Ladies and gentlemen, welcome to Hanmi Financial Corporation's Second Quarter 2024 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 session will follow the formal presentation. Now, I would like to turn the call over to Ben Brodkowitz, Investor Relations for the Company. Please go ahead.

Thank you, Joe, and thank you all for joining us today to discuss Hanmi's second quarter 2024 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 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 will begin today's call with an overview. Anthony 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 up for 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 position. 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-Q. With that, I would now like to turn the call over to Bonnie Lee. Bonnie, please go ahead.

Thank you, Ben. Good afternoon, everyone. Thank you for joining us today to discuss our second quarter 2024 results. Hanmi delivered solid results in the second quarter, notwithstanding a challenging banking environment. Our team continues to execute our strategy well, always staying true to our core relationship banking model, and we remain focused on diversifying and expanding our loan portfolio and deposit franchise. This two-pronged approach enabled us to expand our market share further during the second quarter. Here are some highlights of the second quarter. Net income was $14.5 million or $0.48 per diluted share. Our return on average assets was 0.77% and our return on average stockholders' equity was 7.5%. New loan production increased by 17% quarter-over-quarter. Importantly, our asset quality metrics have remained consistently strong. Demand deposits grew 1.4% from the prior quarter and now comprise 31% of total deposits. Non-interest income increased by 4.2% from the first quarter and finally, non-interest expense declined 3.2%, primarily driven by a decrease in salaries and benefits from seasonally lower employer taxes and capitalized labor costs associated with our investment in a new loan origination system. Looking in more detail at the 17% increase in our new loan production, of particular note was the 77% increase in SBA loan production attributable to increased business activity and our investments in talented bankers. Additionally, C&I production increased by 16% on a sequential basis and 62% year-over-year, which contributed to a 3.6% increase in our C&I portfolio. While loan production was strong, loans were flat compared to the first quarter due to a higher level of payouts and the continued sales of residential mortgage loans. Deposits were relatively stable. On an encouraging note, we grew demand deposit accounts by 5.6% on an annualized basis and we are seeing margin stabilization. During the second quarter, we grew non-interest income and employed rigorous expense management. Turning to asset quality, we continue to exercise stringent credit management during this quarter. As a result, our asset quality remains excellent with the current price loans declining by over 17% compared to the first quarter. Additionally, net charge-offs continued to be low at 12 basis points of average loans annualized. For the second consecutive quarter, we sold residential mortgage loans into the secondary market. We also sold SBA loans during the quarter and both actions supplemented our non-interest income. We anticipate capitalizing on an opportunity to sell more residential mortgage loans contingent on market conditions. This will further diversify our revenue base and enhance our balance sheet. I'm also pleased to report that our strategic growth initiatives are bearing fruit. Our Corporate Korea initiative continues to perform well and in line with our expectations with an increasing number of customer referrals. This serves as a strong sign of confidence in our team's capabilities. In the second quarter, Corporate Korea production was slightly higher than the first quarter at $55 million and $58 million in new deposits. Corporate Korea currently represents approximately 14% of our total loans and 14% of our total deposits. Our SBA loan production reached $55 million, exceeding our quarterly production target of $40 million to $45 million. Going forward, we expect our production to be more in line with this quarterly target. During the second quarter, we completed the consolidation of a three branch location, which Tony and Ron will discuss later. As a reminder, these actions are an integral part of our strategy to maximize growth and generate cost savings. We will continue to evaluate future opportunities to optimize our branch footprint. Finally, as part of our continued investment in people, processes, and technology to support our growth, we completed a more than year-long effort to implement a new loan origination system. This new system offers a comprehensive solution where all of our lending processes now occur under one platform. The new loan origination system is expected to improve efficiency for underwriting and closing commercial loans and enhance the customer experience through loan origination. I'll now turn the call over to Anthony Kim, our Chief Banking Officer, to discuss the second quarter loan production and deposit activity in more detail. Anthony?

