Hanmi Financial Corporation (HAFC) Q1 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the Hanmi Financial Corporation's First Quarter 2013 Conference Call. As a reminder, today's call is being recorded for transcription. [Operator Instructions] I would now like to introduce Mr. David Yang, Vice President of Investor Relations and Corporate Strategy. Please go ahead, sir.

Thank you, Douglas, and thank you all for joining us today. With me to discuss Hanmi Financial's first quarter highlights are Jay Yoo, our President and Chief Executive Officer; Mark Yoon, Senior Vice President and Chief Financial Officer; and JH Son, Executive Vice President and Chief Credit Officer. Mr. Yoo will begin with an overview of the quarter, and Mr. Yoon will then provide more details on our financial performance and credit quality. At the conclusion of the prepared remarks, we will open the session for questions. In today's call, we will 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 morning, Hanmi Financial issued a news release outlining its financial results for the first quarter of 2013, which can be found on our website at hanmi.com. I will now turn the call over to Mr. Yoo.

Thank you, David. Good afternoon, everyone. I would like to welcome and thank our investors, research analysts and others for their interest in Hanmi Financial Corporation. Before we begin the call, I would like to congratulate Mark Yoon on his appointment as our CFO. Mark has been instrumental in helping Hanmi navigate through the economic downturn over the past 4 years. And his 17 years of banking experience, along with his financial expertise and strategic vision, makes him suitable for this key position. Going into the first quarter with strong asset quality and the lifting of the regulatory enforcement actions, I can proudly say that we have completely shifted gears from the defense to the offense. Our vision is to become the bank of choice in our community and beyond, and our goal for this year is to achieve this better on multiple fronts. First, our primary focus is to strengthen our operating efficiency through strategic cost management and active cross-selling, while deploying our [indiscernible] cash through quality loan production. This will be our platform for organic growth and profitability in this new banking era. Second, we want to increase our marketing and sales competitiveness by retaining, protecting and reordering talented employees with a strong focus on relationship-based banking, further enabling us to offer value-added services and products to our customers. Third, we want to patiently explore various strategic options to select the right direction that will create the highest shareholder's value, and so the best interest of all stakeholders. I am pleased to say that the bank has made solid progress in the first quarter and we are one step closer in achieving the goals we have set for the year. Our first quarter profit increased 38% to $10.1 million, up from $7.3 million in the first quarter a year ago. Pretax income doubled to $14.8 million in the first quarter from $7.4 million a year ago. Our diluted earnings per share were $0.32 for the first quarter, up 39% from $0.23 in the first quarter a year ago. Loans increased significantly in the first quarter of 2013, attributable to the new loan production of $179 million, of which $36 million are SBA loans and $138 million are CRE loans. To further boost our organic growth effort, we are opening a loan production office during the second quarter and recently hired an experienced loan production officer in the Texas SBA market. Texas is the second-largest market in the country for SBA loans and also has one of the strongest business climates in the nation. During the quarter, we redeemed $30 million interest fee for the securities. We just complete an additional $30 million last week. The redemption of the remaining $20 million will be executed at the end of April, further improving our profitability. Overall, the first quarter has been a great start for us on many fronts, and a strong sign that 2013 will be another robust year. To further ignite our platform for growth, we have recently renewed our marketing agreement with Shin Soo Choo of the Cincinnati Reds and signed Hyun-Jin Ryu of the Los Angeles Dodgers as our marketing spokespersons. Shin Soo Choo has successfully represented Hanmi to build a positive imagery over the past 2 years and will continue to enhance our creative marketing efforts in our community and beyond. And Ryu's further move to the big leagues, following his perfect career in Korea, exemplifies our spirit of embracing new challenges for growth. We welcome Mr. Choo and Mr. Yoo as part of our marketing team and we look forward to a successful year together both on and off the field. With that, I will turn the call over to Mark, our CFO, to discuss the financial results in more detail. Mark?

