Hanmi Financial's (HAFC) CEO Bonnie Lee on Q3 2019 Results - Earnings Call Transcript

Oct. 22, 2019 9:31 PM ETHanmi Financial Corporation (HAFC)
SA Transcripts profile picture
SA Transcripts
132.49K Followers

Hanmi Financial Corporation (NASDAQ:HAFC) Q3 2019 Earnings Conference Call October 22, 2019 5:00 PM ET

Company Participants

Lasse Glassen – Managing Director-Addo Investor Relations

Bonnie Lee – President and Chief Executive Officer

Ron Santarosa – Chief Financial Officer

Conference Call Participants

Matthew Clark – Piper Jaffray

Gary Tenner – D.A. Davidson & Co

Kelly Motta – Keefe, Bruyette & Woods Incorporated

Don Worthington – Raymond James

Operator

Ladies and gentlemen, welcome to the Hanmi Financial Corporation’s Third Quarter 2019 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. Lasse Glassen, Managing Director at Addo Investor Relations. Please go ahead.

Lasse Glassen

Thank you, operator, and good afternoon and thank you for joining us today. With me to discuss Hanmi Financial’s third quarter 2019 earnings are Bonnie Lee, President and Chief Executive Officer, and Ron Santarosa, Chief Financial Officer.

Ms. Lee 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 our 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 Form 10-Q. In particular, we direct you to the discussion in our Form 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 2019, which can be found on our website at hanmi.com.

I will now turn the call over to Bonnie Lee. Bonnie?

Bonnie Lee

Thank you, Lasse. Good afternoon, everyone. Thank you for joining us today to discuss Hanmi’s 2019 third quarter results. Hanmi’s third quarter performance reflects the continuation of our strategy to protect net interest margin with a moderate growth in loans and leases.

The following are some of the key financial and operational highlights from this past quarter. Net income per diluted share increased significantly from the prior quarter, which included a $15.7 million allowance relating to a troubled $40 million loan relationship.

Earnings in the quarter benefited from a six basis points increase in net interest margin resulting from a decline in cost of deposits and an improvement in the yields on interest earning assets. As a result, net interest income was up 2.5% from the prior quarter. However, these gains are partially offset by elevated noninterest expense arising in part from the affirmation troubled loans as well as other charges. By design, we were selective in our loan and lease production in the quarter and total loan and lease balances increased modestly from the prior quarter, while average loans and leases increased 2.5% in the quarter on an annualized basis.

Importantly, we believe our keen focus on high-quality, well-priced loans and leases will serve our shareholders well in these increasingly volatile and uncertain times. Although total deposits decreased slightly in the quarter, cost of deposits were lower driven by a favorable mix of a lower time deposits and growth in noninterest bearing demand deposits reflecting our efforts to increase core deposit relationship and respond to the recent decline in the general level of interest rates.

And finally Hanmi remains very well capitalized. The bank’s regulatory capital ratios remain very strong and we are well positioned to continue growing in a safe and sound manner.

Our second quarter results were greatly affected by a single loan relationship consisting of a land loan and a business loan. After considering the approaching the year end maturities of both loans, the project status of the land loan and the timeliness of a certain liquidity events of the guarantor we placed the entire relationship on nonaccrual status.

Although both loans were current, we established a specific allowance of a $15.7 million. We have and continued to work closely with a borrower to achieve a positive resolution to the loan. Notwithstanding this particular loan relationship, we believe our overall asset quality remain strong.

Looking in more detail at our third quarter results, we reported net income of $12.4 million or $0.40 per diluted share. On a linked quarter basis, net income per share increased by $0.31 compared to the second quarter of 2019.

Turning to loans and leases receivable. Our portfolio balance has held steady at approximately $4.6 billion over the last 12 months. This coincided was the strategic decision to protect the net interest margin as much as possible, which as a consequence led to more measured loan growth for the second half of 2018 and with a slow economic growth and uncertain times moderated our loan growth expectations for 2019.

Third quarter loan and lease production of $217.5 million, declined from the $252.4 million posted in the previous quarter. Our third quarter production activity continued to reflect our strategic shifts towards the higher yielding category such as equipment leases. At the same time, we continued to reduce our portfolio of lower yielding single family residential loans.

Due impart to the strength of our commercial equipment leasing division and strong C&I loan production, the diversification of our portfolio continues to improve.

CRE loans comprise of 70.2% of our portfolio at the end of the third quarter compared with a 74.1% two years ago. Third quarter production consisted of a $78 million of commercial real estate loans, $34 million of SBA loan and $51 million of C&I loans. We also originated $52 million of a commercial equipment leases.

Newly generated loans and leases for the quarter had a weighted average yield of 5.54%, down 23 basis points from the previous quarters’ weighted average yield on a new production of a 5.77%. However, average loan and lease yields for the portfolio of a 5.08% held steady quarter-over-quarter as the average yields on new loans and lease production in the third quarter exceeded the average yields on loans that paid off in the quarter by 39 basis points.

