Ladies and gentlemen, welcome to Hanmi Financial Corporation's First Quarter 2021 Conference Call. As a reminder, today's call is being recorded for replay purposes. 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 Omni Financial's Q1 2021 earnings are Bonnie Lee, President and Chief Executive Officer Anthony Kim, Chief Banking Officer and Ron Santarosa, Chief Financial Officer. Ms. Muni will begin with an overview of the quarter, Mr. Kim will discuss loan and deposit activities, and Mr.
Santarosa will then provide more details on our operating performance. At the conclusion of the prepared remarks, we will open the call for questions. On today's call, we may include comments and forward looking statements made on current plans, expectations, events and financial industry trends that may affect the company's future operating results and financial position. Our actual results could be different from those expressed or implied by our forward looking statements, which involve risks and uncertainties. The speakers on this call claim the protection of the Safe Harbor provisions contained in the Securities Litigation Reform Act of 1995.
For a list of certain factors that may cause our results to differ from our expectations, please refer to our SEC filings, including our most recent Form 10 ks and 10 Qs. In particular, we direct you to the discussion of certain risk factors affecting our business contained in our earnings release, our investor presentation and our Form 10 ks. This afternoon, Harmony Financial issued a news release outlining our financial results for the Q1 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 hammy.com. I'll now turn the call over to Bonnie Li.
Bonnie?
Thank you, Rasa. Good afternoon, everyone. Thank you for joining us today to discuss Hamid's 2021 Q1 results. Our performance in the Q1 represents a solid start to 2021. During the quarter, we benefited from strong growth in deposits, solid loan production and telephone expense management, which contributed to the significant earnings expansion.
As the country emerges from the pandemic and macroeconomic conditions continue to improve, momentum is building and I believe Hamdi is well positioned for the year ahead. With that as a backdrop, the following are the key financial and operational takeaways from the Q1. We generated net income of $16,700,000 or $0.54 per diluted share, up from both the prior quarter and the same quarter last year. I am very pleased with this result, which was the near all time record for a single quarter. Earnings in the quarter benefited from lower credit loss expense, lower interest expense and gains under sale of a second trial Paycheck Protection Program or PPP loans.
And what is traditionally our slowest quarter of the year for new loan production, new loan origination volume in the Q1 was notably strong and nearly offset the normal loan runoff, loan sales and forgiveness and the 1st draw of PPP loans. Net interest margin of 3.09% was down just slightly from the prior quarter as the reduction in deposit costs nearly offset the decline in yields and earnings assets. Departments were up 4.5% from the prior quarter and 0.2% from the Q1 last year. Once again, growth in the total deposits this past quarter came from non interest bearing demand deposit accounts, which now represents nearly 40% of our total deposits, up from 30% a year ago. 1st quarter non interest expense adjusted for the 2nd row cost capitalization was flat on both the same quarter and year over year basis and declined significantly on an absolute basis.
And finally, Harmony remains very well capitalized. Harmony's regulatory capital ratios remain strong and we are well positioned to continue growing safely. Next, I would like to provide an update on our modified loan portfolio and the positive trends we continue to see as we emerge from the pandemic. At year end 20 20, we have significantly reduced the modified loan balance to $156,000,000 or approximately 3% of the portfolio. And as of the end of the Q1 of 2021, the balance has been further reduced by 25 percent to $117,000,000 and stood at just 2.4 percent of the portfolio.
At the end of the Q1, 89% of the modified loans are providing a modified payment, up from 87% at year end. For all loans that comprise the current modified portfolio, we have completed detailed reviews of our financial condition. In some cases, we have required additional credit enhancements. I firmly believe our commitment to proactive asset management has significantly helped both the borrower and the bank. Looking at the key asset quality metrics, current size loans increased in the 1st quarter by 26 $300,000 reflecting our aforementioned ongoing proactive asset management practices.
