Hanmi Financial Corporation

Ladies and gentlemen, welcome to the Honme Financial Corporation's first quarter 2023 conference call. As a reminder, today's call is being recorded for replay purposes. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I would now like to turn the call over to Larry Clark, investor relations for the company. Please go ahead.

Thank you, Doug, and thank you all for joining us today to discuss Honme's first quarter 2023 financial results. This afternoon, Omni issued its earning 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 Omni Financial Corporation, Anthony Kim, Chief Banking Officer, and Ron Santoroza, Chief Financial Officer. Bonnie will begin today's call with an overview, Anthony will discuss loan and deposit activities, and Ron will provide details on our financial performance. And then Bonnie will provide closing comments before we open the call up to your questions. Before we begin, I'd like to remind you that today's comments may include forward-looking statements under the Federal Securities Laws. Forward-looking statements are based on current plans, expectations, events, and financial industry trends that may affect the company's future operating results and financial position. Our actual results may differ materially from those contemplated by our forelooking statements, which involve risks and uncertainties. Discussions of the factors that could cause our actual results to differ materially from these forelooking 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. in our investor presentation and in our Form 10-K. With that, I'd 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 results. PAMI delivered strong financial results in the first quarter of 2023, even in the face of a continued rising interest rates, economic uncertainty, and a highly volatile banking environment. We believe these results are a testament to the strength of our relationship banking model and our team's consistent execution. I am pleased to report that we delivered 6% year-over-year growth in net income of $22 million, or $0.72 per diluted share, all while maintaining high levels of liquidity, being selective on new loan originations, and exercising disciplined expense management. We added net new customers during the quarter, which led to a sequential growth in deposits. This reflects our disciplined execution of new business initiatives and the strength of our relationships in the communities we serve. As anticipated, loan production moderated during the quarter. However, we were still able to grow our loan portfolio with a new production outpacing payoffs, paydowns, amortization as we maintain our disciplined underwriting standards. Importantly, our overall asset quality metrics remain excellent. We continue to focus on high-quality loans, discipline underwriting, and vigilant credit administration practices. Other highlights for the quarter include the following. Loan balances grew to $6 billion at quarter end, up nearly 1% on an annualized basis. First quarter loan production was $304 million, with an attractive weighted average interest rate of 7.19%. Deposits increased 2% on an annualized basis from year-end 2022 to $6.2 billion. We are proud of the robust deposit franchise that we have built over four decades, with a consistent focus on pursuing new customers and expanding our existing relationships. As a result, non-interest-bearing deposits remain high at 38% of the deposit portfolio at quarter-ends. We continue to exercise disciplined expense management, leading to a 3% decline in non-interest expense quarter over quarter. Our overall asset quality metrics are excellent as non-performing assets to total assets remain low at 27 basis points. We generated a return on average assets of 1.21% and a return on average equity of 12.19%. And we also improved upon our already strong capital levels with a total risk-based capital at 14.8% and a tangible common equity ratio of 8.77%. Turning to our strategic initiatives, our residential mortgage production was a solid at 97.2 million, even in a challenging mortgage market. We attribute this success to the strong relationships we have established with our corresponding lending partners over the past couple of years. While we experienced some deposit outflows from our corporate career customers in mid-March, we gained new corporate career customers during the quarter that offset those outflows. During the quarter, we remained focused on what we do best, serving our customers and helping them to manage through challenging times. For much of 2022 and continuing into 2023, we stepped up direct communication with our customers to better understand the impact of shifting economic factors on their businesses, and to identify solutions to meet their evolving banking needs. As industry events were unfolding in March, we doubled our customer outreach efforts. While our intent was to assure customers that our bank was in a very strong financial condition, I was especially moved as some of our customers asked me what they could do for us. This response is truly an example of the deep relationships we have built over the years. And we continue to look for new opportunities to grow and expand our franchise. For example, we are targeting to open a new branch in the East Bay region of San Francisco in the fourth quarter of this year. This move will enable us to serve growing client demand in this vibrant regional sub-market. Of course, we will continue to explore opportunities to further optimize our footprint in key markets across the United States. In summary, I am grateful to our team of highly skilled bankers who work tirelessly to build and maintain the trusted banking relationship with our customers, which is the hallmark of the Hanmi Bank brand. With that, I'll turn the call to our Chief Banking Officer, Anthony Kim, to discuss the first quarter loan production and deposit gathering in more detail.

