Hanmi Financial Q4 2023 Earnings Call Transcript

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January 23, 2024

There are 9 speakers on the call.

Operator

Ladies and gentlemen, welcome to Hanmi's Financial Corporation's 4th Quarter and Year End 2023 Conference Call. As a reminder, today's call is being recorded for replay purposes. I would now like to turn the call over to Larry Clark, Investor Relations for the company. Please go ahead.

Speaker 1

Thank you, Alicia, and thank you all for joining us today to discuss Hanmi's Q4 and full year 2023 results. Afternoon Hanmi 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. I'm here today with Bonnie Lee, President Chief Executive Officer of Hami 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 then 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 which involve risks and uncertainties. Discussion of the factors that could cause our actual results to differ materially from those forward looking statements be found in our SEC filings, including our reports on Forms 10 ks and 10 Q.

Speaker 1

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 ks. With that, I would now like to turn the call over to Bonnie Lee. Bonnie, please go ahead.

Speaker 2

Thank you, Larry, and good everyone. Thank you for joining us today to discuss our Q4 and full year 2023 results. I am proud of our team's performance as we finished 2023 with a positive momentum, delivering solid 4th quarter results and building a good foundation for 2024. As all of you are aware, the industry faced the notable challenges during the past year. I believe our team fully navigated these challenges as we have done so in the past by focusing on the execution of our long term growth improvement diversification strategy.

Speaker 2

We continue to do what we do best, build and expand our customer relationships by providing the products and services our customers need in this ever changing world. During the past year, We further strengthened and expanded our business, executing on our relationship driven banking strategy. We also focused on strong credit administration, which was essential given the uncertain and dynamic macro environment. In addition, while we could not avoid inflationary pressures, we did exercise disciplined expense management while continuing important investments in personnel and technology. Our diversified lending capabilities allowed us grow our residential mortgage portfolio by 31% for the year despite the challenging interest rate environment.

Speaker 2

Our asset quality remained excellent during the year with a very low delinquencies, non performing assets and net charge offs. We also pursued optimizing our branch network with the opening of 2 new branch locations in markets with a great growth potential. These are just a few examples that give me confidence that we have the right strategy and the right culture to address the challenges of 2024. Now let me review some highlights for the past year. Net income for 2023 was $80,000,000 or 2 point $0.62 per diluted share.

Speaker 2

Our return on average assets was 1.08% and return on average equity was 10.70%. As expected, given the higher interest rate environment and economic uncertainty, Overall, our loan growth was constrained to 3.6% for 2023. Our deposits grew by 1.8% for 2023 and we ended the year with a healthy mix of non interest bearing deposits at 32% of total deposits. This is especially encouraging given the competitive nature in our markets in this particular environment. We manage our non interest expenses diligently.

Speaker 2

Expenses increased by less than 5% for the year as we were able to offset the inflationary pressure on salaries and employee benefits with the cost savings and other expense categories. Importantly, asset quality remains strong as we continue our focus on high quality loans, disciplined underwriting and business credit administration practices. As a result, criticized loans were down 23% year over year, net charge offs for the full year of 2023 were A low 0.12 percent of average loans and non performing assets ended the year at 0.21 percent of total assets. Last, we finished the year with a solid financial position and very strong capital ratios. This positions us well for continued growth in 2020 Looking ahead to 2024, we see continued uncertainty about the economy and interest rates.

Speaker 2

As a result, we will remain vigilant in our credit practices, prudent in our growth objectives and disciplined with our operating expenses. As I have mentioned, I'm very pleased with our diversified lending capabilities. For 2024, we will below the use of our production capabilities in residential mortgages and equipment finance agreements towards the secondary market activities to generate another source of non interest income and assisting balance sheet management. Our Corporate Korea initiative continues to delivered strong results with the deposits from these customers increasing 42% for the year. During the later part of 2023, We made a good progress in our efforts to increase awareness of this strategic growth initiative.

