Q1 2023 Hanmi Financial Corporation Earnings Call
I will 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 continued 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 loan balances historically C&I fundings are seasonally a door into first quarter, but we also believe that the slowdown. This quarter also has to do with our 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 36% between quarters, resulting in a first quarter utilization rate of three 8% down.
Around 40% in the fourth quarter.
V. A seven year loan production was 34 million for the first quarter lower than our long term target for 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 little 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 719% of 30 40 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 727% up 100 basis points from our fourth quarter payoffs.
Our total loan portfolio grew slightly in the first quarter as our a $304 million in new production exceeded our total payoffs and 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 or it's 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 as some deposits and checking money market and saving accounts moving into time deposits.
However, noninterest bearing DDA is representing 38% of our total deposits at quarter end, which we believe validates our strong customer service and local market relationships.
In addition to the mix shift in deposits, we saw renewed interest in deposit insurance programs that we effect on a reciprocal basis risk.
Reciprocal time deposits also known as theaters were 68 7 million at the end of first quarter and we recently launched a deposit sweep 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 Santa Rosa, 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 rates 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 renew deposit or 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 719% Rose 30 basis points to 551%.
Turning to our net interest margin to decline from the prior quarter 39 basis points to 3.28% the increase in the cost of interest bearing deposits contributed 60 basis points of 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.
When we met to discuss our 2022 fourth quarter results I noted that the cost of our interest bearing deposits for January or 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 <unk>, 16% of the portfolio, while noninterest bearing demand deposits were at 46%.
At the end of the first quarter time deposits were 38% of the portfolio and noninterest bearing demand deposits were the same at 38%.
So altogether, even though this rising rate cycle may yet have yet to peak. It appears that most of the heavy lift into the current environment has occurred.
Moving on noninterest income was $8 $3 million for the first quarter up from $7 $5 billion for the prior quarter, the increase essentially reflecting loan customer interest rate swap fees and the absence of the fourth quarter valuation adjustment on bank owned life insurance and.
Encouraging while the volume of SBA loans sold during the first quarter decline, we did see a notable increase in the trade premiums rising to an average of 785% for the quarter.
Noninterest 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 ORP and repossessed personal property expenses.
Noninterest 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 $100000 negative provision for off balance sheet items.
The allowance for credit losses increased to $72 $2 million or one 1% of loans up one basis point from year end net.
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 classic.
Classified loans remained low and non accrual loans saw a 10 million dollar edition of our health care industry loan with a specific allowance of $2 $5 billion. Overall, we believe our asset quality remains strong.
Turning to funding liquidity and capital as body and you have to 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 <unk> borrowings are.
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 three 7% to $21 30 at March 31 2023.
How many and the bank continue to exceed minimum regulatory capital requirements and the bank continues to exceed minimum ratios for the well capitalized category the.
The common equity tier one ratio for the company was 11, five 9% and 13.0% to 6% 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 our 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 of working pay for deposits and loan production.
That being said our team is demonstrating the tremendous value that our customer relationships spring 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 our credit quality. We are focused on delivering attractive returns to our shareholders are serving the communities in which we operate and by developing our team here at Hanmi.
Thank you well.
Well now open the call for your questions. Operator, please open the lineup for the questions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.
You May press Star two if you would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pay may be necessary to pick up your handset before pressing the starkey.
Our first question comes from the line of Gary Tenner with D. A Davidson. Please. Please proceed with your question.
Thanks, Good afternoon everybody.
Wanted to ask first about some of the deposit commentary Ron.
You said in your.
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.
Kind of the confidence in that from a deposit mix perspective, I mean still up 38% noninterest bearing DDA. If you go back which is certainly year over year, but if you go down back to kind of entering the pandemic I mean, it was up 30% so.
I know that there's been any structural changes at the bank, but what gives you the confidence I guess in saying that heavy lifting on that deposit side of things has been done already 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 et cetera remained relatively constant.
And so in the 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 signed here in the first quarter.
I think again, the premise being that or 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.
Yeah.
Okay, but you also then you weren't saying that.
So as we think forward then to the for the next you weren't suggesting that you thought the mix.
Shift was completely done exactly that right.
Yes, we are seeing a decline in that mix shift, meaning that those those individuals' or those depositors that had.
A heavier tilt towards DDA have effectively moved their balances to run their DDA are operating accounts relative to savings and 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 is <unk>.
And.
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 or about $400 million or so was that.
Primarily customer time deposits shifting or did you add brokered.
To the balance this quarter.
Yes, we've been tracking.
Those deposit movement.
Total.
Out of total of $424 million CD growth approximately a little over 50% was the migration from DDA and others other interest bearing accounts and with respect to broker deposits. Gary I think we only have about $85 million or so left of three year money that was one.
<unk> 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 to the loan growth outlook for the year.
Really modest growth this quarter production levels quite a bit lower.
Is there any.
If you think of visibility and pipeline.
Our 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, you know what.
We expect the overall loan growth at least the first half of the year.
With moderate.
Having said that though just comparing the first quarter going into the first quarter, our loan pipeline versus the.
It can have the second quarter loan pipeline loan pipeline itself is up.
We see that increasing trend. However, as I had mentioned we are very selective in the deals that we chose to do and the pricing that we chose to do so so have to see.
Thank you.
Our next question comes from the line of Matthew Clark with Piper Sandler. Please proceed with your question.
Okay. Thank you.
Just on the.
The margin kind.
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.
Our spot rate or was that.
You know the average in April so far just wanted to clarify.
Okay.
Okay.
Great and then do you happen to have the average margin in March.
I'd have to look at.
Our slides in our footnotes, okay, and if I can find it then.
If you'd like I said I don't have my glasses with me so I can't read it.
Hum kind of gone down that same path.
And then.
