Q2 2024 Hanmi Financial Corp Earnings Call
Ladies and gentlemen, welcome to Henry Financial Corporation's second quarter 2024 conference call.
As a reminder, today's call is being recorded for replay purposes. At this time all participants are in a listen only mode.
And the answer session will follow the formal presentation.
And what should require operator assistance during the conference. Please press star zero on your telephone keypad.
Now I would like to turn the call over to Ben Brock, which Investor Relations for the company. Please go ahead.
Thank you Joe and thank you all for joining us today to discuss <unk> second quarter 2024 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 at Hanmi Dot Com I'm.
I'm here today with Bonnie Lee President and Chief Executive Officer of Hanmi Financial Corporation, Anthony Kim Chief Banking Officer, and Bob <unk>, Chief Financial Officer.
I will begin today's call with an overview Anthony will discuss loan and deposit activities well I won't provide details on our <unk>.
Financial performance and then Bonnie will provide closing comments before we open the call up for 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 results our actual results may differ materially from those contemplated by our forward looking statements, which involve risks and uncertainties discussions.
Discussions discussion of the factors that could cause our actual results to differ materially.
From these forward looking statements can be found in our SEC filings, including our reports on forms 10-K and 10-Q in particular, we direct you to the discussion of certain risk factors affecting our business contained in our earnings release, our investor presentation.
10-Q.
With that I would now like to turn the call over to Bonnie Lee Bonnie. Please go ahead. Thank.
Thank you Ben and good afternoon, everyone. Thank you for joining us today to discuss our second quarter 2024 results.
They very solid results in the second quarter, notwithstanding a challenging banking environment.
Our team continues to execute our strategy well always staying true to our core relationship banking model and we remain focused on diversifying and expanding our loan portfolio and deposit franchise.
This two pronged approach enabled us to expand our market share for deck.
Yeah.
Here are some highlights.
Okay.
Net income was $14 5 million or 48 cents per diluted share. Our return on average assets was seven 7% and then return on average stockholders' equity was seven 5%.
New loan production increased by 17% quarter over quarter importantly, our asset quality metrics have remained consistently strong.
Deposits grew one 4% from the prior quarter and now comprise 31% of total deposits.
Noninterest income increased by four 2% from the fourth quarter and finally noninterest expense declined three 2%, primarily driven by a decrease in salaries and benefits from seasonally lower employer in Texas and capitalized labor and costs associated with our investment in a new loan.
Originations just.
Looking in more detail at the 17% increase in our new loan production.
It was 77% increase in S is loan production.
An example to increased business activity and our investment in college at bankers. Additionally, C&I production increased by 16% on a sequential basis and 62% year over year, which contributed to a three 6% increase in C&I portfolio.
While loan production was strong but as far as flat.
Barracuda first quarter due to a higher level of payoffs and then continued sales of residential mortgage loans.
Deposits were relatively stable on an encouraging note, where you could demand deposit accounts by five 6% on an annualized basis, and we are seeing margin stabilization.
During the second quarter, we grew our noninterest income and employing rigorous expense management.
Turning to asset quality, we continued to exercise stringent credit management during the quarter as a result, our asset quality remains excellent with a criticized loans declined by over 17% compared to the first quarter.
Net charge offs continued to be low at 12 basis points of average loans annualized.
Well does that cause it could take a quarter, we saw some mortgage loans into the secondary market.
So all of the SBA loans during the quarter and both actions supplemental our noninterest income.
We anticipate capitalizing on opportunities to sell more of us doing some mortgage loans contingent on market conditions.
Since well before in Turkey for supply, our revenue base and enhance our balance sheet.
I'm also pleased to report that our strategic growth initiatives, Gary Pruitt, Our Coke Victoria initiative continues to perform well and in line with our expectations with an increasing number of our customer referrals.
Yes.
Speaker Change: It's a strong sign of our confidence in our team's capabilities in the second quarter Corporate Korea production was slightly higher than the first quarter at 55 million and 58 million in new deposits.
But Korea currently represent approximately 14% of our total loans and 14% of our total deposits.
