Q3 2019 Earnings Call
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 any listen only mode. Following the presentation. The conference will be open for questions I'd now like to introduce.
Mr. Lhasa Glassen managing director at Addo Investor Relations. Please go ahead.
Thank you operator and good afternoon.
Good afternoon, Thank you for joining us today.
With me discuss Hanmi Financial's third quarter 2019 earnings are Bonnie Lee, President and Chief Executive Officer, and wrong, Santa Rosa Chief Financial Officer.
Mostly will begin with an overview of the quarter and Mr. Santa Rosa 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 on forward looking statements based on current plans expectations.
And financial industry trends that may affect the company's future operating results in financial position.
Our actual results could be different from those expressed or implied by our forward looking statements.
Hi involve risks and uncertainties.
The speakers on this call claim the protection of the Safe Harbor provisions contained to the Securities Litigation Reform Act at my to 95.
For some factors that may cause our results to differ from our expectation. Please refer to our FCC 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 .
Certain risk factors affecting our business.
This afternoon Hanmi financial issued a news release outlining our financial results for the third quarter 29 team, which can be found on our website at haunt me Dot com.
I will now turn the call over Bonnie Lee Bonnie.
Your loss that's.
Good afternoon, everyone. Thank you for joining us today to discuss hobbies 2019 third quarter results.
Third quarter performance reflects the continuation of our strategies.
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 our trouble 40 million dollar loan relationship.
Earnings in the quarter benefited from a 60 basis points increase in net interest margin, resulting from a decline in cost of deposits and an improvement in the yield on interest earning assets. As a result, net interest income was up 2.5% from the prior quarter. However, these gains are part.
Actually upset by elevated non interest expense arising in part from the aforementioned troubled loans as well as other targets.
Design, we were selective in our loan and lease production in the quarter and Tautona. These balances increased modestly from the prior quarter, while average loans and leases increased 2.5% in the quarter on an annualized.
Importantly, we believe are keen focus on high quality, well priced loans and leases were served our shareholders well indeed increasingly follow tiles and uncertain time.
Although total deposits decreased slightly in the quarter cost of deposits were more driven by a favorable mix up a lower time deposits and growth in non interest bearing demand deposits.
Electing our efforts to increase core deposit relationship.
Onto the recent declines in the general level of interest rate.
Finally, how many remains very well capitalized stripping regulatory capital ratios remained 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 up on land loans and up business.
After considering the fortune to your end maturity supposed to bond <unk>. The project set us up to let alone and the timeliness of US there tend to could you spend some of the ground poor we placed the entire relationship on non accrual status.
Or don't both laws were curran with tablets, the specific allowance of a $15.7 million.
We have and continue to work closely with a borrower to achieve a positive a resolution to that or not.
Notwithstanding this particular loan relationship we believe our overall asset quality remains strong.
Looking in more detail at our third quarter results. We reported net income of about $12.4 million or 40 cents per diluted share on a linked quarter basis net income per share increased by 31 cents compared to the second quarter of a 2019.
Turning to loans and leases receivables I portfolio up Allen's has held steady at approximately $4.6 billion over the last 12 months.
Coin sided what's the strategic decisions to protect the net interest margin as much as possible, which as a consequence that two more measured loan growth, but the second half over 2018, and with a slow economic growth and uncertain times moderated our loan growth expectations for 2019.
Third quarter going into these production up a $272.5 million decline from the $252.4 million, what's sitting in the previous quarter.
Our third quarter production activity continues to reflect our strategic shifts.
There's a higher yielding categories such as equipment leases.
At the same time, you continue to reduce our portfolio of a lower yielding single family residential <unk>.
Due in part to the strength of our commercial middle Eastern Division and strong San <unk> those production the diversification of our portfolio continues to improve.
See our HEALOS comprises 70.2% of our portfolio at the end, though 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 SPD loan and $51 million ever see at <unk>.
We also originated 52 million other commercial equipment.
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 an unused production of a 5.77% however average loan and lease deals with a portfolio of a 5.0 waste.
Then held steady quarter over quarter as the average yield unused going into these production into third quarter exceeded the average yield than those that paid off in the quarter by 939 basis points.
Looking ahead to the fourth quarter in 2019, our lawn and these pipeline has improved modestly and we anticipated moderate growth of loans and leases for the fourth year.
Now turning to deposit we continue to operate in a highly competitive Asian American banking landscape for deposit gathering activities.
Total deposits as is at the end up the third quarter of a $4.69 billion decreased 1.5% or approximately 70 $72 million on a linked quarter basis, but expended, 1.6% or nearly 76 million from a year ago importantly, the mix.
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 troubled loan relationship identified last quarter overall, the key matrices remain stable.
Net charge offs held relatively steady at $276000.
We recorded a $1.6 million loan loss provision in the quarter and allowance for loan as these losses increased slightly to 211 basis points of loans and leases at quarter end.
Furthermore, we continue to maintain conservative and disciplined underwriting standards, a new loan origination.
The third quarter over 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 ratios 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.
