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 opened for questions. 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 Q2 2021 earnings are Bonnie Lee, President and Chief Executive Officer Anthony Kim, Chief Banking Officer and Ron Santa Rosa, 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 ks 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 ks. This afternoon, Hanmi Financial issued a news release outlining our financial results for the Q2 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 honmi.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 Q2 results. Hanmi delivered another strong performance in the 2nd quarter highlighted by 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 tick up in business activity as economies in our markets reopen has Hamid poised to continue driving solid results in the second half of the year.
Today, we reported net income for the 2nd quarter of $2,100,000 or $0.72 per diluted share. Net income increased 33% from the Q1 and over 140% from a year ago. Our 2nd quarter earnings 2nd 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 2nd quarter and was a single quarter record when excluding PPP loan origination. Excluding PPP loans, our loans grew 2.5% from the Q1.
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 30, loans modified under the CARES Act declined 38% from the 1st quarter to end the 2nd quarter at $72,300,000 representing just 1.5 percent 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 $12,400,000 of Affiliantech credit loans without any loss to the bank.
We have now seen nonaccord 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 a tremendous uncertainty and the hardship of the pandemic. And while the challenges of the pandemic continue, I believe Hamid's commitment to proactive asset management has significantly helped both the borrower and the bank. Balancing these positive and encouraging trends with the prudent, 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 700,000 dollars 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 Q2 loan production results and deposit gathering activity. Anthony?
Thank you, Bonnie. During the Q2, Hanmi generated excellent loan production volume, totaling $466,000,000 in the quarter, up 33.8% from the prior quarter's volume of $348,000,000 dollars Growth was driven by strength in CRE loans, residential mortgages, C and I loans and strong lease volume, partially offset by lower production of SBA loans, which benefited from $131,500,000 in second draw TTP loans last quarter. Altogether, excluding the impact of TPP loan production in previous periods, loan production in the 2nd quarter was an all time record for Hanmi. Looking at the loan production in more detail, 2nd quarter production consisted primarily of $186,100,000 of CII loans, dollars 66,600,000 of residential mortgages, dollars 99,400,000 of CII loans and $42,600,000 of SBA loans. Rounding out 2nd quarter production was $70,900,000 of commercial equipment leases, which returned to levels we're 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 $100,000,000 or nearly 70% from the prior quarter to $705,000,000 Balances on these lines increased by $17,100,000 compared to the prior quarter, reflecting a 2nd 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, 2nd quarter lending activity included approximately $67,000,000 of residential mortgages, along with $63,000,000 of warehouse lending. In addition, new commitments on the warehouse lines of credit have increased to $110,000,000 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 Hamin'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 $87,000,000 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, along with a meaningful contribution in 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 very strong loan pipeline for ARMY.
As such, loan production should remain robust and grow solidly in the second half of the year. Loan payoffs in the second quarter of $264,800,000 included $140,000,000 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 percent 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 4,820,000,000 at the end of 2nd quarter, up 2.5 percent 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 CI loan portfolio as of the end of 2nd quarter were 48.7% and 1.9 times 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 most impacted by COVID-nineteen.
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 $3,200,000 with a weighted average debt coverage ratio of 2 times and weighted average loan to value ratio of 50.1 percent 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%.
Nonoper hospitality loans represents only 1% of this portfolio with only 2 loans over 3,000,000. We continue to believe that our exposure to the hospitality segment and the associated risks are manageable. Turning to deposits, Harmony had another strong quarter. Total deposits were $5,630,000,000 at the end of the quarter, compared with a $5,510,000,000 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 non interest 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 Santolosa, 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 2nd quarter net interest income of $49,600,000 increased 7.8% from the prior quarter and our net interest margin of 3.19 percent 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 $1,800,000 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 7 basis point decline quarter over quarter as the benefit from the fall in the cost of interest bearing deposits was more than offset from 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 2nd 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 non interest income of $8,900,000 we saw our traditional SBA trade premiums rising to 12.55 percent for the 2nd quarter compared with 10.66 percent in the 1st quarter, driving our gains on sales higher to $3,300,000 At the end of the second quarter, traditional SBA loans held for sale were $21,900,000 Loans held for sale also included $14,100,000 of 2nd draw 50P loans that we sold early in the Q3 for a gain of approximately $300,000 Service charges, fees and other income remained consistent quarter over quarter. Non interest expenses were $30,800,000 for the 2nd quarter, essentially flat with the Q1 after adjusting the Q1 for $1,400,000 of capitalized costs from second draw PPP loans.
