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spk03: Ladies and gentlemen, welcome to Hanmi Financial Corporation's second 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 Lassa Glasson, Managing Director at Addo Investor Relations. Please go ahead.
spk02: Thank you, Operator, and thank you all for joining us today. With me to discuss Honme Financial's second 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 then 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 a 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 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 risk factors affecting our business contained in our earnings release, our investor presentation, and our Form 10-K. This afternoon, Honami 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 investor relations section of our website at honami.com. I will now turn the call over to Bonnie Lee. Bonnie? BONNIE LEE.
spk01: Thank you, Lhasa. Good afternoon, everyone. Thank you for joining us today to discuss HANMI's 2021 second quarter results. HANMI delivered another strong performance in the second 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 a significant pickup in business activity as economies in our markets reopen has HANMI posed to continue driving solid results in the second half of the year. Today, we reported net income for the second quarter of $22.1 million, or $0.72 per diluted share. Net income increased 33 percent from the first quarter and over 140 percent 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 loan production remained quite robust in the second quarter and was a single quarter 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 DDAs that now represent nearly 42% of our total deposits. 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 $72.3 million, representing just 1.5% of loans. We continue to stay in close contact with these borrowers who remain affected by the pandemic to work on mutually beneficial solutions. Moving on to other measures of asset quality and further demonstrating our asset management practices, I am especially pleased to report that we successfully resolved the $12.4 million of Affiliate Tax Credit Loans without any loss to the bank. We have now seen non-accrual loans decline by more than 50% since the end of 2020. Even more encouraging, we are beginning to see loan upgrades, including loans moving from classified to special mention to pass. A year ago, we faced the tremendous uncertainty and the hardships of the pandemic. And while the challenges of the pandemic continue, I believe Hami's commitment to proactive asset management has significantly helped both the borrower and the bank. Balancing these positive and encouraging trends with the prudence, our allowance for loan losses stood at 1.78% of loans excluding PPP. 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 0.7 million. As a result of our conservative allowance, strong capital position, our track record of a successful asset management, I'm confident we are well positioned to manage asset quality as we emerge from 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 loan production results and deposit gathering activities. Anthony?
spk00: Thank you, Bonnie. During the second quarter, Hanmi generated excellent loan production volume, totaling $466 million in the quarter, up 33.8 percent from the prior quarter's volume of $348 million. Growth was driven by strength in CRA loans, residential mortgages, CNI loans, and strong lease volume, partially offset by lower production of SBA loans, which benefited from $131.5 million in second-draw PPP loans last quarter. Altogether, excluding the impact of PPP loan production in previous periods, loan production in the second quarter was an all-time record for HOMI. Looking at the loan production in more detail, second quarter production consisted primarily of $186.1 million of CI loans, $66.6 million of residential mortgages, $99.4 million of CNI loans, and $42.6 million of SBA loans. Rounding out second quarter production was $70.9 million of commercial equipment leases, which returned to levels we were seeing prior to the pandemic. Newly generated loans and leases for the quarter, again excluding PPP loans, had a weighted average yield of 3.74%. I'm also pleased to note that commitments under commercial lines of credit expanded by $100 million, or nearly 17% from the prior quarter to $705 million, Balances on these lines 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 Corporate 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 $67 million of residential mortgages, along with $63 million of warehouse lending. 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% of Hamid's 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 loan production totals 87 million, And at quarter end, corporate Korea loans comprise 11% of our total loans with a very strong pipeline entering the second half of the year. We continue to expect the corporate Korea program to generate double-digit growth in loan production in 2021, along with a meaningful contribution in the deposits. Finally, overall 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 a very strong loan pipeline for AMI. As such, loan production should remain robust and grow solidly in the second half of the year. Loan payoffs in the second quarter of $264.8 million included $140 million of PPP loans. Non-PPP loan payoffs were in line with the levels experienced in recent quarters. The weighted average interest rate of the loans that paid off in the period excluding PPP was 4.25% or 51 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 payouts 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 devalue and weighted average debt coverage ratio of our CRE loan portfolio as of the end of second quarter were 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 pandemic. As I've 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% of our loan portfolio. Our hospitality loans are conservatively underwritten. The average loan balance remains at just 3.2 million, with a weighted average debt coverage ratio of two times and weighted average loan-to-value ratio of 50.1% at origination. At quarter end, 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 for these properties and the current weighted average loan-to-value of all the criticized hospitality loans was 68.0%. Non-offeral hospitality loans represent only 1% of its portfolio, with only two loans over $3 million. We continue to believe that our exposure to the hospitality 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 the quarter compared with the $5.51 billion at the end of preceding quarter, representing a 2.2% quarter-over-quarter increase and 8.1% increase from a year ago. Similar to recent prior quarters, we continue to benefit from an improving mix shift of deposits as much of the growth is being 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 and growth from existing larger accounts, which included a significant inflow from existing corporate Korea accounts. In fact, as Bonnie noted earlier, DDAs now represent nearly 42% of total deposits up from 36% a year ago. With that, I'll turn the call over to Ron Santarosa, our Chief Financial Officer. Ron?