Thank you, Bonnie. I'll begin with additional details on our loan production. First quarter production was $304 million, down 36% from the fourth quarter, and as Bonnie noted, reflects the current environment of higher interest rates and economic uncertainty. In addition, we are being more selective on the loans that we approve. and have passed on a number of opportunities this quarter, as we will not sacrifice credit quality in order to achieve loan growth. I'll 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 continue to be active. A large portion of our production was for home purchases rather than refinances. CNI funding was down in the first quarter, where we funded $27 million in loan balances. Historically, CNI fundings are seasonally lower in the first quarter But we also believe that the slowdown this quarter also has to do with the 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 30.6% between quarters, resulting in a first quarter utilization rate of 38%, down from 40% in the fourth quarter. SBA 7A loan production was $34 million for the first quarter, lower than our long-term target, but 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 career initiative, loan production declined modestly in the first quarter, as many of our customers are being cautious in this uncertain economic environment. Our corporate career 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 7.19% of 30 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 7.27% of 100 basis points from our fourth quarter payoffs. Our total loan portfolio grew slightly in the first quarter as our $304 million in new production exceeded our total payoffs, amortization, and paydowns. 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 offloads of about 1% of our total deposits. Importantly, however, deposits were still up from fourth quarter levels. Given the higher interest rate environment, we did continue to see a shift in the competition of our deposits during the quarter as some deposits in checking, money market, and saving accounts moved into time deposits. However, Noninterest-bearing DDAs represented 38% of our total deposits at quarter end, which we believe validates our strong customer service and local market relationships. In addition to mid-shift in deposits, we saw renewed interest in deposit insurance programs that we affect on a reciprocal basis. Reciprocal time deposits, also known as CEDARs, were $67 million at the end of first quarter And we recently launched a deposit suite 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 Ransan Rossa, 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 percent. While the Fed did raise their rate 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 renewed deposit or interest in time deposits. Our cycle to date interest-bearing deposit data was approximately 56%. Loan yields for the first quarter, aided by new loan production at 7.19%, rose 30 basis points to 5.51%. Turning to our net interest margin, it too declined from the prior quarter, 39 basis points to 3.28%. The increase in the cost of interest-bearing deposits contributed 60 basis points to 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 costs of our interest-bearing deposits for October were about 45 basis points higher than the third quarter average. When we met to discuss our 2022 fourth quarter results, I noted that the cost of our interest-bearing deposits for January were 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 mixed shift in our deposit portfolio. At the start of the cycle, time deposits were 16 percent of the portfolio while non-interest-bearing demand deposits were at 46%. At the end of the first quarter, time deposits were 38% of the portfolio, and non-interest-bearing demand deposits were the same at 38%. So altogether, even though this rising rate cycle may yet to peak, it appears that most of the heavy lift into the current environment has occurred. Moving on, non-interest income was $8.3 million for the first quarter, up from $7.5 million 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. Encouraging, while the volume of SBA loans sold during the first quarter declined, we did see a notable increase in the trade premiums, rising to an average of 7.85 percent for the quarter. Non-interest 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 ORE and repossessed personal property expenses. Non-interest 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 $100,000 negative provision for off-balance sheet items. The allowance for credit losses increased to $72.2 million, or 1.1 percent of loans, up one basis point from year end. 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. Classified loans remained low, and non-accrual loans saw a $10 million addition of a healthcare industry loan with a specific allowance of $2.5 million. Overall, we believe our asset quality remains strong. Turning to funding, liquidity, and capital, as Bonnie and Anthony 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 remain essentially unchanged quarter over quarter at 96%, and there has been no change in our FHLB borrowings. Our securities portfolio is all of which are available for sale and carried at current market values, provide a cushion of liquidity, and would, combined with our cash balances, represent 17 percent 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 3.7% to $21.30 at March 31, 2023. Omni and the bank continue to exceed minimum regulatory capital requirements, and the bank continues to exceed minimum ratios for the well-capitalized category. The common equity tier one ratio for the company was 11.59% and 13.06% 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 are ready to serve the needs of our extending 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 will impact both deposits and loan production. That being said, our team is demonstrating the tremendous value that our customer relationships bring. 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 credit quality. We are focused on delivering attractive returns to our shareholders by serving the communities in which we operate and by developing our team here at HANMI. Thank you. We'll now open the call for your questions. Operator, please open the line up to 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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you 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 key. Our first question comes from the line of Gary Tenner with DA Davidson. Please proceed with your question.