Thank you, Bonnie. Thank you all for joining us today. I'll begin by providing additional details on our loan production. Second quarter loan production was $274 million, up $40 million or 17% from the first quarter with a weighted average interest rate of 8.31% compared to 8.02% last quarter. The increase in loan production was primarily due to an increase in commercial real estate, C&I, and SBA, while residential mortgages declined from the first quarter levels. We remain disciplined with our underwriting as we pursue high-quality loans that meet our standards in the current rate environment. CRE production was $88 million, up from $60 million in the first quarter due to increased volume in California and the Northeast. The high-interest rate environment continues to impact traditional and refinancing activity. We remain pleased with the quality of our CRE portfolio. It has a weighted average loan-to-value ratio of approximately 50% and a weighted average debt service coverage ratio of 2.2x. SBA loan production increased to $55 million in the second quarter, up from $31 million in the first quarter. This production increase reflects the marketing talents we have added to the team and the growth we are driving with small businesses across our markets. Production in C&I during the second quarter was $59 million, an increase of $8 million, or 16%. The increase was driven by strong demand from Corporate Korea, which represented $35 million, or 9% of total C&I loan production during the quarter. Total commitments for our commercial lines of credit were over $1.2 billion in the second quarter, up 15% on an annualized basis. Outstanding balances grew by 8%, resulting in a utilization rate of 41%, up from 40% last quarter. Residential mortgage loan production was $30 million for the second quarter, down 43% from the previous quarter due to lower demand for purchase transactions in this higher interest rate environment. Most of our current lending opportunities continue to be in the purchase market as refinance activity remains subdued. Residential mortgage loans represented over 15% of our total loan portfolio, the same as one year ago. As Bonnie noted, during the first quarter, we sold approximately $20 million of residential mortgages from our portfolio and are currently exploring additional portfolio sales depending on market conditions. With respect to Corporate Korea, we again saw healthy demand from these customers who accounted for $55 million of total loan production, which includes approximately $35 million of C&I production. Our efforts to expand and grow these relationships are continuing to bear fruit. USKC loan balances were $865 million, up $30 million or 4% from the first quarter and represent approximately 14% of our total loan portfolio. Turning to deposits, in the second quarter, deposits were down 0.7% from the previous quarter, although our demand deposit accounts grew 1.4% or 5.6% annualized over the same period. We continue to expand our partnership base with our Corporate Korea clients with a deposit production of $58 million in the quarter. Our team is making good progress in adding new relationships that we believe can grow over time. At quarter end, Corporate Korea deposits represented 14% of our total deposits and 16% of our demand deposits. The composition of our deposit base remains relatively stable, which reflects the success of our relationship banking model. During the second quarter, our mix of non-interest-bearing demand deposits increased from 30% to 31%. We completed the consolidation of three branches in May and this was executed successfully with no discernible impact on deposits. We'll continue to evaluate the branch network to optimize our footprint.

Thank you, Anthony. Net interest income for the second quarter was $48.6 million, down 4% from the first quarter. This decline was principally due to an 11 basis point increase in the cost of our interest-bearing deposits. This increase also led to the 9 basis point decline in our net interest margin that was 2.69% on a taxable equivalent basis for the second quarter. Reviewing our net interest margin as it unfolded for the first half of the year, we saw an uptick in June, which may be an inflection point indicating a directional change in the trend. Looking forward, we see that the amount of time deposit maturities for the third quarter is somewhat low and that the average rate paid for those maturities is not that far from our current rates. In addition, the cost of interest-bearing deposits for July to date is only about 2 basis points higher than our second quarter average. Importantly, the average rate of our new loan production continues to exceed 8%. In summary, recognizing that one month does not make a trend, our net interest margin expanded at the end of the second quarter, hopefully indicating a positive inflection into the third quarter. Turning to non-interest income, revenues were $8.1 million, up 4.2% from the first quarter. For the second consecutive quarter, we had gains from the sale of residential mortgages, and although the gain was $78,000 less than the first quarter, we retained the servicing rights in this transaction, which will further diversify our revenue sources. Gains from the sales of SBA loans for the second quarter increased by $200,000 to $1.6 million as trade premiums increased to 8.54%, and income from bank-owned life insurance increased by $300,000. Non-interest expenses for the second quarter declined 3.2% to $35.3 million. Here, we saw the effect of seasonally lower employer taxes and benefits as well as the investment in a new loan origination system that Bonnie mentioned. In addition, as Anthony noted, we completed a branch consolidation at the end of May that resulted in expenses of $300,000 and in addition to other real estate owned of $700,000. Credit loss expense for the second quarter was $961,000, comprised of a loan loss provision of $1.2 million and a recovery for off-balance sheet items of $287,000. Net loan charge-offs for the second quarter remained low at 12 basis points of average loans annualized and overall asset quality remained favorable. Turning to equity capital, our negative AOCI increased $1.1 million from an increase in unrealized after-tax losses on our available-for-sale securities portfolio, as well as an increase in unrealized after-tax losses on our cash flow hedges. During the second quarter, the company announced a new 1.5 million share repurchase program and subsequently we purchased 170,000 shares at an average price of $16.05. Tangible book value per share at the end of the second quarter was $22.99 and our tangible equity to tangible asset ratio was 9.19%. Hanmi and the bank continue to exceed minimum regulatory capital requirements and the bank continues to exceed the minimum ratios for the well-capitalized category. The company's common equity Tier 1 capital ratio was 12.11% and the bank's total capital ratio was 14.51%. With that, I will turn the call back to you, Bonnie.

