HAFC
#Thank you, Darrin, and thank you all for joining us today.
With me to discuss Hanmi Financial's fourth quarter and full year 2017 earnings are <UNK>
G.
<UNK>, our President and Chief Executive Officer; Bonnie Lee, Chief Operating Officer; and Ron <UNK>, Chief Financial Officer.
Mr.
<UNK> 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 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 1955.
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 afternoon, Hanmi Financial issued a news release outlining our financial results for the fourth quarter of 2017, which can be found on our website at hanmi.com.
<UNK>.
Thank you, <UNK>.
Good afternoon, everyone.
Thank you for joining us today to discuss Hanmi's 2017 fourth quarter and full year results.
We finished 2017 with strong fourth quarter performance to conclude another year of safe and profitable growth.
Highlights for the quarter and the year include loans and leases receivable increased 3% in the quarter and were up 12% for the full year.
Hanmi's net interest income for the fourth quarter increased 3% quarter-over-quarter and was up 10% for the year.
While we are operating in an extremely competitive environment, fourth quarter net interest margin, excluding acquisition accounting of 3.76%, has remained stable over the past several quarters.
Deposit gathering activities also remained strong as we achieved a 14% increase in total deposits for the full year.
Due to capital management of noninterest expense, coupled with the improvements in revenue from growth in earning assets, the efficiency ratio improved nicely for the full year.
As a result, earnings before the onetime revaluation adjustment to reduce our deferred tax assets were solidly higher on both linked quarter and on a year-over-year basis.
And finally, all of the credit quality metrics continue to remain favorable.
Going into more detail.
For the fourth quarter of 2017, we reported net income of $11.5 million or $0.36 per diluted share.
As a result of the tax reform signed into law in late December that reduced the corporate tax rate from 35% to 21%, we were required to record a onetime revaluation adjustment of $3.9 million to reduce our deferred tax assets.
This increased the provision for income taxes and reduced fourth quarter and full year earnings by approximately $0.12 per diluted share.
Excluding this onetime adjustment, fourth quarter net income of $0.48 per diluted share was up by $0.02 or 4.4% compared with the prior quarter, as interest income from the growth in our portfolio of loans and leases more than offset lower PCI gains in the quarter and slightly higher noninterest expense from opening of a new branch in New York City in the fourth quarter.
Compared to the fourth quarter last year, net income per share increased by $0.03 or 6.7%.
Hanmi's earnings performance is clearly being driven by the growth of core sustainable earnings generated by the expanding portfolio of loans and leases.
Net interest income was up more than 3% from the third quarter and 10% for the full year.
The increase in revenue, coupled with our continued focus on expense management, helped improve our full year efficiency ratio to 54.3% for 2017, which is 170 basis points better than the prior year.
Turning to loans and leases receivable.
Our portfolio expanded by 3% in the fourth quarter and 12% on a full year basis, marking the fourth consecutive year of Hanmi achieving double-digit growth in loans and leases.
New loan and lease production of $262 million in the fourth quarter, excluding loan purchases, represents 19% increase as compared with production in prior quarter and 15% compared with the fourth quarter last year.
For the full year in 2017, total organically generated loan and lease production of $965 million exceeded production in 2016 by more than 11%.
I continue to be pleased with the ongoing success of our Commercial Equipment Leasing division that was acquired during the fourth quarter of 2016.
This acquisition has been a success as leases receivable have increased 22% compared with the year ago while generating nominal credit losses.
From a strategic perspective, this business complements our emphasis on business banking to diversify the Hanmi loan portfolio.
And importantly, with weighted average lease yield of 5.6%, this portfolio has been accretive to our overall portfolio yields.
Our C&I lending team also wrapped up a strong year in 2017 with excellent fourth quarter results and continues to benefit from investments to extend our reach both geographically and into new areas of focus.
During the fourth quarter, C&I loan production of $48 million was more than 3 times higher than the fourth quarter last year and represented 18% of total new loan production in the quarter.
