Q3 2023 Hanmi Financial Corp Earnings Call
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.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
I would now like to turn the call over to Larry Clark Investor Relations for the company. Mr. Clark. Please go ahead.
Thank you Camilla and thank you all for joining us today to discuss <unk> third quarter 2023 financial results.
This afternoon Hanmi issued its earnings release and quarterly supplemental slide presentation to accompany today's call.
The documents are available on 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 South of Rosa Chief Financial Officer.
Bonnie will begin today's call with an overview.
Anthony will discuss loan and deposit activities and Rob will provide details on our financial performance and anybody who 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 in our form 10.
Okay.
With that I would now like to turn the call over to Bonnie Lee Bonnie. Please go ahead. Thank you Mary good afternoon, everyone and thank you for joining us today to discuss our results for the third quarter, we have 2023.
I'm proud of our team's performance and the results we delivered during a dynamic environment characterized by ongoing economic uncertainty inflation and high interest rates.
During the quarter our team remains focused on executing against our long term growth initiatives and diversification strategy.
We did this while staying true to our core relationship banking model.
Fighting our clients and prospects with a sound banking advice and the product and services they need to navigate the evolving environment.
Approach has been critical to building I think over the past four days, Okay 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 noninterest bearing deposits at 35% of total deposits.
This is especially encouraging given the range of a competing product available to clients in this high interest rate environment.
During the quarter, we generated strong growth in demand deposits from our clients, which is an important growth initiative hanmi is uniquely positioned to serve just market keeping our teams deep understanding of their unique business needs of our corporate clients.
I'm pleased with our team's continued success in serving a growing number of the Korean company investing in the U S to add new banking relationships that we can grow over time.
Third quarter loan balances were up three 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 always have come to accept the reality of the new interest rate environment.
You'll able to achieve a meaningful increase in average origination yields to 787, 8% of new loans in the third quarter. This is up 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 till that point I'm pleased to report that our epic quality remained solid in the third quarter.
Third quarter bankruptcy of that $10 million non accrual loan identified in the beginning of this year led to a $5 $1 million charge offs and.
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 and noninterest expenses, which were essentially flat from last quarter. As a result of a higher revenues and a stable expense our efficiency ratio improved to 51, 8% from 41% last quarter.
Net interest margin was 3.2 or 3% in the third quarter down eight to eight.
Eight 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 a well kept all lines. Thanks.
This provides us the flexibility to invest in our strategic opportunities such as entering new high gross departure rich areas didn't need relationship banking partners like Hanmi.
To that point, we're on track to relocate our branch in San Francisco to the city of doubling in the newspaper and Edison, New Jersey branch to 40 by the end of the year.
Now turning to our strategic cost initiatives, starting with Korea.
Korea as I mentioned earlier, we continue to win new clients drive corporate create Michigan.
In the third quarter U S. Casey deposits increased by 16% or 107 million driven primarily by 22% increase in demand deposits.
Just from our corporate clients now represent nearly 13% of our total deposits up from 9% a year ago.
Alright, and state 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 without a 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 strategies 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 target range of 60% to 65%.
I'll now turn it over to Anthony Kim our Chief banking officer to share more specifics about our own.
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 78, 7 million or 30% from the second quarter with a weighted average interest rate of 780% upfront.
Three 9% last quarter.
The improvement in loan production reflected a balanced contribution from nearly all business lines, even with a higher or are you just more origination rates.
We saw growth in commercial real estate, C&I, and SBA and equipment finance loans in the quarter.
We remain committed to pursuing high quality transactions that meet our underwriting standards and provide appropriate local local yield in the current rate environment.
CRE production was $106 million up from $41 million in the second quarter we.
We feel very good about quality of our CRE portfolio, which as Lonnie noted represented 62, 5% of our total loan portfolio headquarter and it has a weighted average loan to value ratio of 48, 7% and weighted average debt service coverage ratio of two two times.
Chinese 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 or 1.09 billion in the third quarter up slightly from the second quarter outstanding.
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 our clients to put more of a focus on.
There are cash management.
Residential mortgage loan production was $55 million for the third quarter down from $101 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 homeownership.
Residential mortgage loans represented over 15% of total loan portfolio up from 11%. This time last year.
Yeah.
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 loans.
