Hanmi Financial Corp (HAFC) 2014 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Hanmi Financial Corporation's Third Quarter 2014 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, ma'am.

Thank you, LaTonya, and thank you all for joining us today. With me to discuss Hanmi Financial's third quarter 2014 earnings are, C. G. Kum, our President and Chief Executive Officer, and Mark Yoon, Chief Financial Officer. Mr. Kum will begin with an overview of the quarter and Mr. Yoon will then provide more details on our operating performance and credit quality. At the conclusion of the prepared remarks, we'll 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 cause our results to differ from our expectations, please refer to our SEC filings, including our most recent Form 10-K and 10-Q. In particular, we direct you to the discussion in our 10-K of certain risk factors affecting our business.

This morning, Hanmi Financial issued a news release outlining our financial results for the third quarter of 2014, which can be found on our website at hanmi.com.

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

Thank you, Christina. Good morning, everyone. I want to thank all of you for joining our third quarter earnings call today.

This was a very exciting quarter for Hanmi. In addition to our strong financial performance the quarter marked the closing of our acquisition of Central Bancorp, a transaction that we announced back in December last year. From the time of announcement to closing of the acquisition, we have had nearly nine months to plan the integration of the combined bank. I'm pleased to say that we hit the ground running when the transaction closed on August 31. With the acquisition complete, Hanmi became the second largest Korean American bank. We now have 49 banking offices and four loan production offices, serving different communities across California, Colorado, Illinois, New Jersey, New York, Texas, Virginia and Washington. The combined entity has approximately $4.2 billion in assets, $2.7 billion in gross loans and $3.6 billion in deposits, providing Hanmi with a leading deposit market share among Korean American banks in Illinois, Texas and Virginia along with a substantial market share in California.

We believe the combined entity will be a significant competitive force in our markets and will help drive meaningful growth and earnings expansion. And importantly, we are positioned to further expand our market share from our core Korean American customer base to the wider Asian American and mainstream communities by providing our customers with benefits of a larger product offering, improved lending capacity and enhanced customer service.

Looking at our third-quarter results, which reflect two months of stand-alone operations of Hanmi and one month of combined operations following the completion of the acquisition, we reported net income of $13.3 million or $0.41 per diluted share. Net income increased by 20.1% on a quarter-over-quarter basis and grew 27.7% compared to the third quarter last year.

Our third quarter profitability reflects initial benefits from the CBI acquisition and continued growth of the legacy Hanmi's balance sheet.

During the third quarter of 2014, we achieved solid growth in both loans and deposits. Net loans grew 25% to $2.6 billion and deposits grew 48.1% to $3.6 billion from a year ago. The loan growth was $327 million quarter over quarter representing a 14.2% increase. For the third quarter of 2014, the legacy Hanmi's loans grew 2% quarter over quarter. However, I am pleased to report that the new loan production for the third quarter which totaled $170 million and did not include any loans purchased was 47% higher than the second quarter loan production of $115 million, which was adjusted for loans purchased.

Loan production in the third quarter consisted mainly of $132.2 million of commercial real estate loans and $20.9 million of that SBA loans. In addition, we booked $37 million in C&I loan commitments which resulted in $16 million in outstanding balance. The growth in C&I loans represents our continued emphasis on a business banking strategy to diversify our loan portfolio. Due in part to our successful efforts to increase non-interest bearing deposits we've been able to maintain a net interest margin above industry averages.

During the third quarter, as a result of lower yield on securities and interest-bearing deposits acquired from CBI we saw net interest margin fall by 27 basis points compared to the prior quarter. Year-to-date net interest margin was down 22 basis points compared to the same period in 2013. Going forward, one of the key opportunities for us is to convert the $664 million of securities acquired from CBI to higher-yielding loans. With the recent announced hiring of two experienced Regional Presidents who will be responsible for driving growth in Texas and Illinois, we expect to be an active lender in these two markets in 2015.

Asset quality continued to improve in the third quarter with classified loans declining 2.5% in the quarter and down 47.5% year over year. In addition, non-performing loans were down to $24 million at the end of the third quarter compared to $25.4 million at the end of the second quarter of 2014.

