Q3 2020 Hanmi Financial Corp Earnings Call
Financial Corporation third quarter 2020 conference call.
As a reminder, today's call is being recorded for replay purposes.
This time all participants are neither can only mode.
The presentation the conference will be opened for questions I would now.
Like to introduce Mr. lots of glass and managing director of Investor Relations. Please go ahead Sir.
Thank you operator, and thank you all for joining us today.
With me to discuss on the financials third quarter 2020 earnings or Bonnie Lee President and Chief Executive Officer.
And it Kim Chief banking officer and Rob.
Got the Roka Chief Financial Officer.
Lets we will begin with an overview of the quarter Mr. Kim will then discuss the loan to deposit activities and that Mr. Santa Rosa will then provide more details on our operating performance.
At the conclusion of our prepared remarks, we will open the session for questions.
In today's call. We may include comments and forward looking statements based on current plans expectations events and.
And financial industry trends that may affect the company's future operating results and financial position.
Our actual results could be different from those expressed or implied by our forward looking statements, which involve risks and uncertainties.
The speakers on this call claim the protection of the Safe Harbor provisions contained in the Securities Litigation Reform Act of 1995.
For a listing of certain factors that may cause the results to differ from our expectations. Please refer to our FCC Farley.
Including our most recent form 10-K and 10-Q.
Particular, we direct you to the discussion of certain risk factors affecting our business contained in our earnings release.
After presentation and our form 10-K.
This afternoon, Rami financial issued a news release outlining our financial results for the third quarter of 2021.
Along with a supplemental slide presentation to accompany todays call.
Oh documents can be found in the Investor Relations section of our website at <unk> on.
Pardon me Dot com.
I will now turn the call over to Bonnie Bonnie Thank.
Thank you Lisa good afternoon, everyone. Thank you for joining us today to discuss hobbies.
2023rd quarter results.
In light of the challenges we have encountered throughout much of the 2020.
I am extremely pleased with how the bank is competition and that strong performance. The hanmi team delivered in the third quarter.
Highlights included strong earnings growth.
Loan production in California, non interest expense management.
In addition, the proactive steps we took earlier in the year to protect our loan portfolio and support our customers that had been impacted by the Cobi 19 pandemic has been very successful.
While we continue to closely monitored in pick up the pandemic and the banking industry and the fundamentals of our business. We are concurrently taking steps to provide additional products and services and safely drive profitable future growth.
Overall, I believe Hanmi is well positioned as we look ahead to the fourth quarter EPS.
With that as a backdrop. The following are some of the key financial and operational pick away what the third quarter.
Net income was a solidly higher on both.
Quarter and year over year basis in particular, we benefited from higher pretax pre provision income and lower credit loss expense in the third quarter.
New loan production through the third quarter with a solid and increased 18% compared with the third quarter last year.
As a result of a strong production growth over the past year loss receivables 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, earning assets, partially offset by a reduction in the cost of interest bearing deposits we.
We continue to benefit from a relationship based strategy that emphasizes <unk> loan and low cost deposit generation as a result, our overall deposit mix continues to improve led by the growth in didn't don't interest bearing T.D.A. <unk>.
In fact, non interest bearing demand deposits increased to 37.8% of total deposits.
From 35.8% for the prior quarter during.
During the quarter, we hired a seasoned executive who is.
Our residential mortgage and digital banking initiatives to help drive safe profitable growth in the quarters and years ahead anyway.
And importantly, hobbies enjoy ample liquidity 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 point threemillion or if it did three cents per diluted share. This compares favorably to a net income of 30 cents per share in the previous quarter and net income of 40 cents per share in the third quarter last year.
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 696000 compared with the second quarter provision of a $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 include level of economic activity and anticipated unemployment levels.
That said there are inherent uncertainties with these projections.
This remains a very fluid situation and we will continue to closely monitor to in pick up the pandemic in our portfolio.
Our loan modification program has been very successful and we are encouraged by the positive trends we are seeing.
And then you feel 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 the modified loans were provided interest payment.
While the remaining 30% art payment portal.
The borrower requesting a second modification we conducted an in depth review of their financial condition. In some cases, we require credit enhancement in the form of additional collateral to reduce risk to a hobby as.
As a part of this detailed review of each modified lot in phase two of the program. Some most weren't on grade and are now included as a special mention or classified loans.
