Hanmi Financial Corporation
Q1 2017 Earnings Call Transcript

Published: 18 Apr 2017

[Operator:]

Ladies and gentlemen, welcome to the Hanmi Financial Corporation's First Quarter 2017 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, Matt, and thank you all for joining us today. With me to discuss Hanmi Financial’s first 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 and credit quality. 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 morning, Hanmi Financial issued a news release outlining our financial results for the first quarter of 2017, 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 2017 first quarter performance. Overall, it was another good quarter for Hanmi marked by growth across our franchise, excellent credit quality and a very strong capital position. Let me take a moment to briefly summarize our key accomplishments

[Ron Santarosa:]

Thank you C.G. and good afternoon all. First quarter net interest income increased approximately 1 percent or $289,000 to $42.4 million from $42.1 million in the fourth quarter. The increase reflects the expansion of our loan portfolio, partially offset by an increase in interest expense on deposits and borrowings. Quarter-over-quarter, average loans increased 5 percent to $3.9 billion and the average yield increased 2 basis points to 4.74 percent. Average money market and savings deposits increased 7.8% and average borrowings increased 54.9% while the average rate paid increased 6 basis points and 23 basis points, respectively. The increase in deposits however, drove overnight borrowings down to end the quarter at $50 million compared with $315 million at year-end. Our net interest margin, on a taxable equivalent basis, decreased 7 basis points quarter-over-quarter to 3.89 percent from 3.96 percent. The decrease in net interest margin for the first quarter compared with the preceding quarter was primarily due to the 2016 fourth quarter special FHLB dividend of $559,000, which benefitted the prior quarter Net Interest Margin by approximately 6 basis points. Net Interest Margin adjusted for the effects of acquisition accounting and the special dividend was up 5 basis points from the prior quarter and was up 17 basis points from a year ago. Compared with the 2016 first quarter, net interest income grew 10 percent and reflects the solid loan growth we’ve achieved over the past twelve months and the improvement in the mix of interest-earning assets. Year-over-year average loans increased 22 percent with loans at 87 percent of average interest-earning assets, compared with 81 percent for the year-ago period. Turning to noninterest income, we reported a sequential decrease of 11 percent, primarily due to a $1.4 million decrease in disposition gains on PCI loans offset by a $700,000 increase in other operating income. The increase in other operating income was primarily related to a $300,000 increase in servicing fee income resulting from lower servicing asset and liability amortization, and a $400,000 increase in check up-charge fees. PCI loans ended the quarter at $9.0 million, down 9% from year end. On a year-over-year basis, noninterest income increased 4 percent primarily due to a $606,000 increase in gains on sale of SBA loans, a $327,000 increase in other operating income and from $269,000 in gains on sale of securities. Gains on the sales of the guaranteed portion of SBA loans for the first quarter were $1.5 million on sales of $19.6 million of loans compared with the fourth quarter where gains were $1.8 million on loan sales of $27.8 million. A year ago, gains on sales of SBA loans were $858,000 on $12.4 million of loans sales. Noninterest expense for the first quarter increased $1.3 million, or 5.0%, to $27.2 million from $26.0 million primarily due to a $858,000 increase in salaries and employee benefits and a $557,000 decrease in OREO income. First quarter salaries and employee benefits expenses are typically higher in the first quarter due to the seasonal impact of elevated payroll taxes and employee benefits. As a result of the increase in noninterest expense as well as lower noninterest income, the efficiency ratio, excluding merger and integration costs, increased to 55.0 percent in the first quarter from 51.8 percent in the prior quarter and 57.3 percent a year ago. As C. G. mentioned, our asset quality continued to improve with nonperforming assets at $17.4 million at the end of the first quarter, or 36 basis points of assets, compared with 40 basis points of assets at the end of the prior quarter and 60 basis points of assets at the end of the same quarter last year. For the first quarter of 2017, we recorded a negative provision for loan losses of $80,000, which was related to PCI loans from the 2014 CBI acquisition. For the prior quarter, the provision for loan losses was $151,000. The effective tax rate for the first quarter was 38.5 percent, compared with 40.0 percent for the fourth quarter. In the first quarter last year, the effective tax rate was significantly lower at 29.5 percent due to a $1.8 million income tax benefit arising from the finalization of an amended prior year tax return. Finally, our tangible book value reached $16.26 per share, increasing 1.5 percent from the fourth quarter and 3.0 percent from the end of the first quarter last year. Our tangible common equity ratio remains strong at 10.98 percent, as do all of our regulatory ratios. With that, I will now turn the call back to C. G.

[C. G. Kum:]

Thank you, Ron. In a highly competitive environment for good quality loans and lower cost core deposits, Hanmi’s first quarter performance stands out. With strong growth in conservatively underwritten loans and core deposits, Hanmi is well-positioned to expand core earnings capacity and the bottom line. We’re off to a good start in 2017 and on-track to deliver, once again, highly profitable growth throughout the year. I look forward to sharing our continued progress with you when we report our second quarter results in July. Thank you. Richard?