Alright.
Speaker Change: <unk> reached the 55 million exceeding our quarterly production target of about 40 to 45 million.
Going forward, we expect production to be more in line with this quarterly target.
During the second quarter, we completed the cobalt Asian number three branch locations, which Bonnie and Ron will discuss later.
Speaker Change: As a reminder, these actions are integral part of our strategy to maximize growth and generate cost savings.
Well, we'll continue to evaluate.
And that is to optimize our branch footprints.
Finally, as a part of continuing investment in people process and technology to support I quote me.
More than a year long effort to eat.
The amount of new loan origination system.
This new system offers well around your solution or all of our lending processes now occurred under one platform.
Our new loan origination system is expected to improve efficiency for underwriting and closing commercial films and enhance the customer experience student loan origination.
I'll now turn the call over to Anthony Kim Our Chief banking officer to discuss the second quarter loan production and deposit activities in more detail.
Thank you Bonnie Thank you all for joining us today.
We gained by providing additional details around the production.
Second quarter loan production was 278 4 million up $40 million or 17% from the first quarter with a weighted average interest rate of three 1% compared to eight 2% last quarter.
Increase in loan production was primarily due to an increase in commercial real estate C&I and SBA wild residential mortgages declined from the first quarter levels.
We remain disciplined with our underwriting as we pursue high quality loans.
Speaker Change: Our standards in the current rate environment.
CRE production was 88 million up from $16 million in the first quarter due to increased volume in California, and the northeast.
The high interest rate environment continues to impact the traditional and refinancing activity.
Speaker Change: We remain pleased with the quality of our CRE portfolio.
Weighted average loan to value ratio of approximately 50% and a weighted average debt service coverage ratio of two times.
SBA loan production increased by the SEC.
Speaker Change: Quarter up from 31 billion in the first quarter. This production increase reflects some marketing talent, we have added to the team and the growth we are driving with small businesses across all our markets.
Production in C&I during the second quarter was $59 million, an increase of 8 million or 16%.
The increase was driven by strong demand from the corporate Korea, which represented 35 billion or 9% of total C&I loan production during the quarter.
Total commitments for our commercial lines of credit or over $1 2 billion in the second quarter of <unk>.
15% on an annualized basis outstanding.
Outstanding balances grew by 8%, resulting in an utilization rate of 41% up from 40% last quarter.
Speaker Change: Residential mortgage loan production was $30 million for the second quarter.
43% from the previous quarter due to lower demand for purchase transactions and this higher interest rate environment.
Speaker Change: Most of our current amazing opportunities continue to be in the purchase market as refinance activity to remain subdued.
Residential mortgage loans represented over 15% of our total loan portfolio.
Yes.
Go.
As Bonnie noted during the first quarter, we sold approximately $20 million of residential mortgages from our portfolio and are currently exploring additional portfolio sales depending on market conditions.
With respect to corporate Korea, we again saw healthy demand from these customers who accounted for $55 million of Portola production, which includes approximately $35 million of C&I production.
Our efforts to expand and grow these relationships are continuing to bear fruit.
<unk> loan balances were 865 million up $30 million or 4% from the first quarter and represents approximately 14% over our total loan portfolio.
Turning to deposits in the second quarter deposits were down 7% from the previous quarter, although our demand deposit accounts grew one 4% or five 6% annualized over the same period.
We continued to expand our partnership base with our corporate Korea clients with a deposit production of 58 million in the quarter. Our team is making a good progress in adding new relationships that we believe can grow over time.
Quarter end corporate Korea deposits represented 14% over total deposits and 16% of our demand deposits.
The composition of our deposit base remains relatively stable, which reflects the success of our relationship banking model.
During the second quarter, our mix of noninterest bearing demand deposits increased from 30% to 31%.
We completed the consolidation of three branches in May and this was executed successfully with no discernible impact on deposits. We will continue to evaluate our branch network to optimize our footprint.
And now I'll hand, the call over to Ron Santa Rosa, Our Chief Financial Officer for more details on our second quarter financial results.
Thank you Anthony.
