HANMI FINANCIAL CORP Q3 FY2024 earnings call

Highlights - Net income was $14.9 million or $0.49 per diluted share. Return on average assets was 0.79% and return on average stockholder's equity was 7.55%. Net interest margin expanded by 5 basis points. Total loans grew 2% sequentially and new loan production increased by 27%. Deposits grew by 1.2%. Noninterest expense declined 0.6%. - Sold residential mortgage loans into the secondary market, with year-to-date sales at $70 million. ### Strategic Initiatives - Corporate Korea initiative performing in line with expectations, grew corporate Korea loans 6.1% sequentially, representing ~14.5% of total loan portfolio. Filed application to open a representative office in Seoul, South Korea. Closed branch in Koreatown Plaza in L.A., scheduled to finalize in January 2025. Opening a new branch in the metro Atlanta area. ### Credit Quality - Successfully resolved several criticized and nonaccrual loans through sales and payoffs and recognized recovery on a previously charged off loan. Proactively moved three loans to special mention category. Allowance for credit losses to loans increased by a single basis point to 1.11%, with overall credit quality remaining strong.

Loans: Total loans grew 2% sequentially. New loan production increased by 27%, with commercial real estate up 26%, commercial and industrial up 78%, and residential loan production up 35%. Corporate Korea loans grew 6.1% sequentially, representing approximately 14.5% of the total loan portfolio. Deposits: Grew by 1.2%, led by nearly 5% increase in noninterest-bearing deposits and 3.5% in money market and savings accounts. Demand deposits comprise 32% of total deposits. Corporate Korea deposits represent 12% of total deposits.

• On track to achieve low to mid-single-digit loan growth target range for 2024. - Anticipates net interest margin could expand 10 to 20 basis points in Q4 if further rate declines occur. - Dividends and share repurchases have repatriated 64% of earnings over the first nine months.

• Interest rate changes could impact net interest margin and loan yields. - Potential credit quality issues with special mention loans if not resolved. - Market conditions could affect loan sales and deposit costs.

Q: Hi, good afternoon. Thanks for the question. I think kicking off with the margin, I really appreciate all the comments with regards to the funding side of things and the spot rates. But I'm hoping you could help me out a bit on the loan side. I know you have some prime in there that is going to reset next quarter. All in all, how should we be thinking about that as it pertains to low yields, mixing that in with new production and what your idea of the margin is as we look to this next quarter, do you expect some continued expansion off this level?

A: So Kelly, so working backwards on your question, right now, if we anticipate another 50 basis points of rate declines 25 for November, 25 for December. We think that net interest margin, again, holding all the other elements, let's say, equal, could expand between 10 to 20 basis points. With respect to the loan yields, it's a bit more of a challenging question because it starts to involve a little bit of the mix that we have, the mix that may change and then the increments that Anthony and team had. But with that aside, what we try to do to ponder that question is we introduced another slide in our deck where we show the rate sensitivity of the loan portfolio and our interest-bearing deposits against the day weighted average of the Fed funds target rate between the first quarter of 2022 to the second quarter of 2024. So again, if you think about it, second quarter '24 was about a year since the Fed last did a rate increase. So one way that you can start to think about it is just looking at the inverse stair step. That's one way to start to analyze what might happen during the fourth quarter and forward. So you'll find that analysis or that illustration -- I'm sorry, write down the number, but I'll find it here for you in a second. So the portfolio -- so that's on Page 19 of that illustration of our slide deck. So all things being equal, we'd like to think that as we stepped up in the rate environment, we should step down in the same fashion. The caveat to that, though, again, is the time book drags because it has to do the reprices. The loans will step down slightly and then we would envision there's a point at which prepayment speeds might start to pick up depending on how far the short-term rates go. So against all of the things that we know and don't know, that's kind of what we're thinking about.

Q: Hi, guys. This is Ahmad Hasan on for Gary Tenner. Firstly, can you guys give a little bit more color. I know you guys had pretty strong introduction this quarter. Any commentary on loan pipelines and how we should think about them in the next quarter?

A: Yes. Looking at the 4Q pipeline, it came in similar level as well as similar yield as third quarter. So we're optimistic that we can produce a similar level of loan production in the fourth quarter.

Q: Hi. Good afternoon, everyone. This is Adam on for Matthew Clark. Thanks for the disclosure again on that new slide. I'm just curious more on the loan side. Just how the repricing characteristics have progressed quarter-to-date. Do you guys have a spot rate on the loan portfolio? And can you remind us what the fixed and floating rate portion of your overall portfolio is?

A: Sure. So the loan yields for quarter-to-date, which is a little bit challenging for us because some of the information doesn't come in until month end. But it's about the 6% idea, whether that's 5.98% or 6.01%, it can vary, but it seems like for October, it is going to be pretty much at that level. And so as we look at the variable rate portfolio, different pricing characteristics, whether it floats, which is a very small piece of our book, adjustable which you could think of primarily as being the SBA book, but that only moves once a quarter. And then we have a host of hybrids that have even longer tails in terms of when they reprice. So as we tried to point out, we think that the loan book will probably keep its yield, particularly given the increments that which Anthony and his team are producing. So we're not going to see -- we're not anticipating too much of a decline in the loan yields in the rate environment. Probably not until such time as the rates drop fall enough that might start pushing borrowers to prepayment activity. But we're not quite there yet. So we think the fourth quarter would be a pretty good quarter.

Q: Hi, good afternoon, guys. Thanks for taking the question. I want to talk about the loans held for sale. The increase there is pretty significant quarter-over-quarter, but it's still not a huge percentage of your loan portfolio. And specifically the nonaccrual, about half of it is on the nonaccrual. Is your expectation to sell those at par? And what kind of led to the increase in that line item? Or is it just a timing thing?

A: So let's deal with the nonaccrual loan. We actually placed that particular loan on a loan held for sale at the end of September. However, we actually successfully sold that note, and it closes this month. And we provided the 1.1 million reserve charged off. So we don't expect any further loss to be coming out of that particular sale.