Q1 2024 Hanmi Financial Corp Earnings Call

Participants

Ben Brockovich; Investor Relations; Hanmi Financial Corp

Bonita Lee; President, Chief Executive Officer, Director; Hanmi Financial Corp

Anthony Kim; Executive Vice President, Chief Banking Officer; Hanmi Financial Corp

Romolo Santarosa; Chief Financial Officer, Senior Executive Vice President; Hanmi Financial Corp

Kelly Motta; Analyst; Keefe, Bruyette & Woods Inc

Gary Tenner; Analyst; D.A. Davidson & Co

Adam Butler; Analyst; Piper Sandler

Matthew Erdner; Analyst; Jones Research

Presentation

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 purpose. (Operator Instructions)
I would now like to turn the call over to Ben Brockovich, Investor Relations for the company. Please go ahead.

Ben Brockovich

Thank you, Doug, and thank you all for joining us today to discuss Hanmi's first-quarter 2024 results sector. Hanmi issued its earnings release and quarterly supplemental side slide presentation to accompany today's call. Both documents are available in the IR section of the Company's website at hanmi.com.
I'm here today with Bonita Lee, President and Chief Executive Officer of Hanmi 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. Ron will provide details on our financial performance, and then Barry 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.
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-K and 10-Q in particular, we direct you to the discussion of certain risk factors affecting our business. It's 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 late Friday. Please go ahead.

Bonita Lee

And thank you, Ben, and good afternoon, everyone, and thank you for joining us today to discuss our first quarter 2020 core results before we get into the highlights of the first quarter's, 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. 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 two-pronged approach has allowed us once again to expand our market share.
Second, we consistently employ rigorous underwriting standards and vigilant credit administration practices to ensure we maintain excellent asset quality and 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. During the first quarter, we generated 6% annualized deposit growth driven by our relationship banking model. Our C&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 continued to exercise disciplined diligent credit management during this quarter. As a result our asset quality improved with the criticized loans declining by 11% from the fourth quarter. Additionally, nonperforming 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 the residential mortgage loans into the secondary market, which helped to supplement our noninterest income. Going forward. We expect to capitalize on market opportunity to sell more or more of these loans in order to further diversify our revenue base and support the management of our balance sheet.
Now turning to expenses. Disciplined expense management remains a key focus area. Although noninterest 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 first quarter compared to the fourth quarter of 2023. Net income for the quarter was $15 million, or $0.5 per diluted share our return on average assets was 0.81% and return on average stockholders' equity was 7.9%. 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%, 0.4% and noninterest income increased by 16%. I'm also pleased to report that our strategic growth initiatives are performing well. Our corporate Korea 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 first quarter, contact Korean produced strong growth in both loan production and deposits. Corporate Korea currently represents approximately 14% of our total loans and 13% of our total deposits. Our estimated production for the quarter was down from an elevated level last quarter. However, we remain on track to hit our quarterly production target of a 40 to 45 million for the remainder of 2024. Last year, we took steps to optimize our branch network with the opening of two 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 our three branch locations, which is approximately 9% of our branch network. 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 footprints, the heart of our business heads, 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 and those investments are paying off in today's highly competitive labor market and 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 first quarter loan production and deposit gathering in more detail and believe that we have already said to you for joining us today.

Anthony Kim

I'll begin by providing additional details on our loan production. First quarter loan production was 234 million, down $156 million or 40% from the fourth 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. While C&I and residential mortgages were relatively consistent with the fourth quarter levels, we remain selective and disciplined in our pursuit of high-quality loans that meet our underwriting standards in the current rate environment.
Cre production was 60 million, down from $178 million of fourth 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 has a weighted average loan-to-value ratio of approximately 28% and a weighted average debt service coverage ratio of 2.2 times. Sba loan production was $31 million in the first quarter, down from 48 million in the fourth quarter, which was an exception on the strong results. We also had a number of the loan closing pushed into the second quarter as we have added marketing talent to this team. It continues to making strong inroads with small businesses across our markets. Production in C&I came in at 51 million, relatively consistent with the fourth quarter. Total commitments on our commercial lines of credit were over EUR1.1 billion 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 million for the first quarter, in line with our expected range of 50 to 60 million per quarter. Given the current interest rate environment, 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 loan portfolio loan portfolio, up from 14% one year ago. As Bob noted, during the first quarter, we had sold approximately 30 million 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 million of total loan production, which includes approximately $27 billion of C&I production. Our efforts to expand and grow those relationships are continuing to exhibit bear fruit. USKC. loan balances were 834 million, up 70 million or 9.1% from the fourth quarter and represents about approximately 14% of our total loan portfolio.
Turning to deposits in the first quarter, deposits were up 1.5% on a sequential basis and 2.8% year over year. We continued to expand our partnership base with our corporate career clients with deposits growing by $29 million in the quarter for 3.5% from last quarter and 50% from one year ago. Our team is making good progress in adding new relationship that we believe we can grow over time. That quarter end corporate career deposits represented just over 13% of our total deposits and nearly 15% of our demand deposits. Composition of our deposit base remains relatively stable with our mix of noninterest-bearing deposits at just over 30% of total deposits. This is evidence of the loyal banking relation 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 first quarter financial results.

