Hanmi Financial Corp (HAFC) 2016 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Hanmi Financial Corporation's fourth-quarter and full-year 2016 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 Mr. Richard Pimentel, Senior Vice President and Corporate Finance Officer. Thank you. You may begin.

Thank you, Matt, and thank you all for joining us today. With me to discuss Hanmi Financial's fourth-quarter and full-year 2016 earnings are C. G. Kum, our President and Chief Executive Officer; Bonnie Lee, Chief Operating Officer; and 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 more 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-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 of 2016, which can be found on our website at hanmi.com.

I will now turn the call over to Mr. Kum.

Thank you, Richard. Good afternoon, everyone. Thank you for joining us today to discuss our 2016 fourth-quarter and full-year results. We have concluded 2016 with solid fourth-quarter results driven by strong growth across the Hanmi franchise, along with the early contributions from a strategic acquisition that we completed during the quarter. Let me take a moment to summarize the highlights from this past quarter and year.

Net income was higher compared to the prior quarter due to a combination of strong loan growth and significantly lower expenses. Fourth-quarter net interest income increased 6%, and net interest margin expanded 10 basis points from the prior quarter, reflecting the acquisition and commencement of our new Commercial Equipment Leasing division. Loans receivable increased 8% in the quarter and nearly 21% during the year as a result of solid loan production, coupled with the acquired equipment leasing portfolio. I am pleased to report that we have been able to achieve this growth while maintaining our conservative underwriting standards and excellent asset quality. Deposit activities remained strong. Despite the normal seasonal slowdown in fourth-quarter deposit gathering, we achieved a 1% increase in total deposits for the quarter and 9% growth for the full year. In addition, our ongoing commitment to enhancing efficiencies across the franchise was reflected in a significant improvement in our efficiency ratio. And, importantly, along with our strong operational execution in the quarter, the acquisition and commencement of our new Commercial Equipment Leasing division was an important strategic accomplishment that is immediately accretive to earnings and helps diversify our loan portfolio.

Looking in more detail at our fourth-quarter results, we reported net income of $14.4 million or $0.45 per diluted share. On a linked quarter basis, net income increased by nearly 10% or $0.04 per diluted share, compared with the third quarter of 2016. On a year-over-year basis, net income decreased slightly compared with the fourth quarter last year, which benefited from slightly higher negative provision for loan loss, along with higher gain on sale of PCI and SBA loans.

For the full year in 2016, net income increased 5% compared to last year. I am also pleased to report that we have made significant progress in our effort to replace the benefits in recent prior periods from security sales, elevated PCI gains and negative loan-loss provisions with core sustainable earnings from loan growth and meaningful expense reductions. To this end, due primarily to the growth in loans, net interest income before provision for loan losses of $160 million increased more than 8% for the full year.

In addition, full-year 2016 noninterest expense of $108 million was more than 6% lower than the prior year.

And, importantly, as a result of the improvements from the growth in earning assets, coupled with lower expenses, the efficiency ratio improved to 51.77% in the fourth quarter from 58.72% in the prior quarter and 56.78% from the fourth quarter last year. For the full year in 2016, our efficiency ratio improved to 56.00% from 58.93% in 2015.

Looking at loans receivable, our total portfolio grew approximately 8% quarter over quarter and nearly 21% for the full year, driven by organic new loan production of $227 million in the fourth quarter and $869 million over the past 12 months.

I would also like to note that, as we exited 2016, our loan pipeline remained healthy.

In the fourth quarter, purchased loans included $26 million of single-family residential loans.

In addition, the fourth quarter also included $228 million of equipment leases that we assumed as part of the acquisition of the Commercial Equipment Leasing division. This acquisition is a valuable addition to Hanmi and provides several key strategic benefits.

The portfolio of leases we acquired has an average yield of approximately 6%, a track record of excellent asset quality, and was immediately accretive to net income. This business also complements our strategic focus on business banking to diversify the Hanmi loan portfolio. And, finally, this established Hanmi as a leading provider of small ticket leasing projects to businesses nationwide and provides a platform from which we can scale the business in an efficient and profitable manner.

Turning to organic loan production in the fourth quarter, production consisted primarily of $144 million of commercial real estate loans, $38 million of SBA loans, and $14 million of C&I loans. We also originated $30 million of commercial leases for the two months in the quarter that we operated our Commercial Equipment Leasing division.

