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Hanmi Financial Corp (NASDAQ:HAFC)
Q4 2019 Earnings Call
Jan 28, 2020, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, welcome to the Hanmi Financial Corporation's Fourth Quarter and Full-Year 2019 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 question.
I would now like to introduce Mr. Lasse Glassen, Managing Director at Addo Investor Relations. Please go ahead.
Lasse Glassen -- Managing Director
Thank you, operator, and thank you all for joining us today. With me to discuss Hanmi Financial's fourth quarter and full-year 2019 earnings are Bonnie Lee, President and Chief Executive Officer; Anthony Kim, Chief Banking Officer; and Ron Santarosa, Chief Financial Officer. Ms. Lee will begin with an overview of the quarter, Mr. Kim will discuss loan and deposit activities, and Mr. Santarosa will then provide more details on our operating performance. At the conclusion of our 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 the Securities Litigation Reform Act of 1995. For some factors that may cause our results to differ from these expectations, please refer to our SEC filings, including our most recent Form 10-K and Form 10-Q. In particular, we direct you to the discussion in our Form 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 and full-year 2019, which can be found on our website at hanmi.com.
I will now turn the call over to Bonnie Lee. Bonnie?
Bonita I. Lee -- President and Chief Executive Officer
Thank you, Lasse. Good afternoon, everyone. Thank you for joining us today, to discuss Hanmi's 2019 fourth quarter and full-year results. While Hanmi's fourth quarter included some extraordinary items that impacted our financial results in the period, I believe, our underlying performance was solid, and we continue to benefit from our strategic focus on higher yielding assets and lower deposit costs.
The following are some of the key financial and operational highlights from this past quarter and full-year. Loan and lease production was at the highest level since 2015, helping to more than offset extremely elevated levels of loan payoffs in the quarter and resulting in fourth quarter growth in loans and leases receivable of 3.6% on an annualized basis. Net interest income, before the loan and lease loss provision, was relatively consistent quarter-over-quarter, but a higher loss provision stemming from the previously disclosed troubled loan relationship, along with some non-recurring expenses impacted fourth quarter net income.
Deposit gathering activities remained strong as we achieved 8.3% increase in noninterest-bearing deposits for the full year. Throughout the year, we benefited from a favorable mix of a lower time deposits and growth in noninterest-bearing demand deposits, reflecting our efforts to increase core deposit relationships. The lower cost of deposits helped to mitigate pressure on net interest margin, which declined just 4 basis points during the quarter. We also invested in Hanmi common stock during the quarter under our current authorized $1.5 million shares repurchase program.
Notwithstanding the one troubled loan relationship, overall credit quality metrics remained stable.
And finally, the bank remains very well capitalized. Hanmi's regulatory capital ratios remain very strong and we are well positioned to continue to grow -- continue to growing in a safe and sound manner.
Looking in more detail at our fourth quarter results, we reported net income of $3.1 million or $0.10 per diluted share. Net income in fourth quarter was significantly affected by the troubled loan relationship, consisting of $27.2 million land loan and a $12.5 million business loan. While the borrower had continued to make payments and we have incurred no charge-offs, with the loans maturing at year end, we commissioned a current appraisal on the personal property securing the relationship. As a result, we increased the specific allowance by $6.9 million in the fourth quarter, which places the total allowance at $22.6 million. We will continue to work closely with the borrower to achieve a positive resolution to this loan.
In addition, fourth quarter noninterest expense included the recognition of a $1.7 million impairment loss and our formal bank premises that are currently being held for sale. This extraordinary item, along with the specific allowance for the aforementioned loan relationship, reduced the pre-tax income by $8.6 million or approximately $0.23 per diluted share.
Looking at asset quality, aside from the troubled loan relationship, overall, the key metrics remained relatively stable. Nonperforming loans were $63.8 million or 138 basis points of loans at quarter end, representing sequential improvement of 1.9% from third quarter nonperforming loans of a $64.7 million or 143 basis points of loans. The fourth quarter also included nominal net charge-off of $50,000. Importantly, even in today's highly competitive market for loan and leases, we continue to maintain our commitment to conservative disciplined credit underwriting.
For the fourth quarter 2019, consistent with the asset quality data from prior quarters, the weighted average loan to value and debt coverage ratio, our new commercial real estate loan originations were 53.7% and 1.7 times respectively. For the entire commercial real estate portfolio, the weighted average loan to value and weighted average debt coverage ratio as of the end of the fourth quarter were 48.2% and 2.0 times respectively.
