Hanmi Financial Corporation (NASDAQ:HAFC) Q3 2020 Earnings Conference Call - Final Transcript
Oct 27, 2020 • 05:00 pm ET
Bonita I. Lee
particular, we benefited from higher pretax pre-provision income and lower credit loss expense in the third quarter. New loan production during the third quarter was a solid and increased 18% compared with the third quarter last year. As a result of a strong production growth over the past year, loans receivable were up 5.8% year-over-year. Net interest margin of 3.13% was down just two basis points from the prior quarter driven by the decline in yield on average earnings assets, partially offset by a reduction in the cost of interest-bearing deposits.
We continue to benefit from a relationship-based strategy that emphasizes both loan and low-cost deposit generation. As a result, our overall deposit mix continues to improve led by the growth in the noninterest-bearing DDA. In fact, noninterest-bearing demand deposits increased to 37.8% of total deposits, up from 35.8% for the prior quarter. During the quarter, we hired seasoned executives to lead our residential mortgage and digital banking initiatives to help drive safe, profitable growth in the quarters and years ahead. And importantly, Hanmi enjoys ample liquidity and remains very well capitalized. Our regulatory capital ratios are strong, and I believe we continue to be well positioned to address these challenging times. Looking in more detail at our third quarter results, we reported net income of $16.3 million or $0.53 per diluted share. This compares favorably to net income of $0.30 per share in the previous quarter and net income of $0.40 per share in the third quarter last year. In fact, this was the best single quarter earnings performance for Hanmi in six years. Compared to the prior quarter, third quarter net income benefited from a significant reduction in the loan loss provision to $696,000 compared with the second quarter provision of $21.1 million. The lower provision expense reflects the improvement during the quarter in some of the assumptions used in determining the allowance for credit losses, which includes level of economic activity and anticipated unemployment level. That said, there are inherent uncertainties with these projections. This remains very fluid situation, and we will continue to closely monitor the impact of the pandemic on our portfolio. Our loan modification program has been very successful, and we are encouraged by the positive trends we are seeing. In the initial phase of the modification program, modifications stood at $1.4 billion or 29% of the total portfolio. In Phase two of the program, modification declined 59% to $571 million or approximately 12% of the portfolio.
Approximately 70% of modified loans will provide interest payments while the remaining 30% are payment deferrals. For the borrowers requesting a second modification, we conducted an in-depth review of their financial conditions. In some cases, we require credit enhancements in the form of additional collateral to reduce risk to Hanmi. As a part of this detailed review of each modified loading Phase two of the program, some loans were downgraded and are now included as a special mention or classified loan. Overall, we remain committed to working