Ladies and gentlemen, welcome to the Hanmi Financial Corporation's First Quarter 2022 Conference Call. As a reminder, today's call is being recorded for replay purposes. [Operator Instructions] I would now like to turn the call over to Larry Clark, Investor Relations for the company. Please go ahead.

Thank you, Alex and thank you all for joining us today to discuss Hanmi Financial's first quarter 2022 results. This afternoon, 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. 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; Anthony Kim will discuss loan and deposit activities; Ron will provide details on our financial performance, and then Bonnie will provide closing comments before we open the call 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 Forms 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, Larry. Good afternoon everyone. Thank you for joining us today to discuss our first quarter 2022 results. Hanmi had a very, very strong start to the year. Focused execution across the board helped us to deliver solid earnings in the first quarter fueled by healthy loan production, net interest margin expansion, excellent credit quality, and disciplined expense management. We continue to develop new client relationships and strengthen ties for the existing customers, a hallmark of Hanmi's community banking approach. We reported the first quarter 2022 net income of $20.7 million or $0.68 per diluted share, down from our fourth quarter, but up nicely from $16.7 million or $0.54 per diluted share in the first quarter of 2021. Our first quarter return on average assets was 1.22% and our return on average stockholders' equity was 12.74%. I am very pleased with the progress we are making on our strategic initiatives. These initiatives include focusing on diversifying our loan portfolio by ramping up the contribution of our residential mortgage business to loan production, increasing our SBA loan production, and expanding our corporate career initiative. We are making solid progress in our residential mortgage platform, which we launched in 2021. Through this platform, we originated and acquired non-qualified residential loans and established mortgage warehouse lines. This initiative is effectively diversifying our loan portfolio by adding a lower risk asset class that we can grow profitably for years. In the first quarter, our residential mortgage loans represented 12% of the total loan production, well within our steady goal of 10% to 15%. This progress reflects our ability to leverage and expand our community ties. In just over a year, we have achieved impressive scale with this program with a loan production up by $48 million year-over-year. We continue to expand our SBA…

Thank you, Bonnie. I'll begin with additional details on our loan and lease production. First quarter production volumes were $507 million, 19% lower than the record high fourth quarter and more than doubled our first quarter production last year, excluding PPP loans. Our commercial real estate loan production was $233 million in the quarter and represented 46% of total loan and lease production. The majority of this production consisted of warehouse and industrial, office and retail properties. We remain committed to discipline in underwriting as evidenced by our weighted average loan-to-value and weighted average debt service coverage ratio for this portfolio of 50% and 1.9 times respectively at the end of first quarter. C&I production was $98 million, more than double the level of production in the first quarter of 2021. This category includes our Corporate Korea Initiatives as well as loans and lines to varied industries. Commitments on commercial lines of credit increased to $814 million at the end of first quarter, an increase of $42 million or 5.4% from the prior quarter and $210 million or 35% year-over-year. Outstanding balances on these lines, however, were relatively stable between quarters, resulting in first quarter utilization rate of 39%, unchanged from fourth quarter of 2021. New lease production was a healthy $71 million in the first quarter as many of our customers continue to invest in their operations and are looking to finance a portion of the investment through equipment leases. SBA 7(a) loan production was $42 million, as Bonnie noted, reflecting our ongoing focus on serving this segment of the market. Residential mortgage production, which consists of non-QM loans, was $60 million in the quarter and represented 12% of the total loan and lease production. Despite the recent run-up in mortgage rates, we remain cautiously optimistic regarding our non-QM…

Thank you, Anthony. Our fourth quarter net interest income increased 3% from the prior quarter to $51 million and our net interest margin increased 14 basis points to 3.10%. The 6.8% sequential quarter increase in average loans, combined with a higher yield on securities, drove the increase in net interest income. The $1.1 million charge for unamortized debt issuance costs related to the redemption of our 2027 subordinated notes, however, offset the benefit of higher average loans and higher yield on securities. Our net interest margin, however, benefited from the mix shift in earning assets. The increase in our average loan balance was funded primarily with the excess liquidity that we had been holding on our balance sheet at the end of 2021. As a result, the composition of our interest earning assets improved during the quarter driving the 19 basis point improvement in yield on those assets. Offsetting the improvement, however, was the seven basis point charge emanating from the subordinate redemption. Looking forward, we know that we will not have a seven basis point charge for redemption. And we also know that we will save seven basis points from the absence of a debt service on the redeemed debt. Further, we know we still have excess liquidity on our balance sheet, and we know that our balance sheet is asset sensitive. As such, we anticipate that our net interest margin should increase in the near-term. While there is ongoing debate as to the timing and pace of rate changes by the Fed, we also anticipate that depositor behavior will gradually adjust as we move away from a zero interest rate policy and eventually temper the rate of increases in net interest margin. Moving on. Non-interest income was $8.5 million for the first quarter of 2021, down modestly from…

