Q1 2022 Hanmi Financial Corp Earnings Call
Ladies and gentlemen, and welcome to Hanmi financial corporations first quarter 2022 conference call.
As a reminder, today's call is being recorded for replay purposes.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
I would now like to turn the call over to Larry Clark Investor Relations for the company. Please go ahead.
Thank you Alex and thank you all for joining us today to discuss Hanmi Financial's first quarter 2022 results.
Afternoon on 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 and Chief Executive Officer of Hanmi Financial Corporation, Anthony Kim Chief Banking Officer, and Ron Santa Rosa Chief Financial Officer.
Finally, we will begin today's call with an overview.
Anthony Kim will discuss loan and deposit activities.
Rob will provide details on our financial performance and then Bonnie will provide closing comments before we open the call 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.
Discussion of the factors that could cause our actual results to differ materially from those 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 this the discussion of certain risk factors affecting our business contained in our earnings release, our investor presentation and in our Form 10-K with that I would now like to turn the call over to Bonnie Lee Bonnie. Please go ahead.
Larry Good afternoon, everyone. Thank you for joining us today to discuss our first quarter 2022 results Hanmi had a very very strong start to the year focused execution across the board helped us to deliver solid earnings in the first quarter fueled by healthy loan production net interest margin expansion.
Excellent credit quality and disciplined expense management.
We continue to develop new client relationships and strengthen ties with existing customers a hallmark of the Hanmi is community banking approach. We reported the first quarter of 2022 net income of $20 7 million or <unk> 68 per diluted share down from our fourth quarter, but up nicely from 2000.
$16 7 million or 54 cents per diluted share in the first quarter of 2021.
Our first quarter return on average assets was one 2% and our return on average stockholders' equity was 12, 7%.
I am very pleased with the progress we are making in our strategic initiatives.
These initiatives include focusing on diversifying our loan portfolio by ramping up the contribution of our residential mortgage business to loan production, increasing our SBA loan production and expanding our corporate Korea initiative, we are making solid progress in our residential mortgage platform, which we launched in 2021.
Through this platform, we originate and acquire a nonqualified residential loans and establish mortgage warehouse lines.
This initiative is effectively diversifying our loan portfolio by adding a lower risk asset class that we can grow profitably for years.
In the first quarter, our residential mortgage loans represented 12% of the total loan production well within our stated goal of a 10% to 15%.
This progress reflects our ability to leverage and expand our community ties in just over a year. We have achieved impressive scale with this program with a loan production up by 48 million year over year.
We've continued to expand our SBA lending business, where we originated 42 million in SBA seven or eight of those in the quarter exceeding our targets.
We also continued to gain.
Meaningful traction with our corporate Korea initiative, we launched this initiative in 2019 to develop and expand relationships with our Korean companies domiciled here in the United States.
This portfolio grew four 7% sequentially from the fourth quarter to $663 million and is up 23% year over year.
The success of this initiative is rooted in our bankers strong relationships that are gonna communities importantly, as we continue to grow and strengthen our business with a U S. Corporate Korean clients. We are also cultivating corporate client relationships in multiple ethnic communities across our coast to coast footprint.
Overall, our growth strategies are working despite a competitive lending environment, we delivered strong net loan growth of three 6% in the first quarter. Additionally, total loan production more than doubled from the prior year first quarter. When we exclude the euro goes that control a PPP loan production are.
Strategic growth initiatives, along with the strong momentum across our diverse business lines field, our loan and lease growth during the quarter.
Our SBA and leasing businesses were solid contributors to this performance complementing strength in commercial real estate lending and our growing commercial and industrial portfolio.
We are also making good progress in our deposit gathering initiatives.
Hey, Kimberly as we continued to expand our corporate relationships.
These deposits tend to be sticky and are a good source of low cost liquidity to fund our loan growth. Our DDA has continued to grow in the quarter and were up 4% from the fourth quarter and 23% year over year.
These core deposits now represent just over 46% of total deposits and help contribute to our very attractive total funding costs.
In the first quarter, we grew net interest income by more than 5% when we exclude the impact of the onetime charge for the redeeming our 545% subordinated notes.
This growth was driven by both a solid increase in loans as well as an expanding net interest margin.
We believe that we are positioned well to see further improvement both of these metrics given our strong loan pipeline and our asset sensitive balance sheet.
