Q2 2021 Hanmi Financial Corp Earnings Call
[music].
Ladies and gentlemen, welcome to Hanmi Financial Corporation second quarter, 2021 conference call.
Minder today's call is being recorded for replay purposes at this time.
Time, all participants are in a listen only mode. Following the presentation. The conference will be opened for questions.
I would now like to introduce LASA glass I'm managing director at <unk> Investor Relations. Please go ahead.
Thank you operator, and thank you all for joining us today.
With me to discuss Hanmi Financial's second quarter.
2021 earnings are Bonnie Lee, President and Chief Executive Officer, Anthony Kim Chief Banking Officer, and Ron Santa Rosa Chief Financial Officer.
MS. Lee will begin with an overview of the quarter. Mr. Kim will then discuss loan and deposit activities and Mr. Santa Rosa will then provide more details on.
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 financial industry trends.
It may affect the company's future operating results and financial.
<unk> 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 list of factors.
That may cause our results to differ from our expectations.
Please refer to our SEC filings, including our most recent form 10-K and form 10 Qs.
In particular, we direct you to the discussion of certain financial on certain.
Certain risk factors affecting our business contained in our earnings.
Our investor presentation.
And our form 10-K.
This afternoon Hanmi financial issued a news release outlining our financial results for the second quarter of 2021, along with a supplemental slide presentation to accompany today's call.
Both documents can be found in the inverse.
Investor Relations section of our website at Hanmi Dot com.
I will now turn the call over to Bonnie Lee Bonnie.
Thank you Lisa good afternoon, everyone. Thank you for joining us today to discuss Hanmi 2021 second quarter result.
Hanmi delivered another strong performance in the second.
Current quarter highlighted by a sharp increase in loan and lease production growth in deposits improving credit quality and significant earnings expansion.
Our strong operating momentum coupled with the significant pickup in business activity as economies in our markets reopen as Hanmi Poland.
To continue driving solid results in the second half of the year today, we reported net income for the second quarter of 'twenty 2.
$2.1 million or <unk> 72 per diluted share net income increased 33% from the first quarter and over 140% from a year ago.
Our second quarter earnings reflect strong revenues and controlled expenses as well as the recovery of a credit loss expense from improving asset quality.
Our non production remained quite robust in the second quarter and with a single quarter of record when excluding PPP loan origination.
Excluding PPP loans, our loans grew 2.5% from the first quarter.
Deposits were also up 2.2% from the prior quarter and similar to recent past quarters growth came from non interest bearing DDA and now represents nearly 42% of our.
6 deposits net.
Next I would like to provide an update on our modified portfolio and the encouraging trends, we continue to see as we emerge from the pandemic.
At June 30th loans modified under the cares Act declined 38% from the first quarter to end the second quarter at 70.
$2.3 million, representing just 1.5% zone.
We continue to stay in close contact with these borrowers who remain affected by the pandemic to work on mutually beneficial solutions move.
Moving on to other measures of asset quality and further demonstrating our SM management practices.
I am, especially pleased to report that we successfully resolved the $12.4 million of appealing credit loans without any loss to the bank.
We have now in non accrual loans declined by more than 50% since the end of 2020.
Even more encouraging we are beginning to see loan upgrades.
Great, including loans moving from classified and special mention to pass on.
A year ago with face the tremendous uncertainty and the hardships of pandemic and while the challenges of the pandemic continue I believe hanmi is commitment to proactive asset management has significantly helped.
Both the borrower and the bank.
Balancing these positive and encouraging trends with the prudent our allowance for loan losses stood at 178% of non excluding PPP.
We also continued to have a separate amounts for possible losses on accrued interest receivable for loans.
Currently or previously modified under the cares Act now down $2.7 million.
As a result of our conservative allowance strong capital position our track record of successful asset management I'm confident we are well positioned to manage asset quality.
Emerge from them.
The pandemic and the economy continues to reopen.
With that I would like to turn the call over to Anthony Kim Our Chief banking officer to discuss the second quarter non production results and deposit gathering activities Anthony.
Thank you Bonnie.
The second quarter on meat generated excellent on production volume.
<unk> totaling $406.6 million in the quarter.
Up 33, 8% from the prior quarter's volume low $348 million.
Growth was driven by strength in CRE loans residential mortgages, C&I loans and strong lease volume, partially offset by lower production of that spend on <unk>.
Which benefited from $131.5 million and second draw PPP loans last quarter.
Altogether, excluding the impact of PPP loan reduction in previous periods.
Loan production in the second quarter was an all time record for Hanmi.
Looking at on loan production in more detail second quarter production consisted.
System, primarily owed on.
$86.1 million on CRE loans, $66.6 million of residential mortgages, 99, 4 million on C&I loans, and $42.6 million of that.
SBA loans.