For the full year, C&I loan production of $167 million more than doubled compared with 2016.
At the end of the fourth quarter, C&I loans outstanding, excluding leases, was up nearly 10% on a quarter-over-quarter basis and was up 33% on a year-over-year basis.
We continue to make progress in improving the mix of our earning assets.
At year-end 2017, CRE loans comprised 71.3% of our total loan and lease portfolio compared with 76.5% a year ago.
We have made significant progress from year-end 2014 when CRE loans comprised 85% of the total loan and lease portfolio.
As we look ahead, our overall loan and lease pipeline remains healthy.
With our new branch in New York City, giving us access to one of the best markets in the country, we are confident that we can generate double-digit growth in loans and leases in 2018 and beyond.
Turning to deposits.
Despite the typical seasonal slowdown in deposit activity around year-end, total deposits of $4.35 billion increased just over 1% during the fourth quarter on a linked quarter basis.
I continue to be pleased with the strength of Hanmi's deposit franchise as total deposits increased more than 14% in 2017.
The full year growth in deposits was driven by growth in the core deposit categories: noninterest-bearing demand deposits were up more than 9%; money market and savings deposits grew 15%; and retail CDs expanded 20% during the year.
Even though we have been operating in a highly competitive Asian-American banking landscape for deposits, exacerbated by the flat yield curve environment, I'm pleased to report that we have been successful in maintaining our net interest margin over the last several quarters.
In each of the past 3 consecutive quarters, net interest margin, excluding acquisition accounting, has remained steady at 3.76%.
Further, the 8 basis point contraction from first quarter to second quarter of 2017 was primarily attributed to the additional interest expense associated with the $100 million sub-debt that was issued late in the first quarter of 2017.
And finally, our asset quality metrics remain strong.
Nonperforming loans, excluding PCI loans, stand at $15.8 million or 37 basis points of loans.
Net charge-offs for the fourth quarter of 2017 were $1.7 million, which represented 16 basis points of average loan balance.
The charge-offs for the quarter included a $1.3 million charge-off of a fully reserved SBA loan originated in 2012.
Finally, our allowance for loan losses was 72 basis points of loans at quarter-end.
Reflecting our continued credit underwriting discipline, the weighted average loan-to-value and debt coverage ratios on new commercial real estate loan originations for the fourth quarter were 58% and 1.9x, respectively.
Before turning the call over to Ron, I'd like to briefly comment on the Tax Reform Act and its impact on Hanmi.
While it is still too early to tell how it will affect general economic conditions in our markets, the 14 percentage point reduction in the federal statutory rate will significantly improve the earnings power of Hanmi.
With this additional capital, we will have a broader array of strategic options to drive value, which potentially includes additional investments in the infrastructure of our company, expansion into new markets and new products via M&A or on a de novo basis and, finally, rewarding our shareholders with higher cash dividend.
As we announced last month, tax reform provided an opportunity to review our current compensation policies and pass along some of the benefits to our employees.
This included an increase in the minimum hourly wage across the company to $15.
With this move that benefited approximately 100 employees or 13% of our workforce, Hanmi is well in excess of the minimum wage requirements in all states in which we operate, including California, where some employees have seen their wages increase by as much as 36% from previous levels.
The total additional compensation expense to the company for the year will be approximately $400,000.
I truly appreciate the important role our hourly employees play in providing exceptional service for our customers and strongly believe increasing compensation for these team members will have a positive impact on our business.
I also believe that by paying the higher minimum wage to our hourly employees, we will have a competitive edge in recruiting new employees in a tight job market.
With that, I'd like to turn the call over to Ron <UNK>, our Chief Financial Officer, to discuss the fourth quarter operating results in more detail.
Ron.
Thank you, <UNK>
G.
, and good afternoon, all.
Let me continue with income taxes.
As we reported, our provision for income taxes included a $3.9 million charge arising from the remeasurement of our deferred tax assets because of the change in the federal corporate income tax rate.
