Hanmi Reports Second Quarter 2020 Results

2020 Second Quarter Highlights:    

• Net income of $9.2 million, or $0.30 per diluted share, up from net income of $2.4 million, or $0.08 per diluted share, for the prior quarter and up from net income of $2.7 million, or $0.09 per diluted share, from the same quarter a year ago.
• Loans receivable of $4.83 billion, up 6.2% from the end of the prior quarter reflecting $308.8 million of loans originated through the Paycheck Protection Program ("PPP") and $225.3 million of new loan and lease production; Loans receivable up 5.9% year-over-year.
• Deposits of $5.21 billion, up $627.7 million or 13.7% from the end of the first quarter, led principally from increases in noninterest-bearing deposits; Deposits up 9.4% from a year ago. Second quarter cost of interest-bearing deposits declined 45 basis points from the prior quarter.
• Credit loss expense, under the new accounting standard, was $24.6 million, compared with $15.7 million for the prior quarter, resulting in an allowance for credit losses of 1.79% of loans at June 30, 2020 – 1.91% excluding PPP loans.
• Nonperforming assets were 0.94% of total assets at quarter-end compared with 0.93% for the prior quarter.
• Net interest income was $44.4 million for the second quarter compared with $44.0 million for the previous quarter; net interest margin for the second quarter was 3.15% (3.21% excluding PPP loans) compared with 3.36% for the prior quarter.
• Noninterest income was $20.9 million, up from $6.2 million for the previous quarter, and included gains on sales of securities of $15.7 million.
• Noninterest expense was $27.1 million, down 12.7% from the previous quarter chiefly due to deferred PPP loan origination costs; Efficiency ratio for the second quarter was 41.51% (60.82% excluding securities gains and deferred PPP loan origination costs) compared with 61.89% for the prior quarter.
• Hanmi ended the second quarter with a tangible common equity to tangible assets ratio of 8.63% (9.07% excluding PPP loans) and remained well-capitalized with a Total Risk-Based capital ratio of 14.04% and a Common Equity Tier 1 capital ratio of 10.47% as of June 30, 2020.

For more information about our response to the COVID-19 pandemic, including detail regarding our participation in the PPP, our loan deferrals, including a breakdown by loan type and industry, as well as detail concerning our loan exposure to higher impacted industries, please see the Q2 2020 Investor Update (and Supplemental Financial Information), a copy of which is available on our website at www.hanmi.com and via a current report on Form 8-K on the website of the Securities and Exchange Commission at www.sec.gov.

LOS ANGELES, July 28, 2020 (GLOBE NEWSWIRE) -- Hanmi Financial Corporation HAFC or "Hanmi"))), the parent company of Hanmi Bank (the "Bank"), today reported net income for the 2020 second quarter of $9.2 million, or $0.30 per diluted share, compared with $2.4 million, or $0.08 per diluted share for the 2020 first quarter and $2.7 million, or $0.09 per diluted share for the 2019 second quarter.

Bonnie Lee, President and Chief Executive Officer, said, "In an extremely challenging and uncertain operating environment resulting from the ongoing COVID-19 pandemic, Hanmi's performance in the second quarter was highlighted by solid loan growth and strong deposit gathering activities. During the quarter, loan production of $534.1 million increased by $281.7 million year-over-year, which helped drive loans receivable up by 6.2% compared with the prior quarter and 5.9% from a year ago. Second quarter loan production included $225.3 million in new loans as well as more than 3,000 loans totaling $308.8 million for the SBA's Paycheck Protection Program. I am also very pleased with our deposit franchise as noninterest-bearing demand balances grew 36.5% in the quarter, resulting in total deposits increasing 13.7% for the quarter and 9.4% year-over-year."

Ms. Lee further noted, "We also continue to diligently support our customers and our communities in this time of need. In addition to our efforts under the Paycheck Protection Program, we are working with borrowers through modifications, deferrals and other services to help businesses impacted by the pandemic. We remain extremely focused on the management of our loan and lease portfolio by providing individualized support to our customers during this pandemic. Our objective is simple—provide additional liquidity and payment flexibility for our customers as a means to avoid future charge-offs and ultimately help our customers through the crisis."

