Hanmi Financial Corporation (NASDAQ:HAFC) Q1 2023 Earnings Call Transcript
Hanmi Financial Corporation (NASDAQ:HAFC) Q1 2023 Earnings Call Transcript April 25, 2023
Hanmi Financial Corporation misses on earnings expectations. Reported EPS is $0.72 EPS, expectations were $0.76.
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.
Larry Clark: Thank you, Doug and thank you all for joining us today to discuss Hanmi’s first quarter 2023 financial results. This afternoon, Hanmi issued its earnings release and quarterly supplemental slide presentation to accompany today’s call. Both documents are available on the IR section of the company’s website. I’m here today with Bonnie 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, 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. 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. Discussions of the factors that could cause our actual results to differ materially from those – from these forward-looking statements can be found in our SEC filings, including our reports on Forms 10-K 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-K.
With that, I’d now like to turn the call over to Bonnie Lee. Bonnie, please go ahead.
Bonnie Lee: Thank you, Larry. Good afternoon, everyone. Thank you for joining us today to discuss our first quarter results. Hanmi delivered strong financial results in the first quarter of 2023, even in the face of 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. I am pleased to report that we delivered 6% year-over-year growth in net income of $22 million or $0.72 per diluted share, all while maintaining high levels of liquidity in selective on new loan originations and exercising disciplined expense management. We added net new customers during the quarter, which led to a sequential growth in deposits.
This reflects our disciplined execution of new business initiatives and the strength of our relationships in the communities we serve. As anticipated, loan production moderated during the quarter. However, we were still able to grow our loan portfolio with a new production, outpacing payoffs, pay-downs, amortization as we maintain our disciplined underwriting standards. Importantly, our overall asset quality metrics remain excellent. We continue to focus on high-quality loans, disciplined underwriting and vigilant credit administration practices. Other highlights for the quarter include the following. Loan balances grew to $6 billion at quarter end, up nearly 1% on an annualized basis. First quarter loan production was $304 million with an attractive weighted average interest rate of 7.19%.
Deposits increased 2% on an annualized basis from year-end 2022 to $6.2 billion. 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 relationships. 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. Our overall asset quality metrics are excellent as nonperforming assets to total assets remained low at 27 basis points. We generated return-on-average assets of 1.21% and a return-on-average equity of 12.19%. 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%.
Turning to our strategic initiatives. Our residential mortgage production was solid at $97.2 million 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. While we experienced some deposit outflows from our corporate career customers in mid-March, we gained new corporate career customers during the quarter that offset those outflows. During the quarter, we remain focused on what we do best, serving our customers and helping them to manage through challenging times. For much of 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 evolving banking needs.
As industry events were unfolding in March, we doubled our customer outreach efforts. While our intent was to assure customers that our bank was in a very strong financial condition, 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 to 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 fourth quarter of this year. This move will enable us to serve growing client demand in the vibrant regional submarket. 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 will turn the call to our Chief Banking Officer, Anthony Kim, to discuss first quarter loan production and deposit gathering in more detail.
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Anthony Kim: Thank you, Bonnie. I’ll begin with additional details on our loan production. First quarter production was $304 million, down 36% from the fourth quarter 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 approved 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 first quarter, as expected, was still quite strong at $97 million, which was up $36 million from the first quarter of 2022. Our focus remains on the non-QM market, and our correspondent lenders in this market continue to be active.
A large portion of our production was for home purchases rather than refinances. C&I funding was down in the first quarter, where we funded $27 million in loan balances. Historically, C&I fundings are seasonally lower in the first quarter, but we also believe that the slowdown this quarter also has to do with the customers being more cautious. Total commitments on our commercial lines of credit for the quarter were $1.05 billion, up slightly from year-end. Outstanding balances on these lines decreased by 30.6% between quarters, resulting in a first quarter utilization rate of 38%, down from 40% in the fourth quarter. SBA 7(a) loan production was $34 million for the first quarter, lower than our long-term target for the once again. We are being very selective about the new loans that we are willing to make.