Thank you, Ron. I'd like to thank our team for their ongoing commitment and dedication. I am thankful to our bankers who continue to foster meaningful relationships with our customers and enhance our franchise value. Hanmi is well-positioned for sustainable growth. Our balance sheet is robust as evidenced by our strong capital ratios, solid liquidity, and excellent credit quality. Our loan pipeline is healthy and building, which reinforces our confidence in our ability to achieve low to mid-single-digit loan growth this year. We have a stable base of core deposits and have recently experienced improved mix shift to demand deposits. We are committed to disciplined expense management and finally, we are expanding our geographic reach with the opening of a branch in the Atlanta Metropolitan region later this year. With broader macroeconomic uncertainty, our relationship banking model is our foundation. It guides us on how we operate and execute our strategy. We remain confident in our ability to drive ongoing growth and enhance our franchise value for all stakeholders. Thank you for your time today. And we'll now open the call for your questions. Operator, please open the line.

Thank you. And our first question comes from the line of Kelly Motta with KBW. Please proceed.

Hey, good evening. Thanks for the question. Maybe starting with loan growth, I think you mentioned in your prepared remarks that production was up 17%, but it looks like balances themselves were flat. I'm wondering if you have any commentary as to what potentially drove payoffs or paydowns higher, if any of that had to do with working certain relationships out of the bank. And as you look ahead and put it all together, what seems like a reasonable expectation for loan growth at this juncture, given your conservatism as far as what you're seeing in your markets.

Sure, Kelly. So, I mean, we had better production in the second quarter, obviously, compared to the first quarter, but the payoff was higher than average. Looking at the last four quarters, our payouts range from an average of about $85 million, with a low of over $80 million to a high of $120 million. This quarter, it was higher than average obviously. Two things manifested: we did have some payouts coming in, and we always welcome retaining good quality loans. However, some of our competitors are being more aggressive in terms of asset quality, increasing cash out balances, and offering much lower rates in the market. So unfortunately, we have to let some of those loans go. Looking forward, I think that assuming the payoffs remain within the average of $80 million to $85 million with the pipeline building up going into the third quarter, we think we can stay on course and expect the annual net increase of low to mid-single-digit growth.

Got it. That's helpful. And then turning to asset quality, understanding that non-performers are still relatively low. There was a $6 million pickup, partly NPLs and to a lesser extent OREO. Can you provide any color as to the credits that migrated? Any things of note there? And as a second part of that question, it looks like the loan yields didn't really expand much. I'm wondering if there was any interest reversal that may have impacted loan yields in margin this quarter. Thanks.

Sure. So, first of all, NPAs are up roughly about $5 million. The main contributor is one commercial loan, which is about $3 million that was already identified in the prior quarter and was downgraded then. The property is in the foreclosure process. Due to the sufficient equity in the property, we do not anticipate any loss coming from that particular loan. The rest of them are actually a couple of small loans that are accumulating about $1.5 million. Out of that, one of the loans actually was brought to current at the beginning of July. In terms of the loan yields, they're a little lagging. It was down 1 basis point compared to the prior quarter. As I said, this correlates actually with the payoffs. The payoffs that we had this quarter were in higher-yielding loans compared to the prior quarter that got paid off. So, that's why although the new production yields came in higher, the overall loan yield kind of stayed flat or slightly down.