Ms. Lee concluded, "Perhaps most importantly, Hanmi's capital far exceeded the minimum thresholds to be deemed well-capitalized, and the Bank has ample liquidity. Our regulatory capital ratios are strong, and as we enter the second half of 2020, I believe Hanmi is well-positioned to address these challenging times."

Quarterly Highlights
(Dollars in thousands, except per share data)

Results of Operations
Net interest income was $44.4 million for the second quarter of 2020 compared with $44.0 million for the first quarter of 2020, an increase of 1.1%. Interest and fees on loans decreased 4.4%, or $2.4 million, from the preceding quarter primarily due to a 37 basis point reduction in average yields, reflecting the increase in lower yielding PPP loans and the full-quarter decline in the federal funds rate. Offsetting the decrease in interest income was a decrease in total interest expense of 24.5%, or $3.7 million, from the preceding quarter driven by a 45 basis point reduction in the average rate paid on interest-bearing deposits. This was principally due to the effect of management's response to the decline in the general level of interest rates and a decrease in the average balance of time deposits. Second quarter loan prepayment penalties were $0.1 million compared with $0.5 million for the first quarter.

Net interest margin was 3.15% for the second quarter of 2020 compared with 3.36% for the first quarter of 2020, principally reflecting a 55 basis point decline in the yield on earning assets offset by a 45 basis point decline in the cost of interest-bearing deposits. The average earning asset yield was 3.95% for the second quarter of 2020 compared with 4.50% for the first quarter of 2020. The 55 basis point decline reflects the increase in lower-yielding PPP loans, the reduction in securities yields and in dividends on FHLB stock, the full-quarter effect of the decline in the federal funds rate and an overall lower rate environment. The cost of interest-bearing liabilities was 1.23% for the second quarter of 2020 compared with 1.70% for the first quarter of 2020. The 45 basis point decline in the cost of interest-bearing deposits drove the lower cost of interest-bearing liabilities. 

For the second quarter of 2020, credit loss expense was $24.6 million, comprised of a $21.1 million provision for loan losses and a $3.5 million provision for off-balance sheet items. The provision for loan losses for the first quarter of 2020 was $14.9 million and was $16.7 million for the second quarter of 2019. The provision for off-balance sheet items was $0.8 million and $0.2 million for the first quarter of 2020 and second quarter of 2019, respectively. The increase in 2020 second quarter credit loss expense reflects the change in the assumptions in determining the allowance for credit losses including higher unemployment and lower economic activity. The 2020 first quarter expense included a specific qualitative provision of $7.4 million related to the COVID-19 crisis, a $4.9 million provision primarily for changes in other qualitative factors, and a $2.6 million specific provision for the previously identified troubled loan relationship.

Second quarter noninterest income increased to $20.9 million from $6.2 million for the first quarter, primarily due to $479.9 million in sales of securities resulting in $15.7 million in gains. The gains on sales of securities reflect the repositioning of the securities portfolio to capture the high-level of unrealized gains arising from the very low rate environment. Hanmi reinvested the proceeds into U.S. Treasuries and U.S. Government agencies and sponsored agencies mortgage-backed securities, collateralized mortgage obligations and notes. As expected, Hanmi did not sell any SBA loans during the second quarter because of the disruptions in the secondary market resulting from the COVID-19 crisis. Secondary market activity resumed late in the second quarter. As a result, there were $17.9 million of the guaranteed-portion of SBA 7(a) loans held for sale at June 30, 2020, with a weighted-average trade premium of 8.97%. The volume of SBA loans sold and gains on sales of SBA loans for the first quarter of 2020 were $18.2 million and $1.2 million, respectively. Servicing income increased in the 2020-second quarter from the resolution of outstanding servicing fees due on previously outstanding loans and a lower level of asset amortization. Other operating income for the second quarter of 2020 included $0.4 million of fee income, net of credit valuation adjustments, from $29.5 million notional amount of back-to-back loan swaps.

