Q3 2022 Hanmi Financial Corp Earnings Call
Ladies and gentlemen, welcome to the Hanmi financial Corporation's third quarter 2022 Conference call. As a reminder, today's call is being recorded for replay purposes purposes. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. 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 Mollie and thank you all for joining us today to discuss Hanmi <unk> third quarter 2022 results.
<unk> 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 at Hanmi Dot com.
I'm here today with Bonnie Lee President and Chief Executive Officer, Anthony Kim Chief Banking Officer, Ron sets of Rosa Chief Financial Officer.
Bonnie will begin today's call with an overview and he 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 would like to remind you that today's comments may include forward looking statements under the federal Securities laws.
Forward looking statements are based on current plans expectations events and financial industry trends that may affect the company's future operating results and financial position.
Our actual results may differ materially from those contemplated by our forward looking statements, which involve risks and uncertainties discussion of 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 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 third quarter 2020.
Once again, our team executed well against each of us tick ticket growth initiatives, which enabled us to do.
Third quarter of exceptional results by.
By maintaining focus on our customers' evolving needs across our markets. We are providing the right products and services to strengthen our portfolio and asset quality metrics.
The investments we have made in our banking talent continuing to pay off as we deepen existing banking relationships and importantly expand into new customer relationships.
Very pleased with our team's performance and the results we have delivered for our shareholders.
For the third quarter, our net loan growth of two 6% over the prior quarter. It was a strong word.
Collecting solid production in our corporate Korea residential mortgage and equipment finance groups.
With a lower payoffs and paydowns.
Net interest income increased six 8% driven by higher average loan balances.
And an 11 basis point improvement in our net interest margin.
Net income for the quarter was $27 2 million or 89 per diluted share.
Eight 5% from the prior quarter translating into and return on average assets of $1 five 2% and our return on average equity of a 15, 8%.
Up from the second quarter.
Can you just throw those production it was a significant contributor.
Earnings growth.
Recall that last quarter, we shared at our Laurel pipeline had moderated somewhat from the record levels. We saw in the first half of the year. Consequently, we expect a lot of production in the second half of the year to return to more historical levels and in fact that is what occurred in the third quarter non.
Loan production was healthy at $492 million consistent with our historical levels, Let me touch on a few notable highlights.
Loan production for our corporate Korea initiative was strong again this quarter as net sales increased 4% from the prior quarter and are up 31% year over year. In addition, we had substantial deposit growth in our corporate portfolio.
Our continued success in this area validates our decision to elevate this work to a corporate wide initiative.
Deep understanding of how this U S Corp U S corporations Korea based companies by structured coupled with our extensive due diligence and quick turnaround decisions continue to set us apart from the competition and enables enabled us to win new business.
Another notable resolved during the quarter was down more than 18% of new loan production came from outside of California, with Texas contributing the highest growth of all the regions. This reflects our continuous success in attracting new customers in those growing markets.
Quality banking talent.
The overall pricing on bonds was attractive with the average interest rate at 5.5.
Five 5% and new loan production.
120 basis points from the last quarter.
Alright, its target loan growth was more than funded by the increase in our deposits during the quarter deposits.
Increased three 7% sequentially when core deposit relationships drove growth.
While we did see healthy new production and demand deposits some of already existing customers shifted their DDA into interest bearing deposits and we responded to a deposit or appetite with some CD promotions during the quarter, which together effective mix of our deposits Anthony will provide more detail.
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We are proud of the robust deposit franchise that we have built over four decades with a focus on pursuing new customers and expanding our existing relationships as a result, noninterest bearing deposits remained high at 45% of the total deposits.
Importantly, our overall asset quality metrics remain excellent.
Our third quarter results reflect our continued focus on high quality loans.
Underwriting and disciplined credit administration practices.
These purchases reflect the diligent approach informed by decades of experience in management through multiple economic cycles, including stress testing sensitivity analysis and financial projections.
