Hanmi Financial Q1 2023 Earnings Call Transcript

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April 25, 2023

Key Takeaways

  • Hanmi delivered 6% year-over-year net income growth to $22 million ($0.72 per diluted share) in Q1, generating a 1.21% return on average assets and 12.19% return on average equity while maintaining a strong liquidity and capital position (total risk-based capital 14.8%, tangible common equity 8.77%).
  • First-quarter loan production totaled $304 million at a 7.19% weighted average rate, driving slight annualized loan growth and contributing to sequential deposit growth of 2% (annualized) to $6.2 billion, with 38% of deposits in noninterest-bearing accounts.
  • Asset quality remained robust with nonperforming assets at 27 basis points of total assets, an allowance for credit losses of 1.1% of loans, low net charge-offs and only one new nonaccrual addition (a healthcare loan with a $2.5 million specific reserve).
  • The net interest margin declined 39 basis points to 3.28% due to rising deposit costs (deposit beta ~56%); noninterest expense fell 3% quarter-over-quarter, supporting an efficient operating ratio despite modest inflationary pressures.
  • Strategic initiatives include solid residential mortgage production of $97.2 million in a challenging market, intensified customer outreach amid banking sector volatility, and plans to open a new East Bay branch in Q4 to capture regional growth.
AI Generated. May Contain Errors.
Earnings Conference Call
Hanmi Financial Q1 2023
00:00 / 00:00

There are 10 speakers on the call.

Operator

Ladies and gentlemen, welcome to the Hanmi Financial Corporation's First Quarter 2023 Conference Call. As a reminder, today's call is being recorded for replay purposes. I would now like to turn the call over to Larry Clark, Investor Relations for the company. Please go ahead.

Speaker 1

Thank you, Doug, and thank you all for joining us today to discuss Hanmi's 1st quarter 2023 financial results. This afternoon, Hanmi issued its earnings release and quarterly supplemental slide presentation to accompany today's Both documents are available on the IR section of the company's website. I'm here today with Bonnie Lee, President Chief Executive Officer of Omni Financial Corporation Anthony Kim, Chief Banking Officer and Ron Santarosa, Chief Financial Officer. Bonnie will begin today's call with an overview, Anthony will discuss loan and deposit activities, and Ron will provide details on our financial performance and then Bonnie will provide closing comments before we open the call up to your questions. Before we begin, I'd like to remind you that today's comments may include forward looking Statements under the federal securities laws.

Speaker 1

Forward looking statements are based on current plans, expectations, events Actual results may differ materially from those contemplated by our forward looking statements, which involve risks and uncertainties. Discussions of the factors that could cause our actual results to differ materially from these forward looking statements can be found in our SEC filings, including our reports on Forms 10 ks and 10 Q. In particular, we direct you to the discussion of certain risk factors affecting our business contained in our earnings release, in our investor presentation and in our Form 10 ks. With that, I'd now like to turn the call over to Bonnie Lee. Bonnie, please go ahead.

Speaker 2

Thank you, Larry. Good afternoon, everyone. Thank you for joining us today to discuss our Q1 results. Hanmi delivered strong financial results in the Q1 of 2023 even in the face of a continued rising interest rates, Economic uncertainty and a highly volatile banking environment. We believe these results are a testament to the strength of our relationship banking model and our team's consistent execution.

Speaker 2

I am pleased to report that we delivered 6% year over year growth in net income $22,000,000 or $0.72 per diluted share, all while maintaining high levels of liquidity, being selective on new loan originations and exercising disciplined expense management. We added net new customers during the quarter, which led to sequential growth in deposits. This reflects our disciplined execution of new business initiatives and the strength of our relationships portfolio with the new production outpacing payoffs, paydowns, amortization as we maintain our disciplined underwriting standards. Importantly, our overall asset quality metrics remain excellent. We continue to focus on high quality loans, Discipline underwriting and vigilant credit administration practices.