Litigation 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 billion last quarter and in line with our expectations to fund between $35 million and $40 million of SBA loans each quarter we.
We have a talented team that is making excellent strides to grow our SBA portfolio by building strong relationships with small businesses in our communities.
With respect to corporate Korea loan balances were at $720 million or just under 12% of total loans.
Total U S. Casey 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 9% on a sequential basis, but up one 5% year over year.
We continued to expand our partnership base with our corporate Korea clients, but the deposit growing by $107 million in the quarter, primarily from new relationships.
Fortunately, we saw U S. Casey demand deposit increased 75 million late in the quarter and now represents 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 deposits at 35% of total deposits.
This stability is an important indicator of our solid banking relationships that we have developed.
And with that I'll now turn it over to Ron Santa Rosa, 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.
Here, we saw average interest, earning assets grew slightly by <unk>, 6%.
Loan yields improved nine basis points, and we had one additional day of net interest income the <unk>.
Most of our interest bearing deposits. However, rose 28 basis points offsetting these increases and leading to a $567000 decline in net interest income from the second quarter.
Our net interest margin for the third quarter was 3.03% down eight basis points from the second quarter.
As expected the rate of decline in our net interest margin continued to slow it declined eight 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 of 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 a 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 $300000 per year.
Third quarter gains on the sales of the guaranteed portion of SBA loans were about the same as in the second quarter and $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 684%.
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 they 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 one 1% 2% of loans.
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've been 112% as well.
Turning to funding liquidity and capital our deposit portfolio remains 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 100000 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 one half of 1% decline in tangible book value per share to $21 and 45 at September 30.
Omni and the bank continue 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 one ratio was 11, 95% at the bank level. This ratio was $13 four 2%. 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.
Operator: Ladies and gentlemen, welcome to the Hanmi Financial Corp. 3rd quarter 2023 conference call. As a reminder, today's call is being recorded for replay purposes. If anyone you require operator assistance during the conference, please press star zero on your telephone keypad.
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.
I am grateful to our team for their continued hard work and dedication to serving our clients and our communities.
Larry Clark: 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.
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. It's Gary.
Larry Clark: Thank you all for joining us today to discuss Hanmi's 3rd 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.
Our results for the first three quarters of a tiny tiny put us on track to deliver another year of solid financial results. We are mindful of potential ongoing volatility in the marketplace.
And we will continue to execute across all areas of the business.
Larry Clark: 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.
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 brings both lending and deposit relationships to hanmi.
We remain committed to executing our strategic initiatives to drive disciplined growth it created value for our shareholders Openhearted long term. Thank you.
Larry Clark: Before we begin, I'd like to remind you that today's comments may include four looking statements under the federal securities laws. Four 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 four looking statements, which involve risks and uncertainties. The discussion of the factors that could cause our actual results to differ materially from those four looking statements can be found in our SEC filings, including our reports on forms 10K and 10Q. 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 10K.
Operator, we are now ready for the Q&A session. Please open up the lines for questions.
Thank you we will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.
You May press star two if he would like to remove your question from the queue.
For participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of Matthew Clark with Piper Sandler. Please proceed with your question.
Larry Clark: With that, I would now like to turn the call over to Bonnie Lee. Bonnie, please go ahead. Thank you, Larry.
Hey, Thank you good afternoon, everyone.
First <unk>.
Bonnie Lee: 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 high 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 product and services they need to navigate the evolving environment.
Question around the <unk>.
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.
Yeah.
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 last three quarters.
Bonnie Lee: This approach has been critical to building our bank over the past four decades and is the foundation of our future growth. Turning to our third quarter performance, total deposits were relatively stable, quarter to quarter, and I am pleased that we were able to maintain a healthy mix of our non-interest viewing 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.
So.
And to.
The concentration.
The type of production the property that we funded.
His broad based including some hospitality for our existing customers and then.
What the owner occupied building of tier one.
Automotive manufacturers, so it's a broad based and we are comfortable.
Bonnie Lee: During the quarter, we generate a strong growth in demand deposits from our corporate career 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 career clients. I am pleased with our team's continuous success in serving a growing number of the Korean companies investing in the US to add new banking relationships that we can grow over time.
Lending to our.
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.
Yeah.
So I mean, yeah, we we are mindful.
The funding requirements, but we continue to.
Able to generate the deposits coming from our U S. Casey.