Romolo Santarosa

Thank you, Anthony.
Net interest income for the first quarter was 50.7 million, a decline of 4.7% from the fourth quarter. Net interest margin also declined 14 basis points to 2.78% for the first quarter. 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 gains about 10 basis points higher than the average for the first quarter. We also see the time deposit maturities for the next few quarters are comparatively lighter when compared with the fourth quarter of last year and the first quarter of this year. In addition, the average rate paid on those between 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 the third quarter. Noninterest income for the first quarter increased 15.8% from the fourth quarter and included a $443,000 gain from the sale of residential mortgages, a new revenue line we anticipate will continue in future quarters. The gain on sale of SBA loans of $1.5 billion was about the same as last quarter, but notably the premium on sales increased to 7.23% from 6.17% for the fourth quarter.
Noninterest expenses increased 3.5% to 36.4 million, primarily due to seasonally higher employer taxes and benefits. I would like to note a few items that we have undertaken, which will affect noninterest expense in the coming quarters first, 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 three years. In addition, as Bonnie mentioned, we will be consolidating three branch offices in the second quarter we anticipate cost savings from this action as well as optimizing other areas of the bank will be approximately $1.25 million annually commencing in the second half of the year.
Credit loss expense for the first quarter 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 first quarter were low at 10 basis points of average loans and asset quality remained favorable with declines in criticized and nonaccrual loans.
Turning to equity capital, our negative AOCI increased 5 million due to a $3.4 million increase in unrealized after-tax losses on our securities available for sale and a $1.6 million increase in unrealized losses on our cash flow. In addition, we purchased 100,000 shares of our common stock at an average price of $15.92 during the first quarter. Tangible book value per share ended the first quarter at $22.86 per share and our tangible equity to tangible assets ratio was 9.23%, meaning the bank exceeded the minimum regulatory capital requirements and the bank exceeds the minimum ratios for the well-capitalized category. The Company’s common equity Tier one ratio was 12.05% and the bank's total capital ratio was 14.5%.
So with that, I will turn it back to Bonnie.

Bonita Lee

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 consistent execution among the franchises well positioned for sustainable growth. Our balance sheet is strong, as evidenced by our robust capital ratios and liquidity and excellent credit quality. Our loan pipeline is healthy with an increasing number of inbound 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 declining 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 because you notice in the initiatives with employee, our disciplined processes and how we treat our team members. We remain confident in our ability to drive ongoing growth and create value for our shareholder shareholders.
Thank you. We'll now open the call for your questions. Operator, please open the line up to the question.

Question and Answer Session

Operator

(Operator Instructions) Kelly Motta, KBW.

Kelly Motta

Thanks so much for the question. Maybe starting out on expense front, I appreciate that you're doing some work to on kind of control what you can and bring expenses down front, 100, $1.25 million a year on a quarterly basis, that's about 400,000 box, give or take on Kate, do you think that do you actually expect the absolute level of expenses to go down or is this just going to help on the expense the expenses from creeping up. I just want to make sure I'm I'm setting a reasonable bar excitement there. A lot of moving parts here Sure.

Bonita Lee

Thanks, Kelly. We do think that expenses from as measured from the first quarter of 2024 will in fact decline. And I think we probably will hit all of you, I'll say on low point, if I could use that phrase or midpoint it, however, you want to characterize it where the efficiency ratio between what's happening on the revenue side was happening on the cost side, we'll probably end up in the mid 50s. And so I can you can kind of see that. 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 takeover. So in the 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 I think it's going to take over.

Kelly Motta

Got it. And that's helpful. Thanks. And then turning to credit, it looks like everything looks pretty strong there. I appreciate all the color on CRE and one thing was on on slide 22, there is that a tick-up in other loan early-stage delinquencies. Just wondering if there's any trends you're seeing there? Any sort of read through to how you're viewing and managing credit?

Bonita Lee

Yes, Kelly, we haven't really seen new delinquencies coming in. We do have we did have under the 30 to 89 category with over 5 million 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. The current delinquency was mostly due to an administrative issue and the actual payment issue. And then there is another a loan for EUR3 million, which is a CRE loan which was already classified in the previous quarter and that we were in the process of foreclosing the property so that was the temporary uptick can be a 30 to 89 category.