For the legacy Hanmi, classified loans declined 2% quarter over quarter to $44 million with net charge-offs for the third quarter of $755,000.

As part of day one accounting, CBI's loan portfolio was recorded at fair market value. The fair market value discount for the loan portfolio was 15%.

We also continue to make progress on our ongoing initiatives to increase operating efficiency and to reduce expenses. As you may recall, last quarter we streamlined our operations by reducing our staff levels by 7%. We also completed the sale of our insurance subsidiaries in order to improve our focus on our core banking business franchise. During the third quarter, we continued our cost cutting efforts with the closing of a non-strategic and unprofitable branch in Rancho Cucamonga, California. As we integrate CBI into Hanmi, we will also be closing three legacy CBI branches in the first quarter of 2015.

In addition, with the system conversion scheduled to be completed in early 2015, other cost-cutting initiatives associated with this merger will be completed by the end of first quarter 2015.

With that I'd like to turn the call over to Mark Yoon, our Chief Financial Officer, to discuss the third quarter operating results in more detail. Mark?

Thank you, Mr. Kum. Good Morning, everyone. I'll discuss our financial results for the third quarter of 2014 in more detail. We generated $30.7 million net interest income before the credit loss provision in the third quarter, which was up from $28 million, or 9.6%, from the second quarter and up from $28.5 million, or 7.7%, from the third quarter year ago.

While our NIM declined in this quarter, it continues to be well above the 2.81% average posted by the 296 banks making up the SNL U.S. Bank Index for the third quarter of 2014 and in line with the 3.73% average of the 120 banks in the SNL Index for banks with assets of $1 billion to $5 billion.

Non-interest income in the third quarter was $14.3 million compared to $5.1 million in the preceding quarter, and $6.1 million in the third quarter a year ago. In the third quarter of 2014, in conjunction with the CBI acquisition, the Company recorded $6.6 million bargain purchase gain. In addition, the third quarter of 2014 gain on sales of SBA loans increased to $1.2 million from $498,000 in the preceding quarter, and $1 million in the third quarter a year ago, reflecting higher SBA loan production and premium. In the third quarter, SBA loan sales totaled $14.3 million compared to $6.8 million in the preceding quarter and $15.5 million in the third quarter year ago.

Other operating income increased to $2.2 million in the third quarter of 2014 compared to $253,000 in the preceding quarter and $416,000 in the third quarter of 2013. The increase was due mainly to an $819,000 recovery from one OREO property and an $807,000 gain recognized from the early termination of CBI's retirement plan in September.

On the expense side, non-interest expense was $26.8 million in the third quarter of 2014, compared to $18.6 million in the prior quarter and $17.6 million in the third quarter a year ago. The increases mainly related to the CBI acquisition.

Salary and employee benefits increased to $12.8 million in the third quarter, compared to $10.3 million in the preceding quarter and $9.1 million in the third quarter of 2013. Merger and integration costs increased to $3.4 million in the third quarter compared to $72,000 in the preceding quarter. There were no such costs in the third quarter of 2013. Professional fees increased to $1.4 million in the third quarter, compared to $652,000 in the preceding quarter and from $599,000 in the third quarter of 2013. The increase is attributable to an increase in professional fees incurred for risk and compliance.

The third quarter provision for income taxes was $5 million, which is an effective tax rate of 27.25%, compared to $6.9 million, or 37.37%, in the prior quarter and $6.6 million, or 38.95%, in the third quarter a year ago. For the first nine months of 2014, the provision for income taxes was $19.7 million, or 35.48%, compared to $17.5 million, or 37.04%, in the first nine months of 2013. The sequential and year-over-year decrease in our tax rate can be attributed to the bargain purchase gain.

Excluding this gain and transaction cost, the effective tax rate for the third quarter of 2014 would be 40.03%.

