Hanmi Financial Corporation (NASDAQ:HAFC) Q1 2024 Earnings Call Transcript April 23, 2024
Hanmi Financial Corporation misses on earnings expectations. Reported EPS is $0.0005 EPS, expectations were $0.52. HAFC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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. [Operator Instructions] I would now like to turn the call over to Ben Brodkowitz, Investor Relations for the Company. Please go ahead.
Ben Brodkowitz: Thank you, Doug, and thank you all for joining us today to discuss Hanmi’s first quarter 2024 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 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 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 proposition. Our actual results may differ materially from those contemplated by our forward-looking statements, which involve risks and uncertainties. The 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 Lee. Bonnie, please go ahead.
Bonita Lee: 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 two-pronged 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 disciplined 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 continue to exercise diligent credit management during this quarter. As a result, our asset quality improved with the criticized loans declining by 11% from the fourth quarter. Additionally, nonperforming 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 opportunity 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. Disciplined 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 $0.50 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 remained 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 Korea 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 $40 million 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 our 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 it 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 are 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?
Anthony Kim: 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, $556 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 due 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. CRE production was $60 million, down from $178 million in the fourth quarter as the high interest rate environment continues to impact both traditional transaction and refinancing activity.
We remain pleased with the quality of our CRE portfolio, even at a weighted average loan-to-value ratio of approximately 48% and a weighted average debt service coverage ratio of 2.2x. SBA loan production was $31 million in the first quarter, down from $48 million in the fourth quarter, which was an exceptionally strong results. We also had a number of loans closing pushed into the second quarter. As we have added marketing talent to this team, it continues to making strong inroads with the small businesses across our markets. Production in C&I came in at $51 million, relatively consistent with the fourth quarter. Total commitments on our commercial lines of credit were over $1.1 billion 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 million 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, up 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 accounted 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. Turning to 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 Korea 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-interest-bearing 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.
Romolo Santarosa: 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% 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%, up 33 basis points quarter-over-quarter primarily because of the effect of the maturing 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 and 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% 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% from 6.17% 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 remains 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 flow hedges.
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%. Hanmi 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 1 ratio was 12.05%, and the bank’s total capital ratio was 14.5%. With that, I will turn it back to Bonnie.
Bonita Lee: Thank you, Ron. I’d like to thank the entire Hanmi team for their ongoing hard work and dedication. Their commitment and performance are the key drivers of our solid first quarter performance and ongoing track record of a consistent execution. The Hanmi 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 borrowings. 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 disciplined 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.
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