Hanmi Financial Corp
NASDAQ:HAFC
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Hanmi Financial Corp
Earnings Call Analysis
Q4-2023 Analysis
Hanmi Financial Corp
In the face of significant industry challenges in the past year, the company has successfully navigated through by focusing on long-term growth initiatives and a proven diversification strategy. Focusing on relationship-driven banking and strong credit administration amid an uncertain macro environment helped the company maintain solid asset quality and disciplined expense management. The company’s residential mortgage portfolio saw exceptional growth of 31% despite an unfavorable interest rate environment, and critical financial ratios like return on average assets (1.08%) and return on average equity (10.70%) are indicators of a strong performance in 2023, setting up for positive momentum entering 2024.
The company has reported an $80 million net income, equating to $2.62 per diluted share for the year 2023. With a loan growth of 3.6%, deposits growth of 1.8%, and maintaining a substantial portion of noninterest-bearing deposits at 32% of total deposits, the company has demonstrated enduring stability, even though noninterest expenses, primarily due to inflationary pressures, saw a modest increase of less than 5% for the year.
With new production totaling $61 million in the quarter, the company continues to build its robust partnership base, particularly with Corporate Korea clients, adding new relationships for future growth. Corporate Korea deposits grew by $24 million in the quarter and $244 million for the year, eventually making up 13% of total deposits and 17% of demand deposits, showing the successful execution of the company’s relationship-driven strategy.
A shifted asset composition led to a 3.1% decline in net interest income at $53.1 million for the fourth quarter. With the average loans growth of 2.6%, and loan yields improving by 15 basis points, the company managed to somewhat counter the effects of a significant reduction in interest-earning deposits at other banks, which fell by 43%. The net interest margin also dropped by 11 basis points to 2.92% for the same period due to changes in asset mix and funding costs.
Regarding the outlook for 2024, the company is setting the expectation for loan production to closely mirror 2023 levels, with a target for low to mid-single-digit net loan growth. This conservative forecast is set against a backdrop of a strong equity capital position, which has increased by 5.8% to $701.9 million by the end of the fourth quarter. The prudent approach in projecting loan growth is aligned with the company’s historical focus on high-quality loans and maintaining a strong balance sheet.
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Ladies and gentlemen, welcome to Hanmi's Financial Corporation's Fourth Quarter and Year-End 2023 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, Alicia, and thank you all for joining us today to discuss Hanmi's fourth quarter and full year 2023 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 will begin today's call with an overview. Anthony will then 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 forward-looking statements, which involve risks and uncertainties. Discussion of the factors that could cause our actual results to differ materially from those 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 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, and good afternoon, everyone. Thank you for joining us today to discuss our fourth quarter and full year 2023 results. I am proud of our team's performance as we finished 2023 with a positive momentum, delivering solid fourth quarter results and building a good foundation for 2024. As all of you are aware, the industry faced the notable challenges during the past year. I believe our team successfully navigated these challenges as we have done so in the past, by focusing on the execution of our long-term growth initiatives and proven diversification strategy. We continue to do what we do best, build and expand our customer relationships by providing the products and services our customers need in this ever-changing world.
During the past year, we further strengthened and expanded our business, executing on our relationship-driven banking strategy. We also focused on strong credit administration, which was essential given the uncertain and dynamic macro environment. In addition, while we could not avoid inflationary pressures, we did exercise disciplined expense management while continuing important investments in personnel and technology. Our diversified lending capabilities allowed us to grow our residential mortgage portfolio by 31% for the year despite the challenging interest rate environment.
Our asset quality remained excellent during the year with a very low delinquencies, nonperforming assets and net charge-offs. We also pursued optimizing our branch network with the opening of 2 new branch locations in markets with a great growth potential. These are just a few examples that give me confidence that we have the right strategy and the right culture to address the challenges of 2024.
