Ladies and gentlemen, welcome to the Hanmi Financial Corporation's Fourth 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. A question-and-answer will follow the formal the presentation. [Operator Instructions]. I would now like to turn the call over to Maura [indiscernible], Investor Relations for Hanmi Financial. Please go ahead.

Thank you, Kylie and thank you all for joining us today to discuss Hanmi Financial's fourth and full year 2021 results. This after Hanmi issued its earnings release and quarterly supplemental slide presentation to accompany today’s call. Both documents are available in the IR section of the company’s website at hanmi.com. I’m here today with Bonnie Lee, President and Chief Executive Officer of Hanmi Financial Corporation; Anthony Kim, Chief Banking Officer; and Ron Santarosa, Chief Financial Officer. Bonnie. Lee will begin today’s call with an overview of Hanmi’s 2021 accomplishments; Anthony Kim will discuss loan and deposit activities; Ron Santarosa will provide more details on our financial performance and then Bonnie Lee will provide closing comments before we open the call up to your questions. Before we begin, I would like to remind you that today's comments may include forward-looking statements under the federal securities laws. Forward-looking statements are based on current plans, expectations, events, and financial industry trends that may affect the company's future operating results and financial performance. Our actual results may differ materially from those contemplated by our forward-looking statements, which involve risks and uncertainties, discussion of the factors that could cause our actual results to differ materially from these forward-looking statements can be found in our SEC filings, including our reports on 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 in our Form 10-K. With that, I would now like to turn the call over to Bonnie Lee. Bonnie, please go ahead.

Thank you, Maura. Good afternoon, everyone. Thank you for joining us today to discuss our 2021 fourth quarter and year end results. 2021 was a very eventful year with a continuation of a global pandemic, political and social volatility and shifting economic macros. Each of these factors presented challenges as well as opportunities for Hanmi and our team executed exceptionally well. During the year we focused on meeting the banking needs of the multi-ethnic communities we serve across our markets. Guided by our strategic growth plan, we expanded our products and services offerings, we grew and diversified our loan and deposit portfolios and by working closely with our customers, we further strengthen our portfolio and asset quality metrics and the results of a consistent execution throughout 2021. We delivered strong results, meeting and even exceeding the objectives we laid off a year ago. Today, we are better positioned than ever to meet the evolving needs of tomorrow's customers. While continuing to be a trusted community partner to customers who have banked with us for nearly 40 years. This foundation will enable us to deliver sustained growth and profitability over the long-term. As I outlined at the beginning of last year, we focused on several strategic growth initiatives in 2021. These included growing our residential mortgage platform, investing in our digital banking platform, extending our corporate career initiative and adding to our talented team of relationship managers. I am pleased to report our success on all fronts. So let me share a few details. First, 2021 marked the first full year of production from our residential mortgage platform. Through this platform, we originate non-qualified residential loans and mortgage warehouse lines. This business is an effective way to diversify our loan portfolio by adding a lower risk asset class that we can…

Thank you, Bonnie. I'll start off with some additional color on our loan and lease production. We grew our fourth quarter production volumes 25% from the prior quarter to a record 625 million, almost double our fourth quarter production a year ago. We generated sequential quarter growth in all major loan categories, with a notable strength in commercial real estate that when residential mortgages. With record loan production, our loans receivable balance for the fourth quarter was 5.15 billion up 6% from the prior quarter. Pay off moderated 252 million for the fourth quarter from 292 million for the prior quarter. Excluding PPP loans, our loans receivable balance grew 6.4% quarter-over-quarter, and 4.3% year-over-year. In commercial real estate production, loans to clients was a mixed use industrial and warehouse properties help drive quarter-over-quarter improvements. Our new relationship managers and our long tenure bankers continued to generate new business and their collective efforts resulted in a healthy pipeline as we enter 2022. As Bonnie noted, our residential mortgage platform is making meaningful contributions to our results, accounting for 11% of total originations excluding PPP loans for the year, and 14% for the fourth quarter. Lending activity on this platform for the fourth quarter included 85 million of residential mortgages along with 50 million of [indiscernible] lines. Our fourth quarter commercial and industrial loan production increased 2% sequentially. Commitments on the commercial lines of credit increased by 90 million or 13% from the prior quarter to 773 million. However, balances on these lines were relatively stable, resulting in affordable utilization rate of 39% compared with 44% for the third quarter. Loans and leases originated in the fourth quarter had a weighted average rate of 3.91% in line with the prior quarter. Although pay off activity moderating in the fourth quarter, the average…

