Ladies and gentlemen, welcome to Hanmi Financial Corporation’s Fourth Quarter and Full Year 2020 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. Mr. Glassen, the floor is yours.

Thank you, Operator, and thank you all for joining us today. With me to discuss Hanmi Financial’s fourth quarter and full year 2020 earnings are Bonnie Lee, President and Chief Executive Officer; Anthony Kim, Chief Banking Officer; and Ron Santarosa, Chief Financial Officer. Ms. Lee will begin with an overview of the quarter, Mr. Kim will 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. On 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 certain factors that may cause our results to differ from our expectations, please refer to our SEC filings, including our most recent Form 10-K and Form 10-Qs. In particular, we direct you to the discussion of certain 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 fourth quarter and full year of 2020, 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 hanmi.com. With that, 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 2020 fourth quarter and full year results. In spite of ongoing challenges arising from the COVID-19 pandemic, Hanmi finished the year with a strong fourth quarter driven by excellent loan production, stable net interest margin and powerful non-interest expense management. Throughout the pandemic, we have remained focused on helping our borrowers and depositors affected by the crisis and I am pleased to report that these efforts have been very successful in protecting the value of our portfolio. Looking ahead, our solid balance sheet and capital position, coupled with our strong loan and deposit franchise gives me confidence that we will deliver profitable growth as we remain cautiously optimistic that the economy will continue to improve. With that as a backdrop, the following are our results and some of the key financial and operational takeaways from the fourth quarter and full year. We reported net income of $14.3 million or $0.47 per diluted share, up from $0.10 per share in the fourth quarter last year. For the full year, net income was $42.2 million or $1.38 per diluted share, an increase of nearly 29% from 2019. Fourth quarter pretax pre-provision income was a solidly higher in both a linked quarter and year-over-year basis, and benefit from sharply lower interest expense arising from our lowering of the deposit costs. New loan production during the quarter -- fourth quarter was a strong and increase 28% compared with the prior quarter. For the full year 2020, loan production increased 29%, aided by our participation in PPP program from 2019. As a result of this growth over the past year, loans receivable were up 5.9% year-over-year. Net interest margin of 3.13% held steady from the prior quarter as the reduction…

Thank you, Bonnie. Hanmi generated solid loan production volume totaling $327.8 million in the quarter, up 27.8% from the prior quarter’s volume of $256.6 million. We experienced growth across all major categories with the exception of SBA loans. More specifically, fourth quarter production consisted primarily of $187.1 million CRE loans, $71.4 million of C&I loans and $27.5 million of SBA loans. Rounding up fourth quarter production was $39.8 million of a commercial equipment leases, nearly doubled third quarter new lease prep production. New lease generated loans and leases for the quarter had a weighted average yield of 4.11%. This compares to previous quarters weighted average yield of 4.57%. Of note, commitments under commercial lines of credit increased nearly 15% from a year ago to $588 million. However, balances on these lines fell by $12 million quarter-over-quarter at quarter end reflecting a four quarter utilization rate of 42.7%. During the fourth quarter, Hanmi sold $21.6 million of SBA loans, generating a gain on sale of $1.8 million. I was pleased with our execution in the quarter as SBA trade premiums increased to 10.09% in the period. Fourth quarter payoffs of $160 million remain elevated compared with the level experienced in the past recent quarters. The weighted average interest rate of loans that paid off in the period was 4.44% or 33 basis points higher than the weighted average yield of new production in the quarter. The solid loan production in the quarter in conjunction with the loan payoffs resulted in loan receivables of $4.8 billion at the end of fourth quarter, up 4% on an annualized basis from the prior quarter and up 5.9% from a year ago. Hanmi remains committed to conservative discipline underwriting criteria. For the commercial real estate portfolio, consistent with asset quality data from prior quarters, the…

