Hanmi Financial Corp (NASDAQ:HAFC)
Q4 2015 Results Earnings Conference Call
January 26, 2015, 4:00 pm ET
Christina Lee - First Vice President of Investor Relations and Corporate Strategy
C. G. Kum - President, Chief Executive Officer, Director of the Company and Hanmi Bank
Ron Santarosa - Chief Financial Officer, Senior Executive Vice President
Julianna Balicka - KBW
Bob Ramsey - FBR Capital Markets
Matthew Clark - Piper Jaffray
Gary Tenner - D.A. Davidson
Ladies and gentlemen, welcome to the Hanmi Financial Corporation's Fourth Quarter and Full Year 2015 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 Ms. Christina Lee, First Vice President of Investor Relations and Corporate Strategy. Please go ahead.
Thank you, Kris. And thank you all for joining us today. With me to discuss Hanmi Financial’s fourth quarter and full-year 2015 earnings are C. G. Kum, our President and Chief Executive Officer; Bonnie Lee, Chief Operating Officer, Ron Santarosa, Chief Financial Officer.
Mr. Kum will begin with an overview of the quarter and full year, 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 fourth quarter and full-year 2015, 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, Christina. Good afternoon, everyone. Thank you for joining us today to discuss our 2015 fourth quarter and full year results.
Our excellent performance this past quarter was the culmination of a strong year of profitable growth for Hanmi. Let me take a moment to briefly summarize the highlights:
Net income for both the fourth quarter and full year was significantly higher after adjusting for non-recurring items primarily related to the 2014 acquisition of Central Bancorp, Inc.
New loan production remained very strong in the fourth quarter and helped generate 49% growth in loan production for the full year. In addition to strong growth in our core California markets, we saw solid contributions from our expansion initiatives in Texas and Illinois.
As a result of the strong loan production, loans receivable were up 14.2% for the year. I am pleased to report that we have been able to achieve this growth while maintaining our conservative underwriting standards and improving asset quality.
In addition, we’ve had very good success in the repositioning of our balance sheet since the acquisition of CBI, which has led to a nice expansion in net interest margin.
We also continued to benefit from a low cost deposit base. Our ongoing emphasis on relationship banking is helping drive a solid increase in demand deposits.
And importantly, shareholders are being rewarded by the success of the Hanmi franchise. During the fourth quarter, our board of directors increased the quarterly common stock dividend by 27% - reflecting our strong performance in the fourth quarter and full year in 2015 and the board’s continued confidence in our ability to generate sustained profitable growth going forward.
Looking more closely at our fourth quarter and full year results, we reported net income of $14.8 million, or 46 cents per diluted share for the fourth quarter and $53.8 million, or $1.68 per diluted share for the full year in 2015. After adjusting primarily for the CBI acquisition bargain purchase gain and merger and integration costs recognized in 2014, net income increased 84% compared to the fourth quarter last year and 40% for the full year.
On a linked-quarter basis, net income for the fourth quarter increased 6.2% compared to the third quarter of 2015, while the return on average assets of 1.44% for the fourth quarter is up from 1.38% in the prior quarter. During the fourth quarter, noninterest expense was down by 1.9% from the prior quarter and benefitted from the full quarter impact of the branch consolidations completed in the third quarter. As a result of the lower expenses coupled with higher revenues from growth in earning assets, I am pleased to report that our efficiency ratio excluding merger and integration costs of 56.33% improved 164 basis points from the prior quarter and is in-line with our previously stated efficiency ratio target in the mid 50 percent range.
Loans receivable were up 4.5% quarter-over-quarter driven by new loan production for the quarter of $383 million. New loan production was comprised of $269 million of organically generated production and $114 million of purchases. For the full year, loans receivable increased 14.2% primarily as a result of new organically generated loan production of $918 million. During the quarter we experienced strong growth in our legacy Hanmi markets in California, along with solid contributions from our newer operations in Texas and Illinois. In fact, our operations in Texas and Illinois generated 16% of Hanmi’s total new loan production in the fourth quarter, up from 12% of new loan production in third quarter. We expect efforts in these new markets to continue to gain momentum as we move forward.