Net interest income for the second quarter was $48 6 million down 4% from the first quarter. This.
This decline was principally due to an 11 basis point increase in the cost of our interest bearing deposits. This increase also went into the nine basis point decline in our net interest margin and was $2 six 9% on a taxable equivalent basis for the second quarter.
Reviewing our net interest margin as it unfolds for the first half of the year. We saw an uptick in June which may be an inflection point, indicating a directional change in the trend.
Looking forward, we see that the amount of time deposit maturities for the third quarter is somewhat low and that the average rate paid for those maturities is not that far from our current rates. In addition, our cost of interest bearing deposits for July to date is only about two basis points higher than our <unk>.
Quarter average.
Importantly, the average weight of our new loan production continues to exceed 80% in summary, recognizing that one month does not make a trend our net interest margin expanded at the end of the second quarter, hopefully, indicating a positive inflection into the third quarter.
Speaker Change: Turning to noninterest income revenues were $8 $1 million up four 2% from the first quarter for the second consecutive quarter, we had gains from the sale of residential mortgages and although the gain was $78000 less than the first quarter, we retain the servicing rights in this.
Speaker Change: Action, which will further diversify our revenue sources.
James from the sales of SBA loans for the second quarter increased $200000 to $1 $6 million as trade premiums increased to 854% and income from bank owned life insurance increased $300000.
Noninterest expenses for the second quarter declined three 2% to $35 $3 million here, we saw the effect of seasonally lower employer taxes and benefits as well as the investments in a new loan origination system that Bonnie mentioned.
In addition, as Anthony noted we completed a branch consolidation at the end of May that resulted in expenses of $300000 and in addition to other real estate owned of $700000.
Net loan charge offs for the second quarter remains low at 12 basis points of average loans annualized.
And overall asset quality remains favorable.
Turning to equity capital, our negative OCI increased $1 $1 billion from an increase in unrealized after tax losses on our available for sale securities portfolio as well as an increase in unrealized after tax losses on our cash flow hedges during.
During the second quarter, the company announced a new $1 5 million share repurchase program.
And subsequently we purchased 170000 shares at an average price of $16.05 Tans.
Tangible book value per share at the end of the second quarter was $22 99, and our tangible equity to tangible asset ratio was nine 9%.
Hanmi and the bank continue to exceed the minimum regulatory capital requirements and the bank continues to exceed the minimum ratios for the well capitalized category the.
The company's common equity tier one capital ratio was 12, 1% and the bank's total capital ratio was $14 five 1% with that I will turn the call back to you Bonnie thank.
Thank you Ron I'd like to thank our team for their ongoing commitment and dedication I'm thankful to our bankers, who continue to foster and meaningful relationships with our customers and enhance our franchise value.
It's well positioned for sustainable growth our balance sheet is robust as evidenced by our strong capital ratios.
Liquidity and excellent credit quality, our loan pipeline is healthy and building, which reinforces our confidence in our ability to achieve low to mid single digit loan growth as CFO.
We have a stable base of core deposits and have recently experienced the improved mix shifts to D D as well.
We are committed to disciplined expense management and finally, we are extending our geographic reach with the opening of a branch.
A metropolitan region later this year.
With broader macroeconomic uncertainties persist our relationship banking model is our foundation.
Hey, guys, just how we operate and execute our strategy, we remain confident in our ability to drive ongoing growth and enhance our franchise value for all stakeholders.
For your time today and I'll now open the call for your questions. Operator, Please open the line.
Okay.
Speaker Change: Thank you.
And gentlemen, if you would like to ask a question. Please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
And our first question comes from the line of Kelly Motta with K B W. Please proceed.
Hey, good evening, thanks for the question.
Maybe starting with loan growth I think you mentioned.
You mentioned in your prepared remarks that production was up 17%, but it looks like balances in south for flat I'm wondering if you.
You know have any commentary as to what potentially drove payoffs or paydowns higher if any of that had to do with working now start relationships out of the bank and as you look ahead and I'm, putting it all together what seems like a reasonable expectation.
