Q4 2019 Earnings Call

Ladies and gentlemen, welcome to the Army 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 any listen only mode. Following the presentation. The conference will be open for questions I would now like to introduce Mr. lots of glass and managing director.

<unk> Investor Relations. Please go ahead.

Thank you operator, and thank you all for joining us today.

With me to discuss hobby Financial's fourth quarter and for your 2019, earning a Bonnie Lee.

And then the Chief Executive Officer, after the Kim Chief Banking Officer.

Alex After Rosa Chief Financial Officer.

We will begin with an overview the quarter Mr., Kim will discuss loan and deposit activities. Mr. Santa Rosa will then provide more details on our operating performance.

In conclusion conclusion of our prepared remarks, well open the session for questions.

In today's call. We may include comments some forward looking statements.

Based on current plans expectations events and financial history trends that may affect the company's future operating results from financial position.

Actual results could be differ from those expressed or implied by our forward looking statements, which a book, 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 FCC filings, including our most recent forms 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 hobby financial issued a news release outlining our financial results for the fourth quarter and for your 29 to which can be found on our website that pardon me dot com.

I will now turn the call over to body lean body. Thank you Lisa good afternoon, everyone. Thank you for joining us today to discuss how mid 2019 fourth quarter and full year results.

Well, how mid fourth quarter included some extra ordinary items that impacted our financial results and apparel yet.

I believe our underlying performance was solid and we continue to benefit from our strategic focus on higher yielding assets and lower deposit costs to following our sum up the key financial and operational highlights from this past quarter and for you here.

And these 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 Nbcs receivable over 3.6% on an annualized basis.

Net interest income before to loan NVS loss provision was relatively consistent quarter over quarter, but a higher loss probably isn't stemming from the previously disclosed troubled loan relationship along with the some nonrecurring expenses impacted fourth quarter net income.

Deposit gathering activities remain strong as we achieved 8.3% increase in non interest bearing deposits for the full year.

Throughout the year, we benefited from a favorable mix up at lower time deposits and growth and non interest bearing demand deposits, reflecting our efforts to increase core deposit relationship.

The lower cost of deposits helped to mitigate pressure on net interest margin, which declined just four basis points. During the quarter. We also invested in how new 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 remain stable and finally, the bank remains very well capitalize.

I Miss regulatory capital ratios remained very strong and we're well positioned to continue to grow.

It's a growing in a safe and sound manner.

Looking in more detail at our fourth quarter results. We reported net income over 3.1 million or 10 cents per diluted share net income in fourth quarter was a significantly affected by the troubled loan relationship consisting of a $27.2 million Len lawn and a 12.5.

In dollar business law.

While the power had continued to make payments and we have incurred no charge off but the loans maturing at year end, we commissioned a current appraisal and a personal property. So trying to relationship as a result, we increased the specific allowance by $6.9 million into fourth quarter, which plays.

Just the portal allowance at $22.6 million.

Well, we're continuing to work closely with a borrower to achieve a positive resolution to this long.

In addition, fourth quarter noninterest expense included the recognition of a 1.7 million dollar impairment loss no formal bank premises that are currently being held for sale. This extra ordinary item along with the specific allowance for the aforementioned bone relationship reduced the pre tax.

Come by $8.6 million or approximately 23 cents per diluted share.

Looking at asset quality aside from the troubled loan relationship overall, the key metrics remain relatively stable.

Nonperforming loans were 63.8 million or 38 basis points of loans at quarter end, representing sequential improvement of a 1.9% from third quarter nonperforming loans 64.7 million or 143 basis points of loans.

The fourth quarter also included bombing all net charge off about $50000.

Importantly, even in today's highly competitive market for loans and leases, we continued to maintain our commitment to conservative disciplined credit underwriting.

The fourth quarter 2019, consistent with the S. A quality data from prior quarters, the weighted average loan to value and debt coverage ratio, a new commercial real <unk> 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 the weighted average debt coverage ratio as up the end of the fourth quarter were 48.2% and 2.0 times respectively as.

