Q3 2021 Hanmi Financial Corp Earnings Call
[music].
Ladies and gentlemen, welcome to Hanmi financial corporations third quarter, 2021 conference call.
As a reminder, today's call is being recorded for replay purposes.
At this time all participants are in a listen only mode. Following the presentation. The conference will be opened for questions.
I'd now like to introduce LASA Glasson, managing director at Auto Investor Relations. Please go ahead.
Thank you operator, and thank you for joining us today.
With me to discuss Hanmi Financial's third 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 discuss loan and deposit activities and 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 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 995.
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 10 Qs.
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-K.
This afternoon Hanmi issued a news release outlining our financial results for the third quarter of 2021, along with a supplemental slide presentation to accompany today's call.
Both documents can be found in the Investor Relations section of our website at Hanmi Dot com.
I will now turn the call over to Bonnie Lee Bonnie.
Thank you Laura good afternoon, everyone. Thank you for joining us today to discuss our 2021 third quarter results. It was another excellent quarter for Hanmi.
For the third quarter reflects continued strong growth in Montana.
Production.
Solid uptake and deposits improving credit quality and record earnings.
Consistently improving performance throughout the year.
The overall strength of the Hanmi franchise, Airola, some production platform and our ability to develop deeper relationships with both new and existing customers.
Momentum continues to build across the enterprise and Hanmi remains very well positioned to generate profitable growth as we look ahead to the fourth quarter and into 2022.
Our strong operational execution helped drive substantial growth in earnings.
That can come up with $26 6 million or <unk> 86 per diluted share for the third quarter.
<unk>.
Net income was a new quarterly record.
And increased 20% over the prior quarter and nearly 63% from a year ago.
Our third quarter earnings were driven by significant increase in revenue as well as a $7 2 million recovery of a credit loss expense.
Anthony equality.
Overall non interest expense remained well controlled with a modest increase due to higher commissions and the strong loan production and higher advertising and promotional expenses.
Now, let's move on to loan production and deposit gathering.
During the third quarter, our loan production platform with us firing on all cylinders with our loan production growing to $500 million in the quarter.
Breaking the single quarter record established in the prior quarter, when excluding PPP loan originations.
Also continues to benefit from an increase in business activity.
Economies in our key markets emerge from the pandemic.
In total.
Unbalanced.
14% and your annualized rate during the quarter X P. P. P M.
In addition deposits were up a solid 7% annualized from the prior quarter and similar to recent prior periods.
This was led by non interest bearing DDA, which now comprise 44, 5% of total deposits.
From nearly 42% last quarter and nearly 38% from a year ago.
Turning next to an update on modified loans and other measures of asset quality I continue to be encouraged by the performance of our portfolio and the positive trends we are seeing.
As of September 30th lowest modified under the cares Act declined 83% from the second quarter to end the third quarter at just $12 million.
Overall I'm extremely pleased with our credit management activities during the challenging times, we encountered throughout the pandemic and our team's ability to effectively weather the crisis.
Given that the modified loans have become a minor part of our loan portfolio will no longer comment on them in future quarters.
The positive trends, we are seeing in other major asset quality further demonstrate hanmi comprehensive approach to credit management.
Frank and timely assessment of the credit grades and our ability to seek positive resolution through payments and payoffs.
Nonperforming loans declined by nearly 60% from the second quarter and 74% since the end of 2020.
And so September 30th.
Performing loans for just 44 basis points of total loans.
We're also continuing to see those upgrades as well as payoffs and payments.
I don't think these positive and encouraging trends with the caution.
Allowance for loan losses remained strong at one 5% of loans.
As we look ahead I remain very confident in our ability to effectively manage credit quality.
With that I would like to turn the call over to Anthony Kim Our Chief banking officer to discuss the third quarter loan production results and deposit gathering activities.
<unk>.
Thank you Bonnie starting up with additional color on loading these production armies third quarter volumes surged to $500 million.
0.4% from the prior quarter and almost two times higher than the third quarter last year.
In the period, we generated sequential order growth across nearly all major loan categories with a notable growth coming from commercial real estate and the equipment leases along with a record SBA loan production.
Altogether, excluding the impact of PPP loan production in previous periods no production in the third quarter was an all time record for Hanmi breaking the previous record established last quarter.