Speaker 2

And this month, we enter into a memorandum of with the Korea Creative Content Agency under which we will jointly work in helping Korean content companies expand into U. S. Market. We believe this will further propel our U. S.

Speaker 2

KC initiative. As I noted earlier, we opened new offices in 2 markets and we believe have a great growth potential. For 2024, we'll continue to analyze our banking network for consolidation, relocation and growth opportunities. Finally, we'll continue to make strategic investments in our people, technology and infrastructure. We want to ensure that our team is empowered to bring the innovative thinking, adaptability and collaborative spirit needed to drive sustained growth.

Speaker 2

We believe our technology and infrastructure improvements will help drive operational efficiencies and deliver improved profitability, ultimately creating more value for our shareholders. So for 2024, we remain committed to executing our strategy. Our consistent performance and growing reputation as a preferred relationship based banker is enabling us to increase the number of communities we serve. I'll now turn the call over to Anthony Tim, our Chief Banking Officer, to discuss quarter loan production and deposit scheduling in more detail.

Speaker 3

Thank you, Bonnie, and thank you for joining us today. I'll begin by providing additional details on our loan production. 4th quarter loan production was $390,000,000 up $53,000,000 or 16% from the 3rd quarter with a weighted average interest rate of 8.1%, up from 7.8% last quarter. The improvement in loan production was due primarily to Growth in commercial real estate and SBA lending, while C and I and equipment finance production moderated from their strong third quarter levels. We remain committed to pursuing high quality loans that meet our underwriting standards and provide attractive yields in the current rate environment.

Speaker 3

CRE production was $178,000,000 up $72,000,000 from the 3rd quarter. Dollars 44,000,000 of the increase from the corporate Korea loans as our efforts to grow those relationships continues to bear fruit. We continue to be pleased with the quality of our CRE portfolio. It has a weighted average loan to value ratio of approximately 49% and a weighted average debt service coverage ratio of 2.2x. SBA loan production improved to $48,000,000 in the 4th quarter, up from $36,000,000 last quarter.

Speaker 3

We have added marketing talent to this team and it continues to hit on all cylinders making strong inroads with the small businesses across our markets. Production in C and I came in at 52,000,000 down from $68,000,000 in the 3rd quarter. 32% of our production in C and I came in from our corporate Korea clients where we have been focused on building new relationships. Total commitments on our commercial lines of were $1,080,000,000 in the 4th quarter, down slightly from the 3rd quarter. Outstanding balances grew by 6.6% resulting in a utilization rate of 36.7 percent in the 4th quarter, up from 34% last quarter.

Speaker 3

Residential mortgage loan production was $53,000,000 for the 4th quarter, in line with our expected range of $50,000,000 to $60,000,000 per quarter, given the current interest rate environment. Most of our current lending opportunities continue to be in the purchase market As we finance activity remains muted, residential mortgage loans represented over 15% of our total loan portfolio, up from 12% at the end of last year. With respect to Corporate Korea, loan balances were 764,000,000 up $44,000,000 from the 3rd quarter. We saw a very nice pickup in new production, which totaled $61,000,000 in the quarter. Turning to deposits.

Speaker 3

In the 4th quarter, deposits were up 0.3% on a sequential basis and 1.8% year over year. We continue to expand our partnership base with our corporate Korea clients with the deposits growing by $24,000,000 in the quarter $244,000,000 for the year. Our team continues to make progress in adding new relationship that we believe we can grow over time. At year end, corporate Korea deposits represented 13 of our total deposits and 17% of our demand deposits. Our deposit base remains stable with our mix of non interest bearing deposits at 32% of our total deposits.

Speaker 3

This is a testament to the loyal banking relationships we have developed with our customers over the years. And now I'll hand the call over to Ron Sandorosa, our Chief Financial Officer, for more details on our Q4 financial results.