During the second quarter of 2020, noninterest expense decreased 12.7% to $27.1 million from $31.1 million for the first quarter primarily due to a $3.0 million decrease in salaries and benefits expense. A $2.4 million increase in deferred loan costs, principally from PPP loans, and $0.4 million of lower payroll taxes drove the decrease in salary and benefits expense. Higher noninterest income from securities transactions and lower noninterest expense from PPP loan originations resulted in an efficiency ratio of 41.51% for the 2020-second quarter compared with 61.89% in the prior quarter. Without the $15.7 million of securities transactions or $3.1 million in deferred loan costs from PPP loans, the efficiency ratio for the second quarter of 2020 would have been 60.82%.

Hanmi recorded a provision for income taxes of $4.5 million for the second quarter of 2020, representing an effective tax rate of 32.7% compared with $1.0 million, representing an effective tax rate of 30.7% for the first quarter of 2020. The effective tax rate for the first six months of 2020 was 32.3%.

Financial Position
Total assets were $6.22 billion at June 30, 2020, a 10.7% increase from $5.62 billion at March 31, 2020. The increase in total assets was primarily due to an increase in loans driven by the PPP loans and an increase in cash and due from banks arising from the increase in deposits.

Loans receivable, before the allowance for credit losses, were $4.83 billion at June 30, 2020, up 6.2% from $4.54 billion at March 31, 2020. Loans held for sale, representing the guaranteed portion of SBA 7(a) loans were $17.9 million at the end of the second quarter; there were no loans held for sale at the end of the first quarter.

For the second quarter of 2020, commercial real estate loans as a percentage of loans receivable decreased to 67.7% compared with 70.5% for the same period last year. Commercial and industrial loans, which included $301.8 million of SBA guaranteed PPP loans, reached 15.1% of the portfolio at the end of the 2020-second quarter, up from 9.0% a year ago.

Hanmi generated strong loan production volume through the second quarter, with approximately $308.8 million of PPP loans. New loan production including PPP loans funded for the 2020 second quarter totaled $534.1 million at an average rate of 2.35%, while the average rate of loans paid off during the same period was 4.49%. Excluding PPP loans new loan production for the 2020 second quarter was $225.3 million at an average rate of 4.20%.

Deposits totaled $5.21 billion at the end of the second quarter, compared with $4.58 billion at the end of the preceding quarter. Noninterest-bearing demand deposits, interest-bearing demand deposits and money market and savings deposits led this growth with increases of 36.5%, 11.0% and 10.0%, respectively. The increase in deposits reflects depositors placing their PPP loan proceeds and proceeds from other government assistance programs, as well as an increase from our marketing efforts and depositors seeking safety for their funds. At June 30, 2020 the loan-to-deposit ratio fell to 92.6% compared with 99.2% at the end of the previous quarter.

At June 30, 2020, the Bank had $150.0 million in borrowings from the FHLB with $1.4 billion of remaining unused availability. In addition, the Bank had $101.8 million of borrowings under the PPP Liquidity Facility at the end of the 2020-second quarter; the Bank repaid these borrowings in July 2020. As of the end of the second quarter of 2020, the Bank had unused secured and unsecured facilities of $1.7 billion and $115.0 million, respectively.

At June 30, 2020 the Company had $20.3 million of cash on deposit with the Bank. Hanmi continues to believe it has ample liquidity resources to operate in the evolving, uncertain macroeconomic environment resulting from the COVID-19 crisis, and is continuously evaluating potential liquidity requirements.

At June 30, 2020, stockholders' equity was $547.4 million, compared with $553.0 million at March 31, 2020. Tangible common stockholders' equity was $535.7 million, or 8.63% of tangible assets, at June 30, 2020 compared with $541.2 million, or 9.65% of tangible assets at the end of the first quarter. The ratio of tangible common equity to tangible assets excluding the $301.8 million of PPP loans was 9.07% at the end of the 2020-second quarter. Tangible book value per share decreased to $17.47 at June 30, 2020 from $17.67 at the end of the prior quarter.