Overall, we remain committed to working with our borrowers with a goal of helping them, whether the crisis and avoiding future charge offs in these challenging times.
Let's now turn to asset quality.
Special mention loans were 57.1 million at the end of the third quarter compared with a 21.1 billion at June Thirtyth.
Quarter over quarter change include 31.6 million of loans adversely affected by depend on it.
In addition classified loans were 106.2 million at September Thirtyth, 2020, compare with a 93.9 billion.
At the end of the second quarter classified loans included 21.7 million loss adversely affected by depends on it.
I'm performing loans increased modestly to 60, <unk> 64 point, threemillion or 133 basis points of loans at quarter end compared with the second quarter 2020, nonperforming loans up a 58.3 million or 121 basis points of anvil.
We were pleased to see that shortly after the close of the quarter, a 3.6 million classified and nonaccrual construction land loans hate it paid off in pool.
Before turning the call over to Anthony I would like to briefly comment on the steps we are taking to provide our customers with additional products and services.
To further diversify our sole source of revenue and safe and safely and somebody tried to growth and profitability and how to me during the quarter, we announced the hiring of a large suddenly as executive Vice President and head of consumer lending.
Person's mandate is to enhance the residential mortgage origination capabilities said she.
She has a strong track record of success over the last 25 years in mortgage banking at Royal business Bank, Washington, Mutual and Bank of America.
In addition, we also recently announced the appointment of afraid to be at the senior Vice President and head of digital banking threat.
Brett brings a significant digital banking experience and was previously managing director of a digital product sports C. I keep it at.
At Hanmi Fred will accelerate this is a situation of our banking platform to provide a more convenient and seamless customer experience.
Given their extensive experience and leadership, we are confident Larson and Fred would enhance our strategic effort to deepen relationships with new and existing customers long lost its scale mortgage officially and capitalize and exciting growth opportunities for a hobby wood.
With that I would like to turn the call over to Anthony Kim Our Chief banking officer to discuss the third quarter, though to put that kind of result, and deposit gathering activities Anthony thank.
Thank you Bonnie.
Me generated solid loan production volume totaling 256.6 million in the quarter.
Excluding 308.8 million loans originated last quarter, although the government's pitcher protection program.
Total loan production volume extended 10.9% quarter over quarter.
We experienced growth across all major categories with the exception of the CRT loans.
More specifically.
Third quarter production consisted primarily of non.
<unk> point Sixmillion of CRD loans 31.3 million against their loans and 78.6 million Boe Cnine, though.
Rounding out third quarter production was 21.3 million up commercial equipment leases.
We also have jump started our residential mortgage initiative with 25.8 million portfolio up alone.
No they generate loans and leases for the quarter had a weighted average yield of 4.57% compared to the linked quarter is weighted average yield of 4.20%, which excludes the impact of the lower yielding PPP loans originated during the second quarter.
As expected the secondary market for a standalone sales reopen in the quarter after being temporarily shut down last quarter. So it does it does truck disruption from club in 19.
I mean resumed its the loan sales in the third quarter, selling 29.3 million of SD alone and generating a gain on sale of 2.3 million.
Of note, we experienced an elevated levels of payoffs in the third quarter EPS payoff of hundred 39.8 million or more than twice the level, we experienced in the prior quarter.
The weighted average interest rate on the loans that paid off in the period was 5.13% or 56 basis points higher than the weighted average yield of new production in the quarter.
Despite solid loan production in the quarter due to higher levels of loan payoff resulted in loan receivable at the end of third quarter remaining relatively unchanged from the prior quarter is at 4.3 billion. However loan receivable did expand 5.8% from a year ago.
In terms of underwriting we remain committed to conservative disciplined credit criteria for their commercial real estate portfolio consistent with asset quality data from prior quarters, the weighted average loan to value and weighted average debt coverage ratio as of the end of third quarter or 48.1% and 1.9 times.
Respectively.
Looking ahead, we'll continue to prudently originate new loans.
In light of the economic disruption caused by 10 dynamic we expect to maintain more stringent underwriting criteria, which includes limiting origination activities within certain high risk industries.
We will likely continue to closely monitor and observed tighter underwriting as we assess the economic impact on our customers over the near term.
So at this point I would like to provide an update on the hospitality segment of our portfolio. It's segment that has been most impacted by pandemic.
