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spk02: Ladies and gentlemen, welcome to Hanmi Financial Corporation's 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 open for questions. I would now like to introduce Lassa Glasson, Managing Director at Addo Investor Relations. Please go ahead.
spk09: Thank you, Operator, and thank you for joining us today. With me to discuss Honme Financial's third 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 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 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 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.com. I will now turn the call over to Bonnie Lee. Bonnie.
spk05: Thank you, Lhasa. Good afternoon, everyone. Thank you for joining us today to discuss our 2021 third quarter results. It was another excellent quarter for HOMME. Our results for the third quarter reflect continuous strong growth in loan and lease production, a solid uptake in deposits, improving credit quality, and record earnings. Our consistently improving performance throughout the year highlights the overall strength of the HOMME franchise, our robust loan production platform, and our ability to develop deep 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. We reported net income of $26.6 million, or $0.86 per diluted share, for the third quarter. Net income was a new single-quarter 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 revenues as well as a $7.2 million recovery of a credit loss expense due to strengthening asset quality. 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 was firing on all cylinders with the loan production growing to $500 million in the quarter, breaking the single-quarter record established in the prior quarter when excluding PPP loan origination. We also continue to benefit from an increase in business activity as economies in our key markets emerge from the pandemic. In total, our loan balance grew at a 14% annualized rate during the quarter, ex-PPP. In addition, deposits were up solid 7% annualized from the prior quarter and similar to recent prior periods. Growth was led by non-interest-bearing DDAs which now comprise 44.5% of a total deposit, up 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, Loans modified under the CARES Act declined 83% from the second quarter to end the third quarter at just $12 million. Overall, I am 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, we will no longer comment on them in future quarters. The positive trends we are seeing in other measures of asset quality further demonstrate PAMI's comprehensive approach to credit management, our frank and timely assessment of credit grades, and our ability to seek positive resolution through payments and payoffs. Non-performing loans declined by nearly 60% from the second quarter and 74% since the end of 2020. As of September 30th, Non-performing loans were just 44 basis points of total loans. We are also continuing to see loan upgrades as well as payoffs and payments. Balancing these positive and encouraging trends with a caution, our allowance for loan losses remains strong at 1.5% 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 activity. Anthony?
spk00: Thank you, Bonnie. Starting off with additional color on loan and lease production, Hanmi's third quarter volume surged to $500 million, up 7.4% from the prior quarter, and almost two times higher than the third quarter last year. During the period, we generated sequential quarter growth across nearly all major loan categories, with a notable growth coming from commercial real estate and equipment leases, along with a record SBA loan production. Altogether, excluding the impact of PPP loan production in previous periods, loan production in the third quarter was an all-time record for HOMI, breaking the previous record established last quarter. As Bonnie noted, Our loan production platform is performing very well, with volume in the quarter diversified across various asset classes and solid contributions from relationship managers that recently joined HOMI team. With respect to CRA loans in the quarter, the retail category was strong, particularly for neighborhood-based centers with a recognizable national chain anchor tenant. We also had solid volume in the quarter, in the industrial and multifamily classes. Also of note, C&I production increased approximately 16% compared with the prior quarter. Commitments under commercial lines of credit decreased by 22.7 million or approximately 3% from the prior quarter to 682.4 million. 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 3.90% and increase of 16 basis points from last quarter. Next, I would like to provide an update on the Corporate Career Initiative and our new residential mortgage platform, both of which are continuing to contribute meaningfully to our results. As you may recall, the Corporate Career 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 CNI loan category. With a solid Q4 pipeline, the Corporate Career Program is well on its way to generate double-digit growth in loan production in 2021, along with a meaningful contribution in deposits. We also continue to be pleased with the results of our new residential mortgage platform. Third quarter lending activity included approximately 41 million of residential mortgages, along with the 28 million of warehouse lending. Looking ahead to the fourth quarter, we continue to anticipate residential mortgage loan will comprise between 10% to 15% of Hamid's loan origination activity for the full year. Overall, our pipeline of loans and leases remain very strong heading into the fourth quarter, in line with the third quarter pipeline. As such, we expect loan production to remain robust and to finish the year strong. Our underwriting continues to be very disciplined. The weighted average loan-to-value and weighted average debt coverage ratio of our CRA loan portfolio as of the end of third quarter were 48.6% and went 1.9 times respectively. Both metrics have been essentially unchanged throughout the 2021. Moreover, we continue to limit origination activities within certain high-risk industries both impacted by pandemic, most notably hospitality. With that as I said, I would like to provide an update on our hospitality portfolio which has been the loan category most impacted by pandemic. As of the end of third quarter, hospitality loans declined by more than 8% for 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 non-accrual hospitality loan totaling just $140,000 collateralized by a property in a natural location in Texas. De-risking our broader loan portfolio remains a priority, and as such, we are committed to conservative underwriting and reducing loan exposure to riskier asset classes, including hospitality loan, going forward. Turning to deposits, Hamid had another solid quarter. Total deposits were $5.73 billion at the end of third quarter, representing an increase of 1.8% quarter-over-quarter and 10.3% from a year ago. Similar to recent quarters, we continue to benefit from an improving mixed shift of deposits with nearly all of the growth driven by non-interest-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 credit accounts. In fact, as Bonnie noted earlier, DDAs now 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. Ron?