Economic indicators continue to suggest a potential downturn, we have taken additional measures to ensure we are prepared beginning with an increase in communication with our customers. For example, we have enhanced the covenant compliance monitoring and business requirements of our C&I loans to ensure we are.
Identified any risk early on.
We have also adjusted our CRE annual review process by incorporating borrowers refinance risk analysis at significantly higher rates.
This helps us to be proactive with our potential problem loans, where we may need to implement early active strategies.
Finally, we have increased our monitoring of our business conditions, and our core geographic markets and Submarkets, while at the same time place some restrictions on loans outside of banks primary trade area.
We believe this strategic actions in combination with those already in place or help us reduce downside risk in the event of a recession.
With that I'll turn the call to our Chief Banking Officer, Anthony Kim to discuss third quarter loan production and deposit gathering in more detail.
Thank you Bonnie.
Begin with additional details on our loan production, whereas third quarter volumes were $492 million more in line with our historical averages.
Our third quarter residential mortgage production achieved another record at 140 million. Despite the run up in mortgage rates are focused on the non QM market is driving these results.
Our gross button on lenders remain active in the market.
Additionally, a large portion of our production was for home purchases rather than refinances.
This market remains strong in the third quarter as many homebuyers were eager to close on their own and lock in the rates.
That being said, we do expect mortgage originations to moderate in the fourth quarter as higher interest rates are now having an impact on both the purchase and refinance markets.
Our commercial real estate loan production was $133 million for the quarter and represented a two 7% of total production.
Going from 42% for the second quarter.
Originations consisted of a mix of multifamily industrial and warehouse hospitality and retail properties. So lower production relative to the second quarter was primarily due to a higher interest rate environment.
Higher interest rates have created a market wide slowdown in commercial real estate transactions, both purchase and refinance markets.
C&I funding was 88 million to into a corner or new commitments of 145 million fairly consistent with the second quarter.
Total commitments on commercial lines of credit increased to $976 million at the end of third quarter up 74 million or eight 2% from the prior quarter and 43% year over year.
However, outstanding balances on these line declined by six 9% between quarters, resulting in a third quarter utilization rate of 40% down from the second quarter utilization rate of 47%.
This was due to some fluctuation in trade finance balances as well as the scheduled payoff of a large loan equate.
The equipment finance Gorilla to production was strong again at 86 million for the third quarter, but down modestly from the record second quarter.
And SBA seven loan production was 45 million for the third quarter and continues to trend in line with our expectations our investment banking talent over the last several quarters has enabled us to continue to penetrate this key market.
With respect to our corporate Korea initiative, we had another strong quarter with a 71 billion in commitments from new customers of which 48 million was funded during the quarter approximately 60% of fundings were in C&I and the remaining 40% CRE loans.
Our corporate Korea portfolio has grown by 31% since last year well above the pace, we had expected for this new initiative.
These loan balances were 772 million at the end the call.
Order, representing 13% of our total loan portfolio.
The average weighted on all new loan production for the third quarter was $5 five 5% up 120 basis points from the second quarter.
Payoffs were $140 million for the quarter down.
From $230 million for the second quarter.
The average rate on loan payoff was $5 two 6%, excluding PPP loans up 83 basis points from the second quarter payoffs.
This is the first quarter in the last six quarters, where new origination yields have exceeded the yields on loan payoff, excluding PPP, which should benefit our future average loan yields.
In summary, our efforts to further diversify our loan portfolio by industry geography, and loan type is paying off and that strategy is strengthening our business, which we believe will in turn drive incremental growth and profitability.
Now turning to deposits.
<unk> grew by 222 million or three 7% to $6 2 billion and easily supported our loan growth in the quarter.
We haven't had continued success with our deposit gathering efforts, particularly with our new and existing corporate Korea clients as those deposits balances grew by $129 million in the third quarter, which included an increase of 74 million Aten Tas.
Masking their growth as well as growth from other new and existing relationship was the shift by some customers of their funds into interest bearing deposits.
Noninterest bearing DDA as represented nearly 45% of our total deposits at the end of third quarter, which we believe is a testament to our strong customer service and local market expertise.
