Hanmi Financial Q1 2024 Earnings Call Transcript

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April 23, 2024

There are 9 speakers on the call.

Operator

Ladies and gentlemen, welcome to the Hanmi Financial Corporation's First Quarter 2024 Conference Call. As a reminder, today's call is being recorded for replay purposes. I would now like to turn the call over to Ben Brodkovitch, Investor Relations for the company. Please go ahead.

Speaker 1

Thank you, Doug, and thank you all for joining us today to discuss Hamni's Q1 2024 results. This afternoon, Hamni issued its earnings release and quarterly supplemental slide presentation to accompany today's call. Both documents are available in the IR section of the company's website at homni.com. I'm here today with Bonnie Lee, President and 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.

Speaker 1

Anthony will discuss loan and deposit activities. Ron will provide details on our financial performance and then Bonnie will provide closing comments before we open the call up for your questions. Before we begin, I would like to remind you that today's comments may include forward looking statements under the federal securities laws. Forward looking statements are 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 may differ materially from those contemplated by our forward looking statements, which involve risks and uncertainties.

Speaker 1

Discussion 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 Form 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, our investor presentation and in our Form 10 Q. With that, I would now like to turn the call over to Bonnie Lay. Bonnie, please go ahead.

Speaker 2

Thank you, Ben. Good afternoon, everyone. Thank you for joining us today to discuss our Q1 2024 results. Before we get into the highlights of the Q1, I would like to remind investors of the key elements of our business strategy. First, we remain steadfast in our efforts to diversify and expand our loan portfolio and deposit franchise.

Speaker 2

We are achieving this objective through our proven core relationship banking model, which enables us to attract new customers and provide unmatched support to our existing loyal customer base. This dual promo approach has allowed us once again to expand our market share. 2nd, we consistently employ rigorous underwriting standards and vigilant credit administration practices to ensure we maintain excellent asset quality. 3rd, our focus on disciplined expense management is unwavering, which has been particularly important in the current macro environment. Staying true to these core tenets provides us with a winning strategy.

Speaker 2

During the Q1, we generated 6% annualized deposit growth driven by our relationship banking model. Our C and I portfolio grew by approximately 16% on an annualized basis due to both new and existing relationships. This also helped contribute to our solid deposit growth. We continue to exercise diligent credit management during this quarter. As a result, our asset quality improved with the current size loans declining by 11% from the 4th quarter.

Speaker 2

Additionally, non performing loans declined by 9% in the quarter. Net charge offs were also low at 10 basis points of average loans annualized. During the quarter, we sold residential mortgage loans into the secondary market, which helped to supplement our non interest income. Going forward, we expect to capitalize on market opportunities to sell more of these loans in order to further diversify our revenue base and support the management of our balance sheet. Now turning to expenses.

Speaker 2

Disability expense management remains a key focus area. Although non interest expenses were up sequentially due to investments we made in our people and data management, all other expense categories declined. Let me now review the highlights for the Q1 compared to the Q4 2023. Net income for the quarter was $15,000,000 or $0.50 per diluted share. Our return on average assets was 0.81% and return on average stockholders' equity was at 7.9%.

Speaker 2

Deposits grew by 1.5% with non interest bearing deposits remained strong at 30% of total deposits. Loan growth excluding residential mortgage sales was 0.4% and non interest income increased by 16%. I'm also pleased to report that our strategic growth initiatives are performing well. Our corporate career initiative continues to grow and expand with an increasing number of new customers coming to Hanmi through existing customer referrals, a strong sign of confidence in our team's capabilities. In the Q1, Corporate Korea produced strong growth in both loan production and deposits.

Speaker 2

Corporate Korea currently represents approximately 14% of our total loans and 13% of our total deposits. Our SBA production for the quarter was down from an elevated level last quarter. However, we remain on track to hit our quarterly production target of $40,000,000 to $45,000,000 for the remainder of 2024. Last year, we took steps to optimize our branch network with opening of 2 new branch locations, both of which are gaining traction and attracting new customers. This year, we intend to build on the progress with the consolidation of 3 branch locations, which is approximately 9% of our branch network.