Speaker 4

Thank you, Anthony. Let's begin with net interest income. Here, we posted $53,100,000 for the 4th quarter, down 3.1% from the 3rd quarter. This decline essentially reflects a shift in the composition of our interest earning assets and interest bearing liabilities Because average interest earning asset growth quarter over quarter was just 0.4%, while average interest bearing liabilities grew 2.9%. Average loans for the quarter grew $156,200,000 or 2.6 percent and loan yields improved 15 basis points for an average yield of 5.88%.

Speaker 4

However, Average interest earning deposits at other banks for the quarter declined $136,400,000 or 43 percent and their average yield was 5.12%, down 7 basis points. On the funding side, Average interest bearing deposits increased $39,800,000 for the quarter and our average FHLB borrowings increased $85,600,000 essentially offsetting the $110,900,000 decline in average non interest bearing deposits. Looking at the rates paid on the funding side, we had a 30 basis point increase in the cost of our interest bearing deposits to 3.83 percent and 159 basis point increase in the cost of our interest bearing and the cost of our FHLB borrowings to 4.07%. Turning to our net interest margin, it declined 11 basis points to 2.92% for the 4th quarter. Again, the shift in the interest earning asset mix showed loans added 23 basis points to margin and the reduction in our interest earning deposits at banks lowered margin by 10 basis points.

Speaker 4

Looking at the funding side, Interest bearing deposits and borrowings further lowered net interest margin by 17 basis points and 8 basis points, respectively. Hearing more closely at our interest bearing deposits, the quarterly rate of change was about the same quarter over quarter, an increase of 30 basis points from the 3rd quarter to the 4th quarter and an increase of 28 basis points from the 2nd quarter to the 3rd quarter. In addition, the rate of increase for the month of January to date is about 25 basis points. As such, and given the lower amount of time deposits maturing in the Q1 than we had in the last quarter, We envision net interest margin will drift lower for the next few quarters or so before reaching its inflection point. Non interest income was $6,700,000 for the 4th quarter, down $4,500,000 from the 3rd quarter.

Speaker 4

You may recall that the 3rd quarter included a $4,000,000 gain from the sale and leaseback of a branch property. That aside, we did see an $800,000 decline in our service charge and fee category and $5,200,000 for the 4th quarter. Here, we experienced lower NSF fees of about $200,000 We recognized a $300,000 valuation adjustment to our bank owned life insurance investment, and we had a $200,000 change in the valuation of our customer back to back swaps. SBA gains, however, increased $300,000 to $1,400,000 for the 4th quarter on a higher volume of loans sold, while trade premiums declined to 6.17%. Non interest expenses increased to $35,200,000 for the 4th quarter, mostly due to seasonally higher spend on advertising as well as costs attended to the opening of 2 new branch offices and the decommissioning of the 2 former branches.

Speaker 4

Notably, salaries, Occupancy and data processing, representing about 80% or so of our cost structure, remained well controlled throughout the year. We had a negative provision for credit loss expense for the Q4 of $2,900,000 driven by a $6,000,000 recovery on a 2019 troubled loan relationship. For the year, net charge offs were 12 basis points of average loans. Asset quality, as represented by delinquent loans, classified loans and non performing assets, remained strong the allowance remained the same as at the end of the 3rd quarter at 1.12 percent of loans. Our effective tax rate for the 4th quarter And the year was elevated because of an increase in the valuation adjustment on our state net operating loss carry forwards.

Speaker 4

The effective tax rate for 2023 was 30.1%. However, absent this valuation adjustment, it would have been 29.5%. Turning to Equity Capital, it increased $38,500,000 or 5.8 percent to $701,900,000 at the end of the 4th quarter from the end of the 3rd quarter. Here, the after tax loss on our securities portfolio fell $27,300,000 due to the decline and intermediate term interest rates since the end of the 3rd quarter. In addition, 4th quarter net income, less cash dividends paid, contributed $11,000,000 to the increase in equity capital.

