Hanmi Financial Corporation

Ladies and gentlemen, welcome to the Hanmi Financial Corporation's first quarter 2024 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 Ben Brodkovich, Investor Relations for the company. Please go ahead.

Thank you, Doug, and thank you all for joining us today to discuss Hanmi's first quarter

2024 results. This afternoon, HOMNY 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 HOMNY.com. I'm here today with Bonnie Lee, President and Chief Executive Officer of HOMNY Financial Corporation, Anthony Kim, Chief Banking Officer, and Ron Santarosa, Chief Financial Officer. Bonnie will begin today's call with an overview. Anthony 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 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 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-Q. With that, I would now like to turn the call over to Bonnie Leight. Bonnie, please go ahead.

Thank you, Ben. Good afternoon, everyone. Thank you for joining us today to discuss our first quarter 2024 results. Before we get into the highlights of the first quarter, I would like to remind investors of the key elements of our business strategy. First, we remain steadfast in our efforts to diversify and expand our loan portfolio and deposit franchise. We are achieving this objective through our proven core relationship banking model, which enables us to attract new customers and provide unmatched support to our existing loyal customer base. This dual-chrome approach has allowed us once again to expand our market share. Second, we consistently employ rigorous underwriting standards and vigilant credit administration practices to ensure we maintain excellent asset quality. Third, our focus on discipline expense management is unwavering, which has been particularly important in the current macro environment. Staying true to these core tenets provides us with a winning strategy. During the first quarter, we generated 6% annualized deposit growth driven by our relationship banking model. Our C&I portfolio grew by approximately 16% on an annualized basis due to both new and existing relationships. This also helped contribute to our solid deposit growth. We continued to exercise diligent credit management during this quarter. As a result, our asset quality improved with the current size loans declining by 11% from the fourth quarter. Additionally, non-performing loans declined by 9% in the quarter. Net charge-offs were also low at 10 basis points of average loans annualized. During the quarter, we sold residential mortgage loans into the secondary market, which helped to supplement our non-interest income. Going forward, we expect to capitalize on market opportunities to sell more of these loans in order to further diversify our revenue base and support the management of our balance sheet. Now turning to expenses. Discipline expense management remains a key focus area. Although non-interest expenses were up sequentially due to investments we made in our people and data management, all other expense categories declined. Let me now review the highlights for the first quarter compared to the fourth quarter 2023. Net income for the quarter was $15 million, or 50 cents per diluted share. Our return on average assets was 0.81%, and return on average stockholders' equity was 7.9%. Deposits grew by 1.5%, with non-interest-bearing deposits remaining strong at 30% of total deposits. Loan growth excluding residential mortgage sales was 0.4% and non-interest income increased by 16%. I'm also pleased to report that our strategic growth initiatives are performing well. Our corporate career initiative continues to grow and expand with an increasing number of new customers coming to HANMI through existing customer referrals, a strong sign of confidence in our team's capabilities. In the first quarter, corporate Korea produced strong growth in both loan production and deposits. Corporate Korea currently represents approximately 14% of our total loans and 13% of our total deposits. Our SBA production for the quarter was down from an elevated level last quarter. However, we remain on track to hit our quarterly production target of a 40 to 45 million for the remainder of 2024. Last year, we took steps to optimize our branch network with the opening of two new branch locations, both of which are gaining traction and attracting new customers. This year, we intend to build on the progress with the consolidation of three branch locations, which is approximately 9% of our branch network. We'll also open a new branch in the Atlanta metro area later this year. This work is an integral part of our strategy to maximize growth while also generating cost savings within our footprint. The heart of our business has and will always be our team members. Attracting and retaining talented people who understand and embrace our relationship banking model is critical to our success. This is an area we're constantly investing in, and those investments are paying off. In today's highly competitive labor market, We recently brought on some very talented bankers, and importantly, we are attracting and retaining top talent across the organization. I'll now turn the call over to Anthony Kim, our Chief Banking Officer, to discuss the first quarter loan production and deposit gathering in more detail. Anthony?