On the <unk> second quarter production was $79 million of commercial equipment leases.
We should return to levels, we're seeing price the pandemic.
Newly generated loans and leases for the quarter again, excluding PPP loans at a rate that way.
The average yield of 374%.
I'm also pleased to note the commitments under commercial lines of credit expanded by 100 million or nearly 17%.
<unk> from the prior quarter to $705 million.
Balances on these loans increased by $17.1 million compared to the prior quarter, reflecting a second quarter utilization rate of 39, 1%.
Next I would like to provide some additional color on our new residential mortgage platform and.
Korea initiative.
Both of which are continuing to generate momentum and contribute meaningfully to our results.
Beginning with our new residential mortgage platform second quarter lending activity included approximately $6.7 million up.
Residential mortgages, along with $6.3 million.
Warehouse lending in.
In addition, new commitments on the warehouse lines of credit have increased to $110 million as of the end of second quarter.
Looking ahead, we expect residential mortgage production will continue to ramp up during the year with a goal of residential mortgage loans, comprising 10% to 15.
Percentage of Hanmi as loan origination activity in 2021.
We continue to be pleased with the results of our corporate Korea initiative, which is focused on banking Korean companies with a presence or offices in the United States.
Year to date corporate Korea on loan production totaled $87 million and Ed.
Quarter end corporate Korea on loans comprised 11% of our total loans with a very strong pipeline entering the second half of the year.
We continue to expect a corporate Korea program to generate double digit growth in loan production in 2021, along with a meaningful contribution in the deposits.
Finally overall.
We're on business activity in many of our key markets has picked up nicely as the economies in key markets are reopening and this has resulted in very strong loan pipeline from me.
As such non <unk>.
Production should remain robust and growth solid lead in the second half of the year.
Loan payoffs in the second quarter.
$264.8 million and included 114 billion non PPP loans.
Non PPP loan payoffs were in line with the levels experienced in recent quarters.
The weighted average interest rate up on loans that paid off in the period, excluding PPP was $4, 2.5% or 51 basis.
<unk> points higher than the same adjust the weighted average yields on new production in the quarter.
The solid loan production in the quarter, coupled with the loan payoffs and sales resulted in loans of $4.82 billion at the end of second quarter up 2.5% from the prior quarter, excluding PPP loans.
Our underwriting continues to be very disciplined the weighted average loan to value and weighted average debt coverage ratio of our CRE loan portfolio as of the end of second quarter or 48, 7% and 1.9 times respectively.
Both the matrix were essentially unchanged quarter over quarter. Moreover.
We continue to intend to limit origination activities within certain high risk industries that were most impacted by the pandemic.
As <unk> done throughout the course of the pandemic I would like to provide an update on our hospitality portfolio, which has been the loan segment most impacted by COVID-19.
As of June 30th hospitality loans declined by about 5% from the prior quarter and represents 18% over total portfolio.
Our total loans on conservatively underwritten the average loan balance remains at just $3.2 million with a weighted average debt coverage ratio of 2 tier.
And weighted average loan to value ratio of 51% at origination.
At quarter, and 12% of hospitality portfolio was criticized with approximately half of these loans stemming from the metropolitan based properties.
However, we have obtained in the last 12 months current appraisals.
<unk> or these properties and the current weighted average loan to value of all the criticize hospitality loans was 68.0%.
Non accrual hospitality loans represents only 1% of its portfolio with only 2 loans over $3 million.
We continue to believe that our exposure to the hospitality.
<unk> segment and the associated risks are manageable.
Turning to deposits Hanmi had another strong quarter.
Total deposits were $5.63 billion at the end of quarter compared with a 551 billion at the end of the preceding quarter, representing a 2.2% quarter.
<unk> quarterly increase and 8.1% increase from a year ago.
Similar to return prior quarters, we continued to benefit from an improving mix shift of deposits as much of the growth is being driven by noninterest bearing demand deposits.
Key drivers of the increase in DDA during the quarter.
Quarter over from a combination of new deposit relationships and growth from existing large accounts, which included a significant inflow from the existing corporate Korea accounts in.
In fact, as Bonnie annuity earlier deviation now represents nearly a 42% of total deposits up from 36% a year.
With that I'll turn the call over to Ron Santa Rosa, Our Chief Financial Officer, Ron Thank.
Thank you Anthony and good afternoon, all I would like to begin with net interest income as we reported our second quarter net interest income was $49.6 million increased 7.8% from the prior quarter.
Our net interest margin to 3.9% increased 10 basis points as well looking.
Looking deeper into our results and setting aside the effects of PPP loans and the benefit of non accrual interest we would see that net interest income increased approximately $1.8 million quarter over quarter.
Essentially representing a.
A higher volume of liquid interest, earning assets and the benefit of lower cost of interest bearing deposits.