Thank you, Jay, and good afternoon, everyone. As Jay mentioned, we had a good quarter to start 2013 with improvements in many important performance metrics. Our pretax earnings doubled compared to a year ago and continue on an upward trend. We improved our operating efficiency, credit quality and deposit mix. We also grew our loan portfolio by 4% in the quarter and 7% year-over-year, which supported our net interest margin. At quarter end, our tangible book value per share was $12.28, up 32% from a year ago. Both our operations and balance sheet are steadily improving. We ended the quarter at $2.8 billion in assets, $2.1 billion in the loans and $2.3 billion in deposits. One of the most important highlights is our solid loan growth for the quarter. With a solid pipeline for commercial loans, we believe we can achieve our annual target of 8% loan growth. As Jay noted, we have hired an experienced marketing officer to reenter this Texas market. Our expansion in this market will result in a meaningful loan production in the third quarter. Our SBA loan originations were $36 million for the quarter compared to $44 million in the fourth quarter and $30 million a year ago. Premiums on SBA loans remain attractive, so we will continue to sell most of newly generated SBA loans to generate the income. We sold $27.2 million SBA loans with a $2.7 million gain in the quarter compared to the sale of $27.5 million with a $2.7 million gain in prior quarter. There was no SBA loan sale made in the year-ago quarter. As we noted last quarter, those sales are a much smaller part of our overall credit management strategy. With NPLs at the lowest levels seen in more than 6 years, we only sold $1.6 million of notes during the first quarter compared to $26.1 million sold in the year-ago quarter. The significant reduction in note sales resulted in recording just $97,000 in losses in the first quarter compared to $1.2 million in the fourth quarter and $2.4 million in the first quarter of 2012. Core deposits grew to $1.8 billion or 76% of total deposits, up about $100 million or 6% compared to a year-ago quarter. Our year-over-year core deposits in hand with a $6 million increase in demand deposits and $63 million increase in money market and NOW accounts. Our overall deposits were down for the quarter by $63 million or 2.6% compared to the previous quarter, mostly due to a $59 million decrease in jumbo CDs, including a decline of $29 million of CDs raised from Internet listing services. Now let's turn to the income statement. We generated $25.6 million in net interest income for the first quarter of 2013, slightly down from $26.4 million in the preceding quarter and up from $24.5 million a year ago. Average interest earning assets were down slightly in the quarter and up slightly from a year ago, while average interest-bearing liabilities were down for both compatible prior periods. Our use on average earning assets improved 3 bps in the quarter and declined 13 bps year-over-year. Our cost of deposits fell 1 bps in the quarter and 30 bps for the year. Our in-house is steady in the quarter at 3.86% and improved 17 bps from 3.69% a year ago. With the redemption of CPS, we expect to save more than $2.5 million annually in interest costs, which should contribute to a margin improvement. We also expect that we can improve our margin gradually by deploying excess liquidity into high using loans and continuing to maintain or increase core deposits. As we discussed in the earnings release, we did not take a credit loss provision for the first and fourth quarters, reflecting continuing improvement in asset quality. Our credit loss provision for the first quarter of 2012 was $2 million. With a reserve at 2.88% of gross loans, our reserve position continued to be well above average of 2.41% reported for the first quarter by SNL Financial for the 320 banks, making up its U.S. bank index. Non-interest income in the first quarter of 2013 was $8.4 million, which was up from $7.5 million in the prior quarter and up from $3.6 million earned the same quarter a year ago. The major reason for the increase in this quarter was lower losses on sale of problem notes. This, together with the higher gains on sale of SBA loans, contributed to the significant year-over-year increase. We anticipate that the loss from note sales will remain low, while gain from SBA loan sales will continue to contribute to rates. Non-interest expense in the first quarter of 2013 was $19.2 million, down 2% from $19.5 million in the fourth quarter and up 2% from $18.7 million a year ago. Salaries and employee benefits, our largest overhead cost, were up 1.4% in the quarter and 2.6% year-over-year, reflecting higher benefits cost and increased bonus accruals for this year. Our deposit insurance premiums and regulatory assessments were down due to improved overall financial conditions. Our annual run rate is estimated to be $2.1 million. The efficiency ratio for the first quarter of 2013 was at 56.4%, an improvement from 57.7% in the fourth quarter and 66.6% a year ago. We are going to continue to work to control overhead costs; however, we'll spend money to make money as growth opportunities arise. The tax provision for the quarter was $4.7 million. The effective tax rate we commented last quarter was 39%, but this quarter tax rate was down to 32% because of certain DTA benefit adjustments. On a going-forward basis, we expect that our tax rate will go back to 38% or 39%. Now I'd like to review our credit quality that has been continuously improved. Total classified assets at quarter end were down to $96 million compared to $101 million at the end of fourth quarter and $231 million a year ago. The ratio of classified assets to bank Tier 1, capital plus ALLL improved again this quarter, coming down to 21.2% from 21.6% at the end of December and 54% a year ago. Nonperforming assets, including loans held for sale, decreased 46% to $36 million compared to $67 million a year ago, a reduction of $31 million year-over-year. Delinquent loans that are 30 to 89 days past due and still accruing for this quarter also decreased 39% to $6.4 million compared to $10.5 million a year ago but increased by $4 million compared to $2.4 million in the prior quarter. The increase was due to administrative delays, and we expect we will be stabilized in the coming quarters. Our net charge-offs were down at $2.3 million compared to $3.2 million during the fourth quarter and $11.3 million during the first quarter a year ago. So allowance for loan losses totaled $61.2 million or 2.88% of gross loans at quarter end compared to $81.1 million or 4.1% of gross loans a year ago. The allowance for loan losses to NPLs was 186% at the end of March compared to 161% a year ago. Again, based on a standard data at year end, our reserve levels far exceed the 63% coverage ratio for U.S. banks. As Jay mentioned, we have been proactively exploring various strategic options to enhance our franchise value in this highly competitive market. This quarter has been a stepping stone to this process and we'll continue the course with patience until we come across the best possible option that would maximize the shareholder value. We look forward to continuously building our business for the remainder of this year. Thanks again for your attention and support.