Our time deposits increased by 277 million in the third quarter as we saw a move by some depositors into this category as well as renewed interest in time deposits given the recent increases in general level of interest rates.
We were successful in growing these deposits as to where you would start to new existing and former customers of the bank.
And now I'll hand, the call over to Ron Santa Rosa, Our Chief Financial Officer for more details on our third quarter financial results. Thank you Anthony let's begin with net interest income, which grew 7% sequentially and our net interest margin that improved by 11 basis points.
Net interest income was $63 million for the third quarter up $4 million from the previous quarter because of the ongoing increases in the general level of interest rates propelled our loan and security yields higher.
And our average interest earning assets driven by the sequential growth in loans from our continued strong loan production increased two 7% or $181 million.
Turning to our net interest margin, which was 366% for the third quarter and up 11 basis points from the prior quarter. We saw our yield on loans increased 36 basis points driving our net interest margin higher by 28 basis points, while at the same time the rate payer.
On our interest bearing deposits rose 47 basis points moderating that margin growth by 23 basis points and we gained a net six basis points from the increase in yields on securities and cash offset by an increase in rates on borrowings and debt.
Pausing here to look back at our beta as we expected the beta in any particular quarterly period can vary significantly given the amount of the change in the federal funds rate for that period as well as the conditions in the marketplace for.
For the third quarter, the federal funds rate increased 150 basis points as such our interest earning asset for the third quarter was 23%, while our interest bearing deposit beta was 31% and the beta on our net interest margin was 7%.
We also just notice.
Positive differential in our third quarter net interest margin.
Between the higher yields on loans and the higher rates on interest bearing deposits narrowed to just five basis points.
So we've seen the rate of margin increase slow sequentially and we know that we have not yet reached the terminal fed funds rate and that debate continues as to when it will occur and what it will be as such we remain cautious as to the quarterly trajectory of the net interest margin given the uncertainty in <unk>.
Just rates and the economy.
That said, we are very pleased with the performance of our net interest revenues and net interest margin through this stage of the rising rate cycle, especially so given the support from the high level of noninterest bearing demand deposits and moderated loan growth. We continue to anticipate pretax pre provision earnings which did increase <unk>.
5% for the third quarter would remain healthy in the coming quarters.
Moving onto noninterest income, which was $8 9 million for the third quarter down from $9 3 million for the prior quarter due primarily to a 500000 dollar decline in our SBA gain on sales.
The volume of SBA seven loans sold for the third quarter increased modestly to $43 $7 million, while trade premiums as expected declined 16% to 6.67% for the quarter.
We also saw fees declined by around $300000 from the second quarter because of lower trade finance activity.
With respect to expenses non interest expenses for the third quarter were up $1.8 million from the second quarter with the increase was spread across a number of categories salaries and employee benefits expense increased by $600000, reflecting primarily lower deferred costs, resulting from decreased.
<unk> production.
Advertising and promotion expense increased $500000 because of increased marketing activity underscoring the drive for new business as well as a return to more outside meetings and events somewhat consistent with what we were doing pre pandemic. However, the efficiency ratio for the third quarter remained relatively unchanged.
<unk> at $46, two 2% because of our higher revenues for the quarter.
We recorded a provision for credit loss expense of $600000 for the third quarter down from $1 $6 million for the second quarter.
Third quarter expense reflected a negative loan loss provision of $400000 and a positive off balance sheet provision of $1 million. The allowance for credit losses was $71 $6 billion at the end of at quarter end, representing a coverage ratio of 123% compared with.
The second quarter, our specific allowances increased $200000, while the allowance for quantitative and qualitative considerations decreased by $1 $7 million.
In summary, we delivered another commendable quarter with net income of $27 $1 billion or 89 cents per diluted share a return on average assets of 152% and a return on average equity of $15 five 8%.
The company and the bank exceeded minimum regulatory capital ratios and our ratio of tangible common equity to tangible assets was eight 4% down from the prior quarter.