Thank you, Ron. Before I move to our outlook, I want to take a moment to thank our employees for their hard work during the quarter. Hanmi employees serve our communities in many ways in addition to fulfilling their banking needs. I encourage you to read our 2022 ESG report located on our Investor Relations website to learn more about what we are doing here at Hanmi to invest in our employees and support our communities to generate long-term DRU for our stockholders. Looking ahead, there are several macroeconomic and geopolitical factors affecting the economy overall in nearly every industry sector from the war in Ukraine to a 40-year high rate of inflation, individuals and businesses across the country are building the effects. While we cannot forecast the exact impact these factors will have on the U.S. economy or on our clients, specifically, we do believe that they may exert some pressure on loan demand in the second half of the year. That said, we are well capitalized with a strong financial profile and a diversified business model. Our loan pipeline remains solid. Our net interest margin is healthy and our credit quality is excellent. Our dedicated team brings a wealth of banking experience that has served our clients well in various economic cycles over the last 40 years. In any economic environment, at Hanmi, we will continue to be intently focused on meeting the banking needs of our growing customer base and building new relationships across our markets and business lines. We are committed to driving disciplined growth and delivering attractive returns for our shareholders in 2022. With that, we'll open the call for your questions. Operator, please open the line up to the questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Gary Tenner with D.A. Davidson. Please proceed with your question.

Thanks. Good afternoon.

Good afternoon.

Hey. So, a good start to loan production for the year and I think from your commentary, I think visibility is good in the intermediate term, but maybe later in the year, not quite as good. So, as you think about kind of full year your growth, unless I missed you commented on it, Bonnie, and I apologize if I did. Any updates in terms of how you're thinking about the full year pace growth?

Yes, we are still sticking to the -- what we had discussed, I think, from the prior quarter, which is we expect medium to high single-digit growth in the loan production -- I mean, the net loan growth.

And then just following up on that. I think last quarter, in terms of SBA, you talked about $35 million to $40 million, which I think is kind of maybe a quarterly average type number in terms of sales. I thought this quarter, obviously, a little bit below that. Is that number on average for the year still hold or given maybe a little less portfolio growth, otherwise might you -- portfolio more SBA production?

So, the $35 million, $40 million number is actually the production number. So, this quarter, $42 million is actually higher production. But I think if you compare to the fourth quarter, fourth quarter is kind of a catch-up from the third quarter production. So, we had sold higher number -- dollar [indiscernible] loans in the 4Q. But overall, we are on track to do about $40 million per quarter. Some quarters, it may be higher. So, it's pretty much within our line of expectations, $35 million to $40 million.

Okay, I appreciate the clarification. Thank you.

Our next question comes from the line of Kelly Motta with KBW. Please proceed with your question.

Hi, thanks so much for the question. It was a great quarter. Ron, in your prepared remarks, I think you had some nice NIM expansion. I think you said seven basis points you'll get back from the cost of the redemption and another seven basis points. So, does that imply you're going to be in before any rate hikes in the mid-320s? Am I understanding that correctly?

Yes, you are, Kelly. What we don't know is what will -- what the Fed will do next week and in June, and that starts then to change outlook. And so I just hold that in reserve, not sure where that's going. But absent Fed news, we would be up by about 14 basis points.

Got it. Got it. And you are asset sensitive at the start of the rate cycle. Can you just -- can you give us more color on the composition of fixed versus floating in your loan book? Just trying to get a sense of the repricing of those assets on the first couple of hikes, if there's any course.

Sure. So, about 30% of our portfolio would reprice within a three-month interval. And that part of the portfolio is comprised of all of our floaters in all of our three-month adjustables. That represents about 25% of the portfolio in total. The remainder represents those hybrid loans and those fixed rate loans that are rolling down to the reprice date or the maturity date. With respect to course, they're not very consequential for us. There's only a couple of hundred million, if I remember correctly. And our last look, nearly three quarters of that would burn off within the first 100 basis point move. So, it just won't be much of an anchor relative to the asset sensitivity.

Got it. Thank you. That's really helpful, Ron. And then just turning to credit. Obviously, it was really strong, although I did see a tick-up in special mention. Can you provide any color on those migrations in there?

Sure. It's mainly three relationships. One is actually -- it's a combination relationship composed of C&I portion as well as the CRE portion. The company is going through an expansion, so they had a little bit of indirect challenges with respect to the supply chain distribution. But it's being normalized, and we don't expect to have any loss in the coming quarters. The other two is relationships and hospitality portfolio. Again, the borrowers are taking control and taking what's necessary to have the loan being back to the past status.