As Bonnie noted, although production platform is performing very well with volume in the quarter diversified across various asset classes and solid contributions from our relationship manager established on the joint Hanmi team.
With respect to CRE loans in the quarter. The retail category was strong, particularly for neighborhood based centers the recognizable national chain anchor tenants.
We also have solid volume in the quarter in the industrial and multifamily classes.
Also of note C&I production increased approximately 16% compared with our prior quarter.
Amendments under commercial lines of credit decreased by $22 7 million or approximately 3% from the prior quarter to $682 4 billion.
However balances on these lines increased by 24 5 million compared to the prior quarter generating a third quarter utilization rate of 44%.
Altogether newly generated loans and leases for the quarter had a weighted average yield of three 9% an increase of 16 basis points from last quarter.
Next I would like to provide an update on the corporate Korea, and you should too and our new residential mortgage platform both of which are continuing to contribute meaningfully to our results. As you may recall the corporate Ria initiative is focused on banking Korean companies, helping to geographically diversify our loan.
Production.
This initiative contributed more than 15% of our production for the quarter and has been a solid driver of growth in the C&I loan category.
And then solid Q4 pipeline, so corporate Korea program is well on its way to generate double digit growth in loan production in 2021, along with a meaningful distribution in deposits.
We also continue to be pleased with the results of our new residential mortgage platform.
Our lending activity included approximately 41 million.
Residential mortgages, along with a $28 million of warehouse lending.
Looking ahead to the fourth quarter, we continued to anticipate residential mortgage loan will comprise between 10% to 15% of Hanmi as loan origination activity, although full year.
Overall, our pipeline of loans and leases remain very strong heading into the fourth quarter in line with the third quarter of pipeline as such we expect oil production to remain robust and to finish the year strong our underwriting continues to be very disciplined the weighted average loan to value and we.
Average debt coverage ratio of our CRE loan portfolio as of the end of third quarter were 48, 6%.
One nine times respectively.
Both metrics have been essentially unchanged throughout the 2021. Moreover, we continue to limit origination activities within certain high risk industries, but was impacted by pandemic, most notably hospitality.
With that as I say I would like to provide an update on our hospitality portfolio, which has been the loan categories most impacted by pandemic.
As of the end of third quarter hospitality loans declined by more than 8% from the prior quarter and more than 14% since the end of 2020.
At present hospitality represents approximately 16% of our loan portfolio importantly, there remains only one nonaccrual hospitality loan totaling just 140000 collateralized by a property Bachelor location in Texas.
Derisking or broader loan portfolio remains a priority and as such we are committed to a conservative conservative underwriting and reducing loan exposure to riskier asset classes, including hospitality loan going forward.
Turning to deposits Hanmi had another solid quarter total deposits were $5 73 billion at the end of third quarter, representing an increase of <unk>, 8% quarter over quarter, and 10, 3% from a year ago.
Similar to recent quarters, we continued to benefit from an improving mix shift out of deposits with nearly all of the growth driven by noninterest bearing demand deposits.
The key drivers of the increase in DDA during the quarter came from a combination of new deposit relationships along with growth from existing large accounts that we acquired during the past 12 months, including corporate Korea accounts.
In fact, as Bonnie noted earlier DDA is non represent nearly 44, 5% of total deposits up from 38% a year ago with that I'd now like to turn the call over to Ron Santa Rosa, Our Chief Financial Officer for more details on our third quarter financial results.
Thank you Anthony and good afternoon all.
Again with our net interest margin because it will allow us to highlight changes in our earning asset mix and funding portfolios.
Net interest margin was 3.07% for the third quarter down from $3, one 9% for the second quarter.
Adjusting for the effects of our PPP loans as well as the effect of non accrual interest received in the second quarter, we could see a net interest margin of 3% for the third quarter compared with 3.06% for the second quarter down six basis points.
Interest income on PPP loans with $1 6 million for the third quarter down from $2 7 million for the second quarter more importantly, when looking at our loan portfolio. Since year end 2020, we have effectively replace this transient one portfolio with our own traditional loans.
We reported loans ended the quarter at 4.86 billion little change from amounts we reported at the end of the second quarter and at year end 2020 <unk>.
Excluding PPP loans, however, which were $295 7 million at year end 2020, and just $21 9 million at the end of the third quarter.
