Hanmi Financial Corporation

Ladies and gentlemen, welcome to Hanmi Financial Corporation's first 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 open for questions. I would now like to introduce Lasse Blassen, Managing Director at Addo Investor Relations. Please go ahead.

Thank you, operator, and thank you all for joining us today. With me to discuss Hominy Financial's first quarter 2021 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 the prepared remarks, we will open the call for questions. On today's call, we may include comments and forward-looking statements made 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 Regulation 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 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, Honoree Financial issued a news release outlining our financial results for the first 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 honoree.com. I'll now turn the call over to Bonnie Lee. Bonnie.

Thank you, Lhasa. Good afternoon, everyone. Thank you for joining us today to discuss HMIS 2021 first quarter results. Our performance in the first quarter represents a solid start to 2021. During the quarter, we benefited from strong growth in deposits, solid loan production, and helpful expense management, which contributed to the significant earnings expansion. As the country emerges from the pandemic and macroeconomic conditions continue to improve, Momentum is building, and I believe Harmony is well positioned for the year ahead. With that as a backdrop, the following are the key financial and operational takeaways from the first quarter. We generated net income of $16.7 million, or $0.54 per diluted share, up from both the prior quarter and the same quarter last year. I am very pleased with this result, which was near all-time record for a single quarter. Earnings in the quarter benefited from lower credit loss expense, more interest expense, and gains under sale of a second draw paycheck protection program or PPP loans. In what is traditionally our slowest quarter of the year for new loan production, new loan origination volume in the first quarter was notably strong and nearly offset the normal loan runoff, loan sales, and forgiveness on the first draw of PPP loans. Net interest margin of 3.09% was down just slightly from the prior quarter as the reduction in deposit costs nearly offset the declining yield on earnings assets. Deposits were up 4.5 percent from the prior quarter and 20.2 percent from the first quarter last year. Once again, growth in the total deposits this past quarter came from non-interest-bearing demand deposit accounts, which now represent nearly 40 percent of our total deposits, up from 30 percent a year ago. First quarter non-interest expense adjusted for the second draw cost capitalization were flat on both the lean quarter and year-over-year basis, and declined significantly on an absolute basis. And finally, HOMI remains very well capitalized. HOMI's regulatory capital ratios remain strong, and we are well-positioned to continue growing safely. Next. I would like to provide an update on our modified loan portfolio and the positive trends we continue to see as we emerge from the pandemic. At year end 2020, we had significantly reduced the modified loan balance to 156 million or approximately 3% of the portfolio. And as of the end of the first quarter of 2021, the balance has been further reduced by 25% to 117 million and stood at just 2.4% of the portfolio. At the end of the first quarter, 89% of modified loans are providing a modified payment, up from 87% at year end. For all loans that comprise the current modified portfolio, we have completed detailed reviews of a borrower's financial condition. In some cases, we have required additional credit enhancements. I firmly believe our commitment to proactive asset management has significantly helped both the borrower and the bank. Looking at the key asset quality metrics, current size loans increased in the first quarter by $26.3 million, reflecting our aforementioned ongoing proactive asset management practices. Approximately 58% of the total current size loan balance was made up of loans that were adversely affected by In total, numerical loans declined nearly 34 percent in the quarter to $55.1 million or 1.14 percent of loans. The improvement was driven by several loan relationships that were positively dispositioned during the first quarter with a minimum or no loss. At the end of the first quarter, our allowance for credit losses was $88.4 million and stood at 1.94 percent of loans excluding P3 loans. We also continue to have a separate allowance for possible losses and accrued interest receivable for loans currently or previously modified under the CARES Act, now down to $1.2 million. Given our strong allowance and capital position and proactive asset management practices, I am confident we are all well positioned to manage asset quality as we emerge from the pandemic and economic recovers. Now, I would like to shift gears and provide an update on several key initiatives for 2021 that are designed to provide our customers with additional products and services, further diversify our sources of revenue, and drive growth. Beginning with our new residential mortgage platform, first quarter lending activity included approximately 12 million of a residential mortgage, along with the 27 million of a warehouse lending. We have developed strong relationships with several correspondent lenders, which we believe is the most efficient way to build our residential portfolio. Looking ahead, we expect residential mortgage production will be higher in the second quarter and continue to ramp during the year, with the goal of residential mortgage loans comprising 10 to 15% of the HMIS loan origination activity in 2021. Next is our digital initiative. which we have developed a digital banking platform to more efficiently scale our services while providing a more convenient and seamless customer experience. The platform is currently accepting online CD and savings deposits. Later in the year, we expect to add a demand deposit feature to the platform and more aggressively market our digital capabilities to current and prospective customers. And finally, I continue to be pleased with the result of our corporate Korea initiative, which is focused on developing and expanding banking relationships with the Korean companies with the presence or offices in the United States. We recently hired a new relationship manager with a deep relationship in the corporate Korean business community to augment our effort, which includes best at seven strategically located at how many branches. First quarter corporate Korean Corporate Korea loan production was very strong, and at quarter end had contributed 11% of our total loans. With a very strong pipeline, we expect the Corporate Korea program to generate double-digit growth in loan production in 2021. With that, I'd like to turn the call over to Anthony Kim, our Chief Banking Officer, to discuss the first quarter loan production results and deposit gathering activities. Anthony?

