Hanmi Financial Corporation (HAFC) Q4 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the Hanmi Financial Corporation's Fourth Quarter 2021 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. A question-and-answer will follow the formal the presentation. [Operator Instructions]. I would now like to turn the call over to Maura [indiscernible], Investor Relations for Hanmi Financial. Please go ahead.

Thank you, Kylie and thank you all for joining us today to discuss Hanmi Financial's fourth and full year 2021 results. This after 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.com. I’m here today with Bonnie Lee, President and Chief Executive Officer of Hanmi Financial Corporation; Anthony Kim, Chief Banking Officer; and Ron Santarosa, Chief Financial Officer. Bonnie. Lee will begin today’s call with an overview of Hanmi’s 2021 accomplishments; Anthony Kim will discuss loan and deposit activities; Ron Santarosa will provide more details on our financial performance and then Bonnie Lee 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 performance. 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 these forward-looking statements can be found in our SEC filings, including our reports on Form 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.

Thank you, Maura. Good afternoon, everyone. Thank you for joining us today to discuss our 2021 fourth quarter and year end results. 2021 was a very eventful year with a continuation of a global pandemic, political and social volatility and shifting economic macros. Each of these factors presented challenges as well as opportunities for Hanmi and our team executed exceptionally well. During the year we focused on meeting the banking needs of the multi-ethnic communities we serve across our markets. Guided by our strategic growth plan, we expanded our products and services offerings, we grew and diversified our loan and deposit portfolios and by working closely with our customers, we further strengthen our portfolio and asset quality metrics and the results of a consistent execution throughout 2021. We delivered strong results, meeting and even exceeding the objectives we laid off a year ago. Today, we are better positioned than ever to meet the evolving needs of tomorrow's customers. While continuing to be a trusted community partner to customers who have banked with us for nearly 40 years. This foundation will enable us to deliver sustained growth and profitability over the long-term. As I outlined at the beginning of last year, we focused on several strategic growth initiatives in 2021. These included growing our residential mortgage platform, investing in our digital banking platform, extending our corporate career initiative and adding to our talented team of relationship managers. I am pleased to report our success on all fronts. So let me share a few details. First, 2021 marked the first full year of production from our residential mortgage platform. Through this platform, we originate non-qualified residential loans and mortgage warehouse lines. This business is an effective way to diversify our loan portfolio by adding a lower risk asset class that we can grow profitability for years to come. And we are pleased to report that our residential mortgage production ramped meaningfully in 2021, reaching 11% of a total loan production for the year. Second, we made meaningful investments in talent and technology to ensure we meet our customers digital banking needs and expectations. Our digital platform enables us to efficiently scale services for both existing and new customers across our markets and business lines. Importantly, we're improving the customer experience providing more convenient and seamless interactions. Third, we made substantial progress in growing our corporate Korea initiative, which represented 14% of our total loan production in 2021. We launched this initiative in 2019, to develop and expand relationships with Korean companies domiciled in the United States. We have a dedicated team of bankers in this business, who provide our clients with the lines of credit, real estate investment lending, equipment financing, asset-based lending and other services. They deliver service in both Korean and English bridging language device for this unique companies in major California market, as well as the key metropolitan areas such as New York, New Jersey, Georgia, Alabama, and Texas. It is important to note that as we increase lending with our corporate Korea customers, we are also developing new deposit relationships that tend to be sticky. These relationships provide Hanmi with a substantial low cost liquidity to fund both short and long-term growth. To that end, fourth quarter deposits increased 10% year-over-year, noninterest bearing DDAs increased 36% for the year and now account for 44.5% of total deposits, up from 36% a year earlier. This strategic growth initiatives along with a strong momentum across our diverse business lines fueled growth in our loan and lease production in 2021, culminating with a record 625.1 million in production for the fourth quarter. Our multi-lending and leasing businesses were solid contributors to this performance, complementing strength in our commercial real estate and commercial and industrial lending businesses. Our record on production trends in 2021 demonstrates that our growth strategies are working. Hanmi’s strategic footprint in major markets across the country places us in many of the most populous, diverse and economically vibrant markets. And we are pleased that as we have continued to grow and expand our footprint and production product portfolio, we have been able to successfully attract top talent with a growth mindset. In 2021, we added a dozen senior relationship managers across our markets, so we are well positioned to serve more customers as the economy continues to gain momentum in 2022. Finally, our comprehensive approach to our credit management, including our ability to secure payments and pay off as well as our relationship banking model led to improved trends in asset quality last year. Non-performing loans declined 84% year-over-year and at the end of ‘21 accounted for just 26 basis points for total points of total loans. Our $16.0 million recovery of a credit loss expense in the fourth quarter included a 9.1 million recovery from a first quarter 2020 loan charge off. While we anticipate additional recoveries and this relationship over time, we expect future recoveries to be smaller in magnitude. Our allowance for loan losses is strong at 1.41% of loans and we are confident in our ability to effectively manage credit quality going forward. As I said earlier, solid execution across our platform and markets enable us to deliver strong earnings for the year. We reported a full year 2021 net income of 98.7 million or $3.22 per diluted share, up from 42.2 million or $1.38 per diluted share in 2020. These results demonstrate both the earnings power and the ongoing potential of our bank. Looking ahead, we're well positioned for another successful year in 2022. To deliver growth, profitability and shareholder returns in 2022 and beyond. We will focus on executing against the following strategic priorities this year, ramping up our successful residential mortgage business to contribute 10% to 15% of 2022 loan production, further diversifying our loan portfolio by first increasing multifamily and SBA loans. And second by expanding our corporate Korea initiative with the goal of generating 10% to 15% of our total loans and growing percentage of our deposits from this program. Increasing our focus on corporate clients to drive meaningful growth loans in both source of stable low-cost deposits and seeking out and evaluating opportunities and to do high growth and deposit rich verticals that need relationship banking partners like Hanmi. With that, I'll turn the call over to Anthony Kim, our Chief Banking Officer to discuss fourth quarter loan production and deposit gathering in more detail.

