Ladies and gentlemen, welcome to the Hanmi Financial Corporation's Third 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, Camilla, and thank you all for joining us today to discuss Hanmi's third 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. 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 and 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 third quarter of 2023. I am proud of our team's performance and the results we delivered during a dynamic banking environment characterized by ongoing economic uncertainty, inflation, and high interest rates. During the quarter, our team remained focused on executing against our long-term growth initiatives and diversification strategy. We did this while staying true to our core relationship banking model of providing our clients and prospects with sound banking advice and the products and services they need to navigate the evolving environment. This approach has been critical to building our bank over the past four decades and is the foundation of our future growth. Turning to our third quarter performance, total deposits were relatively stable quarter-over-quarter, and I am pleased that we were able to maintain a healthy mix of our non-interest bearing deposits at 35% of total deposits. This is especially encouraging, given the range of competing products available to clients in this high interest rate environment. During the quarter, we generated strong growth in demand deposits from our corporate Korea clients, which is an important growth initiative. Hanmi is uniquely positioned to serve this market, given our team's deep understanding of the unique business needs of corporate Korea clients. I am pleased with our team's continued success in serving a growing number of Korean companies investing in the U.S. to add new banking relationships that we can grow over time. Third quarter loan balances were up 3.7% on an annualized basis, reflecting a 30% increase in new loan production from last quarter. We delivered loan growth across our commercial real estate, CNI, SBA, and equipment finance business lines. Importantly, as borrowers have come to accept the reality of the…

Thank you, Bonnie, and thank you for joining us today. I'll begin by providing additional details on our loan production. Third quarter loan production was $336 million, up $77 million, or 30% from the second quarter, with a weighted average interest rate of 7.80%, up from 7.39% last quarter. The improvement in loan production reflected a balanced contribution from nearly all business lines, even with higher origination rates. We saw growth in commercial real estate, C&I, SBA, and equipment finance loans in the quarter. We remain committed to pursuing high-quality transactions that meet our underwriting standards and provide the appropriate level of yield in the current rate environment. CRA production was $106 million, up from $41 million in the second quarter. We feel very good about the quality of our CRA portfolio, which, as Bonnie noted, represented 62.5% of our total loan portfolio at quarter end. It has a weighted average loan-to-value ratio of 48.7% and a weighted average debt service coverage ratio of 2.2 times. Production in C&I came in strong at $68 million, up $32 million from the second quarter. We entered the third quarter with a strong pipeline of C&I opportunities, and, as we head into the fourth quarter, those pipelines remain healthy. Total commitments on our commercial lines of credit were $1.09 billion in the third quarter, up slightly from the second quarter. Outstanding balances declined 6%, resulting in a utilization rate of 34% in the third quarter, down from 37% last quarter. We attribute the lower utilization to overall economic conditions and the higher interest rate environment, which has caused the clients to put more of a focus on their cash management. Residential mortgage loan production was $55 million for the third quarter, down from $100 million last quarter. As expected, most of our current…

Thank you, Anthony. Beginning with net interest income, we posted $54.9 million for the third quarter, down 1% from the second quarter. Here, we saw average interest earning assets grow slightly by 0.6%. Loan yields improved 9 basis points, and we had one additional day of net interest income. The cost of our interest bearing deposits, however, rose 28 basis points, offsetting these increases and leading to a $567,000 decline in net interest income from the second quarter. Our net interest margin for the third quarter was 3.03%, down 8 basis points from the second quarter. As expected, the rate of decline in our net interest margin continued to slow. It declined 8 basis points for the third quarter, compared with 17 basis points for the second quarter and 39 basis points for the first quarter. When we met last quarter, we noted that the rate of change for our interest bearing deposits was slowing, better reflecting the current rate environment. We also noted that the shift towards interest bearing deposits, driven by the current rate environment, was also slowing. We were pleased to see that non-interest bearing demand deposits remained a healthy 35% of the deposit portfolio, and that our interest bearing deposit categories remained relatively unchanged. We continued to see deceleration in the rate of change as we entered the fourth quarter, where the cost of interest bearing deposits for the month of October to date is about 12 basis points higher than the third quarter average. Turning to non-interest income, we posted $11.2 million, up 41.5% from the second quarter. The increase reflects a $4 million gain on the sale and leaseback of a branch property. Here, we also recognized a $3.5 million right of use asset and a corresponding liability. Going forward, we expect the difference…

