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Hanmi Financial Corp (NASDAQ:HAFC)
Q2 2020 Earnings Call
Jul 28, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, welcome to the Hanmi Financial Corporation's Second Quarter 2020 Conference Call. [Operator Instructions] I would now like to introduce Mr. Lasse Glassen, Managing Director at ADDO Investor Relations. Please go ahead, sir.

Lasse Glassen -- Managing Director, Addo Investor Relations

Thank you, operator, and thank you all for joining us today. With me to discuss Hanmi Financial's second quarter 2020 earnings are Bonnie Lee, President and CEO; Anthony Kim, Chief Banking Officer; and Ron Santarosa, Chief Financial Officer. Ms. Lee will begin with an overview of the quarter. Mr. Kim will discuss loan and deposit activities and Mr. Santarosa will then provide more details on our operating performance. At the conclusion of the 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 risk and uncertainty. The speakers on this call claim the protection of the safe harbor provision contained in the Securities Litigation Reform Act of 1995. For some factors that may cause the results to differ from our expectations, please refer to our SEC filings, including our most recent Form 10-K and 10-Q.

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-K. This afternoon, Hanmi Financial issued a news release outlining our financial results for the second quarter of 2020, along with a supplemental slide presentation to accompany today's call. Both documents can be found on the Investor Relations' section of our website at hanmi.com.

I will now turn the call over to Bonnie Lee. Bonnie?

Bonita I. Lee -- President, Chief Executive Officer

Thank you, Lasse. Good afternoon, everyone. Thank you for joining us today to discuss Hanmi's 2020 second quarter results. Overall, I am pleased with the team's consistent execution during this past quarter in what continues to be an extremely difficult and uncertain operating environment, resulting from the ongoing COVID-19 pandemic. Hanmi's performance in the second quarter was underscored by solid loan growth and strong deposit gathering activity. We also continued to diligently support our customers and our communities.

In addition to our efforts under the Paycheck Protection Program or P3, we remain extremely focused on the management of our loan and lease portfolio by proactively providing individualized support to our customers to ultimately help them get through the crisis. While we continue to face challenges imposed by the pandemic, the following are some of the key financial and operational highlights for the second quarter.

Net income was solidly higher on both a sequential quarter and year-over-year basis. While credit loss expense arising from the pandemic increased, during the quarter, we benefited from gain on sale through the repositioning of our securities portfolio. New loan production during the second quarter was strong and included significant P3 loan production, while loan payoffs were very light [Phonetic]. As a result, loan receivable expanded nicely on both the sequential quarter and year-over-year basis.

Net interest income before credit loss provision increased slightly quarter-over-quarter, despite a 21 basis point sequential quarter reduction in net interest margin that was driven in part by the lower yielding P3 loans. Deposits increased sharply during the quarter led principally from increase in noninterest-bearing demand deposits. While portion of the increase reflect deposits from various government relief programs and a flight to security, I remain pleased with the strength of Hanmi's deposit franchise. But perhaps most importantly, Hanmi remains very well capitalized and has ample liquidity.

Our regulatory capital ratios are very strong and I believe, we are well positioned to address this challenging time. Looking in more detail at our second quarter results. We reported net income of $9.2 million or $0.30 per diluted share. This compares favorably to the net income of $0.08 per share in the previous quarter and net income of $0.09 per share in the second quarter last year. Net income in the second quarter continues to be impacted by uncertainties associated with the COVID-19 pandemic.

Second quarter credit loss expense increased to $24.6 million, up from $15.7 million in the prior quarter. The second quarter credit loss expense includes a $21.1 million provision for loan losses and a $3.5 million provision for off-balance sheet items. The increase in credit loss expense reflect deterioration during the quarter in some of the assumptions used in determining the allowance for credit losses, including levels of economic activity and employment among others. Without a doubt, this remains a very fluid situation and we will continue to closely monitor the impact of the crisis on our portfolio.