Hanmi continues to be well capitalized for regulatory purposes, with a preliminary Tier 1 risk-based capital ratio of 10.86% and a Total risk-based capital ratio of 14.04% at June 30, 2020, versus 11.52% and 14.77%, respectively, at the end of the first quarter.

Asset Quality
Loans and leases 30 to 89 days past due and still accruing were 0.21% of loans and leases at the end of the second quarter of 2020, compared with 0.22% at the end of the first quarter.

Classified loans were $93.9 million at June 30, 2020 compared with $88.2 million at the end of the first quarter, while special mention loans were $21.1 million at the end of the second quarter compared with $20.9 million at March 31, 2020. The increase in classified loans primarily represents the addition of $2.5 million of past due leases, $2.5 million of commercial real estate loans and $1.0 million of residential mortgages.

Nonperforming loans were $58.3 million at the end of the second quarter of 2020, or 1.21% of loans compared with $52.2 million at the end of the first quarter, or 1.15% of the portfolio. The increase in nonperforming loans reflects the addition of three loans totaling $22.9 million and leases totaling $1.6 million offset by the pay-off of the $5.5 million film-tax credit loan that was past due 90 days or more at the end of the first quarter, as well as two other loans totaling $14.1 million returning to accruing status.

Nonperforming assets were $58.4 million at the end of the second quarter of 2020, or 0.94% of total assets, compared with $52.3 million, or 0.93% of assets, at the end of the prior quarter.

At the end of the second quarter the Bank had approved 2,443 modifications totaling $1.4 billion in loans and leases, or approximately 29% of the portfolio, of which 698 or $1.3 billion represented loan modifications and 1,745 or $0.1 million represented lease modifications.

Gross charge-offs for the second quarter of 2020 were $1.6 million compared with $27.5 million for the preceding quarter, $25.2 million of which related to a troubled loan relationship. Recoveries of previously charged-off loans for the second quarter of 2020 were $0.3 million compared with $0.2 million for the preceding quarter. As a result, there were net charge-offs of $1.3 million for the second quarter of 2020, compared with net charge-offs of $27.3 million for the preceding quarter. For the second quarter of 2020 net charge-offs represented an annualized 0.11% of average loans compared with 2.41% of average loans for the first quarter – or 0.19% excluding the charge-off of the troubled loan relationship.

The allowance for credit losses was $86.3 million as of June 30, 2020 generating an allowance for credit losses to loans of 1.79% (1.91% excluding the PPP loans) compared with 1.46% at the end of the prior quarter. The increase in the allowance from the first quarter reflects the change in macroeconomic assumptions including a higher projected average unemployment rate for the subsequent four quarters and a lower projected annual GDP growth rate. Hanmi recognizes the inherent uncertainties in the estimate of the allowance for credit losses and the effects this crisis may have on our borrowers. Hanmi expects the estimate of the allowance for credit losses will change in future periods because of changes in economic conditions, economic forecasts, and other factors.

Corporate Developments
On May 1, 2020 Hanmi's Board of Directors declared a cash dividend on its common stock for the 2020 second quarter of $0.12 per share. The dividend was paid on May 29, 2020 to stockholders of record as of the close of business on May 11, 2020.

Conference Call                            
Management will host a conference call today, July 28, 2020 at 2:00 p.m. PT (5:00 p.m. ET) to discuss these results. This call will also be broadcast live via the internet. Investment professionals and all current and prospective stockholders are invited to access the live call by dialing 1-877-407-9039 before 2:00 p.m. PT, using access code HANMI. To listen to the call online, either live or archived, visit the Investor Relations page of Hanmi's website at www.hanmi.com.

About Hanmi Financial Corporation
Headquartered in Los Angeles, California, Hanmi Financial Corporation owns Hanmi Bank, which serves multi-ethnic communities through its network of 35 full-service branches and 9 loan production offices in California, Texas, Illinois, Virginia, New Jersey, New York, Colorado, Washington and Georgia. Hanmi Bank specializes in real estate, commercial, SBA and trade finance lending to small and middle market businesses. Additional information is available at www.hanmi.com.