Thank you, Bonnie, and thank you for joining us today. I'll begin by providing additional details on our loan production. First quarter loan production was 234 million, down 156 million or 40% from the fourth quarter with a weighted average interest rate of 8.02% as compared to 8.10% last quarter. The decline in loan production was to primarily to A decline in commercial real estate, SBA, and equipment finance lending while C&I and residential mortgages were relatively consistent with the fourth quarter levels. We remain selective and disciplined in our pursuit of high quality loans that meet our underwriting standards in the current rate environment. CRA production was 60 million down from 178 million in the fourth quarter as a high interest rate environment continues to impact both traditional transaction and refinancing activity. We remain pleased with the quality of our CRA portfolio. It has a weighted average loan-to-value ratio of approximately 48% and a weighted average tax service coverage ratio of 2.2 times. SBA loan production was $31 million in the first quarter, exceptionally strong results. We also had a number of loan closings pushed into the second quarter. As we have added marketing talent to this team, it continues to make strong inroads with small businesses across our markets. Production in CNI came in at $51 million, relatively consistent with the fourth quarter. Total commitments on our commercial lines of credit were over $1.1 million in the first quarter, up 15% on an annualized basis. Outstanding balances grew by 12%, resulting in a utilization rate of 40%, up from 37% last quarter. Residential mortgage loan production was 53 million for the first quarter, in line with our expected range of 50 to 60 million per quarter, given the current interest rate environment. Most of our current lending opportunities continue to be in the purchase market, as refinance activity remains subdued. Residential mortgage loans represented over 15% of our total loan portfolio from 14% one year ago. As Bonnie noted, during the first quarter, we sold approximately 30 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 are accounting for $53 million of total loan production, which includes approximately $27 million of C&I production. Our efforts to expand and grow those relationships are continuing to bear fruit. USKC loan balances were $834 million, up $70 million, or 9.1%, from the fourth quarter and represents about approximately 14% of our total loan portfolio. 32 deposits. In the first quarter, deposits were up 1.5% on a sequential basis and 2.8% year over year. We continue to expand our partnership base with our corporate career clients with the deposits growing by 29 million in the quarter or 3.5% from last quarter and 50% from one year ago. Our team is making good progress in adding new relationships that we believe we can grow over time. At quarter end, corporate Korea deposits represented just over 13% of our total deposits and nearly 15% of our demand deposits. The composition of our deposit base remains relatively stable with our mix of non-transferring deposits at just over 30% of total deposits. This is evidence of the loyal banking relationships we have developed with our customers over the years. And now I'll hand the call over to Ron Santarosa, our Chief Financial Officer, for more details on the first quarter financial results.

Thank you, Anthony. Net interest income for the first quarter was $50.7 million, a decline of 4.7% from the fourth quarter. Net interest margin also declined 14 basis points to 2.78 percent for the first quarter. These declines reflect principally the increase in the cost of our interest-bearing deposits, as well as an increase in the average balances of the same. The cost of interest-bearing deposits was 4.16 percent, up 33 basis points quarter over quarter, primarily because of the effect of the touring time deposits and the 5.6% growth in the average balance of our savings, money market, and time deposit accounts. Looking to the average cost of interest-bearing deposits for April to date, we see that it is about 10 basis points higher than the average for the first quarter. We also see that time deposit maturities for the next few quarters are comparatively lighter when compared with the fourth quarter of last year and the first quarter of this year. In addition, the average rate paid on those maturing time deposits is not that far from our current rates. Last, the average rate of our new loan production continues to be just over 8%. So altogether, in assuming no significant change in the interest rate environment or in loan and deposit competition, we believe our net interest margin will reach its inflection point either in the second quarter or early in the third quarter. Non-interest income for the first quarter increased 15.8 percent from the fourth quarter and included a $443,000 gain from the sale of residential mortgages. A new revenue line we anticipate will continue in future quarters. The gain on sale of SBA loans of $1.5 billion was about the same as last quarter, but notably the premium on sales increased to 7.23 percent from 6.17 percent for the fourth quarter. non-interest expenses increased 3.5% to $36.4 million, primarily due to seasonally higher employer taxes and benefits. I would like to note a few items that we have undertaken which will affect non-interest expense in the coming quarters. First, to mitigate the effect of annual salary and wage increases that become effective at the start of the second quarter, all senior vice presidents and above received, in lieu of an increase, restricted stock that will vest over the next three years. In addition, as Bonnie mentioned, we will be consolidating three branch offices in the second quarter. We anticipate cost savings from this action, as well as optimizing other areas of the bank, will be approximately $1.25 million annually commencing in the second half of the year. Credit loss expense for the first quarter was $227,000, comprised of a loan loss provision of $404,000 and a recovery for off-balance sheet items of $177,000. Net loan charge-offs for the first quarter were low at 10 basis points of average loans, and asset quality remained favorable with declines in criticized and non-accrual loans. Turning to equity capital, Our negative AOCI increased $5 million due to a $3.4 million increase in unrealized after-tax losses on our securities available for sale and a $1.6 million increase in unrealized losses on our cash flows. In addition, we purchased 100,000 shares of our common stock at an average price of $15.92 during the first quarter. Tangible book value per share ended the first quarter at $22.86 per share, and our tangible equity to tangible assets ratio was 9.23%. Omni and the bank exceeded minimum regulatory capital requirements, and the bank exceeds the minimum ratios for the well-capitalized category. The company's common equity tier one ratio was 12.05%, and the bank's total capital ratio was 14.5%. With that, I will turn it back to Bonnie.

