Hanmi Financial Corporation

Ladies and gentlemen, welcome to Hominy Financial Corporation's fourth quarter and full year 2020 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 open for questions. I would now like to introduce Lassa Glasson, Managing Director at Addo Investor Relations. Mr. Glasson, the floor is yours.

Thank you, Operator, and thank you all for joining us today. With me to discuss Harmony Financial's fourth quarter and full year 2020 earnings are Bonnie Lee, President and Chief Executive Officer, Anthony Kim, Chief Banking Officer, and Ron Santarosa, Chief Financial Officer. Ms. Lee will begin with an overview of the quarter, Mr. Kim will discuss loan and deposit activities, and Mr. Santarosa will then provide more details on our operating performance. At the conclusion of our prepared remarks, we will open the session for questions. On 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 1995. For a list of certain 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 risk factors affecting our business contained in our earnings release, our investor presentation, and our Form 10-K. This afternoon, HANMI Financial issued a news release outlining our financial results for the fourth quarter and full year of 2020, 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.com. With that, I'll now turn the call over to Bonnie Lee. Bonnie.

Thanks, Yalaza. Good afternoon, everyone. Thank you for joining us today to discuss Hanmi's 2020 fourth quarter and full year results. In spite of ongoing challenges arising from the COVID-19 pandemic, Hanmi finished the year with a strong fourth quarter driven by excellent loan production, stable net interest margin, and careful non-interest expense management. Throughout the pandemic, we have remained focused on helping our borrowers and depositors affected by the crisis and I am pleased to report that these efforts have been very successful in protecting the value of our portfolio. Looking ahead, our solid balance sheet and capital position coupled with our strong loan and deposit franchise gives me confidence that we will deliver profitable growth as we remain cautiously optimistic that the economy will continue to improve. With that as a backdrop, the following for our results and some of the key financial and operational takeaways from the fourth quarter and full year. We reported net income of $14.3 million, or $0.47 per diluted share, up from $0.10 per share in the fourth quarter last year. For the full year, net income was $42.2 million, or $1.38 per diluted share, an increase of nearly $0.29 PERCENT FROM 2019. FOURTH QUARTER PREPROVISION INCOME WAS SOLIDLY HIGHER ON BOTH A LINKED QUARTER AND YEAR OVER YEAR BASIS AND BENEFIT FROM SHARPLY LOWER INTEREST EXPENSE ARISING FROM OUR LOWERING OF DEPOSIT COSTS. YEAR LOAN PRODUCTION DURING THE FOURTH QUARTER WAS STRONG AND INCREASED 28 PERCENT COMPARED WITH THE PRIOR QUARTER. FOR THE FULL YEAR 2020, loan production increased 29% aided by our participation in PPP program from 2019. As a result of this growth over the past year, loans receivable were up 5.9% year over year. Net interest margin of 3.13% held steady from the prior quarter as the reduction in deposit costs offset the declining yield and earning assets. During the course of the year, we were successful in protecting net interest margin despite the increasingly competitive pricing we faced for loans and deposits. We continue to benefit from our strategy emphasizing low-cost deposit generating activities. In fact, nearly 90% of the growth in total deposits this past year came from non-interest-bearing DDAs. As a result, non-interest-bearing demand deposits increased to 36 percent of total deposits, up from 30 percent a year ago. I am very pleased with the results of our ongoing focus on carefully managing non-interest expense, which declined nearly $7 million, or 5.4 percent, for the full year 2020. And finally, the bank remains very well capitalized. Hanmi's regulatory capital ratios remain very strong, that we are well positioned to continue growing in a safe and a sound manner. Moving to asset quality, I continue to be quite pleased with the positive trends that we are seeing in our modified portfolio. In the initial phase of the modification program, first-round requests for modifications reached $1.4 billion, or 29% of the loan portfolio, at the end of the second quarter. In the next phase of the program, second-round modifications declined 59% to $579 million at the end of the third quarter, or approximately 12% of the portfolio. As of December 31st, third-round modifications declined again by 73% from the prior quarter to $156 million, or approximately 3% of the portfolio. As of year-end, 87% of modified loans are providing a modified payment, For all subsequent requests beyond the initial modification, we have completed detailed reviews of the borrower's financial condition. In some cases, we have required additional credit enhancement, and some loans have been downgraded to special mention or classified. Throughout the pandemic, we have maintained a commitment to proactive asset management and helping our borrowers weather the crisis while minimizing future charge-offs. Looking at other elements of asset quality, current size and non-accrual loans increase in the fourth quarter, reflecting, as I noted, our proactive asset management practices. Approximately 75% of our non-accrual loans represent just eight loan relationships of $2 million or more, and we anticipate that several of these will be positively dispositioned in the first quarter with a minimum or no loss. At the end of the year, our allowance for credit losses was $90.4 million and stood at 1.97% of loans excluding PPP. We also had allowance for all balance sheet items of a 2.8 million and a 1.7 million separate allowance for losses and accrued interest receivable for loans modified under the CARES Act. Taken together with our strong capital position, strong pre-tax, pre-prevision earnings, and asset management practices. I am confident we will weather the effects of the pandemic well. Before turning this call to Anthony, I would like to provide an update on several initiatives that we will be focusing on the coming year that are designed to provide our customers with additional products and services, further diversify our sources of revenue, and safely drive profitable growth. Our new residential mortgage platform will be focused on originating non-qualified mortgages, warehouse lending, and retail mortgages. Production is ramping up with the goal of a residential loan 10% to 15% of a HMIS loan origination activity in 2021. In addition, we have rolled out our new digital banking platform that will initially focus on opening new accounts and online deposit gathering activities. Throughout the year, we plan to expand the digitization of our banking platform to more efficiently scale our services while providing a more convenient and seamless customer experience. And finally, I am pleased with the result of our corporate career initiative as we nearly doubled the loan and deposit balances contributed by this program during 2020. And we expect to accelerate our efforts in 2021. Here, we are focusing on developing and expanding relationships with the Korean companies domiciled in the United States. We currently have a corporate career desk in seven strategically located branches, and at year end, this effort had contributed nearly 10% of our total loans and 8% of total deposits. Looking ahead. We expect our corporate career program to continue generating new loan production and new deposit relationships. With that, I would like to turn the call over to Anthony Kim, our chief banking officer, to discuss the fourth quarter loan production results and deposit gathering activities. Anthony?

