Hanmi Financial Corp (HAFC) 2015 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Hanmi Financial Corporation's fourth-quarter and year-end 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 open 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, Tim, 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 provision 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-Q. 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.

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 nonrecurring items, primarily related to the 2014 acquisition of Central Bancorp Inc.

Year-long 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 initiative in Texas and Illinois.

As a result of the strong loan production, loans receivable were up 14.2% for the year. I'm pleased to report that we have been able to achieve this growth while maintaining our conservative underwriting standard and improving asset quality.

In addition, we've had a 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 continue 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 $0.46 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 benefited 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'm 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-50s.

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 the 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'm 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 total 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 benefiting from a low cost deposit base. During the fourth quarter, non-interest-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 non-interest-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 ratio 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 6 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% or $1.6 million to $37.6 million from $36 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% from 3.48%. 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% to $3 billion and climbed to 80% 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% increase in average loans.

For the 2015 year, net interest income increased 21% or $25 million to $148.1 million from $122.7 million for 2014, principally because of the 19% increase in average loans. Net interest margin on a taxable equivalent basis, and again adjusted for the effects of acquisition accounting, however declined to 3.47%, from 3.65% because of security sales and the change in the mix of securities.

Looking to noninterest income for the fourth quarter, we recorded $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 security 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% since the end of the third quarter.

Fourth quarter gains from securities transactions were $467,000 compared with $2 million for the third quarter.

Offsetting the declines in disposition gains and security transactions were the gains from the sales of the guaranteed portion of SBA loans. These gains increased to $3.9 million for the fourth quarter on $29 million of loan sales from $1.6 million of gains in the third quarter and $21 million of loan sales.

Fourth-quarter loan sales included $9.2 million of acquired SBA loans, and our gains included the effects of $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%, chiefly because of higher gains on SBA loan sales.

For the 2015 year, noninterest income increased 13% or $5.3 million to $47.6 million from $42.3 million for 2014, again principally from higher gains on dispositions of PCI loans, security transactions and SBA sales, offset by the absence of the 2014 after-tax bargain purchase gain of $14.6 million.

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% since the end of 2014 to end-of-the-year at $20 million. For 2015, we also recorded loan loss provisions on PCI loans of $4.4 million, in effect reducing the PCI loan contribution to our 2015 earnings.

Gains from security transactions for 2015 were $6.6 million compared with $2 million for 2014. 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.

Gain from the sales of SBA loans were $8.7 million for 2015, up from $3.5 million for 2014. For 2015, we sold $89 million of loans compared with $42 million of loans for 2014.

The total of service charges, fees, and other income for 2015 was $22.1 million, up 6% from the $20.8 million for 2014.

Turning to noninterest expenses, ex-OREO and M&A, we had a 1% 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 our acquired SBA loan servicing. The fourth-quarter provision for possible losses on off-balance-sheet commitments was $430,000 compared to a third-quarter negative provision of $406,000. In addition, for the fourth quarter, we had $400,000 of charges related to SBA-related valuation allowances compared to third-quarter credits of $500,000.

Looking to the 2014 quarter, again ex-OREO and M&A, noninterest expenses fell 15%. And because of the decline in noninterest expenses, coupled with the improvement in our revenues, our efficiency ratio improved to 56.33% for the 2015 fourth-quarter from 57.97% for the third-quarter and 73.01% for the 2014 fourth-quarter.

Year-over-year, noninterest expense increased because of the 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. And 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% since the end of the third quarter and 9% since the end of the 2014 year. Our tangible common equity remained strong at 11.63%, as do all of our regulatory ratios.

Now I will turn the call back to C. G.

Thank you, Ron.

We entered 2015 with several key objectives. First, complete the system conversions 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'm very pleased to report that we have met or exceeded each and every one of the above-mentioned objectives. Overall, I'm 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. Thank you.

Tim, let's open the call for questions.

(Operator Instructions) Julianna Balicka, KBW.

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 saw in 4Q relative to earlier in the year?

At the tail end of the year, we realized in the neighborhood of about 10.7% premium income from the sale of our 7A's. Beginning of the year, it 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 7A co-division is concerned. So my suspicion is that nine may be difficult to hold up 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/or originate in SBA?

As it relates to 7A, as I've 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 to 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 generate what I call a proportional level of income contribution, but not overwriting level of contribution relative to our overall 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 nor would we make compromises as far as that's concerned.

Okay, that makes sense. And then in regards to loan originations and purchases, could you tell us kind of what your thoughts are about continuing to purchase loans? What kind of loans those were? And thoughts about the levels we should expect in 2016.

Well, the -- 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 second quarter -- 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 gave us enough advanced notice to where we could prepare for their payoff.

And both loans were paid off by -- not by another bank, but one by an 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'll probably stay with just a single-family residential portfolio acquisition and a $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?

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've managed down some of your excess liquidity year-over-year. And what are your target levels for where you'd like your securities and cash to be in 2016, as in thoughts about additional excess liquidity management into 2016?

Well, I think we'd 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. So -- but our target number is somewhere between 15% to 20% of the total assets.

Okay, very good. And last question and I'll step back. On the expenses, excluding the other expenses this quarter related to the evaluation on the SBA servicing assets and the unfunded commitments, A, how should we think about those two line items going forward? And, two, in terms of efficiency, is there any further gains to be had from your branch consolidation initiatives that have not fully rolled into 4Q?

