Ladies and gentlemen, welcome to Hanmi Financial Corporation's Third Quarter 2021 Conference Call. As a reminder, today's call is being recorded for replay purposes. At this time, all participants are in a listen-only mode. Following the presentation, the conference will be open for question. I would now like to introduce Lasse Glassen, Managing Director at ADDO Investor Relations. Please go ahead.

Thank you, operator and thank you for joining us today. With me to discuss Hanmi Financial's third quarter 2021 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 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 risks and uncertainties. The speakers on this call claim the protection of the Safe Harbor provisions contained in the Securities Litigation Reform Act of 1995. For a list of factors that may cause our results to differ from our expectations, please refer to our SEC filings, including our most recent Form 10-K 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 in our Form 10-K. This afternoon, Hanmi issued a news release outlining our financial results for the third quarter 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 hanmi.com. I will now turn the call over to Bonnie Lee. Bonnie?

Thank you, Lasse. Good afternoon everyone. Thank you for joining us today to discuss our 2021 third quarter results. It was another excellent quarter for Hanmi. Our results for the third quarter reflect continued strong growth in loan and lease production, a solid uptick in deposits, improving credit quality, and record earnings. Our consistently improving performance throughout the year highlights the overall strength of the Hanmi franchise, our robust loan production platform, and our ability to develop deep relationships with both new and existing customers. Momentum continues to build across the enterprise and Hanmi remains very well-positioned to generate profitable growth as we look ahead to the fourth quarter and into 2022. Our strong operational execution helped drive substantial growth in earnings. We reported net income of $26.6 million or $0.86 per diluted share for the third quarter. Net income was a new single quarter record and increased 20% over the prior quarter and nearly 63% from a year ago. Our third quarter earnings were driven by a significant increase in revenues as well as a $7.2 million recovery of a credit loss expense due to strengthening asset quality. Overall, non-interest expense remained well controlled with a modest increase due to higher commissions and the strong loan production and higher advertising and promotional expenses. Now, let's move on to loan production and deposit gathering. During the third quarter, our loan production platform was firing on all cylinders with our loan production growing to $500 million in the quarter, breaking the single quarter record established in the prior quarter when excluding PPP loan originations. We also continued to benefit from an increase in business activity as the economies in our key markets emerge from the pandemic. In total, our loan balance grew at a 14% annualized rate during the quarter ex-PPP.…

Thank you, Bonnie. Starting off with additional color on loan and lease production. Hanmi's third quarter volumes surged to $500 million, up 7.4% from the prior quarter and almost two times higher than the third quarter last year. During the period, we generated sequential quarter growth across nearly all major loan categories with notable growth coming from commercial real estate and equipment leases, along with record SBA loan production. Altogether, excluding the impact of PPP loan production in previous periods, loan production in the third quarter was an all-time record for Hanmi, breaking the previous record established last quarter. As Bonnie noted, our loan production platform is performing very well with volume in the quarter diversified across various asset classes and solid contributions from relationship managers that recently joined Hanmi team. With respect to CRE loans in the quarter, the retail category was strong, particularly for neighborhood-based centers with recognizable national chain anchor tenants. We also had solid volume in the quarter in the industrial and multifamily classes. Also of note, C&I production increased approximately 16% compared with the prior quarter. Commitments under commercial lines of credit decreased by $22.7 million or approximately 3% from the prior quarter to $682.4 million. However, balances on these lines increased by $24.5 million compared to the prior quarter, generating a third quarter utilization rate of 44%. Altogether, newly generated loans and leases for the quarter had a weighted average yield of 3.90%, an increase of 16 basis points from last quarter. Next, I would like to provide an update on the corporate Korea initiative and our new residential mortgage platform, both of which are continuing to contribute meaningfully to our results. As you may recall, the corporate Korea initiative is focused on banking Korean companies, helping to geographically diversify our loan production. This…

