HAFC - NASDAQ

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. [Operator Instructions] I would now like to turn the call over to Larry Clark, Investor Relations for the company. Please go ahead.

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.

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.

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.

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.

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.

Thank you. [Operator Instructions] Our first question comes from the line of Gary Tenner with D.A. Davidson. Please proceed with your question.

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, I mean still at 38% non-interest-bearing DDA. If you go back – which is down certainly year-over-year. But if you go down back to kind of entering the pandemic, I mean it was at 30%. So I know that there is been structural changes at the bank. But what gives you the confidence, I guess, in saying heavy lifting on that deposit side of things has been done or you reflected in the numbers?

So what I was observing is the rate of change, Gary. So in that implicit is that some of the assumptions with respect to composition, etcetera, remain relatively constant. And so in a similar fashion, when we were on the upswing of the rate increases through 2020, you saw a very large rate of change going from first quarter to second quarter, and then it started to diminish. And then finally, descent here in the first quarter. 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 rate of change diminish as you move out over the next few quarters.

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

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 in 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. It’s most of that has occurred. It doesn’t mean it’s done, but most of it has happened.

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 million or so, was that primarily customer time deposits shifting? Or did you add brokered to the balance this quarter?

Yes. So we’ve been tracking those deposit movements. Total – out of total $424 million CD growth, approximately a little over 50% was the migration from DDA and other interest-bearing accounts.

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

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 in 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?

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 first quarter – going into the first quarter loan pipeline versus the beginning of the second quarter loan pipeline. Loan pipeline itself is up. We see the increasing trend. However, as I have mentioned, we are very selective on the deals that we chose to do and the pricing that we chose to do, so we will still have to see.

Thank you.

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

Great. 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? I just want to clarify.

April-to-date. It’s April-to-date.

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

I have to look at – I think it’s in our slides in the footnote.

Okay. I can find it then.

Yes, if you would say. I don’t have my glasses with me, so I can’t read it, too.

I am kind of going down that same path. And then in terms of deposit flows, any update through April-to-date? Any – I assume there is seasonal outflows with taxes. But any – are you seeing additional inflows or outflows that’s maybe unrelated to taxes?

So, we haven’t seen much of the weather inflow or outflow. Much of them, other than, are normal fluctuation.

Okay. And the new non-performer that I think $10 million 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?

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 this big reserve of $2.5 million for that loan.

Okay. And then just on capital, it’s building back here nicely, but we are also likely going into recession. Any update on the buyback or willingness to do that?

Again, Matthew, as we have mentioned before, I think we will 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 first part of 2023.

Got it. Thank you.

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

Hi. Good afternoon. I think maybe I will circle back to the credit side of things. I really appreciate all the color you guys provided 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. Where are you guys most closely watching? And conversely, where are you seeing – still seeing really good risk-adjusted returns at this point in the cycle? I know, Bonnie, you had said you were being incredibly selective on the origination side.

Yes. I mean I think in this given environment, it’s not just the one sector, I think across the board. I think you have to be very cautious. And we evaluate each credit at a time, and then 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.

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? And any areas where you can manage given that the revenue outlook is just more challenging in this rate environment?

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 two, and it just reversed itself because of the shift in – of 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 is a little bit of variability that we get with OREO and repossessed personal property. So, a few – so, I always kind of look at that before the expense because that one is very hard to predict, if we get fortunate or something happens. So, there the run rate is about $33 million. 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 throwing the mix of other ideas that kind of move with inflationary pressures.

Awesome. I appreciate the color. Thanks guys.

Thanks.

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

Good afternoon everybody.

Hi.

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

Well, let’s just give one particular client. The very onset of the March 10th event date, the client notified us that they are moving their deposits, 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 institutions, 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.

Okay. Do you know what the – how ready the balances of deposit outflow from Corporate Korea clients in the quarter?

Yes. It’s about a little less than $40 million from maybe a couple of customers.

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

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

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

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

Hey guys. Thanks for taking the question. I wanted to ask about two topics. Number one, how you feel the commercial real estate market is right now just given where cap rates are? And two, where you think transition rates are moving on the non-QM portfolio?

So, in terms of 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 would 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 will have Anthony answer on this, mortgage.

Yes. Non-QM market, I mean believe it or not, despite of slowdown in purchase market, we continued to see purchase transactions. So, non-QM market has been very stable and good for us.

Okay. Thanks for taking the question. Appreciate it.

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

Thanks for the follow-up. Two questions. One, do you have any appetite to restructure your securities portfolio with the duration over 5 years, and the yields are moving higher, but probably not as much as you would like, just wanted to check in on that.

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

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 million of loans is owner-occupied versus non-owner?

Yes. Most – I would say most of the office properties are non-owner occupied.

Are non or investor or owner-occupied?

Are non-owner occupied.

Investor.

Okay. Got it. Thank you.

Thank you.

There are no further questions in the queue. I would like to hand the call back to Bonnie Lee for closing remarks.

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