Hanmi Financial Corporation (HAFC) Q1 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the Hanmi Financial Corporation's First Quarter 2022 Conference Call. As a reminder, today's call is being recorded for replay purposes. [Operator Instructions] I would now like to turn the call over to Larry Clark, Investor Relations for the company. Please go ahead.

Thank you, Alex and thank you all for joining us today to discuss Hanmi Financial's first quarter 2022 results. This 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. 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; Anthony Kim will discuss loan and deposit activities; Ron will provide details on our financial performance, and then Bonnie will provide closing comments before we open the call to your questions. Before we begin, I 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 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.

Thank you, Larry. Good afternoon everyone. Thank you for joining us today to discuss our first quarter 2022 results. Hanmi had a very, very strong start to the year. Focused execution across the board helped us to deliver solid earnings in the first quarter fueled by healthy loan production, net interest margin expansion, excellent credit quality, and disciplined expense management. We continue to develop new client relationships and strengthen ties for the existing customers, a hallmark of Hanmi's community banking approach. We reported the first quarter 2022 net income of $20.7 million or $0.68 per diluted share, down from our fourth quarter, but up nicely from $16.7 million or $0.54 per diluted share in the first quarter of 2021. Our first quarter return on average assets was 1.22% and our return on average stockholders' equity was 12.74%. I am very pleased with the progress we are making on our strategic initiatives. These initiatives include focusing on diversifying our loan portfolio by ramping up the contribution of our residential mortgage business to loan production, increasing our SBA loan production, and expanding our corporate career initiative. We are making solid progress in our residential mortgage platform, which we launched in 2021. Through this platform, we originated and acquired non-qualified residential loans and established mortgage warehouse lines. This initiative is effectively diversifying our loan portfolio by adding a lower risk asset class that we can grow profitably for years. In the first quarter, our residential mortgage loans represented 12% of the total loan production, well within our steady goal of 10% to 15%. This progress reflects our ability to leverage and expand our community ties. In just over a year, we have achieved impressive scale with this program with a loan production up by $48 million year-over-year. We continue to expand our SBA lending business where we originated $42 million in SBA 7(a) loans in the quarter, exceeding our targets. We also continue to gain meaningful traction with our Corporate Korea Initiative. We launched this initiative in 2019 to develop and expand relationships with the Korean companies domiciled here in the United States. This portfolio grew 4.7% sequentially from the fourth quarter to $663 million and is up 23% year-over-year. The success of this initiative is rooted in our bankers' strong relationships throughout their communities. Importantly, as we continue to grow and strengthen our business with the U.S. corporate Korean clients, we're also cultivating corporate client relationships in multiple ethnic communities across our coast-to-coast footprint. Overall, our growth strategies are working. Despite a competitive lending environment, we delivered strong net loan growth of 3.6% in the first quarter. Additionally, total loan production more than doubled from the prior year first quarter when we exclude the year ago second draw PPP loan production. Our strategic growth initiatives, along with the strong momentum across our diverse business lines, build our loan and lease growth during the quarter. Our SBA and leasing businesses were solid contributors to this performance, complementing strength in commercial real estate lending and our growing commercial and industrial portfolio. We are also making good progress on our deposit gathering initiatives, particularly as we continue to expand our corporate relationships. These deposits tend to be sticky and are a good source of low-cost liquidity to fund our loan growth. Our DDAs continued to grow in the quarter and were up 4% from the fourth quarter and 23% year-over-year. These core deposits now represent just over 46% of our total deposits and helped contribute to our very attractive total funding costs. In the first quarter, we grew net interest income by more than 5% when we exclude the impact of the onetime charge for the redeeming our 5.45% subordinated notes. This growth was driven by both the solid increase in loans as well as an expanding net interest margin. We believe that we are positioned well to see further improvement in both of these metrics given our strong loan pipeline and our balance sheet. Finally, our credit performance remains excellent, reflecting our focus on high-quality loans and thorough underwriting across credit cycles. Our comprehensive approach to credit management, including our ability to secure payments and payoffs has led to improved trends in asset quality. Further, we remain confident in our ability to effectively manage credit quality going forward. With that, I'll turn the call over to Anthony Kim, our Chief Banking Officer, to discuss first quarter loan production and deposit gathering in more detail.