Bonnie Lee: Third quarter loan balances were up 3.7% on an annualized basis, reflecting a 30% increase in new loan production from last quarter. We deliver loan growth across our commercial real estate, CNI, SBA, and eCumen finance business lines. Importantly, as borrowers have come to accept the reality of the new interest rate environment, we are 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.
And also.
We can do to bring on the <unk>.
Deposit marketing anchors.
So we are kind of a cherry picking and the loans and then manage team.
The funding requirements for the loans in the pipeline.
Okay. Thanks, and then on the SBA piece of it it sounds like.
The production there is remaining consistent.
Yes.
Bonnie Lee: 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 their point, I am pleased to report that our ethical quality remains solid in the third quarter. The third quarter bankruptcy of the $10 million nonocural loan identified in the beginning of this year led to a $5.1 million dollar charge-off. As such, non-performing assets declined by 29% to 15.9 million and represented just 22 basis points of a total assets at quarter end.
I guess, a similar question there I mean, the yields that you know, it's a variable rate product and I think at least on the <unk> side and I think those yields are somewhere around.
You know in some cases the elevens.
Maybe speak to kind of the demand side.
And what Youre seeing on the SBA front.
Okay.
So we've been consistent in terms of production and.
<unk> two dee.
Our talented marketing people.
Be brought in for the last couple of years they are supporting the.
Bonnie Lee: We continue to manage diligently non-interest expenses which were essentially flat from last quarter. As a result of a 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, found 8 basis points from the last quarter. Primarily due to higher fund moderating deposit costs 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 things. This provides us the flexibility to invest in a strategic opportunities such as entering new high gross deposit rich areas that need relationship banking partners like Humming.
Our production.
So going forward I think that we can keep them.
About 35 to.
$40 million.
In that range.
Okay, Okay great.
And then maybe one for Ron It sounds like you know the cost of it.
Yeah.
The rate of change in deposit costs slowing here and even into October.
You know I think you'll have some additional lift in loan yields, particularly with the new production.
Sorry.
But it looks it sounds like overall NIM pressure should subside here and then maybe even stabilize in the first or second quarter or is that the right way to think about it.
Bonnie Lee: To that point, we are in track to relocate our branch in San Francisco to the city of Dublin in the East Bay and our Edison, New Jersey branch to for leave by the end of the year.
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.
Bonnie Lee: Now, turning to our strategic gross initiatives, starting with the corporate career. As I mentioned earlier, we continue to renew clients to our corporate career initiative. In the third quarter, USKC deposits increased by 16% or 107 million, driven primarily by 22% increase in demand deposits. Depadets from our corporate career funds now represent nearly 13% of our total deposits, but from 9% a year ago. Our SB lending group delivers strong results, again, this quarter reflecting our success in securing top banking talent and expanding our market reach in this important business.
Timeframe, whether that's November.
Coming up or in the next year.
The competition, which I think has been while intense has been I'll say.
Reasonably.
Christ, Yes, there are some outliers, but so if we can keep that idea where those ideas continue to hold.
And I think youre going to continue to see this 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 as much as that is it's going to happen I can see that.
But if I can hold the other things relatively constant then that would give you. Some assurances that may be it is the first or the second.
Bonnie Lee: Resolution of 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.
Okay.
Okay, great. Thanks again.
Yeah.
Thank you. Our next question comes from the line of Kelly Motta with K B W. Please proceed with your question.
Hi, good afternoon. Thanks for the question.
I don't want to start off on the capital side.
No you pick away at the buyback I'm very modestly this quarter, but just wondering on what your appetite level is here given.
Bonnie Lee: Our long-term diversification strategies working, our commercial real estate loan portfolio has declined from 70% of the 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%.
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.
Anthony Kim: I'll now turn it over to Anthony Kim, Archie 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. The total loan production was $336 million of $77 million or 30% from the second quarter with a weighted average interest rate of 7.80% 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.
Our our capital plan each quarter.
The dividend actions any repurchase activity and so on and so that topic is taken up each quarter.
We do consider the.
The number of shares that would vest under some of our.
Employee compensation programs so.
To see if it is.
It's worthwhile to keep with the.
The share count relatively neutral.
But what we might do in the fourth quarter and the first quarter or the second quarter.
We take that up each quarter again, we're also very cognizant however of.