As of September Thirtyth, hospitality loans totaled 929 million or 19% of the hobbies total portfolio.
Importantly, the settlement is conservatively underwritten with a weighted average debt coverage ratio of two times and a weighted average loan to value of ratio of 50%.
At September Thirtyth, we had 441 million modifications in our hospitality portfolio down 26% from 593 million at June Thirtyth.
Of the $441 million modified hospitality loans as of September Thirtyth, we were able to secure a payment reserve as additional collateral on hundred 11 million or 25% of total amount.
Although hospitality industry trends are generally showing improvement over the past several months.
The matrix, including occupancy average daily rate and revenue per available room, or well below year ago levels.
That said extended stay limited service and lower scale tell us are forecasted to fare better than higher end full service Luxor sediment hotels.
Additionally, low occupancy and closures in the upper price segments are resulting in a different proportion a percentage of total you estimate accommodated at lower price segments.
Hi, Miss hospitality portfolio is comprised mainly of hotels in the economy to upscale range.
Based on the hotel matrix provides for the month of April 2020 to September 2020, the bank's overall till hub portfolio has experienced a steady increase in occupancy and revenues. Similarly in line with the U.S. National average.
While risk remains within the hospitality segment. We believe they are manageable going forward, we'll continue to work very closely with our hospitality customers with a goal of helping them whether the prices improve their liquidity position and return to normal loan payment schedules.
Moving on to deposit gathering activities total deposits were 5.19 billion at the end of third quarter compared with a 5.21 billion at the end of preceding quarter, representing 8.3% quarter over quarter decline. However, we did see an improving mix of deposits as higher cost time.
Deposit declined while noninterest bearing demand deposit expanded nicely quarter over quarter.
Overall, we remain very pleased with the strength of the hobbyist deposit franchise.
As a result of third quarter loan production and deposit gathering activities.
The deposit ratio at the end of third quarter was 93.1% compared with 92.6% in the prior.
I'd now like to turn the call over to Ron Santa Rosa, Our Chief Financial Officer, Rob.
Thank you Anthony and good afternoon, all well, let's begin with pretax pre provision income for the third quarter.
With net interest income of 45.6 million noninterest income of 7.1 million and non interest expenses of 29.9 million pre tax pre provision income was 22.8 million pops, 17.5% quarter over quarter, when we adjust the second quarter for security gains.
And the effect of a PPP deferred loan origination costs.
Third quarter pretax pre provision income benefited from higher net interest income higher noninterest income and lower non interest expense.
Looking at net interest income, we posted 45.6 million up 2.6% from the prior quarter.
Interest and dividend income declined to 1.6% or zero point ninemillion in part, reflecting the full quarter effect of our lower yielding securities portfolio.
More importantly, interest expense fell 18.2% or $2.1 million driven by lower rates paid on interest bearing deposits.
Turning to net interest margin for the quarter decreased only two basis points from the second quarter to 3.13%.
The average yield on loans for the third quarter was 4.42% down seven basis points from the second quarter. However, the average rate paid on interest bearing deposits dropped 24 basis points to 87 basis points.
Our net interest margin also benefited from the continued shift in deposit mix with higher costing average time deposits declining, 6.9% lower costing average savings and money market accounts, increasing 5.6% and average noninterest bearing deposits increasing 17%.
As Anthony noted.
Average rates on new loan production for the third quarter was 4.57%.
Just above the average yield posted for the quarter.
In addition, we've reduced our deposit rates several times since the onset of the pandemic and have done so again this month.
Also we have 198.7 million of time deposits that will mature in the fourth quarter, which have an average interest rate of 1.69%.
Together this should allow our net interest margin to remain in the low threes.
Next our noninterest income for the third quarter was 7.1 million down from 20.9 million for the second quarter, primarily due to the absence of security gains more significantly. However, we returned to the secondary market and sold $29.3 million of the guaranteed portion of SB eight loans for gains of 2.3.
Millions.
Notably trade premiums averaged 9.53% for the third quarter.
Non interest expenses were 29.9 million this quarter higher than last quarter because of the 3.1 million PPP deferred loan origination costs, notwithstanding that effect, we did see salaries and benefits declined 3.4%.
Near the end of the third quarter, we did trim, where appropriate a small number of individuals through attrition and separation.