spk04: Thank you, Anthony, and good afternoon, all. Let's begin 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 percent for the third quarter, down from 3.19 percent 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 percent for the third quarter, compared with 3.06 percent for the second quarter, down six basis points. Interest income on PPP loans was 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 replaced this transient loan 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. 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 5.5% since year-end and 3.4% quarter-over-quarter. In addition, again, excluding the effects of PPP loans, we would see the average loan balance for the quarter was $4.63 billion, trailing the comparable quarter-end balance of $4.84 billion. Looking at our funding portfolios, we again saw solid growth in our non-interest-bearing demand accounts, up 8.2 percent quarter over quarter, while average balances grew 10 percent 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 5.45 percent notes. Finally, as we've noted previously, Our demand deposit growth has contributed to the growth in our lower yielding balances at other banks, which was $772.6 million at the end of the third quarter and 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%, albeit with a higher amount of average earning assets. Moving on to non-interest income of $12.5 million, we continue to see a strong volume of SBA loan sales rising to $47.9 million, up 80 percent from the previous quarter, and with 11.85 percent trade premiums, gain on sales increased to $5.5 million from $3.3 million 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 $200,000 and $300,000 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. Non-interest 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 52.01% 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 8.4% 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 $400,000 negative provision for the allowance for losses on accrued interest receivable, on current and previously modified loans, and a $400,000 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 $900,000, 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 $300,000. 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 this evolving environment, and we'll update our loss methodology accordingly. Finishing with our capital accounts during the third quarter, we repurchased 249,920 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 17.13%, and our book value per share was $19.96. Our capital ratios remain strong, with a tangible common equity ratio of 8.98%, and a common equity tier one ratio of 11.85%. With that, I'll turn it back to Bonnie.
spk05: Thank you, Ron. Overall, it was another excellent quarter for HOMME, and I am very happy with our expanding loan production, improving asset quality, and another record-setting earnings performance. Once again, I thank the entire HOMME family for its tireless efforts in making our success possible. As we look ahead to the fourth quarter, HMIS continues strong operational execution combined with a resurgence in business activity in our key markets 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.
spk10: Operator, that concludes our prepared remarks. We would now like to open the call for questions.
spk02: 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. The confirmation tone 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.
spk08: One moment please while we poll for questions. Thank you.
spk12: Our first question comes from Jason Stewart with Jones Trading.
spk02: Please proceed with your question.
spk07: Hey, thank you for taking the questions. I wanted to start with the strength in originations in CRE and CNI. Maybe you could share what you think that tells you about your customer's view on the economy and their confidence in growth at this point.
spk01: Sure. Yeah, I mean, you know,
spk05: As we communicate with our customers, there are definitely the activities coming from the pent-up demand, as well as we see the increase in the purchase transactions, whether it's in CRE as well as the CNI business purchases.
spk07: Okay. And then turning to the resi 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 from the outside.
spk00: Well, actually, I don't think there's a seasonality factor in there. As the competition's getting fierce, we're looking to leveraging not only the correspondent channel, but we're trying to leverage our branch network and our existing customer to increase the retail side of the business.
spk08: Okay. Okay. Thank you. Sure.
spk02: Thank you. Our next question is from Kelly Moda with KBW. Please proceed with your question.
spk06: Hi. Thank you so much for the question. Really good quarter. Just wondering if we could talk a little bit on the deposit side, especially since you're 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 plans for funding future growth. Thanks.
spk00: Well, we have been saying the same thing over and over for the last three quarters. At first, we would expect some attrition from the increase, but 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 sticky.
spk06: Great. Thank you so much.
spk05: Just to add an additional color, we had a really great success in the Corporate Career Initiative. And our strategy to really target large business DDA customers at the institution. And we had a really good success even before. you know, acquiring new DBAs from the PPP loans that we did for the last year and then beginning of this year as well. So we are continuing to see this sizable inflow of funds from our existing accounts and as well as the average accounts for the new accounts that we acquired for the past few quarters has really contributed. So, you know, I think that the majority of the deposits, we feel that it'll be a fairly sticky deposit going forward.
spk08: Operator, next question.
spk02: Thank you. Our next question comes from Timothy Coffey with Jani. Please proceed with your question.
spk11: Great. Thanks. Afternoon, everybody. You know, given the success that you're having on the origination side and loans 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?
spk05: It may happen in 2022, probably later part of 2022. But for time being, because I think there is a still The environment is such that I think that we are targeting to keep our low-to-mid single-digit growth for at least the next one or two quarters.
spk11: Okay. And then the gain-on-sale trends. How should we think about that, considering that your period end loans held for sale were much lower than they were last quarter?