Thank you, Anthony. Our fourth quarter net interest income decreased 1% from the prior quarter to 49.5 million and our net interest margin decreased 11 basis points to 2.96%. Interest income on PPP loans was only $100,000 for the fourth quarter, down from 1.6 million for the prior quarter. Adjusting for the effects of PPP loans, our net interest margin contracted four basis points sequentially, as the benefit of lower cost interest bearing deposits was more than offset by lower yield on interest earning assets. However, our net interest income again, excluding the effects of PPP loans increased 2% sequentially, due primarily to a higher volume of interest earning assets and the benefit of lower cost interest bearing deposits. An important takeaway here is that we now have more than replaced our transient PPP loan portfolio with our own loans originates through our relationship based banking teams. To illustrate, loans at year end 2020 were 4.58 billion when excluding the 296 million of PPP loans at that time. For 2021, loans reached 5.15 billion and PPP loans were only 3 million at year end. Accordingly for 2021, we increased loans by 564 million, or 12%. Another important takeaway is the improving mix of interest earning assets arising from a decline in excess liquidity. To illustrate this, you will see that for the fourth quarter, our average interest-bearing deposits in other banks declined 8% sequentially to $802.9 million. However, this lower yielding liquid asset ended 2021 year at $564.7 million, nearly 30% below the average for the fourth quarter. The shift away from lower yielding liquid earning assets into higher yielding loans combined with $100 million of 5.45% notes redeemable at the end of the 2022 first quarter should benefit our net interest income and net interest margin in future quarters.…

Thank you, Ron. I am very pleased with our loan production trends, improving asset quality metrics and strong earnings performance in 2021. I would like to thank the entire Hanmi family for their continued dedication and hard work in making our success possible. Hanmi was founded forty years ago to serve the underbanked minority immigrant community in Los Angeles. Today, we started multi-ethnic communities across nine states with an expanding array of products and services. While we are proud of our past, we are even more excited about our future. We are a community bank that believes long-term corporate value is derived by investing in the communities we serve. That means in a responsible corporate citizen and serving the best interests for all our stakeholders. To support this, we issued our inaugural environmental, social and governance report in 2021. To highlight Hanmi's commitments or stakeholders and to hold ourselves accountable for facilitating financial inclusion while carefully managing risk. You can find the report on our Investor Relations website, and I encourage you to check it out. With that, we will open the call for your questions. Operator, please open the lines up to the questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Matthew Clark with Piper Sandler. Please proceed with your question.

Maybe a question for Ron to start. Looks like you have some tailwind from the strong loan growth on an end period basis relative to the averages should drive I would think some favorable remix in your earning assets and maybe also some lift in the NIM. Be willing to maybe take a stab at your thoughts around the kind of the near term NIM outlook.

Sure. As you observed a few loans on a spot basis were about 5% higher than the fourth quarter average. And of course, that's a much larger contributor to our net interest income and NIM. So I would anticipate that we'll be in what I would characterize again as kind of a low threes, before introducing any fed action that might occur in 2022.

Okay, great. And maybe shifting, well, I'll stick with loans pay off slowed pretty dramatically this quarter. Can you speak to what was driving it? And what your expectations are for payoffs going forward? I know they're hard to forecast. But just curious if that's unusually low or not.

Excluding PPP forgiveness last quarter payoff level in third quarter, compared to fourth quarter is in line. So actually a fourth quarter payoff is not relatively lower, but not significantly lower. And we do expect similar level of a payoff in year 2022.

Okay, thank you. And on expenses, Ron. I think there was some modest, this is credit related kind of expenses in there, but look like a pretty clean run rate, what are your thoughts around expense growth this year with wage inflation and all the other kind of investment needs you might have internally.