This completes our prepared remarks. Douglas, we are now ready for the Q&A.

[Operator Instructions] Our first question is from the line of Julianna Balicka with Keefe, Bruyette, & Woods, Inc. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: I have a couple of follow-up questions. One, can you talk a little bit more about the new branch that you're opening in Texas and what kind of your -- what are your -- about the growth in Texas, and what are your expectations for how much loan growth you expect to achieve, how long before it ramps up to being at full capacity, et cetera.

Okay. Well, that's not really branch, it's a loan production office. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: Yes, I'm sorry. I misspoke. I meant to say LPO.

Yes, it's an LPO. And we're going to have opening ceremony sometime in May. I think we -- I think it's scheduled sometime in the mid-May. And our expectation for the SBA loan production for this year is going to be around $10 million. And I think he is very experienced and he's been well known in the market for the last 20 years. We believe that he will be pretty much quickly produce SBA loans for the second -- in the second half of this year. And then next year, he will probably do about $60 million SBA loans. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: So this should increase the run rate of the SBA gains that you are booking right now?

Slightly more than -- yes. Slightly more than what we have projected. We have projected about $2.6 million to $2.7 million, but it's going to contribute maybe, I would say, $100,000 maybe $200,000 more gains. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: And then -- okay. And you talked a bit about the -- at the beginning about making, for this year, to becoming more efficient and kind of -- so on one hand, you're talking about becoming more efficient in terms of running the bank. On the other hand, you're making a lot of investments into new lenders and revamping growth. So can you kind of give us a sense of how that will come out in terms of expenses? Will there be any improvements or should we expect higher expenses or how are you thinking about all that?

Yes. I definitely, like I said in my prepared remarks, we're going to spend money to make money, right? So we're going to make investment and bring in talented lenders. So we already hired 5 lenders last quarter and we're going to continue to hire more in order to produce good loans. And so we're going to have a little bit of increase in non-interest expenses, but we're going to be very -- we're going to be cost-conscious and we'll try our best to control some of the expenses that are not necessary to -- necessary for the operations like in -- maybe non-recurring items like legal expenses or other non-recurring expenses. So that we're going to try to reduce as much as we can and then also our efforts to be focused on the improve managers' income through promoting or cross-selling programs we have in place right now. So we have made some investment in educating our bank employees to get the insurance license, so that we can cross sell our insurance products in our branches. So we're still in the process of developing the platform for cross-selling programs, but we expect that we're going to have some meaningful production in sometime in the second quarter of this year. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. That makes sense. And then the 5 lenders that you have hired out of Hanmi -- how large is your lending team again?

Lending team, right now is about 86, 85.

85. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: And in terms of your -- this is my final question, I'll step back. In terms of your 8% loan growth target, how much of that is based on your current lending platform versus team and what you have in place versus new additional hires?