[Richard Pimentel:]

Matt let’s open up the call for questions.

[Operator:]

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Bob Ramsey from FBR. Please go ahead.

[Bob Ramsey:]

Hey, good afternoon.

[C. G. Kum:]

Good afternoon.

[Bob Ramsey:]

I wondered if you could talk a little bit about deposit growth, obviously it was very strong this quarter; I am just sort of curious is there anything unusual or particular focus would help you guys to demonstrate the growth?

[C. G. Kum:]

Well as I indicated in my presentation, we have an exceptionally strong retail branch network and very loyal customer base. And so that’s really the first place to start. The -- as you may recall the couple of years ago, we intentionally did not look to our branches for deposits, because of the surplus liquidity picked from the CBI transaction. But starting approximately about a year ago, we started to ask our branch managers to be more active in asking for deposits from our customers and they have been delivering. So, I would say fundamentally it’s really the Hanmi brand and the loyalty of our customers that has been instrumental in helping us grow the deposit base.

[Bob Ramsey:]

Okay. And noticed a very modest uptick in deposit costs, maybe you could talk about what you have seen in terms of deposit pricing out there and whether there any promotions or anything that contributed to that?

[C. G. Kum:]

Yes, I mean we have been competitive in terms of deposit pricing, although when I say competitive, we typically are substantially lower than our peer banks. We have substantial competition particularly in the CD space, we have banks nationwide that we are competing against in the markets like Taxes and Illinois, who are out there putting out 1.4% 12 month CDs. So we expect that the overall deposit costs will continue to trend upwards, but on a relative basis, I believe that it’s going to be less or lower than our competition or our peer banks.

[Bob Ramsey:]

Okay. Have you seen any shift in deposit pricing after the Fed’s March increase, or just sort of the same gradual maybe rise you were seeing before that?

[C. G. Kum:]

Yes, I would say it’s been gradual rise. But there are banks that are particularly those organizations for the business model that’s always been dependent upon CDs for funding, they are doing some pretty ridiculous things. We are seeing some deposit pricing in the 1.4% to 1.5% on one year CDs. So the deposit competition is going to continue to be fierce.

[Bob Ramsey:]

Okay, got it. Shifting gears to talk about net interest margin a little bit. It looks like the purchase accounting contribution was a good deal lower this quarter than last is that just sort of normal volatility looking after that line or are we started see that burn off or how should we think about that?

[C. G. Kum:]

I would say both. The contributions from the acquired book is just becoming very small and there will be some level of I would say volatility because of some recoveries that will come out of I would say some hard work put up by my employees. So it’s a combination of the two.

[Bob Ramsey:]

Okay. You don’t happen to have handy the remaining accretible difference that you guys have left here?

[Ron Santarosa:]

We are -- ready I don’t have that ready.

[C. G. Kum:]

But the book is about $100 million right now, so it’s a fairly small book.

[Ron Santarosa:]

Yes so, what I would point out to in the table where we show the decomposition of the NIM, as it relates to the purchase accounting, you’ll notice kind of the steady contribution if you will from the time deposit portfolio on the borrowing side, the subordinated debt side. The time deposit side is pretty much over with. So that leaves in any large way shape or form the loan book and as you can see overtime the loan book just continues to work its way down, if there are sizable events in the quarter that number will spike upwards, otherwise it’s going to be very normal contribution from this point forward.

[Bob Ramsey:]

Okay, got it. And then sort of thinking about the core margin outlook, I imagine there will be a few basis points of pressure from the notes offering you guys did this quarter. How should we think about overall margin direction heading the second quarter and factoring that in?

[Ron Santarosa:]

I would say steady.

[Bob Ramsey:]

Okay. So steady meaning that that you will have offset to that few basis point of compression or steady from a few basis points lower?

[Ron Santarosa:]

I would say where we are in the first quarter, I think there is a pretty good chance that we can maintain that through second quarter.

[Bob Ramsey:]

Okay, alright. Great, thank you guys.

[C. G. Kum:]

You bet.

[Operator:]

The next question comes from Matthew Clark from Piper Jaffray. Please go ahead.

[Matthew Clark:]

Hey good afternoon guys.

[C. G. Kum:]

Good afternoon.

[Matthew Clark:]

Maybe the first one on any other noninterest income it looks like increased there about $1.7 million up from $1 million. I know that line item can bounce around a little bit, just curious if there was anything unusual or if that's a good run rate to build from.