As you may recall, earlier in 2019, Hanmi announced that its Board of Directors authorized a stock repurchase program of up to 5% or 1.5 million shares of our outstanding common stock.
During the fourth quarter, Hanmi made initial purchases under this authorization and invested approximately $7.4 million to repurchase 375,000 shares, at an average price of $19.63 per share. Even after the share repurchase, Hanmi's tangible common equity ratio remains strong at 9.98%, as do all of our regulatory capital ratios. Today, approximately 1.1 million shares remain available for repurchase under this current authorization and we expect to continue to support the stock with additional purchases as market conditions allow.
We believe the current share price is not indicative of Hanmi's long term intrinsic value. The repurchase of our stock highlights are confident in the Hanmi franchise and we see it as both a timely and appropriate use of our capital resources.
I would now like to provide quick update on our key initiatives, which are focused on being selective in new loan production, protecting net interest margin as much as possible, and careful expense management with our total loan and lease dollars increasing modestly during the course of this past year.
Looking ahead, we anticipate low-to-mid single-digit growth in loans and leases during the full year in 2020. We continued to emphasize areas of growth where we can achieve higher spreads, such as equipment leases as well as a C&I loans. During 2019, production of C&I loans increased nearly 55%, while production of equipment leases expanded more than a 11% year-over-year and we expect to continue to emphasize this category as we move forward in 2020.
I am also pleased with early results achieved by our Corporate Korea initiative. Here, we are focusing on developing and expanding relationships within Korean companies domiciled in the U.S. We have launched the Corporate Korea Desk in seven strategically located branches throughout the United States. While still in its early days, the Corporate Korea program contributed to new loan production and new deposit relationships in 2019.
Throughout 2019, we made good progress on various initiatives, designed to reduce noninterest expense and improve operational efficiency. A significant portion of this effort has been the successful branch consolidation initiative, which was completed during 2019, and included a closure of five branches or approximately 10% of our branch network.
We also continue to make investment in technology and systems, to achieve cost reduction through improvements in operational efficiency. This includes centralizing and streamlining certain back office activities, to improve processing speed along with enhanced consistency across enterprise in-sourcing, underwriting and administrating credit.
With that, I would like to turn the call over to Anthony Kim, our Chief Banking Officer to discuss the fourth quarter loan and lease production results and deposit gathering activities. Anthony?
Anthony Kim -- Executive Vice President & Chief Banking Officer at Hanmi Bank
Thank you, Bonnie. I will discuss loan and lease production and deposit gathering activities. And then, turn it over to Ron Santarosa for additional details on our fourth quarter financial results. During the quarter, loan and lease production totaled $381.4 million, which increased 75% over the prior quarter and nearly 55% from the fourth quarter in 2018. However, due to elevated levels of payoffs as well as higher amortization during the quarter, our portfolio of loans and leases expanded by just 3.6% on an annualized basis and the portfolio grew modestly for the full year.
Production in the fourth quarter was up year-over-year in every major category of loans and leases. Production activity throughout 2019 reflected our shifting emphasis toward higher yielding categories with a strong asset quality, such as C&I loans, as well as equipment leases, while we reduced our exposure to lower yielding asset classes, such as single-family residential loans. In line with our longer-term objective to diversify our loan and lease portfolio, CRE loans comprised 70% of our portfolio at the end of 2019, compared with the 70.8% at the end of 2018 and 76.5% three years ago.
Fourth quarter production consisted primarily of $185.1 million of commercial real estate loans, $33.6 million of SBA loans, and $95.3 million of C&I loans. We also originated $65.5 million of commercial equipment leases. Of note, C&I loan originations in the fourth quarter were nearly 87% higher than the previous quarter, while equipment lease production remained consistently strong throughout the year.
Newly generated loans and leases for the quarter had a weighted average yield of 5.08%, down 45 basis points from the previous quarter's weighted average yield on new production of 5.53%. However, average loan and lease yield for the portfolio of 4.97% was down just 11 basis points quarter-over-quarter, as the average yield on new loan and lease production in the third quarter, exceeded the average yield on loans that paid off in the quarter by 7 basis points.
Looking ahead in the first quarter of 2020, our pipeline remains healthy and supports the annual growth objective range in the low-to-mid single-digit that Bonnie noted in her comments.