For loan growth at this juncture I'm, given your conservatism as well as what you're seeing in your markets.
Sure Kelly, So I mean, we had a.
Better production in the second Q, obviously from the compared to the first Q.
D a.
Pay off well.
Does the higher.
And average so looking at the last four prior four quarters, our payoffs range from.
On average about 85 million so low about 80 high of 120. This quarter. It was a higher obviously higher than average, obviously and and two things are manifesting. We did have some of the payoffs are coming in and we always have all come to retain that.
A good quality loans, that's allowed the some of the.
Predators offering them more aggressive.
In terms of asset quality.
Increasing.
Cash balances and and offering much lower rate than the market and so unfortunately, we have to that that call. So just looking forward I think that.
Now assuming that the payoffs are staying within the average of 80 to 85 Gilead with the pipeline that's building up going into the third quarter. We think we can stay on course and expect a you know.
Speaker Change: Annual net increase.
In the low to mid single digit growth.
Got it that's helpful.
And then turning to asset quality understanding that non performers are still relatively low there was a $6 million pick up partly npls and to a lesser extent Oreo.
Can you provide any color as to the credits that migrated Annie.
Yeah things of note there and.
As a second part of that question it looks like the loan yields and really expand much I'm wondering if there was any interest reversal that may have impacted loan yields and margin this quarter. Thanks.
Sure.
First of all the MTA.
Roughly about 5 million.
Main contributor is one commercial loan which is about 3 million that was already identified in the prior quarter and it was downgraded in the previous quarter.
Speaker Change: The property is in the.
A foreclosure process.
Due to the sufficient equity in the property, we do not anticipate any loss.
From that particular loan.
And then the rest of them are actually a couple of other small loans that are accumulating about $1 5 million and two out of that one of the loan actually it was brought to cry.
At the beginning.
July.
In terms of the loan yield loan yield just a little bit flattening. It goes down one basis points compared to the prior quarter and as I said, it's related to the actually the payoffs the payoffs that we had this.
This quarter.
It was in a higher.
Higher rate higher yielding loans compared to the prior quarter that got paid off so that's why the although the new production yields came in higher the overall loan yield kind of stayed flat.
Hey, Bob.
Yeah.
Got it that's helpful.
I'll step back thanks, so much.
Speaker Change: Sure.
Okay.
And our next question comes from the line of Gary Tenner with D. A Davidson. Please proceed.
Hey, this is Atlantis on on for Gary Tenner Good afternoon.
I wanted to touch on deposit rates.
Is there any visibility on deposit rates, peaking here at the end of the quarter.
Lower rates in September may make this a moot point, but are you seeing rates top out here.
Okay.
We indicated.
Speaker Change: Cost of interest bearing deposits are only up about two basis points. So it's a very modest.
No increase representing a little bit of mix a little bit of rate. So.
Yes.
As we've tried to point out we think we're peaking but again, we see that between June and July when we meet again, we will have more affirming evidence of exactly what's transpired.
Yeah.
Alright sounds good and what was the period end deposits spot rate.
Okay.
I'm, sorry could you repeat.
The deposit spot rate for the period end.
So for the end of <unk>.
June.
The.
Average for June for Cds was $4 eight 1% and the average for interest bearing deposits was $4 two 8%.
Thank you and maybe if I can squeeze one more.
<unk>.
Buybacks are even with the positive stock move recently chairs remained below tangible book.
Is it reasonable to assume that you guys will continue.
Buying back stock.
So as we've mentioned on previous calls.
The board meets quarterly we review our dividend we review our other capital actions.
Nearly all of the way the shares were trading before the most recent moves.
Share repurchases were.
Let's say highly attractive.
That gap has narrowed considerably here over the last several weeks so.
I could anticipate that they may continue but they certainly won't continue to perhaps the same level that you saw over the last four quarters.
Yeah.
Okay.
Thank you.
And then the next question comes from the line of Adam Butler with Piper Sandler. Please proceed.
Hey, everyone. This is Adam on for Matthew Clark, Thanks for taking the questions.