Speaker 2

Other highlights for the quarter include the following. Loan balances grew to $6,000,000,000 at quarter end, up nearly 1% on an annualized basis. 1st loan production was $304,000,000 with an attractive weighted average interest rate of 7.19%. Deposits increased 2% on an annualized basis from year end 2022 to 6,200,000,000 We are proud of the robust deposit franchise that we have built over 4 decades, with a consistent focus on pursuing new customers and expanding our existing As a result, non interest bearing deposits remained high at 38% of the deposit portfolio at quarter end. We continue to exercise disciplined expense management, leading to a 3% decline in non interest expense quarter over quarter.

Speaker 2

Our overall asset quality metrics are excellent as non performing assets to total assets remained low at 27 basis points. We generated a return on average assets of 1.21 percent and a return on average equity of 12.19 percent. And we also improved upon our already strong capital levels with a total risk based capital at 14.8% and a tangible common equity Ratio of 8.77 percent. Turning to our strategic initiatives. Our residential mortgage production was a solid At $97,200,000 even in a challenging mortgage market, we attribute this success to the strong relationships we have established With our corresponding lending partners over the past couple of years.

Speaker 2

While we experienced some deposit outflows from our corporate Korea customers in mid March, We gained new corporate career customers during the quarter that offset those outflows. During the We remain focused on what we do best, serving our customers and helping them to manage through challenging times. For much of the 2022 and continuing into 2023, we stepped up direct communication with our customers To better understand the impact of shifting economic factors on their businesses and to identify solutions to meet their rebounding banking needs. As industry events were unfolding in March, we doubled our customer outreach efforts. While our intent was to assure that our bank was in a very strong financial condition.

Speaker 2

I was especially moved as some of our customers asked me what they could do for us. This response is truly an example of the deep relationships we have built over the years. And we continue to look for new opportunities, grow and expand our franchise. For example, we are targeting to open a new branch in the East Bay region of San Francisco in the Q4 of this year. This move will enable us to serve growing client demand in this vibrant regional submarket.

Speaker 2

Of course, We will continue to explore opportunities to further optimize our footprint in key markets across the United States. In summary, I am grateful to our team of highly skilled bankers who work tirelessly to Build and maintain the trusted banking relationship with our customers, which is the hallmark of the Hanmi Bank brand. With that, I'll turn the call to our Chief Banking Officer, Anthony Kim, to discuss Q1 loan production and deposit gathering in more detail.

Speaker 3

Thank you, Bonnie. I'll begin with additional details on our loan production. 1st quarter production was $304,000,000 down 36 from the Q4 and as Bonnie noted, reflects the current environment of higher interest rates and economic uncertainty. In addition, we are being more selective on the loans that we approve and have passed on a number of opportunities this quarter as we will not sacrifice credit quality in order to achieve loan growth. I'll note that our residential mortgage production, While down in the Q1, as expected, was still quite strong at $97,000,000 which was up $36,000,000 from the Q1 of 2022.

Speaker 3

Our focus remains on the non QN market and our correspondent lenders in this market continue to be A large portion of our production was for home purchases rather than refinances. C and I funding was down in the 1st quarter, We're refunded $27,000,000 in loan balances. Historically, C and I fundings are seasonally lower in the Q1, But we also believe that the slowdown this quarter also has to do with our customers being more cautious. Total commitments on our commercial lines of credit for the quarter were $1,050,000,000 up slightly from year end. Outstanding balances on these lines decreased by 30.6% between quarters, resulting in a first Our team of business development officers is doing a great job, and we are well positioned to continue to serve this key market.

Speaker 3

With respect to our corporate Korea initiative, loan production declined modestly in the Q1 as many of our At this stage, as loan balances were $764,000,000 at quarter end, representing nearly 13% of our total loan portfolio And up just over $100,000,000 from this time last year. The average rate on all new loan production for the first Quarter was 7.19 percent, up 30 40 basis points from the 4th quarter. Payouts were $125,000,000 for the quarter, up slightly from $121,000,000 for the prior quarter. The average rate on loan payoffs was 7.27 percent, up 100 basis points from our Q4 payoffs. Our total loan portfolio grew slightly in the Q1 as our 304,000,000 New production exceeded our total payoffs, amortization and paydowns.