Thank you, Bonnie. Kami generated solid loan production volume, totaling $348 million in the quarter, up 6.2% from the prior quarter's volume of $327.8 million. Growth was driven by strengthened SBA loans, which included $131.5 million second-draw PPP loans, partially offset by lower production of CNI and CRA loans in the seasonally slower 41.9 million of S&I loans, and 155.9 million of SBA loans. Rounding out first quarter production was 34.1 million of commercial equipment leases. Newly generated loans for the quarter, excluding second draw SBA loans, had a weighted average yield of 4.05%. I would also like to mention that commitments under commercial lines of credit increased more than 18% from a year ago to $605 million. However, balances on these lines fell by $9.5 million compared to the first quarter last year, reflecting a first quarter utilization rate of 42.8%. Finally, we did see some of our March production slip into April, and we believe that production should continue in a robust manner. During the first quarter, how many sold non-PPP 7 ASB loans, generating a gain in sale of 1.7 million, and I was pleased with our execution as SBA 7A trade premiums increased to 10.66% in the period. We also sold second draw PPP loans at a net premium of 2.35%, generating an additional $2.5 million in gain on sale in the quarter. First quarter payoffs of $167 million remained in line with levels experienced in the recent quarters, but were further elevated by $44.3 million of forgiveness on first draw PPP loans. The weighted average interest rate of the loans that paid off in the period, excluding PPP, was 4.73%, or 68 basis points higher than the same adjusted weighted average yield of 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 first quarter, essentially unchanged from the prior quarter, excluding PPP loans. TAMI remains committed to conservative discipline underwriting criteria. For the commercial-related portfolio, consistent with the EPSA quality data from prior quarters, the rated average loan-to-value and rated average debt coverage ratio as of the end of first 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 the pandemic. As of March 31st, hospitality loans totaled $888 million, or 18% of total at year end. Overall, we believe our hospitality loans are conservatively underwritten. The average loan balance remains at just 3.3 million with a weighted average debt coverage ratio of two times and a weighted average loan to value ratio of 50.1% at origination. At quarter end, 11% of our hospitality portfolio was criticized with approximately half of these loans stemming from metropolitan-based properties. However, we have obtained, in the last 12 months, current appraisals for these properties, and the current weighted average rental value of all the credit-sized hospitality loans was 69.3%, with a range of 47% to 81% for loans greater than $5 million. This reflects, we believe, The particular property location not necessarily a systematic decline in valuations. Furthermore, non-accrual hospitality loans represent only 1% of this portfolio with only two loans over 3 million. Overall, we believe our exposure to the hospitality segment and the related risk in the current environment are manageable. We remain vigilant in working with our effective hospitality customers to help them through the crisis. Moving on to deposit gathering activities, we have a very strong first quarter. Total deposits were 5.51 billion at the end of quarter, compared with the 5.28 billion at the end of preceding quarter, representing a 4.5% quarter-over-quarter increase and a 20.2% increase from a year ago. Importantly, we continue to benefit from an as much of the growth is being driven by noninterest-bearing demand deposits. In fact, as Bonnie mentioned, noninterest-bearing demand deposits now represent nearly 40% of total deposits, up from 30% a year ago. I would now like to turn the call over to Ron Senorosa, our Chief Financial Officer. Ron?