So in your commentary you mentioned that the cost of IBD deposits were up two bps linked quarter or in in July to date.
And as Kelly mentioned, the loan yields stepped down a slight bit and you guys mentioned that was related to.
The elevated payoffs at higher yields and I think Ron you May have also mentioned in your previous remarks that at the end of the quarter the NIM inflicted so.
Is it fair to assume that those loan yields recovered.
And do you guys happen to have the spot and then and in July to to help us out a little bit with model X.
Speaker Change: So working backwards no. We don't we don't to NIM on a on a daily basis.
With respect to the.
Loan yields as Bonnie pointed out it's just a basis point differential so I would call that flat.
Speaker Change: Yeah.
In addition to the payoffs, which had higher average yields than the production that was put in you also saw a small wood.
Underscore a small mix shift in the portfolio.
Equipment financing this a little bit less on a percentage basis.
Residential move down just a bit.
And CRE picked up and so you start to see again, just as a smidge. So I wouldn't make it too too much it's more evident that youll see it year over year than it is quarter over quarter.
With respect to get into the cost of interest bearing deposits.
I indicated we were.
On a month to date basis 10 basis points over we finished out the quarter at 11.
So if you think about it it's only a one basis point move over the last two months of the second quarter here, we are at two basis points.
I just have a sense that you.
You're probably going to see the same kind of idea for this third quarter. That's assuming one there is no further.
Market conditions that would cause our competitors too.
Act in ways that may not be conducive to a rate environment that most people would expect will decline.
And three our second I should say any particular moves.
The fed might do outside of expectations now for September so.
It seems like we're on the right trajectory for the inflection, but as I pointed out we really need July August and September to affirm that that is in fact the trend.
Okay.
Speaker Change: Okay. That's that's some helpful information there I appreciate that and if I look over on slide 19, you guys have some good information on loan maturities and re pricing it looks like over the next year, you have about $130 million or so per quarter in fixed rate loan production mature.
Bring a repricing what yields are coming off the fixed portfolio right now and.
I guess for the maturing portion do you.
Our plan to use that to fund growth or.
Free up some higher cost funding.
Speaker Change: I don't have that particular data point for you Adam.
I will say and you could see it.
I think better.
Earlier slide.
Let me kind of go backwards, yes. So if you look at slide 10, you can see the maturities over a 12 month period ended but its granular relative to the to the to the loan class.
And as you can see the CNI.
It's a.
There's a category fairly larger piece because those are typically term credits.
That are one to three lines, which are typically one.
And so the renewal element, particularly in the line, let's say is perhaps a bit more certain if I could use that phrase.
And then you go into the.
But roll down of the commercial property loans.
The largest one being hospitality.
Followed by.
Perhaps office and retail and so those have a tendency as Bonnie mentioned I think are as Anthony mentioned, either one that we're kind of selective in how we will look at that renewal.
Either from a credit perspective, where we may feel its not quite what we need for the portfolio or from a competition perspective, where.
There'll be another lending institution that Mike.
Offer a much lower rate than we're comfortable with our cash outs that we're comfortable with or for other parts of financing terms that we just don't feel.
With benefit.
Our bank in the long term.
Okay.
Speaker Change: Okay helpful.
And then just one more for me and I might be missing some information, but I thought that you guys closed two branches in Texas. This quarter was that just a product of redundancies in the footprint or is that reflective of like a <unk>.
Broader initiatives.
Yeah.
Our branch evaluation and optimization of our branches, it's an ongoing effort during the second quarter, we closed.
Three branches, one in California and two in.
Texas.
And not only the consolidation of the branches at that if you remember we opened two new branches.
Yeah, one important in Dublin, but emerging markets and and then as I had mentioned in my prepared remarks that we plan to open one in later part of this year indeed.
Metropolitan Georgia.
Yes.
It's an ongoing process.
Okay got it. Thank you. Thank you for taking my questions I appreciate it.
Alright, thank you.
Speaker Change: Yeah.
And the next question comes from the line of Matthew <unk> with Jones trading. Please proceed.