Thanks. Good afternoon, everybody. I 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 of the confidence in that from a deposit mix perspective. I mean, still at 38% non-trust bearing DBA. If you go back, you know, which is down certainly year over year, but if you go down back to kind of entering the pandemic, I mean, it was at 30%. So, you know, I know that there's been structural changes at the bank, but what, gives you the confidence, I guess, in saying the heavy lifting on that deposit side of things has been done or 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, remain 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, you know, descend here in the first quarter. I think, again, the premise being that we're 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.

Okay. So then you weren't saying that – So that as we think forward then to the mix, you weren't suggesting that you thought the mix shift was completely done. Is that right?

No, we're seeing a decline in that mix shift, meaning that those individuals or those depositors that had you know, a heavier tilt towards DDA, have effectively moved their balances to run their DDA or 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. Most of that has occurred. It doesn't mean it's done, but most of it has happened.

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 seed debalances over the course of the quarter, about $400 million or so, was that primarily customer time deposit shifting or did you add brokered to the balances quarter?

Yes, we've been tracking those deposit movements. total, you know, out of total 424 million CD growth, approximately a little over 50% was the migration from DDA and 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 once 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 loan growth outlook for the year, obviously modest growth this quarter, production level is quite a bit lower. Is there any, as you think of visibility and pipeline in the 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, we expect overall loan growth, at least the first half of the year, you know, would moderate. Having said that, though, just comparing the, you know, the first quarter, going into the first quarter loan pipeline versus the, you know, beginning of the second quarter loan pipeline. Loan pipeline itself is up. You know, we see the increasing trend. However, as I had mentioned, we are very selective. and the deals that we chose to do and the pricing that we chose to do. So we'll still have to see.

Thank you.

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

Thank you. Just on the margin 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 a spot rate or was that the average in April so far? I just want to clarify that.

April to date.

Okay. Great. And then do you happen to have the average margin in March?

I'd have to look it up. I think it's our slides in a footnote.

Okay. I can find it then.

Yeah. If you would, I said, I don't have my glasses with me, so I can't read it.

I'm kind of going down that same path. And then in terms of deposit flows, any update, you know, through April, you know, to date, any, I assume, you know, there's seasonal outflows with taxes, but any, You know, you've seen additional inflows or outflows that's maybe unrelated to taxes.

So we haven't seen much of the weather inflow or outflow, much of them other than our normal fluctuation.

Okay. Okay. And the new non-performer that I think $10 million that was added this quarter, trying 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. We believe it's a one-off of the case. It's actually a hospital loan that's beginning to go into reorganization. So at this current time, based on the availability of the information and the progress that's in, we provided this big reserve of $2.5 million for that loan.

Okay. And then just on capital, it's 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.

Our next question comes from the line of Kelly Mata with KBW. 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 provide 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 are you guys most closely watching, and conversely, where are you seeing, still seeing really good risk-adjusted returns at this point in the cycle? I know, Bonnie, you had said you were being incredibly selective on the origination side.

Yeah, I mean, you know, 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 then we look at the merits of the credit as well as the pricing that we can get for. So it's not in a particular one specific industry or sector, but I think it's across the board.