Thank you, Bonnie. How many generate solid loan production volume, totaling 327.8 million in the quarter? of 27.8% from the prior quarter's volume of $256.6 million. We experienced growth across all major categories, with the exception of SBA loans. More specifically, fourth quarter production consisted primarily of $187.1 million of CRA loans, $71.4 million of CNI loans, and $27.5 million of SBA loans. Rounding out fourth quarter production was $39.8 million of commercial equipment leases, nearly double third quarter new lease production. Newly generated loans and leases for the quarter had a weighted average yield of 4.11%. This compares to the previous quarter's weighted average yield of 4.57%. Of note, commitments under commercial lines of credit increased nearly 15% from a year ago to $588 million However, balances on these lines fell by $12 million quarter over quarter at quarter end, reflecting a fourth quarter utilization rate of 42.7%. During the fourth quarter, ABMI sold $21.6 million of SBA loans, generating a gain on sale of $0.8 million. I was pleased with our execution in the quarter as SBA trade premiums increased to 10.09% in the period. Fourth quarter payoffs of $160 million remain elevated compared with the levels experienced in the past recent quarters. The weighted average interest rate of the loans that paid off in the period was 4.44 percent, or 33 basis points higher than the weighted average yield of new production in the quarter. The solid low production in the quarter in conjunction with the loan payoffs resulted in loan receivables of $4.88 billion at the end of fourth quarter up 4% on an annualized basis from the prior quarter and up 5.9% from a year ago. Summing remains committed to conservative discipline underwriting criteria. For the commercial real estate portfolio, consistent with that quality data from prior quarters, the weighted average loan-to-value and weighted average debt coverage ratio as of end of fourth quarter were 48.6% and 1.9 times respectively. In light of the economic disruption caused by pandemic, we expect to maintain more conservative underwriting standards, which includes limiting origination activities within certain high-risk industries and closely monitoring the economic impact on our customers over the near term. Now, I would like to provide an update on our hospitality portfolio, the segment of our portfolio that has been most impacted by pandemic. As of December 31st, hospitality loans totaled $907 million, or 19% of Hamid's total portfolio. Our hospitality loans are conservatively underwritten. The average loan balance is just $3.3 million, with a weighted average debt coverage ratio of two times and a weighted average loan-to-value ratio of 50.3%. At year-end, hospitality loans comprised $124 million, or 78% of modified portfolio, down 72% from $441 million at September 30th. Of the $124 million of modified hospitality loans as of year-end, we were able to secure a payment reserve as additional collateral on $52.5 million, or more than 42% of total amounts. Overall, we believe COVID-related risks are manageable, and we continue to work with our effective hospitality customers to help them through the crisis and return to normal loan payment schedules. Moving on to deposits, we remain very pleased with the strength of Hamid's deposit franchise. Total deposits were $5.28 billion at the end of the fourth quarter, compared with the $5.19 billion at the end of the preceding quarter, representing a 1.6 percent quarter-over-quarter increase. For the full year, deposit grew 12.3 percent. Importantly, we saw an improving mixed shift of deposits as higher-cost time deposits declined throughout the year and were replaced with the non-interest-bearing demand deposits, which comprised the vast majority of our total growth in deposits during the year. As a result of fourth quarter loan production and deposit activities, our loan-to-deposit ratio was 92.5% compared with a 93.1% in the prior quarter. I'd now like to turn the call over to Ron Santarosa, our Chief Financial Officer. Ron?