Thank you, Bonnie. I'll begin with additional details on our loan and lease production. First quarter production volumes were $507 million, 19% lower than the record high fourth quarter and more than doubled our first quarter production last year, excluding PPP loans. Our commercial real estate loan production was $233 million in the quarter and represented 46% of total loan and lease production. The majority of this production consisted of warehouse and industrial, office and retail properties. We remain committed to discipline in underwriting as evidenced by our weighted average loan-to-value and weighted average debt service coverage ratio for this portfolio of 50% and 1.9 times respectively at the end of first quarter. C&I production was $98 million, more than double the level of production in the first quarter of 2021. This category includes our Corporate Korea Initiatives as well as loans and lines to varied industries. Commitments on commercial lines of credit increased to $814 million at the end of first quarter, an increase of $42 million or 5.4% from the prior quarter and $210 million or 35% year-over-year. Outstanding balances on these lines, however, were relatively stable between quarters, resulting in first quarter utilization rate of 39%, unchanged from fourth quarter of 2021. New lease production was a healthy $71 million in the first quarter as many of our customers continue to invest in their operations and are looking to finance a portion of the investment through equipment leases. SBA 7(a) loan production was $42 million, as Bonnie noted, reflecting our ongoing focus on serving this segment of the market. Residential mortgage production, which consists of non-QM loans, was $60 million in the quarter and represented 12% of the total loan and lease production. Despite the recent run-up in mortgage rates, we remain cautiously optimistic regarding our non-QM residential mortgage platform as our current pipeline is solid, and we are seeing the benefits of our investment in this line of business. Given our overall solid loan and lease production in the first quarter, our loan portfolio increased 3.6% from the previous quarter to $5.3 billion and was also up 10.8% from the first quarter of 2021. Payoffs were $181 million for the quarter compared to $152 million in the fourth quarter. The average rate on loan payoffs was 4.45%, an increase of 13 basis points from the fourth quarter payoffs. Now I'll discuss the considerable progress we've made on our Corporate Korea Initiative, a program we began in 2019. Since its inception, this program has grown significantly. This is a testament to the strong relationships our bankers have in our communities where we have Corporate Korea programs in seven strategically located branches across our footprint. As Bonnie mentioned, this portfolio has grown by 23% since last year to $663 million in the first quarter and is up 4.7% from the fourth quarter. At the end of first quarter, the Corporate Korea Initiative represented more than 12% of our total loans and 6% of total deposits. With an expanding customer base and a relatively favorable economic environment, we anticipate continued growth in this category throughout the remainder of 2022. In summary, initiatives to further diversify our loan portfolio by industry, geography and loan type remains a strategic priority for us, and we believe we will continue to deliver on this objective. Now, a word on deposits. Total deposits were $5.8 billion, down slightly from the fourth quarter. The decrease was due to a $91 million decline in time deposits, an $18 million decrease in money market and savings deposits, which was partially offset by a $104 million increase in non-interest-bearing dividend deposits. The overall composition of our deposit base improved again during the quarter as our efforts to drive DDA growth continues to pay off. DDAs represented just over 46% of our total deposits at the end of first quarter, up from 44% at year end and 40% in the first quarter of 2021. And now, I'll turn the call over to Ron Santarosa, our Chief Financial Officer, for more details on our first quarter financial results. Ron?