Speaker 2

We'll also open a new branch in the Atlanta metro area later this year. This work is an integral part of our strategy to maximize growth while also generating cost savings within our footprint. The heart of our business has and it will always be our team members. Attracting and retaining talented people who understand and embrace our relationship banking model is critical to our success. This is an area we are constantly investing in and those investments are paying off.

Speaker 2

In today's highly competitive labor market, we recently brought on some very talented bankers and importantly, we are attracting and retaining top talent across the organization. I'll now turn the call over to Anthony Kim, our Chief Banking Officer, to discuss the Q1 loan production and deposit gathering in more detail. Anthony?

Speaker 3

Thank you, Bonnie, and thank you for joining us today. I'll begin by providing additional details on our loan production. First quarter loan production was $234,000,000 $256,000,000 or 40% from the 4th quarter with a weighted average interest rate of 8.02% as compared to 8.10% last quarter. The decline in loan production was due primarily to a decline in commercial real estate, SBA and equipment finance lending, ROC and I and residential mortgages were relatively consistent with the 4th quarter levels. We remain selective and disciplined in our pursuit of high quality loans that meet our underwriting standards in the current rate environment.

Speaker 3

CRE production was $60,000,000 down from $178,000,000 in the 4th quarter as the high interest rate environment continues to impact both traditional transaction and refinancing activity. We remain pleased with the quality of our CRE portfolio. It has a weighted average loan to value ratio of approximately 48% and a weighted average debt service coverage ratio of 2.2 times. SBA loan production was $31,000,000 in the 1st quarter, down from $48,000,000 in the 4th quarter, which was an exceptionally strong result. We also had a number of loan closing pushed into the Q2.

Speaker 3

As we have added marketing talent to this team, it continues to making strong inroads with the small businesses across our markets. Production in C and I came in at 51,000,000 relatively consistent with the Q4. Total commitments on our commercial lines of credit were over $1,100,000 in the first quarter, up 15% on an annualized basis. Outstanding balances grew by 12%, resulting in a utilization rate of 40%, up from 37% last quarter. Residential mortgage loan production was $53,000,000 for the Q1, in line with our expected range of $50,000,000 to $60,000,000 per quarter given the current interest rate environment.

Speaker 3

Most of our current lending opportunities continue to be in the purchase market as refinance activity remains subdued. Residential mortgage loans represented over 15% of our total loan portfolio, up from 14% 1 year ago. As Bonnie noted, during the Q1, we sold approximately $30,000,000 of residential mortgages from our portfolio and are currently exploring additional portfolio sales depending on market conditions. With respect to Corporate Korea, we again saw healthy demand from these customers who accounted for $53,000,000 of total loan production, which includes approximately $27,000,000 of C and I production. Our efforts to expand and grow those relationships are continuing to bear fruit.

Speaker 3

USKC loan balances were $834,000,000 up $70,000,000 or 9.1 percent from the 4th quarter and represents about approximately 14% of our total loan portfolio. Turning to deposits. In the Q1, deposits were up 1.5% on a sequential basis and 2.8% year over year. We continue to expand our partnership base with our corporate Korea clients with the deposits growing by $29,000,000 in the quarter or 3.5% from last quarter and 50% from 1 year ago. Our team is making good progress in adding new relationships that we believe we can grow over time.

Speaker 3

At quarter end, corporate Korea deposits represented just over 13% of our total deposits and nearly 15% of our demand deposits. The competition of our deposit base remains relatively stable with our mix of non interest bearing deposits at just over 30% of total deposits. This is evidence of the loyal banking relationships we have developed with our customers over the years. And now, I'll hand the call over to Ron Santarosa, our Chief Financial Officer, for more details on the Q1 financial results.

Speaker 1

Thank you, Anthony. Net interest income

Speaker 4

for the Q1 was $50,700,000 a decline of 4.7% from the 4th quarter. Net interest margin also declined 14 basis points to 2.78 percent for the Q1. These declines reflect principally the increase in the cost of our interest bearing deposits as well as an increase in the average balances of the same. The cost of interest bearing deposits was 4.16%, up 33 basis points quarter over quarter, primarily because of the effect of maturing time deposits and the 5.6% growth in the average balance of our savings, money market and time deposit accounts. Looking to the average cost of interest bearing deposits for April to date, we see that it is about 10 basis points higher than the average for the Q1.