Moving onto the balance sheet, gross loans increased 24% to $2.68 billion, from $2.16 billion a year ago, and increased 13.9% from $2.35 billion at the end of the preceding quarter. Third quarter new loans totaled $169.9 million. Excluding $57.1 million of loans purchased in the prior quarter, new loans increased $54.7 million or 47.5% in the third quarter of 2014. There were no loans purchased in the third quarter.

The allowance for loan losses at the end of third quarter of 2014 stood at $51.2 million, representing 1.91% to gross loans and 213.1% of NPLs, compared to 2.21% of gross loans and 204.4% of NPLs in the prior quarter. There was no provision for credit losses in the third quarter of 2014.

On the deposit side, core deposits were $2.68 billion, or 74.5%, of deposits, up by $742.9 million, or 38.4%, compared to year ago. Year-over-year, our core deposit growth was fueled by a $251 million increase in demand deposits, which is a 32.2% year-over-year growth rate.

Our overall deposits were up by $1.05 billion from the preceding quarter, and up by $1.17 billion from a year ago. The percentage of non-interest bearing deposits to total deposits declined to 28.6% at September 30, 2014 from 35.8% at June 30, 2014 due to the CBI acquisition. The cost of deposits declined to 0.45% in the third quarter of 2014 from 0.5% in the prior quarter.

Now I'd like to turn the call back to Mr. Kum.

Thank you, Mark. In conclusion, I'm pleased with our third quarter results which reflect strong organic loan growth at legacy Hanmi and the initial benefits from our acquisition of CBI. We are well positioned to have a strong finish to 2014 and to carry significant momentum into 2015. These are extraordinarily exciting times for Hanmi. We look forward to completing the integration of the two organizations as quickly as possible and realize the strategic value of the combination to enhance shareholder value. Thank you. Christina?

LaTonya, let's open the call for questions.

Thank you. (Operator Instructions) Julianna Balicka, KBW.

I have several questions please. One, I think a tax housekeeping question. It appears that there was some non-operating tax benefit in the tax rate. I think you said that the effective tax rate ex merger charges on BPO gain will be 40%. So is that the case?

The two major factors that reduced the effective tax rates were bargain purchase gain, which is permanent difference and also transaction cost like fees paid to our investment bankers and lawyers related to the acquisition should be capitalized. So those are the two major ones that play in the effective tax rate.

So does that look like there is a tax benefit?

No, no, that's not -- those are not tax benefits. Basically it includes -- you need to take it out from -- when you're calculating the taxable income. So you increase your taxable income, right.

Right.

You need to add it back because it is expense item form a [book] purposes. For tax purposes, you need to take them out. So your taxable incomes increase. So your effective tax rate goes up.

Okay. All right. And then in terms of the full quarter run rate of operating expenses for next year, one in this quarter, what was the [one main] contribution from United Central? And kind of thinking about next year's run rate for expenses, one, what would be some elevated expenses that should migrate downwards because (inaudible) as merger charges; and two, could you quantify the cost saving dollars that you are expecting once [you are all in]?

We're not going to provide you with -- we are not able to provide you with the forecast for 2015 as we speak in the detail that you probably want. But let me just kind of [parcel] that out a little bit to give you a sense of the trajectory, the upward trajectory, of our income.

Based on the [marks] that we have taken, we are projecting that the net interest income for the fourth quarter and for the full year of 2015 to be up by somewhere between 14% to 16%. On the expense side, the one-month run rate of UCB's personnel annualizing that, we believe that there is about -- roughly about a 35% to 38% reduction that will manifest as of the end of the first quarter of 2015. That's roughly about a, on an annualized basis, $5.6 million number as it relates to the former UCB side as far as the salary and benefits -- salary line item is concerned.

However, the offsetting expenses that we will incur to ramp up the lending platform in both Texas and Illinois, but there should also be offsetting revenue coming from the loans that will be generated from those two offices.

Are there any legacy costs that could migrate downwards such as professional fees et cetera that are on the Hanmi side?

There shouldn't be. You are talking about 2015?

No, in your third quarter number, it looks like your professional fees are elevated.

Yes, I mean associated with the merger basically.