Finally, our credit performance remains excellent, reflecting our focus on high quality loans and thorough underwriting across credit cycles, our comprehensive approach to credit management, including our ability to secure payments and payoffs has led to improved trends in asset quality.
Further we remain confident in our ability to effectively manage credit quality going forward.
With that I'll turn the call over to Anthony Kim Our Chief banking officer to discuss the first quarter loan production and deposit gathering in more detail.
Thank you Bonnie.
I'll begin with additional details on our loan and lease production first quarter production volumes were $507 million, 19% lower than the record high fourth quarter and more than double our first quarter production last year, excluding PPP loans.
Our commercial real estate loan production was 233 million in the quarter and represented a 46% of total loan and lease production.
The majority of this production consisted of warehouse and industrial office and retail properties.
We remain committed to disciplined underwriting as evidenced by our weighted average loan to value and weighted average debt service coverage ratio for this portfolio of 50% and one nine times, respectively at the end of first quarter.
C&I production was 98 million more than double the level of production in the first quarter of 2021.
This category includes our corporate Korea initiatives as well as loans and lines to varied industries.
Commitments on commercial lines of credit increased to $814 million at the end of first quarter, an increase of 42 million or five 4% from the prior quarter and $210 million or 35% year over year outstanding.
Outstanding balances on these lines, however were relatively stable between quarters, resulting in the first quarter utilization rate of 39% unchanged from fourth quarter of 2021 news.
New lease production was a healthy 71 billion in the first quarter as many of our customer continue to invest in their operations and are looking to finance a portion of that investment through equipment leases.
SBA seven loan production was $42 million as fun, you noted, reflecting our ongoing focus on serving this segment of the market.
Residential mortgage production, which consist of non QM loans was $60 million in the quarter and represented 12% of the total loan and lease production.
Despite the recent run up in mortgage rates, we remain cautiously optimistic.
Our non QM residential mortgage platform as our current pipeline is solid and we are seeing the benefits of our investment in this line of business.
Given our overall solid loan and lease production in the first quarter, our loan portfolio increased three 6% from the previous quarter to $5 3 billion and was also up 10, 8% from the first quarter of 2021.
Payoffs were $181 million for the quarter compared to $152 million in the fourth quarter.
Average rate on loan payoffs was $4 four 5% an increase of 13 basis points from the fourth quarter of pay offs.
Now I'll discuss the considerable progress we've made on our corporate Korea initiative a program we began in 2019.
Since its inception. This program has grown significantly this year.
Is a testament to the strong relationships our bankers have in our communities, where we have a corporate Korea programs and seven strategically located branches across our footprint as Bonnie mentioned this portfolio has grown by 23% since last year to $663 million in the first quarter.
And is up four 7% from the fourth quarter.
At the end of first quarter, the corporate Korea initiative, representing more than 12% of our total loans and 6% of total deposits.
With an expanding customer base and a relatively favorable economic environment. We anticipate continued growth in this category.
The remainder of 2022.
In summary initiatives to further diversify our loan portfolio by industry geography, and loan type remains a strategic priority for us and we believe we will continue to deliver on this objective.
Now well now a word on deposits.
Total deposits were $5 8 billion down slightly from the fourth quarter. The decrease was due to a $91 million decline in time deposits and $18 million decrease in money market and savings deposits, which was partially offset by a $104 million increase in noninterest bearing demand deposits.
The overall composition of our deposit base improved again during the quarter as our efforts to drive DDA growth continues to pay off.
<unk> represented just over 46% of our total deposits at the end of first quarter up from 44% at year end and 40% in the first quarter of 2021, and now I will turn the call over to Ron Santa Rosa, Our Chief Financial Officer for more details on our first quarter financial results.
Thank you Anthony.
Our fourth quarter net interest income increased 3% from the prior quarter to $51 million and our net interest margin increased 14 basis points to 310%.
The six 8% sequential quarter increase in average loans combined with a higher yield on securities drove low increase in net interest income.
The $1 1 million dollar charge for unamortized debt issuance costs related to the redemption of our 2027 subordinated notes, however, offset the benefit of higher average loans and higher yield on securities.
Our net interest margin however.
From a mix shift in earning assets.
The increase in our average loan balance was funded primarily with the excess liquidity that we had been holding on our balance sheet at the end of 2021.
As a result, the composition of our interest earning assets improved during the quarter driving a 19 basis point improvement in yield on those assets.