Looking ahead to the fourth quarter in 2019. Our loan and lease pipeline has improved modestly and we anticipate moderate growth of loans and leases for the full year.

Now turning to deposits. We continue to operate in a highly competitive Asian-American banking landscape for deposit gathering activities. Total deposits at the end of the third quarter of a $4.69 billion decreased 1.5% or approximately $72 million.

On a linked quarter basis, but expanded 1.6% or nearly $76 million from a year ago. Importantly, the mix of deposits has improved. Noninterest demand deposits increased 5.8% over the prior quarter, while time deposits decreased by 11.6% which resulted in the cost of deposits declining by four basis points in the quarter.

Looking at asset quality. Aside from the trouble loan relationship identified last quarter, overall the key metrics remained stable. Net charge offs held relatively steady at $276,000 or two basis points for the third quarter. We recorded a $1.6 million loan loss provision in the quarter and allowance for loan and lease losses increased slightly to 111 basis points of loans and leases at quarter end. Furthermore, we continued to maintain conservative and disciplined underwriting standards on new loan origination.

For the third quarter of 2019, the weighted average loan to value and debt coverage ratio, a new commercial real estate loan originations were 54.2% and 1.7 times respectively. For the entire commercial real estate portfolio, the weighted average loan to value and weighted average debt-coverage ratio as of the end of the third quarter were 48.6% and 2.1 times respectively.

I would now like to provide a quick update on our key initiatives for 2019 which are focused on being more selective in new loan production, protecting net interest margin as much as possible and careful expense management with our loan and lease balance holding steady through the first three quarters of the year.

As I noted earlier, we now anticipate full year 2019 loan and lease growth to be modest. We’ve continued to emphasize areas of growth where we can achieve higher spreads such as equipment leases. The commercial equipment leasing division as a percentage of our overall loan production has increased significantly during 2019 and we expect this trend to continue.

I would also like to provide an update on our efforts to reduce costs and to improve operational efficiencies. A significant portion of this effort has been the successful branch consolidation initiative, which was completed earlier in the year and included a closure of our five branches or about 10% of our branch network. We are also making investment in technology and systems to achieve cost reductions through improvements in operational efficiency. This includes centralizing and streamlining certain back office activities to improve processing speed along with enhanced consistency across the enterprise, in sourcing, underwriting, and administrating credits.

With that, I would now like to turn the call over to Ron Santarosa, our Chief Financial Officer for additional details on our third quarter financial results. Ron?

Ron Santarosa

Thank you, Bonnie and good afternoon all. Looking at our top line revenue results, net interest income for the third quarter was $44.1 million, up from $43 million for the second quarter, reflecting an improved margin and one extra day in the period. Overall yields improved during the quarter and mixed with higher average balances led to a 1.1% sequential increase in interest income. Further benefiting our net interest income was a 2% decrease in total interest expense to $18.1 million mostly driven by a 4.4% decrease in interest on deposits.

Net interest margin for the quarter was 3.36%, up six basis points from 3.3% in the linked quarter. The cost of deposits fell four basis points to 1.37% mostly due to the decline of higher-costing time deposits. In addition to lower funding costs, we realized a two basis point increase in average yield on our interest earning assets to 4.74%. Although individual yields mostly remain flat quarter-over-quarter, we saw a mix shift in average balances out of lower yielding interest bearing deposits with other banks and it’s a higher yielding loans and leases.

Turning to noninterest income, we had an 11.2% decrease from the second quarter to $6.9 million. In the second quarter we had a $1.2 million gain from the sale of a branch building. In addition, we sold the remaining position in our tax-exempt municipal securities portfolio in the second quarter. The absence of the building sale gain and the securities gain account for the large part of the decline in noninterest income on a linked quarter basis.

Gains from the sales of SBA loans, however, increased to $1.8 million from $1.1 million last quarter. SBA trading premiums were very favorable in the third quarter, averaging 9.15%, up from 8.6% for the prior quarter. The volume of loans sold also increased 58% in the quarter to $24.3 million from $15.4 million.

Noninterest expenses increased by $2.5 million to $3.26 million for the linked quarter due to several items. There was a $1.1 million increase in occupancy and equipment costs driven mainly by the reassessment and reduction of personal property tax expense in the second quarter. We also saw an increase in professional fees relating to a $600,000 of charges realized in connection with the reporting delay. And also there were about $200,000 in legal fees from the year ago terminated merger transaction and our seasonal efforts added an additional $300,000 in the period.

Increased headcount incentives in part from added SBA staff contributed to a $600,000 increase in salaries and benefits. Partially offsetting these increases was a $400,000 FDIC insurance credit. Increased expenses this quarter mixed with a slight increase in revenue, drove our efficiency ratio to 64.04% from 59.44% in the prior quarter.