Turning to our net interest margin adjusted in the same fashion, we would see about a 7 basis point decline quarter over quarter as the benefit from the fall on the cost of interest bearing deposits was more than offset from the higher.
And also lower yielding securities and interest bearing deposits at the Federal Reserve Bank.
Again, as we've reported we did see a 2.5% increase in loans for the second quarter. After adjusting for PPP loans and as Anthony mentioned, we anticipate loan growth from the second half of the year, albeit modestly.
Obviously lower yields altogether, we anticipate that this mixed shift and liquid interest, earning assets will continue to dampen net interest margin and continue to keep it in the low threes.
Moving to our noninterest income was $8.9 million, we saw our traditional SBA trade premiums rising to $12.55.
5% for the second quarter compared with 10, 66% in the first quarter driving our gains on sales higher to $3.3 million.
At the end of the second quarter traditional SBA loans held for sales were $21.9 million.
Loans held for sale also included $14.1 million of second.
<unk> loans that we sold early in the third quarter for a gain of approximately $300000 service charges fees and other income remained consistent quarter over quarter.
Noninterest expenses were $30.8 million for the second quarter, essentially flat with the first quarter after adjusting.
Draw first quarter for $1.4 million of capitalized cost from second draw PPP loans, our efficiency ratio improved to 52, 6% from $52.9 2% for the prior quarter.
Pulling this all together from a pre tax pre provision perspective, and adjusting for the effects.
<unk> the current dropped PPP loans as well as certain other items, we saw pre tax pre provision income of $27.4 million up solidly from the first quarter.
Our second quarter results also included a $3.3 million recovery of credit loss expense. This was comprised of a $4.1 million.
<unk> provision for loan losses.
$5 million reduction in our allowance for accrued interest receivable for current or previously modified loans offset partially by a $1.3 billion positive provision for off balance sheet items.
Looking to the balance sheet, our allowance for credit losses decreased to $83.4.
Negative <unk> from $88.4 million and the coverage ratio.
<unk> PPP loans also declined to $1, 78% from 194%.
Overall, we believe our allowance for credit losses adequately reflects various economic forecasts as well as the heightened levels of near term uncertainty as we.
Moving to emerge from the pandemic, we will continue to closely monitor and evaluate the evolving economic environment and update our loss allowances accordingly.
Our return on average assets and return on average equity for the second quarter were 138% and $14, 91% respectively. In addition.
Our tangible book value increased 3.7% to $19.27 per common share at the end of the second quarter and our tangible common equity ratio remains strong at 9.0 or 1% as do all of our regulatory capital ratios with that I'll turn it back to bundle.
Thank you Ron Hanmi.
Hanmi has enjoyed a record setting second quarter net kept back on very strong performance throughout the first half of the 2021.
I am very pleased with our spending amount production improving asset quality and most importantly robust earnings quality.
I am very proud of the tremendous efforts of the entire.
Entire hanmi team without whom our success would not be possible as we look ahead to the second half of the year and momentum that we have built combined with the significant increase in business activity as the economies that are keep markets reopen has hanmi well positioned to drive continued strong.
We saw in the second half the tier I look forward to sharing our continued progress with you when we reported third quarter results in the fall.
Operator that concludes our prepared remarks, we'd now like to open the call for questions.
Thank you, ladies and gentlemen, we will now begin our question and answer session.
To ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate that your line is on the question queue. You May Press Star 2 if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
1 moment, please while we poll for questions.
Thank you. Our first question comes from Matthew Clark with Piper Sandler. Please proceed with your question.
Hey, good afternoon.
Good afternoon.
Hum.
Let me first.
Ron on the core margin.
[laughter] outlook I think you said.
If you would like 7 basis points from the upcoming quarter was that on is that on a reported basis or on a core margin basis.
That would be.
Core adjusted basis. So if you look at the benefits that we received in the second quarter.
PPP loans, the non accruing loan interest cash.
Sure.
Down.
Reduce the first quarter for the same ideas.
You'll see that the.
Net interest margin is down about 7 basis points.
So first okay.
On an adjusted basis $3.13 were down 7 from that.
Okay I thought you were talking about the upcoming.
My apologies.
Okay.
And then you have the average PPP loan balance on the quarter.
For the quarter.
Just give me a minute.
I'm guessing that's about $190 million, but that's alright.
Okay.
The quarter.
Quarter averages.
Here we go.
$2.54 for $4.35.
Okay. Okay.
And then.
Shifting gears to.
On the deposit side of things do you happen to have the spot rate on deposit costs at the end of the quarter.
So cost of deposits.
I believe were within about 2 to 3 basis points from the average for the previous quarter.
And so we will continue to.
See the benefit of the time deposits repricing lower but that rate of change has become very very small.
Quarter over quarter now if you measure first effective problems with Baird.
Okay.
Got you.
And then what are your thoughts on that.