Speaker 4

Last, we repurchased 50,000 shares during the 4th quarter at an average price of $14.77 And there are 409,972 shares remaining under our share repurchase program. So altogether, tangible book value per share increased 6% to $22.75 a share. Omni and the bank continue to exceed minimum regulatory capital requirements and the bank continues to exceed the minimum ratios for the well capitalized category. The company's common equity Tier 1 ratio was 11.86 percent And the bank's total capital ratio was 14.27%. With that, I will turn it back to Bonnie.

Speaker 2

Thank you, Ron. As I noted, I believe we have continued to demonstrate our ability to successfully navigate uncertainty. We're continuing to do so this year with a keen focus on the execution of our relationship driven banking strategy. Looking ahead, we anticipate loan production will remain near the same levels that we delivered in 2023. However, it may be larger as a function of the possible secondary market activities I noted earlier.

Speaker 2

Altogether, however, we anticipate moderate loan growth for 2024. We remain focused on growing our coal deposit base, seeking deposit rich business verticals and expanding into new markets where we can grow both deposits and loans. I want to thank the entire Hanmi team for their outstanding work this past year as well as their dedication to serving our customers and the communities in which we operate. I believe our future is bright despite some near term uncertainties. We remain committed to our communities, delivering personalized relationship based service with a dedication to helping our customers reach their financial objectives.

Speaker 2

We will do this all with the goal of delivering improved profitability and attractive returns for our

Operator

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

Speaker 5

Thanks. Good afternoon, everybody. So we were a bit surprised by the pace of deposit cost increase in the quarter that it was the same as the 4th quarter, around which I think you alluded to. I want to make sure I heard you right though that You said that in January, the rate of change is 25 basis points. Was that quarter to date versus the full 4th quarter?

Speaker 5

Did I hear that correctly?

Speaker 4

Quarter to date for the Q1 of 2024, 25 basis points. So each quarter I've been telling you where we are through the current period or through Our conversation, if you will, and we're 25 basis points to date.

Speaker 5

And that's on cost of total deposits?

Speaker 4

Cost of interest bearing deposits, correct.

Speaker 5

Interest bearing. Okay. All right. Thank you. And then so given the uncertainty, Bonnie, that you mentioned heading into 2024, Loan growth in 2023 was 3.5%.

Speaker 5

Can you any thoughts on where you think Net loan growth perhaps shakes out for the year. What's your target range? And also any further thoughts on the revenue I think you mentioned secondary loan sales of mortgage and I think equipment finance, if I heard correctly?

Speaker 2

Correct. So as I said, I think in terms of production, I think it will mirror the 2023 production this year. So net loan growth is a function of The new production as well as any payoffs. So I would just say that We would expect the net loan growth into 2024 will be probably lowtomidsingledigitgrowth. In terms of the secondary market activities, we're exploring that idea with our Mortgage as well as equipment finance, both areas we built up nice portfolio and we continue to have a solid production.

Speaker 2

So we'll be able to share more colors as we explore and actually be able to execute that going into the Q1.

Speaker 5

Thanks for taking my questions.

Operator

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

Speaker 6

Hi, good afternoon. Thanks for the question. I was hoping you could talk a bit about the non interest bearing flows that happened. It looks like you had another outflow there and some growth in money market. Just wondering, If there's any color you can provide on what you're still seeing in terms of non interest bearing deposit pressure, thoughts about where that could level out?

Speaker 6

And at this point, would you characterize more of the pressure coming from the retail deposit base kind of catching up or is this still being driven by your commercial clients? Thanks.

Speaker 2

So Kelly, so in terms of non interest bearing deposits, there was a slowdown from the quarter to quarter And moving into the interest bearing deposits, however, when fed actually kind of signal the possible rate decrease. For the last couple of weeks, we saw kind of a last minute, our retail Depositors try to convert, transfer the DDAs into the whether money market or the savings category. So that's the phenomena. But I think in the longer term, I think that there will continue to quarter over quarter, We are hoping that will slow down.