Speaker 4

We also see that time deposit maturities for the next few quarters are comparatively lighter when compared with the Q4 of last year and the Q1 of this year. In addition, the average rate paid on those maturing time deposits is not that far from our current rates. Last, the average rate of our new loan production continues to be just over 8%. So altogether, and assuming no significant change in the interest rate environment or in loan and deposit competition, we believe our net interest margin will reach its inflection point either in the second quarter or early in Q3. Non interest income for the Q1 increased 15.8% from the 4th quarter and included a $443,000 gain from the sale of residential mortgages, a new revenue line we anticipate will continue in future quarters.

Speaker 4

The gain on sale of SBA loans of $1,500,000,000 was about the same as last quarter, but notably the premium on sales increased to 7.23% from 6.17% for the 4th quarter. Non interest expenses increased 3.5% to $36,400,000 primarily due to seasonally higher employer taxes and benefits. I would like to note a few items that we have undertaken, which will affect non interest expense in the coming quarters. 1st, to mitigate the effect of annual salary and wage increases that become effective at the start of the second quarter, all senior vice presidents and above received, in lieu of an increase restricted stock that will vest over the next 3 years. In addition, as Bonnie mentioned, we will be consolidating 3 branch offices in the Q2.

Speaker 4

We anticipate cost savings from this action as well as optimizing other areas of the bank will be approximately $1,250,000 annually commencing in the second half of the year. Credit loss expense for the Q1 was $227,000 comprised of a loan loss provision of $404,000 and a recovery for off balance sheet items of $177,000 Net loan charge offs for the Q1 were low at 10 basis points of average loans and asset quality remains favorable with declines in criticized and non accrual loans. Turning to equity capital, our negative AOCI increased $5,000,000 due to a $3,400,000 increase in unrealized after tax losses on our securities available for sale and a $1,600,000 increase in unrealized losses on our cash flow business. In addition, we purchased 100,000 shares of our common stock at an average price of $15.92 during the Q1. Tangible book value per share ended the 1st quarter at $22.86 per share and our tangible equity to tangible assets ratio was 9.23%.

Speaker 4

Commedia and the bank exceeded minimum regulatory capital requirements and the bank exceeds the minimum ratios for the well capitalized category. The company's common equity Tier 1 ratio was 12.05 percent and the bank's total capital ratio was 14.5%. With that, I will turn it back to Bonnie.

Speaker 2

Thank you, Ron. I'd like to thank the entire Hanmi team for their ongoing hard work and dedication. Their commitment and performance are the key drivers of our solid first quarter performance and ongoing track record of a consistent execution. The Hamme franchise is well positioned for sustainable growth. Our balance sheet is strong as evidenced by our robust capital ratios, ample liquidity and excellent credit quality.

Speaker 2

Our loan pipeline is healthy with an increasing number of loan inquiries, which bolsters our confidence in our ability to achieve low to mid single digit loan growth in 2024. Our mix of funding has improved with the growth in core deposits and a decline in volumes. Finally, we remain committed to exercising disciplined expense management. While uncertainty continues to impact our customers and broader economy in the higher for longer interest rate environment, we are guided by our relationship banking model. It is our compass underscoring how we operate, the growth initiatives we employ, our disciplined processes and how we treat our team members.

Speaker 2

We remain confident in our ability to drive ongoing growth and create value for our shareholders. Thank you. We'll now open the call for your questions. Operator, please open the line up to the questions.

Operator

Thank you. Our first question comes from the line of Kelly Motta with KBW. Please proceed with your question.

Speaker 5

Hi. Thanks so much for the question. I guess maybe starting out on the expense front, I appreciate that you're doing some work to kind of control what you can and bring expenses down. Ron, if I put the $101,250,000 a year on a quarterly basis that's about 400 $1,000 give or take. Do you think that do you actually expect the absolute level of expenses to go down?