Thank you, Ron. As I have said many times before, our competitive advantage at Hanmi is our team. And I'm grateful to our team for their continued hard work and dedication to serving our clients and our communities. Our third quarter performance reflects the adaptability and consistent execution of our team. Their commitment to building strong client relationships by delivering smart banking advice and our diverse offerings is bearing fruit. Our results for the first three quarters of 2020 put us on track to deliver another year of solid financial results. We are mindful of the potential ongoing volatility in the marketplace and will continue to execute across all areas of the business. Our diversified business model, strong core deposit franchise, healthy loan pipelines, excellent credit quality, and strong capital position give us positive momentum as we enter the fourth quarter. We will continue to focus on diversifying our portfolio with a focus on maintaining strong credit quality and adding new clients that bring both lending and deposit relationships to Hanmi. We remain committed to executing our strategic initiatives to drive discipline growth that create value for our shareholders over the long term. Thank you.

Operator, we are now ready for the Q&A session. Please open up the lines for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Matthew Clark with Piper Sandler. Please proceed with your question.

Thank you. Good afternoon, everyone. First question around the production in the quarter stepping up 30%, I guess, some of which is coming in commercial real estate. I guess, can you give us a sense for why you're comfortable with putting on stronger production in this environment, and how do you plan to fund it?

Well, we had about 30 million approved loans that got pushed back from second quarter to third quarter. So, without 30 million, it would have been about 70 million per quarter production, which is consistent for the last past three quarters. So, and the concentration, I mean, type of production, the property that we funded is broad based, including some hospitality for our existing customers. And then, tier one, the owner occupied building of tier one automotive manufacturers. So, it's a broad based and we are comfortable lending to our VIP existing customers.

And then, just around how you plan to fund it, just thinking about the kind of the marginal cost of funding?

So, I mean, we are mindful of the funding requirements, but we continue to, be able to generate the deposits coming from our USKC. And also, we continue to bring on the deposit marketing bankers. So, we are kind of cherry picking on the loans and then manage the funding requirements for the loans in the pipeline.

Okay, thanks. And then, on the SBA piece of it, it sounds like the production there is remaining kind of consistent. I guess a similar question there. I mean, the yields, it's a variable rate product. And I think, at least on the 7A side, and I think those yields are somewhere, in some cases the 11s. Maybe speak to kind of the demand side and what you're seeing on the SBA front?

So, we've been consistent in terms of the production. And, thanks to the talented marketing people that we brought in through the last couple of years, they are supporting the production. So, going forward, I think that we can keep about $35 million to $40 million in that range.

Okay. Okay, great. And then maybe one for Ron. It sounds like, the rate of change in deposit costs is slowing here. And even in October, I think you'll have some additional lift in loan yields, particularly with the new production. Sorry. But it looks, it sounds like, overall name pressure should subside here and then maybe even stabilize in the first or second quarter. Is that the right way to think about it?

I would agree, again, but making the assumption that the aggregate level of interest rates, the Fed's not really doing anything much more than perhaps another 25, whatever time frame, whether that's November coming up or in the next year. And that the competition, which I think has been, well, intense, has been, I'll say, reasonably priced; there are some outliers, but if we can keep that idea, or if those ideas continue to hold, then I think you're going to continue to see this gradual deceleration until we hit an inflection point, which, again, could be first quarter, maybe second quarter. But I wouldn't predict the quarter too much as much as that. It's going to happen. I can see that. But if I can hold the other things relatively constant, then that would give you some assurances that maybe it is the first or the second.