Loan production in the fourth quarter consisted primarily of $199 million of commercial real estate loans, $27 million of SBA loans and $40 million of C&I loans. C&I loan production, which represented 15% of new loan production in the quarter, was 56% higher than the fourth quarter last year and reflects our ongoing emphasis on business banking to diversify our loan portfolio. In fact, our C&I loan balance at the end of the fourth quarter of $306 million represents an increase of 9% and 23% from the third quarter of 2015 and the fourth quarter of 2014, respectively. C&I loans now represent nearly 10% of our loan portfolio. In addition, total commercial line of credit commitments increased to $357 million, up nearly 18% on a year over year basis.
I am pleased to report that our loan pipeline entering 2016 remains strong and we are, once again, targeting year-over-year loans receivable growth to be in the double digits for the full year.
Overall, we have been successful in repositioning the Hanmi balance sheet by converting liquid assets acquired from CBI to higher yielding loans. At the end of 2015, loans represented 75% of total assets and 91% of deposits. This compares favorably to loans at 66% of total assets and 79% of deposits at the end of 2014. The improved mix of earning assets has helped to expand fourth quarter net interest margin excluding acquisition accounting to 3.62%, or 14 basis points higher than the previous quarter. This is an impressive accomplishment in the current environment.
In addition, we are benefitting from a low cost deposit base. During the fourth quarter, noninterest-bearing demand deposits increased 3.7% compared to the prior quarter, led in part by solid DDA gathering activities by our new Healthcare Banking Group. Overall, total deposits stand at $3.5 billion and noninterest-bearing demand deposits now comprise 32.9% of total deposits, up from 28.8% at the end of the prior year.
And finally, we continue to emphasize credit quality. Loan to value ratios on new commercial real estate loan originations for the fourth quarter averaged 56.8%. Nonperforming loans, excluding PCI loans, fell to $19.1 million, or 60 basis points of loans, a 19 basis point improvement from the prior quarter and 32 basis point improvement since the end of 2014. We experienced full year net recoveries of six basis points and recorded negative provisions in each quarter of 2015. Our allowance for loan losses now stands at 1.35% of loans at the end of the fourth quarter. Overall, our focus at Hanmi on disciplined underwriting continues to manifest itself in excellent credit quality for our loan portfolio.
With that, I’d like to turn the call over to Ron Santarosa, our Chief Financial Officer, to discuss the fourth quarter operating results in more detail. Ron?
Thank you C. G. and good afternoon everyone.
Fourth quarter net interest income increased 4 percent or $1.6 million to $37.6 million from $36.0 million for the third quarter. Our net interest margin, on a taxable equivalent basis and adjusted for the effects of acquisition accounting, also increased 14 basis points to 3.62 percent from 3.48 percent. The increase in our net interest revenues and margin reflects the expansion of our loan portfolio and the positive change in the mix of our earning assets. Quarter-over-quarter, average loans increased 5 percent to $3.0 billion and climbed to 80 percent of average interest-earning assets.
Compared with the 2014 fourth quarter, our net interest income changed little; however, net interest margin jumped 38 basis points, again measured in the same manner, further evidencing the change in the mix of our earning assets and a 12 percent increase in average loans.
For the 2015 year, net interest income increased 21 percent or $25.4 million to $148.1 million from $122.7 million for 2014 principally because of the 19 percent increase in average loans. Net interest margin, on a taxable equivalent basis and adjusted for the effects of acquisition accounting, however, declined to 3.47 percent from 3.65 percent because of securities sales and the change in the mix of securities.
Noninterest income for the fourth quarter was $12.1 million, down from $13.6 million for the third quarter principally on lower gains from dispositions on PCI loans and lower gains from securities sales.
Gains from the resolution or disposition of our acquired PCI loans were $2.1 million for the fourth quarter compared with $4.3 million for the third quarter. Outstanding PCI loans declined 20 percent since the end of the third quarter.