Thank you, Anthony, and good afternoon all. Let's begin with pre-tax, pre-provision income for the fourth quarter. With net interest income of 46.9 million, non-interest income of 7.8 million, and non-interest expense of $30.9 million. Pre-tax, pre-provision income was $23.8 million, up 4.1 percent quarter over quarter when we adjust the fourth quarter for the $1 million benefit associated with the litigation settlement. Fourth quarter pre-tax, pre-provision income benefited from higher net interest income and higher non-interest income. Looking at net interest income, we posted $46.9 million up 2.8 percent from the prior quarter. Driving the increase was a reduction in interest expense, which fell 19 percent, or $1.8 million, due to lower rates paid on interest-bearing deposits. This was partially offset by lower interest and dividend income, which declined 0.9 percent, or $500,000, reflecting lower prepayment penalties and a modest decline in average yields on loans. Turning to net interest margin for the quarter, it was the same as the prior quarter at 3.13%. The average yield on loans for the fourth quarter was 4.34%, down 8 basis points from the third quarter. However, the average rate paid on interest-bearing deposits dropped 23 basis points to 64 basis points. Our net interest margin also benefited from the continued shift in deposit notes, with higher-costing time deposits declining 4.1%, and lower costing money market and savings accounts, increasing 11%. As Anthony noted, the weighted average interest rate on new loan production for the fourth quarter was 4.11%, slightly below the average yield posted for the quarter. However, we expect the average rate paid on time deposits will decline again as higher rate maturing deposits renew into lower rate time deposits. As a result, we anticipate our net interest margin to remain at about the same level. Non-interest expenses were $30.9 million in the fourth quarter, up slightly from the prior quarter, primarily due to the change in other real estate owned and repossessed personal property activity. Notwithstanding this modest increase, the increase in revenues helped our efficiency ratio improve 120 basis points to 55.53% in the fourth quarter, from 56.73% in the prior quarter. Our credit loss expense for the fourth quarter was 5.1 million. It included a provision for loan losses of 5.7 million, a negative provision for off-balance sheet items of 2.9 million, and a $2.3 million provision for losses on accrued interest receivable for loans previously or currently modified under the CARES Act. Looking to the balance sheet, Our allowance for credit losses increased to 90.4 million from 86.6 million after the provision of 5.7 million and net charge-offs of 1.9 million. Included in the allowance for credit losses were allowances for credit losses associated with individually impaired loans. While the macroeconomic conditions continue to improve, we continue to assess the risk factors associated with the pandemic, And these risk factors, together with an increase in specific allowances for and an increase in individually impaired loans, led to an increase in the allowance for credit losses. Our return on average assets and our return on average equity in the fourth quarter were 0.92% and 1.01% respectively. And finally, our tangible book value per share increased to $18.41 at the end of the fourth quarter, and our tangible common equity ratio remains strong at 9.13%, as do all of our regulatory calculations. With that, I'll turn it back to Bonnie.