As you May recall earlier in 2019, how many you announced that its board of directors authorized stock repurchase program of up to 5% or 1.5 million shares.

Our outstanding common stock during the fourth quarter, how many made initial purchases under this authorization and invested approximately $7.4 million to repurchase repurchased 375000 shares at an average price of a $19 then 63 cents per.

A share even after <unk> share repurchase Hum is 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 its current all three.

Operation and we expect to continue to support the stock with the additional purchases as market conditions alone.

We believe the current share price is not indicative of a hobby is long term intrinsic value.

The repurchase of our stock highlights our confidence in the Homie franchise, and we see it as both a timely and appropriate use of our capital resources.

Now I'd 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 in California expense management.

With our total going into these scotland's 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 continue to emphasize area. So the growth where we can achieve higher spreads so chose incrementally the equipment leases as well as I see an island.

During 2019 production or what's your nine loans increased nearly 55% while production nobody equipment leases expanded more than 11% year over year, and we expect to contend to emphasize is categories as we move forward in 2020 I.

I'm also pleased with the early result, but she by our corporate Korea initiative.

Here, we are focusing on developing an expanding relationships with the Korean companies domiciled in the U.S., we have launched a corporate co yet that's in seven strategically located branches throughout the United States.

While still in its early days, the corporate Korea program contributed to new loan production annuity parties relationships in 22019.

Throughout 2019, we made good progress on various initiatives designed to reduce noninterest expense and improve operational efficiency. It's significant portion of this effort has been de success has been the successful branch consolidation initiative, which was completed during.

2019, and included a closer of a five branches or approximately 10% of our branch network. We also continue to make investment technology and systems to a cheap cost reduction through improvements in operational efficiency. This include centralizing and screaming lightstream.

Lining certain back office activities to improve processing speed, along with enhanced consistency across the enterprise insourcing underwriting and administrating credit.

With that I would like to turn to call over to Anthony Kim Our Chief banking officer to discuss the fourth quarter loan in these production results and deposit gathering activities Anthony.

Thank you Bonnie.

I will discuss loan and lease production and deposit gathering activities and then turn it over to run Santa Rosa Pro additional details on our fourth quarter financial results.

During the quarter loan and lease production totaled 381.4 million, which increased to 75% over the prior quarter and nearly a 55% from the fourth quarter in 2018.

However.

Two elevated levels of pay off as well as higher amortization during the quarter, our portfolio up a loans and leases expanded by just 3.6% on an annualized basis and their 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 2910 reflected.

Shifting emphasis towards higher yields in categories with a strong asset quality, such as yet cnine loans as well as equipment leases.

While we reduced our exposure to a lower yielding asset classes, such as single family residential loans.

In line with our longer term objective to diversify our loan and lease portfolio.

Yes, any loans comprised 70.0% of our portfolio at the end of 2019 compared with a 70.8% at the end of 2018 and 76.5% three years ago.

Fourth quarter production consisted primarily of hundred 80 85.1 million of commercial real estate loans.

3.6 million of it the loans and 95.3 million Lcnine loans.

We also originated six to 5.5 million up commensurately equipment leases.

Of note then I loan originations in the fourth quarter, where nearly 87% higher than the previous quarter wildly equipment. These production remained consistently strong throughout the year.

The only generate loans and leases for the quarter had a weighted average yield of 5.08%.

Down 45 basis point from the previous quarters weighted average yields on new production of provide point by 3%.

However, average loan and lease yield for the portfolio of 4.97% was down just 11 basis points.

Quarter over quarter as the average yields on new alone and these production in the third quarter exceeded the average yield on loans that paid off in the quarter by seven basis point.

Looking ahead into first quarter of 2020, our pipeline remains healthy and supports the annual growth objective range in the low to mid single digits that Bonnie noted in her comments.

Moving onto the positives we continue to operate in a highly competitive Asian, Nebraska banking landscape for deposit gathering activities.

On deposit of 4.70 via the on increased nearly 1% during the fourth quarter on an annualized spaces, but declined 1% from eight 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 of 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% into fourth quarter last year.