That decline was primarily due to the unrealized after tax loss on our securities portfolio, resulting from the rapid increase in interest rates during the quarter. However, tangible book value per share was only down one 6% from the second quarter as our strong earnings helped offset this accounting convention for us.
Billable for sale securities with that I will turn it back to Bonnie. Thank you Ron we entered the fourth quarter with the cautious optimism our team's focus on our strategic initiatives to diversify our business along with our continued investments in talent and technology are fueling growth across our loan portfolio.
Despite an uncertain macroeconomic environment.
I wish it is strong and our margins are healthy.
The exceptional performance, we delivered in both the quarter and year to date has put us on track for another year of solid financial results for 2022 as.
As we close out the final month of the year. We also look forward to celebrating hanmi banks 40th anniversary in December .
There is a four for four decades of Athena trusted community partner two generations of our customers today, we are better positioned than ever to meet the evolving needs of our customers. We look forward to serving them, while continuing to drive disciplined growth and deliver attractive returns for our shareholders.
With that we'll open the call for your questions. Operator, Please open the line up a question.
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One moment, please while we poll for questions.
And our first question comes from the line of Matthew Clark with Piper Sandler.
Please proceed with your question.
Hi, good afternoon.
Maybe first for Ron just on the interest bearing deposit costs can you.
Give us what the spot rate was at the end of September either interest bearing or total.
Sure so with the.
End of September for the month of September our interest bearing deposit costs were 112 basis points, but as I mentioned last quarter.
Matthew.
The most recent rate increase happened late in the quarter. So I do peak into October .
For October I can tell you that we're already about 45 basis points over the third quarter average of 78 basis points.
Okay great.
Okay.
And then.
And then just on I'm sorry.
Wayne around with the model here.
And what are your what are your latest thoughts on or how are you modeling.
Your through cycle deposit beta at this point.
Assuming we get to 570, sorry, 475 of fed funds.
Yeah. So we still anticipate this kind of uneven push pull between.
Yields on earning assets and the cost of interest bearing deposits in any particular three months periods. So.
Until we leg into whatever this new rate environment may be I still see that as can start to diminish as we as we kind of finish out perhaps the year maybe into the first quarter, but I with only a five basis point differential that I saw in the third quarter I'm, just not quite sure when that's going to happen.
Yes.
Okay.
And then shifting gears to expenses 33 spot.
Spot three run rate I guess, how are you thinking about that run rate in the fourth quarter and then expense growth in general for next year given inflationary.
[noise] pressures and slower growth.
So from a from a fourth quarter perspective, I would just continue.
The same remarks have had previous quarters, we will continue to see.
General inflationary pushes in different categories with respect to 2023, we really haven't pulled together all of our thoughts yet because there will be certainly inflationary ideas. There will be initiatives there will be cost save ideas. So how those all balance out just not quite sure at this point.
Okay, and then last one for me just on the SBA outlook higher rates, you know obviously slowing that.
Activity what are your latest thoughts on production and premiums.
Yeah I think.
We've been keeping the guidance.
Okay.
$60 million to $65 million I think we're going to stay with that guidance.
In terms of our production numbers and in terms of the premium the premium has come down to around.
Six 6% and that I think its going to hover around that area or maybe slightly less.
Perfect. Thank you.
Okay.
Our next question comes from the line of Kelly Motta with K B W. Please proceed with your question.
Hey, good afternoon. Thanks for the question.
Maybe just starting off with loan growth.
Hell, then it's really strong all year and reflecting.
It's that you guys have been doing over there.
One.
And I apologize if this was mentioned during the prepared remarks, but I thought C&I.
Down a little bit just wondering if you could provide some updates on it if there was any.
A large pay offs or trends.
And anything like that that could.
Help us understand and kind of help us look forward. Thank you.
Sure Kelly in terms of our C&I, particularly into line facility actually we grew our combined bank compared to the second quarter. Our commitment was around 900 till Gillingham, we grew that to a 909 hundred 77 million in the quarter in terms of the fluctuation in the actual balance.