Speaker 5

Or is this just going to help the expenses from creeping up? Just want to make sure I'm setting a reasonable bar because I know there's a lot of moving parts here.

Speaker 4

Sure. Thanks, Kelly. We do think that expenses from as measured from the Q1 of 2024 will in fact decline. I think we probably will hit, I'll say, a low point, if I could use that phrase or a midpoint, however you want to characterize it, where the efficiency ratio between what's happening on the revenue side, what's happening on the cost side would probably end up in the mid-50s. So I can we can kind of see that.

Speaker 4

And then at some point, as you pointed out, inflationary pressures kind of take over other ideas that kind of enter into the business mix take over. So in the 2024 calendar year, I do anticipate we should see a decline in expense before reaching a level and then, as I mentioned, inflation and other things kind of take over.

Speaker 5

Got it. That's helpful. Thanks. And then turning to credit, it looks like everything looks pretty strong there. I appreciate all the color on CRE.

Speaker 5

One thing was on Slide 22, is a tick up in other loan early stage delinquencies. Just wondering if there is any trend you're seeing there, any sort of read through to how you're viewing and managing credit?

Speaker 2

Yes, Kelly. We haven't really seen new delinquencies coming in. We do we did have under the $3,289,000 category, a little over $5,000,000 increase in that category. Half of that increase is due to a couple of residential mortgage loans, most of which have been subsequently been brought to current. The delinquency was mostly due to an administrative issue and the actual payment issue.

Speaker 2

And then there is another there is a loan for $3,000,000 which is a CRE loan, which was already classified in the previous quarter and we were in the process of foreclosing the property. So that was the temporary uptick from the $30,000,000 to $89,000,000 category.

Speaker 5

Got it. And then I appreciate the color on margin, your expectation for that to bottom either this quarter or early next. One thing that I did notice was the decline in non interest bearing again. It looks like those declined another 3.5%. Just wondering if you can provide any color as to what drove that decline if you're still seeing migration to higher cost accounts, if there was maybe a bigger chunkier deposit that had that that drove that decline?

Speaker 5

And kind of what gives you confidence that will stabilize and enable margin to start to inflect pretty soon?

Speaker 3

Yes. We keep track the shift from DDA to other interest bearing account for the past few quarters. From last quarter to this quarter, certainly, pace has been slowed down. But with the Fed recent announcement longer for higher or higher for longer. We continue to see a shift from DDA to interest bearing accounts.

Speaker 3

However, we think it's going to stabilize toward the end of the second quarter.

Speaker 5

Got it. Appreciate it. I'll sit back. Thank you so much.

Operator

Our next question comes from the line of Gary Tenner with D. A. Davidson. Please proceed with your question.

Speaker 6

Hey, this is Ahmad Hassan on for Gary Tenner. So in terms of the decline in zone production this quarter, what do you think drove the decline versus last quarter level?

Speaker 2

So last quarter, we did actually have exceptional CRE production. This quarter most of the decline is in the CRE. I think it's just overall the number of transactions that we see in the marketplace because of the interest rate environment, it's still slow. That was for the Q1, but we do see, particularly coming into the Q2, the pipeline is higher and the inquiries are definitely higher and the pipelines are higher than the Q1, the initial quarter going in.

Speaker 6

All right. Thank you. So I guess, is it fair to assume that loan pipe lines heading into the Q2 are looking strong, stronger than this quarter?

Speaker 2

1st quarter, yes.

Speaker 6

All right, sounds good. And lastly, with CDs maturing at $4.44 in the second quarter, although a lower dollar amount, but is it reasonable to assume that NIM compresses a bit more or does this mark the bottom?

Speaker 4

So certainly, we're not suggesting that Q1 marks the bottom. But as I pointed out, in April to date, the cost of interest bearing deposits is only 10 basis points higher than where we were in the for the Q1. In addition, when you look at the rate of change in what's been occurring for the last three quarters, the rate of increase on deposits interest bearing deposits has been about 30 basis points. We think that has slowed. As Anthony mentioned, the mix is kind of slowing.