Okay, understood. On the expense front, the release called out an adjustment on the servicing asset that benefited expenses. Ron, do you have how large that was? And excluding that, is that a good go-forward run rate for expenses in any areas where you can manage, given that the revenue outlook is just more challenging in this rate environment?

So I think the valuation adjustment was either 0.3 or 0.4, so $300,000 or $400,000. I don't remember which of the two. And it just reversed itself because of the shift in the interest rate environment, especially the discount rate. So, you know, that can come back again depending on how the interest rate markets are when we value that particular portfolio, or it could be nonexistent forever and a day. With respect to expenses, there's a little bit of variability that we get with – OREO and repossessed personal property. So I always kind of look at that before the expense because that one's very hard to predict if we get fortunate or something happens. So there the run rate's 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 increase to reflect at least that idea and then, you know, throw in the mix of other ideas that kind of move with inflationary pressures.

Awesome. I appreciate the caller. Thanks, guys.

Thanks. Our next question comes from the line of Tim Coffey with Jannie Montgomery Scott. Please proceed with your question. Good.

Thank you.

Afternoon, everybody.

Good afternoon. Bonnie. There was a comment made about the corporate Korea clients and deposits. There was some outflow in deposits. And I'm wondering, did those deposits move to other institutions into their deposit portfolios or were those deposits moved out for investment purposes?

Let's just give one particular client. At the very onset of the March 10th event date, the client notified us that that they're moving their deposit, but they said temporarily. And so, you know, we hope to get that back. So I would think that, you know, it depends on the customers, but mostly just being cautious. They want to do kind of diversify their deposits to other institutions, mainly obviously larger institutions. So not so much for their investment or other purposes, but more of a temporary shelter type of deposit movement.

Okay. Do you know already the balances of deposit outflow from corporate credit clients in the quarter?

Yeah, it's about a little less than $40 million from maybe a handful of customers.

Okay, thank you. That's very helpful. And then, Bonnie, just looking at the totality of your customer base, corporate career plus legacy customers, have you seen a material change in their behavior since mid-March, since some of the banking stress came about?

So, you know, I have to say, within the first week of the event date of March 10th, there was a little bit of a concern expressed. And that's why we have really doubled the efforts of customer communication reaching out to the customers. And I think that had subsided about two weeks later. And as we speak, I think that our customers clearly understand that the banks there were having challenges. And Anahami is a very different bank in terms of the customer base as well as the loan and deposit competition of those customers.

Okay. All right. Great. Those are my questions. Thank you very much for your time.

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

Hey, guys. Thanks for taking the question. I wanted to ask about two topics. Number one, how you feel the commercial real estate market is right now, just given where cap rates are. And two, where you think transition rates are moving on the non-QM portfolio. Yeah.

So in terms of a commercial real estate, I think just the demands are down. And I think, you know, given the environment as well as the increase in the interest rate, because most of the CRE customers, they would like to entertain with the fixed rate notion. So overall, in the CRE, you know, production side, even particularly in the purchase transactions as well as refinances. And I'll have Anthony answer on the mortgage.

Yeah, non-care market, I mean, believe it or not, despite of slowdown in purchase market, we continue to see, you know, purchase transactions. So non-care market has been very stable and good for us.

Okay. Thanks for taking the question. Appreciate it.

Our next question is a follow-up question from the line of Matthew Clark. Please proceed with your question.

Thanks for the follow-up. I've got two questions. One, do you have any appetite to restructure your securities portfolio with the duration over five years and yields are moving higher but probably not as much as you'd like? Wanted to check in on that.

Yes. So, Matthew, no real plans. I mean, we'll be, you know, when opportunities present themselves, we probably will take advantage. But there's no real, you know, effort or desire afoot to restructure that portfolio.

Okay. And then just back to the office, commercial real estate exposure, the average balances look relatively low at $900,000. Do you have a mix of how much of that $534 million of loans is owner-occupied versus non-owner?

I would say most of the office properties are non-owner-occupied.

Investor or owner-occupied?

Non-owner-occupied.

Investor. Got it. Thank you.

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 HOMNI and look forward to sharing our continued progress with you throughout the year.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day.