Thank you, Anthony and good afternoon all. Let's begin with our net interest margin because it will allow us to highlight changes in our earning asset mix and funding portfolios. Net interest margin was 3.07% for the third quarter, down from 3.19% for the second quarter. Adjusting for the effects of our PPP loans as well as the effect of nonaccrual interest received in the second quarter, we could see a net interest margin of 3% for the third quarter compared with 3.06% for the second quarter, down six basis points. Interest income on PPP loans was $1.6 million for the third quarter, down from $2.7 million for the second quarter. More importantly, when looking at our loan portfolio since year end 2020, we have effectively replaced this transient loan portfolio with our own traditional loans. We reported loans ended the quarter at $4.86 billion, little change from amounts we reported at the end of the second quarter and at year end 2020. Excluding PPP loans, however, which were $295.7 million at year end 2020 and just $21.9 million at the end of the third quarter, we would see loans increased 5.5% since year end and 3.4% quarter-over-quarter. In addition, again, excluding the effects of PPP loans, we could see the average loan balance for the quarter was $4.63 billion, trailing the comparable quarter end balance of $4.84 billion. Looking at our funding portfolios. We again saw solid growth in our non-interest-bearing demand accounts, up 8.2% quarter-over-quarter, while average balances grew 10% sequentially to $2.44 billion. Interest-bearing deposits declined to $94.2 million, principally because of reductions in our wholesale deposit portfolio of $61.6 million; and the cost of interest-bearing deposits fell seven basis points to 30 basis points for the quarter. Last, we also reduced the amount of our wholesale…

Thank you, Ron. Overall, it was another excellent quarter for Hanmi, and I am very happy with our expanding loan production, improving asset quality, and another record-setting earnings performance. Once again, I thank the entire Hanmi family for its tireless efforts in making our success possible. As we look ahead to the fourth quarter, Hanmi's continued strong operational execution combined with the resurgence in business activity in our key markets and robust pipeline has us poised for a strong finish to the year. I look forward to sharing our continued progress with you when we report our fourth quarter results next January.

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

Thank you. Ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] Thank you. Our first question comes from Jason Stewart with JonesTrading. Please proceed with your question.

Hey thank you for taking the questions. I wanted to start with the strength in originations in CRE and C&I. Maybe you could share what you think that tells you about your customers' view on the economy and their confidence in growth at this point?

Sure. Yes. I mean as we communicate with our customers, there are definitely the activities coming from the pent-up demand as well as we see the increase in the purchase transactions, whether it's in CRE as well as the C&I business purchases.

Okay. And then turning to the resi origination platform. How correlated should we think about that business with purchase volume seasonality? Maybe you could give us a little bit of idea of what drives the origination volume quarter-to-quarter as we look at it just from the outside.

Well, actually, there is -- I don't think there's a seasonality factor in there. As the competition's getting fierce, we're more looking to leveraging our -- not only the correspondent channel, but we're trying to leverage our branch network and our existing customer to increase the retail side of the business.

Okay. Okay. Thank you.

Thank you. Our next question is from Kelly Motta with KBW. Please proceed with your question.

Hi, thank you for list for the question. Really good quarter. Just wondering if you could talk a little bit on the deposit side, especially since you're seeing such great growth. You've had a nice influx of non-interest-bearing over the past several quarters now. Just wondering how we should be thinking about the stickiness of those deposits and plans for funding future growth? Thanks.

Well, we have been saying the same thing over and over for the last three quarters. At first, we would expect some attrition from the increase. But then we continue to see increase from the -- our largest large accounts that we acquired for the last 12 months. So, as far as stickiness goes, I think we would expect 70% to 80% of these deposits will be sticky.

Great. Thank you so much.

Yes. Just to add additional color. We had a really great success in the corporate Korea initiative and our strategy to really target large business DDA customers and other institution. And we had a really good success even acquiring new DDAs from the PPP loans that we did for the last year and then beginning of this year as well. So, we are continuing to see this sizable inflow of funds from our existing accounts and as well as the average accounts for the new accounts that we acquired for the past few quarters has really contributed. So, I think the majority of these deposits, we feel, they'll be fairly sticky deposits going forward.

Operator, next question.

Thank you. Our next question comes from Timothy Coffey with Janney. Please proceed with your question.

Great. Thanks. Afternoon everybody. Given the success that you're having on the origination side and loans and the comments you've made so far in this conference call, is the right way to think about kind of a forward loan growth rate in that low double-digit range?

It may happen in 2022, probably later part of 2022. But for time being, because I think there's still -- the environment is such that I think that we are targeting to keep our single -- low to mid-single-digit growth for the -- at least next one or two quarters.

Okay. And then the gain on sale trends, how should we think about that considering that your period end loans held for sale were much lower than they were last quarter?

So, the volume, when you compare quarter-to-quarter, had a little bit of second draw PPP in it, so that -- we try to isolate that for you, Tim. But going forward, again, our SBA production volume, we anticipate to be strong, let's say, not too dissimilar from third quarter. What remains to be seen, though, as we move into the first quarter of the new fiscal year for the federal government, the guarantee rates will change, moving down to 80% from 90%. Still not quite sure where trade premiums will settle out. They've been very healthy for the good three quarters here of 2021. So, I would say there's a chance of continuing, maybe fading a bit. I'm -- absent volume, I'm not sure they would necessarily increase relative to the trade premium.