[Ron Santarosa:]

I would say Matt as we mentioned there is about $400,000 that comes from some upcharge income from check sales that's probably not going to repeat itself. And then you get a little bit of the swing from the amortization of our servicing assets, part of it involve just from again most of that from the acquired side if you will. It depends on how fast some of those acquired loans pay off. And so you saw the slowdown in the first quarter as compared to the fourth quarter of the amortization effects of that. So all of that said, you're probably better at a midpoint idea than the low end or the high end.

[Matthew Clark:]

Okay. Okay, great. And then I guess how much did that I guess swing in the servicing assets account for just to make sure that we're on the same page.

[Ron Santarosa:]

I guess it was about $400,000 for the upcharge and about $300,000 for the net effect on the amortization.

[Matthew Clark:]

Okay. Okay, and then just curious if well before I get to that one, how about on expenses, I know comp was seasonally higher this quarter. I also know you guys have been doing some hiring I think you open up a branch. Just curious what the outlook is there for the run rate and some of the activities that you’re working on?

[C. G. Kum:]

Well, what we're hoping for is some reduction in the personnel cost. As we have mentioned, there has been an uptick associated with the seasonal charges associated with the personnel cost and then the branch opening in Illinois. Absent another branch opening which could happen in the second half of the year, we're hoping that the -- with some continued focus on the noninterest expense management that number will come down.

[Matthew Clark:]

Okay, great. And then last one maybe from me is on the sub-debt raise and kind of thinking through strategic opportunities out there whether or not I guess what are your updated thoughts on the M&A prospects for you all?

[C. G. Kum:]

I was a lot more optimistic about a month ago. But there is still sellers out there, potential sellers. And the volatility of the stock market as it relates to the financial institutions I think has caused all of us to somewhat off-guard. But I'm still evaluating opportunities and we'll see how it goes, but there is still a lot of talking going on in my space. And so I remain hopeful that there could be transactions done in 2017 and beyond.

[Matthew Clark:]

And are you thinking whole banks or you thinking in other types of business lines?

[C. G. Kum:]

I'd say the preferred route at this point is a whole bank acquisition. Given that we did the equipment leasing acquisition last year, I would say it's more likely that the next one would be a whole bank acquisition.

[Matthew Clark:]

Got it. Okay, thank you.

[C. G. Kum:]

You bet.

[Operator:]

Our next question comes from Gary Tenner from D.A. Davidson. Please go ahead.

[Unidentified Analyst:]

Good morning, this is Matt on for Gary, but all my questions have been answered. So I'll step back. Thank you.

[Operator:]

[Operator Instructions] And our next question comes from Chris McGratty from KBW. Please go ahead.

[Chris McGratty:]

Hey, good afternoon. Thanks for taking the question.

[C. G. Kum:]

Thank you.

[Chris McGratty:]

Bonnie maybe if I could go back to the margins a bit, if I'm thinking about it I want to make sure I'm thinking about it right. So the right hand side of the balance sheet, you've got next quarter a full quarter's impact to the debt, you've got gradually rising funding cost. Could you speak to where the new origination yields are? I'm trying to get to your stable comments C.G., but I'm trying to factor in the flattening of the yield curve that's occurred. And maybe where new production versus book yields are at that would have maybe bridge the gap. Thanks.

[Bonnie Lee:]

Sure the new production in the first quarter at the 4.71%

[C. G. Kum:]

So, Chris, where I was coming from is that yes we understand there are pressures that are going to be coming from the sub-debt and also the continued pressure in terms of the deposit pricing. Having said that though as Bonnie mentioned, I was very encourage with the pricing of our new loans that are coming in as Bonnie just mentioned in excess of 4.70%. And on top of that we have a fairly modest book of commercial equipment leases but they are generating somewhere with the five handle on it. And so between the two we remain hopeful that those two components will enable us to maintain the level of net interest margin that we were able to generate for the first quarter.

[Chris McGratty:]

Okay. Maybe if I could come back, looking at USA it looks like money markets are a little over 1%. Is there more competition, I’m just trying to get educated. Is there more competition from moment market C. G. than for CDs at this point of cycle give a model?

[C. G. Kum:]

I would say right now there is more competition for CDs than money markets. I think bankers like me we would prefer money markets because of the lack of duration commitment by a bank. And so many of the banks that are I would say liquidity start are out there basically putting out CDs. So there is greater competition in the CD arena than in money markets in my opinion.

[Chris McGratty:]

Okay. maybe I could ask a question or two on credit, obviously your staff look great, but the growth outlooks is pretty strong, I’m wondering if you could comment on the pipeline of recoveries obviously picking a quarter where the provisions in deposits though but if you are going to hit the mid-teens growth you are going to have to like we provide. I’m just trying to bridge a gap between the current earnings run rate and maybe 2018 consensus numbers.