Last quarter line utilization was around 46% and this quarter, it's actually about 40% and looking at just a couple of quarters. It ranges from 40 to 45, 46%. So that's the impact that you're seeing the change in the C&I.
Got it that's helpful.
And looking at yields it looks like loan yields expanded really nicely.
Six basis points quarter over quarter can you remind us any.
And just like the percentage of the book that floats as well as how we should be thinking about.
So again, a lot about deposit betas, but how we should be thinking about the repricing of loans going forward in this higher rate environment.
Sure.
25% of the loan book re prices within a three month interval quarter interval.
And about another 5% kind of is subject to.
Potential renewal if you will so the.
Hypocenter rolling down of the maturing loans that are rolling down. So you can look at anywhere between 25% to 30% of the book could reprice in any quarterly period.
Got it that's helpful. Maybe last question from me and then I'll ask back is just.
Looking at funding and how how you're funding your lawn.
On growth going forward.
You clearly have some deposit specials in there.
The loan to deposit ratio.
We're still in the mid nineties, so still some room, but.
Just wondering how you play.
You know C D and CD promotions versus maybe extending out with some term funding in there and if that's a consideration or if it's if you're going to continue funding with.
Cds that and.
On deposit generation.
So maybe I'll start with that in terms of a city publish that it's actually the the the C D. A.
It's a more of a campaign that we had were trying to.
Bringing back our former customers.
Who are we have a current relationships. So that was a part of that promotion not necessarily.
Entertaining the Hyatt.
Higher rates.
But the outlook.
For the rest of the funding I'll sure. So covered as you as you noted Kelly.
We're at about a 95% loan to deposit ratio and we're comfortable at that level and we anticipate that the moderated loan growth that we probably are going to continue to see as you go through this rising rate cycle.
Should be met with continued what I would characterize core deposit mean, our own franchise.
We have very nominal amounts of wholesale funding.
You see the $100 billion of S. H L b.
Funds those were <unk>.
Secured back in the low rate environment. So you know there are at 87 basis points and they'll run from now till about February of 2025.
We have some.
Brokered money just under about $100 million, that's been at about 43 basis points again garnered during the new zero rate timeframe that runs out until 2024, and then I've got some.
We're comfortable with what we have I continue to see the wholesale funds as being Marshall to the to the proposition.
But we will continue to grow.
And we'll continue to I think have healthy.
Pre tax earnings.
I appreciate all the color I'll step back great quarter. Thank you.
Yes.
Yeah.
Our next question comes from the line of Jason Stewart with Jones trading. Please proceed with your question.
Hello, Jason are you on mute.
Okay.
Okay.
Yeah.
It seems if we are having technical difficulties.
Awesome.
Unfortunately.
Our next question comes from the line of Gary Tenner with D. A Davidson. Please proceed with your question.
Thanks, Good afternoon.
Pardon me I think I heard you comment on the commitment growth in the quarter could you give us a sense of where the pipeline stands at the end of the quarter compared to June 30, I don't think I heard that during the prepared remarks.
Can you repeat that question again Terry.
You are asking.
Yeah, just what you you had given us the growth in commitments quarter to quarter, but was wondering if you could.
Update us on where the loan pipeline stood at the end of the quarter compared to June 30.
Sure Yeah.
Yeah, you know going into the fourth Q, our loan pipeline is actually pretty strong I would say it mirrors pretty much the beginning of the third quarter.
Okay. Thank you and then secondly, just as you've talked about kind of the increased oversight and restricting some some growth outside your primary trade area could you maybe.
Maybe just give us a sense as to what what segments, that's going to impact mostly in and to what degree you think that kind of is a restraint on growth.
Yeah, I mean, which we try to stay focused within our business.
Business our network.
And then also depending on certain markets.
Certain industries.
That you know.
We are.
Focused on so.
There is from.
Okay. Thank you.
Sure.
Our next question comes from the line of Timothy Coffey Janney. Please proceed with your question.
Great. Thanks, good afternoon everybody.
Good afternoon.
This is different to the so obviously pay downs came down big this quarter quarter over quarter year over year really good way.
