Hanmi Financial Corp
NASDAQ:HAFC
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Hanmi Financial Corp
Earnings Call Analysis
Summary
Q3-2023
The company maintains a strong funding position through ongoing US deposits and selective loan underwriting. SBA production remains consistent, with a range of $35 to $40 million expected moving forward. Net interest margin (NIM) pressures are anticipated to ease, potentially stabilizing by Q1 or Q2 next year. While modest share buybacks were conducted, future capital returns will be considered quarterly, balancing attractiveness against potential adverse effects. Credit quality management led to a specific $28 million downgrade, attributed to a one-off situation with no expected loss. Operational expenses are under control, with efforts to achieve efficiencies, and a slight anticipated rise in occupancy costs from a sale leaseback transaction. The company appears set for a steady outlook, with careful consideration of costs, capital management, and asset quality.
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Ladies and gentlemen, welcome to the Hanmi Financial Corporation's Third Quarter 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. Mr. Clark, please go ahead.
Thank you, Camilla, and thank you all for joining us today to discuss Hanmi's Third Quarter 2023 financial 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 discuss loan and deposit activities, and Ron will provide details on our financial performance. 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. The 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 in our Form 10-K.
With that, I would now like to turn the call over to Bonnie Lee. Bonnie, please go ahead.
Thank you, Larry. Good afternoon, everyone, and thank you for joining us today to discuss our results for the third quarter of 2023. I am proud of our team's performance and the results we delivered during a dynamic banking environment characterized by ongoing economic uncertainty, inflation and higher interest rates. During the quarter, our team remained focused on executing against our long-term growth initiatives and diversification strategy. We did this while staying true to our core relationship banking model of providing our clients and prospects with a sound banking advice and the products and services they need to navigate the evolving environment. This approach has been critical to building our bank over the past 4 decades and is the foundation of our future growth.
Turning to our third quarter performance. Total deposits were relatively stable quarter-over-quarter, and I am pleased that we were able to maintain a healthy mix of our noninterest-bearing deposits at 35% of total deposits. This is especially encouraging given the range of competing products available to clients in this high interest rate environment. During the quarter, we generated strong growth in demand deposits from our Corporate Korea clients which is an important growth initiative. Hanmi is uniquely positioned to serve this market, given our team's deep understanding of the unique business needs of the Corporate Korea clients.
I am pleased with our team's continued success in serving a growing number of Korean companies investing in the U.S. to add new banking relationships that we can grow over time. Third quarter loan balances were up 3.7% on an annualized basis, reflecting a 30% increase in new loan production from last quarter. We delivered loan growth across our commercial real estate C&I, SBA and Equipment Finance business lines. Importantly, as borrowers have come to accept the reality of the new interest rate environment, we were able to achieve a meaningful increase in average origination yields to 7.8% on new loans in the third quarter.
This is a 41 basis point increase from the second quarter. We continue to take a highly disciplined and selective approach to lending in the current environment with the goal of maintaining our excellent credit quality. To that point, I am pleased to report that our asset quality remained solid in the third quarter. The third quarter bankruptcy of the $10 million non-accrual loan identified in the beginning of this year led to a $5.1 million charge-off. As such, nonperforming assets declined by 29% to $15.9 million and represented just 22 basis points of total assets at quarter end.
We continue to manage diligently noninterest expenses, which were essentially flat from last quarter. As a result of higher revenues and stable expense, our efficiency ratio improved to 51.8% from 54.1% last quarter. Net interest margin was 3.03% in the third quarter, down 8 basis points from the last quarter, primarily due to higher but moderating deposit cost partially offset by improved loan yields during the quarter. We have a strong financial position and a sound capital levels that exceed all regulatory requirements for well-capitalized banks. This provides us the flexibility to invest in strategic opportunities such as entering new high-growth deposit rich areas that need relationship banking partners like Hanmi.