Thank you, Anthony, and good afternoon all. Let’s begin with pretax pre-provision income for the fourth quarter, with net interest income of $46.9 million, non-interest income of $7.8 million and non-interest expense of $30.9 million, pretax pre-provision income was $23.8 million, up 4.1% quarter-over-quarter when we adjust the fourth quarter for the $1 million benefit associated with the litigation settlement. Fourth quarter pretax pre-provision income benefited from higher net interest income and higher non-interest income. Looking at net interest income, we posted $46.9 million, up 2.8% from the prior quarter, driving the increase was a reduction in interest expense, which fell 19% or $1.8 million due to lower rates paid on interest bearing deposits. This was partially offset by lower interest and dividend income, which declined to 0.9% or $500,000, reflecting lower prepayment penalties and a modest decline in average yields on loans. Turning to net interest margin for the quarter, it was the same as the prior quarter at 3.13%. The average yield on loans for the fourth quarter was 4.34%, down 8 basis points from the third quarter. However, the average rate paid on interest bearing deposits dropped 23 basis points to 64 basis points. Our net interest margin also benefited from the continued shift in deposit mix, with higher costs and time deposits declining 4.1% and lower costing money market and savings accounts increasing 11%. As Anthony noted, the weighted average interest rate on new loan production for the fourth quarter was 4.11%, slightly below the average yield posted for the quarter. However, we expect the average rate paid on time deposits will decline again as higher rate maturing deposits renew into lower rates time deposits. As a result, we anticipate our net interest margin to remain at about the same level. Non-interest expenses were $30.9 million…

Thank you, Ron. As I noted at the beginning, we remained focused on helping our borrowers and depositors affected by the pandemic. We also remain equally focused on our communities and the health and well being of our employees, without those we could not have succeeded. Overall, I am very pleased with our performance against the challenging backdrop of a COVID-19. Our solid finish to the year demonstrates the durability and resilience of the Hanmi franchise. As such, I am confident as we look ahead to a new year that we have the ability to emerge from the pandemic, well position to drive profitable growth and value for our shareholders. I look forward to sharing our continued progress with you when we report our first quarter for 2021 results in April. Thank you.

That concludes my prepared remarks. Operator, we would now like to open a call for questions.

Thank you. [Operator Instructions] And our first question is from Matthew Clark with Piper Sandler.

Hey. Good afternoon. First question was just around the margin. Ron, do you happen to have the amount of PPP related income on a net basis that helped NII and how much is left?

So, for the fourth quarter, net interest income or interest income, I should say, from the P3 activity was $1.8 million, a little change from the third quarter at $1.7 million. We did have a level of forgiveness, but they were small balance loans, 50,000 or less. So that really didn’t change the contribution for a PPP in the fourth quarter as compared with the third quarter.

Any amount you have left just over in the ballpark?

So, we have, again, we started with about $303 million -- $302 million. At the end of the calendar year we had $296 million. So we still have a way to go.

Okay. Got it. Okay. And then on the hotel portfolio, have -- are you seeing any opportunities to sell hotels in this environment? I came across another Bank this past week that was able to sell some hotels at par and whether or not you would consider something like that?

Sure. And that is a possibility and time-to-time we have interest -- interested buyers as well.

Okay. And then just on the ACL 1.97% I believe, 1.97% ex PPP, is the expectation that you’ll probably continue to build reserves kind of incrementally as you see maybe some additional migration from criticized into non-accrual or do you feel like we’re at a point where we might be peaking and we can start to release a little bit maybe next year or this year, I’m sorry?

So, what you’ll find Matt and what we try to point out is that, there was a shift in the allowance for credit losses, with a higher proportion being assigned to individually impaired loans and a lesser portion, let’s say, we’ll call that the general idea. And so if you think through that and comparing third quarter, fourth quarter, what you saw there was a reduction in one category and increase in the other, for just a net increase, which I don’t think was all that much at about $5.1 million. So I expect as we go through first quarter, second quarter, third quarter, we’ll see one, what will be the broad impacts of the so called macroeconomic conditions and let’s assume those continue to improve, then it will become down to more the narrowed circumstances, what was happening specifically in the portfolio. So, yes, it could end up with a negative provision. I’m a bit more I’ll say conservative. Some would say pessimistic. But it would be -- it’s a likely event, but I’m not sure it’s in the front-end of 2021 is it is more towards the back end of 2021.

Okay. And then any thoughts -- the updated thoughts on capital return, whether or not you might consider a buyback, given the stronger earnings and the ability to cover the dividend here, that’s realistic maybe this coming quarter?

So as we’ve mentioned in our previous calls, the Board does take up the dividend and capital each quarter. They will do so again here shortly. And the decision with respect to dividend and share repurchase, I’m sure will be known soon.