Now let me review some highlights for the past year. Net income for 2023 was $80 million or $2.62 per diluted share. Our return on average assets was 1.08% and our return on average equity was 10.70%. As expected, given the higher interest rate environment and economic uncertainty, overall, our loan growth was constrained to 3.6% for 2023. Our deposits grew by 1.8% for 2023, and we ended the year with a healthy mix of noninterest-bearing deposits at 32% of total deposits. This is especially encouraging given the competitive nature in our markets in this particular environment. We managed our noninterest expenses diligently. Expenses increased by less than 5% for the year as we were able to offset the inflationary pressure on salaries and employee benefits with the cost savings and other expense categories.
Importantly, asset quality remains strong as we continue our focus on high-quality loans, disciplined underwriting and business and credit administration practices. As a result, criticized loans were down 23% year-over-year. Net charge-offs for the full year of 2023 were a low 0.12% of average loans and nonperforming assets ended the year at 0.21% of total assets. Last, we finished the year with a solid financial position and very strong capital ratios. This positions us well for continued growth in 2024 and beyond in a safe and solid matter.
Looking ahead to 2024, we see continued uncertainty about the economy and interest rates. As a result, we will remain visible in our credit practices, prudent in our growth objectives and disciplined with our operating expenses. As I have mentioned, I'm very pleased with our diversified lending capabilities. For 2024, we will explore the use of our production capabilities in residential mortgages and equipment finance agreements towards the secondary market activities to generate another source of noninterest income and assisting balance sheet management.
Our Corporate Korea Initiative continues to deliver strong results with the deposits from these customers increasing 42% for the year. During the later part of 2023, we made a good progress in our efforts to increase awareness of the strategic growth initiatives. And this month, we entered into a memorandum of understanding with the Korea Creative Content Agency under which we will jointly work in helping Korean content companies expand into U.S. market.
We believe this will further propel our USKC initiative. As I noted earlier, we opened new offices in 2 markets, and we believe have a great growth potential. For 2024, we will continue to analyze our banking network for consolidation, relocation and growth opportunities. Finally, we'll continue to make strategic investments in our people, technology and infrastructure. We want to ensure that our team is empowered to bring the innovative thinking adaptability and collaborative spirit needed to drive sustained growth. We believe our technology and infrastructure improvements will help drive operational efficiencies and deliver improved profitability ultimately creating more value for our shareholders.
So for 2024, we remain committed to executing our strategy. Our consistent performance and growing reputation as a preferred relationship-based banker is enabling us to increase the number of communities we serve. I'll now turn the call over to Anthony Kim, our Chief Banking Officer, to discuss fourth quarter loan production and deposit scheduling in more detail.
Thank you, Bonnie, and thank you for joining us today. I'll begin by providing additional details on our loan production. Fourth quarter loan production was $390 million, up $53 million or 16% from the third quarter with a weighted average interest rate of 8.1%, up from 7.8% last quarter. The improvement in loan production was due primarily to growth in commercial real estate and estate lending, while C&I and equipment finance production moderated from their strong third quarter levels.
We remain committed to pursuing high-quality loans that meet our underwriting standards and provide attractive yields in the current rate environment. CRE production was $178 million, up $72 million from the third quarter. $44 million of the increase came from the Corporate Korea loans as our efforts to grow those relationships continues to bear fruit. We continue to be pleased with the quality of our CRE portfolio. It has a weighted average loan-to-value ratio of approximately 49% and a weighted average debt service coverage ratio of 2.2x. SBA loan production improved to $48 million in the fourth quarter, up from $36 million last quarter.
We have added marketing talent to this team and it continues to hit on all cylinders making strong inroads with the small businesses across our markets. Production in C&I came in at $52 million, down from $68 million in the third quarter. 32% of our production in C&I came in from our Corporate Korea clients where we have been focused on building new relationships.