Approximately 58% of the total curricized loan balance was made up of loans that were adversely affected by the COVID-nineteen pandemic. I was very pleased with the substantial 1st quarter reduction in rental loans. In total, rental loans declined nearly 34% in the quarter to $55,100,000 or 1.14 percent of loans. The improvement was driven by several loan relationships that were positively dispositioned during the Q1 with a minimum or no loss. At the end of the first quarter, our allowance for credit losses was $88,400,000 and stood at 1.94 percent of loans excluding P3 loans.
We also continue to have a separate allowance for possible losses and accrued interest receivable for loans currently or previously modified under the CARES Act, now down to $1,200,000 Given our strong allowance and capital position and proactive asset management practices, I'm confident we are all well positioned to manage asset quality as we emerge from the pandemic and economic recoveries. Now I would like to shift gears and provide an update on several key initiatives for 2021 that are designed to provide our customers with additional products and services, further diversify our sources of revenue and drive growth. Beginning with our new residential mortgage platform, 1st quarter lending activity included approximately $12,000,000 of residential mortgage along with a $27,000,000 of warehouse lending. We have developed strong relationships with several correspondent lenders, which we believe is the most efficient way to build our residential portfolio. Looking ahead, we expect residential mortgage production will be higher in the Q2 and continue to ramp during the year, with the goal of a residential mortgage loans comprising 10% to 15% of Hanmi's loan origination activity in 2021.
Next is our digital initiative, which we have developed a digital banking platform to more efficiently scale our services, while providing a more convenient and seamless customer experience. The platform is currently accepting online DB and savings deposits. Later in the year, we expect to add a demand deposit feature to the platform and more aggressively market our digital capabilities to current and prospective customers. And finally, I continue to be pleased with the results of our corporate Korea initiative, which is focused on developing and expanding banking relationships with the Korean companies with the presence or offices in the United States. We recently hired a new relationship manager with a deep relationship in the corporate Korean business community to augment our effort, which includes staff at 7 strategically located at Hongni branches.
1st quarter corporate Korean Korea loan production was very strong and at quarter end had contributed 11% of our total loans. With a very strong pipeline, we expect the corporate Korea program to generate double digit growth in loan production in 2021. With that, I'd like to turn the call over to Anthony Kim, our Chief Banking Officer, to discuss the Q1 loan production results and deposit gathering activity. Anthony?
Thank you, Bonnie. Hanmi generates solid loan production volume totaling $348,000,000 in the quarter, up 6.2% from the prior quarter's volume of 327,800,000 dollars Growth was driven by strength in SBA loans, which included $131,500,000 second draw PPP loans, partially offset by lower production of C and I and CRE loans in the seasonally slower Q1. More specifically, Q1 production consisted primarily of $103,100,000 of CRE loans, dollars 41,900,000 of C and I loans and $155,900,000 of SBA loans. Rounding out, 1st quarter production was $34,100,000 of commercial equipment leases. Newly generated loans for the quarter, excluding 2nd draw, SBA loans had a weighted average yield of 4.05%.
I would also like to mention that commitments under commercial lines of credit increased more than 18% from a year ago to $605,000,000 However, balances on these lines fell by $9,500,000 compared to the Q1 of last year, reflecting a Q1 utilization rate of 42.8%. Finally, we did see some of our March production slip into April, and we believe that production should continue in a robust manner. During the Q1, Hungia sold non PPP 7 ASB loans generating a gain on sale of 1,700,000 and I was pleased with our execution as SBA 7H trade premiums increased to 10.66% in the period. In addition, we also sold 2nd row PPP loans at a net premium of 2.35%, generating an additional $2,500,000 in gain on sale in the quarter. 1st quarter payoffs of $167,000,000 remained in line with levels experienced in the recent quarters, but were further elevated by $44,300,000 of forgiveness from 1st draw of PPP loans.