Speaker 3

Now turning to deposits. As Bonnie mentioned, we grew our deposits by $33,000,000 in the quarter, up 2% on an annualized basis. We are pleased with this result given all of the volatility created by the turmoil in the banking sector. We estimate that we experienced deposit outflows of about 1% of our total deposits. Importantly, however, Deposits were still up from 4th quarter levels.

Speaker 3

Given the higher interest rate environment, we did continue to see a shift In the competition of our deposits during the quarter, as some deposits in checking, money market and saving accounts moved into time deposits. However, non interest bearing DDAs represented 38% of our total deposits at quarter end, which we believe validates our strong customer service and local market relationships. In addition to mix shift in deposits, We saw renewed interest in deposit insurance programs that we affect on a reciprocal basis. Reciprocal time deposits, also known as SEDARs, We're $67,000,000 at the end of Q1, and we recently launched a deposit sweep program, also known as ICS. Overall, we are very pleased and grateful that our customers chose to stay and bank with Hanmi.

Speaker 3

And now I'll hand the call over to Ron Syrosa, our Chief Financial Officer, for more details on our Q4 financial results.

Speaker 4

Thank you, Anthony. Let's begin with net interest income, which was $57,900,000 for the quarter And down $6,700,000 from the 4th quarter. The decline here was primarily due to the increase in the cost of our interest bearing deposits. The cost of interest bearing deposits rose 103 basis points to 2.73%. While the Fed did raise their rate 50 basis points during the Q1, modest as measured against the 4 25 basis point increase for 2022.

Speaker 4

We believe our deposit interest expense now better reflects the current interest rate environment as well as renew deposit or interest in time deposits. Our cycle to date interest bearing deposit beta was approximately 56%. Loan yields for the Q1 aided by new loan production at 7.19% rose 30 basis points to 5.51%. Turning to our debt interest margin, EBITDA declined from the prior quarter, 39 basis points to 3.28%. The increase in the cost of interest bearing deposits contributed 60 basis points to this decline, while the increase in loan yields offset that effect by 21 basis points.

Speaker 4

When we met to discuss our 2022 Q3 results, I noted that the cost of our interest bearing deposits for October We're about 45 basis points higher than the 3rd quarter average. When we met to discuss our 2022 Q4 results, I noted that the cost of our interest bearing deposits for January were about 70 basis points higher than the 4th quarter average. Today, the cost of our interest bearing deposits is about 35 basis points higher than the Q1 average. The rate of change is slowing. I will also note the mix shift in our deposit portfolio.

Speaker 4

At the start of the cycle, time deposits were 16% of the portfolio, While non interest bearing demand deposits were at 46%. At the end of the Q1, time deposits were 38% of the portfolio and non interest bearing demand It appears that most of the heavy lift into the current environment has occurred. Moving on, non interest income was $8,300,000 for the Q1, up from $7,500,000 for the prior quarter. The increase essentially reflecting Loan customer interest rate swap fees and the absence of the 4th quarter valuation adjustment on bank owned life insurance. Encouraging, while the volume of SBA loans sold during the Q1 declined, we did see a notable increase in the trade premiums, rising to an average of 7.8 5% for the quarter.

Speaker 4

Non interest expense was $32,800,000 down $1,000,000 from the 4th quarter. Here we saw lower professional fees, a recovery of the 4th quarter valuation adjustment to servicing assets and a recovery of ORE and repossessed personal property expenses. Non interest expenses as a percentage of average assets or as a function of revenues, the efficiency ratio, remained in favorable ranges. Credit loss expense for the Q1 was $2,100,000 and included a positive loan loss provision of $2,200,000 and a $100,000 negative provision for off balance sheet items. The allowance for credit losses increased to $72,200,000 or 1.1 percent of loans, up 1 basis point from year end.

Speaker 4

Net charge offs to average loans were annualized 10 basis points for the Q1 and reflect a larger contribution from our equipment finance portfolio. Delinquencies remained low with the quarter end uptick being resolved early this quarter. Classified loans remained low And non accrual loans saw a $10,000,000 addition of a healthcare industry loan with a specific allowance of $2,500,000 Overall, we believe our asset quality remains strong. Turning to funding, liquidity and capital. As Bonnie and Anthony have noted, Our deposit base is solid with strong customer relationships and little reliance on broker deposits or wholesale funds.