And what product categories are you seeing slowdowns, we are seeing pay downs slow down the most.
Obviously with the rising interest rate environment, we see a substantial.
A reduction in pay down and mortgages.
We usually okay.
<unk> averages about $25 million to $30 million a quarter. This quarter, we just had very minimal at $3 million.
Okay.
Mhm.
And then yes, sorry about it yet so that's just just to add in addition to the mortgage is obviously.
And CRE.
Payoffs were a much reduced from the second quarter.
Okay, and specifically the CRE do you think that's the beginning of a trend.
And I would say somewhat yes, because I think both in the pay offs.
And the <unk> and the new generation.
Thank you.
Right so.
Well, we'll see but I think in maybe.
Okay.
Okay, that'd be that'd be that'd be a positive and then can you provide some color on the relationship out of special mention this quarter.
Sure.
Yeah.
It's a.
The customer is then a manufacturer of auto parts industry and are mainly.
The fundamental operation is a sound, but as we noted in the earnings release, there was a change in the executive management. So you'd had happened so they have new management in place.
And then we thought it was a prudent to put into special mention and then.
And what's the relationship.
Okay and of the asset based lending line business that you have do you have relationships that are bigger than that 18 million outstanding but this relationship.
Yes.
Yeah.
We may have I don't have that inflammation, Oh I can get back okay. Okay. Yeah, I'm just curious if that's one of the larger relationships in that portfolio.
And then just my last question is for Ron.
If I remember correctly, there's a regular maturity schedule to your time deposits were about a quarter of them reprice or mature and reprice every every quarter.
Have you thought is that you can give any thought to changing that maturity schedule given the violent uptick in rates that we've seen and are going to see this quarter.
So that that so called maturity schedules are function of depositor appetite for 12 months Cds and it just happens that they kind of come in about every quarter. So that 25% relationship became a little bit distorted as we went through kind of that low spot.
Of the last year, where you saw the entire.
CD book fall to about 16% of total deposits. So there's some some.
Some lumpiness that's going to happen I think in the third quarter of next year, just because there's just been as I say a dearth of individuals' had wanted you know Cvs as we went through 2021 2022.
It's picking up now because you know CD rates are attractive, but I have a sense, we'll continue to probably see that idea as we kind of settle into this newer newer rate environment.
Okay.
Okay, great well those are my questions. Thank you very much for your time.
Thank you.
And again as a reminder, if anyone has any questions you May press star one on your telephone keypad to join the question and answer queue. Our next question comes from the line of Kelly Motta with K B W. Please proceed with your question.
Hey, Thank you so much for the follow up I'm I'm, just I'm just going over the commentary from the last call and.
I feel like your commentary around margin then was what's more cautious than we we again got expansion even with the deposit betas you've seen.
You know I know you've given different pieces of the name, but you know given the expectations for you know.
Probably another 75 basis points again and continued rate hikes.
Do you think we've reached a peak named here at <unk> 22, or do you think we can still get a quarter or two more of expansion with them the way.
Pricing relative to them.
Hospitals.
Well, it's certainly possible, but I just I wouldn't put.
I, just don't see that as a very.
Probable.
And the only reason for that as I tried to mention in any particular quarter. There is a strong push pull between what's occurring in the loan book and what's happening on the funding book and as I mentioned this quarter, we only ended up with a five basis point differential.
That's that's a very narrow differential which can easily shift in any one quarter. So we'll see what happens next week with what the fed does and whether we're at the peak with respect to what they believe the terminal rates should be and once I get into whatever that terminal rate is and again I.
I still have a mind that people are still debating what that rate is should be will be it's very difficult for me to tell you when we're going to get to the peak and when we're going to get into that.
Different rate environment.
Got it. Thanks. Thank you so much for entertaining that question Ron I really appreciate it.
Sure not a problem.
And thank you we have no further questions in the queue at this time I'll now turn it back to MS. Bonnie Lee for concluding 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 remainder of the year.
And the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].
Okay.
Uh huh.