Thank you, Ron. I'd like to thank the entire HOMNI team for their ongoing hard work and dedication. Their commitment and performance are the key drivers of our solid first quarter performance, an ongoing track record of a consistent execution. The HOMNI franchise is well positioned for sustainable growth. Our balance sheet is strong, as evidenced by our robust capital ratios, ample liquidity, and excellent credit quality. Our loan pipeline is healthy with an increasing number of loan inquiries, which bolsters our confidence in our ability to achieve low to mid-single-digit loan growth in 2024. Our mix of funding has improved with the growth in core deposits and a decline in volumes. Finally, we remain committed to exercising disciplined expense management. While uncertainty continues to impact our customers and broader economy in the higher for longer interest rate environment, we are guided by our relationship banking model. It is our compass, underscoring how we operate, the growth initiatives with employees, our discipline processes, and how we treat our team members. We remain confident in our ability to drive ongoing growth and create value for our shareholders.

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 Kelly Moda with KBW. Please proceed with your question.

Hi. Thanks so much for the question. I guess maybe starting out on the expense front, I appreciate that you're doing some work to kind of control what you can and bring expenses down. Ron, if I put the $1.25 million a year, on a quarterly basis, that's about $400,000, give or take. Do you think that, do you actually expect the absolute level of expenses to go down, or is this just going to help the expenses from creeping up? Just want to make sure I'm setting a reasonable bar, because I know there's a lot of moving parts here.

Sure. Thanks, Kelly. We do think that expenses as measured from the first quarter of 2024 will, in fact, decline. I think we probably will hit, I'll say, a low point, if I could use that phrase, or a midpoint, however you want to characterize it, where the efficiency ratio between what's happening on the revenue side, what's happening on the cost side, would probably end up in the mid-50s. So we can kind of see that. And then at some point, as you pointed out, inflationary pressures kind of take over. Other ideas that kind of enter into the business mix take over. In the 2024 calendar year, I do anticipate we should see a decline in expense before reaching a level when then, as I mentioned, inflation and other things kind of take over.

Got it. That's helpful. Thanks. And then turning to credit, it looks like everything looks pretty strong there. I appreciate all the color on CRE. One thing was on slide 22, there's there's a tick up in other loan early stage delinquencies. Just wondering if there's any trend you're seeing there, any sort of read through to how you're viewing and managing credit.

Yeah, Kelly, we haven't really seen new delinquencies coming in. We did have under the 30 to 89 category, a little over 5 million increase in that category. Half of that increase is due to couple of residential mortgage loans, most of which have been subsequently been brought to current. The delinquency was mostly due to an administrative issue and the actual payment issue. And then there's another, there's a loan for $3 million, which is a CRE loan, which was already classified in the previous quarter. And we were in the process of foreclosing the property. So that was the temporary uptake from the 30 to 89 category.

got it um and then um i appreciate the color on margin your expectation for that to bottom either this quarter early next um one thing that i did notice was um the decline in non-interest bearing again it looks like those declined another three and a half percent just wondering if you can provide any color as to um what what drove that decline if you're still seeing to higher-cost accounts, if there was maybe a bigger, chunkier deposit that had that, that drove that decline, and kind of what gives you confidence that that will, you know, stabilize and enable margin to start to inflect pretty soon.

Yeah, we keep track of the shift from DDA to other interest bank accounts. for the past few quarters. From last quarter to this quarter, certainly pace has been slowed down. But with the Fed's recent announcement, longer for higher or higher for longer, we continue to see a shift from DDA to interest-bearing account. However, we think it's going to stabilize toward the end of the second quarter.

Got it. Appreciate it. I'll step back. Thank you so much.

Our next question, Carrie, comes from the line of Gary Tenner with DA Davidson. Please proceed with your question.

Hey, this is Ahmad Hanan for Gary Tenner. So in terms of the decline in loan production this quarter, what do you think drove the decline versus last quarter level?