Total commitments on our commercial lines of credit were $1.08 billion in the fourth quarter, down slightly from the third quarter. Outstanding balances grew by 6.6%, resulting in a utilization rate of 36.7% in the fourth quarter, up from 34% last quarter. Residential and mortgage loan production was $53 million for the fourth quarter, in line with our expected range of $50 million to $60 million per quarter given the current interest rate environment. Both of our current lending opportunities continue to be in the purchase market as refinance activity remains muted. Residential mortgage loans represented over 15% of our total loan portfolio up from 12% at the end of last year. With respect to Corporate Korea, loan balances were $764 million, up $44 million from the third quarter. We saw a very nice pickup in new production, which totaled $61 million in the quarter.
Turning to deposits. In the fourth quarter, deposits were up 0.3% on a sequential basis and 1.8% year-over-year. We continue to expand our partnership base with our Corporate Korea clients with the deposits growing by $24 million in the quarter and $244 million for the year. Our team continues to make good progress in adding new relationship that we believe we can grow over time.
At year-end, Corporate Korea deposits represented 13% of our total deposits and 17% of our demand deposits. Our deposit base remains stable with our mix of noninterest-bearing deposits at 32% of our total deposits. This is a testament to 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 our fourth quarter financial results.
Thank you, Anthony.
Let's begin with net interest income. Here we posted $53.1 million for the fourth quarter, down 3.1% from the third quarter. This decline essentially reflects a shift in the composition of our interest-earning assets and interest-bearing liabilities because average interest-earning asset growth quarter-over-quarter was just 0.4%, while average interest-bearing liabilities grew 2.9%. Average loans for the quarter grew $156.2 million or 2.6% and loan yields improved 15 basis points for an average yield of 5.88%.
However, average interest-earning deposits at other banks for the quarter declined $136.4 million or 43%, and their average yield was 5.12%, down 7 basis points. On the funding side, average interest-bearing deposits increased $39.8 million for the quarter, and our average FHLB borrowings increased $85.6 million, essentially offsetting the $110.9 million decline in average noninterest-bearing deposits.
Looking at the rates paid on the funding side, we had a 30 basis point increase in the cost of our interest-bearing deposits to 3.83% and a [ 159 ] basis point increase in the cost of our interest-bearing -- in the cost of our FHLB borrowings to 4.07%.
Turning to our net interest margin. It declined 11 basis points to 2.92% for the fourth quarter. Again, the shift in the interest-earning asset mix showed loans added 23 basis points to margin and the reduction in our interest-earning deposits at banks lowered margin by 10 basis points.
Looking at the funding side, interest-bearing deposits and borrowings further lowered net interest margin by 17 basis points and 8 basis points, respectively. Pairing more closely at our interest-bearing deposits, the quarterly rate of change was about the same quarter-over-quarter, an increase of 30 basis points from the third quarter to the fourth quarter and an increase of 28 basis points from the second quarter to the third quarter.
In addition, the rate of increase for the month of January to date is about 25 basis points. As such, and given the lower amount of time deposits maturing in the first quarter than we had in the last quarter, we envision net interest margin will drift lower for the next few quarters or so before reaching this inflection point.
Noninterest income was $6.7 million for the fourth quarter, down $4.5 million from the third quarter. You may recall that the third quarter included a $4 million gain from the sale and leaseback of a branch property. That aside, we did see an $800,000 decline in our service charge and fee category and $5.2 million for the fourth quarter. Here, we experienced lower NSF fees of about $200,000. We recognized a $300,000 valuation adjustment to our bank-owned life insurance investments. And we had a $200,000 change in the valuation of our customer back-to-back swaps. SBA gains, however, increased $300,000 to $1.4 million for the fourth quarter on a higher volume of loans sold while trade [indiscernible] has declined to 6.17%.
Noninterest expenses increased to $35.2 million for the fourth quarter mostly due to seasonally higher spend on advertising as well as costs attended to the opening of 2 new branch offices and the decommissioning of the 2 former branches. Notably, salaries, occupancy and data processing representing about 80% or so of our cost structure remain well controlled throughout the year. We had a negative provision for credit loss expense for the fourth quarter of $2.9 million, driven by a $6 million recovery on a 2019 troubled loan relationship.
