Ladies and gentlemen, welcome to the Hanmi Financial Corporation's Second Quarter 2023 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, Doug, and thank you all for joining us today to discuss Hanmi's second quarter 2023 financial 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 Hami Financial Corporation; Anthony Kim, Chief Banking Officer; and Ron Santarosa, Chief Financial Officer. Bonnie will begin today's call with an overview and Anthony will discuss loan and deposit activities as Ron will provide details on our financial performance and then Bonnie will provide closing comments before we open the call up to your questions. Before we begin, I'd 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. Discussions 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, in 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, and thank you for joining us today to discuss our results for the second quarter of 2023. As you all well know, the second quarter was a challenging time for the banking industry with the rising interest rates, ongoing economic uncertainty and the aftermath of the banking industry events in March. I am pleased to report that even with these challenges, Hanmi delivered solid results for the second quarter of 2023 highlighted by healthy deposit growth, continued expansion of our Corporate Korea initiative, disciplined expense management and continued improvement in credit quality. We attribute these results to our successful relationship banking model and our team's consistent and steady execution of our strategy. Net income for the second quarter of 2023 was $20.6 million or $0.67 per diluted share compared with $25.1 million or $0.82 per diluted share for the year ago quarter. We have spoken to you about our strategic initiatives to position Hanmi to deliver sustained growth and returns over the long term. You may recall these include growing our residential mortgage platform to diversify our loan portfolio by adding lower risk assets that can grow profitably for many years, accelerating our Corporate Korea initiative to grow our loan and deposit portfolios from Korean companies that are investing in the U.S., and expanding our team by attracting top talent with the growth and relationship mindset to win more business and serve more customers. Our success in executing this strategic initiative was evident in our second quarter results, where we most notably benefited from strength in our residential mortgage lending business and our Corporate Korea initiative. Second quarter deposits increased over 7% on an annualized basis to $6.3 billion and noninterest-bearing deposits remained high at 35% of our total deposits at quarter end. These…

Thank you, Bonnie, and thank you for joining us today. I'll begin with more detail on our loan production. Second quarter loan production was $259 million, down 15% from the first quarter. Given the current interest rate environment, we had expected loan production to moderate this year, and that has been the case in the first half of the year. We attribute the second quarter decline in loan production to a couple of factors. First, we are seeing softer demand for purchases and refinances, especially in the CRE sector, where rapidly rising interest rates have had a major impact. In this sector, we are only pursuing high-quality transactions that meet our underwriting standards and provide the appropriate level of yield in this high rate environment. Additionally, during the second quarter, we approved three large loans totaling about $40 million that did not fund by the end of second quarter. However, these loans will fund in the third quarter. Had these loans been funded in the second quarter, new loan production would have been consistent with the first quarter loans. Our residential mortgage production was a strong performer this quarter at $100 million, which is consistent with the last five quarters. We attribute our success in residential mortgage lending to the close relationships we have built with our correspondent lenders who continue to be active in their own markets by focusing on the non-QM space. Practically, all of our current lending is in the purchase market as refinance activity has dropped off significantly with higher interest rates. These loans now comprise nearly 15% of our total loan portfolio, up from 9% a year ago. As Bonnie said, residential mortgage has been and will continue to be an important part of our loan diversification strategy, and we want to be in the…

Thank you, Anthony. Let's begin with net interest income where we posted $55.4 million for the second quarter, down $2.4 million or 4.2% sequentially from the first quarter, primarily because of higher interest-bearing deposit expense. Here, we saw a $6.6 million increase in interest expense on deposits largely driven by a 52 basis point increase in average rates paid. Offsetting this effect was a $2.6 million increase in loan interest income, mostly due to a 13 basis point increase in yields. Further offsetting the effect of higher deposit interest expense was a $729,000 increase in interest income from our deposits at the Fed and a $736,000 reduction in interest expense from fewer borrowings. Net interest margin also declined for the second quarter 17 basis points to 3.11%. Here, the cost of interest-bearing deposits contributed 35 basis points to this decline while the increase in loan yields offset that effect by 9 basis points. The contribution of higher yields on our deposits at the Fed and the benefit of lower FHLB borrowings further offset the margin decline by another 8 basis points. As expected, the pace of decline in our net interest margin moderated from the first quarter where we saw margin decline 39 basis points from the prior fourth quarter. When we met last quarter, we noted that the rate of change for our interest-bearing deposits was slowing as we entered the second quarter. That did happen as the second quarter increase in the average rates paid on interest-bearing deposits was about half the increase we experienced in the first quarter. We continue to see deceleration as we enter the third quarter as the cost of interest-bearing deposits for the month of July to date is about 25 basis points higher than the second quarter average. In addition, the mix…

In closing, I would like to thank our analysts and investors for your continued support. I would also like to thank our outstanding team for their dedication to building strong relationships with our customers by delivering superior customer and banking solutions that help them and help Hanmi grow. Heading into the second half of 2023, we will remain focused on executing on our strategy continuing to provide advice, products and services our customers need and prudently managing our business to deliver growth and return to our shareholders. Thank you.