Expense run rate.
From here.
Again, I think very happy to see both first quarter and second quarter, when you adjust first quarter for the.
Cost capitalization from second drop ETP.
<unk> about the same.
Net $30 million ASO.
Continue to see it running at that same level.
With just.
Little bumps here and there potentially offsetting each other for inflation or for some other activities, but the 30 sounds about right to me.
Okay and did you guys buy back any stock on a quarter on what are your thoughts about the buyback going forward.
So we had no share repurchases in the second quarter.
And.
We understand.
Where the market is today and so.
We got very active discussion.
<unk> board of directors.
On our capital actions, whether it's share repurchase of dividend so that will be taken up again here in the third quarter.
Okay. Thank you.
Thank you. Our next question comes from Tim Coffey with Janney.
<unk>. Please proceed with your question great.
Great. Thank you everybody.
Hey, Bonnie Anthony I Wonder if you can kind of give me a little more idea on on on the pipeline for the residential mortgage product the growth you're projecting for the second half is pretty strong and what's driving this quarter I'm just kind of wondering if you can kind of tell me where you're getting on the.
Any interest from.
Yes, we spent a couple of quick.
Previous quarter is setting up the quest funding vendors on warehouse lenders.
So the increased production came from both retail and corresponding lending.
So as is.
Success doing that for the past.
Next 2 quarters E on.
<unk> retail and correspondent lending will ramp up.
Okay. Okay.
Thank you for that.
And then Ron just not.
Dig too deep into this but it seems like the kind of the goal going forward.
Just to focus on growing NII, while try on the best you can to manage margin is that about right.
Yes.
Okay.
Alright.
Those are my questions. Thank you.
Thank you.
Thank you our next.
Next question comes from Gary Tenner with D. A Davidson. Please proceed with your question.
Thanks question is mostly have been answered, but just wanted to ask about the commercial real estate production in the quarter in terms of what kind of sub sub segments youre, saying most of that production on.
It came from mostly.
Industrial properties.
As well as multifamily.
And office properties to buyback credit tenants.
Is that was that primarily in California, where are you getting any growth out of your other markets, primarily California as well as some some from Texas.
We're in.
Area.
Okay.
And then with regard to the PPP sales.
To sell additional PPP prior to forgiveness or repayment.
Our <unk>.
Sales to data from the second drop ETP.
So everything that we've originated we have sold with respect to first draw TTP, we've been using the forgiveness route.
But as windows down.
We will take a look at what's there to decide if there is anything else work to expedite.
Right.
The fidelity of the program, but for the most part first dropped TTP has been through the forgiveness process.
Okay. So the small amount of.
PPP loan sales you mentioned early in the third quarter as all that's currently on a second all of those are all second drop it right. Okay alright. Thank you.
As a reminder, if you would like to ask a question. Please press star 1 on your telephone keypad.
Our next question is from Kelly Motta with <unk>. Please proceed with your question.
Hi.
Immune everyone.
Apologize if this has.
Already been asked I accidentally fell off the call for a little bit.
But I was wondering if there was any any common theme on the CRA exam and Ron I from from what I can tell from the expense commentary it doesn't seem like there's.
That can be.
<unk>.
Additional costs associated with that but maybe any color around.
Cost of compliance with that thank you.
Sure.
We don't believe that we will incur any significant additional.
Todd.
Theres going to then what's normally expected.
Okay.
Yeah.
Okay. Thank you that's on all my other question for asked and answered. So thanks, so much for her at the time on the question.
Thank you.
Thank you. Our next question comes from Jason Stewart with Jones trading. Please proceed with your question.
Hey, good afternoon. Thanks for taking the question wanted to ask you about what your thoughts were on the residential mortgage market and the changes at FHFA and perhaps how that changes the opportunity set that you see.
And.
So that's from mortgage banks.
Well actually.
We've been focusing on the on non QM product.
Not on day side, so that's not going to affect us much.
But then on the <unk>.
Syed I've seen.
Elevated levels of payoffs because the rating.
Hey, Martin.
Okay.
But in terms of the fact that.
We might move the credit box a little bit wider.
What products do you think make the most sense for me and make the most sense for the GSE.
And price going forward.
Yeah.
Hello.
Windows with a low rate environment with a 30 year fixed under 3% as I said.
Net product that makes sense for us as non QM products, which ranges from above.
75 to 4.5% so.
So we will continue to concentrate on that.
On the product.
Okay.
Okay. Appreciate it thanks.
Thank you.
There are no more questions at this time I would like to hand, the call back over to management for any closing comments.
Thank you for listening to Hanmi financial second quarter 2021 results Conference call. We look forward to speaking with you again next quarter.
Thank you ladies and gentlemen, this does conclude today's conference you may disconnect.
Your lines at this time and thank you for your participation.
Yes.
Okay.