We would see loans increased five 5% since year end and three 4% quarter over quarter. In addition, again, excluding the effects of PPP loans, we would see the average loan balance for the quarter was $4 six 3 billion trailing the comparable quarter and balance of $4 84 billion.
Looking at our funding portfolios, we again saw solid growth in our noninterest bearing demand accounts up eight 2% quarter over quarter, while average balances grew 10% sequentially to 2.44 billion.
Interest bearing deposits declined to $94 2 million, principally because of reductions in our wholesale deposit portfolio of $61 6 million and the cost of interest bearing deposits fell seven basis points to 30 basis points for the quarter.
Last we also reduced the amount of our wholesale borrowings by $12 $5 million on scheduled maturities and repurchased $12 $7 million of our 545% notes.
Finally, as we've noted previously our demand deposit growth has contributed to the growth in our lower yielding balances that other banks, which was $772 6 million at the end of the third quarter.
11, 5% lower than the $872 8 million average for the quarter.
As a result, we anticipate that our net interest margin will continue to be at about a 3%.
With a higher amount of average earning assets.
Moving on to noninterest income of $12 5 million, we continue to see a strong volume of SBA loan sales rising to $47 9 million up 80% from the previous quarter.
And with 11, 5% trade premiums gain on sales increased to $5 5 million from $3 3 million in the second quarter.
As you may recall, the bulk of our sales of second draw PPP loans occurred in the first quarter, while the second and third quarter included only 200000 and 300000 of gains respectively.
There are no more remaining second draw loans on our balance sheet.
We did revise upward our business deposit account fee schedules and improved our business practices, leading to a meaningful change in this particular revenue source.
Noninterest expenses increased this quarter on higher advertising and marketing expenses from new marketing campaigns as well as increased compensation on higher loan production volumes, our efficiency ratio. However, did improve to 52.0 or 1% for the third quarter as revenue growth outpaced the growth in expenses.
Pausing here to look at our quarterly results from an adjusted pre tax pre provision perspective, we saw adjusted pre tax pre provision income of $29 7 million up eight 4% from the previous quarter.
Turning to credit loss expense, we again posted a recovery in the third quarter for $7 2 million.
Analyzing components of this expense recovery, we posted a $7 $6 million negative provision to the allowance for credit losses, a $1 $2 million positive provision to the allowance for losses on off balance sheet items, a $400000 negative provision for the allowance for losses on accrued interest.
Receivable on current and previously modified loans and a $400000 recovery on a previously established SBA repair loss allowance as a result, and noting that we experienced net loan loss recoveries for the third quarter of 900000.
Our allowance for credit losses ended the quarter at 1.58% or $76 6 million.
The allowance for losses on off balance sheet items was $4 9 million, while the allowance for losses on accrued interest receivable for modified loans was $300000.
Overall, we believe our allowance for credit losses adequately reflects various economic forecasts as well as the continued near term uncertainty of the lingering effects of the pandemic. We continue to closely monitor and evaluate to see evolving environment and will update our loss methodology accordingly.
Finishing with our capital accounts during the third quarter, we repurchased 249920 shares of our common stock under our previously authorized stock repurchase program for an aggregate of $4 7 million or approximately $18.70 a share.
Our return on average equity for the third quarter was $17, one 3% and our book value per share was $19.96. Our capital ratios remained strong with a tangible common equity ratio of 898% and a common equity tier one ratio of 11, 5% with that.
I'll turn it back to Bonnie.
Thank you Ron overall, it was another excellent quarter for Hanmi and I am very happy with our ending loan production improving asset quality and another record setting earnings performance. Once again I. Thank the entire Hanmi family high on this effort in making our success possible.
As we look ahead to the fourth quarter Hanmi is continued strong operational execution combined with a resurgence in business activity in our key market and robust pipeline has us poised for a strong finish to the year I look forward to sharing our continued progress with you when we report our fourth quarter results next January.
Operator that concludes our prepared remarks, we would now like to open the call for questions.
Thank you, ladies and gentlemen, we will now begin our question and answer session.
I 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 and may be necessary to pick up your handset before pressing the star keys one.
One moment, please while we poll for questions.
Okay.
Thank you. Our first question comes from Jason Stewart with Jones trading. Please proceed with your question.