Return on average assets for the third quarter increased to 0.9% from 0.19% last quarter, while return on average equity increased sequentially to 8.67% from 1.87%.

Our tangible book value increased by $0.22 to $18.05 per share from the second quarter. And our tangible common equity ratio remains strong at 10.2%.

With that, I’ll turn it back to Bonnie.

Bonnie Lee

Thank you, Ron. As we look ahead for the fourth quarter, we continue to see headwinds from the persistently, competitive market for loans and deposits. However, our recent success in shifting toward a higher yielding asset and lower cost of deposits give me confidence that we can meet challenges ahead. Hanmi is poised for a strong finish in 2019 while generating solid returns for our shareholders. I look forward to sharing our continued progress with you next quarter.

Lasse Glassen

Operator that concludes our prepared marks, you can now open the call for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin our question-and-answer session. [Operator Instructions] Our first question is from Matthew Clark, Piper Jaffray, please proceed with your question.

Matthew Clark

Hey, good afternoon. First one from me just wanted to know how much prepaid penalty income may have contributed to the margin this quarter and last quarter as well?

Ron Santarosa

Matthew, this is Ron. Very slight, about $300,000 in the third quarter and about a $100,000 in the second quarter.

Matthew Clark

Okay. Okay, great. And then was there a tax benefit this quarter that contributed to the lower tax rate, as well that you could quantify?

Ron Santarosa

No, actually I would just observe in the first quarter, our tax rate was particularly high because of some matters bearing in the first quarter. As I mentioned, we would probably have an effective tax rate for the year of about 29%. We’re still headed towards that. And so the subsequent quarters would naturally have to be below that mark to get to the 29% for the year.

Matthew Clark

Okay. And then honing in on the commercial real estate portfolio that’s kind of drifted lower here year-to-date, I guess, should we not expect that portfolio to grow as we look out in the next year as you kind of – as you get more selective and maybe rework some of the portfolio or should we expect some net growth?

Bonnie Lee

I think we would expect moderate growth. Growth of the portfolio is a function of not only the new production, but of course the pay off that some of the payoffs are – come in unexpectedly and if we are not really in control of the – when the pay are happening. But I do hope to have a little bit of a moderate growth in the portfolio.

Matthew Clark

Okay. And then just last one from me on the leasing portfolio, you guys want to continue to grow that portfolio. I know it comes at higher yields. I guess how should we think about kind of lost content or charge offs on that portfolio as it seasons?

Bonnie Lee

So, leasing portfolio has performed actually fairly well. And we expected about 1% loss when we actually first started the business. But I think it’s actually – the actual loss is coming much lower than that, the 1% target we originally expected.

Matthew Clark

Okay. Thanks.

Operator

Our next question is from Gary Tenner, D.A. Davidson & Co. Please proceed with your question.

Gary Tenner

Thanks, good afternoon.

Bonnie Lee

Good afternoon.

Gary Tenner

Question Ron on the FDIC credit, how much of that is left or rather just how long should that continue to be a positive driver for chances?

Ron Santarosa

I believe that would just be for this quarter unless the agency does another reassessment.

Gary Tenner

Okay. There are some banks that are suggesting it goes into the even first quarter of next year. So I don’t know, it probably depends on the pace of recognizing that credit.

And then I wonder just on the expense side, or rather as you go back to kind of the troubled loan issue in the second quarter and your comments in the Q about kind of efforts to remediate some of those issues, what is involved there is it technology as a processes, is it headcount in any particular business lines?

Ron Santarosa

I’m sorry Gary can you repeat the question? Are you talking about the resolution efforts to the troubled loan or the charge…

Gary Tenner

I think – in the queue, I think the commentary suggested that there is some weaknesses that you needed to address internally. So I’m just wondering what’s involved from a expense or investment or action in terms of that activity.

Ron Santarosa

I understand now. Thank you. So the material weakness that we cited in the filing of our second quarter Form 10-Q that’ll continue again for the third quarter. Remediation efforts are underway. It will not command an unreasonable amount of effort on our part or additional resources. That’s something that we can resolve pretty much what we have. So I don’t anticipate any real charges coming from the remediation efforts.

Gary Tenner

Thank you.

Operator

[Operator Instructions] Our next question is from Matthew Clark, Piper Jaffray. Please proceed with your question.

Matthew Clark

The outlook on the loan yields given the repricing within your portfolio. And again, the increased contribution from leasing, I haven’t made the adjustment yet on kind of the core loan yield ex the recoveries – or not the recoveries, prepaid penalty income. But it was fairly steady, I guess, how do you, I know when a new business came in, but I guess, how do you feel about that loan yield relative to the recent fed cuts and what you’re putting on?

