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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.
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Julianna Balicka - KBW Bob Ramsey - FBR Capital Markets Matthew Clark - Piper Jaffray Gary Tenner - D.A. Davidson.
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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..
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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..
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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.
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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..
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..
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Our next question comes from the line of Bob Ramsey of FBR Capital Markets. Mr. Ramsey, please proceed with your question..
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[Operator Instructions]. Our next question comes from the line of Matthew Clark of Piper Jaffray. Mr. Clark, please proceed with your question..
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Our next question comes from the line of Gary Tenner of D.A. Davidson. Mr. Tenner, please proceed with your question..
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We have a follow-up question from the line of Bob Ramsey of FBR Capital Markets. Mr. Ramsey, please proceed with that question..
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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..