Great. Thank you for taking the questions.
I wanted to start with the strength in originations in CRE and C&I, maybe you could share. What you think that tells you about your customers' view on the economy and their confidence in growth at this point.
Uh huh.
Sure.
Yeah.
No.
As we communicate.
With our customers.
There are definitely the activity is coming from the pent up demand as well as that we see the increase in the.
The purchase.
Transactions, whether it's.
CRE as.
As well as <unk>.
Our C&I isn't purchases.
Okay.
And then turning to the rest of your origination.
Platform.
How correlated should we think about that business with purchase volume seasonality, maybe you could give us a little bit of idea of what drives.
The origination volume quarter to quarter as we look at it is from the outside.
Well actually there is.
I think there's a seasonality factor in there.
As the competitions.
Fears.
We are looking to.
Leveraging our not only the correspondent channel, but where we.
We're trying to leverage our branch network.
It gives us the customer.
To increase.
Retail side of the business.
Okay. Okay. Thank you.
Sure.
Yeah.
Thank you. Our next question from Kelly Motta with K B W. Please proceed with your question.
Hi, Thank you so much for the question really good quarter.
I'm just I'm just wondering if we could talk a little bit on the deposit side, especially since you are seeing such great growth.
You've had a nice influx of non interest bearing over the past several quarters now just wondering how we should be thinking about.
The stickiness of those deposits and.
Lance for funding future growth. Thanks.
Okay.
Well, we have been saying the same thing.
And Oprah for last three quarters.
At first we would expect.
Some.
Attrition from from the increase.
Then we continue to see increase from.
Our largest large accounts.
For the last 12 months so.
As far as stickiness goes I think we would expect 70% to 80% of these deposits will be.
Right.
Yes.
Yeah just to add.
No additional color is we had a really great.
Success in the.
Corporate credit initiative and.
And our strategy to really target launch business DDA customers.
The institution and we had really good success.
Ben.
Acquiring new Ppas from D. A PPP loans and we did that.
Last year, and then picking up this year as well. So we are continuing to see just a sizeable inflow of funds from our existing accounts.
And as well as.
He did the average accounts or the.
You are content that we acquired.
The past few quarters has really contributed so.
I think it's the majority of the deposits, we feel that it would be fairly sticky deposits going forward.
Operator next question. Thank you. Our next question comes from Timothy Coffey with Janney. Please proceed with your question.
Great. Thanks, good afternoon everybody.
Given the success that you're having on the origination side.
And the comments you've made so far on this conference call.
Is the right way to think about kind of a forward loan growth rate in that low double digit range.
Okay.
It may happen in 2021.
Two are probably later part of 2022, but for time being because I think there is still.
The environment is.
Such that I think that we.
Our targeting to keep.
Our.
<unk>.
Low to mid single digit growth.
Well they at least next.
Two quarters.
Okay.
And then the gain on sale trends, how should we think about that considering that your period end loans held for sale or much lower than they were last quarter.
So the.
The volume.
When you compare quarter to quarter I had a little bit of.
Second dropped PPP in it so that we tried to isolate that for you Tim.
But going forward again, our SBA.
Production volume, we are anticipate to be strong.
Let's say not too dissimilar from third quarter, but remains to be seen though as we move into the <unk>.
First quarter of the new fiscal year for the federal government the guaranteed rates will change moving down to 80% from 90%.
Still not quite sure where trade premiums will settle out they've been very healthy for the good.
Three quarters here of 2021.
So I would say there is a chance of continuing may be fading a bit.
Absent volume I'm not sure they would necessarily increase relative to the trade premium.
Okay, great. Thanks, that's very helpful.
Congrats on the line.
The marketing spend in the quarter were not equivalent to what youre doing in 2019.
That kind of a good run rate for the advertising and promotion expense.
So if you look at our quarterly spend going back pre pandemic.
Kind of see a seasonality to it where it's Lee.
Low for a few periods and picks up towards the end of the year.
It's I'd like to say that the seasonality is returning although may be off a quarter or two.
But it should stay at a level.
Not too dissimilar to what we're seeing here in the third.
Third quarter.
And then kind of drift down again, so I believe that pattern will return.
I'm just not quite sure how it's going to manifest as we go through quarter to quarter.