Okay. And then just housekeeping item on the tax rate and a little light this quarter, should we still -- should we assume 30% or maybe a little lower than that going forward?

No. As you said, on a quarter, Matt, the tax rate will vary around the 30%. But as you see, we finished the year at around the 30%. So barring any changes in the tax law, I think, 30% is still a fairly good target effective tax rate.

Okay. Thank you.

Our next question is from Kelly Motta with KBW.

Hi. Thanks for the question this afternoon. Okay. Well, I know it’s still early, but with losses, do you have an idea of the general ballpark of kind of what you’re expecting at least in the coming year? And also, if you have what the specific reserve was that component of the reserve ratio, that would be helpful?

So to address part of the question, Kelly, so specific allowances at the end of the year were $14.1 million, up from $3.7 million at the end of the third quarter. Again, specifically or individually, I identified impaired loans they were about $91 million at the end of the year, compared to $69 million at the end of the third quarter. With respect to charge-offs or net charge-offs, this quarter at -- it is like $2.1, if I remember it correctly. So I would think that would be, let’s say, a somewhat regular idea. I know the first quarter of this past year was punctuated with the -- that particular troubled loan relationship and then I think we had a favorable recovery in one of the other quarters, which brought about pretty much a mill event. So I think, barring any specific credits, which could happen from time to time, I would say, the fourth quarter and I think it would have been the second quarter of last year, we’re probably, normalized ideas. We still are waiting to understand better, what are the long-term effects of the pandemic. So, those would be my two data points I would look to.

Great. And then with the hotel portfolio specifically, how much of that right now is in the special mentioned and criticized NPL buckets. And also, I noticed your slide deck, a lot of what’s remaining on modifications in Texas, is that being swayed higher by a larger loan or is it just -- you have a bunch of credits in that market that are just struggling? Thanks.

I will try to answer first part of question. Total downgraded, special mention and classified category is about $86 million and then Texas loans kind of center into three or four loans there are in Texas, represents a higher percentage of the modification. Does that answer your question?

Sorry, I was on mute. The part of -- when you say about four loans in Texas, are you referring to the hospitality segment loans on slide 13 or just in general?

In hospitality.

Thank you.

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

Thanks for filling me in. Couple of questions. First on SBA, obviously, fourth quarter production was a little bit lighter there than it had been or was in the third quarter, at least. What should the expectation be for early 2021 that were up in the second round PPP might negatively affect demand for SBA or maybe just, probably, what are you seeing in terms of demand today?

So, I think, it will be helpful to just provide overall 2021. I -- in an average quarterly, we would expect to produce about $30 million -- $30 million to $35 million. Particularly in the first quarter, we do have a healthy pipeline of SBA loans. So -- and we would plan to book in the first quarter, so.

Okay. All right. Thank you. And then on the time deposit side, even with the shift of the mix of deposits, I think, it’s still near 25% of total deposits that you are in. Can you maybe walk us through, maybe some of the CD maturities over the next few quarters, maybe give us a sense of how much more you think you would want to try to work out of the Bank or into different deposit buckets versus renewing?

Yeah. We have about a little over $260 million maturing in the first quarter at 1.44%. So, historically, our retention ratio is about 70% to 75% of the CDs. In 2021, I think, a little over $900 million is maturing. So I would say, we’ll retain about 70% of that at a lower rate between 0.4% or lower.

Thanks. What was that last part in terms of the rate?

We’ll probably be able to replace -- re-price at 0.4% or lower.

Okay. Great. And then last question is that the $2.3 million provision for losses on accrued interest receivable. Was that effectively a loan that was on full payment deferral, so the interest was capitalized? But then after the deferral period, collection of that what integrator doubt? Is that the capital of that?

No. So what we did is we looked at all the loans that were modified, either formally modified or currently modified under the CARES Act. So, if you recall, I think, as Bonnie mentioned, we started off at about $1.4 billion, we’re down to about $156 million. So we looked at where we were in the collection of all of that interest, recognizing that some of those borrowers maybe downgraded further or moved to non-accrual and so we did an assessment to determine what are the potential losses for that pool. So it’s not related to a specific loan. It is related to that pool of loans that were at one-time modified or currently modified. So think of it as a general allowance, not a specific allowance to a specific credit.