I'd now like to turn the call over to Ron Santarosa, Our Chief Financial Officer Ron.

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 to the general level of interest rates from earlier in the quarter and mix was slightly lower average loan and lease balance.

Led to a 2.4% sequential decrease and 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 four 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 markets in savings were the main drivers of the decrease in interest on deposits.

Looking at noninterest 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 SBK loans falling 15.2% to 1.5 million.

SP a 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 billion to $34.1 million from the third quarter, driven mostly by the 1.7 million dollar impairment loss, which Bonnie mentioned earlier.

In addition, the provision for off balance sheet items increased 646000 from an increase in outstanding commitments as well as an increase in estimated loss factors.

I asked the 2019 third quarter included charges for an ESP 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 64.0% into linked quarter.

Return on average assets for the fourth quarter decreased two 0.22% from 0.90%.

Last quarter, while return on average equity experienced similar sequential decrease to 2.15% from 8.67%.

Our tangible book value at year end declined by 15 cents to $17, a 90 cents per share and our time tangible common equity ratio was strong at 9.98%.

With that I'll turn it back to Bonnie.

Thank you Ron well, some extra ordinary items impacted our profitability in the quarter Hameed 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'm confident in our ability to deliver.

Talking about growth throughout the year I look forward to sharing our continued progress with you. When we report our first quarter 2020 results in April .

Operator that concludes our prepared remarks, we would now like to open the lines for questions.

Thank you ladies and gentlemen, we will now begin our question answer session.

Back to ask your question. Please press star one under telephone keypad, a confirmation tomlin get your line is in the question Q you May press star to if you'd like to move your question from the Q4 participants using speaker equipment and maybe that's had a bigger brands that before president start to use one on the please while we pull for questions.

Our first question is from Gary Tenner, D.A. Davidson and company. Please proceed with your question.

Thanks, Good afternoon everybody.

I had a couple of questions on credit or in terms of the large credit the increase in the specific reserve.

And the current valuation, which I think it's 22 and half million dollars.

What was the most prior or appraisal to the updated one that you mentioned in the press release.

We so we obtained the most recent in one.

Within the last.

A month or so the prior one was a what didn't last.

Second half what the last year that second half at the last year. So.

Gary This is Ron so the the real estate side of life that was.

A year ago second quarter I'm 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 do with et cetera. So we commissioned to us and another one here. It is we got into the fourth quarter.

Got it okay. Thank you.

And then I'm curious about the provision over and above.

Provision for that credit or be around $4 million on vishal.

$80 million of net loan growth sequentially. So you talked about what drove that I mean, there was the increasing classified loans related to another construction credit, but maybe just talk broadly about.

The magnitude of the provision increase over and above the mortgage credit issue.

Sure so.

As you noted classified loans did increase.

And as we go through our.

According to the analysis to determine the allowance we look at trends we look at concentrations. We look at recent experiences and with that we've increased our estimated loss factors.

So thats part of the reason for the for the increase and of course, the other side of the equations. We just have a higher level of loans and we had in the past period.

Okay. Thanks, guys like this.

That's one last question here any projections or outlook with regard to sushil.

In terms of the day one restaurant.

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 one on March too.

Okay. Thank you.

Our next question is from Matthew Clark Piper Jaffray. Please proceed with your question.

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 seven basis points. That's just looking for those yields.

Okay. So Gary this is Ron so I think I have I have five await in my mind, but our average production was so five a one would have been the payout.

I would have been the average rate on the loans that you learn came in in the quarter at 5.08% and then pay off rate was 5.0.

The new and almost 508, and then pay off was 5.01.

As I think we had.

Talked about before.

Matthew and whether with your with others.

You know, we cannot predict and have been fortunate or fortuitous in.

The average rate of loans that have been paying off and so far for most of 19.

We've been in a net accretive mode. When you look at the portfolio that was one of the elements of of why the our net interest margin was.

Able to kind of stay within a fairly narrow corridor.

Okay, and then prepayment income this quarter within the margin.

700000.

Okay.

And then I.

I think last quarter, you talked about $1 million.