Thank you, Ron. As I noted at the beginning, we remain focused on helping our borrowers and depositors affected by the pandemic. We also remain equally focused on our communities and the health and well-being of our employees. without whom we could not have succeeded. Overall, I am very pleased with our performance against the challenging backdrop of COVID-19. Our solid finish to the year demonstrates the durability and resilience of the HANMI franchise. As such, I am confident as we look ahead to a new year that we have the ability to emerge from the pandemic well-positioned to drive profitable growth and value for our shareholders. I look forward to sharing our continued progress with you when we report our first quarter 2021 results in April. Thank you.

That concludes our prepared remarks. Operator, we'd now like to open the call for questions.

Thank you, ladies and gentlemen. We'll now begin our question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. The confirmation form will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. And our first question is from Matthew Clark with Piper Sandler.

Hey, good afternoon. If I first First question was just around the margin. Ron, do you happen to have the amount of PPP-related income or on a net basis that helped NII? And how much is left?

So for the fourth quarter, net interest income or interest income, I should say, from the P3 activity was $1.8 million, little change from the third quarter at $1.7 million. We did have a level of forgiveness, but they were small balanced loans, $50,000 or less, so it really didn't change the contribution for PPP in the fourth quarter as compared with the third quarter.

Any amount you have left, just so we're in the ballpark?

So we have, again, we started with about 303, 302 million. At the end of the calendar year, we had 296 million. So we still have a way to go.

Got it. Okay. And then on The hotel portfolio, are you seeing any opportunities to sell hotels in this environment? I came across another bank this past week that was able to sell some hotels at par. And whether or not you would consider something like that?

Sure. And that is a possibility. And, you know, time to time we have interested buyers as well.

Okay. And then just on the ACL, the 197, I believe, 1.97% XPTP, is the expectation that you'll probably continue to build reserves kind of incrementally as you see maybe some additional migration from, you know, criticized into non-accrual? Or do you feel like we're at a point where we might be peaking and we can start to release a little bit maybe next year? or this year, I'm sorry.

So what you'll find, Matt, and what we try to point out is that there was a shift in the allowance for credit losses, you know, with a higher proportion being assigned to individually impaired loans and a lesser portion, let's say, we'll call that the general idea, And so if you think through that, and I'm comparing third quarter and fourth quarter, what you saw then was a reduction in one category and an increase in the other for just the net increase, which I don't think was all that much at about $5.1 million. So I expect as we go through first quarter, second quarter, third quarter, we'll see, one, what will be the broad impacts of the so-called macroeconomic conditions, and let's assume those continue to improve. Then it will become down to more of the narrowed circumstances, what's happening specifically in the portfolio. So, yes, it could end up with a negative provision. I'm a bit more, I'll say, conservative. Some would say pessimistic. But it would be, you know, it's a likely event, but I'm not sure it's in the front end of 2021 as it is more towards the back end of 2021. Okay. And then...

Any thoughts, updated thoughts on capital return and whether or not you might consider a buyback given the stronger earnings and the ability to cover the dividend here, whether or not that's realistic maybe this coming quarter?

So as we've mentioned in our previous calls, the board does take up the dividend and capital each quarter. They will do so again here shortly. And you know, the decision with respect to dividend and share repurchase, I'm sure, will be known soon.

Okay. And then just a housekeeping item on the tax rate, a little like this quarter, should we assume 30% or maybe a little lower than that going forward?