At year-end 2017, our deferred tax assets, inclusive of this rate change, were estimated to be $32.5 million.
The effective tax rate for the fourth quarter was 53.2% compared with 39.9% for the third quarter, while the effective tax rate for the 2017 year was 42.6%, up from 36.8% in 2016.
The higher effective tax rates for the quarter and the year reflect the additional income tax expense from the remeasurement of our deferred tax assets.
The effective tax rate before this additional income tax expense would have been 37.5% and 38.6% for the 2017 fourth quarter and year, respectively.
Going forward, we anticipate our effective tax rate will be lower in the range of 27% to 28%.
Let me next turn to our net interest revenues in more detail.
Fourth quarter net interest income increased approximately 3.2% or $1.4 million to $46.3 million from $44.9 million in the third quarter.
This increase from the prior quarter reflects the continued strong growth of our loan and lease portfolio as evidenced by a 3.3% or $135.1 million increase in the portfolio average balance and a 3.8% or $1.9 million increase in interest and fees on the portfolio.
Of course, this increase was partially offset by a $331,000 increase in interest expense on deposits.
The average rate paid on interest-bearing deposits for the fourth quarter increased to 97 basis points from 93 basis points for the preceding quarter while the average cost of deposits similarly increased to 68 basis points from 66 basis points.
Since December, 2016, the Federal Reserve increased the benchmark federal funds rate 4 times or 100 basis points.
The quarterly average rate paid on interest-bearing deposits over that same time period increased 23 basis points, representing 23% of the change in the federal funds rates.
For the 2017 fourth quarter, the average rate paid on interest-bearing deposits increased 4 basis points, representing 16% of the most recent change in the federal funds rate.
The average yield on loans and leases receivable was 4.9%, up 3 basis points from 4.87% for the third quarter.
For the year, the quarterly average yield on loans and leases increased 18 basis points, representing 18% of the change in the federal funds rate.
Compared with the year-ago 2016 fourth quarter, net interest income grew 10.2% and reflects the solid loan growth we have achieved over this past year as well as last year's fourth quarter acquisition commencement of the Commercial Equipment Leasing Division.
For the 2017 year, net interest income increased 10.4% or $16.6 million to $176.8 million from $160.2 million for 2016, principally because of the 18% growth in average loans and leases.
Looking to noninterest income.
During the fourth quarter, we reported a sequential decrease of 12.9%, primarily due to an $888,000 decrease in gains on PCI loans and a $490,000 decrease in gains on sales of SBA loans.
For the full year, noninterest income increased $340,000 or 1%, primarily due to the $2.7 million increase from SBA loan gains and a $1.7 million increase in security gains, partially offset by a decrease of $3.2 million in the PCI loan gains.
Disposition gains on PCI loans were $1.8 million for the year ended 2017 compared with $5 million for the year ended 2016.
Gains on sales of SBA loans were $8.7 million for the year ended 2017 compared with $6 million for the year ended 2016 as the volume of SBA loans sold increased to $112 million from $84.9 million for the same period last year.
Noninterest expenses for the fourth quarter increased nearly $600,000 to $29.3 million from $28.7 million for the third quarter, primarily due to increases in salaries and professional fees.
Salary and benefits were up because of commissions and incentives, while professional fees were up because of year-end audit compliance activities.
As a result of the increase in noninterest expense as well as lower noninterest income, the efficiency ratio increased to 54.2% in the fourth quarter from 53.3% in the prior quarter and 51.8% a year ago.
For the year ended 2017, noninterest expense increased $5.9 million or 5.4% to $114.1 million from $108.2 million for the same period last year, primarily due to increased salaries and employee benefits expense, higher data processing fees and increased occupancy and equipment expense.
However, the improvements in revenue from the growth in earning assets outpaced the increase in noninterest expense leading to an improved full year efficiency ratio of 54.3% in 2017 from 56% for the year ended 2016.