In addition, total commercial line of credit -- excuse me. Commercial lines of credit commitments increased to $392 million in the fourth quarter, up 10% on a year-over-year basis.

At the end of the fourth quarter, loans represented 82% of total assets and 101% of deposits. This compares favorably to loans at 75% of total assets and 91% of deposits a year ago. The strong loan growth, including the higher yielding Commercial Equipment Leasing division portfolio, helped drive our fourth-quarter net interest margin to an impressive 3.96%, up 10 basis points from the prior quarter.

I also continue to be very pleased with our deposit franchise and, in particular, the strength of our retail branch network. Despite the normal seasonal slowdown in fourth-quarter deposit activity, higher money market and savings balances helped increase total deposits by 1% in the quarter and 9% for the full year. Overall, total deposits increased to $3.81 billion, and non-maturity deposits as of December 31, 2016, totaled 69% of the total deposits as compared to 60% as of December 31, 2015.

As we evaluate adding new verticals like the Commercial Equipment Leasing division this past quarter, I am reassured by our ability to fund these investments with lower cost core deposits.

And, finally, we remain keenly focused on credit quality, and we are committed to maintaining our disciplined underwriting standards for our loan portfolio. Although we recorded charge-offs of $7.3 million in the quarter, $5 million was related to a PCI loan that we had reserved for in prior periods.

Nonperforming loans, excluding PCI loans, stand at only $11.4 million or 30 basis points of loans, which reflects a 30 basis point improvement from a year ago. Our allowance for loan losses stands at 84 basis points of loans at the end of the fourth quarter. Excluding loans acquired in 2014 and 2016, our allowance for loan losses to loans was approximately 90 basis points.

In terms of underwriting, the weighted average loan-to-value and debt coverage ratios on new commercial real estate loan originations for the fourth quarter were quite strong at 55.5% and 1.88 times, respectively.

With that, I would like to turn the call over to Ron Santarosa, our Chief Financial Officer, to discuss the fourth-quarter and full-year operating results in more detail. Ron?

Thank you, C. G., and good afternoon, all.

Fourth-quarter net interest income increased 6% or $2.5 million to $42.1 million from $39.6 million in the third quarter. Our net interest margin, on a taxable equivalent basis, also increased 10 basis points to 3.96% from 3.86%. The increase in our net interest revenues and margin reflects the growth of our loan portfolio and the positive impact of the acquisition and commencement of the new leasing division. Quarter over quarter, average loans increased 6% to $3.7 billion, and the average yield on interest-earning assets increased 13 basis points, while the cost of interest-bearing liabilities rose only 5 basis points.

Compared with the 2015 fourth quarter, net interest income was up 12% from $37.6 million, and net interest margin increased 3 basis points from 3.93%. These year-over-year increases further illustrate solid loan growth and the improvement in the mix of interest-earning assets. Average loans increased 21% year over year with loans at 86% of average interest-earning assets compared with 80% for the year ago period.

For the 2016 year, net interest income increased 8% or $12.1 million to $160.2 million from $148.1 million for 2015, principally because of the 18% increase in average loans. Net interest margin on a taxable equivalent basis and adjusted for the effects of acquisition accounting, increased to 3.79% from 3.47%, driven by an 8% growth in average interest-earning assets.

Turning to noninterest income, we reported a sequential decrease of 7%, primarily due to the $1 million third-quarter gain from the sale of a branch facility, offset, in part, by an increase in disposition gains on PCI loans. On a year-over-year basis, noninterest income decreased 31%, primarily because of the decrease in gains on securities sales, SBA loan sales, and disposition gains on PCI loans. For 2015, gains on sales of securities were $6.6 million, and they were nil for 2016.

Gains on the sales of the guaranteed portion of SBA loans for the fourth quarter were $1.8 million on $27.8 million of loans, compared with the third quarter where gains were $1.6 million on $24.1 million of loans. Year over year, gains on sales of SBA loans were down $2.7 million.

Disposition gains on PCI loans were $1.6 million for the fourth quarter of 2016 compared with $800,000 for the prior quarter and $2.1 million for the fourth quarter last year. Year over year, disposition gains fell to $5 million from $10.2 million.

PCI loans were down 51% from a year ago and ended the year at $9.9 million.