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

Hi, good afternoon. Thanks for the question. I thought I would start off on the capital side. I know you picked away at the buyback very modestly this quarter, but just wondering on what your appetite level is here, given where your stock is trading. It was seen that buybacks would be attractive. Just wondering what your appetite looks like in the quarter ahead and kind of the priorities here for capital return?

Sure. Well, as I've mentioned on previous calls, the board of directors actively looks at our capital plan each quarter, the dividend actions, any repurchase activity, and so on. And so that topic is taken up each quarter. We do consider the number of shares that would vest under some of our employee compensation programs, so looking to see if it is worthwhile to keep the share count relatively neutral. But what we might do in the fourth quarter, the first quarter, or the second quarter, we take that up each quarter. Again, we're also very cognizant, however, of credit charge that could affect capital, things of that sort. So while I can appreciate that the price might be attractive, we also make sure that we want to keep sufficient levels of capital to deal with any adverse effects that might pop up in any particular period for any particular reason.

Got it. That's helpful, Ron. And can you just remind us how much is left on the current authorization?

I believe it's just under 500,000 shares.

Got it. That's helpful. I think there was a tick up in special mention I'm seeing this quarter. Can you just kind of walk through the drivers of that, wondering how much of that is just proactive portfolio management and any sort of trends there that you're seeing that drove that increase?

Sure. Yeah, I mean, you're right. We are very, very proactive when it comes to correctly and timely creating our loans. So there was a $128 million credit. It's a memory care assisted living facility. It is in the lease up stability period and due in part to COVID and other various factors, this hasn't reached the optimal occupancy rate. So that's why we had downgraded it this quarter. But based on the most recent communication with the borrower, the occupancy rate most recently reached the above the break-even point. And then also the customers are looking to sell the property. So based on all the current assessment, we do not expect any loss from this particular relationship. So it's not a trend of anything. So this just happens to be the kind of one off type of situation.

Got it. That's helpful. Maybe last question for me and then I'll step back. Ron, can you, can you -- I missed what you had said about the sale lease back and the impact to occupancy and equipment. Can you just walk us through what's a good run rate for that line item? And more broadly speaking, expenses are really nicely controlled. Just wondering how you guys are approaching expense management at these levels. Is there additional room for areas to trim or is this a good number to be building off of?

So to the first part of your question on the sale lease back, we only anticipate about a $300,000 annual increase in that particular line item, if you will; if you isolate just the differential between the existing building as an owned property and then as a leased property. So I would say it's fairly muted on a quarterly basis. With respect to expenses generally, I think we've been doing a fairly good job notwithstanding inflationary pressures. So as we enter the planning season for 2024, we certainly will be looking at areas where we might be able to achieve efficiencies, eliminate redundancies, and things of that sort. I couldn't tell you how much that would be, but certainly we recognize the environment that we're in. Being very cost conscious, as I think we are, continues to be what we need to do. Taking it forward then at a run rate, last year was highly inflationary, depending on how you want to measure the year. But I would think we would at least see what we're seeing now until we get to about the second quarter, where salary merits, promotions, things of that sort come to play, which would affect our salaries line. And then, of course, we have the annual health benefits ideas that will probably take effect in the first quarter. So those are kind of early yet. Don't know where they are, but I guess I would ask you to pick an inflationary factor, let's say 3%, or 4%, wherever we think we might be. And that's probably how I would start to at least guess at those ideas.

Just a minor follow-up on that occupancy line. It was about $4.8 million this year, which annualizes out to $19.3 million. Would that be kind of the number to build that $300,000 per year off of? It was just a little bit higher than the first half of the year, so I kind of want to make sure I have the base of that right?

I would average over the quarters because while the occupancy expenses measured by rents or depreciation, amortization are fairly constant, you do get maintenance repair, which creates some volatility, if you will. So little ups and downs depending on whatever the particular property is. So I would average the quarters before you put an inflation effect on top of it.

Thank you. [Operator Instructions] Thank you. We have no further questions in the queue at this time. Bonnie Lee for concluding remarks.

Thank you for joining our call today. We appreciate your interest in Hanmi and look forward to sharing our continued progress with you on our year-end call in January. Thank you.

Thank you. This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.