Our team of business development officers is doing a great job, and we are well positioned to continue to serve this key market. With respect to our Corporate Korea Initiative, loan production declined modestly in the first quarter as many of our customers are being cautious in this uncertain economic environment. Our Corporate Korea portfolio remains well above the level we had planned for at this stage as loan balances were $764 million at quarter end, representing nearly 13% of our total loan portfolio and up just over $100 million from this time last year. The average rate on all new loan production for the first quarter was 7.19%, up 34 basis points from the fourth quarter. Payoffs were $125 million for the quarter, up slightly from $121 million for the prior quarter.
The average rate on loan payoffs was 7.27%, up 100 basis points from our fourth quarter payoffs. Our total loan portfolio grew slightly in the first quarter as our $304 million in new production exceeded our total payoffs, amortization and pay-downs. Now turning to deposits. As Bonnie mentioned, we grew our deposits by $33 million 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 fourth quarter levels. Given the higher interest rate environment, we do continue to see a shift in the competition of our deposits during the quarter and 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 were affected on a reciprocal basis. Reciprocal time deposits, also known as Cedars, were $67 million at the end of first quarter, and we recently launched a deposit suite program also known as ICS. Overall, we are very pleased and grateful that our customers chose to stay and bank with Hanmi. And now I’ll hand the call over to Ron Santarosa, our Chief Financial Officer, for more details on our fourth quarter financial results.
Ron Santarosa: Thank you, Anthony. Let’s begin with net interest income, which was $57.9 million for the quarter and down $6.7 million from the fourth 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 first quarter, modest as measured against the 425-basis-point increase for 2022. We believe our deposit interest expense now better reflects the current interest rate environment as well as renewed depositor interest in time deposits. Our cycle-to-date interest-bearing deposit beta was approximately 56%. Loan yields for the first quarter, aided by new loan production at 7.19%, rose 30 basis points to 5.51%.
Turning to our net interest margin, it, too, 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. When we met to discuss our 2022 third quarter results, I noted that the cost of our interest-bearing deposits for October were about 45 basis points higher than the third quarter average. When we met to discuss our 2022 fourth quarter results, I noted that the cost of our interest-bearing deposits for January were about 70 basis points higher than the fourth quarter average. Today, the cost of our interest-bearing deposits is about 35 basis points higher than the first quarter average.
The rate of change is slowing. I will also note the mix shift in our deposit portfolio. 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 first quarter, time deposits were 38% of the portfolio, and non-interest-bearing demand deposits were the same at 38%. So altogether, even though this rising rate cycle may yet to peak, it appears that most of the heavy lift into the current environment has occurred. Moving on, non-interest income was $8.3 million for the first quarter, up from $7.5 million for the prior quarter. The increase is essentially reflecting loan customer interest rate swap fees and the absence of the fourth quarter valuation adjustment on bank-owned life insurance.
Encouraging, while the volume of SBA loans sold during the first quarter declined, we did see a notable increase in the trade premiums rising to an average of 7.85% for the quarter. Non-interest expense was $32.8 million, down $1 million from the fourth quarter. Here, we saw lower professional fees, a recovery of the fourth 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 first quarter was $2.1 million and included a positive loan loss provision of $2.2 million and a $100,000 negative provision for off-balance sheet items.
The allowance for credit losses increased to $72.2 million or 1.1% of loans, up 1 basis point from year-end. Net charge-offs to average loans were annualized 10 basis points for the first quarter and reflect a larger contribution from our equipment finance portfolio. Delinquencies remain low, with the quarter end uptick being resolved early this quarter. Classified loans remained low, and non-accrual loans saw a $10 million addition of a healthcare industry loan with a specific allowance of $2.5 million. 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.
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 first quarter, we saw capital grow $24.7 million from a decline in those unrealized losses as well as from the quarterly contribution of earnings less dividends. Tangible book value per share increased 3.7% to $21.30 at March 31, 2023.
Hanmi 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% and 13.06% for the bank. With that, I will turn it back to Bonnie.
Bonnie Lee: 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 expanding client base. I am proud of the results our team delivered during the first quarter. 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. 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 will now open the call for your questions. Operator, please open the line up to the questions.
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