Okay.
Thank you and then Anthony just a question on the S. F. R are the mortgage business is there a targeted mix between originations and warehouse lines that youre looking at.
There is no actual targeted mix.
Our target on the warehouse line.
Come in but it is $100 million.
Average outstanding balance is about $50 million to $60 million.
Okay great.
Yes.
That we expect.
Mortgage side of the business contribution in terms of production would be 10% to 15%. So it's a combination of our retail mortgage as well as that.
Yes.
Warehouse line as well.
Yes.
Some of the portfolio if there is an opportunity to acquire.
So that would be a combination of were just overall targeting business about 10% to 15% of our overall production.
Okay, Okay I got it okay. Thanks Bonnie.
I'll step back thank you very much.
Sure.
Thank you. Our next question comes from Gary Tenner with D. A Davidson. Please proceed with your question.
Hi, good afternoon.
A lot of my questions were answered, but I wonder if you could share with us the loans.
Loans and deposits that you're currently holding related to the corporate Korea initiative, just give us a sense of kind of the current scale of that initiative.
Currently.
So.
The loans are 12% of the loans are.
Corporate Korea space.
Space.
Approximately six 5% of deposits are in corporate Korea.
Thank you.
And then Ron do you have plans to redeem any more of that five 5% sub debt more at this point do you expect to.
Hold the remainder there along with the new sub debt.
So we.
We have a.
Our redemption.
Option at the end of March of 2022.
Which we are going to take a very hard look at Kevin.
The attractiveness of exiting the $5 45.
Notes.
Redemptions of repurchases between that they would be more.
What the market might present.
So that was one opportunity we had in the third quarter.
So we took advantage of that.
I don't know how to predict if any of those opportunities will present themselves in the fourth quarter, but we're clearly looking at its a redemption that that can occur at the end of March.
Okay, Great and then finally.
The revision to the business account fee schedules did that impact the full quarter.
So it's fully kind of loaded into the into that third quarter run rate.
Yes, you can look at that is affecting the third quarter completely.
So it's a fairly rare.
A representative run rate I think.
The variations to that idea will be a little bit more of.
Depositor activity, which would be a little bit hard to predict what might occur in the fourth quarter, but.
Sure.
The first digit to the left to the decimal point is pretty good after that depending on.
Cost per activity.
Okay, great. Thank you.
Thank you. Our next question is from Kelly Motta with K B W. Please proceed with your question.
Hi, Thanks for the follow up my my question was actually about the sub debt redemption. So that Jeff covered did want to ask though about buybacks as well and kind of how your.
Thinking about deploying that.
Our use of capital.
So as we pointed out.
And all of our previous calls when we do look at our.
At our.
Capital practices, each quarter, whether that'd be repurchases or dividends or both.
Clearly during the third quarter there were some very.
Good market opportunities to effect repurchases. So we took advantage of that.
We'll see what kind of.
<unk> market opportunities present themselves in the fourth quarter.
And again in any in any period thereafter.
Thanks, So much Ron maybe a last one on credit obviously, you had a nice reserve release this quarter, but it's it's still high relative to peers, especially given how.
Our credit quality has been trending just wondering you know I know none of us have a crystal ball, but assuming.
Now things stay kind of ads as they are is there still room on the qualitative side to bring bring that down further or at least to me.
Or did you kind of just take it up this quarter with that big.
Negative provision we attack.
So just focusing on the on the principal idea, which is that the traditional allowance for credit losses.
Set aside.
The mechanics of off balance sheet and the other allowances that we have.
As we pointed out we ended.
Third quarter very strong at $1 five 8%.
Yes, roughly about $77 million of loss allowance when you. When you look inside of that you'll notice that we have about $45 million associated with commercial real estate and of that about $30 million of its associated with hospitality. So it should follow than that.
As hospitality continues to to demonstrate improvements there will be.
Opportunities.
And <unk>.
It needs to continue to.
Watch the reserves at rush the allowance drift lower.
Got it. Thanks, Thanks for all the color on that is really helpful. I appreciate that.
Yeah.
Thank you we have no further questions in the queue at this time please continue.
Thank you for listening to Hanmi financials third quarter 2021 results conference call. We look forward to speaking with you again next quarter.
Yeah.
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.
Okay.
[music].