spk04: So the volume, when you compare quarter to quarter, had a little bit of second drop PPP in it. So we tried to isolate that for you, Tim. But going forward, again, our SBA production volume or anticipate to be strong, you know, let's say not too dissimilar from third quarter. What remains to be seen, though, as we move into the first quarter of the new fiscal year for the federal government, the guarantee rates will change, moving down to 80 percent from 90 percent. Still not quite sure where trade premiums will settle out. They've been very healthy for the good, you know, three quarters here of 2021. So I would say there's a chance of continuing, maybe fading a bit. Absent volume, I'm not sure they would necessarily increase relative to the trade premium.
spk11: Okay, great. Ron, thanks. That's very helpful. And since I've got you on the line, the marketing spend in the quarter was about equivalent to what you were doing in 2019. Is that kind of a good run rate for the advertising and promotion expense?
spk04: So if you look at our quarterly spend going back pre-pandemic, you'll kind of see a seasonality to it where it's, you know, low for a few periods and picks up towards the end of the year. I'd like to say that the seasonality is returning, although maybe off a quarter or two, but it should, you know, stay at a level, you know, perhaps not too dissimilar to what we're seeing here in the 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.
spk11: Okay. That's helpful. Thank you. And then, Anthony, a question on the SFR, the mortgage business. Is there a targeted mix between originations and warehouse lines that you're looking at?
spk08: Yeah.
spk00: There's no actual targeted mix. Our target on the warehouse line coming in is $100 million, and average outstanding balance is about $50 to $60 million.
spk08: Okay, great.
spk05: As we were saying, we expect the mortgage side of the business contribution in terms of production will be 10% to 15%. So it's a combination of a retail mortgage as well as the warehouse line as well as some of the portfolio if there's an opportunity to acquire. So that would be a combination. So we're just overall targeting that business about 10% to 15% of our overall production.
spk11: Okay. Okay. I got it. I got it. Thanks, Bonnie. All right. I'll step back. Thank you very much.
spk02: Thank you. Our next question comes from Gary Tenner with DA Davidson. Please proceed with your question.
spk03: Hi, good afternoon. A lot of my questions were answered, but I wonder if you could share with us the loans and deposits that you're currently holding related to the Corporate Career Initiative. Just give us a sense of kind of the current scale of that initiative.
spk00: Currently, on the loans, we have 12% of the loans are in corporate Korea space. And approximately 6.5% of deposits are in corporate Korea.
spk03: Thank you. And then, Ron, do you have plans to redeem any more of the 5.5% sub-debt? Or at this point, do you expect to hold the remainder there along with the new sub-debt?
spk04: So we have a redemption option at the end of March of 2022, which we are going to take a very hard look at, given the attractiveness of exiting the 545 notes. Redemptions or repurchases between that date would be more, you know, what the market might present Um, so that was just, you know, one opportunity we had in the third quarter. Um, so we took advantage of that. Uh, I, I, I, I don't know how to predict if any of those opportunities will, will present themselves in the fourth quarter, but we're clearly looking at the, at the redemption that, that can occur at the end of March.
spk03: Okay. Great. And then finally, uh, on the, the, revision to the business account fee schedules, did that impact the full quarter so it's fully kind of loaded into that third quarter run rate?
spk04: Yeah, you could look at that as affecting the third quarter completely. So it's a fairly representative run rate. I think the variations to that idea will be a little bit more of, you know, depositor activity, which would be, you know, a little bit hard to predict what might occur in the fourth quarter, but, you know, the first digit to the left of the decimal point is pretty good. After that, it'd be depending on deposit for activity.
spk08: Okay, great. Thank you.
spk12: Thank you. Our next question is from Kelly Moda with KBW.
spk02: Please proceed with your question.
spk06: Hi, thanks for the follow-up. My question was actually about the sub-debt redemption, so that was just covered. I did want to ask, though, about buybacks as well, of kind of how you're thinking about deploying that as a use of capital.
spk04: So, as we've pointed out in all of our previous calls, we do look at our capital practices each quarter, whether that be repurchases or dividends or both. Clearly, during the third quarter, there were some very good market opportunities to affect repurchases, so we took advantage of that. We'll see what kind of market opportunities present themselves in the fourth quarter and, again, in any period thereafter.
spk06: Thanks so much, Ron. Maybe a last one on credit. Obviously, you had a nice reserve release this quarter, but it's still high relative to peers, especially given how credit quality has been trending. Just wondering, I know none of us have a crystal ball, but assuming things stay kind of as they are, is there still room on the qualitative side to bring bring that down further? Or did you kind of just take it off this quarter with the big negative provision you took?
spk04: So just focusing on the principal idea, which is the traditional allowance for credit losses and set aside the mechanics of off-balance sheet and the other allowances that we have. As we pointed out, we ended the third quarter very strong at 1.58%. And that's roughly about 77 million of loss allowance. 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 it's associated with hospitality. So it should follow then that as hospitality continues to to demonstrate improvements, there will be opportunities and needs to continue to watch the reserves, watch the allowance trip lower.
spk06: Got it. Thanks for all the color, Ron. That's really helpful. Appreciate it.
spk02: Thank you. We have no further questions in the queue at this time. Please continue.
spk09: Thank you for listening to Hanmi Financial's third quarter 2021 results conference call. We look forward to speaking with you again next quarter.
spk02: 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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