Fourth quarter gains from securities transactions were $467 thousand compared with $2.0 million for the third quarter.
Offsetting the declines in disposition gains and securities transactions, were the gains from the sale of the guaranteed portion of SBA loans. These gains increased to $3.9 million for the fourth quarter on $29.3 million of loan sales from $1.6 million of gains for the third quarter on $20.6 million of loan sales. Fourth quarter loan sales included $9.2 million of acquired SBA loans and the gains included $1.8 million of acquisition discounts.
The total of service charges, fees and other income were unchanged at $5.6 million for both the fourth and third quarters.
Compared with the 2014 fourth quarter, noninterest income increased 34 percent chiefly because of higher gains on SBA loan sales.
For the 2015 year, noninterest income increased 13 percent or $5.3 million to $47.6 million from $42.3 million for 2014 principally from higher gains on dispositions on PCI loans, securities transactions and SBA sales offset by the absence of the 2014 $14.6 million after-tax bargain purchase gain.
Gains from the resolution of our PCI loans were $10.2 million for 2015 compared with $1.4 million for 2014. Outstanding PCI loans declined 55 percent since the end of 2014 to end the year at $20.0 million. You may recall that for 2015, we also recorded loan loss provisions on PCI loans of $4.4 million, in effect reducing the PCI contribution to 2015 earnings.
Gains from securities transactions for 2015 were $6.6 million compared with $2.0 million for 2014. Again, as you may recall, at the time of the acquisition, we added $663 million of securities to our balance sheet driving our securities portfolio to more than $1 billion. We ended the 2015 year with a $698 million securities portfolio.
Gains from the sales of the guaranteed portion of SBA loans were $8.7 million for 2015, up $3.5 million from 2014. We sold $89.1 million of loans for 2015 compared with $42.4 million for 2014.
The total of service charges, fees and other income for 2015 was $22.1 million, up 6 percent from $20.8 million for 2014.
Turning to noninterest expenses, ex OREO and M&A, we had a 1 percent linked-quarter decline as the savings from the branch consolidations completed in the third quarter were offset by the change in our provision for off-balance sheet commitments and the change in the valuation allowances related to acquired SBA loan servicing. The fourth quarter provision for possible losses on off-balance sheet commitments was $430 thousand compared to a third quarter negative provision of $406 thousand. In addition, for the fourth quarter, we had $400 thousand of charges to SBA-related valuation allowances compared to third quarter credits of $500 thousand.
Looking to the 2014 quarter, again ex OREO and M&A, noninterest expenses fell 15 percent.
Because of the decline in noninterest expenses, coupled with the improvement in revenue, our efficiency ratio improved to 56.33 percent for the 2015 fourth quarter from 57.97 percent for the third quarter and 73.01percent for the 2014 fourth quarter.
Year-over-year noninterest expense increased because of the August 2014 acquisition and we continued to make investments throughout 2015 that we expect will enable the Hanmi franchise to scale in 2016 and beyond.
As C. G. mentioned, our asset quality continued to show improvement period over period and, for the 2015 fourth quarter, we had a negative provision for loan losses of $3.8 million compared with a negative provision of $3.7 million for the third quarter. For the 2014 fourth quarter, we had a positive provision of $1.2 million. For the 2015 year, our negative provision was $11.6 million compared with a negative provision of $6.3 million for 2014.
Last, our tangible book value reached $15.39 per share, increasing 2 percent since the end of the third quarter and 9 percent since the end of 2014. Our tangible common equity ratio remains strong at 11.63 percent, as do all of our regulatory ratios.
Now, I will turn the call back to C. G.
C. G. Kum
Thank you, Ron.