For the year, net charge-offs were 12 basis points of average loans. Asset quality as represented by delinquent loans, classified loans and nonperforming assets remained strong, and the allowance remained the same as at the end of the third quarter at 1.12% of loans. Our effective tax rate for the fourth quarter and the year was elevated because of an increase in the valuation adjustment on our state net operating loss carryforwards. The effective tax rate for 2023 was 30.1%. However, absent this valuation adjustment, it would have been 29.5%.
Turning to equity capital. It increased $38.5 million or 5.8% to $701.9 million at the end of the fourth quarter from the end of the third quarter. Here, the after-tax loss on our securities portfolio fell $27.3 million due to the decline in intermediate term interest rates since the end of the third quarter. In addition, fourth quarter net income less cash dividends paid contributed $11 million to the increase in equity capital. Last, we repurchased 50,000 shares during the fourth quarter at an average price of $14.77. And there are 409,972 shares remaining under our share repurchase program. So altogether, tangible book value per share increased 6% to $22.75 a share.
Hanmi and the bank continue to exceed minimum regulatory capital requirements, and the bank continues to exceed the minimum ratios for the well-capitalized category. The company's common equity Tier 1 ratio was 11.86%, and the bank's total capital ratio was 14.27%.
With that, I will turn it back to Bonnie.
Thank you, Ron. As I noted, I believe we have continued to demonstrate our ability to successfully navigate uncertainty. We'll continue to do so this year with a keen focus on the execution of our relationship-driven banking strategy. Looking ahead, we anticipate that loan production will remain near the same levels that we delivered in 2023. However, it may be larger as a function of the possible secondary market activities I noted earlier. Altogether, however, we anticipate moderate loan growth for 2024. We remain focused on growing our core deposit base, seeking deposit-rich business verticals and expanding into new markets where we can grow both deposits and loans.
I want to thank the entire Hanmi team for their outstanding work this past year as well as their dedication to serving our customers and the communities in which we operate. I believe our future is bright despite some near-term uncertainties. We remain committed to our communities, delivering personalized relationship-based service with the dedication to helping our customers reach their financial objectives. We will do this all with the goal of delivering improved profitability and attractive returns for our shareholders. Thank you. We will now open the call for your questions. Operator, please open the line up to questions.
[Operator Instructions]
Our first question comes from the line of Gary Tenner with D.A. Davidson.
So we were a bit surprised by the peso deposit cost increase in the quarter that was the same as the fourth quarter, around which I think you alluded to. I want to make sure I heard you right, though, that you said that in January, the rate of change is 25 basis points. Was that quarter-to-date versus the full fourth quarter? Did I hear that correctly?
Quarter-to-date for the first quarter of 2024, 25 basis points. So each quarter, I've been telling you where we are through the current period or through our conversation, if you will, and we're 25 basis points to date.
And that's on cost of total deposits, this is over the 50...
Cost of interest-bearing deposits, correct.
Interest-bearing, okay. And then so given the uncertainty, Bonnie, that you mentioned heading into 2024, loan growth in 2023 was 3.5%. Can you -- any thoughts on where you think net loan growth perhaps shakes out for the year? What's your target range? And also, any further thoughts on the revenue potential? I think you mentioned secondary loan sales of mortgage and I think, equipment finance, if I heard correctly?
Correct. So as I said, I think that in terms of production, I think it will mirror the 2023 production this year. So net loan growth is a function of obviously new production as well as any payoffs. I would just say that we would expect the net loan growth into 2024 will be probably low to mid-single-digit growth. In terms of the secondary market activities, we're exploring that idea with our mortgage as well as equipment finance in both areas we built up a nice portfolio, and we continue to have a solid production. So we'll be able to share more colors as we explore and actually be able to execute that going into the first quarter.
The next question comes from the line of Kelly Motta with KBW.