Partially offsetting the credit loss expense was a $15.7 million gain on sale of the securities recorded in the quarter. The gain on sale of the securities reflect the repositioning of our securities portfolio to capture a high level of unrealized gains arising from the very low interest rate environment. As expected, Hanmi did not sell any SBA loans during the second quarter because of the disruption in the secondary market resulting from the COVID-19 crisis. We expect, however, to resume selling SBA loans in the third quarter. As a result, there were $17.9 million of the guaranteed-portion of SBA 7(a) loans held for sale at June 30th. Let's now turn to asset quality.

Nonperforming loans increased modestly to $58.3 million or 121 basis points of loans at quarter end compared with the first quarter 2020 nonperforming loans of $52.2 million or 150 basis points of loans. The increase in nonperforming loans reflect 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 discussed in our call last quarter as well as two other loans totaling $14.1 million returning to accruing status.

The COVID-19 pandemic caused a number of our borrowers to take temporary modifications to their loan agreement. We approved in the second quarter over 2,000 applications for 90-day modifications, reaching $1.4 billion. Since then, we have kept in close contact with our borrowers and are guardedly encouraged that about 30% of our hotel, retail and other real estate secured borrowers may not take an additional 90-day modification. As many of you are aware, the circumstances facing our borrowers can change rapidly as the instance of the virus rises or fall. As we did last quarter, we will continued to work with our borrowers in these challenging times.

In terms of underwriting, we remain committed to conservative, disciplined credit criteria. For the second quarter 2020, consistent with the asset quality data from prior quarters, the weighted average loan-to-value and debt-coverage ratio on new commercial real estate loan originations were 55.5% [Phonetic] and 1.7 times, respectively. For the entire commercial real estate portfolio, the weighted average loan-to-value and weighted average debt-coverage ratios as of the end of the second quarter were 48.7% and 1.9 times, respectively. Anthony will provide additional detail on changes to underwriting in-light of the COVID-19 crisis.

With that, I would like to turn the call over to Anthony Kim, our Chief Banking Officer to discuss the second quarter loan production result and deposit gathering activity. Anthony?

Anthony Kim -- Executive Vice President and Chief Banking Officer

Thank you, Bonnie. I will discuss loan production, deposit gathering activities and then turn it over to Ron Santarosa for additional details on our second quarter financial results. Hanmi generated strong loan production volume through the second quarter. Total loan production was $534.1 million in the quarter and included $308.8 million of new PPP loans and $225.3 million of new loans and leases.

We experienced growth across the all major categories except equipment leases where volume declined as expected. During the second quarter, we originated approximately one [Indecipherable] of these volume as compared to pre-crisis levels. More specifically, second quarter production consisted primarily of $129.4 million of commercial real estate loans, $328.3 million of SBA loans and $61.1 million of C&I loans.

Rounding out, second quarter production was $15.3 million of commercial equipment leases. Newly generated loans and leases for the quarter had a weighted average yield of 2.35% and includes a lower yielding PPP loans. Excluding PPP loans in the quarter, the yield on new production was 4.20%, down 68 basis points from the previous quarter's weighted average yield on new production of 4.88%.

Off-note, commitments under commercial lines of credit increased nearly 10% over the prior quarter to $566 million. However, the commercial lines of credit balance at quarter-end fell by nearly $40 million quarter-over-quarter, reflecting a second quarter utilization rate of just 40.5%. Thanks to the solid loan production in the quarter, coupled with relatively low levels of loan payoffs, loans receivable at the end of second quarter expanded to $4.83 billion, up 6.2% from the end of first quarter and up 5.9% from a year ago.

Similar to last quarter, I'd like to provide an update on our efforts to help our customers during this time of need. As of June 30th, we have approved 2,443 request for payment modification, totaling $1.4 billion of loans and leases, which comprises approximately 29% of our total portfolio. In addition, we have also been very active with the PPP loan production as I noted earlier. Suffice to say, we have been very engaged with our customers throughout the crisis and are working to help them weather the crisis. Looking ahead from the second quarter of 2020, we'll continue to prudently originate new loans.

In light of the economic disruption caused by pandemic, during the second quarter, we've tightened aspects of our underwriting, which includes limiting origination activities within certain high-risk industries. I do expect, Hanmi will continue observe this more stringent underwriting as we assess the impact of slowing economy on customers over the near term.