Very importantly, asset quality remains strong with nonperforming assets at $17.8 million at the end of the fourth quarter or 34 basis points of total assets compared with 32 basis points of assets at the end of the prior quarter and 40 basis points of assets at the end of the same quarter last year.
For the fourth quarter of 2017, we recorded a provision of loan losses of $220,000 compared to the third quarter where the provision for loan losses was $269,000.
For the full year, we recorded a provision for loan losses of $0.8 million compared with the negative loan loss provision of $4.3 million for the full year of 2016.
And finally, our tangible book value grew to $16.96 per share from $16.86 per share from the prior quarter.
Our tangible common equity ratio remains strong at 10.58% as do all of our regulatory capital ratios.
With that, I'll turn the call back to <UNK>
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 and continued credit quality.
Overall, I was very pleased with our performance throughout 2017, and I believe Hanmi is well positioned to continue generating profitable growth in 2018 and beyond.
I look forward to sharing our continued progress when we speak with you again next quarter.
Thank you, and have a nice day.
Darrin, let's open up the call for questions.
Yes, Chris.
That's going to be one of our biggest challenges in 2018.
In the Asian-American banking sector, the competition for deposits is fierce.
As a result, even though our posted rates, as it relates to CDs, tend to be I would say, reasonable, we are having to defend our customer base from those other banks who have, let me put it this way, insane level of rates that they are posting for 1-year CDs.
As an example, our competition here in Los Angeles, they posted a 1.65% 1-year CD, and that's substantially higher than what we generally provide.
But to defend our customer base, we match them.
So the competition varies depending on the markets.
Whether they're Korean-American banks, in particular, the one large bank in question, the competition is very significant.
But in other markets, we are ---+ I would say we're facing more reasonable competition relative to rates.
So one of the key priorities for us in 2018 is to look for ways by which to continue to generate lower-cost deposits.
Some of that is going to be in the form of, let's say, recruiting of additional bankers, some of that is going to be in the form of acquiring other institutions that may be under-leveraged as far as use of their deposits are concerned.
But that's one of the key priorities for us in 2018.
As we mentioned before, Chris, in prior calls, our balance sheet is fairly neutral.
So rate increases driven by the Fed, et cetera, I think you've seen that we've been able to kind of hold the margin and you haven't seen much dissipation of that.
The competition question, of course, probably just amplifies that a bit.
Don't know how much that might be or when it might be, but I see the margin basically holding, drifting down slightly but not all that much.
Also, Chris, one of the issues that most banks like us have been dealing with is in a flat yield curve environment, the long end of the curve has not moved up significantly, notwithstanding the Fed's decisions.
But as you noted that recently, it appears that the 10-year treasury has been moving in an upward slope, if you will, and that may enable banks like us to start moving our pricing ---+ move up the pricing as it relates to the traditional 5-year ---+ excuse me, the commercial real estate loan product that's our bread and butter.
And so I am hopeful that there will be more relief on the asset pricing side as the long end of the curve generates a more of an upward slope.
Well, I'll let Ron speak to more of the details as far as expense issue is concerned.
But our focus in a prime choice market like in New York is continue with our recruiting efforts to bring in additional bankers to Hanmi.
We're expecting to deploy some of the benefits of this tax bill in the form of investing in additional branches in the New York City market.
So our fourth quarter noninterest expenses were just over $29 million.
So looking at 2018, I envision expenses at about the same level.
We've yet to fully explore how we may invest other parts of the Tax Reform Act into our business, so that might drift upward.
But we're not quite there yet.
So I anticipate, at least at that level, perhaps, slightly higher.
I would say the major contributing factor that impacted the lower CRE concentration number has to do with the success coming from the other asset categories that has been established over the last couple of years.
We've been very competitive in the CRE lending arena and we'll continue to do so.
But the flat yield curve and the lower returns that we can get on the CRE side has, I would say, lowered our enthusiasm in 2017.
Having said that, as the long end of the curve demonstrates an upward slope, we will be much more active and more enthusiastic about the CRE loan generation.