To that point, we are on track to relocate our branch in San Francisco to the city of Dublin in the East Bay and our Edison, New Jersey branch to [ leave ] by the end of the year. Now turning to our strategic growth initiatives. Starting with the Corporate Korea. As I mentioned earlier, we continue to win new clients through our Corporate Korea initiative. In the third quarter, U.S. KC deposits increased by 16% or $107 million, driven primarily by a 22% increase in demand deposits. Deposits from our Corporate Korea clients now represent nearly 13% of our total deposits, up from 9% a year ago.
Our Estate Lending Group delivered strong results again this quarter, reflecting our success in securing top banking talent and expanding our market reach in this important business. Residential mortgage loan production was lower for the quarter, which is not surprising given the challenging mortgage market. That said, it is worth noting that we started this initiative in 2020, our residential loan portfolio has grown from 7% of the total loans in 2020 to over 15% today. The success of this business is the result of the strong relationships we have established with our corresponding lending partners over the past couple of years and our team's commitment to offering mortgage loans to our clients.
Our long-term diversification strategy is working. Our commercial real estate loan portfolio has declined from 70% of our total loans at the end of 2019 to just over 62% today. Importantly, this is very much in line with our targeted range of 60% to 65%.
I'll now turn it over to Anthony Kim, our Chief Banking Officer, to share more specifics about our loan and deposit activity.
Thank you, Bonnie, and thank you for joining us today. I'll begin by providing additional details on our loan production. Third quarter loan production was $336 million, up $77 million or 30% from the second quarter with a weighted average interest rate of 7.80%, up from 7.39% last quarter. The improvement in loan production reflected a balanced contribution from nearly all business lines, even with a higher origination rates. We saw growth in commercial real estate, C&I, SBA and Equipment Finance loans in the quarter.
We remain committed to pursuing high-quality transactions that met our underwriting standards and provide the appropriate level of yield in the current rate environment. CRE production was $106 million, up from $41 million in the second quarter. We feel very good about quality of our CRE portfolio, which as Bonnie noted, represented 62.5% of our total loan portfolio at quarter end. It has a weighted average loan-to-value ratio of 48.7% (sic) 47.8% and weighted average debt service coverage ratio of 2.2x (sic) 2.67x. Production in C&I came in strong at $68 million, up $32 million from the second quarter.
We entered the third quarter with a strong pipeline of C&I opportunities. And as we head into the fourth quarter, those pipelines remain healthy. Total commitments on our commercial lines of credit were $1.09 billion in the third quarter, up slightly from the second quarter. Outstanding balances declined 6%, resulting in a utilization rate of 34% in the third quarter, down from 37% last quarter. We attribute the lower utilization to overall economic conditions and the higher interest rate environment, which has caused the clients to put more of a focus on their cash management. Residential mortgage loan production was $55 million for the third quarter, down from $10 million last quarter.
As expected, most of our current lending opportunities are in the purchase market as refinance activity has declined significantly in response to rising interest rates and higher cost of home ownership. Residential mortgage loan represented over 15% of our total loan portfolio, up from 11% this time last year. Our team's success reflects the strong relationship we have developed with our corresponding lending partners over the past couple of years. Residential mortgage remains an important piece of our loan diversification strategy. Based on the current environment, we expect production to be in the range of $50 million to $60 million per quarter assuming interest rates remain at current levels.
SBA loan production improved to $36 million in the third quarter, up from $31 million last quarter and in line with our expectations to fund between $35 million and $40 million of SBA loans each quarter. We have a talented team that is making excellent strides to grow our SBA portfolio by building strong relationships with the small businesses in our communities. With respect to Corporate Korea, loan balances were $720 million or just under 12% of total loan. Total US KC loan balances were down $12 million in the third quarter but this was driven by lower utilization on C&I lines as CRE loans were up $10 million in the quarter.