I was hoping you could talk a bit about the noninterest-bearing flows that happened. It looks like you had a another outflow there and some growth in money market. Just wondering if there's any color you can provide on what you're still seeing in terms of noninterest-bearing deposit pressure thought about where that could double out. And at this point, would you characterize more the pressure coming from the retail deposit base kind of catching up? Or is this still being driven by your commercial clients?
So Kelly, so in terms of noninterest-bearing deposits, there was a slowdown from the quarter-to-quarter and moving into the interest-bearing deposits. However, when Fed actually kind of signaled the possible rate decrease. For the last couple of weeks, we saw kind of a last minute, our retail depositors try to convert, transfer the DDAs into the whether money market or the savings category. So that's the phenomena. But I think in the longer term, I think that, that will continue to -- quarter-over-quarter, we are hoping that will slow down.
Got it. And then -- sorry, and I realize that was like a 4-part question, as I was asking it. As we kind of look ahead in terms of how that translates to the margin, I think the commentary is definitely margin down in the first quarter. Just wondering if rates hold here for a bit, where you would expect margin to start the loan yields are to overtake the pressure on funding costs, one? And then two, if we get some rate cuts, can you just, Ron, maybe walk us through the repricing dynamics as well as how we should think about that.
Sure, Kelly. If I could use time deposits as kind of a proxy for the response. When rates moved up rapidly, we saw basically, let's say, a 0 portfolio suddenly just balloon. So if you look at our maturities quarter-to-quarter, we had a bulge and the first bulge was the fourth quarter, the second bulge here is in the first quarter. So when I -- so we were kind of curious how the fourth quarter but would actually play itself out.
So looking backwards, it seems now some of the feathering that we thought would occur in our time deposit portfolio is occurring. And as we're seeing a little bit more of a ratable notion quarter-over-quarter. And that's important because that helps kind of envision how margin might look in the following quarters as those cores or those cohorts of time deposits repriced to the then current rate.
So when I look now from the fourth quarter looking out, first quarter we have about, if I remember correctly, about 30% of the book that will reprice. It's about 45 basis points lower than the average yield that we produced on the fourth quarter portfolio, assuming when I look out for quarters, all of that cohort actually occurred in the fourth quarter this year. So we basically do 1-year CDs. That's why I'm looking out 4 years -- or 4 quarters, I'm sorry.
So I can still see a little bit of the margin pressure coming in the first quarter and in the second quarter. But then when I look at the third quarter, the differential between the average price or the average rate on those CDs is not that far from where we are today. So the pressure should diminish. Hence, my notion that said, well, we've got about a quarter or 2 or so, again, barring any other shifts that are not -- I haven't isolated that said we'd probably hit our inflection point. It's kind of what I'm seeing based on what we have today. So that's about, let's say, the outlook.
Then turning to your other question relative to what happens to us then when rates decline. So there, I would look at that as a 2-part question. First, you have to kind of tell me what type of rate decline are we expecting? So if we get the notion of just 25 step -- 25 basis point step each meeting of a very slow decline. I'm expecting rates to kind of be perhaps as stubborn as they were when we started this, meaning the first 25, the first 50, nothing really happened in the marketplace. It wouldn't surprise me if we have that outcome, where the first 25, the first 50, nothing might be really happening in the marketplace.
Since there's a gap between that rate differential and what you could get in a money market, right? So it might just exacerbate what's already there. So I can see people may be holding pat or not doing as much. When you get into the next round, let's say, the next 50 to 75, now I would start to anticipate, let's say, more of a matched beta, if you will, that kind of makes sense to me. And so with respect to our nonmaturity, interest-bearing portfolio, you'll start to see that step down quite nicely. The time book, again, is becoming more ratable. So it takes about 4 quarters for it to reflect the current rate. So hopefully, those long answers respond to your two questions.
Our next question comes from the line of Matthew Erdner with JonesTrading.