No, as you said, on a quarter mark, the tax rate will vary around the 30%, but as you see, we finished the year at around the 30%, so barring any changes in the tax law, I think 30% is still a fairly good target effective tax rate.

Okay. Thank you.

Our next question is from Kelly Motta with KBW.

Hi. Thanks for the question this afternoon. Okay, well, I know it's still early, but with losses, do you have an idea of the general ballpark of kind of what you're expecting at least in the coming year? And also, if you have what the specific reserve was, that component of the reserve ratio, that would be helpful.

So to address part of the question, Kelly, So specific allowances at the end of the year were $14.1 million, up from $3.7 million at the end of the third quarter. Again, specifically or individually identified impaired loans, they were about $91 million at the end of the year compared to $69 million at the end of the third quarter. With respect to charge-offs or net charge-offs, you know, this quarter, I remember it was about 2.1 if I'm remembering it correctly. So I would think that would be, let's say, a somewhat regular idea. I know the first quarter of this past year was punctuated with that particular troubled loan relationship. And then I think we had a favorable recovery in one of the other quarters, which brought about pretty much a nil event. So I think, you know, barring any specific credit, which could happen from time to time, I would say the fourth quarter, and I think it would have been the second quarter of last year, were probably, you know, normalized ideas. We still are waiting to understand better what are the long-term effects of the pandemic. So those would be my two data points I would look to.

Great. And then with the hotel portfolio specifically, how much of that right now is in the special mention and criticized MPL buckets? And also, I noticed in your slide deck a lot of what's remaining on modification is in Texas. Is that being swayed higher by a larger loan, or is it just you have a bunch of credits in that market that are just struggling?

Thanks. Try to answer first part of the question. Total downgraded. Special mention and classified category is about 86 billion. And then Texas loans kind of center into three or four loans that are in Texas that represents a higher percentage of the modification. Does that answer your question?

Sorry, I was on mute. The part of when you say about four loans in Texas, are you referring to the hospitality segment loans on slide 13 or just in general?

In hospitality.

Thank you.

And our next question is from Gary Tenner with the DA Davidson.

A couple of questions. First on SBA, obviously, fourth quarter production was a little bit lighter there than it had been or was in the third quarter at least. Should the expectation be for early 2021 that this second round of PPP might negatively affect demand for SBA or maybe just broadly what are you seeing in terms of demand today?

So I think it would be helpful to just provide overall 2021. On average, quarterly, we would expect to produce about $30 million, $30 to $35 million. Particularly in the first quarter, we do have a healthy pipeline of SBA loans. And we plan to book them in the first quarter.

Okay. All right. Thank you. And then on the time deposit side, you know, even with the shift of the mix of deposits, I think it's still near 25% of total deposits at your end. You know, can you maybe walk us through maybe some of the seed dematurities over the next few quarters? Maybe give us a sense of how much more you think you would want to try to work out of the bank or into different deposit buckets? versus renewing?

Yeah, we have about a little over 260 million maturing in the first quarter at 1.44%. So historically, our retention ratio is about 70% to 75% of the CDs. In 2021, I think a little over 900 million is maturing. So I would say we'll retain about 70% of that at lower rate, 0.4% or lower.

I'm sorry, what was that last part in terms of the rate?

We're probably able to reprice that 0.4% or lower. Okay.

Great. And then last question. The $2.3 million provision for losses on accrued interest receivable, was that effectively, although that was on full payment deferral, so the interest was capitalized, but then after the deferral period collection of that, what, into greater doubt, is that the capsule of that?

No. So what we did is we looked at all the loans that were modified, either formally modified or currently modified under the CARES Act. So if you recall, I think, as Bonnie mentioned, we started off at about $1.4 billion. We're down to about $156 million. So we looked at where we were in the collection of all of that interest, recognizing that some of those borrowers may be downgraded further or moved to non-accrual. And so we did an assessment to determine what are the potential losses for that pool. So it's not related to a specific loan. It's related to that pool of loans that were at one time modified or are currently modified. So think of it as a general allowance, not a specific allowance to a specific credit.

Great. Thanks for the call.

Thank you.