Speaker 4

Personal and business customers equally represent our core franchise with 60% of these deposit liabilities enjoying FDIC insurance. The ratio of loans to deposits remained essentially unchanged quarter over quarter at 96%, and there has been no change in our FHLB borrowings. Our securities portfolio, all of which are available for sale and carried at current market values, provide a cushion of liquidity and when combined with our cash balances, Represent 17% of our deposits. The after tax unrealized loss on our securities portfolio does reduce our capital position. However, for the Q1, we saw capital grow $24,700,000 from a decline in those unrealized losses, as well as from the quarterly contribution of earnings less dividends.

Speaker 4

Tangible book value per share increased 3.7% to $21.30 at March 31, 2023. Omni and the bank continue to exceed Minimum regulatory capital requirements and the bank continues to exceed minimum ratios for the well capitalized category. The common equity Tier 1 ratio for the company was 11.59% 13.06% for the bank. With that, I will turn it back to Bonnie.

Speaker 2

Thank you, Ron. To conclude, we continue to have a strong balance sheet, ample liquidity and excellent capital ratios and are ready to serve the needs of our extending client base. I'm proud of the results our team delivered during the Q1. We are seeing that customers remain sensitive to the interest rate environment, and we expect the sensitivity will impact both deposits and loan production. That being said, our team is demonstrating the tremendous value that our customer relationships bring, And we are also seeing the value that comes with a strong communication during these uncertain times.

Speaker 2

As we have said, We remain vigilant in our credit administration practices. We are committed to responsible and disciplined growth while maintaining our strong levels of credit quality. We are focused on delivering attractive returns to our shareholders by serving the communities in which we operate and by developing our team here at Hanmi. Thank you. We'll now open the call for your questions.

Speaker 2

Operator, please open the line up to the questions.

Operator

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. Our first question comes from the line of Gary Tenner with D. A. Davidson.

Operator

Please proceed with your question.

Speaker 5

Thanks. Good afternoon, everybody. I wanted to ask first about Some of the deposit commentary, Ron. You said in your comments that most of the heavy lifting in the current environment appears to be done. And I just I'm curious about, kind of the confidence in that from a deposit mix perspective.

Speaker 5

I mean, still up 38% non interest bearing GVA, if you go back, which is down certainly year over year, but if you go down back to kind of entering the pandemic, it was at 30%. I know that there's been structural changes at the bank, but what gives you the confidence, I guess, in saying the heavy lifting On that deposit side of things has been done or already reflected in the numbers.

Speaker 4

So what I was observing is the rate of change, Gary. So in that implicit Some of the assumptions with respect to composition, etcetera, remain relatively constant. And so in the Similar fashion, when we were on the upswing of the rate increases through 2020, you saw a very large rate of change Going from Q1 to Q2 and then it started to diminish, and then finally, you know, descend here in the Q1. I think again the premise being that we're in the rate environment, we're kind of getting close to the end of the rate cycle, the composition stays relatively the same, Then you should start to see that bring a change diminish as you move out over the next few quarters.

Speaker 5

Okay. But you were so then you weren't saying that so that as we think forward then to the mix, you weren't suggesting that You thought the mix shift was completely done. Is that right?

Speaker 4

No. We're seeing a decline in that mix shift, meaning that Those individuals or those depositors that had a heavier tilt towards DDA have effectively moved their balances To run their DDA or operating accounts relative to savings and time. So that most of that has occurred. So It's not as if there are a bevy of people who have yet to do that. Most of that has occurred.

Speaker 4

It doesn't mean it's done, but most of it has happened.

Speaker 5

Okay. I appreciate the clarification. And then I think you answered this question or perhaps alluded to it, but In terms of the increase in CD balances over the course of the quarter, about $400,000,000 or so, was that Primarily customer time deposits shifting or did you add brokered to the balance this quarter?

Speaker 3

Yes. We've been tracking those deposit movements. Out of Total of $424,000,000 CD growth, approximately a little over 50% was the migration from DDA And other interest bearing accounts.