Turning to deposits. In the third quarter, Deposits were down 0.9% on a sequential basis, but up 1.5% year-over-year. We continue to expand our partnership base with our Corporate Korea clients with the deposit growing by $107 million in the quarter, primarily from new relationships. Importantly, we saw U.S. KC demand deposit increased $75 million in the quarter, and they now represent 19% of our total DDA. Our team continues to make good progress in adding new relationships that we believe we can grow over time. Our deposit base remains stable with our mix of noninterest-bearing deposit at 35% of total deposits. This stability is an important indicator of the solid banking relationships that we have developed.
And with that, I'll now turn it over to Ron Santarosa, our Chief Financial Officer, for more details on our third quarter financial results.
Thank you, Anthony. Beginning with net interest income, we posted $54.9 million for the third quarter, down 1% from the second quarter. Here, we saw average interest earning assets grow slightly by 0.6%. Loan yields improved 9 basis points, and we had one additional day of net interest income. The cost of our interest-bearing deposits, however, rose 28 basis points, offsetting these increases and leading to a $567,000 decline in net interest income from the second quarter. Our net interest margin for the third quarter was 3.03%, down 8 basis points from the second quarter.
As expected, the rate of decline in our net interest margin continued to slow, it declined 8 basis points for the third quarter compared with 17 basis points for the second quarter and 39 basis points for the first quarter. When we met last quarter, we noted that the rate of change for our interest-bearing deposits was slowing, better reflecting the current rate environment. We also noted that the shift towards interest-bearing deposits, driven by the current rate environment was also slowing. We were pleased to see that noninterest-bearing demand deposits remained healthy, 35% of the deposit portfolio and that our interest-bearing deposit categories remained relatively unchanged. We continue to see deceleration in the rate of change as we enter the fourth quarter, where the cost of interest-bearing deposits for the month of October to date is about 12 basis points higher than the third quarter average.
Turning to noninterest income, we posted $11.2 million, up 41.5% from the second quarter. The increase reflects a $4 million gain on the sale and leaseback of a branch property. Here, we also recognized a $3.5 billion right-of-use asset and a corresponding liability. Going forward, we expect the difference between the expense associated with the previously owned property and now the lease property to be approximately $300,000 per year. Third quarter gains on the sales of the guaranteed portion of SBA loans were about the same as in the second quarter at $1.2 million. The volume of loans sold, however, increased to $21 million for the third quarter from $19.9 million from the second quarter while the trade premium declined 91 basis points to 6.84%.
Noninterest expenses for the third quarter remained well controlled at $34.2 million or 1.83% of average assets on an annualized basis. Credit loss expense for the third quarter was $5.2 million compared with a small recovery for the second quarter. As we have noted, net charge-offs were elevated by $6.1 million this quarter, reflecting actions taken on the two previously identified classified credits. Since there were $4.3 million of specific allowances for these loans, these charge-offs resulted in an incremental credit loss expense of $1.8 million for the third quarter. On an annualized basis, net charge-offs to average loans for the third quarter were 60 basis points, 19 basis points if we exclude the $6.1 million of charge-offs just noted. So altogether, with a provision of $5.2 million and net charge-offs of $8.9 million, we ended the quarter with an allowance for loan losses of $67.3 million or 1.12% of loans. I think it's important to point out that if you were to exclude the $4.3 million of specific allowances from the coverage ratio for the second quarter, that ratio would have been 1.12% as well.
Turning to funding, liquidity and capital. Our deposit portfolio remained strong due to our solid client relationships and limited reliance on broker deposits or wholesale funds. The ratios of loans to deposits was 96.2% at quarter end. Our available-for-sale securities portfolio reduced for pledging needs and combined with our cash position, represented 16.2% of deposits. The after-tax unrealized loss on our securities portfolio is included in our capital position and grew $14.8 million due to the changes in interest rates since the end of the second quarter. We also repurchased 100,000 shares of our common stock, further reducing our capital position by $1.9 million. The addition of third quarter net income less cash dividends paid offset these reductions to capital resulted in just a 0.5% to 1% decline in tangible book value per share to $21.45 at September 30.