Offsetting the improvement however was the seven basis point charge emanating from the subordinate debt redemption.
Looking forward, we know that we will not have a seven basis point charge for the redemption and we also know that we will save seven basis points from the absence of the debt service on the redeemed debt.
Further we know we still have excess liquidity on our balance sheet.
We know that our balance sheet is asset sensitive.
Such we anticipate that our net interest margin should increase in the near term.
While there is ongoing debate as to the timing and pace of great changes by the fed. We also anticipate that depositor behavior will gradually adjust as we will move away from a zero interest rate policy and eventually temper the rate of increases in net interest margin.
Moving on.
Noninterest income was $8 5 million for the first quarter of 2021 down modestly from $9 $3 million for the prior quarter.
The decrease was primarily due to a $1 $3 million decline in gains on the sale of SBA loans. The volume of loans sold in the first quarter declined as expected to $29 6 million from $36 $6 million in the fourth quarter.
And the trade crews on those sales also declined again as expected to 98, 5% from 10 nine 8% for the prior quarter.
Turning now to expenses.
Noninterest expense increased slightly to $31 $7 million for the first quarter of 2021 from $31 $6 million for the prior quarter.
Salaries and employee benefit expense declined $900000, reflecting lower estimated incentive compensation for 2020 to loan production and.
Occupancy expense was down by about $200000.
These declines were more than offset by a $1 $5 billion increase in other operating expenses largely from more normalized insurance premiums.
Efficiency ratio improved slightly for the first quarter to $53 two 9% from 53, 1% from the prior quarter.
We posted a recovery of credit loss expense of $1 $4 million for the first quarter 2021, and we again recorded net recoveries of $100000 for the quarter.
The allowance for credit losses was $71 $5 billion as of March 31, 2022, generating an allowance for credit losses to loans of 134%.
Paired with 141% at the end of the prior quarter.
While quantitative loss factors increased slightly during the first quarter due to strong loan growth qualitative loss factors declined in the first quarter, reflecting improving economic conditions and asset quality metrics.
We recorded a provision for income taxes of $8 $5 million for the first quarter.
Presenting a more normalized tax rate of 29% up from the fourth quarter, where we benefited from charges and the deferred tax asset valuation allowance.
With respect to profitability metrics are return on average assets and our return on average equity for the fourth quarter were 122, 2% and $12 74% respectively.
We remain very well capitalized and our tangible common equity ratio was 9.07%. However.
However, our TCE ratio declined one 7% from the previous quarter because of the $36 $4 million after tax increase in unrealized losses on our securities portfolio.
From a rapid and sizable increase in interest rates.
And finally on March 30, we redeemed the entire outstanding $100 million balance of our 545% subordinated notes that were due in March 2027.
Retiring the $5 four 5% notes will benefit as will noted our cost of funds in the second quarter and beyond with that I'll turn it back to Bonnie.
Thank you Ron before I move to our outlook I want to take a moment to thank our employees for their hard work during the quarter Hanmi employees serve our communities in many ways. In addition to fulfilling their banking needs.
For you to read our 2022 ESG report located on our Investor Relations website to learn more about what we are doing here at hanmi to invest in our employees and support our communities to generate long term value for our stockholders.
Looking ahead, there are several macroeconomic and geopolitical factors affecting the economy overall and nearly every industry sector from the war in Ukraine to a 40 year high rate of inflation individuals and businesses across the country are feeling the effects.
While we cannot forecast the exact impact.
Factors would have in the U S economy or in our clients specifically, we do believe that they may see some pressure on loan demand in the second half of the year that said, we're well capitalized with a strong financial profile and diversified business model our loan pipeline remains solid.
Net interest margin is healthy and our credit quality is excellent and our dedicated team brings a wealth of banking experience that has served our clients well in various economic cycles over the last 40 years in any economic environment at Hanmi will continue to be intently focused on meeting the banking needs of our growing.
Customer base and building new relationships across our markets and business lines, we are committed to driving disciplined growth and delivering attractive returns for our shareholders in 2022 with that we'll open the call for your question.
<unk>. Please open the line up to the question.
Thank you.
At this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is my question to you.
You May press star two if he would like to remove your question from the Q.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of Gary Tenner with D. A Davidson. Please proceed with your question.
Thanks, Good afternoon.
Hey, so a good start to the loan production for the year and I. Thank God you know from your commentary I think visibility is good in the intermediate term, but maybe later in the year not not quite as good. So as you think about.