Our efficiency ratio improved to 52.66 percent from 52.92 percent for the prior quarter. Pulling this all together from a pre tax pre provision perspective and adjusting for the effects of 2nd draw PPP loans as well as certain other items, we saw pre tax pre provision income of $27,400,000 up solidly from the Q1. Our 2nd quarter results also included a $3,300,000 recovery of credit loss expense. This was comprised of a $4,100,000 negative provision for loan losses, a $500,000 reduction in our allowance for accrued interest receivable for current or previously modified loans offset partially by a $1,300,000 positive provision for off balance sheet items. Looking to the balance sheet, our allowance for credit losses decreased to $83,400,000 from $88,400,000 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 Q2 were 1.38% and 14.91%, respectively. In addition, our tangible book value increased 3.7 percent 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 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 capped off a very strong performance throughout the first half of twenty twenty one. 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 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 Hami 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 Q3 results in the fall.
Operator, that concludes our prepared remarks. We'd now like to open the call for questions.
Thank you. Our first question comes from Matthew Clark with Piper Sandler. Please proceed with your question.
Hey, good afternoon.
Good afternoon.
Maybe first, Ron, on the core margin outlook, I think you said down 7 basis points in the upcoming quarter. Was 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 2nd quarter, PPP loans, the non accrual loan interest capture and reduce the Q1 for the same ideas, you'll see that the net interest margin is down about 7 basis points. So 1st quarter on an adjusted basis 3.13 percent, we're down 7% from that.
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?
For the quarter? Just give me a minute.
I'm guessing it's about $190,000,000 but that's right.
For the quarter looking for averages, here we go, 254,000,000 for 4.35
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 1st, it's back then probably a 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 Q1 and Q2 when you adjust Q1 for the cost capitalization from 2nd Draw PPP about the same, that $30,000,000 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 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 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 Q3.
Okay. Thank you.
Thank you. Our next question comes from Tim Coffey with Janney. Please proceed with your question.
Great. Thank you. Good afternoon, everybody. Good morning. 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 kind of tell me where you're getting the successes from?
Yes. We spent a couple of previous quarters setting up the credit funding lenders and warehouse lenders. So the increased production came from both retails and corresponding lending. So as during the for the past for the next two quarters, the both retail and corresponding lending will ramp up.
Okay.
Thank you for that. 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.
Okay.
All right. Those are my questions. Thank you.
Thank you.
Thank you. Our next question comes from Gary Tenner with D. A. Davidson. Please proceed with your question.
Thanks. My 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 sub segments you're seeing most of that production in?
It came from mostly industrial properties as well as multifamily and office properties occupied by credit tenants.
And is that primarily in California? Are you getting any growth out of your other markets?
Primarily California as well as some from Texas area and New York area.
And then with regard to the PPP sales, do you have plans to sell additional PPP prior to forgiveness or repayment?
Our sales to date have been the 2nd draw PPP. So everything that we've originated, we've sold. With respect to 1st draw PPP, we've been using the forgiveness route. But as it windows down, we will take a look at what's there to decide if there's anything else worth to expedite the finality of the program. But for the most part, 1st drop PPP has been through the forgiveness process.
Okay. So the small amount of PPP loan sales you mentioned early in the Q3 is all that's currently?
All the 2nd all those are all second drop.
Right. Okay. All right. Thank
you.
Our next question is from Kelly Motta with KBW. Please proceed with your question.
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. 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?
Thank you.
Sure. So we don't believe that we will incur any significant additional costs other than what's normally expected.
Okay. Thank you. That's all my other questions were asked and answered. So thanks so much for the time and the question.
Thank you.
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? Thanks.
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.
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?
Well, with a low rate environment with a 30 year fixed 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.
Okay. Appreciate it. Thanks.
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 Q2 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.