Moving on to deposits. We continue to operate in a highly competitive Asian American banking landscape for deposit gathering activities. Total deposit of $4.70 billion, increased nearly 1% during the fourth quarter on an annualized basis, but declined 1% from a year ago.
For the full year, we benefited from a favorable shift in deposit mix, that included an 8.3% increase in noninterest-bearing demand deposits, along with 13.6% reduction in higher cost time deposits. As a result of fourth quarter loan production and deposit gathering activities, our loan to deposit ratio for the fourth quarter was 98% compared with a 97% in the fourth quarter last year.
I'd now like to turn the call over to Ron Santarosa, our Chief Financial Officer. Ron?
Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer
Thank you, Anthony, and good afternoon all.
Starting with net interest income, we posted $43.9 million, down slightly from $44.1 million for the prior quarter, due mostly to a 2.9% decrease in income from loans and leases receivable on lower average yields for the portfolio. Overall, yields decreased during the quarter, reflecting the decline in the general level of interest rates from earlier in the quarter and mixed with slightly lower average loan and lease balances, led to a 2.4% sequential decrease in interest income. Partially offsetting the decrease in net interest income was a 7.5% decrease in total interest expense to $16.8 million, mostly driven by an 8.1% decrease in interest on deposits.
Net interest margin for the quarter was 3.32%, down 4 basis points from 3.36% in the third quarter. The average yield on interest earning assets fell by 15 basis points to 4.59% with a commensurate 15 basis point decrease in costs for interest-bearing liabilities to 1.89%. The cost of deposits fell 12 basis points to 1.25%, due to a decline of higher rate time deposits, and an increase in lower costing money market and savings deposits. Time deposits now make up 33% of total deposits, down from 35% of the linked quarter. This mix shift in our interest-bearing deposits from time deposits into money market and savings were the main drivers of the decrease in interest on deposits.
Looking at non-interest income, we had a 2.2% decrease from the third quarter to $6.7 million. Income from service charges on deposit accounts and trade finance and other service charges and fees increased by 2.8% and 6.8% respectively. However, this was offset by a decrease in gains from the sales of SBA loans, following 15.2% to $1.5 million. SBA loan sales volume increased to $25.1 million in the quarter from $24.3 million. However, trade premiums fell during the fourth quarter, averaging 7.6% down from 9.15% for the prior quarter.
Noninterest expenses increased by $1.5 million to $34.1 million from the third quarter, driven mostly by the $1.7 million impairment loss, which Bonnie mentioned earlier. In addition, the provision for off-balance sheet items increased $646,000, from an increase in outstanding commitments as well as an increase in estimated loss factors.
Last, the 2019 third quarter included charges for an SBA guarantee repair that's not present in the fourth quarter. For the 4.5% increase in noninterest expense this quarter combined with the decline in revenue caused our efficiency ratio to increase to 67.31% from 64% in the linked quarter. Return on average assets for the fourth quarter decreased to 0.22% from 0.90% last quarter, while return on average equity experienced a similar sequential decrease to 2.15% from 8.67%. Our tangible book value at year end declined by $0.15 to $17.90 per share and our tangible common equity ratio was strong at 9.98%.
With that, I'll turn it back to Bonnie.
Bonita I. Lee -- President and Chief Executive Officer
Thank you, Ron. While some extraordinary items impacted our profitability in the quarter, Hanmi delivered a solid overall performance to wrap up 2019. As we look ahead to 2020, given our strong deposit franchise and loan and lease pipeline, I am confident in our ability to deliver profitable growth throughout the year. I look forward to sharing our continued progress with you when we report our first quarter 2020 results in April.
Lasse Glassen -- Managing Director
Operator, that concludes our prepared remarks. We would now like to open the line for questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question is from Gary Tenner, DA Davidson & Company. Please proceed with your question.
Gary Tenner -- DA Davidson & Company -- Analyst
Thanks, good afternoon everybody. I had a couple of questions on credit. In terms of the large credit, the increase in the specific reserve and the current valuation, which I think is $22.5 million, when was the most prior appraisal to the updated one that you mentioned in the press release?
Bonita I. Lee -- President and Chief Executive Officer
We -- so, we obtained the most recent one within the last month or so. The prior one was within the last -- second half of the last year. Is it second half of the last year?
Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer
Yeah. So, Gary, this is Ron. So, the real estate side of life that was a year-ago second quarter. On the personal property, we had one, of course, at inception. We had one in the second quarter, which gave rise to the question about how we should view it etc. So, we commissioned another one here at -- as we got into the fourth quarter.
Gary Tenner -- DA Davidson & Company -- Analyst
Got it. Okay, thank you. And then, I'm curious about the provision over and above the specific provision for that credit to be around $4 million on especially [Phonetic] $40 million of net loan growth sequentially. So, can you talk about what drove that? I mean, there was the increase in classified loans related to another construction credit, but maybe just talk broadly about the magnitude of the provision increase over and above the large credit issue.
Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer
Sure. So, as you noted, classified loans did increase and as we go through our quarterly analysis to determine the allowance, we look at trends, we look at concentrations, we look at recent experiences. And with that, we increased our estimated loss factors. So, that's part of the reason for the increase and, of course, the other side of the equation, is we just have a higher level of loans than we had in the past period.
Gary Tenner -- DA Davidson & Company -- Analyst
Okay, thanks. And if I could just ask one last question here, any projections or outlook with regard to CECL, in terms of the day one adjustment?
Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer
Not at this time. We're working with our auditors and advisors. So, we'll be prepared for that idea when we publish our 10-K, I think, March 1, March 2.
Gary Tenner -- DA Davidson & Company -- Analyst
Okay, thank you.
Operator
Our next question is from Matthew Clark, Piper Jaffray. Please proceed with your question.
Matthew Clark -- Piper Jaffray -- Analyst
Hi, good afternoon. Just wanted to get the rate on new production and the rate on the loans that were paid off. I think, you mentioned that the differential was 7 basis points. So, I was just looking for those deals.
Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer
So, Gary, this is Ron. So, I think I have 5.08% in my mind, but our average production was -- so, 5.01% would have been the payout or would have been the average rate on the loans that pay off.
Bonita I. Lee -- President and Chief Executive Officer
Yeah. New loan came in, in the quarter at 5.08% and then payout rate was 5% [Phonetic] -- the new loan was 5.08% and then pay off was 5.01%.
Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer
As I think we have talked about before, Matthew and whether with you or with others, we cannot predict and have been fortunate or fortuitous in the average rate of the loans that have been paying off. And so far, for most of '19, we have been in a net accretive mode when you look at the portfolio and that was one of the elements of why the -- our net interest margin was able to kind of stay within a fairly narrow corridor.
Matthew Clark -- Piper Jaffray -- Analyst
Okay. And then, prepayment income this quarter within the margin?
Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer
$700,000.
Matthew Clark -- Piper Jaffray -- Analyst
Okay. And then, I think last quarter you talked about $1 million of, that might come out of the run rate of expense related to the reporting delay, CECL legal, the SERC credit assessment and maybe some occupancy and equipment. Can you update us there whether or not that came out or whether or not that's still in there for some portion?
Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer
So, we did see the decline in professional and data processing and I'll say the other category. Then there were some offsets to those ideas that came about. We have a seasonal increase of spend in some of our marketing and we had some increase in our salaries and benefits.
So the FDIC notion, insurance notion [Phonetic] is pretty well flat quarter-to-quarter. We did get -- the third quarter had a charge and it relating to an SBA guarantee repair for -- than old SBA loan. So, we did see the reduction, but as we tried to point out then we had the increase because of the increase in the off-balance sheet provision, stemming again from just larger unused commitments as well as increased loss factors which are consistent with the other part of the allowance and the impairment loss on the properties.
Matthew Clark -- Piper Jaffray -- Analyst
Okay. And then, I guess, how much in the way of reserves did you set aside for that loan that migrated into classified, the $11 million credit?
Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer
That would be no specific allowance. So that's just...
Bonita I. Lee -- President and Chief Executive Officer
I think it's about $0.5 million.
Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer
Yeah, general allowance.
Bonita I. Lee -- President and Chief Executive Officer
Yeah.
Matthew Clark -- Piper Jaffray -- Analyst
Okay. And then, the tax rate outlook little higher this quarter, but I assume that will normalize?
Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer
Yes, I think for 2020, we may be able to post kind of mid-29s, but if I would use the sum measure, I'd probably would use 30% and then look forward to trying to drift down slightly.
Matthew Clark -- Piper Jaffray -- Analyst
Okay, thank you.