Noninterest expense for the fourth quarter decreased $2.4 million or 8% to $26 million from the preceding quarter, chiefly from the $1.4 million third-quarter charge that was related to the finalization of prior year FDIC loss share claims. The decline in noninterest expense combined with higher revenue led to an improvement in the efficiency ratio to 51.77% from 58.72% in the prior quarter and 56.78% a year ago.

For the 2016 year, noninterest expense fell 6% to $108.2 million from $115.3 million for the same period, primarily due to reductions in merger and integration costs, professional fees and data processing fees, along with lower salaries and employee benefits related to the branch closures and consolidations completed in the 2015 third quarter. The efficiency ratio improved to 56.00% for the year from 58.93% for the 2015 year.

As C. G. mentioned, our asset quality continued to improve with nonperforming assets at $18.9 million at the end of the fourth quarter or 40 basis points of assets compared with 50 basis points of assets at the end of the third quarter and 65 basis points of assets at the end of the same quarter last year. For the fourth quarter, we've recognized a provision for loan losses of $151,000, an increase from a negative provision for loan losses of $1.5 million for the prior quarter. We recorded a negative loan-loss provision of $4.3 million for the full year of 2016, which included a $664,000 provision for losses on PCI loans, compared with a negative loan-loss provision of $11.6 million for the full year of 2015, which included a $4.4 million provision for losses on PCI loans.

The effective tax rate for the fourth quarter was 40%, in line with the third quarter at 39%. The effective tax rate for -the 2016 year was 36.8%, down from 41.5% for 2015, principally because of tax-exempt interest on municipal securities and a tax benefit arising from the finalization of our 2014 amended tax returns earlier this year.

Lastly, our tangible book value was $16.03 per share, down 2.4% from the third quarter and up 4.1% from the end of the year ago fourth-quarter. Our tangible common equity ratio remains strong at 11.05% as do all of our regulatory ratios.

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

Thank you, Ron. The fourth quarter was the culmination of an excellent year, driven by strong loan and deposit growth, sustainable expansion in core earnings, significant expense reduction, and continued credit quality. Overall, I was very pleased with our performance throughout 2016, and I believe Hanmi is well-positioned to continue generating profitable growth in 2017 and beyond. I look forward to sharing our continued progress when we speak with you again next quarter.

Thank you. Richard?

Matt, let's open the call for questions.

(Operator Instructions) Chris McGratty, KBW.

Could you maybe start with loan growth? Now that you have got the acquisition closed, can you maybe provide an update on growth expectations for 2017 and maybe parse it between portfolios where the growth is likely to come from?

Historically, since I have been here, we have been able to generate organic growth in the low double-digits to mid double digits, and I believe that that is sustainable or achievable in 2017. That does include some level of acquisition of the single-family mortgages, as we had done over the last several years, but I expect that to be a relatively small portion.

So just dialing out the acquisition and strictly focusing on the organically generated loans, I think it is eminently achievable for us to be in the low double -- excuse me, low double digits to mid double digits in 2017.

Okay. Great. Maybe if we just move to credit quality and provisioning. Obviously, 2016 was another strong year. But with the reserve where it stands and the new portfolio being added in the quarter, can you help us with provisioning expectations in light of what seems to be a pretty good growth outlook?

Yes. The -- it is likely that in 2017 we will start to provision. There is a question as to whether or not we are going to be required to provision in the first quarter or not. It depends on the asset quality, it depends on the level of new loan production that we are generating.

Having said that, though, I think it is likely that, for the year as a whole, we may provision at the level of somewhere around, maybe, 50 to 100 basis points, depending on various factors.

That's helpful. Thanks a lot. Maybe one for you, Ron, and then I will step back. I believe you said the PCI portfolio is down to about $10 million. What is the expectation or what is left in terms of potential recovery that will run through the noninterest income line and, also, maybe, for the pipeline of net recoveries, just in the general portfolio? Thanks.

I think, with the PCI loans being about half of where they were a year ago, I would expect some but very small. It will be sporadic, not a large contributor in 2017. So I think most of the purchased accounting effects that we obtained or most of the benefits we obtained from the acquisition of the distressed organization back in 2014 have been recognized. We will be surprised from time to time, but I don't think they will be a large part of our story going forward.

Okay. Great.

Bob Ramsey, FBR.

Was wondering if you could just clarify, would any set provision be 50 to 100 basis points? Is that of net loan growth or just what is that of?