Ron Santarosa

So Matthew, this is Ron. So in the quarter, as we mentioned, our loan yields came in favorable, particularly relative to the yields that left us through payoffs. If that were to repeat again for the fourth quarter, I think we should be able to see our yields basically holding. We do have the repricing that occurred late in the third quarter. However, when we look at the loan book that will be maturing in the fourth quarter, which came on about four to five years ago. The distance between what those loans came on back in 2014, 2015 to what we might be experiencing here in 2019 isn’t all that great. So there’s an opportunity that the loan yield could stay at that five level. It could also dip below in front of four handle. But it would be a combination of those ideas manifesting in the fourth quarter.

Matthew Clark

Okay. And then just on the increase in criticized loans, I know it wasn’t that substantial, but just was wondering what was behind that increase.

Bonnie Lee

So in the criticized and classified category, we have in each category – respected category, we have a three loans. And most all loans are actually paying. And but there is a sign of a stress. So we have downgraded the loans and then we look at the supporting collaterals and then we don’t expect any loss from any of those credits.

Matthew Clark

You just give us a little more color on what types of industries, those are types of customers.

Bonnie Lee

It’s a pretty broad based. There are some real estate loans. There’s a small C&I loans. So in terms of aside, it ranges from less than $1 million to the $3 million.

Matthew Clark

Okay, great. Thank you.

Operator

Our next question is from Kelly Motta, Keefe, Bruyette & Woods Incorporated. Please proceed with your question.

Kelly Motta

Hi. Thank you so much for taking my question. My – first thing I wanted to ask, I wanted to circle back to expenses. I believe Ron, in the prepared remarks you mentioned there were some elevated expenses related to CECL, some related to the workout. Just wondering what in there could potentially go away on a go forward basis and how we should be thinking about modeling it going forward.

Ron Santarosa

The CECL element will come to a close here in the fourth quarter. And so in large part, there’ll be a piece that will continue on into 2020. But I expect that in aggregate, we probably will be down about a million dollars from the third quarter, taking a look at the troubled loan from the delay, the legal matters in the CECL. So I would guess about a million dollars.

Kelly Motta

Great, thanks a lot. And then on to another question on loan growth, you mentioned that you expect loans fee modestly up, that implies bit stronger in Q4. I was wondering, what gives you the confidence of the kind of boost backup and how you were also thinking about loan purchases, which is something you had been doing a couple of quarters before pausing, if that was something you’d be looking into getting into again. Thanks.

Bonnie Lee

So in terms of a loan purchases, we haven’t had any purchases done for last couple of quarters and we don’t intend to have any purchases within the coming quarter. And what was the first part of the question.

Kelly Motta

Just where – what gives you the confidence that loan is going to kind of boost back up after the first three quarters of this year? What drive that?

Bonnie Lee

Looking into the – going into the fourth quarter – looking at the pipeline, we have somewhat increased in the pipeline compared to the third quarter. But as I had mentioned previously, a net expansion of the loan portfolio is a function of the production as well as the payoff. We have been ranging the last couple of quarters in terms of a payoff, anywhere from $80 million, $90 million up to $130 million. So whether we actually going to have a net expansion of the portfolio to be determined by those loans. But in summary, I think the pipeline going into fourth quarter is a stronger than the third quarter or other periods.

Kelly Motta

That’s helpful. Thank you, Bonnie.

Operator

Our next question is from Don Worthington, Raymond James. Please proceed with your question.

Don Worthington

Thank you. Good afternoon.

Ron Santarosa

Go ahead, Don.

Don Worthington

Sorry. I didn’t make sure I was in. Just to touch on loan sales. Look like, you had pretty good quarter this quarter versus last as the SPA premium holding up this quarter and where you might expect the gain on sale to run going forward.

Bonnie Lee

So in terms of the premiums on the SPA loans in the third quarter, we saw the premium rates coming in around 9%. But I think this quarter, we made the little bit of a reduction in there, maybe to a about 8% level incomes overall premium level.

Don Worthington

Okay. And it sounds like the volumes are kind of holding where they have been in terms of originations on SPA.

Bonnie Lee

We had a pretty good production. This is actually the highest production within the last eight quarters.

Don Worthington

Okay. And then on provisioning, you basically just looking to cover any charge-offs you might have and maybe some for loan growth.

Bonnie Lee

Yes. I mean we’ll have to see how they – was both numbers coming along in the fourth Q. So we will provide the reserves accordingly.

Don Worthington

All right, thank you.

Bonnie Lee

Sure.

Operator

We have reached the end of the question-and-answer session. And I will now turn the call back over to Lasse Glassen for closing remarks.

Lasse Glassen

Thank you for listening to Hanmi’s third quarter 2019 results conference call. We look forward to speaking with you again next quarter.

Operator

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.

Recommended For You

Comments

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.