Thank you, Anthony. Our fourth quarter net interest income increased 3% from the prior quarter to $51 million and our net interest margin increased 14 basis points to 3.10%. The 6.8% sequential quarter increase in average loans, combined with a higher yield on securities, drove the increase in net interest income. The $1.1 million charge for unamortized debt issuance costs related to the redemption of our 2027 subordinated notes, however, offset the benefit of higher average loans and higher yield on securities. Our net interest margin, however, benefited from the mix shift in earning assets. The increase in our average loan balance was funded primarily with the excess liquidity that we had been holding on our balance sheet at the end of 2021. As a result, the composition of our interest earning assets improved during the quarter driving the 19 basis point improvement in yield on those assets. Offsetting the improvement, however, was the seven basis point charge emanating from the subordinate redemption. Looking forward, we know that we will not have a seven basis point charge for redemption. And we also know that we will save seven basis points from the absence of a debt service on the redeemed debt. Further, we know we still have excess liquidity on our balance sheet, and we know that our balance sheet is asset sensitive. As such, we anticipate that our net interest margin should increase in the near-term. While there is ongoing debate as to the timing and pace of rate changes by the Fed, we also anticipate that depositor behavior will gradually adjust as we move away from a zero interest rate policy and eventually temper the rate of increases in net interest margin. Moving on. Non-interest income was $8.5 million for the first quarter of 2021, down modestly from $9.3 million for the prior quarter. The decrease was primarily due to a $1.3 million decline in gains on the sale of SBA loans. The volume of loans sold in the first quarter declined, as expected, to $29.6 million from $36.6 million in the fourth quarter. And the trade premiums on those sales also declined again, as expected, to 9.5% from 10.98% for the prior quarter. Turning now to expenses. Non-interest expense increased slightly to $31.7 million for the first quarter of 2021 from $31.6 million from the prior quarter. Salaries and employee benefit expense declined $900,000, reflecting lower estimated incentive compensation for 2022 loan production. And occupancy and expense was down by about $200,000. These declines were more than offset by a $1.5 million increase in other operating expenses, largely from more normalized insurance premiums. The efficiency ratio improved slightly for the first quarter to 53.29% and from 53.81% from the prior quarter. We posted a recovery of credit loss expense of $1.4 million for the first quarter 2021 and we again recorded net recoveries of $100,000 for the quarter. The allowance for credit losses was $71.5 million as of March 31, 2022, generating an allowance for credit losses to loans of 1.34% compared with 1.41% at the end of the prior quarter. While quantitative loss factors increased slightly during the first quarter due to strong loan growth, qualitative loss factors declined in the first quarter, reflecting improving economic conditions and asset quality metrics. We recorded a provision for income taxes of $8.5 million for the first quarter, representing a more normalized tax rate of 29%, up from the fourth quarter where we benefited from charges in our deferred tax asset valuation allowance. With respect to profitability metrics, our return on average assets and our return on average equity for the first quarter were 1.22% and 12.74%, respectively. We remain very well-capitalized, and our tangible common equity ratio was 9.07%. However, our TCE ratio declined 1.7% from the previous quarter because of the $36.4 million after-tax increase in unrealized losses on our securities portfolio arising from the rapid and sizable increase in interest rates. And finally, on March 30, we redeemed the entire outstanding $100 million balance of our 5.45% subordinated notes that were due in March 2027. Retiring the 5.45% notes will benefit, as we noted, our cost of funds in the second quarter and beyond. With that, I'll turn it back to Bonnie.

Thank you, Ron. Before I move to our outlook, I want to take a moment to thank our employees for their hard work during the quarter. Hanmi employees serve our communities in many ways in addition to fulfilling their banking needs. I encourage you to read our 2022 ESG report located on our Investor Relations website to learn more about what we are doing here at Hanmi to invest in our employees and support our communities to generate long-term DRU for our stockholders. Looking ahead, there are several macroeconomic and geopolitical factors affecting the economy overall in nearly every industry sector from the war in Ukraine to a 40-year high rate of inflation, individuals and businesses across the country are building the effects. While we cannot forecast the exact impact these factors will have on the U.S. economy or on our clients, specifically, we do believe that they may exert some pressure on loan demand in the second half of the year. That said, we are well capitalized with a strong financial profile and a diversified business model. Our loan pipeline remains solid. Our net interest margin is healthy and our credit quality is excellent. Our dedicated team brings a wealth of banking experience that has served our clients well in various economic cycles over the last 40 years. In any economic environment, at Hanmi, we will continue to be intently focused on meeting the banking needs of our growing customer base and building new relationships across our markets and business lines. We are committed to driving disciplined growth and delivering attractive returns for our shareholders in 2022. With that, we'll open the call for your questions. Operator, please open the line up to the questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Gary Tenner with D.A. Davidson. Please proceed with your question.