Deposits totaled $5.21 billion at the end of second quarter compared with a $4.58 billion at the end of preceding quarter, representing an increase of 13.7%. Noninterest-bearing demand deposits, interest-bearing demand deposit and money market and saving deposits led this growth with increases of 36.5%, 11% and 10%, respectively.

The increase in noninterest-bearing demand deposit for the current quarter was primarily due to the deposit increases from customers with the PPP as well as the overall liquid deposit market. Deposits held with customers with the PPP loans increased $201.1 million to $408.7 million at June 30, 2020, compared with $207.6 million at March 31, 2020. As a result of second quarter loan production and deposit gathering activities, our loan deposit ratio at the end of second quarter was 92.6% compared with 95.7% in the second quarter last year.

I would now like to turn the call over to Ron Santarosa, our Chief Financial Officer. Ron?

Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer

Thank you, Anthony, and good afternoon all. Let's begin with pre-tax pre-provision income for the second quarter. With net interest income of $44.4 million, noninterest income of $20.9 million and noninterest expenses of $27.1 million, pre-tax pre-provision income was $38.2 million. Adjusting for security gains and the deferral of PPP loan origination costs, pre-tax pre-provision income was $19.4 million, up 1.6% quarter-over-quarter.

Looking at net interest income. We posted $44.4 million, up 1.1% from the prior quarter, driven by a 30.2% decline in deposit interest expense, partially offset by a 4.4% decrease in interest income from loans against the backdrop of an overall lower rate environments. Average yields for all asset classes decreased in the second quarter, reducing total interest income by $3.2 million sequentially, despite a 7.8% increase in average interest earning assets.

In addition, interest expense decreased 24.5% in the linked quarter to $11.3 million from $15 million driven by the lower rates paid on interest-bearing deposits. Net interest margin for the quarter decreased by 21 basis points to 3.15% or 15 basis points when excluding the effect of PPP loans.

The average yield on interest earning assets fell by 55 basis points to 3.95%, with the corresponding 47 basis point decline in the cost of interest-bearing liabilities to 1.23%. The cost of deposits decreased by 37 basis points to 0.74%, driven by the lower interest rate environment and the continued mix shift in deposits.

As of June, relatively higher costing time deposits represented 27.5% of total deposits, declining 3.1% from the prior quarter, while noninterest bearing demand deposits were 35.8% of total deposits, rising 36.5% from the previous quarter. While total deposits increased by 13.7% sequentially, the ongoing shift in deposit mix in conjunction with the lower rate environment were the two main drivers of the improvement in interest non-deposits.

Turning next to non-interest income. We saw a significant increase in the second quarter to $20.9 million from $6.2 million for the first quarter. The increase was primarily due to the $15.7 million in gains on the sale of $479.9 million of securities. The gains on sales of securities reflect our repositioning of the portfolio to capture the high level of unrealized gains arising from the very low rate environment. Offsetting the increase for the quarter were lower levels of service charges and fees on deposits from lower activity and also from the fact that we did not sell any SBA loans during the second quarter. By comparison, the gain on sales of SBA loans for the first quarter of 2020 was $1.2 million.

Looking ahead, as Bonnie mentioned, we have resumed SBA loan sales and we will have gains on sales of SBA [Technical Issues]. And finally, non-interest expenses were $27.1 million in this quarter, a 12.7% sequential decline from $31.1 million last quarter. This was primarily due to a $3 million decrease in salaries and benefits expense. Here we see a $2.4 million increase in deferred loan cost, principally from PPP loans and a $400,000 reduction in payroll taxes drove the decrease overall. We also realized additional savings from the prior quarter from declines in professional fees and advertising and promotion of 19.3% and 37.8%, respectively. At June 30, the bank had $150 million in borrowings from the FHLB with $1.4 billion of remaining unused availability. As of the end of the second quarter, the bank also had unused secured and unsecured facilities of $163 million.

In addition, the bank did participate in the Federal Reserve's Paycheck Protection Program liquidity facility during the quarter with $101.8 million outstanding at the end of the second quarter. We've repaid this advance in July. At quarter end, the company had $20.3 million of cash on deposit with the Bank and Hanmi believes it has ample liquidity resources to address the uncertainties of the COVID-19 pandemic as they've unfolded to-date and we remain vigilant in assessing customer behavior and potential liquidity needs in this uncertain period. Tangible book value was $17.47 per share at June 30, while our tangible common equity ratio remain strong at 8.63%.