Thank you, Anthony, and good afternoon, all. Let's begin at the top, where we posted $46 million of debt-increased revenues. down sequentially because of two fewer days in the quarter. Looking a bit deeper, we saw a 1.2% growth in average interest earning assets offset the four basis point decline in that interest margin. More than half of the growth in earning assets came from our loan portfolio, while the remainder occurred in lower yielding securities and deposits at the Fed. In addition, while we did see some first-draw PPP loan forgiveness in the quarter, it had little effect on our net interest revenues. Turning to our net interest margin, relatively steady at 3.09%, our loan yields declined 10 basis points from the fourth quarter to 4.24%, while the cost of our interest-bearing deposits dropped 15 basis points to 0.49%. Notably, the spread between the yield on earning assets and the rate paid on interest-bearing liabilities was 281 basis points for the first quarter, nearly the same as the 280 basis points for the fourth quarter and the 280 basis points for the first quarter a year ago, where we had a much different interest rate environment. As Anthony noted, the weighted average interest rate on new loan production for the first quarter, excluding second draw PPP loans, was 4.05% below our first quarter loan portfolio average yield. However, we also have maturing time deposits for the second quarter with a weighted average interest rate of 65 basis points that will mature into lower rate time deposits. In addition, at the end of the first quarter, we saw a significant growth in non-interest-bearing demand deposits and the concomitant growth in lower-yielding balances at the Fed. As a result, we expect the tension between the continued shift to the current rate environment, as well as the continued shift in the mix of earning assets and funding, should allow for the net interest margin to remain relatively steady. Moving to our net interest income of $9.8 million, we realized a $2.5 million gain from the sale of second-draw PPP loans at a net premium of 2.35%. At the end of the first quarter, loans held for sale included $21.7 million of second-draw PPP loans that we expect to sell in the second quarter. We also had $1.7 million of gains from the sale of traditional SBA loans at a net premium of 10.66%. At the end of the first quarter, traditional SBA loans held for sale were $10.9 million. Non-interest expenses were $29.5 million for the first quarter, down 4.5 percent from the fourth quarter, principally because of the $1.4 million of capitalized costs from second draw PPP loans. The efficiency ratio was 52.92 percent for the first quarter. Adjusting for security gains and second draw PPP loan gains and origination costs, the efficiency ratio would have been 58.07%. Pulling this all together from a pre-tax, pre-provision perspective and adjusting for the effects of second draw PPP loans as well as certain other items, we saw pre-tax, pre-provision income of 22.1 million, down from the fourth quarter, but again, primarily because of two fewer days in the quarter. Our credit loss expense for the first quarter was $2.1 million. This included a provision for loan losses of $1 million, a negative provision for off-balance sheet items of a half a million dollars, and another $1.5 million negative provision for losses on accrued interest receivable on loans previously or currently modified in the CARE Act. We also established a $2.1 million allowance for possible losses on an SBA guaranteed repair loss. Looking to the balance sheet, our allowance for credit losses decreased to $88.4 million from $90.4 million after a provision of $1 million and net charge-offs of $3 million. Included in the allowance for credit losses were $12.2 million of allowances associated with individually impaired loans, down $1.9 million from year-end. While macroeconomic conditions continue to improve, we believe our allowance for credit losses adequately reflects various economic forecasts as well as the heightened levels of near-term uncertainty as we continue to emerge from the pandemic. We will continue to closely monitor and evaluate the evolving economic environment and refine our outlook and update our loss allowances accordingly. Our return on average assets and return on average equity in the first quarter were 1.08% in 2011. Our tangible book value increased to $18.59 per common share at the end of the first quarter, and our tangible common equity ratio remained strong at 8.87%, as do all of our regulatory capital ratios. With that, I'll turn it over to Bonnie.

Thank you, Ron. As we slowly emerge from this crisis, I couldn't be more proud of the hard work done by our employees across all of our locations who have supported our customers in this unique environment. Looking ahead, I believe HMME is well positioned to continue driving profitable growth as the pandemic subsides and macroeconomic conditions continue to improve. I look forward to sharing our continued progress with you when we report our second quarter results in July. Thank you.

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. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation phone will indicate that your line is in 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. One moment, please, while we poll for questions. Our first question is with Matthew Clark from Super Sandler. Please proceed with your question.

Hey, good afternoon. Maybe starting on the PPP, did I hear you guys correctly that you plan to sell the remaining amount of PPP loans here in the second quarter? And if not, you know, I'm just trying to get a sense for what's remaining in terms of net fees.

Yes, Matthew, this is Ron. So we plan to sell the second draw PPP loans, $21.7 million. With respect to first draw PPP loans, which are about $256 million at the end of the quarter, we'll continue to let that be reduced by forgiveness and any payments that the borrowers wish to make.