Forward-Looking Statements
This press release contains forward-looking statements, which are included in accordance with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are "forward–looking statements" for purposes of federal and state securities laws, including, but not limited to, statements about anticipated future operating and financial performance, financial position and liquidity, business strategies, regulatory and competitive outlook, investment and expenditure plans, capital and financing needs and availability, plans and objectives of management for future operations, developments regarding our capital plans, strategic alternatives for a possible business combination, merger or sale transaction, and other similar forecasts and statements of expectation and statements of assumption underlying any of the foregoing. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential," or "continue," or the negative of such terms and other comparable terminology. Although we believe that our forward-looking statements to be reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statements. These factors include the following:

• a failure to maintain adequate levels of capital and liquidity to support our operations;
• the effect of potential future supervisory action against us or Hanmi Bank;
• our ability to remediate any material weakness in our internal controls over financial reporting;
• general economic and business conditions internationally, nationally and in those areas in which we operate;
• volatility and deterioration in the credit and equity markets;
• changes in consumer spending, borrowing and savings habits;
• availability of capital from private and government sources;
• demographic changes;
• competition for loans and deposits and failure to attract or retain loans and deposits;
• fluctuations in interest rates and a decline in the level of our interest rate spread;
• risks of natural disasters;
• a failure in or breach of our operational or security systems or infrastructure, including cyberattacks;
• the failure to maintain current technologies;
• our inability to successfully implement future information technology enhancements;
• difficult business and economic conditions that can adversely affect our industry and business, including competition and lack of soundness of other financial institutions, fraudulent activity and negative publicity;
• risks associated with Small Business Administration loans;
• failure to attract or retain key employees;
• our ability to access cost-effective funding;
• fluctuations in real estate values;
• changes in accounting policies and practices;
• the imposition of tariffs or other domestic or international governmental policies impacting the value of the products of our borrowers;
• changes in governmental regulation, including, but not limited to, any increase in FDIC insurance premiums;
• the ability of Hanmi Bank to make distributions to Hanmi Financial Corporation, which is restricted by certain factors, including Hanmi Bank's retained earnings, net income, prior distributions made, and certain other financial tests;
• our ability to identify a suitable strategic partner or to consummate a strategic transaction;
• the adequacy of our allowance for credit losses;
• our credit quality and the effect of credit quality on our provision for loan losses and allowance for credit losses;
• changes in the financial performance and/or condition of our borrowers and the ability of our borrowers to perform under the terms of their loans and other terms of credit agreements;
• our ability to control expenses;
• changes in securities markets; and
• risks as it relates to cyber security against our information technology and those of our third-party providers and vendors.

Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

• demand for our products and services may decline, making it difficult to grow assets and income;
• if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
• collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
• our allowance for credit losses may have to be increased if borrowers experience financial difficulties, which will adversely affect our net income;
• a worsening of business and economic conditions or in the financial markets could result in an impairment of certain intangible assets, such as goodwill or our servicing assets;
• the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
• as the result of the decline in the Federal Reserve Board's target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;
• a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;
• litigation, regulatory enforcement risk and reputation risk regarding our participation in the Paycheck Protection Program and the risk that the Small Business Administration may not fund some or all PPP loan guaranties;
• our cyber security risks are increased as the result of an increase in the number of employees working remotely;
• FDIC premiums may increase if the agency experiences additional resolution costs; and
• the unanticipated loss or unavailability of key employees due to the outbreak, which could harm our ability to operate our business or execute our business strategy, especially as we may not be successful in finding and integrating suitable successors.

In addition, we set forth certain risks in our reports filed with the U.S. Securities and Exchange Commission, including, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, our Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K that we will file hereafter, which could cause actual results to differ from those projected. We undertake no obligation to update such forward-looking statements except as required by law.

Investor Contacts:
Romolo (Ron) Santarosa
Senior Executive Vice President & Chief Financial Officer
213-427-5636

Lasse Glassen
Investor Relations / Addo Investor Relations
310-829-5400

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