But having said that, though, we expect that the C&I activities in 2018 to be equally, I would say, successful or active.
And C&I includes also the equipment leasing side.
The equipment leasing and the C&I teams here in California as well as in other parts of the country have been very active and very successful, and I believe that we just scratched the surface.
So the goal for the last 3, 4 years since I've been here is to, in essence, generate a much more of a diversified book of assets.
And we're seeing progress in that regard, but over the next couple of years, we think that the CRE concentration, just from a proportional standpoint in terms of contributing to the overall portfolio, probably will go down just because of the other sectors, other earning asset categories, in essence, stepping up and growing even at a faster pace.
Yes.
The answer is yes.
But not at that level.
Not at that size level.
We had some expected runoff in our commercial real estate portfolio, so we geared up via the single-family purchases.
And that product has performed very well for us.
It comes from a very dependable source.
And from a credit quality, in the 3 years that we've been working with them, it's been basically 0 in terms of any kind of credit issues.
But having said that, though, I think 2018 is going to be much more of a challenging year for all the mortgage originators in a rising rate environment.
So given that to be the case, I don't expect us to do the same level as we did in 2018.
But it will still be part of our overall, I would say, ways by which we're going to continue to generate earning assets.
I have historically said that we are capable year in and year out of generating double-digit loan growth.
Whether it's in the low teens or mid-teens, we have demonstrated over the last 4 years that we can generate and sustain that level of growth.
So that's my hope and expectation for '18 and beyond.
Our trend has been ---+ we'll have these one-off situations.
Like in the fourth quarter, we had this one credit that basically was fully reserved for some period of time that we finally charged off.
And so periodically, we'll have these kinds of one-off situations, but there's nothing systemic, there's nothing that's at a significant level that I've seen in our portfolio that would cause me to say that there's a deterioration in our asset quality.
I just wanted to revisit the loan outlook question again.
It looks like this year's loan growth, especially given the sizable purchase in the fourth quarter, was in the ballpark of 50% versus loans, 50% net organic growth.
As you think about maybe similar or a little bit lower pace of overall growth next year with less purchases, is that driven by your expectation of being able to as you said, having a little more enthusiasm about commercial real estate with this steeper curve.
Yes, actually, <UNK>, over 2017, the proportionality between organically generated versus loan purchases varied from the beginning of the year to the latter part of the year.
As an example, first 2 quarters, the organically generated loans constituted about 85% to 88% of the total production, the balance, 12% to 14%, being the purchases.
That dynamic shifted somewhat in the fourth quarter to where 71% of the production was organically generated and 28% or 29% was purchased.
So it's not really 50-50.
It's substantially less than that.
And so I expect that for 2018 the similar kind of dynamic.
So for 2017, as an example, of all the production that we've had, increases that we've had, about 80% came from organically generated sources and 20% from purchases.
And I would say that, that type of proportionality is probably what's going to happen again in 2018.
Okay.
And then just as you've talked about uses of the additional capital generated with a tax cut.
You talked about M&A opportunities potentially in your market.
Can you just talk about the markets that you think you would have relatively greater interest in at this point.
Yes.
The ---+ we've been very active in terms of looking at M&A opportunities, both on the specialty finance side as well as traditional banking side.
And so I remain hopeful that something will happen in 2018.
And as I mentioned earlier, some of the benefits of the new tax bill probably will be dedicated to that particular endeavor.
The markets that we're interested in are California, Texas and New York and other parts of the country.
And one of the key priorities for us, as I mentioned early on, is finding partners who can, in essence, mitigate one of our key priorities or challenges in 2018, which is the cost of funds, the fierce competition for deposits.
And so there are banks out there, as an example, that could somehow provide some relief for benefits to us by having a ---+ let's say, a less-leveraged deposit base, excess liquidity and so on, we're interested.
But we're strategically looking for situations, not only in the Asian space but also in the mainstream space, to in essence, expand the franchise but to deal with some of the key priorities relating to what will be very difficult next couple of years as far as the deposit ---+ the cost of deposits are concerned.