Without loan and lease Scotland, holding steady through the first quarter for three quarters something here as I noted earlier, we now anticipate full year 2000 19 million in these gross growth to be modest we've continued to emphasize area. So the growth of where we can achieve a higher spreads the kids equipment.
The commercial equipment leasing division as a percentage of our overall those 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 cost and to improve operational efficiency.
So you can Nixon a significant portion of this effort has been to successful branch consolidation initiatives.
Which was completed earlier in the year and included the closure of a five branches or about 10% of our friends network.
Were also making investment in technology and systems to a cheap cost reductions through improvements in operational consistency.
This includes a centralizing and streamlining streamlining certain back office activities swimming pools of processing.
Speed, along with enhanced consistency across the enterprise insourcing 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 in our third quarter financial.
Uh huh.
Thank you Bonnie and good afternoon all.
Looking at our topline 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 at one extra day in the period.
Overall yields improved during the quarter end mixed with higher average balances led to a 1.1% sequential increase in interest income.
Further benefiting aren't interested 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 percents.
Although individual yields mostly remained 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 dollar gain from the sale of the 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 game into securities gain account for a large part of the decline in noninterest income on a linked quarter basis.
Gains from the sales of Sta loans, however, increased to $1.8 million from 1.1 million last quarter.
Sta 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.
Non interest expenses increased by 2.5 billion to $3.26 million for the linked quarter due to several items.
There was a $1.1 billion 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 $600000 of charges realize in connection with the reporting to away.
And also there were about 200000 legal fees from the year ago terminated merger transaction and our seasonal efforts added an additional 300000 in the period.
Increased head count and incentives in part from added SBK staff contributed to a 600000 dollar increase in salaries and benefits.
Partially offsetting these increases was a 400000 dollar 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 percents.
Our tangible book value increased by 22 cents to $18.05 per share from the second quarter and our time tangible common equity rebate ratio remained strong at 10.2 percents with that I'll turn it back to Bonnie.
Karen as we look ahead for the fourth quarter, we've continued to see headwinds from the persistently competitive market for loans and deposits. However, our recent success in shifting toward a higher yielding assets and lower cost of deposits give me confidence that we can move 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.
[noise] operator that concludes our prepared remarks, you can now open the call to call for questions.
Thank you, we'll now begin our question and answer session. If he would like to ask your question. Please press star one under telephone keypad a confirmation total indicate your line is in the question Q you May Press Star too if you would like to remove your question from the Q4 participants using speaker equipment, and maybe that's sort of pick up your handset before pressing the star one moment, please while we post.
Questions.
Our first question is from Matthew Clark Piper Jaffray. Please proceed with your question.
Hi, good afternoon.
First one for me just.
Wanted to know how much prepaid penalty income maybe that's contributing to the margin this quarter and last quarter as well.
Matthew This is Ron very slight.
About 300000 in the third quarter and about 100000 in the second quarter.
Okay.
Okay great.
And then.
The was there a tax benefit.
This quarter that.
Attributed to lower tax rate as well, but you could quantify.
No I actually I would just observe in the first quarter, our tax rate was particularly high because of some matters bearing in the first quarter a as I've mentioned, we would probably have an effective tax rate for the here of about 29%, we're still headed towards that and so.
So the subsequent quarters would naturally have to be below that mark to get to the the 29% for the year.
Okay.
And then.
Honing in on the commercial real estate portfolio, that's contributed lower here year to date.
Yes should we not expect that portfolio to grow as we look out into next year. That's kind of did you get more selective and maybe rework some of the portfolio or should we expect net growth.
I think we would expect a moderate growth growth of the portfolio is a function of not only the new production for the payoffs in some of the payoffs are come in.
The and.
Not really control.
I have.
So, but I do hope that.
To have a little bit at a moderate growth in the portfolio.
Okay, and then just last one from me on the leasing portfolio.
You guys want to continuing to grow that portfolio I know it comes at higher yields I guess, how should we think about.
Kind of loss content.
Charge offs on that portfolio as it seasons.
So.
In portfolio.
Has performed actually fairly well and Ah.
You know, we expected or about 1% or.
When we actually first started see a business, but I think it's actually the actual loss is coming much lower than that 1% target.
Okay. Thanks.
Our next question is from Gary Tenner, D.A. Davidson and company. Please proceed with your question.
Thanks, Good afternoon.
A.
Question around on the on the up here, she credit or how much of that as loved her or rather just how long should that continue to be positive driver for sponsors.
I believe that would just be for this quarter unless the agency doesn't other reassessments.
Okay Theres some banks that are suggesting that goes into the even first quarter of extra so I don't know probably depends on the pace of recognizing that credit.
And then.
I Wonder just on the expense our four rather as as you go back to.
Kind of the troubled loan issue in the second quarter and your comments MCU about kinda efforts to remediate.
Some of those issues what what is involved there is it.
Technologies and processes as head count.
You know it any particular business lines.
I'm sorry.
Gary can can you repeat the question are you talking about.
The resolution efforts to the troubled loan or is it true I think.
In the in the queue I'd say the commentary suggested that there were some weakness is that you needed to address internally, yes. So I'm just wondering what's involved from a you know expense or investment.