Speaker 4

The rate differentials are slowing or are narrowing, I should say. In addition, when you look at the rate of increase on the loan book, that's averaged about 12 basis points for the last four quarters. So the convergence is near. And that's why we think it's either be in the second quarter or so early in Q3 that it really sees itself in the 3rd, but we do think it's in hand.

Speaker 6

That's helpful. Thank you.

Operator

Our next question comes from the line of Adam Butler with Piper Sandler. Please proceed with your question.

Speaker 7

Hey, everyone. This is Adam on for Matthew Clark. Just to start out on the deposit front, it looks like a lot of the inflow in deposit this quarter came from the money market and savings segment. And I was just curious if you could provide some commentary on how much of that was some remix from the non interest bearing side and what amount was production this quarter and what you're kind of seeing going forward? It looks like deposits from the Corporate Korea initiative led to some increases, but I was just wondering if you could talk about that?

Speaker 3

Yes. We continue to acquire new accounts on DDA as well as money markets and savings account. Migration from DBA to money market and savings account accounts for approximately $30,000,000 to $40,000,000 ish. The remainder of the increase is due to acquisition of new accounts, particularly from corporate rail accounts. And going forward, with looking at the pipeline of our deposit accounts, that trend will continue.

Speaker 7

Okay, that's helpful. And I think I heard you mention on in the prepared comments that the April to date was it the average cost of deposits are 10 basis points higher than the quarter. Is that right? Correct. And do you guys happen to have the NIM for the month of March?

Speaker 4

It's about 2 or 3 basis points lower than the average for the quarter.

Speaker 7

Okay. That's helpful. And then, just shifting over to the repurchase front. So I saw the 100,000 shares repurchased during the quarter. What does your appetite look like going forward with the roughly 300,000 left under the authorization?

Speaker 4

So we've been for the past three quarters, I believe, we've been doing about 100 or 50,000 vary between that. So given that the market disruptions that began, I want to say we've lost track of time now, but since midyear of last year or whenever it was, we continue to see very deep valuation in our currency. So we'll continue to probably nibble at those levels. And as I've mentioned in previous calls, we do meet with the Board quarterly to review our capital actions, both the dividend as well as the share repurchase. So that will continue this quarter as well as in future quarters.

Speaker 7

Okay. Great. That is also helpful and I will step back.

Operator

Our next question comes from the line of Matthew Erner with Jones Trading. Please proceed with your question.

Speaker 8

Hey guys, thanks for taking the question. I'd like to explore the residential mortgage sales. What made you guys decide right now that it was the time to kind of step into this? And then could you talk about the profile of buyers that you guys are selling to?

Speaker 3

We're looking into managing our balance sheet. That was first reason. Secondly, we're trying to generate a new revenue source of non interest income. And then to answer your last question, it was 30,000,000 dollars about 50 loans with weighted average cost of the rate of a little over 7%. And obviously, with a higher interest rate environment, it's going to be difficult to for us to get a higher premium going forward, but we continue to explore the opportunity.

Speaker 8

Right. And then are you guys able to give any guidance on what we should expect in terms of pace of aluminum sales?

Speaker 2

I think we are projecting around the $30,000,000 level per quarter. And just going back to your first question as why started this time. We built this portfolio and the platform is successfully built and we have the ability to generate the loans from the platform. So kind of as Anthony said, managing the balance sheet as well as realizing additional income source. That's why we last quarter, we share that we are looking into do this and the Q1 we were able to execute the sale.

Speaker 8

Yes, that's helpful. And then are you guys targeting a certain margin on these sales? And then that's it for me. Thank you.

Speaker 2

We are looking for premium in the range of about 2 percent 2.5%. So if we can get that going forward, I think that we'll be able to continue to sell the portfolio.

Speaker 8

Thank you.

Operator

There are no more questions in the queue. I'd like to hand it back to Bonnie Lee for closing remarks.

Speaker 2

Thank you for joining our call today. We appreciate your interest in Hami and look forward to sharing our continued progress with you throughout the year.

Operator

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

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Hanmi Financial Q1 2024
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