Yes, the growth. The net loan growth. Excuse me.

Okay. Perfect. Got it. And then, the expense level looks really good this quarter, especially figuring you did have a partial quarter impact on the equipment finance guys. Just wondering if you could talk about how we should think about expenses headed into 2017.

That's a good question because we have had some fluctuations in the expense level, translating into the expense ratio -- excuse me, the efficiency ratio fluctuating as a result. Our goal has been to keep the efficiency ratio around the mid-50s% and we get lucky maybe in the low 50s%. So we have some growth aspirations in 2017 that is organic. And, shortly, we will be making an announcement in terms of additional, I would say, producers who are going to be joining us, along with, perhaps, another office that we may be opening. So that will contribute to, perhaps, a short-term increase in the expenses, but over a 12-month period, we hope that it's going to settle down to a low to mid 50% kind of efficiency ratio.

Okay. Fair enough. Is that -- what you are alluding to, is that hiring individuals and putting them in a new office, or is it more of an acquisition of a business?

At this point, it is hiring of individuals. We are evaluating acquisition of another business line, but there is no assurance that that is going to happen. And so, at this point, it is going to be a couple of producers who are primarily in the C&I space.

Got it. Very good. And then, you mentioned, also, evaluating another possible acquisition. Maybe just share your thoughts a little bit on capital here and the avenues you may have to deploy it, what the acquisition pipeline looks like, what opportunities might be out there, et cetera.

Well, we have plenty of callers who are looking at Hanmi as a potential partner. And, in that regard, we have a couple of different categories, one of which is in the traditional Korean-American banking space. Other is in the -- other Asian space, which include the Chinese-American and the South Asians. And, thirdly, there are some specialty finance entities that, after finding out about our partnering with the Equipment Leasing division folks, they have approached us about partnering with us. And so we have quite a few options that we are sorting through as we speak to pick the best path possible. That is going to consume some of the capital, as you may gather. And, I guess, to answer your potential next question in terms of our optimum capital common equity Tier 1 capital ratio, we think that we are going to be heading towards more of a 9.0% to 9.5% kind of a number.

Okay. That's helpful. Thank you very much.

Matthew Clark, Piper Jaffray.

On the core margin outlook, just curious, with the remixing that you guys have been doing in getting that contribution of loans to earning assets up, just curious how much more of that might be left, whether or not we also might see some additional benefit in the securities portfolio from higher reinvestment rates in the upcoming quarter. And, lastly, just the full quarter impact of the CSF deal, whether or not that might also help the margin. I guess, just net net, curious if that core margin could creep a little bit higher here in the first quarter before maybe moderating.

I am going to tag team with Ron in terms of answering this question, but the part that I will take on is that I do believe that the Equipment Leasing division is going to continue to contribute in a significant way towards enhancing our margin in the forward periods.

Having said that, though, like all banks, what is dragging our -- dragging down our net interest margin is the higher cost of funds, where I think the entire industry has, in a rising rate environment, is experiencing that. I think we are to a lesser extent, but that is the kind of a headwind that we have and will continue to face. But I think the Equipment Leasing division, along with the kind of quality assets that Bonnie and her team have been generating, I think is going to more than offset that.

Ron?

Yes. I would just echo C. G. a bit. With the addition of the leasing portfolio, I am a bit more optimistic or comfortable that the margin will be able to hold or improve slightly, at least in respect to the near term. But, as you know, with interest rates rising, I would expect as we move out to 2017 there will be some cost pressures. And so that will start to subside, whatever benefit or reduce whatever benefit that might be in front of us in the near term.

Also, I would look like to just add that, based on the asset liability position within Hanmi, we get the biggest bang for the buck as the rate increases head towards 1.5% to 2%. We are about 50 -- we are past 50 basis points. So this year, if the Fed is kind enough to move the rate more and with a little higher speed, that will obviously, like all banks, it is going to really help us tremendously.

Okay. Okay. And then, just I am curious what the weighted average rate was on the loan production this quarter. I think it was about 4.25% last quarter. Just curious whether or not that might have changed given what happened with rates in the quarter.

Sure. During the fourth quarter, new loan interest rate is at 4.69% and compare that from the third quarter, which was actually 4.37% which is actually much higher.