Action in terms of that activity.
Got I understand now thank you so the material weakness that we cited a in the filing of our second quarter Form 10-Q .
That will continue again for the third quarter.
Remediation efforts are underway or it will not command a an unreasonable amount of effort on our part or a.
Additional resources that something that we can resolve pretty much what we have so I don't anticipate any real charges a coming from the remediation efforts.
Thank you.
As a reminder, if you'd like to ask your question. Please press star one under telephone keypad, a confirmation Tony when the Carolinas into question Q You May press Star too if you would like to remove request from the Q4 participants using speaker equipment and maybe necessary to pick up your handset before pressing the star keys, one mother fees, while people's questions.
Our next question is from Matthew Clark Piper Jaffray. Please proceed with your question.
Sales [laughter] Nelson and ask the question so.
I get back on.
The.
The outlook come on the loan yield I'm, giving you the repricing within your portfolio and again the increased contribution from we've seen.
I haven't made the adjustment not on kind of the core loan yield ex the recoveries or another occurs the prepaid pelley income but.
It was fairly steady I guess, how do you know business came and but I guess, how do you feel about that loan yields relative to the recent said cuts.
What you're putting on.
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 holdings.
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 this the the distance between what those loans came on backend 14, 15 to what we might be experiencing here in 19 isn't all that great.
So theres an opportunity that the loan yield could stay.
That five level. It could also dip below a in print a four handle but it would be if it will be.
Combination of those those ideas manifesting in the fourth quarter.
Okay, and then just on the increase in criticized loans I know it wasn't.
That's substantial but just was wondering what was behind that increase.
So India criticized and classified category we have a.
It's kinda respected category, we haven't three loans and lost all loans are actually paying.
And Ah, but there is a sign of a stress so we have downgrades that loans and.
At the that's supporting Collaterals, and we don't expect any loss from any of those credits.
Can you just give us a little more color on what types of.
Industries as our types of customers, it's a pretty broad base, there's some real estate loans as a small see an island.
So in terms of aside you know it ranges from Ah that's been a million Q2 to three.
Okay.
Thank you.
Our next question is from Kelly Motta Keefe Bruyette and what's incorporated. Please proceed with your question.
Hi, Thank you so much for taking my question.
My My first thing I wanted to ask they wanted to circle back to expenses I believe Ron in my prepared remarks, you mentioned there is some elevated expenses related to cease all some related to you or the work out just wondering.
What's in there could potentially go away on a go forward basis in how we should be thinking about modeling it going forward.
The the seasonal elements 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.
The legal matters in the Cecil So I would guess about a million dollars.
Great. Thanks, a lot and then.
On on to another question on loan growth you mentioned that Ah you expect lunch be modestly up that implies bit stronger in Q4 I was wondering.
You know what what gives you the confidence and that kind of goes back up in and how you were also thinking about loan purchases, which is something you had been doing a couple of quarters before before passing it Dallas something you'd be looking into getting into again. Thanks.
So.
In terms of a loan purchases. We haven't had any purchase is done for last couple of quarters and I read on intend to have any purchases.
Within the coming quarters.
And yet.
Yeah.
No what was the first part but the question just <unk>, where what gives you the confidence at that loan growth is going to kind of this backup after the first three quarters at this year.
What drives that.
Looking into the going into the fourth quarter is looking at the pipeline, we have somebody increase in the pipe type like compared to the third quarter, but as I had mentioned previously.
Net expansion of the loan portfolio, it's a function of the production as well that's a payout we had been a ranking as the last couple of quarters in terms of a pay up anywhere from Oh.
80, 90 million up 230 million so.
Whether we actually going to have a net expansion of the portfolio to see determined by [noise].
But that's the in summary.
Pipeline going into.
Fourth quarter is a strong but and so quarter.
That's helpful. Thank you Bonnie.
Our next question is from Don Worthington Raymond James. Please proceed with your question.
Thank you good afternoon.
Right.
Oh, sorry can make sure I was in just too.
Touch on loan sales.
Look like at pretty good quarter this quarter versus last as.
Yes fee, a premium holding up this quarter and.
Where are you might expect.
The gain on sale to run going forward.
So in terms of the premium Sundance <unk>, Oh I'm sorry.
Third quarter, we saw the premium rates coming in around 9%, but a I think that's quota we may see a little bit of a reduction in that maybe to about 8% level and comes over a premium.
<unk>.
Okay and it sounds like the volumes are kind of holding where they where they have been in terms of originations.
Yes.
Pretty good production. This is actually the highest production within the last eight quarters.
Okay.
And then on provisioning you basically just looking too.
Cover any charge offs, you might have and.
Maybe some for loan growth.
Yeah, I mean, we'll have to see how they both both numbers coming along in the fourth Q.
Accordingly.
Alright, thank you.
Sure.
We have reached the end of the question answer session and I will now turn the call back over to loss a glass in for closing remarks.
Thank you for listening to Hanmi is a third quarter 2019 results conference call. We look forward to speaking with you again next quarter.
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.
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