In terms of deposit flows any update.
Through April to date, any I assume theres seasonal outflows with taxes, but any you've seen additional inflows or outflows.
Maybe unrelated to taxes.
So we haven't seen much of a weather inflow or outflow much of them are other than our normal.
Fluctuation.
Okay.
Okay.
And the new nonperformer that.
$10 million that was added this quarter.
Turning to find it.
In your deck.
But can you give us a sense for what happened there.
And the basis for the specific reserve.
Sure.
It's a one off.
Case, it's actually a hospital alone that's under are beginning to go into reorganization. So at this current time.
Based on the.
Availability of inflammation.
Progress that's and.
We provide ft.
A big reserve of $2 $5 million for that loan.
Okay.
And then just on capital.
Building back here nicely, but we're also likely going into a recession any update on the buyback or willingness to do that.
Again.
Matthew as we've mentioned before I think we'll be very patient.
With capital.
It served us well through the upheaval that we experienced in 2022.
And I think so far it's served us well for the little bit of upheaval for a different reason here in the first part of 2023.
Got it thank you.
Yeah.
Our next question comes from the line of Kelly Motta with K B W. Please proceed with your question.
Hi.
Good afternoon, I think maybe I'll 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 where are you guys. Most closely watching and Conversely, where are you seeing.
Still seeing really good risk adjusted returns at this point.
Michael I know Bonnie you had said you were.
We're being incredibly selective on on the origination side.
Yeah, 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 we look at the merits of the credit as well as the not the pricing that we can get.
It's not in a particular, one specific industry or sector and I think it's across the board.
Yeah.
Okay understood.
On the expense front the release.
Called out as an adjustment on the servicing asset that benefited expenses. Ron do you have do you have how how large that was and excluding that is that it.
Good go forward.
Run rate for expenses and any any areas, where you can manage given that the revenue outlook is just more challenging in this rate.
Great environment.
So the FIC.
The valuation adjustment was either.
Three are point force of 300000, or 400000, I don't remember, which of the two and it just reverse itself because of the shift in.
The the interest rate environment, and 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 nonexistent.
For ever and a day.
With respect to expenses, there's a little bit of variability that we get with <unk>.
Oh are we owe and repossessed personal property. So 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 rates of 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.
Throw in the.
The mix of other ideas that kind of move with inflationary pressures.
Awesome I appreciate the color. Thanks, Thanks, guys.
Thanks.
Okay.
Our next question comes from the line of Tim Coffey with Janney Montgomery Scott. Please proceed with your question.
Great. Thank you afternoon everybody.
Good afternoon, everyone.
Yeah. There was a comment made about the corporate Korea clients and deposits. There was some outflow of deposits and I'm wondering did those deposits moved to other institutions into their deposit portfolios or were those just moved out for investment purposes.
Well, let's just give it one critic.
Particular client.
At the very onset at the March 10th the event date.
The client notified us that.
That they're moving their deposit, but they said temporarily.
And so we hope to get that back.
So I would think that it depends on that.
Customers, but mostly just being cautious they wanted to.
Kind of diversify that their deposits to other institution, mainly August at larger institutions, so not so much into the.
Where do you invest in that or other purposes, but more of a temporary shelter type of.
Deposit movement.
Okay do you know what the ready.
Already the balances of deposit outflow from corporate credit clients in the quarter.
Yeah, it's about a little less than 70.
$40 million.
From maybe a handful of customers.
Yeah.
Okay. Thank you that's very helpful.
And then Bonnie just looking at sort of totality of your customer base corporate Korea, plus legacy customers have you seen a material change in their behavior since mid March to some of the banking stress.
It came about.
So you know I have to say within the first week of the event date of March 10, [laughter] there was.
It's a little bit of a concern is expressed and that's why we have really doubled the efforts of our customer communication, reaching out to the customers.
And I think that's had a society about about two weeks later and as we speak I think that our customers are clearly.
Understand that the banks that were having challenges and Hanmi is it's a very different bank in terms of the the customer base as well as the.
Loan and deposit competition that those customers.
Okay, Alright, great. Those are my questions. Thank you very much for your time.
Okay.
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 about two topics are number one how you feel the commercial real estate market.
Is right now.
Given where cap rates are too.
Where you think transition rates are moving on the non QM portfolio.
So in terms of the commercial real estate I think in just the demands are going up and I think given the environment as well as the date.
Okay.
The increase in the interest rate is most of the CRE customers they would like to entertain with the fixed space.
So overall.
And the C U E.
Production site.
Particularly in the purchase transactions as well as the refinance it.
Okay.
Atlanta.
<unk>, Yeah, Nokia market, I mean believe it or not.
Despite a slowdown in purchase market the week, we've continued to see.
And on purchase transactions, so non COVID-19 much has been very stable and good for us.
Okay.
Yeah.
Yeah.
Okay.
Thanks for taking the question I appreciate it.
Okay.
Our next question is a follow up question from the line of Matthew Clark. Please proceed with your question.
Hey, thanks for the follow up.
Two questions one.
Do you have any appetite to restructure your securities portfolio with a duration over five years and the yields are.
Moving higher, but probably not as much as you'd like.
I wanted to check in on that.
Yes, so Matthew no no real plans I mean will be.
When opportunities present themselves, we'll probably we'll take advantage of.
But theres no real.
Effort or desire a foot two to restructure that portfolio.
Okay, and then just back to the office commercial real estate exposure average balances.
Relatively low at $900000 do you have a mix of.
How much of that 534 million of loans is owner occupied versus non owner.
Okay.
Most I would say most of the office properties are down on non owner occupied.
Our non R R R investor or owner occupied.
Non owner occupied.
Okay Investor Okay got it thank you.
Okay.
There are no further questions in the queue I'd 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.
Yes.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day.