That might come out of the run rate of expense related to the reporting Delleri Cecil legal.

You have to actually credit assessment, and some maybe some occupancy and equipment can you update us there and whether or not that came out or whether or not that's cylinder. There's some portion.

So we did see the decline in professional and and data processing and.

Ill say the other category.

Then there were some offsets to those ideas.

That came about we have a 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 sauces pretty well flat.

Quarter.

We did get.

Third quarter had a charge and it relating to.

SBA guaranteed repair for.

Then hold SB eight loans.

So we did see the reduction.

But as we tried to point out than we had the.

The increase because of the.

The increase in the off balance sheet provision stemming again from just.

[noise] larger unused commitments as well as increased loss factors, which are consistent with part of the the allowance and.

And the impairment loss on the properties.

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 dollar credit.

That would be but no specific allowance. So thats just I think it's about a half a million general allowance.

Okay.

Okay.

And then the tax rate outlook, a little higher this quarter, but I assume that will normalize.

Yes, I think effort for 2020.

We may be able to post kind of mid 20 nines, but if I would use some measure I'd probably would use 30 and then.

Look forward to trying to drift down slightly.

Okay. Thank you.

Our next question is from Timothy Coffey Janney Montgomery Scott. Please proceed with your question.

Great. Thank you.

Q.

The new loan growth outlook does that include payoffs that we saw.

Level in the fourth quarter or kind of what we saw throughout the rest of 2019.

So in terms of a payout 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 Hundredd hobbies. He to 200 million in fiscal Q, which is the elevated from overall ever.

Each payoffs in the 2018 pair yet so that's still on I think the messages that.

Our production is holding up fairly nicely. So a assuming just the average pay off about 100 hundred 30.

We think that we can grow to single to meet digits loan growth.

Okay. Thanks Bonnie.

And then what how does that kind of impact the trends within your margin given that there is that kind of slow churn in the deposit portfolio that could give you tailwinds to through year end in terms of lower deposit cost, but not necessarily in the beginning of the year.

So on the on the deposit costs again, if you think of our time deposits.

Most of those mature approximately 25% of quarter give or take five percents. So we should see.

A little bit more reduction in the first quarter, albeit at a lower rates and by the time, we get to second quarter, we've probably have now stepped into or leg to into.

The rate environment. We're currently expect that we're currently experiencing.

On the on the on the loan side.

You know a large part of the shift away from residential into the higher yielding a equipment CNR has occurred so will we would continue to see some decline in the resi, but probably not as much as we experienced at 2019.

So that said I would think we would continue to see margin kind of play within this corridor of.

330 ish.

And as long as there's fed stays where I think spend will be staying are most people expect that to stay and barring.

Headline news and unusual prepay will I.

I think is how we could probably think about 2020.

Okay. Thanks, My clarification on those are all my questions.

Our next question is from Kelly Motta Keefe, Bruyette and Woods incorporated. Please proceed with your question.

Hi, Thanks for taking my question.

Maybe staying on on the margin and kind of the balance sheet that out it looks like cash.

Elevated this quarter I'm wondering.

What the dynamics for going on there and is.

Turning to get more back to the level you're at third quarter.

Yes so.

Production by month can sometimes be uneven.

And so the the the cash balances that you saw at.

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.

Got it and securities kind of building off this level and growing with the overall balance sheet is at the right way to think about it.

Yes, so most most of.

Securities would represent.

Kind of a regular ratable growth where.

The cash as I recall that overnight that will fluctuate depending on where we are with.

Cash inflows from the portfolio versus.

Endings.

Right.

Turning back to expenses.

I said that the compensation line went up a bit this quarter I was wondering.

We are adding people its if you're adding talent.

Back office, or if you're writing to the frontline snap supporting your.

Production you had thanks.

We have an ongoing.

Talent recruitment process is so.

We did bring and and.

Some of the relationship manager type of.

Employee so that may have contributed.

Thank you.

We have no further questions in the queue at this time please continue.

Thank you for listening to Hanmi Financial's fourth quarter full year 2019 results conference call. We look forward do speaking with you again in the quarter results 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.