Kelly Motta

Got it. And then I appreciate the color on margin. Your expectation for that to bottom either this quarter or early next. And one thing that I did notice was the decline in bearing again, it looks like those declined another 3.5%. Just wondering if you can provide any color as to and what drove that decline if you're still seeing and migration to higher cost accounts, if there was maybe a bigger chunkier deposit that had that what drove that decline and kind of what gives you confidence that that will stabilize and enables margin to start to inflect pretty soon?

Anthony Kim

Yes. We keep track on the shift from DDA to other interest-bearing account for the past few quarters from last quarter. But this quarter, certainly the pace has been slowed down. But with the Fed's recent announcement, lumber number higher, our higher for longer than the day. We see that we continue to see a shift from DDA to interest-bearing account. However, a pay TV, we think it's going to stabilize on toward the end of the second quarter.

Kelly Motta

Got I appreciate it. Thank you so much.

Operator

Gary Tenner, D.A. Davidson.

Gary Tenner

This is Amanda on for Gary Tenner. In terms of the decline in loan production this quarter, what do you think drove the decline versus last quarter's level?

Bonita Lee

So last quarter, we did actually have exceptional CRE production this quarter, and most of the decline is in the CRE. And I think it's just overall the number of class action that we see in the marketplace because of the risk or interest rate environment, it's still slow. That was for the first quarter, but we do see, particularly coming into the second quarter, the pipeline is a higher, does that increase the quarters are definitely higher than our pipelines are higher than the first quarter, the initial quarter going in.

Gary Tenner

All right. Thank you. So I guess is it fair to assume that loan pipeline heading into the second quarter are looking strong stronger than?

Ben Brockovich

Yes, this quarter first quarter, yes.

Gary Tenner

All right. Sounds good. And lastly, with CDs, maturing at four 44 in the second quarter, although a lower dollar amount. But is it reasonable to assume that the name compresses a bit more? Does this mark?

Anthony Kim

The bottom so certainly we're not we're not suggesting that the first quarter marks the bottom. But as I pointed out in April today, the cost of interest-bearing deposits is only 10 basis points higher than where we were in the of collections for the first quarter. In addition, when you look at the rate of change and what's been occurring for the last three quarters, the rate of increase on deposits, interest-bearing deposits as it has been about 30 basis points.

Romolo Santarosa

We think that has slowed. As Anthony mentioned, the mix is kind of slowing the rate differentials are slowing or 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 the third quarter that really sees itself in the third but we do think it's enhanced.

Gary Tenner

That's helpful. Thank you.

Operator

Adam Butler, Piper Sandler.

Adam Butler

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 deposits 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 a 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.
I was just wondering if you could talk about that we continue to acquire new accounts on DDA as well of those money markets and savings account.

Anthony Kim

Some migration from DDA to money market savings account accounts per account for approximately $40 billion, $30 billion to $40 billion-ish. And the remainder of the increase is due to the acquisition of new accounts, particularly from corporate Korea accounts and going forward, got with the looking at the pipeline of our deposit accounts that Trenton will continue.

Adam Butler

Okay.

Gary Tenner

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?

Bonita Lee

Correct.

Adam Butler

And do you guys happen to have the nil for the month of March?

Anthony Kim

It's of about two or three basis points lower than the average for the quarter.

Gary Tenner

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

Anthony Kim

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 off the Ross track of time now, but presence in midyear of last year or whatever it was, we continue to see very good devaluation in ours and our currency. So it will continue to probably devote it at those levels on. 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 on the share repurchase. So that will continue on this quarter as well as in future quarters.

Adam Butler

Okay. It has. That is also helpful, and I will step back.

Operator

Matthew Erdner, Jones Trading.

Matthew Erdner

Hey, guys, thanks for taking the question. I'd like to explore the residential mortgage sales and what made you guys decide right now that it was the time to kind of step into this.

Anthony Kim

And then could you talk about the profile of buyers that you guys are selling to wherever we were looking into managing our balance sheet. That was first reason. And secondly, we're trying to generate a new revenue source of noninterest income. And then that's quick to answer your that quick last question. It was a 30 million about 50 loans with a weighted average cost of debt at the rate of a little over 7%. And obviously with a higher interest rate environment. That kind of is it. It's going to be difficult to for us to get a higher premium going forward, but we continue to explore the opportunity right and then are you guys able to give any guidance on what we should expect in terms of pace of balloon sales?

Bonita Lee

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

Matthew Erdner

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.

Bonita Lee

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

Operator

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

Bonita Lee

Thank you for joining our call today. We appreciate your interest in Hanmi 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 and have a wonderful day.