With that, I will turn it back to Bonnie.

Bonita I. Lee -- President, Chief Executive Officer

Thank you, Ron. As we begin in the second half of 2020, we continued to be keenly focused on operating efficiently, protecting our portfolio and maintaining a strong capital and liquidity position to effectively withstand this pandemic. As we move forward, we remain committed to supporting our loyal customers and prioritizing the health and safety of our employees and community to ultimately emerge from these uncertain times, well positioned and as a stronger company. I look forward to sharing our continued progress with you when we report our third quarter 2020 results in October.

Lasse Glassen -- Managing Director, Addo Investor Relations

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

Questions and Answers:

Operator

[Operator Instructions] Our first question is from David Feaster from Raymond James. Please proceed with your question.

David Feaster -- Raymond James -- Analyst

Hey. Good evening, everybody.

Bonita I. Lee -- President, Chief Executive Officer

Hello, David.

Anthony Kim -- Executive Vice President and Chief Banking Officer

Good evening.

David Feaster -- Raymond James -- Analyst

I just wanted to start on redeferral rate, how are the early read on modifications I mean, and then any details on the percentage of these that were 90-day versus 180-day interest only versus full payment deferral just -- and then again, the early read on redeferral rate?

Bonita I. Lee -- President, Chief Executive Officer

Sure. Approximately 78% of our overall modification is on the payment deferral. And as we had mentioned, as of June 30, we have about a $1.4 billion, representing 29%, 30% of our portfolio under modification. But most of these modifications were for the period of 90 days. So starting in the late June and also part of July, we are going through the second wave review of the modifications and where we have individually contacted our customers and try to assess where they are on each loan relationship. So from their communication that -- based on the responses that we have received from the customer base that we think that the second wave of deferment [Phonetic] will be about 30% lower than what is in the books under the current modification.

David Feaster -- Raymond James -- Analyst

Okay, that's helpful. And then I guess as you grant these additional modifications, are you acquiring any additional collateral, personal guarantees and then, maybe just any downgrade of the risk ratings or anything?

Bonita I. Lee -- President, Chief Executive Officer

As we speak, most of -- currently, of the loans under modifications, almost most of them had guarantees in place to begin with. In terms of additional collaterals, we are reviewing in each individual cases. So far, most of them we haven't had to ask for additional collateral.

David Feaster -- Raymond James -- Analyst

Okay, and then I guess just the last one from me. Just how do you think maybe that translate into additional reserve build? I mean, it seems like most of the heavy lifting has been done, but just as some of these modifications come through and then maybe negative credit migration, I mean should we expect some modest reserve builds or just how do you think about that going forward?

Bonita I. Lee -- President, Chief Executive Officer

It's fairly difficult to say that on the each individual loans in terms of a reserve impact on these loans, because we still have the second wave of the modifications to review, so I think we can get a more clear number, I think toward the -- maybe the end of the third quarter or even maybe the beginning of -- toward end of the third quarter or the beginning of the fourth quarter.

Operator

Okay. And our next question is from Kelly Motta from KBW. Please proceed with your question.

Kelly Motta -- Keefe, Bruyette & Woods, Inc. -- Analyst

Hi, everyone. Thanks for the question. Mostly, maybe switching to capital. Obviously, your regulatory ratios are still pretty healthy, but you did cut the dividend last quarter and absent [Phonetic] this, the securities gain this quarter. Again it would have been another lower quarter, so I'm just wondering how you guys are speaking about the dividend at this point, letting [Phonetic] CECL be on [Phonetic], what you declared last May is something that can be sustainable as -- in this uncertain environment?

Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer

So as you observed, Kelly, our capital ratios are fairly strong and they even are stronger when you start to give effect to the bulge that the PPP program causes some of those ratios. That said, as you know, capital management as well as asset quality and liquidity are really important matters for both management and the Board. So the Board does deliberate on capital at -- in each quarter's meeting. They will do so again. I think the dividend reduction in light of all the uncertainty was appropriate. How it will be determined next, I think we will see shortly, but I think where we're standing today, I think we feel good about capital. If you think about how the first half unfolded and the dividends paid in the first half, I think that demonstrates both being good stewards of capital for the shareholder, but also being good stewards of capital just to protect the institution. So the Board will meet and the Board will have its decision.

Kelly Motta -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. And maybe if I can switch back a bit to credit. I appreciate all the color around deferrals and I understand that a lot of it was for a change in some qualitative factors you put for us under CECL. I was hoping you were -- you could kind of share what backdrop you've incorporated in kind of your modeling and maybe the unemployment rate or GDP or whatever that went in, so we can have a better understanding of what you put out this quarter is factoring in?

Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer

Sure. So as you know, in the first quarter, the onset of COVID and the adoption of CECL were on the heels of each other. We weren't using economic data at that time from the Federal Reserve, the FRED this is called, Federal Reserve Economic Data and they have not adjusted for what may be the COVID environment. And we've provided for that idea through a qualitative adjustment in the first quarter. In the second quarter, we've moved to looking at Moody's data. My recollection is that GDP is pretty much at a 1% or less notion in the forecast period, which for us is about a year. For unemployment, we're looking at probably numbers just below 8% for the one-year horizon. So if we look at those two drivers or at least those two elements for the calculation, we're probably approaching where maybe current consensus is today. Although, I've seen different views on that from even the members of the Fed, when they deliberate, where they think unemployment might be. So it would be nice to say that we're -- that we might be at a high point, I don't think so. I think, we still need to see how the economy unfolds. What was promising initially was disappointing, where we might have to have some resets. How that plays out? Still not sure. But I'd like to say that the lion's share of the reserve build is perhaps over with, but if you can tell me how this is going to turn out, I can give you the better sense of what that is.

Kelly Motta -- Keefe, Bruyette & Woods, Inc. -- Analyst

Thank you so much, Ron.

Operator

And our next question is from Gary Tenner from D.A. Davidson. Please proceed with your question.

Gary Tenner -- D.A. Davidson & Co. -- Analyst

Thanks. Good afternoon. Bonnie, I wanted to make sure that I heard your comment correctly in terms of the redeferral rates. Did you say that the number of folks requesting second deferral was 30% of those that are expiring or 70%?

Bonita I. Lee -- President, Chief Executive Officer

So currently, as of June 30, we have about $1.4 billion. And from that original modification about 30% of the modified customers from the first wave may not request the second additional 90-day modification. That clear...

Gary Tenner -- D.A. Davidson & Co. -- Analyst

Okay. So you're saying that you think 70% was requested?

Bonita I. Lee -- President, Chief Executive Officer

Yeah, yeah.

Gary Tenner -- D.A. Davidson & Co. -- Analyst

Okay, OK. That's quite a bit higher number. We've heard from other banks. Obviously, with the hospitality and retail exposure, I'd imagine that that there is probably an overweight amount of those borrowers that would be requesting the second round deferrals, is that fair?

Bonita I. Lee -- President, Chief Executive Officer

Yeah. Among all the segments, yeah, hospitality will be higher, yes.

Gary Tenner -- D.A. Davidson & Co. -- Analyst

Okay, OK. And then the loan, line of credit pay-down this quarter, as I think you pointed out, I mean, a big source of kind of the -- kind of offset to your production for the quarter, I think $90 million of worth of decline in line utilization. It's also what the line utilization was at quarter end and what your sense is of additional downward pressure on that portfolio?

Bonita I. Lee -- President, Chief Executive Officer

So second quarter end, line utilization was 40%. In any given quarter, line utilization is -- fluctuate anywhere from 50% to 55%. So second quarter was much, much lower than our average, but I would presume that's related to the lower economic activity.

Gary Tenner -- D.A. Davidson & Co. -- Analyst

Right. Do you have the expectations for that potentially getting down still further, I mean, I've had some banks claiming their line utilization is sub-30% right now. Do you have a sense of how far that might?

Bonita I. Lee -- President, Chief Executive Officer

I would presume it will move from like a 40% to 45%. It may not quite reach to 50%.