Thank you, Bonnie. I'll start off with some additional color on our loan and lease production. We grew our fourth quarter production volumes 25% from the prior quarter to a record 625 million, almost double our fourth quarter production a year ago. We generated sequential quarter growth in all major loan categories, with a notable strength in commercial real estate that when residential mortgages. With record loan production, our loans receivable balance for the fourth quarter was 5.15 billion up 6% from the prior quarter. Pay off moderated 252 million for the fourth quarter from 292 million for the prior quarter. Excluding PPP loans, our loans receivable balance grew 6.4% quarter-over-quarter, and 4.3% year-over-year. In commercial real estate production, loans to clients was a mixed use industrial and warehouse properties help drive quarter-over-quarter improvements. Our new relationship managers and our long tenure bankers continued to generate new business and their collective efforts resulted in a healthy pipeline as we enter 2022. As Bonnie noted, our residential mortgage platform is making meaningful contributions to our results, accounting for 11% of total originations excluding PPP loans for the year, and 14% for the fourth quarter. Lending activity on this platform for the fourth quarter included 85 million of residential mortgages along with 50 million of [indiscernible] lines. Our fourth quarter commercial and industrial loan production increased 2% sequentially. Commitments on the commercial lines of credit increased by 90 million or 13% from the prior quarter to 773 million. However, balances on these lines were relatively stable, resulting in affordable utilization rate of 39% compared with 44% for the third quarter. Loans and leases originated in the fourth quarter had a weighted average rate of 3.91% in line with the prior quarter. Although pay off activity moderating in the fourth quarter, the average rate on payoffs 4.02% increased 84 basis points from the third quarter. Let me say that now to the considerable progress we've made to our corporate Korea initiative. We now have a corporate Korea test in seven strategically located branches across our footprint. As Bonnie explained, more than 14% of our total 2021 loan production, excluding typical loans was from our corporate Korea growth initiative. Notably, we kept off 2021 in exceptionally strong fashion, contributing more than 18% for a record fourth quarter loan production. This helped us to comfortably meet our double-digit total loan production growth call for 2021. At year end, the corporate Korea initiative represented more than 4% of our total loans and 6% of total audits. With an expanding customer base, we anticipate continued growth from this important initiative in 2022. We remain committed to disciplined underwriting as evidenced by our weighted average loan to value and weighted average that service coverage ratios for our commercial real estate loan portfolio of 49.2% and 1.9x respectively at the end of fourth quarter. Both metrics were essentially unchanged throughout 2021. As we have said many times, further diversifying our loan portfolio by industry, geography and loan type remains a priority. At year end, outstanding loans represented about 15% of our loan portfolio, a decline of more than 1% from the previous quarter and 16% since the end of 2020. Importantly, we have only one outstanding loan or non-accrual totaling 132,000, and it is collateralized by a property in a metro location in Texas. Total deposits were 5.79 billion at the end of fourth quarter up 1% from the preceding quarter, and 9.7% from year end 2020. Fourth quarter deposit growth was driven primarily by a 66 million increase in money market and savings deposits and 26 million increase in noninterest bearing demand deposits. These increases were partially offset by a 42 million decrease in time deposits. As Bonnie noted earlier, DDAs represented 44.5% of our total deposits at the end of ’21 up from 36% at year-end 2020. The substantial improvement in our deposit franchise positions as well for the expected rise in the federal funds rate later this year. With that, I'll turn the call over to Ron Santarosa, our Chief Financial Officer for more details on our fourth quarter financial results.