spk05: 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 of $49.6 million increased 7.8% from the prior quarter, and our net interest margin of 3.19% increased 10 basis points as well. 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 higher volume of liquid interest earning assets and the benefit of lower costing interest bearing deposits. Turning to our net interest margin, adjusted in the same fashion, we would see about a seven basis point decline quarter over quarter as the benefit from the fall in the cost of interest bearing deposits was more than offset from the higher levels of lower yielding securities and interest bearing deposits at the Federal Reserve Bank. Again, as we 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 in the second half of the year, albeit at modestly lower yields. Altogether, we anticipate that this mixed shift in liquid interest earning assets will continue to dampen net interest margin and continue to keep it in the low threes. Moving to our non-interest income of 8.9 million, We saw our traditional SBA trade premiums rising to 12.55% 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 sale were 21.9 million. Loans held for sale also included 14.1 million of second draw PPP loans that we sold early in the third quarter, for a gain of approximately $300,000. Service charges, fees, and other income remain consistent quarter over quarter. Non-interest expenses were $30.8 million for the second quarter, essentially flat with the first quarter after adjusting the first quarter for $1.4 million of capitalized costs from second draw PPP loans. Our efficiency ratio improved to 52.66% from 52.92% for the prior quarter. 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 $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 negative provision for loan losses, a half a million dollar reduction in our allowance for accrued interest receivable for current or previously modified loans, offset partially by a $1.3 million positive provision for off-balance sheet items. Looking to the balance sheet, our allowance for credit losses decreased to $83.4 million from $88.4 million, and the coverage ratio, excluding PPP loans, also declined to 1.78% from 1.94%. 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 continue 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 1.38% 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 remained strong at 9.01% as to all of our regulatory capital ratios. With that, I'll turn it back to Bonnie.
spk01: Thank you, Ron. Hanmi has enjoyed a record-setting second quarter that kept up a very strong performance throughout the first half of 2021. I am very pleased with our expanding loan production, improving asset quality, and most importantly, robust earnings growth. I am very proud of the tremendous effort of the entire HANMI team, without whom our success would not be possible. As we look ahead to the second half of the year, the momentum that we have built combined with a significant increase in business activity as the economies in our key markets reopen has HANMI well positioned to drive a continued strong result in the second half of the year. I look forward to sharing our continued progress with you when we report our third quarter results in the fall.
spk02: Operator, that concludes our prepared remarks. We'd now like to open the call for questions.
spk03: 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 tone will indicate that your line is in the question queue. You may press star two 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. Thank you. Our first question comes from Matthew Clark with Piper Sandler. Please proceed with your question.
spk08: Hey, good afternoon.
spk01: Good afternoon.
spk08: um maybe first um ron on the core margin outlook i think you said down seven basis points in the upcoming quarter was that on is that on a reported basis or on a core margin basis that would be a good
spk05: a core adjusted basis so if you look at the benefits that we received in the second quarter um ppp loans the non-accruing loan interest uh capture um and reduce the first quarter for the same ideas uh you'll see that the um the net interest margin is down about seven basis points so first quarter on an aggressive basis 313 we're down seven from that
spk08: Okay, I thought you were talking about the upcoming quarter. My apologies. Okay, and then do you have the average PPP loan balance in the quarter?
spk05: For the quarter? Just give me a minute.
spk08: I'm guessing it's about $190 million, but that's all right.
spk05: For the quarter, looking for averages, here we go, $254,435.
spk08: 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?