The weighted average interest rate of the loans that paid off in the period, excluding PPP, was 4.73% or 68 basis points higher than the same adjusted weighted average of the new production in the quarter. The selling loan production in the quarter, coupled with the loan payoffs and sales, resulted in loans of $4,820,000,000 at the end of Q1, essentially unchanged from the prior quarter, excluding pay 50 loans. Hanmi remains committed to conservative, disciplined underwriting criteria. For the commercial real estate portfolio consistent with the asset quality data from prior quarters, the weighted average book to value and weighted average debt coverage ratio as of the end of Q1 were 48.6% and 1.9 times respectively. In light of the economic disruption caused by pandemic, we expect to maintain more conservative underwriting spend dollars, which includes limiting origination activities within certain high risk industries and closely monitoring the pandemic impact on our customers over the near term.
Now I would like to provide an update on our hospitality portfolio, the segment of our portfolio that has been most impacted by the pandemic. As of March 31, hospitality loans totaled $888,000,000 or 18% of total portfolio, down from 19% at year end. Overall, we believe our hospitality loans are conservatively underwritten. The average loan balance remains at just $3,300,000 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, 11% of our hospitality portfolio was criticized with approximately half of these loans stemming from Metropolitan based properties.
However, we have obtained in the last 12 months current appraisals for these properties and the current weighted average amount of value of all the criticized hospitality loans was 69.3% with a range of 47% to 81% for loans greater than 5,000,000 dollars This reflects, we believe, the particular property location, not necessarily a systematic decline in valuations. Furthermore, non accrual hospitality loans represent only 1% of this portfolio with only 2 loans over $3,000,000 Overall, we believe our exposure to the hospitality segment and the related risk in the current environment are manageable. We remain vigilant in working with our affected hospitality customers to help them further crisis. Moving on to deposit gathering activities, we have a very strong Q1. Total deposits were $5,510,000,000 at the end of quarter compared with the $5,280,000,000 at the end of preceding quarter, representing a 4.5% quarter over quarter increase and a 20.2% increase from a year ago.
Importantly, we continue to benefit from an improving mix shift of deposits as much of the growth is being driven by non interest bearing demand deposits. In fact, as Lonnie mentioned, non interest bearing deposits now represent nearly 40% of total deposits, up from 30% a year ago. I would now like to turn the call over to Ron Santorosa, our Chief Financial Officer. Ron?
Thank you, Anthony, and good afternoon, all. Let's begin at the top where we posted $46,000,000 of debt interest revenues, down sequentially because of 2 fewer days in the quarter. Looking a bit deeper, we saw a 1.2% growth in average interest earning assets, offset the 4 basis point decline in net interest margin. More than half of the growth in earning assets came from our loan portfolio, while the remainder occurred in lower yielding securities and deposits at the Fed. In addition, while we did see some 1st draw PPP loan forgiveness in the quarter, it had little effect on our net interest revenues.
Turning to our net interest margin, relatively steady at 3.09%. Our loan yields declined 10 basis points from the 4th quarter to 4.24%, while the cost of our interest bearing deposits dropped 15 basis points to 0.49%. Notably, the spread between the yield on earning assets and the rate paid on interest bearing liabilities was 281 basis points for the Q1, nearly the same as the 280 basis points for the 4th quarter and the 2 80 basis points for the Q1 a year ago where we had a much different interest rate environment. As Anthony noted, the weighted average interest rate on new loan production for the Q1, excluding 2nd draw of PPP loans, was 4.05%, below our 1st quarter loan portfolio average yield. However, we also had maturing time deposits for the 2nd quarter with a weighted average interest rate of 65 basis points that will mature into lower rate time deposits.
In addition, at the end of the Q1, we saw a significant growth in non interest bearing demand deposits with concomitant growth in lower yielding balances at the Fed. As a result, we expect the tension between the continued shift to the current rate environment as well as the continued shift in the mix of earning assets and funding should allow for the net interest margin to remain relatively steady. Moving to our net interest income of $9,800,000 we realized a $2,500,000 gain from the sale of second draw PPP loans at a net premium of 2.35 percent. At the end of the Q1, loans held for sale included $21,700,000 of 2nd draw PPP loans that we expect to sell in the 2nd quarter. We also had $1,700,000 of gains from the sale of traditional SBA loans at a net premium of 10.66%.