To answer your question in a slightly different way, I think it's reasonable to expect a run rate on our expenses in the range -- noninterest expenses in the range of about $2.6 million, $2.7 million range per quarter -- I'm sorry, $27 million. (laughter) My CFO is giving me just look like you missed a decimal point there, fella. (laughter). And so I'd say the $26.5 million to $27 million is about the right range.

The -- as far as the additional branch consolidation, or to answer it, once again, in a slightly different way, I think all of us in our organization believe that the lower rate environment is going to unfortunately persist in 2016. Therefore, we're 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 a 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.

Bob Ramsey, FBR Capital Markets.

It sounds like the balance sheet positioning, you've largely got it in the place where you want it to be. I know that's been a bit of a tailwind for your net interest margin through 2015, particularly there at year-end. Just kind of curious how you're thinking about the margin trajectory from where we sit today, if there is any lift from the modest uptick in the rates we saw at the end of the fourth quarter? And otherwise what the trend looks like.

Yes, we didn't get, I would say, noticeable lift as a result of the rate increase just recently. We're -- we think that there are some additional benefits to us as it relates to net interest margin is, from the CD portfolio that we picked up from CBI. In the first quarter, we have $64 million of CDs with the 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 deposit saves from the CD portfolio that we picked up from CDI -- CBI.

And where would it be reasonable to expect those CDs to re-price to, from 1.84 to how much of a savings can you expect?

Well, I mean, I don't think you can make this direct connection, but as an example, our -- the rate at which we are issuing the one-year CDs from our legacy branches is about 73 basis points. But we also have opportunities to -- continued opportunities to generate DDA.

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 caused the deposit to replace 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 touched on the residential mortgage loans that you guys buy with a 3.93 yield. I'm just wondering if you could remind me what the structure of those loans is, if that's 30-year fixed or 15-year fixed or what type of asset duration they are?

Yes, these are five to seven-year fixed, so not too different from our commercial real estate portfolio. Average size is about $370 thousand; 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 for that business in 2016. Just remind me, is there any seasonality quarter to quarter? Or how should we think about the first quarter, not the whole year, but just sort of headed into next quarter?

Well, I'm not so sure this applies just to SBA, but what I'm finding -- well, I mean, not just in Korean-American but in mainstream, first-quarter tend 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 terms of credit cost, obviously, you all were able to release a fair amount of reserves in 2015. Is it fair to expect that, in 2016, that that will swing back to a -- an actual expense?

I don't think so. I think we -- given the trend that we have, as far as continued improvement in asset quality, I think there may be some more opportunities for reserve release. We've, in fact, have revised our ALLL methodology to extend what we call the look-back period to four years -- excuse me, five years from four years, to try to enable us to kind of slow the tide of the pickup from 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 some positive opportunities emanating from where we stand with our ALLL right now.

Okay. Is there a floor on how low you would take the allowance of loans?

Well, it's difficult for me to say in terms of creating an artificial floor. Because we, as an industry, are required to assess our ALLL on a quarterly basis, looking at all different quantitative and qualitative factors. But I would say on a -- for a normalized economic environment with the kind of portfolio that we have, it's probably likely to be in the 110 to 120-ish kind of a range.

Okay. That's helpful. Last question and I'll hop out is, what is a good rate to use for tax in 2016?

41%.

Perfect, thank you.

(Operator Instructions) Matthew Clark, Piper Jaffray.

Just a question on prepayment fees, whether or not there is any prepayment fee income in your margin this quarter. If so, how much this quarter and also in the third?

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, Matt, it contributed in a large way to either quarter.

Yes, the two large loans that paid off were at the end of the term, if you will. So we didn't pick up anything of significance as far as prepayment penalties are concerned.

Okay, great and --

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 from me, because everything else has been asked. PCI gains -- how much do you think you have left there in the next quarter or two?

Well, 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 situation.

And so I'd say, through this year, that I think there should be some reasonable level of PCI gains. But once again, it's going to be lumpy. I mean, it's not something where you can prognosticate on a straight-line basis.

Okay. Thank you.

Gary Tenner, D.A. Davidson.

I just had a quick question on the healthcare business. You referenced the healthcare team as being a good driver of deposit gathering at this point. Can you talk about sort of the footings you've got there on the deposit side and how the landscape lays out for asset generation?

The -- they ended the year at $28 million of total deposits, of which about a little over $23 million was DDAs, and the balance being the money markets. On the asset side, they had average loan balance of about $25 million for the fourth quarter.

The -- in this kind of business, it's sometimes easier to pick up DDAs or the deposits first and then the assets thereafter because of the renewals, the maturities of the lines and things like that. But they are off to a very good start.

Just to add on the health group, although their loan balance was around average about $25 million, actually their production was about, by commitment, over $44 million for the year.

Thank you.

We have a follow-up question from the line of Bob Ramsey of FBR Capital Markets. Mr. Ramsey, please proceed with that question.

Hey, thanks for taking the follow-up. Just curious if you all had any thoughts on the inter-agency guidance sort of put out around commercial real estate lending?

Yes. You know, we actually were ahead of the regulators in terms of the way we analyzed the CRE portfolio. So, I guess we've been expecting that the regulators are going to require banks like ours to be more focused on the way we understand the risks associated with our CRE portfolio. Our CRE concentration number is well under 300%, by the way.

But the -- so I would say that if we are able to continue to manage the risks -- concentration 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 work that we've been doing in advance of this regulatory guideline is -- it's being received very well by the regulators.

Great. Thank you.

We have no further questions in the 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.