Got it. That's helpful. I'll step back. Thanks so much.

And the next question comes from the line of Gary Tenner with D.A. Davidson. Please proceed.

Hey, this is Ahmad Hasan on for Gary Tenner. Good afternoon. I wanted to touch on deposit rates. Is there any visibility on deposit rates peaking here at the end of the quarter? I mean, lower rates in September may make this a moot point, but are you seeing rates pop out here?

As we indicated, the cost of interest-bearing deposits is only about 2 basis points. So it's a very modest increase representing a little bit of mix and a little bit of rate. We think we are peaking, but again, we see that between June and July, when we meet again, we'll have more affirming evidence of exactly what's transpired.

All right. Sounds good. And what was the period-end deposit spot rate?

I'm sorry. Could you repeat?

The deposit spot rate for the period end?

So for the end of June, the average for June for CDs was 4.81% and the average for interest-bearing deposits was 4.28%.

Thank you. And maybe if I can squeeze one more. Buybacks, even with the positive stock move recently, shares remain below tangible book. Is it reasonable to assume that you guys will continue buying back stock?

As we mentioned on previous calls, the Board meets quarterly. We review our dividend. We review our other capital actions. Clearly, the way the shares were trading before the most recent moves, share repurchases were, let's say, highly attractive. That gap has narrowed considerably here over the last several weeks, so I could anticipate that they may continue, but they certainly won't continue at perhaps the same level that you saw over the last four quarters.

Thank you.

And the next question comes from the line of Adam Butler with Piper Sandler. Please proceed.

Hey everyone, this is Adam on for Matthew Clark. Thanks for taking the questions. So in your commentary, you mentioned that the cost of IBD deposits were up 2 bps of quarter, or in July to date. And as Kelly mentioned, the loan yields stepped down a slight bit. And you guys mentioned that was related to the elevated payoff at higher yields. I think you, Ron, may have also mentioned in your previous remarks that at the end of the quarter, the NIM inflected. So is it fair to assume that those loan yields recovered? And do you happen to have the spot NIM in July to help us out a little bit with modeling? Thanks.

So working backwards, no, we don't do NIM on a daily basis. With respect to the loan yields, as Bonnie pointed out, it's just a basis point differential, so I would call that flat. In addition to the payoffs, which have higher average yields than the production that was put in, you also saw a small, and underscoring a small mix shift in the portfolio. Equipment financing was a little less on a percentage basis. Residential moved down just a bit and salaries picked up. It's more evident that you see it year-over-year than it is quarter-over-quarter. With respect again to the cost of interest-bearing deposits, when we met last quarter, I indicated we were on a month-to-date basis, 10 basis points over. We finished out the quarter at 11. So if you think about it, that's only a 1 basis point move over the last two months of the second quarter. Here we are at 2 basis points. I just have a sense that you're probably going to see the same kind of idea for the third quarter. That's assuming, one, there's no further market conditions that would cause our competitors to act in ways that may not be conducive to a rate environment that most people expect will decline. It seems like we're on the right trajectory for the inflection, but as I pointed out, we really need July, August, and September to affirm that that is, in fact, the trend.

Okay. That's some helpful information. I appreciate that. And if I look over on Slide 19, you guys have some good information on loan maturities and repricing. It looks like over the next year, you have about $130 million or so per quarter in fixed-rate loan production maturing or repricing? What yields are coming off the fixed portfolio right now? And I guess for the maturing portion, do you plan to use that to fund growth or free up some higher-cost funding? Thanks.

I don't have that particular data point for you, Adam. I will say, and you can see it, I think, better on earlier slides and kind of go backwards. Yes, if you look at Slide 10, you can see the maturities over a 12-month period, and because it's granular relative to the loan class. As you can see, C&I is a fairly larger piece; those are typically term credits that are one to three years. The renewal element, particularly on the line, is perhaps a bit more certain, if I could use that phrase. And then you go into the roll down of the commercial property loans, the largest one being hospitality, followed by perhaps office and retail. Those have a tendency, as Bonnie mentioned, or as Anthony mentioned, we're kind of selective in how we will look at that renewal, either from a credit perspective where we may feel it's not quite what we need for the portfolio, or from a competition perspective, where there'll be another lending institution that might offer a much lower rate than we're comfortable with, or other parts of finance in terms that we just don't feel would benefit our bank in the long term.