Okay, and did you have that... Remaining amount, I think it's around $6 million or so. Do you have the remaining?

Go ahead. $3.7 million.

$3.7, okay. Thanks. Okay, and then your production was good. Loan balances, XPPP, were flattish, though. I think coming out of last quarter, you were guiding to low to mid-single-digit growth. I assume that's still the case. for the year? Yeah. Okay. Any updated thoughts on the non-interest expense outlook? I know the $1.4 million was a little unusual this quarter, but excluding that, you know, modest growth, is that also still expected?

Yeah, I think, Matt, you could probably continue to expect, you know, I'll say inflationary-style growth. trending at about $30 million a quarter, give or take. That sounds about right.

Okay. And on the increase in criticized loans, the additions this quarter, can you give us some color there as to what was added?

Sure. In the special mention category, we have inflow about three hospitality loans. And it happens to be these all three properties are near either the tourist spot or the airport. So all three of them, if you combine them, you know, that's over 20 million. And for the substandard, we have basically one known to a media company that was impacted by COVID that has contributed to the increase in the substandard category.

Okay. Got it. And then just on the share repurchase plan, Given where your shares are today relative to where they were on average, at least at the price you bought them at during the first quarter, should we suspect that buyback activity will be more muted here going forward?

We'll continue to do share repurchases, I'll say, in the ordinary course as market conditions allow.

Okay.

Fair enough.

Thanks.

Our next question is with Kelly Mota with KBW. Please proceed with your question.

Hi, Ronnie and Bonnie. Wow, good afternoon. Yeah, you can tell it's late in the earnings season right now. With regards to credit, given where everything is with the movement between criticized and special mentions. Do you expect any more kind of negative migrations from the hotel portfolio? And should that not occur, do you think that reserves are adequate for the losses that could potentially flow through? And then, you know, should there be greater improvement, there could be further releases ahead, as we've seen at other banks?

So let me respond to the first part of the question. So in terms of, you know, COVID-infected hospitality loans in the current size category, I think most of the loans have surfaced up, and we're hoping that this particular hospitality industry is really, the activities are taking off. So, you know, looking, you know, forward, I hope that we don't have additional downgrade. But I think, you know, within the next couple of quarters, we will see the activities, you know, in and out. And there will be, you know, some of the properties that will be moving out of the category. And possibly maybe there's some moving from special mention to subcategory. So it depends on the more of the industry outlook. the hospitality industry. In terms of the reserve, I think we're adequately reserved. As currently viewing, I think it's maybe too early to talk about releasing the reserve.

Got it. Okay, thank you. And with expenses, I'm sorry, I think you started to talk about it in your prepared remarks, but I may have missed it. With PPP round two, what was the amount of deferred expenses that remained deferred in Q1? I assume sales would accelerate the recognition, but just wondering what the impact was to one Q1. expenses to kind of figure out a good go-forward rate to use.

Sure. So I would ask you to think of PPP as two discrete ideas. The first discrete idea, second draw, which we've originated and we will sell. So those capitalized costs are in the first quarter, and they were $1.4 million. We have about $256 million. Those are on the balance sheet, and they will go through the forgiveness process or repayment process. They have $3.7 million of net deferred fees remaining in those balances.

Got it. Thank you. And maybe one final question on deposits. Obviously, some really good growth, especially in non-interest-bearing. Do you have a sense of how much of that, I know it's a difficult question, but how much of that is related to stimulus and PPP and, you know, what is your expectation for how sticky that core deposit growth is?

Well, out of total GBA growth of about $270 million, obviously we did $131.5 million of PPP second round. So we think $130 million is due to PPP second round. And other increase was due to some of the new accounts that we acquire in first quarter, as well as balance increase from the existing customer that we acquired last year. So from the organic growth, I think we're estimating about 60% to 70% will be sticky.

Got it. Thank you so much. That's very helpful. I'll step back now.

As a reminder, If you would like to ask a question, please press star 1 on your telephone keypad. Our next question is with Tim Coffey from Janney. Please proceed with your question.

Great. Thanks. Afternoon, everybody. As you look at the round two PVP loans, were the majority of those two existing clients or were there new clients mixed in there?

Those are two mostly existing clients.

Okay. That's great. And then, Ron, how do we think about the tax rate as you roll through the year?