Well, the professional fees that you are seeing here of $1.4 million for the third quarter is just related to normal professional fees, consulting fees we paid for risk and compliance and also COSO 2013 as well.

Okay. All right. And then in terms of SBA income, is that an income that you gained this quarter kind of the run rate that we should be thinking about or is this sometimes at the end from previous quarters about some deals that closed a little later or anytime in the future?

I think for 2015 a $120 million [7A] production is a reasonable expectation and then you can do the analysis as far as what their premium income might be, but we believe that we can comfortably with the new team and the new leadership generate about $120 million and if we can accelerate some of the infrastructure enhancement on the SBA side that number could go up.

Okay, excellent. And then in terms of the new hires that you put in Texas and Midwest that you are hiring, what kind of contributions to loan growth are you expecting from the new markets once they are up and running?

Overall, we are expecting to generate double-digit loan growth for Hanmi for 2015. Depending on the opportunities, both Texas and Illinois may end up exceeding that but overall for the organization we believe that we should be able to obtain low double digit loan growth in 2015.

And are you planning to transform any of the CBI's deposit base, any larger deposit run off that you're planning or anything like that in terms of leveraging up your loan to deposit ratio again?

Yes, I mean some of the higher yielding or higher rate [of CDs] we'll probably let it run off. I think that's logical. For us the better way to leverage is to generate more loans and we believe that with the people we have in place with the infrastructure that's being built in Texas and Illinois that we will be able to better leverage.

Now having said that though as you have heard me say before our goal is not to be 100% loan to deposit. That's just not our business model. With our focus on generating deposits just as much as generating good quality loans, the comfortable zone for us is in the high 80%s and perhaps even as much as low 90%s. But I'd say with the additional deposits that we've picked up, we'll probably be hovering in the high 80%s or that will be the target, I should say, for the near future.

Okay, very good. And a final housekeeping question. Was there any accelerated yields from UCB launch this quarter and what is the accretion income expectations from that portfolio (inaudible)?

Are you talking about for the one month of third quarter or going forward?

For one month as well as for both.

One month for the third quarter wasn't all that significant.

No, there was no acceleration of yield accretion here for the September.

For the fourth quarter, we're expecting some more in the range of about $4.5 million accretion.

What he meant was the $3 million for the fourth quarter for credit and then $1.7 million for CD premium amortization.

Great. And what was the final fair value, Mark, on the UCB loan?

15%.

15%. Okay. Very good. Thank you very much. I will step back.

You bet.

(Operator Instructions) Gary Tenner, DA Davidson.

Couple of questions. I wonder if on the personnel line, it was up more than I would have expected just from the one month of CBI. So was there anything else on that line item that contributed to the $2.6 million sequential quarter increase?

The $2.6 million consist of $1.6 million from UCB and then also we accrued additional bonus provision in the third quarter.

It's more of a one-time item obviously. With the expectation that with the successful year that we're having in 2014, the Board and the management's plan is to reward the hard working employees here at Hanmi. So that's not an ongoing run rate as far as the bonus item is concerned.

Okay. And then, your comments on the net interest income, kind of growth expectations for the fourth quarter and 2015, 14% to 16%, is that coming off this abbreviated third quarter of CBI benefit or is that off of more -- I guess, I am just not clear how that translates. Is the 2015 growth rate off of a kind of normalized fourth quarter and then growing up that, is that what you're suggesting?

This is strictly as it relates to the accretion item coming from the CBI fair market valuation process. So as it relates to the growth in the net interest income from the organic activities, that's not part of that. So that could be incremental increase above and beyond the items that I just mentioned.

Okay. So the 14% to 16% was purely from the decreasing asset.

Correct.

Okay. Thank you for that. And just one last question because I am not clear on exactly the numbers that were transferred over from CBI. Of the period-end loan balances of the $2.68 billion, how much of that is actually represented by CBI balances?

At September 30, the former UCB loan balance was $283 million.

And that's net of the fair value mark?

Yes, the fair value, right.

(Operator Instructions) We have no further questions in queue at this time, please continue.

Thank you for listening to Hanmi Financial's third quarter 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.