Great. Thanks for the color.

Thank you.

And our next call is from Timothy Coffey with Janney.

Yeah. Thank you. Afternoon, everybody. Bonnie, I want to follow-up a bit on the resi mortgage origination business. And I apologize if you’ve talked about this on previous calls, but it’s been a really busy year. Has that program already started up?

So we spent our fourth Q setting up the platform and then we did a little bit of a production in the 4Q, not meaningful, but in the starting with this quarter the department will kick into gear and they will go with the full production mode.

Okay. Okay. Well, do you have any kind of idea on when you might be hitting full speed on that? Is it like mid-year or sooner?

Yeah. We finally -- definitely we should be in a full gear.

Okay. And did you say that you expect that to be 10% to 15% of originations?

Yes.

Okay. And is that all three categories, the non-QM, the warehouse and then the regular mortgage?

Correct.

Okay. All right. The rest of my questions have been asked and answered. Thank you.

Thank you.

And our next question is from David Chiaverini with Wedbush Securities.

Hi. Thanks. I want to follow up on loan growth, what are your expectations for loan growth this year? And I know there’s clearly some moving pieces with the PPP forgiveness both on Round One and new PPP loans coming on with Round Two, but what are your thoughts on loan growth this year?

So I think excluding the new P3 program, I would expect the 2021 loan growth to be low-to-mid single-digit growth.

Great. Okay. And then shifting to back to the hospitality portfolio, it’s good to see, well, the overall portfolio seeing that the modifications come down the way they have and looking at the slide 13, it is nice to see that most of the loans are in the non-modified category at this point. Is this due to better operating performance or are the sponsors writing more checks if needed for their properties or is it a combination of both?

I think, overall, our borrowers are either performing above -- at or above the industry standard -- industry levels of the hospitality owners. So I think it’s -- certainly, I think, early on P3 programs have helped and then also most recent P3 programs that we are planning for as well that will help them as well.

Got it. And then last one is on the Corporate Korea initiative. Thanks for the detail around the loans and deposits. I was curious, are these mostly in your existing -- your Southern California market or they on a national basis that you’re able to get some of these loans and deposits pretty much wherever there’s a Korean domiciled company you’re kind of targeting them regardless of their location?

So, there are Corporate Korea companies are all over the United States, particularly the automobile sectors are in Georgia and Alabama area. But pretty much in terms of Corporate Korea companies, they are in major U.S. cities or states.

I see. So there is 10% of loans and 8% of deposits that you guys have it is kind of across the U.S., is what you saying?

Correct. Correct.

Great.

But -- yeah. And then larger contribution is obviously from California and somewhat Texas area, Texas, Georgia area. But, yeah, it’s pretty much made up within national footprint.

Got it. Thanks very much.

Our next call is Kelly Motta with KBW.

Hi. I got bounce off the call. So I apologize if this was asked during that time. But I was wondering if on the expenses, if this is a good run rate to kind of build off of or if there’s any puts or takes in next year that we should keep in mind when modeling?

So, with respect to the fourth quarter, and I guess, the same for the third quarter, when you look at our non-interest expenses, particularly before the effects of OROE and repossess personal property and some of the other little one-time ideas, that run rate is probably about right and then as you kind of played out over quarters, of course, first quarter we always get the bump because of payroll taxes and then you just have general inflationary notions which you could model it maybe 2% to 3%.

Great. Thank you very much.

And our next and final question is with Gary Tenner with D.A. Davidson.

Thank you. Hi. Thanks for the follow up. I apologize if you had mentioned this, but in terms of the mortgage products that you were talking about, other than mortgage warehouse, are the other product is going to be completely portfolio products or is there going to be any sort of gain on shelf component are expected to develop from those?

I think initially we look portfolio of those assets and then later on we may consider selling them for gain.

Okay. Thank you.

All right. Ladies and gentlemen, that concludes our question-and-answer session. Now let’s turn the call back over to management for closing remarks.

Thank you for listening to Hanmi Financial’s fourth quarter and full year 2020 results conference call. We look forward to speaking with you again next quarter.

All right. Thank you, again, ladies and gentlemen. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great evening.