Anthony Kim: We saw growth in commercial real estate, CNI, SBA, and equipment finance loans in the quarter. We remain committed to pursuing high-quality transactions that meet our underwriting standards and provide the appropriate level of the yield in the current rate environment. CERI production was $106 million up from $41 million in the second quarter. We feel very good about quality of our CERI portfolio, which has Bonnie noted, represented 62.5% of a total loan portfolio at quarter end.
Credit charges that could affect capital things of that sort, so well I can appreciate that the price might be attractive. We also make sure that we wanted to keep sufficient levels of capital to deal with any.
Adverse effects that might pop up in any particular exterior 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 is just under 500000 shares.
Got it.
Anthony Kim: It has a weighted average non-divaluration of 48.7% and weighted average service coverage ratio of 2.2 times. Production in CNI came in strong at $68 million of $32 million from the second quarter. We entered the third quarter with a strong pipeline of CNI opportunities and as we had entered the fourth quarter, those pipelines remain healthy. Total commitments on our commercial lines of credit were $1.09 billion in the third quarter, not slightly from the second quarter.
That's helpful.
I think there was a tick up in <unk>.
<unk> seen this quarter can you just kind of walk through the drivers of that I'm wondering how much of that is just the port.
Proactive portfolio management, and you know any sort of trends there that you're seeing that drove that that increase.
Sure.
Yes.
Right, we are very very proactive when it comes to correctly and timely Quaker.
Creating our loans so that was a one.
Anthony Kim: 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. Regidential mortgage loan production was $55 million for the third quarter, found from $100 million last quarter. As expected, most of our current lending opportunities are in the purchase market as we have financed activity has declined significantly in response to rising interest rates and higher cost of home ownership.
28 million.
The dollar credit, it's a memory care assisted living facility.
It is and we are at least up stability here yet and.
Q in part to Colgate and other various factors.
Yes.
Has enriched the.
Our optimal occupancy rate. So that's why we had downgraded this quarter.
But based on the most recent communication with the borrower.
The occupancy rate. Most recently reached the about the breakeven point and then also the customers are looking to sell the property. So based on the current assessment.
Anthony Kim: Residential mortgage loan represented over 15% over our total 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.
We do not expect any loss from this.
Because that relationship so it's not a trend of anything.
As to BD kind of one off type of that.
Situations.
Got it that's helpful. Maybe last question for me and then I'll step back.
Ron can you can you.
I missed what you had said about.
Anthony Kim: Based on the current environment, we expect production to be in the range of 50 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 tries to grow our SBA portfolio by building strong relationships with the small businesses in our communities.
The sale leaseback can be impact to them.
Occupancy and equipment can you just walk us through.
What's a good run rate for that line item and more broadly speaking expenses are really nicely control. Just just wondering how you guys are approaching it.
Our expense management at these levels is there additional additional room for.
Or areas to trim or is this a good number to be building off of.
So.
So to the first part of your question on the sale leaseback, we only anticipate about a $300000 annual increase in.
Anthony Kim: With respect to corporate Korea, loan balances were 720 million or just under 12 percent of the total loans. For the USKC loan balances were down 12 million in the third quarter, but this was driven by lower utilization on CNI lines as CR loans were up 10 million in the quarter. Turning to deposits in the third quarter, deposits were down 0.9 percent on a sequential basis, but up 1.5 percent year over year.
That particular line item if you will if you isolate.
Just the differential between the existing building.
As an owned property and then as it 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 entered the planning season for 2024, we certainly will be looking at areas, where we might be able to achieve efficiencies.
Anthony Kim: We continue to expand our partnership base with our corporate Korea clients with a deposit growing by 107 million in the quarter, primarily from new relationships. Importantly, we saw USKC demand deposit increased 75 million in the quarter and then they now represents 19 percent of our total DDA. Our team continues to make progress in adding new relationships that we believe we can grow over time. Our deposit base remains stable with our mix of non-interesting deposit at 35 percent of total deposits. This stability is an important indicator of the solid banking relationships that we have developed.
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 of the year, but I would think the can sheet.
Ron Santarosa: And with that, I'll now turn it over to Ransana Roseva, my 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 percent from the second quarter. Here, we saw average interest earning assets grow slightly by 0.6 percent. Lone yields improved 9 basis points, and we had one additional day of net interest income.