As always we will continue to scrutinize, our resources and activities striving for a balance among efficiency effective compliance and risk management and superior customer experience and service.
As of September 32020, we had a billion of cash and Unpledged securities as well as 1.4 billion of remaining unused borrowing availability with the FHLB and 1.9 billion of unused secured and unsecured facilities.
We remain confident that we have ample liquidity to operate in the evolving uncertain macroeconomic environment, resulting from the pandemic and we will continue to closely monitor and evaluate our potential liquidity requirements.
Our return on average assets and return on average equity both increased in the third quarter to 1.08% and 11.74% respectively.
Last our tangible book value increased to $17.95 per common share at the end of the third quarter and our tangible common equity ratio remained strong at 9.05% as do all of our regulatory capital ratios with that I'll turn it back to Bonnie.
Thank you Ron as we look ahead to the fourth quarter and beyond we remain committed to putting our loyal customer prioritizing the health and safety of our employees and communities.
And ultimately emerging from the pandemic well positioned to drive profitable sustainable growth and maximize value for our shareholders I look forward to sharing our continued progress with you when we report our fourth quarter 2020 results in January.
Operator that concludes our prepared remarks, we'd now like to open the call for questions.
Thank you.
At this time, we will conduct a question answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Emission tone will indicate your line is then the question queue. You May press star to feel like to remove your question from the Q.
Participants you as I speak we equipment it may be necessary to pick up your handset before press. It this far Keith once again Thats star one to ask a question at this time, one moment, while people far first question.
Our first question comes from Matthew Clark with Piper Jaffray. Please proceed with your question.
Hi, good afternoon.
[laughter].
The single family residential portfolio has been running all for quite some time now it turned the corner, though this quarter.
The expectation with some new originators that those balances may start to stabilize and.
Maybe grow in this environment.
That's correct, that's our plan yes.
Okay.
Okay.
And then the.
Your reserves on commercial real estate declined about 18.
Basis points to 146 can you isolate the reserves on your hospitality portfolio and.
Retail Siri portfolio separately.
The the real estate secured element of our portfolio.
My recollection, a coverage ratio of about 2.3%, but.
But that that excludes the c. and I elements, which we do have as part of that and I don't remember that number as well off the top of my head.
It's not a larger piece, but there's another element to it.
Okay.
Okay and then.
I was going to at least to some thought they might have seen something but the contribution of PPP to Eni this quarter.
If you happen to have that.
Sure just give me a minute Matt.
Yeah.
So for the third quarter.
Interesting include fee.
I see and cost amortization $1.7 million.
Okay and.
And then just on the SP a gain on sale look like good volumes, good volume sold and premiums are a little bit higher than expected.
What's your expectation in terms of.
Production going forward and in premiums can.
Can we sustain this level or do you think will have some seasonal slowdown here for Q.
Based on the pipeline that we have for T.S.P.A. in terms of a production I think that that will probably sustain the production level in the fourth Q.
And Ah hopefully and of course Q.
As far as the premium levels are concerned I at least it's holding up and its.
9.5% in between 9.5% to 10% and hopefully it stays at that.
<unk> level as well.
Okay. Thank you.
Thank you. Our next question comes from Kelly Motta with KBW. Please proceed with your question.
Hi, thank.
Thank you for the questions.
I guess my my first question has to do with the migration of special mention and cost.
Hi, I was just wondering.
Was that mostly within what's out in the second round deferrals and about how much of that second round just throw them out has migrated into.
Into these categories are.
At this time.
Ah I release covers or.
Terms of a special mention category.
About 31.6 million is Colgate impacted laws and that's composed about a six loans.
For the substandard category.
It's about 21.7 million impact if I caught that and ER and that includes about five alone.
Okay. So the one highlighted it is clear that impacted our <unk> are those currently in the second round deferral buckets or are they they currently paying right now.
No one is going to special mention category solid.
Most of them are in the.
Interest that paying bucket and a there so in terms of a substandard category, they're somewhere in the interest only interest payment and that some R&D for capital.
Great. Thank you and then on the Securities book you added.
Her Mount it looks like UBS Securities. This quarter. Just wondering if this is kind of a good level to hold that out or if you're going to continue to kind of put some of your liquidity into securities Guy apart.
No.
So securities are roughly 12% of our balance sheet.