At the end of the Q1, traditional SBA loans held for sale of $10,900,000 Non interest expenses were $29,500,000 for the Q1, down 4.5% from the 4th quarter, presently because of the $1,400,000 of capitalized costs from second draw PPP loans. The efficiency ratio was 52.92 percent for the Q1. However, adjusting for security gains in 2nd draw PPP loan gains and origination costs, the efficiency ratio would have been 58.07%. Pulling this all together from a pre tax pre provision perspective and adjusting for the effects of second draw PPP loans as well as certain other items, we saw pre tax pre provision income of 22,100,000 dollars down from the Q4, but again primarily because of 2 fewer days in the quarter. Our credit loss expense for the Q1 was $2,100,000 This included a provision for loan losses of $1,000,000 a negative provision for off balance sheet items of $500,000 and another $1,500,000 negative provision for losses on accrued interest receivable on loans previously or currently modified under the
CARE Act.
We also established a $2,100,000 allowance for possible losses from an SBA guarantee repair loss. Looking to the balance sheet, our allowance for credit losses decreased to $88,400,000 from $90,400,000 after a provision of $1,000,000 and net charge offs of $3,000,000 Included in the allowance for credit losses were $12,200,000 of allowances associated with individually impaired loans, down $1,900,000 from year end. When macroeconomic conditions continue to improve, we believe our allowance for credit losses adequately reflects various economic forecasts as well as the heightened levels of near term uncertainty as we continue to emerge from the pandemic. We will continue to closely monitor and evaluate the evolving economic environment and refine our outlook and update our loss allowances accordingly. Our return on average assets and return on average equity in the Q1 were 1.08% and 11.63% respectively.
And finally, our tangible book value increased to $18.59 per common share at the end of the Q1 and our tangible common equity ratio remains strong at 8.87% as in all of our regulatory capital ratios. With that, I'll turn it over to Bonnie.
Thank you, Ram. As we slowly emerge from this crisis, I couldn't be more proud of the hard work done by our employees across all of our locations who have supported our customers in this unique environment. Looking ahead, I believe Hanmi is well positioned to continue driving profitable growth as the pandemic subsides and macroeconomic conditions continue to improve. I look forward to sharing our continued progress with you when we report our 2nd quarter results
in July. Thank you. Operator, that concludes our prepared remarks. We'd now like to open the call for questions.
Thank you. Ladies and gentlemen, we will now begin our question and answer session. Our first question is with Matthew Clark from Piper Sandler. Please proceed with your question.
Hey, good afternoon. Hi, Matthew. Maybe starting on the PPP, did I hear you guys correctly that you plan to sell the remaining amount of PPP loans here in the Q2? If not, I'm just trying to get a sense for what's remaining in terms of net fees.
Yes. Matthew, this is Ron. So we plan to sell the 2nd draw of PPP loans, dollars 21,700,000 With respect to 1st draw of PPP loans, which are about $256,000,000 at the end of the quarter, We'll continue to let that be reduced by forgiveness and any payments that the borrowers wish to make.
Okay. And do you have that remaining amount of I think it's around $6,000,000
or so?
Do you have the remaining go ahead. $3,700,000 $3,700,000
Okay. And then, your production was good balances loan balances ex PPT were flattish though. I think coming out of last quarter, you were guiding to low to mid single digit growth. I assume that's still the case for the year? Yes.
Okay. Any updated thoughts on the non interest expense outlook? I know the $1,400,000 was a little unusual this quarter, but excluding that modest growth, is that also still expected, most single digits?
Yes. I think, Matt, you can probably continue to expect, I'll say, inflationary style growth. So trending at about $30,000,000 a quarter, give or take.
That sounds about right.
Okay. And on the increase in criticized loans, the additions this quarter, can you give us some color there as to what was added?