Operator
Our next question is from Timothy Coffey, Janney Montgomery Scott. Please proceed with your question.
Timothy Coffey -- Janney Montgomery Scott -- Analyst
Great, thank you. Looking at, kind of, your loan growth outlook, does that include payoffs that we saw, that level in the fourth quarter or kind of what we saw throughout the rest of 2019?
Bonita I. Lee -- President and Chief Executive Officer
So, in terms of a payoff, which is hard to predict, but I think just looking at 2019, I think, the average payoffs in a given quarter ranges from anywhere from $100 million to obviously $200 million in the 4Q, which is elevated from overall average payout in the 2018 period.
So, but still, I think the message is that our production is holding up fairly nicely. So, assuming that the average payoff about $100 million, $130 million, we think that we can grow to single to mid-digit loan growth.
Timothy Coffey -- Janney Montgomery Scott -- Analyst
Okay. Thanks, Bonnie. And then, how does that kind of impact the trends within your margin, given that there is a kind of slow churn in the deposit portfolio that could give you tailwinds through year end and in terms of lower deposit costs, but not necessarily in the beginning of the year.
Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer
So, on the deposit costs, again, if you think of our time deposits, most of those mature approximately 25% of the quarter, give or take 5%. So, we should see a little bit more reduction in the first quarter, albeit, at a lower rate, and by the time we get to second quarter, we've probably have now stepped into or legged into the rate environment we're currently expect -- that we're currently experiencing.
On the loan side, a large part of the shift away from the residential into the higher yielding equipment that C&I has occurred. So, we would continue to see some decline in the resi, but probably not as much as we experienced in 2019. So that said, I would think we would continue to see margins kind of play within this corridor of 330-ish basis points and as long as there's fed stays where I think fed will be staying or most people expect that to stay and borrowing headline news and unusual prepay, will -- that, I think, is how we could probably think about 2020.
Timothy Coffey -- Janney Montgomery Scott -- Analyst
Okay, thanks for that clarification, Ron. Those are all my questions.
Operator
Our next question is from Kelly Motta, Keefe, Bruyette & Woods Incorporated. Please proceed with your question.
Kelly Motta -- Keefe, Bruyette & Woods -- Analyst
Hi, thanks for taking my question. Maybe staying on the margin and kind of the balance sheet a bit. It looks like cash was elevated this quarter. I'm wondering what the dynamics were going on there, and if you expect to kind of get more back to the level you're at in the third quarter.
Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer
Yeah, so production by month can sometimes be uneven, And so, the cash balances that you saw, at least on an average basis were that -- most of the production happened as we went into December with not much for October, November, and so, that will vary from quarter to quarter.
Kelly Motta -- Keefe, Bruyette & Woods -- Analyst
Got it. And securities kind of building off this level and growing with the overall balance sheet. Is that the right way to think about it?
Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer
Yeah. So, most of -- securities would represent kind of a regular ratable growth where the cash is, I would, call that overnight. That will fluctuate depending on where we are with cash inflows from the portfolio versus fundings.
Kelly Motta -- Keefe, Bruyette & Woods -- Analyst
Great. Turning back to expenses, I saw the compensation line went up a bit this quarter. I was wondering, we're adding people, if you're adding talent, if it's back office or if you're adding to the front line, that's kind of supporting your strong production you had. Thanks.
Bonita I. Lee -- President and Chief Executive Officer
We have an ongoing talent recruitment process. So, no, we did bring in some of the relationship manager type of employees. So, that may have contributed.
Kelly Motta -- Keefe, Bruyette & Woods -- Analyst
Thank you.
Operator
We have no further questions in the queue at this time. Please continue.
Lasse Glassen -- Managing Director
Thank you for listening to Hanmi Financial's Fourth Quarter and Full-Year 2019 Results Conference Call. We look forward to speaking with you again in the quarter results next quarter.
Operator
[Operator Closing Remarks]
Duration: 32 minutes
Call participants:
Lasse Glassen -- Managing Director
Bonita I. Lee -- President and Chief Executive Officer
Anthony Kim -- Executive Vice President & Chief Banking Officer at Hanmi Bank
Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer
Gary Tenner -- DA Davidson & Company -- Analyst
Matthew Clark -- Piper Jaffray -- Analyst
Timothy Coffey -- Janney Montgomery Scott -- Analyst
Kelly Motta -- Keefe, Bruyette & Woods -- Analyst
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