Hanmi and the bank continued to exceed the minimum regulatory capital requirements and the bank continues to exceed minimum ratios for the well-capitalized category. The company's common equity Tier 1 ratio was 11.95%. At the bank level, this ratio was 13.42%. If we were to give effect to the after-tax unrealized losses in our regulatory capital, about 156 basis points, our ratios would still exceed the minimums.
With that, I'll turn it back to Bonnie.
Thank you, Ron. As I have said many times before, our competitive advantage at Hanmi is our team, and I'm grateful to our team for their continued hard work and dedication to serving our clients and our communities. Our third quarter performance reflects the adaptability and consistent execution of our team. Their commitment to building strong client relationships by delivering smart banking advice and our diverse offerings is bearing fruit. Our results for the first three quarters of 2020 put us on track to deliver another year of solid financial results. We are mindful of the potential ongoing volatility in the marketplace, and we'll continue to execute across all areas of the business.
Our diversified business model, strong core deposit franchise, healthy loan pipelines, excellent credit quality and strong capital position give us positive momentum as we enter the fourth quarter. We will continue to focus on diversifying our portfolio with a focus on maintaining strong credit quality and adding new clients that bring both lending and deposit relationships to Hanmi. We remain committed to executing our strategic initiatives to drive disciplined growth to create value for our shareholders over the long term. Thank you.
Operator, we are now ready for the Q&A session. please open up the lines for questions.
[Operator Instructions] our first question comes from the line of Matthew Clark with Piper Sandler.
First question around the production in the quarter, stepping up 30%, I guess, some of which is coming in commercial real estate. I guess can you give us a sense for why you're comfortable with putting on stronger production in this environment? And how do you plan to fund it?
Well, we had about $30 million approved loans that got pushed back from second quarter to third quarter. So without $30 million, it would have been about $70 million per quarter production, which is consistent for the past three quarters. So -- and the concentration, I mean, type of production, the property that we funded is broad-based, including some hospitality for our existing customers. And then Tier 1, the owner-occupied building of Tier 1 automotive manufacturer. So it's a broad-based and we are comfortable lending to our VIP existing customers.
And then just around how you plan to fund it, just thinking about the kind of the marginal cost of funding.
So I mean, we are mindful of the funding requirements, but we continue to be able to generate the deposits coming from our U.S. KC. And also, we continue to bring on the deposit marketing bankers. So we are kind of a cherry picking on the loans and then manage the funding requirements for the loans in the pipeline.
Okay. And then on the SBA piece of it, it sounds like the production there is remaining kind of consistent, I guess a similar question there. I mean, the yields at a variable rate product, and I think at least on the 7(a) side. And I think those yields are somewhere in some cases, the [ 11s ], maybe speak to kind of the demand side and what you're seeing on the SBA front.
We've been consistent in terms of the production. And thanks to the talented marketing people that we brought in through the last couple of years, they are supporting the production. So going forward, I think that we can keep about $35 million to $40 million in that range.
Okay. Okay. Great. And then maybe one for Ron. It sounds like the cost of -- the rate of change in deposit cost is slowing here and even in October, I think you'll have some additional lift in loan yields, particularly with the new production. Sorry, but it looks -- it sounds like the overall NIM pressure should subside here and then maybe even stabilize in the first or second quarter. Is that the right way to think about it?
I would agree, again, but making the assumption that the aggregate level of interest rates, the Fed is not really doing anything much more than perhaps another 25, whatever time frame, whether that's November coming up or in the next year and that the competition, which I think has been -- well, intense has been, I'll say, reasonably priced there are some outliners. But so if we can keep that idea or if those ideas continue to hold, then I think you're going to continue to see this gradual deceleration until we hit an inflection point which again, could be first quarter, maybe second quarter. But I wouldn't predict the quarter too much as it's going to happen. I can see that. But if I can hold the other things relatively constant, and that would give you some assurances that maybe it is the first or the second.
Our next question comes from the line of Kelly Motta with KBW.