[Operator Instructions] Our first question comes from the line of Matthew Erdner with JonesTrading.

How are you viewing new loan originations versus share buybacks at the current level?

So to take it, I guess, in two parts. With respect to capital actions, whether they be share repurchase or dividends, as we've said in our previous calls, the Board meets quarterly and we review our plans, both as they unfolded and what we might see in the future. So share repurchase in this particular case here for the second quarter just happened to be very opportunistic, given the severe dislocation in the equity markets from the March events. So the Board will meet again. We will have a conversation, and we will proceed from there. With respect to loans themselves, again, as Bonnie and Anthony pointed out, that's a pretty slow environment right now given the high rate that borrowers have to pay, and we'll continue to be selective in what we do in the current rate environment.

That's helpful. And then following up on the loan originations, you guys had a pretty good quarter with resi loans. Could you talk about the average profile of that loan, whether it be size, the rate and if it was non-QM for this quarter?

Yes. We produced mostly non-QM loans, about 90-something percent, like over 90% of the production is in California. Average rate we produced was 6.43, I believe. And then average loan-to-value is about 60%.

Our next question comes from the line of Matt Fedorjaka with KBW.

Obviously, you guys have a high base of noninterest-bearing deposits and I know they're running off a little bit and you guys mentioned that pace is slowing. I don't know if you guys could give any more specific color around recent trends that you maybe have seen at the end of the quarter in June and possibly even into July on the noninterest-bearing deposit movement?

Looking at the recent trends, obviously, there has been some shift from DDA to CD and interest-bearing accounts for the past two quarters, but the pace has actually been slow. And we expect the noninterest-bearing deposits to either hold or maybe go down slightly from the current 35%. So maybe when this is all done, it will stay at about 30% to 33% of noninterest-bearing deposits to total deposits.

Got it. Got it. That's super helpful. And maybe just kind of similarm following up on that with the margin. Looking forward, are you guys expecting a similar maybe another quarter or two of dip in margin in the back half of the year? Or what are you guys kind of expecting with the margin moving forward here?

So as we've tried to point out, we continue to see the deceleration in the decline difficult to call when the inflection point will occur. I doubt it's going to be the third quarter that will likely do something tomorrow. So when Fed stops, then we have a better sense of when we might get to the inflection point.

All right. Very cool. One last question here on expenses. Obviously, you guys talked about the increase that you saw here. Is this $34 million a good run rate moving forward? Or is this a little bit higher than what you guys might expect for future quarters coming up here?

I think it's a pretty good run rate. But what we try to do in our earnings release is to isolate especially the OREO and repossessed personal property expenses. They can alternate from a net benefit to a net expense. So when you kind of look outside of that, and I can't tell you what those numbers might be in any one quarter, you could kind of start to see some stability around that $34 million dot x type of idea.

[Operator Instructions] Our next question comes from the line of Adam Butler with Piper Sandler.

This is Adam on for Matthew Clark. Just -- I saw that borrowings came down a significant amount during the quarter. And I imagine that's mostly due to the increase in deposits. Do you envision the balance of borrowings going -- remaining in this range going forward or going down?

So the $125 million of borrowings that we have at June 30 represent term financings. And they were -- they are three-year term financing. So they've been on for a while, maybe the most recent tranche about a year ago. So the differential pretty much represents just overnight ideas depending on what might be needed. And when you go back to March, where there was still uncertainty with respect to just the banking industry, I would say they were just bulked up just to ensure that should anything adverse occur, we were well positioned to address it. Of course, that did not materialize. So those borrowings went away pretty quickly in the top of the second quarter.

Okay. Great. Thanks. And I think I appreciate the color on deposit cost pressures decreasing thus far. And I think I heard you say that deposit costs were up 25 basis points quarter-to-date. Is that interest-bearing or total deposit costs?

It's just -- I only focus on interest-bearing. So interest-bearing deposits...

[3.5] as of today?

Correct.

Okay. Great. And then one more question with regards to credit. I saw the specific reserve increase on the C&I healthcare loan. Is there -- could you just provide an update on the status of that credit?

Sure. So in line with what we actually shared last quarter, the borrower is in the reorganization and also including a possible sale of the business as well. So it's just still going through the reorganization process.

There are no further questions in the queue. I'd like to hand the call back 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 as we move through the remainder of 2023.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.