We entered 2015 with several key objectives. First, complete the system conversion as scheduled for February of 2015. Second, reposition the Hanmi balance sheet by converting liquid assets acquired from CBI to higher yielding loans. Third, generate year over year net loan growth in the low double digits. Fourth, lower the efficiency ratio to mid-50s by year end. I am very pleased to report that we have met or exceeded each and every one of the above mentioned objectives. Overall, I am very pleased with our performance in 2015 and I believe Hanmi is well-positioned to continue generating profitable growth and capitalizing on market dislocation in the quarters and years ahead. I look forward to sharing our progress with you again next quarter.
Kris, let’s open the call for questions.
[Operator Instructions]. Our first question comes from the line of Julianna Balicka of KBW. Please proceed with your question.
C. G. Kum
If I could ask, in terms of SBA loan sales, could you comment about where the trends in SBA loan premiums are heading into 2016? And what you in 4Q about this earlier in the year?
C. G. Kum
With the tail-end of the year, we realized in the neighborhood of about 10.7% premium income from the sale of our 7As. Beginning of the year was a little bit higher but not that much higher. But my staff in the SBA area has been advising me that the premium income has been gradually going downward to where, I think it's around 9% at this point as we speak. That's based on the different interest rate environment and what has become a very competitive arena as far as 7(a) cultivation is concerned. So my suspicion is that 9% to holdup in 2016. I think that number will continue to go downward.
Okay. That makes sense. And what is your outlook for the volume of loans that you expect to sell and/our originate in SBA?
C. G. Kum
As it relates to 7(a), as I mentioned in the past, our range is around $120 million to $160 million and where we fall within that range is dependent upon the environment as it relates how it translates into asset quality and opportunities. And so we are still going to play within that range of $120 million to $160 million and as I mentioned also before, our goal is to use SBA or to have SBA side generate what I call a proportional level of income contributions, but not overwriting level of contribution to our over income base. So that way, we keep a proper perspective on SBA so that from an asset quality standpoint, we don't have to make compromises and know where we would make compromises as far as that's concerned.
Okay. That makes sense. And then in regards to our loan originations and purchases could you tell us what your thoughts are about continuing to purchase loans? What kind of those were? And thoughts about the levels we should expect in 2016?
C. G. Kum
Well, first of all, we have been acquiring single-family residential mortgages and that's been in the range of about $30 million to $40 million a quarter. And it's likely that we will continue with that trend for portfolio diversification purposes as well as getting a little bit better yield by looking at these nonqualified jumbos, if you will. In the fourth quarter, we made a purchase of a $50 million commercial real estate portfolio, the main reason being that we were made aware by two of our very good customers that two large loans are going to get paid off, two different customers that is and then they were paid off. They give us enough advance notice to where we could prepare for their pay off and both loans were paid off by not by another bank, but one by insurance company, another one was through a bond financing. And so we came across an opportunity to acquire a $50 million portfolio with net average coupon of a little over 4% and average loan-to-value of 56% and DCR of 2.24%. So it met our credit criteria and so we jumped on that one. But I would say generally speaking, unless something, another opportunity like that surfaces, we will probably stay with just the single-family residential portfolio acquisition in the $30 million to $40 million range per quarter.
And could you refresh our memory, what is the yield on these residential mortgages that you are purchasing?
C. G. Kum
It's yielding about 3.93% at this point, net to us.
Okay. Very good. And then if I may, on the securities portfolio, you have managed down some of your excess liquidity year-over-year and where are your target levels for where you like tour securities and cash to be in 2016, as in thoughts about additional excess liquidity management into 2016?
C. G. Kum
Well, I think we like to keep that number maybe just a shade below 20% of the total assets and where we settle is going to depend on what opportunities there might be for acquisitions or dispositions of securities that we may have on our books. But our target number is somewhere between 15% to 20% of the total assets.
Okay. Very good. And last question and I will step back. On that expenses, are there expenses this quarter related to the evaluation on the SBA servicing assets and the unplanned commitments? A, how should we think about those two line items going forward? And two, in terms of efficiency, is there further gains to be had from our branch consolidation initiative that have not fully rolled into 4Q?