Thank you, Anthony. Our fourth quarter net interest income decreased 1% from the prior quarter to 49.5 million and our net interest margin decreased 11 basis points to 2.96%. Interest income on PPP loans was only $100,000 for the fourth quarter, down from 1.6 million for the prior quarter. Adjusting for the effects of PPP loans, our net interest margin contracted four basis points sequentially, as the benefit of lower cost interest bearing deposits was more than offset by lower yield on interest earning assets. However, our net interest income again, excluding the effects of PPP loans increased 2% sequentially, due primarily to a higher volume of interest earning assets and the benefit of lower cost interest bearing deposits. An important takeaway here is that we now have more than replaced our transient PPP loan portfolio with our own loans originates through our relationship based banking teams. To illustrate, loans at year end 2020 were 4.58 billion when excluding the 296 million of PPP loans at that time. For 2021, loans reached 5.15 billion and PPP loans were only 3 million at year end. Accordingly for 2021, we increased loans by 564 million, or 12%. Another important takeaway is the improving mix of interest earning assets arising from a decline in excess liquidity. To illustrate this, you will see that for the fourth quarter, our average interest-bearing deposits in other banks declined 8% sequentially to $802.9 million. However, this lower yielding liquid asset ended 2021 year at $564.7 million, nearly 30% below the average for the fourth quarter. The shift away from lower yielding liquid earning assets into higher yielding loans combined with $100 million of 5.45% notes redeemable at the end of the 2022 first quarter should benefit our net interest income and net interest margin in future quarters. Our growth in noninterest bearing demand accounts moderated to 1% quarter-over-quarter, while quarterly average balances grew 5% sequentially to 2.56 billion. Interest bearing deposits increased 1% or $30.8 million, while their cost decreased two basis points quarter-over-quarter to 28 basis points for the fourth quarter. Our fourth quarter noninterest income decreased to $9.3 million from 12.5 million for the third quarter, primarily due to a $2.1 million decrease in gains on the sale of SBA loans. The volume of SBA loans sold in the fourth quarter decreased 24% to $36.6 million, while trade premiums also declined to 10.98% in the fourth quarter, compared with 11.85% for the third quarter. Notably, while service charges, fees and other income declined sequentially such fees increased 7.5% on the year ago quarter, driven by the change in our fee schedules mentioned on our last call. We expect these changes, along with management practices over this deposit account service charge activity to continue to benefit our noninterest income in future quarters, Noninterest expense decreased to $31.6 billion for the fourth quarter from 32.5 million for the prior quarter, primarily due to a $1.1 million decline in other operating expenses, largely from lower insurance premiums. Salaries and benefit expense remained about same quarter-to-quarter, reflecting commissions and incentives and higher loan production. Our efficiency ratio increased to 53.81% for the fourth quarter from 52.01% for the prior quarter, due primarily to lower interest income on PPP loans and lower fee income due to the decrease in gains and sales of SBA loans. We posted a credit last expense recovery of $16 million for the fourth quarter, which included a $9.1 million recovery from the first quarter 2020 loan charge off. Breaking this down further, we posted a $13.4 million negative provision for loan losses, a $2.3 million negative provision for off balance sheet items and a $300,000 negative provision for the allowance for losses on accrued interest receivable for current or previously modified loans. With the precipitous decline in modified loans, and the lack of any meaningful adverse credit charges for these loans, the $300,000 negative provision brought to an end in this particular allowance. Our allowance for credit losses was 1.41%, or $72.6 million at the year end, while the allowance for losses on off balance sheet items was $2.6 million. We believe our allowance for credit losses adequately reflects various economic forecasts, as well as the continued near-term uncertainty caused by the lingering effects of the pandemic. We continue to closely monitor and evaluate the evolving environment. And we'll update our loss methodology accordingly. Income tax expense for the fourth quarter included a $2.7 million benefit from the reduction of our deferred tax asset valuation allowance for state net operating loss carryforwards because of recent changes in state income tax regulations that extended their expiration dates, Our effective tax rate for 2021. inclusive of this benefit was 27.2%. While for 2020, our effective tax rate was 29.1%. Finally, our return on average assets and a return on average equity for the fourth quarter were 1.93% and 20.89% respectively. For the full year, our return on average assets was 1.51%. And our return on average equity was 16.27%. And finally, our tangible book value increased to $20.79 per share at the end of the fourth quarter, and our tangible common equity ratio remains strong at 9.23%. With that, I'll turn it back to Bonnie.