Kind of a full year your growth unless I missed your comment on about me and I apologize if I did.
Any updates in terms of how youre thinking about the full year patient growth.
Yeah, we are still sticking to the what we had discussed I think from the prior quarter, which as we expect.
Hum.
Medium to high single digit growth.
Production I mean, the net loan growth.
And then just following up on that you know I think last quarter in terms of SBA you talked about 35 to 40 million, which I think is kind of a maybe a quarterly average type number in terms of shell's I thought.
This quarter, obviously, you have a little bit below that.
Is that number on average for the year still hold or given maybe a little less.
Portfolio of growth otherwise might you portfolio more of SBA production.
So the 35 40 number is actually the production number. So this quarter of 42 million is actually higher production.
But I think compared to fourth quarter fourth quarter is kind of a catch up.
From the third quarter production, so we had sold higher.
Number dollar amount of loans in the fourth Q, but overall.
We are on track to do about $40 million per quarter, some quarters. It may be higher so.
It's pretty much within our line of expectation 35 to 40.
Okay I appreciate the clarification. Thank you.
Our next question comes from the line of Kelly Motta with <unk>. Please proceed with your question.
Hi, Thanks, so much.
Part of the question it was a great quarter.
Oh well.
Prepared remarks, I think you had some nice NIM expansion I think he said.
Seven basis points.
You'll get back from.
The cost of the redemption another seven basis points. So does that does that imply youre going to be in before any rate hikes in the mid three 'twenty is am I understanding that correctly.
Yes, yes sure Kelly.
Well, we don't know is what we.
We'll do next weekend and in tune in that that starts to change.
So just hold that and reserve not sure where that's going but have some fed moves we would be.
It would be up about 14 basis points.
Got it got it.
Our asset sensitive at that.
The start up.
Michael can you just.
Can you give us more color on the composition of fixed versus floating in your loan book I'm, just trying to get a sense of the repricing of our.
Those assets on the first couple of hikes and if Theres any force.
Sure so about <unk>.
30% of our portfolio.
Reprice within a three month interval.
And that.
Part of the portfolio is comprised of all of our floaters and all of our three months adjustables.
That represents about 25% of the portfolio in total and the remainder represents those hybrid loans and those fixed rate loans that are rolling down to their requests a day towards their maturity dates.
With respect to floors theyre, not very consequential for us.
Hmm there's only.
A couple of hundred million dollars, if I remember correctly.
And our last look.
Nearly three quarters of that would burn off within the first 100 basis points now. So it's just it just won't be much of a.
Of an anchor relative to the to the asset sensitivity.
Got it. Thank you that's really helpful. Ron.
Turning to credit obviously it was it was really strong and I did see a tick up in special mention can you provide any color on them.
Those migrations in there.
Sure.
It's mainly.
Three relationships one is.
Actually.
It's a combination of relationship composed of our C&I portion as well as the CRE portion of that.
Company is going through an expansion.
So they had a little bit of a interact challenges are respected.
The supply chain distribution.
It's being normalized and we don't expect to have any loss.
In the coming quarters.
The other two is our relationships our hospitality portfolio again, the borrowers are taking control and.
Taking what's necessary to.
I have to then bring back to the past status.
Got it.
And then last question for me.
The expense side, you were they were very well controlled.
Your salaries and benefits looks like it ticked down a bit.
What does the outlook look like I know, there's there's a lot of competition in inflationary pressures can you provide.
Provide kind of an outlook for.
The pace of that.
Where you might be seeing pressure.
Wherever you may be investing in and how that should trend.
Sure.
So.
Beginning in the second quarter.
We expect our salaries and benefits to increase.
Because of the <unk>.
Annual merit cycle as well as the I'll say the inflationary increases in our in our benefit programs.
We also anticipate that some of the other categories will start to show evidence of the inflation that's been talked about so starting in the second quarter. We think we'll start to see our noninterest expenses lift off of where we were in the fourth and first quarter of 'twenty 2022.
Got it thanks, so much I'll step back I appreciate the question.
Thank you.
Our next question comes from the line of Matthew Clark with Piper Sandler. Please proceed with your question.
Hey, good afternoon.
Hi.
Maybe just.
One on the margin outlook.
You mentioned, a floating rate loan contribution, but what are your latest thoughts on.