Thanks. Good afternoon.

Good afternoon.

Hey. So, a good start to loan production for the year and I think from your commentary, I think visibility is good in the intermediate term, but maybe later in the year, not quite as good. So, as you think about kind of full year your growth, unless I missed you commented on it, Bonnie, and I apologize if I did. Any updates in terms of how you're thinking about the full year pace growth?

Yes, we are still sticking to the -- what we had discussed, I think, from the prior quarter, which is we expect medium to high single-digit growth in the loan production -- I mean, the net loan growth.

And then just following up on that. I think last quarter, in terms of SBA, you talked about $35 million to $40 million, which I think is kind of maybe a quarterly average type number in terms of sales. I thought this quarter, obviously, a little bit below that. Is that number on average for the year still hold or given maybe a little less portfolio growth, otherwise might you -- portfolio more SBA production?

So, the $35 million, $40 million number is actually the production number. So, this quarter, $42 million is actually higher production. But I think if you compare to the fourth quarter, fourth quarter is kind of a catch-up from the third quarter production. So, we had sold higher number -- dollar [indiscernible] loans in the 4Q. But overall, we are on track to do about $40 million per quarter. Some quarters, it may be higher. So, it's pretty much within our line of expectations, $35 million to $40 million.

Okay, I appreciate the clarification. Thank you.

Our next question comes from the line of Kelly Motta with KBW. Please proceed with your question.

Hi, thanks so much for the question. It was a great quarter. Ron, in your prepared remarks, I think you had some nice NIM expansion. I think you said seven basis points you'll get back from the cost of the redemption and another seven basis points. So, does that imply you're going to be in before any rate hikes in the mid-320s? Am I understanding that correctly?

Yes, you are, Kelly. What we don't know is what will -- what the Fed will do next week and in June, and that starts then to change outlook. And so I just hold that in reserve, not sure where that's going. But absent Fed news, we would be up by about 14 basis points.

Got it. Got it. And you are asset sensitive at the start of the rate cycle. Can you just -- can you give us more color on the composition of fixed versus floating in your loan book? Just trying to get a sense of the repricing of those assets on the first couple of hikes, if there's any course.

Sure. So, about 30% of our portfolio would reprice within a three-month interval. And that part of the portfolio is comprised of all of our floaters in all of our three-month adjustables. That represents about 25% of the portfolio in total. The remainder represents those hybrid loans and those fixed rate loans that are rolling down to the reprice date or the maturity date. With respect to course, they're not very consequential for us. There's only a couple of hundred million, if I remember correctly. And our last look, nearly three quarters of that would burn off within the first 100 basis point move. So, it just won't be much of an anchor relative to the asset sensitivity.

Got it. Thank you. That's really helpful, Ron. And then just turning to credit. Obviously, it was really strong, although I did see a tick-up in special mention. Can you provide any color on those migrations in there?

Sure. It's mainly three relationships. One is actually -- it's a combination relationship composed of C&I portion as well as the CRE portion. The company is going through an expansion, so they had a little bit of indirect challenges with respect to the supply chain distribution. But it's being normalized, and we don't expect to have any loss in the coming quarters. The other two is relationships and hospitality portfolio. Again, the borrowers are taking control and taking what's necessary to have the loan being back to the past status.

Got it. And then last question for me. On the expense side, they were very well controlled. Your salaries and benefits looks like it ticked down a bit. What does the outlook look like? I know there's a lot of competition in inflationary pressures. Can you provide kind of an outlook for the pace of where you might be seeing pressure and where you may be investing and how that might trend?

Sure. So, beginning in the second quarter, we expect our salaries and benefits to increase because of the annual merit cycle as well as the, I'll say, the inflationary increases in our benefit programs. We also anticipate that some of the other categories will start to show evidence of the inflation that's been talked about. So, starting in the second quarter, we think we'll start to see our non-interest expenses lift off of where we were in the fourth and first quarter of 2022.

Got it. Thanks so much. I'll step back. Appreciate the questions.

Thank you.

Our next question comes from the line of Matthew Clark with Piper Sandler. Please proceed with your question.