Great. And then, just last one. I think Kum mentioned that, in your net charge-off, the $5 million was related to a PCI loan. That still suggests about $1.7 million in net charge-offs. Just curious if there was anything else that might be lumpy in there and whether or not that might be the new normal or whether or not we might return to a more benign net charge-off level here, at least in the near term?

Well, my expectation is the return to the more benign history that we have had. We are not seeing anything on the horizon that would manifest in terms of a material level of charge-off.

Okay. And then, just on the tax rate, it has been creeping up here the last few quarters. What should we use for 2017?

40% would be a good estimate.

Okay. Thank you.

Gary Tenner, D. A. Davidson.

A couple of quick questions. Ron and C. G., both, I guess you had mentioned that the leasing division helped on the margin benefit. I assume you were talking about just the impact it had on the mix of assets in the quarter. Because it looked like loan yields were basically flat or up 1 basis point in the quarter. So unless I'm missing something there, I just wanted to confirm what you were saying.

Yes. The leasing portfolio, in and of itself, contributed, we think, to roughly about 8 to 9 basis points, in terms of the improvement in the NIM for the quarter.

Okay. And, again, that was due to just the mix -- just adding that mix of loans.

Yes. Correct.

It is the dollar volume of the income contribution. While the leases do have a higher coupon, the coupon on the $200 some-odd million portfolio doesn't come through as much on the margin as -- if that is where you are going, Gary. It is more of the dollar contribution than the coupon contribution.

Okay.

(multiple speakers) basis points.

Yes. That is perfect. I just wanted to confirm that that is what you were saying.

And then, regarding the -- on the fee income side, deposit service charges peaked sort of mid-2015, they have been trending downward ever since. Can you talk about what you are seeing there and what the outlook would be just for that line item? Because it is a meaningful part of your fee income line.

In deference to the line item, the industry as a whole, people are writing less checks. So, therefore, traditional income contributions coming from the deposit fee income, that has been gradually coming down. And not only for us. I think that is an overall industry.

Okay. That is fine. And then last question I had, on the deposit cost side, C. G., you mentioned some upward pressure there, and obviously some interest-bearing deposits were up, what, about 4 basis points or up about 10 basis points over a two-quarter period. And last quarter, some of the rationale was that you were sort of pre-funding the expected acquisition of the leasing division, which you ultimately announced, of course, and did and then up another up 4 basis points this quarter. How much more upward pressure do you think there is, let's say, over the next two quarters? How much more pass-through is there to keep the deposits coming in commensurate with loan growth?

I think the fourth-quarter trend is probably going to repeat itself in the first quarter, at least. And, once again, that is a function of the environment and the rate environment, in particular, but I think it is likely that what happened in the fourth quarter is going to portend what is going to happen in the first quarter of this year.

Okay. Thanks for taking my questions.

(Operator Instructions) Donald Worthington, Raymond James.

Other companies have reported receiving a special FHLB dividend. I assume you got one as well. How much was that, and where is it reported?

That was $559,000, and I will let Ron where say it was recorded.

It is in the security interest income.

Okay. And that in terms of the FHLB advances were up, as you mentioned; in the press release, it was to fund the leasing purchase. Were those basically short-term advances that will be paid back with deposits?

Yes, that is the goal.

Okay. And then, lastly, there was a net positive or net income from OREO during the quarter. Can you give any more color on that?

We had set some recoveries on some property taxes and some other claims. So this goes back to a large part of the 2014 acquisition.

Okay. All right. Thanks.

Chris McGratty, KBW.

Ron, I want to make sure I am good on the balance sheet mix. With the remix that has been going on in support of the margin, the bottom of the portfolio has declined a decent amount year over year. At what point do you believe it troughs, or do we still see a little bit of a downward pressure on the $530 million bond book?

We are at the trough, so we may decline a bit. But we are kind of hitting the bottom ideas at about 10% of assets.

Okay. Great. And was there any -- just on the (inaudible) on the margin. Was there any benefit from bond premium amortization in the quarter? And, if not, is there something we should be thinking about in the first quarter?

I'm sorry. I didn't catch the first part of the question. Any benefits from (multiple speakers).

Just lower bond premium amortization, was there a material change quarter over quarter?

On the bond portfolio? No. Not much at all.

Okay. Thanks.

I would like to turn the floor back over to management for any closing comments.

Thank you for listening to Hanmi Financial's fourth-quarter and full-year conference call. We are looking forward to speaking to you next quarter.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.