Hey, guys. Thanks for taking the question the loan to deposit ratio increased quarter over quarter kind of due to that net loan growth. There is there a ratio that you guys are targeting internally and you know.
Speaker Change: As this kind of creeps up should we expect more loan sales going forward to increase the gain on sale revenue. Thank you.
So I think.
A couple of quarters, I think I shared that ideally.
We're targeting trying to target.
Loan to deposit ratio.
Speaker Change: Below 95%.
But you know coming out of the pandemic and whatnot and then with interest rate environment, We are where we are.
So I mean, we will take them time.
Loan sales.
And as we see is that one and contributing to the.
To the online and then also managing the balance sheet, we will continue with the loan.
Speaker Change: Loan sales in the residential portfolio for now.
<unk>.
Speaker Change: Got you. Thank you for that and then.
As mentioned retaining the servicing rights earlier could you kind of flush that out for me because I think I missed the second half of that.
Sure. So the first portfolio sale Hollywood servicing released in this one.
We explored in and executed the idea of servicing retained and so the point, we're trying to debate that as we continue to to look at our production and to look at the the appetite for these particular loans in the marketplace. We will continue to explore either retained or re leased.
<unk> element again, providing us another revenue source that we think would be beneficial.
Speaker Change: The enterprise over the longer term.
Gotcha, and then is there kind of an average coupon on the servicing rights here I guess on the loans that you guys are selling.
We do charge typically 25 basis points.
$233 75, and the servicing.
Okay. That's helpful. Thank you guys.
Okay.
Speaker Change: Okay.
And the next question will come from the line will come again from the line of Kelly Motta with K VW. Please proceed.
Hey, Thanks for letting me back on.
You know I was I was hoping to go a bit more on the core expense run rate you guys had a nice reduction in part and when you strip out the one time costs related to branch consolidations, a nice reduction in cost.
And you mentioned you do have another branch coming online later this year just wondering as we look ahead is there any other areas where.
You're continuing to work out you know cost from or is this a good run rate on which to build as we look ahead to the back half of the year, especially as production.
And loan growth is expected to rebound back.
So so kelly for the second quarter, our noninterest expenses were about $35 3 million.
When we look out over the balance of the year.
Kelly: That seems to be a pretty good run rates.
Allowing for some movement on the <unk>.
To the right of the decimal point, but it seems like that's going to be able to hold it at that.
Vicinity.
For the balance of the year.
Okay.
Speaker Change: Got it.
That.
That is helpful. And then last question for me.
At least as of <unk> I believe your CRE concentration was above 300% am I know that's lower than it's been historically, but I know you guys are conservative within your niche just wondering.
It's that's a consideration at all if your if you look to fund growth and thoughts about the mix of that is that a constraint or do you feel good at that level.
So are the the regulatory CRE concentration ratio.
Which we typically illustrated in our <unk>.
Industrial slides not so much the quarterly slides.
That diminish over I'll say, the past five years or so.
Right.
Can't remember the numbers, specifically the $3 40 kind of comes to mind.
The decline the more recent declined is it is.
It's a combination of a little bit lower growth in those categories because the other.
Loan classes, such as residential mortgages <unk>. The other C&I lending has has allowed us to be as let's say a more balanced producer.
Notwithstanding some variations that occur quarter to quarter. In addition, you see the general growth in capital.
Which also then leads to.
A decline in that number so.
I think as we stand today, you're likely to see kind of a continued.
Slow decline in that particular ratio, we don't have a policy or desire at this point or any particular directors for that manner to drive it below 300%.
Yeah.
Got it thanks for letting me back on.
Sure.
Speaker Change: Okay.
Thank you.
Ladies and gentlemen, there are no further questions at this time I'd like to hand, the call back to management for any closing remarks.
Thank you for joining our call today, we appreciate your interest in Hanmi and look forward to sharing our continued progress with you throughout the balance of 2024, we will be participating in the 20 <unk> annual capital being a community Bank Investor Conference in New York and for like 30, and hope to see many of you there. Thank you.
This concludes today's conference you may now disconnect your lines and enjoy the rest of your day.
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