And our next call is from Timothy Coffey with Jannie.

Thank you. Afternoon, everybody. Bonnie, I want to follow up a bit on the resi mortgage origination business. I apologize if you've talked about this on previous calls, but it's been a really busy year. Has that program already started up?

So we spent the fourth queue setting up the platform, and we did a little bit of a production in the fourth queue. Not meaningful, but starting with this quarter, the department will kick in the gear, and then we'll go with the full production mode.

Okay, okay. Do you have any kind of idea on when you might be hitting full speed on that? Is it like mid-year or sooner?

Yeah, by mid-year definitely, yeah, we should be in a full gear.

Okay. And did you say that you expect that to be 10% to 15% of originations? Yes. Okay. And is that all three categories, the non-QM, the warehouse, and then the regular mortgage? Correct. Okay. All right. The rest of my questions have been asked and answered. Thank you.

Thank you.

And our next question is from David Chiaverini with Wedbush Securities.

Hi, thanks. I wanted to follow up on loan growth. What are your expectations for loan growth this year? And I know there's clearly some moving pieces with the PPP, you know, forgiveness both on round one and new PPP loans coming on with round two. But what are your thoughts on loan growth this year?

So I think excluding the UP3 program, I would expect the 2021 loan growth to be low to mid single-digit growth.

Great. Okay. And then shifting back to the hospitality portfolio, it's It's good to see, well, the overall portfolio, seeing that the modifications come down the way they have. And looking at this slide 13, it is nice to see that most of the loans are in the non-modified category at this point. Is this due to better operating performance or are the sponsors writing more checks if needed for their properties? Or is it a combination of both?

I think overall our borrowers are either performing at par or above the industry standard, industry levels of the hospitality owners. So I think it's certainly, I think, you know, early on P3 programs have helped. And then also, you know, most recent P3 programs that, you know, we are planning for as well, that will help them as well.

Got it. And then the last one is on the corporate career. Initiative thanks for the detail around the loans and deposits. I was curious. Are these. Mostly in your existing, you know, your Southern California market, or are they on a national basis that you're able to get some of these loans and deposits pretty much wherever there's a Korean domiciled company, you're kind of targeting them regardless of their location.

So, you know, there are corporate career companies are all over the United States, you know, particularly the automobile sectors are in Georgia and Alabama area. But pretty much in terms of corporate career companies, they are in major U.S. cities or states.

I see. So this 10% of loans and 8% of deposits that you guys have, it is kind of, across the U.S. is what you're saying.

Correct.

Correct.

You know, yeah, and then larger contribution is obviously from California and somewhat Texas area, Texas, Georgia area. But, yeah, you know, it's pretty much made up with the national footprint. Got it.

Thanks very much.

Our next call is Kelly Motta with KBW.

Hi. I got bounced off the call, so I apologize if this was asked during that time. But I was wondering if, on expenses, if this is a good run rate to kind of build off of, or if there's any puts or takes in next year that we should keep in mind when modeling?

So with respect to the fourth quarter, and I guess the same for the third quarter, when you look at our non-interest expenses, particularly before the effects of OREO and repossessed personal property and some of the other little one-time ideas, that run rate is probably about right. And then as you kind of play it out over quarters, of course, first quarter, we always get the bump because of payroll taxes. And then you just have general inflationary notions, which, you know, you could model at maybe 2 to 3%.

Great. Thank you very much.

And our next and final question is with Gary Tenner, who's with BA Davidson. Thank you.

Hi. Thanks for the follow-up. I apologize if you had mentioned this, but in terms of the mortgage products that you were talking about, other than mortgage warehouse, are the other products going to be completely portfolio products, or is there going to be any sort of gain-on-sell component expected to develop on those?

I think initially we will portfolio those assets, and then later on we may consider selling them for gains.

Okay, thank you.

All right, ladies and gentlemen, that concludes our question and answer session. I'd now like to turn the call back over to management for closing remarks.

Thank you for listening to HOMI Financial's fourth quarter and full year 2020 results conference call. We look forward to speaking with you again next quarter.

All right. Thank you again, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great evening.