Speaker 4

And with respect to broker deposits, Gary, I think we only have about $85,000,000 or so left Of 3 year money that was once 35 basis points. So we're not adding to that portfolio.

Speaker 5

Okay, great. If I could ask one more question. As it relates to the loan growth outlook for the year, obviously, Modest growth this quarter, production level is quite a bit lower. Is there any as you think of visibility and pipeline And the next couple of quarters at least, is this kind of pace of growth or production level, what you might expect over the near term?

Speaker 2

So, I mean, we expect overall loan growth at least the first half of the year would moderate. Having said that though, just comparing the Q1 going into the Q1 loan pipeline versus Beginning of the Q2 loan pipeline, loan pipeline itself is up. We see the increasing trend. However, as I had mentioned, we are very selective in the deals that we chose to do and the pricing that we chose to do. So we'll still have to see.

Operator

Thank you. Our next question comes from the line of Matthew Clark with Piper Sandler. Please proceed with your question.

Speaker 6

Thank you. Just on the margin kind of drivers there. I think, Ron, you mentioned the cost of interest bearing deposits being up 35 basis points relative to the average in the quarter. Was that a spot rate or was that the average in April so far? Just want to clarify that.

Speaker 2

April to date.

Speaker 6

Okay. Great. And then do you happen to have the average margin in March?

Speaker 4

I'd have to look at, I think it's our slides in the footnote.

Speaker 6

Okay. I can find it then.

Speaker 4

Yes. If you would say, I don't have my glasses with me, so I can't read it too well.

Speaker 6

I'm kind of going down that same path. And then, in terms of deposit flows, any update through April to date? Any I assume there's seasonal outflows with taxes, but any you've seen additional inflows or outflows that's maybe unrelated to taxes?

Speaker 2

Okay. Okay.

Speaker 6

And the new non performer that I think $10,000,000 That was added this quarter, trying to find it in your deck. But can you give us a sense for what happened there in the basis for the specific reserve?

Speaker 2

Sure. We believe it's a one off of the case. It's actually a hospital loan that's under Beginning to go into reorganization. So at this current time, we based on the Availability of the information and the progress that's in, we provided the specific reserve of $2,500,000 for that loan.

Speaker 6

Okay. And then just on capital, it's building back here nicely, but we're also Likely going into a recession, any update on the buyback or willingness to do that?

Speaker 4

Again, Matthew, as we've mentioned before, I think we'll be very patient with capital. It served us well through the upheaval That we experienced in 2022. And I think so far it served us well for a little bit of upheaval for a different reason Here in the 1st part of 2023.

Speaker 2

Got it. Thank you.

Operator

Our next question comes from the line of Kelly Motta with KBW. Please proceed with your question.

Speaker 7

Hi. Good afternoon. I think maybe I'll circle back to the credit side of things. I really appreciate all Color you guys provide on in your deck about different asset classes. And it looks like From your disclosures, your office portfolio, so far is holding up very well.

Speaker 7

Where Are you guys most closely watching and conversely, where are you seeing still seeing really good risk adjusted return At this point, in the cycle, I know Bonnie, you had said you were being incredibly selective on the origination side.

Speaker 2

Yes. I mean, I think, in this given environment, it's not just one sector. I think across the board, I think you have to be very cautious and we evaluate each credit at a time and we look at the merits of the credit As well as the pricing that we can get for. So it's not in a particular one specific industry or sector, But I think it's across the board.

Speaker 7

Okay. Understood. On the expense front, the release Called out an adjustment on the servicing asset that benefited expenses. Ron, do you have how large that was? And excluding that, is that a good go forward run rate for expenses?

Speaker 7

And any areas where you can manage, given that the Revenue outlook is just more challenging in this rate environment.

Speaker 4

So I think the valuation adjustment was either 0.3 or 0.4, so 300,000 or 400,000, I don't remember which of the 2. And it just reversed itself because shift in the interest rate environment, especially the discount rate. So that can come back again depending on how The interest rate markets are when we value that particular portfolio or it could be non existent forever in a day. With respect to expenses, there's a little bit of variability that we get with OR REO and Represents Personal Property. So if you so I always kind of look at that before the expense because that one's very hard to predict if We are we get fortunate or something happens.