Sure. In the special mention category, we have inflow about 3 hospitality loans. And in that facility, these operating properties are near either the tourist spot or the airport. So all 3 of them, if you combine them, that's over $20,000,000 So that's the contribution to the special needs category. And for the substandard, we have basically 1 loan to a media company that was impacted by COVID that has contributed to the increase in the substandard category.
Okay, got it. And then just on the share repurchase plan, given where your shares are today relative to where they were on average, at least with the price you bought them at during the Q1, should we suspect that buyback activity will be more muted here going forward?
Yes. We'll continue to do share repurchases, I'll say, in the ordinary course as market conditions allow.
Okay. Fair enough. Thanks.
Our next question is with Kelly Molta with KBW. Please proceed with your question.
Hi, Ronny and Bonnie.
Wow. Good afternoon.
Yes, you can tell it's late in the earnings season right now. With regards to credit, given where everything is with the movement between criticized and special mentions, do you expect any more kind of negative migrations from the hotel portfolio? And should that not occur? Do you think that reserves are adequate for the losses that could potentially flow through? And then should there be greater improvement, there could be further releases ahead as we've seen on other ranks?
So let me respond to the first part of the question. So in terms of COVID infected hospitality loans in the criticized category, I think most of the loans have surfaced up and we're hoping that the hospitality industry is really the activities are kicking off. So looking forward, I hope that we don't have additional downgrades. But I think within the next couple of quarters, we will see the activities in and out. And there will be some of the properties known as that are moving out of the category and possibly maybe there's some moving from special mention to sub categories.
So it depends on the more of the industry outlook in the hospitality industry. In terms of the result, I think we're adequately reserved. As currently, I think it's maybe too early to talk about the leasing of reserve.
Got it. Okay. Thank you. And with expenses, I'm sorry, I think you started to talk about it in your prepared remarks, but I may have missed it. With PPP REM2, what was the amount of deferred expenses that remain deferred in Q1?
I assume sales would accelerate the recognition, but just wondering what the impact was to 1Q expenses to kind of figure out a good go forward rate to use?
Sure. So I would ask you to think of PPP as 2 discrete ideas. The first discrete idea, second draw, which we've originated and we will sell. So those capitalized costs are in the Q1 and they were $1,400,000 The 1st draw of PPP loans, which we have about $256,000,000 those are on the balance sheet and they will go through the forgiveness process or repayment process. They have $3,700,000 of net deferred fees remaining in those balances.
Got it. Thank you. And maybe one final question on deposits. Obviously, some really good growth, especially in non interest bearing. Do you have a sense of how much of that I know it's a difficult question, but how much of that is related to stimulus and PPP?
And what is your expectation for how sticky that core deposit growth is?
Well, out of total TBA growth of about $207,000,000 Obviously, we did $131,500,000 of the 50% 2nd round. So we think $130,000,000 is 2 50% 2nd round. And other increase was due to some of the new accounts that we acquired in Q1 as well as balance increase from the existing customer that we acquired last year. So from the organic growth, I think we're estimating about 60% to 70% will be sticky.
Got it. Thank you so much. That's very helpful. I'll step back now.
Our next question is with Tim Coffey from Janney. Please proceed with your question.
Great. Thanks. Afternoon, everybody. If you look at the round 2 PPP loans, were the majority of those 2 existing clients or were there new clients mixed in there?
Those are 2 most of the existing clients.
Okay. Okay. That's great. And then Ron, what's the
how do we
think about the tax rate as we roll through the year?
So a little bit higher in the Q1 just because of the timing of certain discrete events. But I think for the year, we should trend more towards a 30% effective tax rate.
Okay. Those are my questions. Thank you very much.
Our next question is with Jason Stewart from Jones Trading. Please proceed with your question.
Thanks. Ron, I wanted to talk about the securities portfolio for a second and how you view the attractiveness of securities in particular as rates backed up in 1Q versus
where they are
today? Well, I guess I can keep it simple in saying the alternative is balances at the Fed at 10 basis points. So when 10 basis points is your baseline, a lot can look attractive. But we prefer in terms of investment keeping the duration right now basically short. I think we're around on an effective basis about 3.5 ish.