Thank you, Ron. I am very pleased with our loan production trends, improving asset quality metrics and strong earnings performance in 2021. I would like to thank the entire Hanmi family for their continued dedication and hard work in making our success possible. Hanmi was founded forty years ago to serve the underbanked minority immigrant community in Los Angeles. Today, we started multi-ethnic communities across nine states with an expanding array of products and services. While we are proud of our past, we are even more excited about our future. We are a community bank that believes long-term corporate value is derived by investing in the communities we serve. That means in a responsible corporate citizen and serving the best interests for all our stakeholders. To support this, we issued our inaugural environmental, social and governance report in 2021. To highlight Hanmi's commitments or stakeholders and to hold ourselves accountable for facilitating financial inclusion while carefully managing risk. You can find the report on our Investor Relations website, and I encourage you to check it out. With that, we will open the call for your questions. Operator, please open the lines up to the questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Matthew Clark with Piper Sandler. Please proceed with your question.

Maybe a question for Ron to start. Looks like you have some tailwind from the strong loan growth on an end period basis relative to the averages should drive I would think some favorable remix in your earning assets and maybe also some lift in the NIM. Be willing to maybe take a stab at your thoughts around the kind of the near term NIM outlook.

Sure. As you observed a few loans on a spot basis were about 5% higher than the fourth quarter average. And of course, that's a much larger contributor to our net interest income and NIM. So I would anticipate that we'll be in what I would characterize again as kind of a low threes, before introducing any fed action that might occur in 2022.

Okay, great. And maybe shifting, well, I'll stick with loans pay off slowed pretty dramatically this quarter. Can you speak to what was driving it? And what your expectations are for payoffs going forward? I know they're hard to forecast. But just curious if that's unusually low or not.

Excluding PPP forgiveness last quarter payoff level in third quarter, compared to fourth quarter is in line. So actually a fourth quarter payoff is not relatively lower, but not significantly lower. And we do expect similar level of a payoff in year 2022.

Okay, thank you. And on expenses, Ron. I think there was some modest, this is credit related kind of expenses in there, but look like a pretty clean run rate, what are your thoughts around expense growth this year with wage inflation and all the other kind of investment needs you might have internally.