So a little bit higher in the first quarter just because of the timing of certain discrete events. But I think for the year, we should trend more towards a 30% effective tax rate.

Okay. Okay. Those are my questions. Thank you very much.

Our next question is with Jason Stewart from Jones Trading. Please proceed with your question.

All right, thanks. Ron, I wanted to talk about the securities portfolio for a second and how you view the attractiveness of securities, in particular as rates backed up in 1Q versus where they are today.

Well, I guess I can keep it simple in saying the alternative is balances at the Fed at 10 basis points. So when 10 basis points is your baseline, a lot can look attractive. But we prefer, in terms of investment, keeping the duration right now basically short. I think we're around, on an effective basis, about three and a half-ish So we'll continue to look at mortgage backs. We do like amortizing securities. We enjoy the cash flow that gives us that reinvestment opportunity each month.

Okay, thank you. And then a quick follow-up. I do believe you mentioned the amount of loans and hospitality that were modified, but I think I missed that. Could you provide that?

It was 86.7 million. 86.7.

Sorry, what was the total amount of modified?

Total modified loans are $116 million.

Correct. Thank you so much. Appreciate it.

Our next question is from Gary Tenner with C.A. Davidson. Please proceed with your question.

Thanks. Good afternoon. I just wanted to Talk a little bit about the corporate career initiative. You know, you've talked about the pipeline that you expected to generate double-digit growth in loan production this year. Can you talk a little more about what are the typical types of loans you're making there? Do you have any existing deposit relationships thus far coming out of that endeavor and what the outlook might be in terms of contribution on that side of the balance sheet?

Sure. When we first initiated the Corporate Korea project or initiative, this was more of a CNI place, but it's going to be more both the CNI as well as the CRE loans, as well as a tremendous DDA contribution. a DDA increase that Anthony mentioned about from new accounts that we acquired in the last year as well as this quarter. So, you know, it's both sides of the balance sheet. And what we, in terms of a type of loan that we see, as I said, it's a line facility as well as some of the commercial real estate that corporate Korean companies are buying up in the United States. And I had explained this, I think, last quarter. mentioned that it's a little bit different than the type of commercial real estate that we entertained in the past, whereas corporate career companies look for A-class type of properties in the major metropolitan cities, and they're backed up by a lot of capital investment from other companies. So we have done the line facilities at $5 to $10 million to some of the commercial real estate deals that are over $30 million. So in terms of the range, in terms of the sizes, the type of years, it's very broad-based. So when I think a couple years ago when this was initiated at other banks as well, it was more of a to the tier one, two, three automobile companies. But now it's not only to those companies, but, you know, some of the manufacturers as well as trade wholesalers and food business as well. So we are making our name out there, and sometimes that we are, you know, attracting the deals, you know, the deals are walking to our doors.

Thank you, Bonnie. And then just as a follow-up, in terms of kind of the outlook for second quarter growth in terms of the pipeline, are you seeing increasing demand on the CNI side at all, or is the pipeline build and kind of at least near-term growth projection more CRE-oriented? And I mean in general, not just specific to the corporate career initiative.

Yeah. I think just looking at the point into the, you know, looking at the second quarter pipeline, I think we have, you know, good CRE as well as a CNI, some significant CNI. opportunities. So and as well as some of the SBA deals and also some of the leasing opportunities as well. So our pipeline going into second quarter is much stronger than the first quarter.

Thank you for taking my questions.

Our next question is with David with Wedbush Securities. Please proceed with your question.

Hi, thanks. A couple questions. I was curious about the pricing that you're getting on your new resi mortgage initiatives. Could you, I think you spoke about $12 million or so on SFR and $27 million on Mortgage Warehouse. Can you talk about the pricing that you're getting on those?

Yeah, because we're concentrating on the non-QM products, which is typically just 3 quarters to 1% higher than the confirming notes. So it's about 3.75 to 4.25-ish.

Great. And the mortgage warehouse?

Mortgage warehouse, we typically charge anywhere between 3.5 to 4%. Great. And then...

Yep, go ahead. No, go ahead. And I was also curious about on the SBA PPP loans for round two. Can you talk about why you decided to sell the round two as opposed to retaining them like round one?

You know, sure. We did, you know, return analysis obviously. And we still have, you know, over $250 million, the forgiveness from the first round. And I think, you know, it's taking much slower to going through the forgiveness process. And I think just, you know, evaluating the time and effort and the return analysis, as we introduced for the second round.

Got it. Thanks very much.

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