C. G. Kum
To answer your question a slightly different way, I think it's reasonable to expect a run rate on our noninterest expenses in the range of about $2.6 million, $2.7 million range per quarter. Sorry $27 million. My CFO is just giving me this look like, you missed the decimal point there, fella. And so I would say, the $26.5 million to $27 million is about the right range. As far as the additional branch consolidation, to answer it, once again, in a slightly different way, I think all of us in our organization believe that the low rate environment is going to unfortunately persist in 2016. Therefore we are going to have to look closer and closer at our expense level. And as part of that, we are going to look closer at our branch network involving some of the legacy branches that we have and perhaps some other ways by which to lower our noninterest expenses. And so long-winded way of saying, as good management team, we are very focused on the market and how it's going to impact our bottom line. And as a result, we will probably look much closer at the level of branches that we have, whether legacy or the acquired branches from UCB to ensure that we have the most efficient delivery system for our customers.
Very good. Thank you very much.
Our next question comes from the line of Bob Ramsey of FBR Capital Markets. Mr. Ramsey, please proceed with your question.
Hi. Good afternoon. It sounds like the balance sheet position, you largely got it in the placer where you wanted to be. I know that's been a bit of a tailwind for your net interest margin through 2015, particularly at the year-end. Just kind of curious, how you are thinking about the margin trajectory from where we sit today? If there is any lift from the modest uptick rates we saw at the end of the fourth quarter and otherwise what the trend looks like?
C. G. Kum
Yes. We didn't get, obviously a noticeable lift as a result of the rate increase just recently. Where we think that there are some additional benefits to us as it relates to net interest margin is from the UCB portfolio that we picked up from the CBI. In the first quarter, we have $64 million of CDs with average rate of 1.84% that are maturing. And so as we deal with those kinds of opportunities, we think that we should be able to maintain at least for maybe another couple of quarters the net interest margin that we currently have. So we still have some additional potential opportunities for cost saves or the deposit saves from the CD portfolio that we picked up from CBI.
And where would it be reasonable to expect this CDs to reprice to from 1.8%? How much of a savings can you expect?
C. G. Kum
Well, I don't think you can make this direct connection, but as an example, the rate at which we are issuing one-year CDs from our legacy branches is about 73 basis points. But we also have continued opportunities to generate DDAs. As mentioned previously, our healthcare lending group has been phenomenal in terms of bringing in DDAs and under Bonnie's leadership, our entire branch network is very focused on retail DDA cultivation. So it could be that the cost of funds, cost of deposit to place that $64 million could be equal or more than likely less than that because of our organizational emphasis on DDA cultivation.
Great. I know you have touched on the resi mortgage loans that you guys buy with 3.93% yield. Just wondered if you could remind me what the structure of those loans is? Is that 30-year fixed or 15-year fixed or what type of asset duration they are?
C. G. Kum
Yes. These are five to seven year fixed. So not too differ from our commercial real estate portfolio. Average size is about $370 million, loan-to-value under 60%, debt-to-income about 36% and these are properties all located within our footprint in Southern California.
Perfect. Got it. And on the SBA, I know you guys gave good color around the expectations of that business in 2016. Just remind me, is there any seasonality quarter-to-quarter? Or how should we think about the first quarter and not the year, but just headed in the next quarter?
C. G. Kum
I am not sure if this applies just to SBA, but what I am finding, not just in Korean-American, but in mainstream, first quarter tends to be a slower quarter and then it starts to ramp up with the second half of the year being much more active. So I suspect that that trend will probably apply to the SBA program here at Hanmi.
Okay. In the terms of credit costs, obviously you are able release a fair amount of reserve in 2015. Is it fair to expect in 2016 that that will swing back to an actual expense?
C. G. Kum
I don't think so. I think we, given the trend that we have as far as continued improvement in asset quality, I think that maybe some more opportunities for reserve release. We, in fact have revised are ALLL methodology to extend what we call the look back period to four years, really five years from four years, to try to enable us to kind of slow the tide of the pickup of the reserve, but the continued improvement in our asset quality, if that trend continues, I think will allow for another negative provision and maybe even a very modest provision expense in the second half of the year. So in other words, there are positive opportunities emanating from where we stand with our ALLL right now.