Got it. And then last question for me. On the expense side, they were very well controlled. Your salaries and benefits looks like it ticked down a bit. What does the outlook look like? I know there's a lot of competition in inflationary pressures. Can you provide kind of an outlook for the pace of where you might be seeing pressure and where you may be investing and how that might trend?

Sure. So, beginning in the second quarter, we expect our salaries and benefits to increase because of the annual merit cycle as well as the, I'll say, the inflationary increases in our benefit programs. We also anticipate that some of the other categories will start to show evidence of the inflation that's been talked about. So, starting in the second quarter, we think we'll start to see our non-interest expenses lift off of where we were in the fourth and first quarter of 2022.

Got it. Thanks so much. I'll step back. Appreciate the questions.

Thank you.

Our next question comes from the line of Matthew Clark with Piper Sandler. Please proceed with your question.

Hey, good afternoon. Maybe just one on the margin outlook. You mentioned the floating rate loan contribution. What are your latest thoughts on the deposit beta outlook, given the expectation for more rate hikes than we probably considered last quarter?

So, Matthew, when we look backwards at the last rate cycle, our data was about 30%, correlating about 95% to the Fed fund's moves. But that was over a 13-quarter period. And what we do know in that 13-quarter period is that, that beta was not linear. It was higher in some periods, lower in others. So, in this case here, we're anticipating a beta probably in that 30% to 50% range. But again, I'm just cautious here, not sure what Fed will do next week, how big of a move they may or may not take and that can affect the beta in any three-month period. So, overall, I think our betas will probably be -- probably not much more than what we experienced in the last rate cycle. I just don't know how that's going to unfold quarter-over-quarter.

Do you think that 30% to 50 % is more of a cumulative beta?

Again, the 30% would have been cumulative. So, as we stress, we -- in our rate models, we use a 50% beta for the non-maturity deposits and 100% beta for the maturity deposits. So, we think our interest rate sensitivity is, let's say, conservative. So, something between those two points is where the reality is going to be. Again, I just -- that's the part I puzzle on. I'm just not quite sure how it's going to unfold this rate cycle.

Okay. And then just back on the floating rate loans. Do you feel like you're going to be able to pass through those rate hikes to your borrowers? Do you feel like the -- we might not see the full 30% over time just because you got to make concessions? Thinking about the leasing business maybe as an example. Just any thoughts on the ability to --?

We think it's pretty much a fixed rate portfolio, so that doesn't really affect it. But for the floaters, that's contractual. So, there's no need of concessions. It moves as the rate moves. So, I have no core concerns on that whatsoever.

Okay. And on the securities yields, I think 1.11 [ph] up linked quarter. Can you give us a sense for -- I think your securities overall are down in the quarter, but what new purchases are coming on at -- in April here?

Sure. So, our portfolio complexion -- securities portfolio complexion will stay about the same. We're mostly looking at March-back securities, cash flowing instruments that we really like and whether that's traditional MBS or CMO style, but all agency. So, we'll continue to look at that, not as keen on the small market at this point. We will take a look at it, but it's not going to grow appreciably from where we're at. And in terms of current coupons, we're looking at, what, two handles and some of the MBS. So, you'll start to see that portfolio which produces somewhere between $10 million to $15 million a month in cash start to lift up as we go through this rate cycle.

Okay. Thank you.

Our next question comes from the line of Tim Coffey with Janney. Please proceed with your question.

Great. Thanks for taking my questions. Ron, can you remind me just what level of cash you'd like to keep on balance sheet?

So, pre-pandemic, our cash due from banks was about, I'd say, $150 million, maybe as well as $100 million. And so I see it returning to those levels at some point. We'll see how long it takes us to get there.

And then, Bonnie, what is the thought process about buying back stock at these levels?

We are always watchful. So, I mean, we just take the decision as a necessary.

Okay. And -- nope, those were my questions. Thank you.

Thank you.

Our next question comes from the line of Jason Stewart with JonesTrading. Please proceed with your question.

Hey, thanks for taking the question. I wanted to ask on the mortgage side, what's your view of affordability was given HPA, the increase in rates and expected increases in taxes and how that might impact production and rate in the non-QM side?

Yes. Certainly, we do anticipate a higher mortgage rate impact will impact the demand in mortgage industry in general. But the impact on non-QM market will be lesser than the QM market, which is much more competitive. So looking at the pipeline, we do expect a similar production level in Q2 as Q1 as due to continued high demand for the purchase of homes and however, we anticipate, that slows down in starting third quarter.

Okay. And have you had to make any concessions in terms of credit quality to continue the pipeline at historical levels?

No. No concession.

Great. Thanks for taking the questions. Appreciate it.

Thank you.

Thank you. We have no further questions in the queue at this time. I'll now turn the call back over to Ms. 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. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.