Hey, good afternoon. Maybe just one on the margin outlook. You mentioned the floating rate loan contribution. What are your latest thoughts on the deposit beta outlook, given the expectation for more rate hikes than we probably considered last quarter?

So, Matthew, when we look backwards at the last rate cycle, our data was about 30%, correlating about 95% to the Fed fund's moves. But that was over a 13-quarter period. And what we do know in that 13-quarter period is that, that beta was not linear. It was higher in some periods, lower in others. So, in this case here, we're anticipating a beta probably in that 30% to 50% range. But again, I'm just cautious here, not sure what Fed will do next week, how big of a move they may or may not take and that can affect the beta in any three-month period. So, overall, I think our betas will probably be -- probably not much more than what we experienced in the last rate cycle. I just don't know how that's going to unfold quarter-over-quarter.

Do you think that 30% to 50 % is more of a cumulative beta?

Again, the 30% would have been cumulative. So, as we stress, we -- in our rate models, we use a 50% beta for the non-maturity deposits and 100% beta for the maturity deposits. So, we think our interest rate sensitivity is, let's say, conservative. So, something between those two points is where the reality is going to be. Again, I just -- that's the part I puzzle on. I'm just not quite sure how it's going to unfold this rate cycle.

Okay. And then just back on the floating rate loans. Do you feel like you're going to be able to pass through those rate hikes to your borrowers? Do you feel like the -- we might not see the full 30% over time just because you got to make concessions? Thinking about the leasing business maybe as an example. Just any thoughts on the ability to --?

We think it's pretty much a fixed rate portfolio, so that doesn't really affect it. But for the floaters, that's contractual. So, there's no need of concessions. It moves as the rate moves. So, I have no core concerns on that whatsoever.

Okay. And on the securities yields, I think 1.11 [ph] up linked quarter. Can you give us a sense for -- I think your securities overall are down in the quarter, but what new purchases are coming on at -- in April here?

Sure. So, our portfolio complexion -- securities portfolio complexion will stay about the same. We're mostly looking at March-back securities, cash flowing instruments that we really like and whether that's traditional MBS or CMO style, but all agency. So, we'll continue to look at that, not as keen on the small market at this point. We will take a look at it, but it's not going to grow appreciably from where we're at. And in terms of current coupons, we're looking at, what, two handles and some of the MBS. So, you'll start to see that portfolio which produces somewhere between $10 million to $15 million a month in cash start to lift up as we go through this rate cycle.

Okay. Thank you.

Our next question comes from the line of Tim Coffey with Janney. Please proceed with your question.

Great. Thanks for taking my questions. Ron, can you remind me just what level of cash you'd like to keep on balance sheet?

So, pre-pandemic, our cash due from banks was about, I'd say, $150 million, maybe as well as $100 million. And so I see it returning to those levels at some point. We'll see how long it takes us to get there.

And then, Bonnie, what is the thought process about buying back stock at these levels?

We are always watchful. So, I mean, we just take the decision as a necessary.

Okay. And -- nope, those were my questions. Thank you.

Thank you.

Our next question comes from the line of Jason Stewart with JonesTrading. Please proceed with your question.

Hey, thanks for taking the question. I wanted to ask on the mortgage side, what's your view of affordability was given HPA, the increase in rates and expected increases in taxes and how that might impact production and rate in the non-QM side?

Yes. Certainly, we do anticipate a higher mortgage rate impact will impact the demand in mortgage industry in general. But the impact on non-QM market will be lesser than the QM market, which is much more competitive. So looking at the pipeline, we do expect a similar production level in Q2 as Q1 as due to continued high demand for the purchase of homes and however, we anticipate, that slows down in starting third quarter.

Okay. And have you had to make any concessions in terms of credit quality to continue the pipeline at historical levels?

No. No concession.

Great. Thanks for taking the questions. Appreciate it.

Thank you.

Thank you. We have no further questions in the queue at this time. I'll now turn the call back over to Ms. Bonnie Lee for closing remarks.

Thank you for participating in our call today. We appreciate your interest in Hanmi and look forward to sharing our continued progress with you throughout the year. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.