At least see what we're seeing now until we get to about.
The second quarter were.
Salary merits promotions things of that sort of come to play which would affect.
Ron Santarosa: The cost of our interest bearing deposits, however, rose 28 basis points of setting 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 percent, 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.
Our salaries line and then of course, we have the.
The annual.
Yeah.
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.
Guests at those ideas.
Just.
Follow up on that occupancy line that it was about $4 8 million this year, which.
Annualize out to 19.3 million would that be.
Kind of the number to build that 300000 per year off of it was just a little bit higher than the first half of the year. So I don't want to make sure the base with that right.
Ron Santarosa: 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 not interest bearing demand deposits remained to healthy, 35% of the deposit portfolio and that our interest bearing deposit categories remained relatively unchanged. We continued to see deceleration in the rate of changes 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.
Yeah, I would average over the quarters because.
While the size of the occupancy expense as measured by rents are depreciation amortization are fairly constant you do get.
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Maintenance repair, which creates some volatility if you will so little ups and downs.
Depending on whatever the particular property is so I would average the quarters before.
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To put an inflation effect on top of it.
Perfect. Thank you so much I'll step back.
Thank you.
Ron Santarosa: 32 non-interest income, we posted 11.2 million dollars, 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 million right-of-use asset and a corresponding liability. Going forward, we expected 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 guaranteed portion of SBA loans were about the same as in the second quarter at $1.2 million.
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Thank you.
We have no further questions in the queue at this time I will 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.
Ron Santarosa: The volume of loan 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%. Non-interest 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 with $5.2 million compared with a small recovery for the second quarter. As we have noted, net chargeoffs were elevated by $6.1 million as quarter, reflecting actions taken on the two previously identified classified credits.
Thank you for your participation.
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Ron Santarosa: Since there were $4.3 million as specific allowances for these loans, these chargeoffs resulted in an incremental credit loss expense of $1.8 million for the third quarter. On an annualized basis, net chargeoffs to average loans for the third quarter were 60 basis points. 19 basis points if we exclude the $6.1 million of chargeoffs just noted. So, altogether, with a provision of $5.2 million and net chargeoffs of $8.9 million, we ended the quarter within 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 as specific allowances from the coverage ratio for the second quarter, that ratio would have been 1.12% as well.
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Ron Santarosa: Turning to funding liquidity in capital, our deposit portfolio remains 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, are available for sale security portfolio, reduced for pledging needs and combined with our cash position, represented 16.2% of deposits. The after-tax unrealized loss on our security portfolio is included in our capital position and grew $14.8 million due to the changes and interest rates since the end of the second quarter.
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Ron Santarosa: 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 1.5% decline in tangible book value per share to $21.45 as September 30. On the in the bank continue to exceed 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%.
Ron Santarosa: If we were to give a fact 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 Donnie. Thank you, Ron.
Bonnie Lee: As I have said many times before, our competitive advantage at Hammy 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 very good. Our result for the first three quarters of a 2020 put us a track to deliver another year of solid financial results.
Bonnie Lee: We are mindful of the potential ongoing volatility in the marketplace and will 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 forth lending and deposit relationships to Hammy. We remain committed to executing our strategic initiatives to drive discipline growth that create value for our shareholders over the long term.
Bonnie Lee: Thank you.
Operator: Operator, we are now ready for the Q&A session. Please open up the lines for questions. Thank you.
Operator: We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, maybe necessary to pick up your handset before pressing the star keys.
Matthew Clark: Our first question comes from the line of Matthew Clark with Piper Sandler. Please proceed with your question. Thank you. Good afternoon, everyone. The first question around the production in the quarter, stepping up 30%. I guess, you know, 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?
Matthew Clark: 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 last past three quarters. So, and the concentration, I mean, type of production, the property that we funded is brought based, including some hospitality for our existing customers. And then hear what the owner occupied building of tier one automotive manufacturer.
Matthew Clark: So it's a broad based and we are comfortable lending to our VIP users and 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, you know, we are mindful of the funding requirements, but that we continue to, you know, be able to generate the deposits coming from our US KC and also, you know, we continue to bring on the dependent marketing bankers. So we are kind of a cherry picking under loans and then manage the funding requirements for the loans in the pipeline.
