Hanmi Financial Corp (HAFC) 2021 Q2 法說會逐字稿

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. (Operator Instructions) I would now like to introduce Lasse Glassen, Managing Director at ADDO Investor Relations. Please go ahead.

Thank you, operator, and thank you all for joining us today. With me to discuss Hanmi 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 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 Form 10-Qs. In particular, we direct you to the discussion of certain financial -- 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 second quarter of 2021, along with the 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?

Thank you, Lasse. 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 poised 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% from the first quarter and over 140% 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 with 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 noninterest-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 30, 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 filling tax credit loans without any loss to the bank. We have now seen nonaccrual loans declined 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 a tremendous uncertainty and the hardship of pandemic. And while the challenges of the pandemic continue, I believe Hanmi'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?

Thank you, Bonnie. During the second quarter, Hanmi generated excellent new production volume totaling $466 million in the quarter, up 33.8% from the prior quarter's volume of $348 million. Growth was driven by strength in CRE loans, residential mortgages, C&I loans and strong lease volume, partially offset by lower production of SBA loans, which benefited from $131.5 million in Second Draw of 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 Hanmi.

Looking at the loan production in more detail. Second quarter production consisted primarily of $186.1 million of CRE loans, $66.6 million of residential mortgages, $99.4 million of C&I loans and $42.6 million of SBA loans. Rounding our 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 commission 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 Hanmi'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 totaled $87 million. And at quarter end, corporate Korea loans comprised 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 and along with a meaningful contribution in the deposits.

Finally, the 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 Hanmi. 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 payoffs 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-to-value and weighted average debt coverage ratio of our CRE loan portfolio as of the end of second quarter were 48.7% and 1.9x, respectively. Both metrics 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 was impacted by COVID-19. As of June 30, 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 2x and a 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%.

Nonaccrual hospitality loans represent only 1% of its portfolio with only 2 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 $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 introducing 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?

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 nonaccrual 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 cost and interest-bearing deposits.

Turning to our net interest margin. Adjusted in the same fashion, we would see about a 7 basis point decline quarter-over-quarter as the benefit from the fall and 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 mix shift in liquid interest-earning assets will continue to dampen net interest margin and continue to keep it in the low 3s.

Moving to our noninterest 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 remained consistent quarter-over-quarter. Noninterest 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 of PPP loans.

Our efficiency ratio improved to 52.66% from 52.92% for the prior quarter. Pulling this all together from a pretax preprovision perspective and adjusting for the effects of Second Draw of PPP loans as well as certain other items. We saw a pretax 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 $0.5 million 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 remains strong at 9.01% as do all of our regulatory capital ratios. With that, I'll turn it back to Bonnie.

Thank you, Ron. Hanmi has enjoyed a record-setting second quarter that kept up the 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'm very proud of the tremendous efforts 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 continued strong results 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.

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

(Operator Instructions) Our first question comes from Matthew Clark with Piper Sandler.

Maybe first, Ron, on the core margin outlook. I think you said down 7 basis points in the upcoming quarter. Is that on a reported basis or on a core margin basis?

That would be a core adjusted basis. So if you look at the benefits that we received in the second quarter, PPP loans, the nonaccruing loan interest capture and reduce the first quarter for the same ideas, you'll see that the net margin is down about 7 basis points. So first it was on an adjusted basis, 3.13%. We're down 7% from that.

Okay. I thought you were talking about the upcoming quarter. My apologies. Okay. And then you have the average PPP loan balance in the quarter?

For the quarter? Just give me a minute.

I'm guessing it's about $190 million, but -- if that's right.

For the quarter, looking for the averages, here we go, [254], [435].

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?

So cost of deposits. I believe we're within about 2 to 3 basis points from the average for the previous quarter. So we'll continue to 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, the second and probably to third.

Okay. Got you. And then what are your thoughts on the expense run rate from here?

Again, I think very happy to see both first quarter and second quarter when you adjust first quarter for the cost capitalization from Second Draw of PPP, about the same, that $30 million idea. So I continue to see it running at that same level with just little bumps here and there, potentially offsetting each other for inflation or for some other activities. But the $30 million sounds about right to me.

Okay. And did you guys buy back any stock in the quarter? And what are your thoughts about the buyback going forward?

So we had no share repurchases in the second quarter, and we understand where the market is today. And so we have a very active discussions with our Board of Directors on our capital actions, whether it's share repurchase or dividend. So that will be taken up again here in the third quarter.

Our next question comes from Tim Coffey with Janney.

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 we're projecting for the second half is pretty strong. and was strong in this quarter. I'm just kind of wondering if you can tell me where you're getting the successes from.

Yes. 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 as during the -- for the past -- for the next 2 quarters, both retail and corresponding lending will ramp up.

Okay. Okay. And then, Ron, just not to dig too deep into this, but it seems like the 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?

Yes.

Our next question comes from Gary Tenner with D.A. Davidson.

My questions have 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 in most of that production?

It came from mostly industrial properties as well as multifamily and office properties occupied by credit tenants.

Is that primarily in California? Or are you getting any growth out of your other markets?

Right now, only California as well as some from Texas area and New York area.

And then with regard to the PPP sales, do you plan to sell additional PPP prior to forgiveness or repayment?

Our sales to date have been the Second Draw of PPP. So everything that we've originated, we've sold. With respect to first draw of PPP, we've been using the forgiveness route. But as that windows down, we will take a look at what's there to decide if there's anything elsewhere to expedite the finality of the program, but for the most part, first draw of PPP has been through the forgiveness process.

Okay. So the small amount of PPP loan sales, you mentioned early in the third quarter is all that's currently...

All second -- those are all Second Draw.

(Operator Instructions)

Our next question is from Kelly Motta with KBW.

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 commentate on the CRA exam? And 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.

Sure. So we don't believe that we will incur any significant additional cost other than what's normally expected.

Our next question comes from Jason Stewart with Jones Trading.

I wanted 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?

Well, actually, we've been focusing on the non-QM products, not on the FHFA 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.

Okay. But in terms of the fact that we might move the credit box by a little bit wider, what products do you think make the most sense for Hanmi and make the most sense for the GSEs going forward?

Well, with a low rate environment, with a 30-year fix under 3%, as I said, the product that makes sense for us is non-QM products. which ranges about 3.75% to 4.25%. So we'll continue to concentrate on that, selling the product.

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.

Thank you for listening to Hanmi Financial's Second Quarter 2021 Results Conference Call. We look forward to speaking with you again next quarter.

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.