Speaker 6

Got it. And then Sorry, and I realized that was like a 4 part question as I was asking it. As we kind of look ahead in terms of how that translates to the margin. I think the commentary is definitely margin down in the Q1. Just wondering if rates hold here for a bit, where you would expect margin to start the loan yield truck to overtake the pressure on funding costs, 1.

Speaker 6

And then 2, if we get some rate cuts, can you just Ron maybe walk us through the repricing dynamics, as well as how we should

Speaker 4

Sure, Kelly. Excuse me. If I could use Time deposits is kind of a proxy for the response. When rates moved up rapidly, we saw basically, let's say, a nil portfolio suddenly just balloon. So if you looked at our maturities quarter to quarter, we had a bulge.

Speaker 4

And the first bulge was the 4th quarter. The second bulge here is in the 1st quarter. So when I so we were kind of curious how the 4th quarter bulge would actually play itself out. So looking backwards, it seems now some of the feathering that we thought would occur in our time deposit is occurring. That is we're seeing a little bit more of a ratable notion quarter over quarter.

Speaker 4

And that's important because that helps kind of envision how margin might look in the following quarters as those cadres or those cohorts of time deposits repriced to the then current rate. So when I look now from the Q4 looking out, 1st quarter, we have about, if I remember correctly, about 30% of the book that will reprice. It's about 45 basis points lower than the average yield that we produced on The 4th quarter portfolio, assuming when I look out 4 quarters, all of that cohort actually occurred in the Q4 of this year. So we basically do 1 year CDs. That's why I'm looking out 4 years or 4 quarters, I'm sorry.

Speaker 4

So I can still see a little bit of the margin pressure coming in the Q1 and in the second quarter. But then when I look at the Q3, The differential between the average price or the average rate on those CDs is not that far from where we are today. So the pressure should diminish. Hence, My notion that said, well, we've got about a quarter or 2 or so, again, barring any other shifts that are not I haven't isolated, That said, we've probably hit our inflection point. It's kind of what I'm seeing based on what we have today.

Speaker 4

So that's about, let's say, the outlook. Then turning to your other question relative to what happens to us then when rates decline. So there I would look at that as a 2 part question. First, you have to kind of tell me what type of rate decline are we expecting. So if we get The notion of just 25 step 25 basis point step each meeting of a very slow decline, I'm expecting rates to kind of be perhaps as stubborn as they were when we started this, meaning The first 25, the first 50, nothing really happened in the marketplace.

Speaker 4

It wouldn't surprise me if we have that outcome where the first 25, the first 50, Nothing might be really happening in the marketplace since there's a gap between That rate differential and what you could get in a money market, right? So it might just exacerbate what's already there. So I can see people maybe holding pat or not doing as much. When you get into the next round, let's say the next 50 to 75, now I would start to interest bearing portfolio, you'll start to see that step down quite nicely. The time book again is becoming more ratable.

Speaker 4

So it takes about 4 quarters for it to reflect the current rate. So hopefully those long answers respond to your 2 questions.

Speaker 6

Thanks, Ron. Long answers to 2 long questions. Appreciate it. I'll step back.

Operator

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

Speaker 7

Hey guys, thanks for taking the question. You guys had a really strong quarter for commercial real estate loans. Could you talk about the profile of those asset type, geography, LTV, that sort of thing?

Speaker 3

Yes. Most of our dairy production team actually broad based, mainly in hospitality, Industrial warehouse, multifamily and retail and geographically, that's evenly from California to Eastern region. And then Lonza value came in, I believe, 47% for new production.

Speaker 7

Got you. Thank you. And then what kind of pipeline are you guys seeing at the moment in terms of commercial and then C and I as well?

Speaker 3

Looking at the Q1 pipeline, it has been moderated from the level of in 4th quarter. And then I'm seeing elevated percentage of C and I portion than CRE.