[C. G. Kum:]

I would say based on the trajectory of growth, it’s likely that we will provision for loan growth based on loan growth in the second quarter. And so the recoveries that’s been historically pretty lumpy for us like what happened in the first quarter. And so it’s hard for us to predict on a quarter-by-quarter basis the level of recoveries that we would get on previously charged off loans. But if you look at us on a kind of an annualized basis in terms of what happened in 2016 as it relates to non-PCI loans my expectation is that in 2017 the level of recovery will be fairly similar.

[Chris McGratty:]

Okay. Okay. And is there -- maybe last one on credit is there any concern you’ve got a decent piece of CRE portfolio that’s retail obviously we’re all reading kind of the impact of the retail industry given online, any signs of stress there or any concerns of what you may not be kind of underwriting to maybe next year or so given the stress. Thanks.

[C. G. Kum:]

Well, our retail properties do not have any big box kind of retail tenant or major shopping centers or things of that nature. Retail types of deals tend to be much more I would say B&C types of projects and as far as those categories are concerns we have not seen any signs of stress as we speak.

[Chris McGratty:]

Okay. Great, thanks for taking all the questions C.G.

[C. G. Kum:]

Thank you.

[Operator:]

Our next question comes from Don Worthington from Raymond James. Please go ahead.

[Don Worthington:]

Thank you. Good afternoon.

[C. G. Kum:]

Good afternoon, Don.

[Don Worthington:]

Couple of things, one obviously the markets like Taxes and Illinois are contributing nicely to the deposit growth, are they also on the loan side doing kind of what you were expecting there in terms of generating loan growth?

[Bonnie Lee:]

So, in the first quarter Taxes and Illinois contributed about 13% of the organic loan growth and which is actually higher than the company’s share, their share of the company. So, as you said deposits they track by it mirrors the company.

[Don Worthington:]

Okay, great. And then in terms of SBA gains where you kind of see that going forward maybe a run rate similar to this quarter?

[C. G. Kum:]

Yes, I would say our expectation is it’s going to pick up in the second quarter. One of the reasons I’m very optimistic about nice to say very but I am optimistic about 2017 is that historically the first quarter tends to be a slower quarter in terms of loan generation including SBA. But we had a pretty good first quarter. So -- and with the pipeline going into the second quarter it seems that we are going to have a decent second quarter as far as loan generation and in particular in the SBA area of concern. The -- as part of the SBA the premium income level actually went up by almost 20 basis points from fourth quarter of last year to first quarter of this year and I think that reflects the flattening of the yield curve where the loan end has come down a little bit. And so, if that’s maintained then we think that the second quarter could be I would say more productive for us as far as SBA premium income is concerned.

[Don Worthington:]

Okay great. And then lastly maybe this for Ron, the outlook for the tax rate in 2017 given the first quarter number.

[Ron Santarosa:]

We should be between -- somewhere between 39% to 40% Don.

[Don Worthington:]

For the full year?

[Ron Santarosa:]

For the full year, right.

[Don Worthington:]

Yes, okay great. Alright, thank you.

[Ron Santarosa:]

Thank you.

[Operator:]

Our next question comes from Bob Ramsey from FBR. Please go ahead.

[Bob Ramsey:]

Hey, thanks for taking the follow-up. I just wanted to follow-up on the provision of mark. I know you guys said you are pretty close to provisioning from growth. Is it fair to think about as you do that maybe you provision around 1% of net loan growth or how should we think about what the provision rate is for the incremental growth?

[C. G. Kum:]

It’s hard to say at this point. The -- some of that is going to be -- some of the provision is going to be based on the overall quarter-by-quarter analysis of the adequacy of our ALLL and frankly there is still room within the model that we use to absorb growth. I would say over an extended period, I would say somewhere in the 50 to 75 basis points is probably reasonable, but I am not so sure that will be applicable for at least the next couple of quarters. So I think that might be a little bit high, because as I said, I think we still have some capacity within our ALLL to absorb some of the loan growth. But there will be some provisioning, I just couldn’t tell you at this point, until we finalize the quarter at what level we would provision.

[Bob Ramsey:]

Okay. And then in terms of the first quarter, do you have the breakout of what the provision impact was from purchase credit impaired versus non-purchase credit impaired loans?

[Ron Santarosa:]

In terms of the provision it was solely related to PCI, so the 80,000 that was solely related to the PCI reserve. So there was no net provision for all the other loans if you will, largely because of the 800,000 plus recovery related to all of the other loans.

[Bob Ramsey:]

Okay, got it. And then is it fair to say that the loan growth guidance you guys have given so far this year, I think you said low to mid double-digit growth is the expectation for the year?

[C. G. Kum:]

Yes it is.

[Bob Ramsey:]

Okay, great. Thank you.

[Operator:]

Thank you. This does conclude the question-and-answer session. I would like to turn the floor back over to management for any closing comments.

[C. G. Kum:]

Thank you for listening to Hanmi Financial’s first quarter 2017 results conference call. We look forward to speaking with you next quarter.

[Operator:]

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