Turning to new loan production. You guys had a really strong quarter for commercial real estate loans. Could you talk about the profile of those asset type, geography, LTV, that sort of thing?
Yes. [indiscernible] production team actually broad-based mainly in hospitality, industrial warehouse, multifamily and retail and geographically, this evenly distributed from California to Eastern region. And then loan to value came in, I believe, 47% revenue production.
Got you. And then what kind of pipeline are you guys seeing at the moment in terms of commercial and then C&I as well.
Looking at the first quarter pipeline, it has been moderated from the level of -- in fourth quarter. And then I'm seeing elevated percentage of C&I portion and CRE.
Got you. And then one more question for me. The loan portfolio maturity is less than a year. Could you talk about the profile of the other loans, $115 million, it looks like it's about 570 million over the next 3 years. Could you just talk about those?
Sure. In terms of a loan to value and debt service coverage, it probably mirror our book, CR in general, which is loan to value anywhere from 50 -- around average around 50% and then there's a risk coverage of 1.8 to 2.
Our next question comes from the line of Adam Butler with Piper Sandler.
I'm on for Matthew Clark. Looking over the noninterest income, it was nice to see the SBA production tick up quarter-over-quarter and it looked like trade premiums declined by about 70 bps linked quarter. I was just curious if you can give another update on your outlook for SBA production and trade premiums.
So in terms of production, I think we can give a range about anywhere from 35 to 45 on a quarterly basis.
Yes. And then with respect to the trade premiums, I would just observe that our trade premiums, if you looked at other SBA secondary marketing notions tend to be a little bit lower, which is a little bit more indicative of the kind of product that we originate, whether it's real estate secured or just C&I secured, if you will. So I would -- I can envision again, there are going to be a function of the marketplace. They probably have a little bit of drift left in them, but not maybe -- perhaps not too much as long as we're -- the rate environment stays relatively stable.
And then in terms of expenses, is $35 million a good run rate going forward? Or is there anything that you guys are envisioning in terms of technology expenses or whatnot to kind of [indiscernible] that up or salaries coming up in the first quarter?
So specifically with direct to salaries, our merit and other adjustments don't become effective until the second quarter. So that said, that's probably one of our larger spend categories. I think we're targeting inflation, which is about 3% to 4%. And then after that, as we went through 2023, where we kind of had the 5 to 6 notions in hand, I think we'll try to basically, be inflationary, let just say 3 to 4. I'm not sensing that there will be any momentous ideas unless you get to a quarter like we have here in the fourth quarter where you see seasonally our spend goes up because of advertising, there will be other some ideas, but the core expenses of salaries, occupancy and data processing probably should hold probably about a 3% to 4% inflationary pressure.
Our next question comes from Kelly Motta with KBW.
I just wanted to snap on back about the buyback. You're clearly active again this quarter. Wondering about how you're feeling about implementing that, especially as kind of loan growth is more moderate as we look out to next year based on your commentary.
So Kelly, I think we'll continue to look -- first of all, I appreciate the word active. I would prefer the word that we know. So we'll probably continue to nibble as market opportunities present themselves. We also have an eye towards sufficient capital to deal with all of the worries out there relative to credit and so on. But we'll look at that as we do every quarter. So I think we also keep an eye towards our employee share compensation programs and the vesting. We don't like that to be too dilutive. So we'll be looking at those to make sure we kind of keep a fairly stable share count. So between those ideas, we'll continue to analyze each quarter as it presents itself.
And with your larger recovery you had this quarter, just to confirm, was that the problem credit that caused some issues a couple of years back? And can you remind us how much of that you've recovered on so far?
Yes. With the recovery in the 4Q, this were [indiscernible] the closure of the relationship.
We have no further questions in the queue at this time. I'll now turn the call back over to Ms. Bonnie Lee for concluding remarks.
Thank you for joining our call today. We appreciate your interest in Hanmi, and we look forward to sharing our continued progress with you throughout the year.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.