Speaker 4

So there the run rate is about $33,000,000 And when I sit back and look at that, we will have merit adjustments that go into effect here in the second quarter. So probably looking at about maybe a 5% increase to reflect at least that idea and then throw in The mix of other ideas that kind of move with inflationary pressures.

Speaker 7

Awesome. I appreciate the color. Thanks. Thanks, guys.

Speaker 2

Thanks.

Operator

Our next question comes from the line of Tim Coffey with Janney Montgomery Scott. Please proceed with your question.

Speaker 8

Good. Thank you. Afternoon, everybody.

Speaker 2

Good afternoon.

Speaker 8

Bonnie, afternoon. There was a comment made about the corporate Korea clients and deposits. There was some outflow in deposits. And I'm wondering, do those deposits move to other institutions And to their deposit portfolios or where those deposits moved out for investment purposes?

Speaker 2

Let's just give a one Particular client, at very onset of the March 10 event date, the client notified us That they're moving their deposit, but they said temporarily. And so we hope to get that back. So I would think that it depends on the customers, but mostly just being cautious, they wanted to Kind of diversify their deposits to other institution, mainly, obviously, larger institutions. So not so much into the for their investment or other purposes, but more of a temporary shelter type of deposit movement.

Speaker 8

Okay. Do you know what the how ready the balance is of deposit outflow from corporate clients in the quarter?

Speaker 3

Yes, it's about a little less than 40,000,000 From maybe a handful of customers.

Speaker 9

Okay.

Speaker 8

Thank you. That's very helpful. And then Bonnie, just looking at the totality of your customer base, Cobra Korea plus legacy customers, Have you seen a material change in their behavior since mid March, since some of the banking stress came about?

Speaker 2

So I have to say, within the 1st week of the event date of March 10, there was a A little bit of concerns expressed. And that's why we have really doubled the efforts of customer communication reaching out to the customers. And I think that's had subsided about 2 weeks later. And as we speak, I think that our customers clearly Understand that banks that were having challenges and Anand Hanmi is a very different bank in terms of The customer base as well as the loan and deposit competition of those customers.

Speaker 8

Okay. All right. Great. Those are my questions. Thank you very much for your time.

Operator

Our next question comes from the line of Jason Stewart with Jones Trading. Please proceed with your question.

Speaker 9

Hey guys, thanks for taking the Question, I wanted to ask about 2 topics. Number 1, how you feel the commercial real estate market Is right now, just given where cap rates are? And 2, where you think Transition rates are moving on the Non QM portfolio.

Speaker 2

In terms of a commercial real estate, I think just the demands are down. And I think given the environment as well as The increase in the interest rate, because most of the CRE customers, they like to entertain with the fixed rate notion. So overall, in the CRE production side, even particularly in the Purchase transactions as well as refinances. And I'll have Anthony answer on this. Mortgage?

Speaker 3

Yes. Don't care market, I mean, believe it or not, despite of slowdown in purchase market, We continue to see purchase transactions. So non K market has been very stable and good for us.

Speaker 9

Okay. Thanks for taking the question. Appreciate it.

Operator

Our next question is a follow-up question from the line of Matthew Clark. Please proceed with your question.

Speaker 6

Hey, thanks for the follow-up. Two questions. 1, do you have any appetite to restructure your securities portfolio With the duration of our 5 years and yields are moving higher, but probably not as much as you'd like, just wanted to check-in on that.

Speaker 4

Yes. So Matthew, no real plans. I mean, we'll be when opportunities present themselves, we probably will take advantage. But there's no real effort or desire afoot to restructure that portfolio.

Speaker 6

Okay. And then just back to the office commercial real estate exposure, the average balances look Relatively low at $900,000 do you have a mix of how much of that $534,000,000 of loans is owner occupied Non owner?

Speaker 2

Yes. I would say most of the office properties are done on owner occupied.

Speaker 6

Are non or investor or owner occupied?

Speaker 2

Non owner occupied. Okay. Investor. Okay. Got it.

Speaker 2

Thank you. There Your interest in Harmony and look forward to sharing our continued progress with you throughout the year.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.

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