Speaker 7

Got you. Thank you. And then one more question for me. The loan portfolio maturities less than a year. Could you talk about the profile of the other loans, $115,000,000 It looks like it's about $570,000,000 over the next 3 years.

Speaker 7

Could you just talk about those? Thanks.

Speaker 2

Sure. In terms of our loan to value and debt service coverage, It'll probably mirror our book, CRX book in general, which is loan to value anywhere from Around average around 50% and then that's a risk coverage of 1.8% to 2%.

Speaker 8

Thank you.

Operator

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

Speaker 8

Hey, good afternoon everybody. Thanks for taking my questions. I'm on for Matthew Clark. Looking over into non interest income, it was nice to see the SBA production tick up quarter over quarter And it looked like trade premiums declined by about 70 bps linked quarter. I was just curious if you can give another update Your outlook for SBA production and trade premiums.

Speaker 8

Thanks.

Speaker 2

So in terms of production, I think we can give a range about anywhere from 35 to 45 on a quarterly basis.

Speaker 4

And then with respect to the trade premiums, I would just observe that our trade premiums, if you looked at other SBA secondary marketing notions, tend to be a little bit lower, which a little bit more indicative of the kind of product that we originate, whether it's real estate secured or just C and I secured, if you will. So I would I can envision again there could be a function of the marketplace. They probably have a little bit of drift left in them, but not maybe perhaps not too much as long as we're the rate environment stays relatively stable.

Speaker 8

Okay, great. That's helpful. Thanks. And then In terms of expenses, is $35,000,000 a good run rate going forward? Or is there anything that you guys are envisioning in terms of technology expenses or whatnot to kind of brush that up or salaries coming up in the Q1?

Speaker 8

Thanks.

Speaker 4

So specifically with respect to salaries, our merits and other adjustments don't become effective until the Q2. So that said, that's probably one of our larger spend categories. I think we're targeting inflation, which is about 3% to 4%. And Then after that, as we went through 2023, where we kind of had the 5 to 6 notions in hand, I think we'll try to Basically, you envision inflationary, let me just say 3% to 4%. I'm not sensing that there'll be any Momentous ideas unless you get to a quarter like we have here in Q4 where you see seasonally our spend goes up because of advertising, there'd be other some ideas, but the core expenses of salaries, occupancy and data processing probably should hold probably about a 3% to 4% inflationary pressure.

Speaker 8

Okay, great. Thanks. Those are all my questions. Thank you.

Operator

Thank you. Our next question comes from Kelly Motta with KBW. Please proceed with your question.

Speaker 6

Hey, thanks for letting me back on. I just wanted to snap on back about the buyback, you're clearly active again this quarter. Wondering about How you're feeling about implementing that, especially as kind of loan growth is more moderate as we look Out to next year based on your commentary.

Speaker 4

So, Kelly, I think We'll continue to look first of all, I appreciate the word active. I would prefer the word that we nibble. So we'll probably continue to nibble as market opportunities present themselves. We also have an eye towards sufficient capital to deal with all of the worries out there relative to credit and so on. But

Speaker 3

we'll look

Speaker 4

at that as we do every quarter. So I think we also keep an eye towards Our employee share compensation programs and the best thing because we don't like that to be too dilutive. So we'll be looking at those to make sure we kind of keep a fairly stable share count. So between those ideas, we'll continue to analyze each quarter as it

Speaker 6

Thanks. Appreciate it. And with your larger recovery you had this quarter, Just to confirm, was that the problem credit that caused Some issues a couple of years back. And can you remind us how much of that you've recovered on so far?

Speaker 2

Yes. This is the with the recovery in the 4Q, this will end the closure on the relationship.

Operator

Thank you. We have no further questions in the queue at this time. I'll now turn the call back over to Ms. Bonnie Lee for concluding remarks.

Speaker 2

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

Operator

This concludes today's teleconference. You may disconnect your lines at this time.

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Hanmi Financial Q4 2023
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