Well, I would say -- well, it's kind of hard to break it down, but I would say maybe 89% from the existing platform and the rest coming from the new lenders we're going to hire. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: So all things being equal, next year, you should have even a higher run rate as new lenders kind of ramp up?

Yes.

Our next question is from the line of Scott Valentin with FBR Capital Markets. Scott Valentin - FBR Capital Markets & Co., Research Division: Just with regard to the margin, you guys did a little better than we thought this quarter. You held it flat. And I guess, that was due to the asset mix, some of the low-yielding assets running off. But going forward, I expect I guess there'll be a little bit more margin pressure, some of the older higher-rate loans pay off and new loans are low rates. So just 2 questions, one, maybe trajectory of margin and, two, maybe if you talk about where new origination loan yields are for commercial real estate and C&I versus last quarter, comparing maybe this quarter to last quarter?

Okay. Well, the new loan rate that we're seeing right now is in the range of 4.75% to 4.25%, so I think a weighted average rate would be around say 4.5% to 4.6%. And then we'd expect that there will be some downward pressure on the new loan rate because of the intense competition. And so we probably see some consistent decline quarter-over-quarter on loan yield. But at the same time, we're going to continue to increase, ramp up our loan production toward the end of this year so that we can offset some of the decline in rate by volume. And then also, as we indicated in our earnings release, we're going to save $2.5 million from retiring -- fully redeeming of GPS. So that would pretty much give us about $0.05 per -- after-tax earnings per share, so that would pretty much contribute to some margin expansion. And then also because we're going to deploy some of the excess liquidity, especially interest-earning -- interest-bearing -- interest-earning, I'm sorry, deposit in the fed account, earning only just 25 bps has been used for loan production, new loans. And as you can see from the December to March 31, there is about $100 million decline. So we're going to continue to see more decline in this balance here. So it's basically going back, used for higher-yielding loans which will contribute to our overall margin expansion. Scott Valentin - FBR Capital Markets & Co., Research Division: Okay. And then just a follow-up question. In terms of the pace of origination just during the quarter, was it more back-end loaded so things start off slow in January, February and picked up as you went into March? And maybe if you'd give us the idea where the pipeline is today versus, say, the end of the fourth quarter?

Well, our target is 8% loan growth, net growth. And as we experienced the last year and in the last 10 years, we have seen that there is always loan production starts slow in the first quarter and the second quarter and they ramp up in the third quarter and fourth quarter. So what we achieved in this quarter is going to be pretty much -- we'll see as same level of this growth in next quarter. But we'll see more growth in the 3 and fourth quarter. I think Mr. Son has more color on that.

This is JH. If I add a little more color on that. And our income so inventory -- loan inventory that were for the second quarter 2013, the prospect of a euros bargain [ph] has been increased with a similar loan and investment high from variable previous quarter. Also, we have seen a regular loan demand increase in the market. With such increasing loan inventory in pipeline and the recent loan demand pickup, we will continue to generate comparable level of loan production in the second quarter and going forward.

[Operator Instructions] Our next question is from the line of Tim Coffey with FIG Partners.

I was wondering, to what extent has the competition from competitors caused you to accelerate your growth initiatives in terms of hiring people and diversifying the loan portfolio?

We see a very intense competition so we see competition coming from mainstream banks, especially Wells Fargo Bank, they form a Korean lending team. And so they've been targeting middle-market, free [ph] American businesses. And I think our -- this competition will remain -- continuing this year and next year. I think a smaller Korean-American banks, they are very strongly focused on SBA. And we're going to see continuous margin compression on the new loans. And it's going to be very tough to generate good loans and -- but at the same time, we -- it's going to take some time to see some pickup in the demand for C&I loans. But we do see that the SBA market continues to be strong for the time being.

And also -- this is JH. You may notice, we continue to benefit from our strong brand reputation as being one of the oldest and strongest franchise community bank. For the remaining quarters this year, as I mentioned with an adequate new loans inventory level, we continue to focus on strong good loan growth in order to meet our 2013 target of 8% increase.

[Operator Instructions] There are no further questions in queue. I'd like to turn the call back over for closing remarks.

Thank you for listening to Hanmi Financial's First Quarter Conference Call. We look forward to talking to you next quarter.

And ladies and gentlemen, that does conclude our conference for today. We'd like to thank you for your participation and please -- excuse me, thank you for your participation and you may now disconnect.