So I think we are as perhaps anxious as everyone else to understand where interest rates will go, and then just the general demand for labor and the cost of that labor. That said, I think, I would envisioned maybe starting the year at about that $32 million per quarter run rate. And then, I guess the choice is what kind of inflationary factor to apply to that. And it could be anywhere from, let's say three to seven, seven on the outside relative to being waited more for wages, three on the inside, if wages and things of that sort don't come in as strong. Our 2021 expense rate does include higher levels of incentive pay, commission pay relative to loan production. So I'm not looking at Anthony, I'm not sure if he's going to set another record here for 2022. But there could be some relief in that number if production were to come in at about the same or maybe a little bit less. So those would be some of the factors I would think about as I look to an expense run rate.

Okay. And then on the tax rate a little low this quarter, should we continue to use 30% for the outlook?

I think 29% might be better in 2022.

Okay. And then, lastly, on buybacks, did you guys buyback any stock this quarter [indiscernible] lease?

Very small amount at the early -- at the top of the quarter, so about 24,000 shares and the price back then was probably about $20 a share.

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

Just a follow up on that buyback question to start, just kind of false expectations around activity might be in the buyback now that you've obviously had a very strong quarter built tangible book. Where do you think the level of activity might be early in ‘23, or early ’22?

So given the volatility that we've all seen here over the last couple of days, my hope, which would be, I guess, counter to a buyback is that we would see a return to normalcy and the share price continues to be relatively attractive in the marketplace. However, if we continue to be in these doldrums, where we can see some great volatility, I can see entering into the marketplace to acquire something at a pretty low multiple to tangible book.

Okay, thanks. And then, in terms of SBA kind of the outlook for 2022. Do you have any kind of budget levels of production and sale that would be helpful to be thinking about going into the year?

Sure. Any given year, I think about last couple of quarters rearrange from 25, 30 to 35, or 10 quarters around 40 million. Going forward in 2022, I think that we are comfortable with providing the range of about 35 million to 40 million in any given quarter.

Okay. Thank you. And then, last question on my end. Actually, just on the service charge income line, Ron, I think pointed out in your prepared remarks that it declined, although it's still well above the year-over-year number. And if I recall correctly, you had changed some of your kind of fee levels earlier in 2021, that helped drive that line on a bit higher? Have you seen any change in customer behavior as a result that kind of negatively impacted the fourth quarter or just less activity? Just generally, what was the difference there?

Yes. So it'd be more I would just to business, customer activity, so nothing negative in that. So I look at that, what we posted for the fourth quarter downward for that line, but you just kind of look at the aggregate for everything outside of gain on sale for SBA, that's probably a pretty good picture of where ROI might be in 2022. With perhaps growth coming from some of the business growth that we might get from certain depositors and the activities that they might get, so I feel pretty good about that contribution.

Okay, thank you. And then just last question for me. On Slide 10, you break out the personal versus business deposit mix at the end of the year, just wondering if you have the comparable number from your prior.

I don't have a specific number, Gary, but it would probably be a little bit more even, 50:50. So the increasing of business is more from some of the efforts that we described earlier, which is kind of taking root here in 2021.

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

Ron, maybe a question for you. I believe in your prepared remarks, you mentioned potentially redeeming some notes at the end of 1Q '22. Is this something we should build into our models? Or is it it's still something you're toying with as we look to next year?

Well, we haven't made the final decision. But given the outlook for where interest rates may be and given where our capital position is that is probably a likely outcome. I don't see the need in the current marketplace where sub debt could be 3.5 to 3.75 why would continue with 5.45 even though the price is down with -- to LIBOR.

Got it. And then, with your -- I appreciate the kind of commentary you gave around NIM. Just wondering with rate hikes, lightly on the horizon, how we should be thinking about how your balance sheet performs in the -- with the first couple of hikes given that, the deposit base looks quite a bit different than it did going in last cycle.