Okay, helpful. And then just one more for me. And I might be missing some information, but I thought that you guys closed two branches in Texas this quarter. Was that just a product of redundancies in the footprint or is that reflective of a broader initiative?

Yes. That's our branch evaluation and optimization of our branches. It's an ongoing effort. So during the second quarter, we closed three branches: one in California and two in Texas. Not only the consolidation of the branches, but if you remember, we opened two new branches last year, one in Fort Lee and one in Dublin, the emerging markets. As I had mentioned in my prepared remarks, we plan to open one in the later part of this year in the Metropolitan Georgia area. So that's an ongoing process.

Okay. Got it. Thank you for taking my questions. I appreciate it.

Thank you.

The next question comes from the line of Matthew Erdner with JonesTrading. Please proceed.

Hey guys, thanks for taking the question. The loan-to-deposit ratio increased quarter-over-quarter, kind of due to that net loan growth there. Is there a ratio that you guys are targeting internally? And as this kind of creeps up, should we expect more loan sales going forward to increase the gain on sale revenue? Thank you.

So I think in a couple of quarters, I think I shared that ideally, we will try to target a loan-to-deposit ratio below 95%. But coming out of the pandemic and in the current interest rate environment, we are where we are. We will consider loan sales as we see contributions to the bottom line, and we will continue with loan sales and residential portfolio for now.

Got you. Thank you for that. And then you guys mentioned retaining the servicing rights earlier. Could you kind of flush that out for me because I think I missed the second half of that?

Sure. So in the first portfolio sale, it was servicing released. In this one, we explored and then executed the idea of servicing retained. The point we're trying to emphasize is as we continue to look at our production and observe the appetite for these particular loans in the marketplace, we will continue to explore either retained or released servicing elements, again providing us another revenue source that we think would be beneficial to the enterprise over the long term.

Got you. And then is there kind of an average coupon on the servicing rights or I guess, on the loans that you guys are selling?

We typically charge 25 basis points to 30.375 for servicing.

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

Hey, thanks for letting me back on. I was hoping to go a bit more on the core expense run rate. You guys had a nice reduction in part. It wouldn't strip out the one-time costs related to branch consolidations and a nice reduction in cost. You mentioned you do have another branch coming online later this year. Just wondering as we look ahead, is there any other areas where you're continuing to work out costs from, or is this a good run rate on which to build as we look ahead to the back half of the year, especially as production and loan growth is expected to rebound?

So Kelly, for the second quarter, our non-interest expenses were about $35.3 million. When we look out over the balance of the year, that seems to be a pretty good run rate, allowing for some movement on the numbers to the right of the decimal point, but it seems like that's going to be able to hold at that vicinity for the balance of the year.

Got it. That is helpful. And then last question for me, at least as of 1Q, I believe your CRE concentration was above 300%. I know that's lower than it's been historically, but I know you guys are conservative within your niche. Just wondering if that's a consideration at all as you look to fund growth and thoughts about the mix of that, is that a constraint or do you feel good at that level?

So the regulatory CRE concentration ratio, which we typically illustrate in our investor slides, has diminished over the past five years or so. I can't remember the number specifically, but 340 comes to mind. The decline is a combination of a little bit lower growth in those categories because other loan classes such as residential mortgages and other C&I lending have allowed us to be a more balanced producer, notwithstanding some variations that occur quarter-to-quarter. In addition, you see the general growth in capital, which also leads to a decline in that number. I think as we stand today, you're likely to see a continued slow decline in that particular ratio. We don't have a policy or desire to drive us below 300% at this point.

Got it. Thanks for letting me back on.

Sure.

Thank you. Ladies and gentlemen, there are no further questions at this time. I'd like to hand the call back to management for any closing remarks.

Thank you for joining our call today. We appreciate your interest in Hanmi and look forward to sharing our continued progress with you throughout the balance of 2024. We will be participating in the 25th Annual Community Bank Investor Conference in New York on July 30, and I hope to see many of you there. Thank you.

This concludes today's conference. You may now disconnect your lines. Enjoy the rest of your day.