I thought I would start off on the capital side. I know you picked away at the buyback very modestly this quarter, but just wondering on what your appetite level is here given where your stock is trading, it would seem that buybacks would be attractive. Just wondering what your appetite looks like in the quarter ahead and kind of the priorities here for capital return.
Sure. Well, as I've mentioned on previous calls, the Board of Directors actively looks at our capital plan each quarter, the dividend actions and repurchase activity and so on. And so that topic is taken up each quarter. We do consider the number of shares that would vest under some of our employee compensation programs. So looking to see if it is worthwhile to keep the share count relatively neutral. But what we might do in the fourth quarter, the first quarter or the second quarter, debt we take that up each quarter. Again, we're also very cognizant, however, of credit charge that could affect capital, things of that sort. So while I can appreciate that the price might be attractive. We also make sure that we want to keep sufficient levels of capital to deal with any adverse effects that might pop up in any particular period for any particular reason.
Got it. That's helpful, Ron. And can you just remind us how much is left on the current authorization?
I believe it's just under 500,000 shares.
Got it. That's helpful. I think there was a tick up in special mention. I'm seeing this quarter. Can you just kind of walk through the drivers of that? I'm wondering how much of that is just proactive portfolio management and any sort of trends there that you're seeing that drove that increase?
Sure. Yes, I mean, you're right. We are very, very proactive when it comes to correctly and timely creating our loans. So there was a one $28 million credit. It's a memory care assisted living facility, it is in the lease-up stability period. And due in part to COVID and other various factors this hasn't reached the optimal occupancy rate. So that's why we had downgraded it this quarter. But based on the most recent communication with the borrower, the occupancy rate most recently reached the above -- the breakeven point and then also the customers are looking to sell the property. Based on all the current assessment, we do not expect any loss from this particular relationship. So it's not a trend of anything. So this just happens to be the kind of one-off type of situation.
Got it. That's helpful. Maybe last question for me, and then I'll step back. Ron, can you -- I missed what you had said about the sale leaseback and the impact to occupancy and equipment. Can you just walk us through what's the good run rate for that line item? And more broadly speaking, expenses are really nicely controlled. Just wondering how you guys are approaching expense management at these levels? Is there additional room for or areas to trim? Or is this a good number to be building off of?
So to the first part of your question on the sale leaseback, we only anticipate about a $300,000 annual increase in that particular line item, if you will. If you isolate just the differential between the existing building as an owned property and then as a leased property. So I would say it's fairly muted on a quarterly basis. With respect to expenses, generally, I think we've been doing a fairly good job notwithstanding inflationary pressures. So as we enter the planning season for 2024, we certainly will be looking at areas where we might be able to achieve efficiencies, eliminate redundancies and things of that sort.
I couldn't tell you how much that would be. But certainly, we recognize the environment that we're in being very cost conscious, as I think we are, continues to be what we need to do. So taking it forward then at a run rate last year was highly inflationary depending on how you want to measure the year. But I would think we would at least see what we're seeing now until we get to about the second quarter where salary, merits, promotions, things of that sort, come to play, which would affect salaries line. And then, of course, we have the annual health benefits ideas that will probably take effect in the first quarter. So those are kind of early yet, don't know where they are, but I guess I would ask you to pick an inflationary factor, let's say, 3% for wherever we think we might be. And that's probably how I would start to at least guess at those ideas.
Just minor follow-up on that occupancy line. It was about $4.8 million this year, which annualizes out to $19.3 million, would that be kind of the number to build that $300,000 per year off of. It was still a little bit higher than the first half of the year. So I kind of want to make sure I have the base of that, right?
Yes. I would average over the quarters because while the -- I'll say, the occupancy expense is measured by rents or depreciation, amortization are fairly constant. You do get maintenance repair, which creates some volatility, if you will, so a little ups and downs depending on whatever the particular priority is. So I would average the quarters before you put to put an inflation effect on top of it.
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 look forward to sharing our continued progress with you on our year-end call in January. Thank you.
Thank you. This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.