So I think we are as perhaps anxious as everyone else to understand where interest rates will go, and then just the general demand for labor and the cost of that labor. That said, I think, I would envisioned maybe starting the year at about that $32 million per quarter run rate. And then, I guess the choice is what kind of inflationary factor to apply to that. And it could be anywhere from, let's say three to seven, seven on the outside relative to being waited more for wages, three on the inside, if wages and things of that sort don't come in as strong. Our 2021 expense rate does include higher levels of incentive pay, commission pay relative to loan production. So I'm not looking at Anthony, I'm not sure if he's going to set another record here for 2022. But there could be some relief in that number if production were to come in at about the same or maybe a little bit less. So those would be some of the factors I would think about as I look to an expense run rate.

Okay. And then on the tax rate a little low this quarter, should we continue to use 30% for the outlook?

I think 29% might be better in 2022.

Okay. And then, lastly, on buybacks, did you guys buyback any stock this quarter [indiscernible] lease?

Very small amount at the early -- at the top of the quarter, so about 24,000 shares and the price back then was probably about $20 a share.

Our next question is from Gary Tenner with D.A. Davidson. Please proceed with your question.

Just a follow up on that buyback question to start, just kind of false expectations around activity might be in the buyback now that you've obviously had a very strong quarter built tangible book. Where do you think the level of activity might be early in ‘23, or early ’22?

So given the volatility that we've all seen here over the last couple of days, my hope, which would be, I guess, counter to a buyback is that we would see a return to normalcy and the share price continues to be relatively attractive in the marketplace. However, if we continue to be in these doldrums, where we can see some great volatility, I can see entering into the marketplace to acquire something at a pretty low multiple to tangible book.

Okay, thanks. And then, in terms of SBA kind of the outlook for 2022. Do you have any kind of budget levels of production and sale that would be helpful to be thinking about going into the year?

Sure. Any given year, I think about last couple of quarters rearrange from 25, 30 to 35, or 10 quarters around 40 million. Going forward in 2022, I think that we are comfortable with providing the range of about 35 million to 40 million in any given quarter.

Okay. Thank you. And then, last question on my end. Actually, just on the service charge income line, Ron, I think pointed out in your prepared remarks that it declined, although it's still well above the year-over-year number. And if I recall correctly, you had changed some of your kind of fee levels earlier in 2021, that helped drive that line on a bit higher? Have you seen any change in customer behavior as a result that kind of negatively impacted the fourth quarter or just less activity? Just generally, what was the difference there?

Yes. So it'd be more I would just to business, customer activity, so nothing negative in that. So I look at that, what we posted for the fourth quarter downward for that line, but you just kind of look at the aggregate for everything outside of gain on sale for SBA, that's probably a pretty good picture of where ROI might be in 2022. With perhaps growth coming from some of the business growth that we might get from certain depositors and the activities that they might get, so I feel pretty good about that contribution.

Okay, thank you. And then just last question for me. On Slide 10, you break out the personal versus business deposit mix at the end of the year, just wondering if you have the comparable number from your prior.

I don't have a specific number, Gary, but it would probably be a little bit more even, 50:50. So the increasing of business is more from some of the efforts that we described earlier, which is kind of taking root here in 2021.

Our next question is from Kelly Motta with KBW. Please proceed with your question.

Ron, maybe a question for you. I believe in your prepared remarks, you mentioned potentially redeeming some notes at the end of 1Q '22. Is this something we should build into our models? Or is it it's still something you're toying with as we look to next year?

Well, we haven't made the final decision. But given the outlook for where interest rates may be and given where our capital position is that is probably a likely outcome. I don't see the need in the current marketplace where sub debt could be 3.5 to 3.75 why would continue with 5.45 even though the price is down with -- to LIBOR.

Got it. And then, with your -- I appreciate the kind of commentary you gave around NIM. Just wondering with rate hikes, lightly on the horizon, how we should be thinking about how your balance sheet performs in the -- with the first couple of hikes given that, the deposit base looks quite a bit different than it did going in last cycle.