So we'll continue to look at mortgage backed. We do like amortizing securities. We enjoy the cash flow that gives us that reinvestment opportunity each month.
Okay. And then a quick follow-up. I do believe you mentioned the amount of loans in hospitality that were modified, but I think I missed that. Do you could you provide that?
It was $86,700,000. $86,700,000 $86,700,000
Sorry, what's the total amount of modified?
Total modified loans are $106,200,000 $16,000,000 in the future. Correct.
Our next question is from Gary Tenner with D. A. Davidson. Please proceed with your question.
Thanks. Good afternoon. I just wanted to talk a little bit about the Corporate Korea initiative. You've talked about the pipeline that you expect to generate double digit growth in loan production this year. Can you talk a little more about what are the typical types of loans you're making there?
Do you have any existing deposit relationships thus far coming out of that endeavor? And what the outlook might be in terms of contribution on that side of the balance sheet?
Sure. When we first initiated the Corporate Korea project or initiative, this was more of C and I play. But it's growing to be more both the C and I as well as the CRE loans as well as a tremendous DDA contribution. And part of the DDA increase that Anthony mentioned about from new accounts that we acquired in last year as well as this quarter. So it's a both side of the balance sheet.
And what we in terms of type of loans that we see, as I said, it's a line facility as well as some of the commercial real estate that corporate Korean companies are buying up in the United States. And then I had explained this, I think, last quarter mentioned that it's a little bit different than the type of commercial real estate that we entertained in the past, whereas corporate credit companies look for A class type of properties in the major metropolitan cities and they are backed up by a lot of capital investment from other companies. So we have done the line facilities at $5,000,000 to $10,000,000 to some of the commercial real estate deals that are over $30,000,000 dollars So in terms of the range, in terms of the sizes, as well as the type of deals, it's very broad based. So when I think couple of years ago, when this was initiated, other banks as well was more of a to the Tier 1, Tier 3 automobile companies. But now it's not only to those companies, but some of the manufacturers as well as trade wholesalers, attracting the deals.
Attracting the deals, but the deals are walking through our doors.
Thank you, Bonnie. And then just as a follow-up, in terms of kind of the outlook for 2nd quarter growth in terms of the pipeline, are you seeing increasing demand on the C and I side at all? Or is the pipeline build and kind of at least near term growth projection more CRE oriented? And I mean, in general, not just specific to the Corporate Korea initiative?
Yes. I think just looking at the point into this looking at the 2nd quarter pipeline, I think we have a good CRE as well as a C and I, some significant C and I opportunities. So and as well as some of the SBA deals and also some of the leasing opportunities as well. So our pipeline in the 2nd quarter is much stronger than the Q1. Thank you
for taking my questions.
Our next question is with David Quirognani with Wedbush Securities. Please proceed with your question.
Hi, thanks. A couple of questions. I was curious about the pricing that you're getting on your new resi mortgage initiatives. Could you I think you spoke about $12,000,000 or so on SFR and $27,000,000 on mortgage warehouse. Can you talk about the pricing that you're getting on those?
Yes. Because we're concentrating on the non QM products, which is typically 3 quarters to 1% higher than the confirming notes. So it's about 3.75 to 4.25 ish.
Great. And the mortgage warehouse?
Mortgage warehouse, we typically charge anywhere between 3.5% to 4%.
Great. And then And we do
Yes, go ahead. Go ahead.
And I was also curious about on the SBA PPP loans for round 2. Can you talk about why you decided to sell the round 2 as opposed to retaining them like round 1?
Sure. We did return analysis, obviously. And we still have over $250,000,000 the forgiveness from the 1st round. And I think it's taking much slower to going through the forgiveness process. And I think just evaluating the time and effort and the return analysis, we decide to expect to sell the loans as we produce for the 2nd round.
Got it. Thanks very much.
We have no further questions in the queue at this time. Please continue.
Thank you. Ladies and gentlemen, that does conclude our call today. You may disconnect the lines, and thank you for your participation.