Okay. Great Ron, that's very helpful. And since I've got you on the line, the marketing spend in the quarter was about equivalent to what you were doing in 2019. Is that kind of a good run rate for the advertising and promotion expense?

So, if you look at our quarterly spend going back pre-pandemic, you'll kind of see a seasonality to it, where it's low for a few periods and picks up towards the end of the year. It's -- I'd like to say that the seasonality is returning, although maybe off a quarter or two. But it should stay at a level perhaps not too dissimilar to what we're seeing here in the third quarter and then kind of drift down again. So, I believe that pattern will return. I'm just not quite sure how it's going to manifest as we go through quarter-to-quarter.

Okay, that's helpful. Thank you. And then, Anthony, just a question on the SFR, the mortgage business. Is there a targeted mix between originations and warehouse lines that you're looking at?

There's no actual targeted mix. Our target on the warehouse line commitment is $100 million, and average outstanding balance is about $50 million to $60 million.

Okay, great.

So -- yes. As we were saying that we expect our mortgage side of the business contribution in terms of production will be 10% to 15%. So, it's a combination of retail mortgage as well as the warehouse buying as well as some of the portfolio, if there's an opportunity to acquire, so that will be a combination. So, we're just overall targeting that business about 10% to 15% of our overall production.

Okay, I got it. Thanks Bonnie. I'll step back. Thank you very much.

Sure.

Thank you. Our next question comes from Gary Tenner with D.A. Davidson. Please proceed with your question.

Hi good afternoon. All of my questions were answered. But I wonder if you could share with us the loans and deposits that you're currently holding related to the corporate Korea initiative. Just give us a sense of kind of the current scale of that initiative.

Currently on the loans, we have 12% of the loans are in corporate Korea space and approximately 6.5% of deposits are in corporate Korea.

Thank you. And then, Ron, do you have plans to redeem any more of the 5.5% sub-debt or at this point, do you expect to hold the remainder there along with the new sub-debt?

So, we have a redemption option at the end of March of 2022, which we are going to take a very hard look at given the attractiveness of exiting the 5.45% notes. Redemptions or repurchases between that date would be more what the market might present. So, that was one opportunity we had in the third quarter, so we took advantage of that. I don't know how to predict if any of those opportunities will present themselves in the fourth quarter, but we're clearly looking at the redemption that can occur at the end of March.

Okay, great. And then finally, on the revision to the business account fee schedules, did that impact the full quarter, so it's fully kind of loaded into that third quarter run rate?

Yes, you could look at that as affecting the third quarter completely, so it's a fairly representative run rate. I think the variations to that idea will be a little bit more of depositor activity, which would be a little bit hard to predict what might occur in the fourth quarter. But the first digit to the left of the decimal point is pretty good. After that, it'll be depending on [indiscernible] activity.

Okay, great. Thank you.

Thank you. Our next question is from Kelly Motta with KBW. Please proceed with your question.

Hi, thanks for the follow-up. My question was actually about the sub-debt redemption, so that was just covered. Did want to ask, though, about buybacks as well, kind of how you're thinking about deploying that as a use of capital?

So, as we've pointed out in all of our previous calls, we do look at our capital practices each quarter, whether they be repurchases or dividends or both. Clearly, during the third quarter, there were some very good market opportunities to effect repurchases, so we took advantage of that. We'll see what kind of market opportunities present themselves in the fourth quarter and again, in any period thereafter.

Thanks so much Ron. Maybe a last one on credit. Obviously, you had a nice reserve release this quarter, but it's still high relative to peers, especially given how credit quality has been trending. Just wondering, I know we -- none of us have a crystal ball, but assuming things stay kind of as they are, is there still room on the qualitative side to bring that down further or -- and we should be -- or did you kind of just take it as a -- this quarter with a big negative provision?

So, just focusing on the principal idea, which is the traditional allowance for credit losses and set aside the mechanics of off-balance sheet and the other allowances that we have, as we pointed out, we ended the third quarter very strong at 1.58%, and it's roughly about $77 million of loss allowance. When you look inside of that, you'll notice that we have about $45 million associated with commercial real estate and of that, about $30 million of it is associated with hospitality. So, it should follow then that as hospitality continues to demonstrate improvements, there will be opportunities and needs to continue to watch the reserves -- watch the allowance drip lower.

Got it. Thanks for all the color Ron. That’s really helpful. Appreciate it.

Thank you. We have no further questions in the queue at this time. Please continue.

Thank you for listening to Hanmi Financial's third quarter 2021 results conference call. We look forward to speaking with you again next quarter.

Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.