Gary Tenner -- D.A. Davidson & Co. -- Analyst

Okay. So you think that's a little more stable from this level?

Bonita I. Lee -- President, Chief Executive Officer

Yeah.

Gary Tenner -- D.A. Davidson & Co. -- Analyst

Okay. All right, thank you.

Bonita I. Lee -- President, Chief Executive Officer

Sure.

Operator

[Operator Instructions] Our next question is from Kelly Motta from KBW. Please proceed with your question.

Kelly Motta -- Keefe, Bruyette & Woods, Inc. -- Analyst

Hi. I was -- just on the NIM, I was hoping to get some color on what new loan yields were looking like and if the pressure there is potentially offset by the repricing of CDs and roll-off there?

Bonita I. Lee -- President, Chief Executive Officer

Kelly, new loan yields in the second quarter excluding P3 loans were about 4.2% and that's partially offset by obviously repricing of the CD rate. Going into the third quarter, we have a little over $300 million in the CD that's priced over -- a little over 2%. And if we price it down successfully below 60 basis points, 55 to 60 basis point, we'll have the savings there. In terms of new loan with the rate drop, there is a definitely more competition, the pricing competition on the new loan, but looking at just our pipeline, new loan yields are a couple of basis points lower, not too much compared to the second quarter. But we still -- we are at the beginning of the quarter, so we will have to watch how our pipeline goes up.

Kelly Motta -- Keefe, Bruyette & Woods, Inc. -- Analyst

Great. And not to beat a dead horse with deferrals, but I did want to see if -- while we've talked a lot about the redeferral rate, it's new deferrals at least have slowed or if there is additional borrowers coming in and few may need some assistance beyond just kind of what you had at June 30?

Bonita I. Lee -- President, Chief Executive Officer

So we do not have a new deferral. It's a pretty -- that this is the same customer base that we had, if you just think deferrals. So one positive is that I said that, no new customers are asking for new deferrals and we're just trying to improve the -- from the existing customer base. So based on the communication that we had so far from the middle of June to today, what customer has expressed is we think that there maybe about 30% decrease in the second wave of the deferral.

Kelly Motta -- Keefe, Bruyette & Woods, Inc. -- Analyst

Thank you so much.

Bonita I. Lee -- President, Chief Executive Officer

Sure.

Operator

And our next question is from Matthew Clark from Piper Sandler. Please proceed with your question.

Matthew Clark -- Piper Sandler -- Analyst

Hey, good afternoon. Thanks for getting me in the queue there, I'm not sure what was going on. On the hospitality exposure, as you speak to your customers, what -- where occupancy rate looks like of-late and any sense for break-even levels, I know you're dealing with averages or medians but any color there would be helpful.

Bonita I. Lee -- President, Chief Executive Officer

Sure. Actually, this is a portfolio that we are tracking on a -- almost on a daily basis and we are tracking how the industry is performing overall [Technical Issues] total industry. So starting from April, where the occupancy was down around 20, mid-20%, 24%, 25%. Now, at the end of June and early part of July, the occupancy level has moved up to 45% to 50% level industrywide. And our portfolio is actually tracking slightly above the industry average. So I think, it's a fairly good sign in terms of overall hospitality sector.

Matthew Clark -- Piper Sandler -- Analyst

Okay, great. And then, on the three loans that moved into a non-accrual, the $23 million excluding the leases. Can you provide some color there and what drove that increase?

Bonita I. Lee -- President, Chief Executive Officer

Sure. One loan is it's a hotel construction loan. This was -- this is a loan that we mentioned, I think the prior quarter, it's about $12.8 million. The challenge is that the customers and the general contractor are at pause and so there is a delay in the construction portfolio. And the second one is actually another credit that we mentioned, I think the prior quarter, it's $8.7 million, the tax credit, a film financing deal. So -- and this one, we're just waiting for the Court to approve the sale of the tax credit and we have the ample value to pay us out.

Matthew Clark -- Piper Sandler -- Analyst

Okay, great. And then, maybe on your deferrals, the $1.4 billion. Do you know how much of that amount got PPP?

Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer

I would say, our PPP steps, most of our credits were at the lowest tier. I think, we only had 17 at the highest tier and I know the 17th participate, because most of our hotel credits are pretty large denomination. So I don't -- I just don't think any received the PPP, but really have to get very granular to take a look at some of the lower ones, but not in any large way, Matt.

Matthew Clark -- Piper Sandler -- Analyst

Okay. I figured it. Just checking. And then on the SBA volume going forward and the rush to get approved before, I think the end of September to qualify to have six months basically covered. Are you going to participate in that type of activity? Should we expect kind of outsized gain on sale here in the third quarter and then maybe normalize after that or not?

Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer

So just to be plain, when we're talking about gain on sale, we're talking about the traditional 7(a) loans, not the PPP loans, right? So...

Matthew Clark -- Piper Sandler -- Analyst

Right.

Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer

So we would expect activity through July, August and whatever is achievable through September. I know you're pushing up against the government's fiscal end year, so I don't think we will see anything unusual, but we have to see what September plays out, because that's usually -- it's own month with its own dynamic. And then the PPP side of light, if they should renew the program and things of that sort, now that's a whole different question and quite honestly, I don't think we've taken a look at that and we'll deal with if and when it comes. And then last, with respect to the forgiveness element, once they actually have life worked out on what the borrower needs to fill out in petition for that forgiveness, I think we will step up to that plate, so traditional SBA will be back on in the third quarter and then likely in the fourth, the PPP program, I think that as they unfold, we will address it.

Matthew Clark -- Piper Sandler -- Analyst

Okay. And the 9% premium that you guys mentioned in the release, is that gross or net that we'll see kind of in the income statement? I just can't remember.

Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer

That will be a gross trade premium.

Matthew Clark -- Piper Sandler -- Analyst

Okay, so something closer to maybe 7% net?

Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer

Yeah, typically depending on the mix of loans, we have different types of percentage participations, but as a rule of thumb, may be 75% of the trade premiums would be of booking.

Matthew Clark -- Piper Sandler -- Analyst

Okay, and then just lastly on expenses. Obviously, need to adjust for the deferred origination costs for the PPP of just over $3 million. I guess, how do you think about that run rate going forward and your ability to manage expenses from here?

Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer

So we did, in the end of the second quarter, trim some staff. We have addressed certain expenses, so that should allow us to see perhaps a small drift downward. But we do have a spend going the other direction, not nearly as much, but we do have the spend relative to personal protective equipment that's now kind of ingrained in our run rate. So there are things that should benefit us but the conservative -- I'd say it shouldn't be higher than the adjusted rate for the second quarter with everything that we know today.

Matthew Clark -- Piper Sandler -- Analyst

Okay. And then I just forgot one more on other income, other noninterest income. It's been trending higher over the last four quarters. Is there anything unusual in there or is it sustainable?

Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer

The two items that came into the second quarter, one with respect to servicing income on our SBA loans. There was a, I'll call it a pocket of fees that were due to us on some outstanding SBA loans that were of some conversations with the SBA and they finally paid that in the second quarter. And then in the second quarter, we also have about $0.5 million of fees on a net basis related to just under $30 million notional of back-to-back swaps. So those two items probably won't repeat or are not necessarily repeatable, so we tried to identify that for you in the table and in the pack, so you can work out run rates.

Matthew Clark -- Piper Sandler -- Analyst

Got it. Thank you.

Operator

And we have no further questions in the queue at this time. Please continue.

Lasse Glassen -- Managing Director, Addo Investor Relations

Thank you very much for listening to Hanmi Financial's second quarter 2020 results conference call. We look forward to speaking you -- with you again next quarter.

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

Lasse Glassen -- Managing Director, Addo Investor Relations

Bonita I. Lee -- President, Chief Executive Officer

Anthony Kim -- Executive Vice President and Chief Banking Officer

Romolo C. Santarosa -- Senior Executive Vice President and Chief Financial Officer

David Feaster -- Raymond James -- Analyst

Kelly Motta -- Keefe, Bruyette & Woods, Inc. -- Analyst

Gary Tenner -- D.A. Davidson & Co. -- Analyst

Matthew Clark -- Piper Sandler -- Analyst

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