The deposit beta outlook.
Kevin.
The expectation for <unk>.
More rate hikes, then we probably.
Considered last quarter.
So.
Matthew when we look backwards at the last rate cycle Oh.
Our beta was about 30% correlating about 95% too.
But fed funds moves, but that was over a 13 quarter period and what we do know in that 13 quarter period is that the beta was not linear.
It was higher in some periods lower than others. So in this case here, we're anticipating a beta.
Probably in that 30% to 50% range, but again.
I'm.
Just cautious here not sure what that will do next week, how big of a move they may or may not take and that can affect the beta in any three months period. So overall I think our betas will probably be probably.
Probably not much more than what we experienced in the last rate cycle I, just don't know, how that's going to unfold quarter over quarter.
Do you think that 30 to 50 is more of a cumulative beta.
Again, the 30 would have been cumulative so when we stress.
And our.
Right models, we use.
50% data for the non maturity deposits and 100% beta for the maturity deposit. So we think you know our interest rates sensitivity is let's say conservative.
So somewhere between those two points.
The reality is going to be again I just that's the part I puzzle warm I just don't quite sure how it's going to unfold this rate cycle.
Okay, and then just back on the.
Floating.
Rate loans.
<unk>.
Do you feel like Youre going to be able to pass through.
Those rate hikes to your borrowers do you feel like.
We might not see the full 30% over time, just because you've got to make concessions.
Thinking about the leasing business, maybe as an example.
Just any thoughts there.
So at least.
What are you, saying, it's pretty much a fixed rate portfolio, so that doesn't really affect it but for the floaters. That's contractual so they're you know they're there.
So lean of concessions.
Since the rate moves so.
I have no no credit concerns on that whatsoever.
Okay and on the securities yields I think of 111.
Quarter.
Can you give us a sense for.
I think the strings overall are down in the quarter, but.
What new purchases are coming on at.
In in April here.
Sure so our.
Our portfolio of complexion securities portfolio complexion will.
We will stay about the same we're mostly looking at mortgage backed securities.
Cash flowing instruments that we really like and.
And whether that's.
Traditional MBS or CMO style, but all agency.
We will continue to look at that.
Not not as keen on.
Small market at this point, we will take a look at it but it's not going to have grown appreciably from where we're at.
And in terms of the current coupons gosh, we're looking at what two handles.
And some of the MBS, so you'll start to see that portfolio.
<unk> produces somewhere.
Somewhere between $10 million to $15 million a month in cash start to lift up as we go through this rate cycle.
Okay. Thank you.
Our next question comes from the line of Tim Coffey with Janney. Please proceed with your question.
Great. Thanks for taking my questions.
Ron can you remind me just how what level of cash.
I'd like to keep on balance sheet.
So pre pandemic or cash and due from banks was about.
Say 150 million, maybe as low as 100 billion.
Hmm.
And so I I see it returning to those levels.
At some point we will.
We'll see how long it takes us to get there.
Okay.
And then Bonnie.
What is the thought process about buying back stock at these levels.
We are always a watchful.
So I mean just the.
Take the decision is unnecessary.
Right Okay.
Okay.
And yeah.
Those are those are my questions. Thank you.
Thank you.
Our next question comes from the line of Jason Stewart with Jones trading. Please proceed with your question.
Hi, Thanks for taking the question.
I wanted to ask on the mortgage side Whats your view of affordability was given HPA and the increase in rates and expected increases in taxes, and how that might impact production in and rates are in the non QM side.
Yeah.
Yeah, certainly we do anticipate a higher mortgage rate impact will impact the demand in mortgage industry in general.
But the impact on non QM market.
Will be lesser than the trim market, which is much more competitive.
So looking at the pipeline, we do expect.
Similar production levels in Q2.
Q1.
Is due to continued high demand for the purchase.
Poems.
However, we anticipate that that slows down and starting third quarter.
Okay and have you had to make any concessions in terms of credit quality too to continue the pipeline at historical levels.
No no concession.
Great. Thanks for taking the questions I appreciate it.
Thank you.
Thank you we have no further questions in the queue. At this time I will now turn the call back over to MS. Bonnie Lee for closing remarks.
Thank you for participating in our call today. We appreciate your interest in Hanmi and look forward to continued progress with you throughout the year. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
[music].
Okay.
[music].
Sure.
Yes.
Yes.
Yes.
Yes.
[music].