Okay. Is there a floor on how you will take the allowance loans?
C. G. Kum
Well, it's difficult for me to say in terms of creating an artificial floor because we, as an industry, are required to assess ALLL on a quarterly basis, looking at all different quantitative and qualitative factors. But I would say, for a normalized economic environment with the kind of portfolio that we have, it's probably likely to be in the 1.10% to 1.20%-ish kind of a range.
Okay. That's helpful. Last question and I will hop out. What is a good rate to use for tax in 2016?
C. G. Kum
Perfect. Thank you.
[Operator Instructions]. Our next question comes from the line of Matthew Clark of Piper Jaffray. Mr. Clark, please proceed with your question.
Just a question on prepayment fees, whether or not there was any prepayment fee income in your margin this quarter? If so, how much this quarter and also in the third?
C. G. Kum
Well, we do have prepayment penalties. But I don't have that. Ron, do you have that number at this point?
No, not at top of mind. I don't think that contributed in a large way to wither quarter.
C. G. Kum
Yes. The other two large loans that paid off were at the end of the term, if you will. So we didn't pick up anything significant as far as prepayment penalties are concerned.
C. G. Kum
But it did not make a material impact or contribution towards that expansion of our net interest margin for the quarter.
Understood. Okay. And then just last one for me, because everyone else has been asked. PCI gains, how much do you think you have left there in the next quarter or two?
C. G. Kum
When we started down this road with CBI, our assessment was it's about a three-year life as far as these types of benefits are concerned. And so we are kind of in the second-year right now. So I would say that, first of all, the PCI gains tend to be lumpy. It's not a straight line kind of a situation. And so I would say, through this year I think there should be some reasonable level of PCI gains. But once again, it's going to be lumpy. It's not something we can prognosticate on a straight-line basis.
Okay. Thank you.
Our next question comes from the line of Gary Tenner of D.A. Davidson. Mr. Tenner, please proceed with your question.
I just had a quick question on the healthcare business you referenced. The healthcare team is being a good driver of deposit gathering at this point. Can you talk about the fittings you have got there on the deposit side and how the landscape lays out for asset generation?
C. G. Kum
They ended the year at $28 million of total deposits, of which about a little over $23 million was DDAs and the balance would been the money markets. On the asset side, they had average loan balance of about $25 million for the fourth quarter. In this kind of business, it's sometimes easier to pick up DDAs or the deposit first and then the assets because of the renewals, the maturities of the lines and things like that. But they are off to a very good start.
And just to add, on the health group, although their loan balance was averaged about $25 million, actually their production was about, buy commitment, over $44 million for the quarter.
We have a follow-up question from the line of Bob Ramsey of FBR Capital Markets. Mr. Ramsey, please proceed with that question.
Hi. Thanks for taking the follow-up. Just curious if you all had any thoughts on the interagency guidance put out around commercial real estate lending?
C. G. Kum
Yes. We actually are ahead of the regulators in terms of the way we analyze the CRE portfolio. So I guess we have been expecting that the regulators are going to require banks like ours to be more focused and the way we understand the risks associated with our CRE portfolio. Our CRE concentration number is well under 300%, by the way. So I would say that if we are able to continue to manage the risks, concentration of risks properly, I think that will give us a competitive edge in that those other institutions who are over 300% are going to be hamstrung as far as being active in the CRE arena. Whereas at this point because we don't have any regulatory issues along those lines or any other front by the way that unless we go crazy one day and do $100 million, $200 million of CRE's which we are not, we are very well situated to continue to mine opportunities and to grow that portfolio cautiously. But the kind of credit administration that we have been doing in advance of this regulatory guidelines is being received very well by the regulators.
Great. Thank you.
We have no further questions in queue at this time. Please continue.
Thank you for listening to Hanmi Financial's fourth quarter and full year conference call. We look forward to speaking to you 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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