. If I just follow that up, you are at 28.5 this quarter backing out to the one timers, is the right way to think about that grow that perhaps at 1% to 2% for inflation near term and then cut five off the bat. Is that a fair kind of map?

[Ron Santarosa:]

That would be a fair start, Chris.

[Chris McGratty:]

Okay. Okay. Thanks a lot. And maybe a second derivative of the slower loan growth. You talked about the buy back 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 buyback beyond with authorized given kind of the point in the loan growth and the capital accumulation is still pretty high?

[C. G. Kum:]

I think, first of all, I don’t have definite answer for you at this point. One of the aspects that we need to study further is the impact of seasonal [ph]. And so by end of this year we will have our first cut of the capital requirements if any, that the – then you’ll see some programs may generate. And so once we have that number and once we can start to fine-tune that number that would determine and obviously with other environmental factors that we need to assess at that point in time, we will make a determination along with the Board of Directors as to what if any further repurchase that we may undertake.

[Chris McGratty:]

Okay. That’s great color. Thanks. If I could just step one more, the slower balance sheet growth should provide perhaps a little bit less pressure on the fund raising. I guess would you agree what kind of that opinion is that the rate of NIM erosion might perhaps slow as you kind of moderate the growth of balance sheet?

[C. G. Kum:]

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

[Chris McGratty:]

Great. Thanks for questions. Appreciate it.

[Operator:]

Thank you. Our next question is coming from the line of Gary Tenner with D.A. Davidson & Company. Please proceed with your questions.

[Gary Tenner:]

Thanks. Good afternoon. Some of my questions were asked, but if you could just repeat C.G, because I don’t think I got it. The expectation for the branch consolidation, did you say, 10% of your branches by the first quarter or did I and mishear that?

[C. G. Kum:]

Yes. You’re correct. Our goal is to have the process completed and the cost saves realized by the end of the first quarter of 2019.

[Gary Tenner:]

Okay. So those the branches themselves are pretty decent chunk of the cost save initiative impairment?

[C. G. Kum:]

Yes.

[Gary Tenner:]

Okay.

[C. G. Kum:]

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

[Gary Tenner:]

Okay. Thanks. And then, just I wonder if you can comment, we know from other banks they 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 2019 on production and what the opportunities are there?

[C. G. Kum:]

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 7.4%. This particular product is where we’re finding a lot of competition, and its 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 higher risk credits. What we’re finding more and more, as you know there are many banks that enter this particularly 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 a commercial real estate loans that are 7(a) guarantee, 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 problem and that’s impacted the volume. But the environmental factor with the other component in that in a raising 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 have had in the past. Going forward I think the range of about $25 million per quarter 7(a) is a reasonable expectations. And premium income, your guess is a good as mine. It’s all function. It’s quite a bit of a function of competition and also the long-term, the interest environment, but I think it safe to say something in the 6% to 7% range on a go forward basis wouldn’t be too far of the market.

[Gary Tenner:]

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

[C. G. Kum:]

No, no, that’s not.

[Gary Tenner:]

Okay. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question is coming from the line of Don Worthington with Raymond James. Please proceed with your questions.

[Don Worthington:]

Thank you. Good afternoon.

[C. G. Kum:]

Good afternoon.

[Don Worthington:]

Just one follow-up little bit on the deposit flows. Look like during the quarter non-interest bearing accounts decrease and time deposits increase. Was there any shift from one to the other or if not the reason for the reduction in DDA?

[C. G. Kum:]

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 that significant operationally in terms of shift from DDA to the interest bearing DDAs. I think it’s more cyclical.

[Bonnie Lee:]

Yes. Let me just give a little bit more color. There is a seasonal -- somewhat of a season effect and when we correct actually from those customers that are contributing a larger deposits, average deposit balances, it’s a part of the normal fluctuation and its individually track. So it’s not that the deposits [Indiscernible] from the DDA components to other deposits interest-bearing category.

[Don Worthington:]

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

[Bonnie Lee:]

We have run savings deposit campaign. Not so much in the CD, we are more on the defensive strategy than the offensive, because there are still banks that are running CD rates above 2.45 [ph], 2.5 on a one year money.

[Don Worthington:]

Okay. All right. Great. Thank you.

[Operator:]

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

[Richard Pimentel:]

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

[Operator:]

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