So quarterly we do a net interest income simulation, when we disclosed those shocks in our 10-Q's, 10-Ks. And so, we've been in that 5% to 6% range over a 12 month horizon given 100 basis, point shock. So, if I were to break that down into how life might behave over 90-day periods. The inclination that we have now looking back at the last cycle that we went through, when we started raising rates, we noticed that the first 50 basis points coming off a zero rate interest policy that was pretty much a non-effect on our deposits. We've really no movement. But we did capture that 50 notion relative to our loan book. And we can debate whether it was 100% or 90%. So I would expect, given the excess liquidity that most institutions have, that we are likely to behave in that way. But we have to see when we get there one and two, if you remember the last rate cycle, as we went past first 50. The markets became very anxious that rates were going to continue to move up rapidly. And so a number of institutions were, in my words bidding up the price to capture today at lower cost, and that might get in the next 90 day period. So that came about rather quickly as we moved into that next group. So the beta is really started to run up faster than normal. Our beta over that whole cycle was about 3%.

Our next question is from Jason Stewart with JonesTrading. Please proceed with your question.

Nice quarter on the origination side. I was hoping you could give us a little bit more color on the commercial real estate origination. I think you mentioned mixed use in industrial strength. Those tend to be the smaller parts of the portfolio. Any color on the rest of the segment in terms of what drove growth there.

Yes. Other than mixed use and industrial warehouse, we produced about 33 million, 34 million of multifamily, which will be our focus for the year 2022.

Okay. In that 33, 16 of that is warehouse, is that correct?

No, I was talking about multifamily. Warehouse line is tied to the mortgage.

Okay, so that's reported in the 86 million segment?

You are right.

Got you. And then when you're thinking about non-QM loans, how do you think about the duration of those and remind us the overall size of the portfolio that you're targeting there?

Based on my experience and with historical numbers, the years probably averaged about 3.5 years. And then, with the interest rate environment, we don't expect demand is going to decrease the non-care market is still out there. So we expect to see constant demand.

Great. And then, just remind us if you don't mind the overall size of the non-QM portfolio that you're targeting?

As Bonnie noted, we're targeting 10% to 15% of the production coming from the mortgage and non-QM consists of 80% to 90% of the production.

Our next question is from Tim Coffey with Janney. Please proceed with your question.

Bonnie had a question on the loan growth for this year, can you describe some of the headwinds that would prevent you from duplicating what you did this past year?

Sure. So I mean, 2021 was a great year, much better than we anticipated at the beginning of last year. So we built the momentum. And we have the platform, we have the relationship managers, we identify target markets. So we are fairly confident going into 2022. However, we still have the environment where the -- we still have the supply chain issues and the labor challenges and what not. So conservatively, I think that, we are projecting about mid to high digit, low single digit loan growth. So in terms of just what everybody -- all those community banks are experiencing. So other than that, I think we're in a good spot for this year.

Okay, great. And then, I was wondering on the commercial lines of credit, if you had the utilization rates?

Yes, this quarter, I think it was –

It was 39% compared to 44% last quarter. And we have reached anywhere between 35 to 45.

Okay. Do you have the year ago, utilization rate do you?

Fourth quarter 2020 utilization was 42.7%.

Okay. Okay. Thank you, Bonnie. And then, Ron, kind of some of the loans, your cash and equivalents, the spot rate or spot number was lower than the average? Do you feel comfortable with the deposits, that they're going to be sticky, and that you could start to invest some of that cash into securities as you've already been doing in the fourth quarter?

So on the deposit side, I would say yes, we explore the composition of our deposits, the type of the reasons et cetera monthly at our management [indiscernible]. So we do think that there is some staying power there. So, going then to the investment side of that, my first thought is we'd like to see the excess liquidity go to true loans, rather than to the securities portfolio. So we will add to the securities portfolio, but it shouldn't be much, much larger than about, let's say, a billion dollars just to round. So we're looking more towards the higher yielding loan growth rather than, let's say middle yielding security portfolio.

Okay. And I suspect that based on your commentary that would be a measured approach, then if you did get into the securities portfolio.

Right.

Sure. We have reached the end of the question-and-answer session and I will now turn the call over 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.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.