So quarterly we do a net interest income simulation, when we disclosed those shocks in our 10-Q's, 10-Ks. And so, we've been in that 5% to 6% range over a 12 month horizon given 100 basis, point shock. So, if I were to break that down into how life might behave over 90-day periods. The inclination that we have now looking back at the last cycle that we went through, when we started raising rates, we noticed that the first 50 basis points coming off a zero rate interest policy that was pretty much a non-effect on our deposits. We've really no movement. But we did capture that 50 notion relative to our loan book. And we can debate whether it was 100% or 90%. So I would expect, given the excess liquidity that most institutions have, that we are likely to behave in that way. But we have to see when we get there one and two, if you remember the last rate cycle, as we went past first 50. The markets became very anxious that rates were going to continue to move up rapidly. And so a number of institutions were, in my words bidding up the price to capture today at lower cost, and that might get in the next 90 day period. So that came about rather quickly as we moved into that next group. So the beta is really started to run up faster than normal. Our beta over that whole cycle was about 3%.

Our next question is from Jason Stewart with JonesTrading. Please proceed with your question.

Nice quarter on the origination side. I was hoping you could give us a little bit more color on the commercial real estate origination. I think you mentioned mixed use in industrial strength. Those tend to be the smaller parts of the portfolio. Any color on the rest of the segment in terms of what drove growth there.

Yes. Other than mixed use and industrial warehouse, we produced about 33 million, 34 million of multifamily, which will be our focus for the year 2022.

Okay. In that 33, 16 of that is warehouse, is that correct?

No, I was talking about multifamily. Warehouse line is tied to the mortgage.

Okay, so that's reported in the 86 million segment?

You are right.

Got you. And then when you're thinking about non-QM loans, how do you think about the duration of those and remind us the overall size of the portfolio that you're targeting there?

Based on my experience and with historical numbers, the years probably averaged about 3.5 years. And then, with the interest rate environment, we don't expect demand is going to decrease the non-care market is still out there. So we expect to see constant demand.

Great. And then, just remind us if you don't mind the overall size of the non-QM portfolio that you're targeting?

As Bonnie noted, we're targeting 10% to 15% of the production coming from the mortgage and non-QM consists of 80% to 90% of the production.

Our next question is from Tim Coffey with Janney. Please proceed with your question.

Bonnie had a question on the loan growth for this year, can you describe some of the headwinds that would prevent you from duplicating what you did this past year?

Sure. So I mean, 2021 was a great year, much better than we anticipated at the beginning of last year. So we built the momentum. And we have the platform, we have the relationship managers, we identify target markets. So we are fairly confident going into 2022. However, we still have the environment where the -- we still have the supply chain issues and the labor challenges and what not. So conservatively, I think that, we are projecting about mid to high digit, low single digit loan growth. So in terms of just what everybody -- all those community banks are experiencing. So other than that, I think we're in a good spot for this year.

Okay, great. And then, I was wondering on the commercial lines of credit, if you had the utilization rates?

Yes, this quarter, I think it was –

It was 39% compared to 44% last quarter. And we have reached anywhere between 35 to 45.

Okay. Do you have the year ago, utilization rate do you?

Fourth quarter 2020 utilization was 42.7%.

Okay. Okay. Thank you, Bonnie. And then, Ron, kind of some of the loans, your cash and equivalents, the spot rate or spot number was lower than the average? Do you feel comfortable with the deposits, that they're going to be sticky, and that you could start to invest some of that cash into securities as you've already been doing in the fourth quarter?

So on the deposit side, I would say yes, we explore the composition of our deposits, the type of the reasons et cetera monthly at our management [indiscernible]. So we do think that there is some staying power there. So, going then to the investment side of that, my first thought is we'd like to see the excess liquidity go to true loans, rather than to the securities portfolio. So we will add to the securities portfolio, but it shouldn't be much, much larger than about, let's say, a billion dollars just to round. So we're looking more towards the higher yielding loan growth rather than, let's say middle yielding security portfolio.

Okay. And I suspect that based on your commentary that would be a measured approach, then if you did get into the securities portfolio.

Right.

Sure. We have reached the end of the question-and-answer session and I will now turn the call over to Bonnie Lee for closing remarks.

Thank you for participating in our call today. We appreciate your interest in Hanmi and look forward to sharing our continued progress with you throughout the year.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.