spk05: Oh, so cost of deposits, I believe we're within about two to three basis points from the average for the previous quarter. So, we'll continue to, you know, see the benefit of the time deposits repricing lower, but that rate of change has become very, very small quarter over quarter now. Like, if you measure first to second, probably to third.
spk08: Okay. Gotcha. And then, what are your thoughts on the expense run rate from here?
spk05: Again, I think I'm very happy to see both first quarter and second quarter, when you adjust first quarter for the cost capitalization from second drop PPP, about the same, you know, that $30 million idea. So I continue to see it running at that same level with just, you know, little bumps here and there potentially offsetting each other for inflation or for some other activities. But the 30-some is about right to me.
spk08: Okay. And did you guys buy back any stock in the quarter, and what are your thoughts about the buyback going forward?
spk05: So we had no share repurchases in the second quarter, and we understand where the market is today. And so we have very active discussions with our board of directors on our capital actions, whether it's share repurchase or dividends. So that will be taken up again here in the third quarter.
spk08: Okay, thank you.
spk03: Thank you. Our next question comes from Tim Coffey with Jannie. Please proceed with your question.
spk06: Great, thank you. Afternoon, everybody. Bonnie, Anthony, I wonder if you can kind of give me a little more idea on the pipeline for the residential mortgage product. The growth you're projecting for the second half is pretty strong, and it was strong in this quarter. I'm just kind of wondering if you can tell me where you're getting the successes from.
spk00: Yeah, we spent a couple of previous quarters setting up the corresponding lenders and warehouse lenders. So the increased production came from both retail and corresponding lending. So for the next two quarters, both retail and corresponding lending will ramp up. Okay.
spk06: Okay. Thank you for that. And then, Ron, not to dig too deep into this, but it seems like kind of the goal going forward is to focus on growing NII while trying the best you can to manage margin. Is that about right?
spk04: Yes.
spk06: Okay. All right. Those are my questions. Thank you. Thank you.
spk03: Thank you. Our next question comes from Gary Tenner with DA Davidson. Please proceed with your question.
spk04: Thanks. The question has mostly been answered, but just wanted to ask about the commercial real estate production in the quarter in terms of what kind of subsegments you're seeing most of that production in.
spk00: It came from mostly industrial properties as well as multifamily properties. and office properties occupied by credit tenants.
spk04: Is that primarily in California, or are you getting any growth out of your other markets?
spk00: Primarily California, as well as some from Texas area and New York area.
spk04: And then with regard to the PPP sales, do you plans to sell additional PPP prior to forgiveness or repayment?
spk05: Our sales to date have been the second draw PPP. So everything that we've originated, we've sold. With respect to first draw PPP, we've been using the forgiveness route. But as it windows down, we will take a look at what's there, decide if there's anything else worth to expedite the finality of the program. But for the most part, first drop PPP has been through the forgiveness process.
spk04: Okay, so the small amount of PPP loan sales you mentioned early in the third quarter is all that's currently? Oh, those are all second drop. Right, okay. All right, thank you.
spk03: 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 Moda with KBW. Please proceed with your question.
spk09: Hi. Good afternoon, everyone. I 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 comments made on the CRA exam Ron, from what I can tell from the expense commentary, it doesn't seem like there's going to be any additional costs associated with that, but maybe any color around cost of compliance with that. Thank you.
spk01: Sure. We don't believe that we will incur any significant additional costs other than what's normally expected.
spk09: Okay, thank you. That's all my other questions were asked and answered, so thanks so much for the time and the questions.
spk01: Thank you.
spk03: Thank you. Our next question comes from Jason Stewart with Jones Trading. Please proceed with your question.
spk07: Hey, good afternoon. Thanks for taking the question. I want 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 in residential mortgage? Thanks.
spk00: Well, actually, we've been focusing on the non-QM products, not on the FHA side, so that's not going to affect us much. But then on the payoff side, I've seen elevated levels of payoff because of rate environment.
spk07: 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 handmade and make the most sense for the GSEs going forward?
spk00: Well, with a low rate environment, with a 30% effect under 3%, as I said, The product that makes sense for us is non-QM products, which ranges about 3.75 to 4.25 percent. So we'll continue to concentrate on that selling the product.
spk07: Okay. Appreciate it. Thanks.
spk03: 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.
spk02: Thank you for listening to HONME Financial's second quarter 2021 results conference call. We look forward to speaking with you again next quarter.
spk03: 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.
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