Matthew Clark: Okay, thanks. And then on the SBA piece of it, it sounds like the production there is remaining kind of consistent. I guess, I guess a similar question there, I mean, the yields, you know, at the variable rate product. And I think, you know, at least on the seven A side, and I think those yields are somewhere in, you know, in some cases, the 11s, maybe speak to the demand side and what you're seeing on the SBA from.
Matthew Clark: So, you know, we've been consistent in terms of a production. And, you know, 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 to 40 million in that range. Okay, okay, great. And then maybe one for Ron, it sounds like, you know, the cost of The rate of change in deposit costs is low in here, and even in October, I think you'll have some additional lift in the loan yields, particularly with the new production, sorry, but it sounds like an overall name pressure should subside here, and then maybe even stabilize in the first or second quarter, is that the right way to think about it?
Matthew Clark: I would agree, again, but making the assumption that the aggregate level of interest rates that says 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, you know, there are some outliers, but if we can keep that idea or those ideas continue to hold, and 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 much as it's going to happen, I can see that, but if I can hold the other things relatively constant, then that would give you some assurances that maybe it is the first or the second.
Matthew Clark: Okay, great, thanks again.
Operator: Thank you.
Kelly Mata: Our next question comes from the line of Kelly Mata with KBW, please proceed with your question. Hi, good afternoon, thanks for the question. I thought I would start off on the capital side.
Ron Santarosa: You 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 was seen that buybacks would be attractive, just wondering what your appetite looks like in the quarter ahead and kind of the priorities here for capital returns. Sure, well, as I've mentioned on previous calls, the board of directors actively look at our capital plan each quarter, the dividend actions, any repurchase activity, and so on.
Ron Santarosa: And so that topic has taken up each quarter. We do consider the number of shares that would best 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, that we take that up each quarter. Again, we're also very cognizant, however, of credit charge that could affect capital things of that sort.
Ron Santarosa: So, well, 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? and the current authorization. I believe it's under 500,000 shares. That's helpful. I think there was a take up in special mention. I'm seeing this corner.
Ron Santarosa: Can you just kind of walk through the drivers of that, wondering how much of that is just proactive portfolio management and any sort of trends there that you're seeing that growth has that increase? Sure. I mean, you know why we are very, very proactive when it comes to correctly and timely creating our loans. So there was a one 20 million dollar credit. It's a memory care assisted living facility. It is in the least of stability period and due in part to COVID and other various factors, this has enriched the optimal occupancy rate.
Ron Santarosa: So that's why we had downgraded 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. So based on 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. But that's helpful.
Ron Santarosa: Maybe last question for me and then I'll step back. Ron, can you, can you, can you, I, I missed what you had said about the sale lease back and the impact to occupancy and equipment. Can you just walk us through what's the good run rate for that line item? And, you know, more broadly speaking, expenses are really nicely controlled. Just, just wondering, you know, how you guys are approaching expense management at these levels.
Ron Santarosa: Is there additional, 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 lease back, we only anticipate about a $300,000 annual increase in, in that particular line item, if you will, if you isolate just the, the differential between the existing building as a known property and then as a lease property. So I would say it's, it's, you know, fairly muted on a quarterly basis.
Ron Santarosa: 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, you know, 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.
Ron Santarosa: So taking it forward then in a run rate, you know, last year was highly inflationary, depending on how you want to measure the year. But I would think, you know, we would at least see what we're seeing now until we get to about the second quarter where and salary merits, promotions, things of that sort come to play which would affect our salaries line and then of course we have the annual health benefits ideas that will probably take effect in the first quarter.
Ron Santarosa: 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% you know 4 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 that it was about 4.8 million this year which annualizes out to 19.3 million would that be the 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.
Ron Santarosa: Yeah I would average over the quarters because while the the occupancy expense is measured by rents or depreciation and amortization are fairly constant you do get you know maintenance repair which creates some volatility if you will so a little ups and downs depending on whatever the particular property is so I would average the quarters before you put an inflation effect on top of it. Perfect thank you so much I'll step back. Thank you. As a reminder if you would like to ask a question please press star 1 on your telephone keypad. Thank you.
Bonnie Lee: 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 Hami and the port for sharing our continued progress with you on our year end calling January thank you. Thank you.
Operator: This concludes today's teleconference you may now disconnect your lines at this time. Thank you for your participation. .