Okay.
And so I appreciate that detail, <UNK>
G.
I thought in your prepared remarks, you've mentioned being open to some new markets.
And the markets you just mentioned are ones you guys are already in, so I'm just wondering if there are any specific markets you're thinking about.
Or are you a little more agnostic about location and more worried about the funding side of the mix.
Well, I'm not agnostic about location because it doesn't really make sense for us to jump into markets that are dramatically different than where we are today geographically or from a capability or a culture standpoint.
And so there's some ---+ there has to be some logic or rationality behind that.
But the logical markets from the Asian-American banking space standpoint includes the Southeast, New York-New Jersey corridor and the Northwest.
But it could be beyond that, depending on some of the interesting opportunities that we're getting to look at as it relates to mainstream banks.
But once again, the culture, the geography, and as I stated, one of the key priorities in '18 having to do with the deposit base, those are going to be the key drivers of our efforts as it relates to M&A in 2018.
<UNK>
G.
, given the challenges you've discussed in raising reasonable cost deposits from the Asian-American communities, does it lead you to want to potentially increase efforts to target mainstream clients.
Or is it still more cost effective to expand marketing efforts to the Asian-American communities.
Given the reputation of Hanmi Bank and the marketing strength that we have had historically within the Asian-American sector, primarily Korean, yes, I would say that our first priority is to continue to mine opportunities for lower-cost deposits within primarily the Korean-American space and, secondarily, the South Asian space.
So that's a natural extension or expansion of what we have already been doing.
But beyond that, though, we are expending a lot of effort right now in looking at some mainstream bankers and other capabilities outside of the traditional Asian sector because in order for us to make incremental, I would say, growth or generate incremental growth on a lower-cost basis, I got to look at the problem from a slightly different vantage point, and that is outside of the traditional Korean-American/South Asian sectors, if you will.
And so because of that, we're looking at some recruitment efforts, we're evaluating some recruitment efforts of non-Asian bankers who may be operating in markets that are non-traditional Asian markets, if you will.
And so we are evaluating those kinds of situations as we speak.
These kinds of investments in the business that we're talking about right now, is that something you'll be able to talk about more about on the first quarter conference call or would it be closer to mid-year.
Or does that depend on what's happening on the M&A environment.
Both.
I'm hopeful that when we talk about the first quarter results that there's something that we can talk about that's much more tangible.
And so, we'll see.
We'll see if we can get some of these things to fruition.
Okay.
And then I had a question for Ron.
Do you have the current discount on the PCI loans.
Not off the top of my head, Tim.
Again, PCI is about $7.7 million, $7.8 million.
We're down about 20% year-over-year.
You can tell from the margin analysis, I think we're at about a 3 basis point differential from reported to purchase accounting.
So PCI just doesn't ---+ it's just not going to be a big part of our story for '18.
We may, from time to time, as we did in '17, have a resolution or a payoff of a credit, and that's what causes some of the noise or the lumpiness and the disposition gains.
But it's just not a very big idea for 2018.
Yes ---+ no.
Our target loan-to-deposit ratio has been in the 95 to high-90s on a given day.
We believe that, that range maximizes the leverage and the use of our deposit base.
And so that number doesn't trouble me as much as the competitive pressures coming from these other institutions that's driving up the cost of deposits.
And that's one of the reasons why we're looking at solving that problem through a slightly different set of lenses.
Yes, I see that number moving up.
I think we should be ---+ we're targeting around $160 million of seven SBA's for 2018.
We've ---+ the head of our SBA department has been successful in terms of recruiting outside of the Asian space, and so we are hopeful and looking forward to additional contributions coming from these other bankers that have joined us within the last 90 days to drive up the SBA production and, therefore, the premium income.
Thank you for listening to Hanmi Financial's Fourth Quarter and Full Year 2017 Results Conference Call.
We look forward to speaking to you next quarter.