I think up from about if I remember correctly, 10% at yearend before the pandemic struck so I suspect colleague that again most of our book actually pretty much substantially all of the book is a high cash flow book. So we do put back to work the the remittances that we receive each.
Month so.
So I can see the book growing slightly but I, if I had to put a boundary around it I don't think at this point it would grow bigger than 15, and it won't be less than 10.
So 12, 12 and half the midpoint, so we'll kind of bounce.
In it around that level, depending on where.
You know where the market is each month.
What our.
Outlooks are for funding and so on so I would I would say I would say that about 12, and a half maybe a little bit higher maybe a little bit lower but I think that's about where we would be.
Great and if I can sneak up a final one and.
I'm good.
When your valuation is and will continue to build capital at what point do you start to revisit the buyback is that entering the discussions at all in terms, that's how you're viewing capital return.
Well as I think I've mentioned in the past the board, particularly given the the onset of the pandemic discusses quarterly our capital actions and whether that's dividend or whether that's a share repurchase so I.
I think we're all encouraged of what we saw in the third quarter, but we're still in the pandemic. So we'll we'll deliberate longer further on what fourth quarter, what first quarter might do and and and.
And make a decision informed by that outlook.
Thank you so much.
Once again, ladies and gentlemen to ask a question. Please press star one on your telephone keypad. Our next question comes from Tim Coffey with Janney. Please proceed with your question.
Great. Thank you very much had a couple of questions on the hotel modifications for the call.
Order.
When do these are the hotels are in most cases, where those modifications set to expire.
Those are majority of modification second round modification expires.
Towards the end of October November and December.
We have given three months are.
Limited to three months under for Smart.
So second month three months as well so it's maturing starting end of October.
Okay.
Cash collateral that you've collected do you plan to apply that to the back end of the modification or is that already been used up to for for interest only payments no.
No we're holding it at the reserve they got so much will pay.
Great whether its interest payment.
Okay.
So Tim I don't know yet, it's just to add on to payment reserve.
Some of our customers, although they are in modification or some of the customers aren't sitting on a ample liquidity. So so we wanted to have customers commit to their payment going forward. So that it was a good behind getting the.
I paint it in some of the interest payment.
Okay, Yeah, yeah that kind of falls on my next question Bonnie.
If you look at the loans that are on the second deferral.
Just generally speaking are these properties, where the owner just needs a little bit of time to you just news all the time or is it a situation where they are actively seeing occupancy rates that are well below your portfolio average.
It's a combination so I'm not as we look at the individual financial conditions of the hospitality powers, though some of them to show a.
That service ability however, given that we're still independently.
Some of the customers are taking more conservative approach still asking for the modification, that's where we required the payment read there to show their commitment and somebody else depending on the where the properties are or some of them to cover a much better than the others, but if you are obviously.
The you know convention.
You know closer to convention at the property or the airports or airline industries art that main customer then they're good companies that are a bit slower than the average industry.
Okay. Okay. That's super helpful. Thank you.
Just my last question was just look at the PPP loans have 'em is your borrowers started the forgiveness process.
Yeah, we actually just a I began that process SBK mild wed see a at least for the loans up to 50000, they came up with the guideline. So we have.
Started the process.
Okay, Great. Those are my questions. Thank you.
Sure.
We have a follow up question from Kelly Motta with KBW. Please proceed with your question.
Hi, Thanks, so much for the follow up I'm just a quick question about the loan portfolio and this is the second quarter that lease leases felt.
Kinda substantially I was just wondering if there was any pit there if it's just a change in demand and how how we should be thinking about growth and it'd be says in this environment.
So it's not so much of the did the market has changed or if there's a lesser demand I think that there's a consistent demand and the leasing industry headwinds.
Having said that though you know you know we we are being very cautious in terms of providing a new leases to the you know service industry accommodations or a retail. So that's why on you know I think that if you compared our production into historical production.
It's lower but I think going forward as the economy activity improve we'll see some of the improvements in the production up but it may not be the same level as last year, but a certainly.
Certainly may have covered the run off.
If not a slightly lower so that's what the expectation.
Thanks, so much money.
And at this time there are no further questions in queue I would like to turn the call back over to management for closing comments.
Thank you for listening to Hanmi Financial's third quarter 2020 results conference call. We look forward to speaking with you again next quarter.
Thank you ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time and thank you for your participation.