So last quarter, we did actually have, you know, exceptional CRE production. This quarter, most of the decline is in the CRE. I think it's just overall, the number of transactions that we see in the marketplace, because of the interest rate environment, it's still slow. That was for the first quarter. But we do see, particularly coming into the second quarter, The pipeline is higher, and the inquiries are definitely higher, and the pipelines are higher than the first quarter, the initial quarter going in.

All right. Thank you.

So, I guess, is it fair to assume that loan pipelines heading into the second quarter are looking stronger than this quarter? All right, sounds good. And lastly, with CDs maturing at $4.44 in the second quarter, although a lower dollar amount, but is it reasonable to assume that the NIM compresses a bit more, or does this mark the bottom?

So, certainly, we're not suggesting that the first quarter marks the bottom, but as I pointed out, In April to date, the cost of interest-bearing deposits is only 10 basis points higher than where we were for the first quarter. In addition, when you look at the rate of change in what's been occurring, for the last three quarters, the rate of increase on interest-bearing deposits has been about 30 basis points. We think that has slowed. As Anthony mentioned, the mix is kind of slowing. The rate differentials are slowing or are narrowing, I should say. In addition, when you look at the rate of increase on the loan book, that's averaged about 12 basis points for the last four quarters. So the convergence is near. And that's why we think it's either be in the second quarter or so early in the third quarter that it really sees itself in the third, but we do think it's in hand.

That's helpful. Thank you.

Our next question comes from the line of Adam Butler with Piper Sandler. Please proceed with your question.

Hey, everyone. This is Adam on from Matthew Clark. Just to start out on the deposit front, it looks like a lot of the inflow and deposit this quarter came from the money market and savings segment. And I was just curious if you could provide some commentary on how much of that was some remix from the non-interest bearing side and what amount was production this quarter and what you're kind of seeing going forward. It looks like deposits from the Corporate Korea Initiative led to some increases, but I was just wondering if you could talk about that.

Yeah, we continue to acquire new accounts on DBA as well as money markets and savings accounts. Migration from DBA to money market and savings accounts accounts for approximately $30 to $40 million-ish. The remainder of the increase is due to acquisition of new accounts, particularly from corporate credit accounts. And going forward, you know, with looking at the pipeline of our deposit accounts, that trend will continue.

Okay, that's helpful. And I think I heard you mention on in the prepared comments that the April to date was the average cost of deposits are 10 basis points higher than the quarter. Is that right?

Correct.

And do you guys happen to have the NIM for the month of March?

Oh, it's about. two or three basis points lower than the average for the quarter. Okay, that's helpful.

And then just shifting over to the repurchase front, I saw the 100,000 shares repurchased during the quarter. What does your appetite look like going forward with the roughly 300,000 left under the authorization?

So we've been, for the past three quarters, I believe, we've been doing about 100 or 50,000, varied between that. So given that the market disruptions that began, I want to say, we've lost track of time now, but since the mid-year of last year or whenever it was, we continue to see very deep valuation in our currency. So We'll continue to probably nibble at those levels. And as I've mentioned in previous calls, we do meet with the board quarterly to review our capital actions, both the dividend as well as the share repurchase. So that will continue this quarter as well as future quarters.

Okay. Great. That is also helpful, and I will step back.

Our next question comes from the line of Matthew Erdner with Jones Trading. Please receive your question.

Hey, guys. Thanks for taking the question. I'd like to explore the residential mortgage sales. What made you guys decide right now that it was the time to kind of step into this? And then could you talk about the profile of buyers that you guys are selling to?

Well, we're looking into managing our balance sheet. That was the first reason. Secondly, we're trying to generate a new revenue source of non-interest income. And then to answer your last question, it was $30 million, about 50 loans with weighted average cost of the rate of a little over 7%. And obviously, With a higher interest rate environment, it's going to be difficult for us to get a higher premium going forward, but we continue to explore the opportunity.

Right. And then are you guys able to give any guidance on what we should expect in terms of pace of balloon sales?

I think we are projecting around the $30 million per quarter. And just going back to your first question as to why we started this time, we built this portfolio And, you know, the platform is successfully built, and we have the ability to generate the loans from the platform. So kind of, as Anthony said, managing the balance sheet as well as realizing additional income source. That's why we last quarter, you know, we share that we are looking to do this. And first quarter, we were able to execute the sale.

Yeah, that's helpful. And then are you guys targeting a certain margin on these sales? And then that's it for me. Thank you.

You know, we are looking for premium in the range of about 2% and 2.5%.

So if we can get that going forward, I think that we'll be able to continue to sell the portfolio.

Thank you. There are no more questions in the queue.

I'd like to hand it back to Bonnie Lee for closing remarks.

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

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