Richard Pimentel - Senior Vice President and Corporate Finance Officer C. G. Kum - President and Chief Executive Officer Bonnie Lee - Chief Operating Officer Ron Santarosa - Chief Financial Officer.

Chris McGratty - KBW Gary Tenner - D. A. Davidson and Company Don Worthington - Raymond James.

Ladies and gentlemen, welcome to the Hanmi Financial Corporation's First Quarter 2018 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. Following the presentation, the conference will be opened for questions. I would now like to introduce Mr.

Richard Pimentel, Senior Vice President and Corporate Finance Officer. Please go ahead..

Thank you, Dianna. And thank you all for joining us today. With me to discuss Hanmi Financial’s first quarter 2018 earnings are C. G. Kum, our President and Chief Executive Officer; Bonnie Lee, Chief Operating Officer, and Ron Santarosa, Chief Financial Officer. Mr. Kum will begin with an overview of the quarter, and Mr.

Santarosa will then provide more details on our operating performance. At the conclusion of the prepared remarks, we will open the session for questions.

In today’s call, we may include comments and forward-looking statements 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 could be different from those expressed or implied by our forward-looking statements, which involve risks and uncertainties. The speakers on this call claim the protection of the Safe Harbor provisions contained in the Securities Litigation Reform Act of 1995.

For some factors that may cause our results to differ from our expectations, please refer to our SEC filings, including our most recent Form 10-K and 10-Qs. In particular, we direct you to the discussion in our 10-K of certain risk factors affecting our business.

This afternoon, Hanmi Financial issued a news release outlining our financial results for the first quarter of 2018, which can be found on our website at hanmi.com. I will now turn the call over to Mr. Kum..

Thank you, Richard. Good afternoon, everyone. Thank you for joining us today to discuss Hanmi’s 2018 first quarter results. Hanmi continues to deliver strong financial performance even in today’s highly competitive banking environment. Let me take a moment to briefly summarize the key highlights from the first quarter.

Net income expanded nicely on both a sequential quarter and year-over-year basis. Loans and leases receivable increased 2.5% on a linked quarter basis, which represented 10% increase on an annualized basis, and were up 12% from a year ago.

Importantly, we have been able to achieve this solid growth in loans and leases while maintaining our disciplined underwriting standards and excellent asset quality. Net interest margin of 3.7% in the first quarter held relatively steady after adjusting for benefits in the prior quarter from pre-payment fees.

This is a good result considering the extremely competitive environment in which we are operating. Deposit gathering activities were bolstered by growth in non-interest bearing demand deposits, which increased 3% from the prior quarter and nearly 9% from a year ago.

Non-interest expense increased just modestly compared with the prior quarter, despite the seasonal impact of elevated payroll taxes and employee benefits in the first quarter. And finally, our Board announced a 14% increase in our first quarter dividend to $0.24 per common share.

In fact, this was the fifth increase in our dividend since 2013 and during this time the dividend has grown more than 240%. Looking in more detail at our first quarter results, we reported net income of $14.9 million, or $0.46 per diluted share.

On a linked quarter basis, net income per share increased by $0.10, or 28%, compared to the fourth quarter of 2017, which included a one-time revaluation adjustment of $3.9 million to reduce our deferred tax assets as a result of the recently passed tax reform legislation.

Compared to the first quarter last year, net income per share increased by 7%, or $0.03 per share, primarily due to the growth of core sustainable earnings generated by the expanding portfolio of loans and leases.

I’d like to point out that net income in the first quarter of 2018 relative to the fourth quarter was negatively impacted by approximately $0.04 per share related to two events.

These included the $428,000 loss from the sale of and the exit from Community Reinvestment Act or CRA mutual funds that were acquired as part of our 2014 acquisition of Central Bancorp Inc., as well as de minimis prepayment fees in the first quarter.

Turning to loans and leases receivable, our portfolio expanded by 10% on an annualized basis in the first quarter and 12% from a year ago.

New loan and lease commitments booked in the first quarter of $281 million, excluding residential loan purchases, represents a 17% increase as compared with production in the first quarter last year and 5% increase on a linked quarter basis.

This is a very strong result in what is typically our seasonally weakest quarter of the year for loan and lease production. Our Commercial Equipment Leasing division continued its exceptionally strong performance in the quarter. First quarter lease production of $55 million increased 5% from the prior quarter and 39% from the first quarter last year.

I am pleased to report that this was the best quarterly result since we completed the acquisition of this business in the fourth quarter of 2016. In addition to being a nice complement to our focus on business banking to diversify the Hanmi loan portfolio, the newly generated leases for the quarter had a weighted average lease yield of 5.50%.

This weighted average yield on new production is higher than the fourth quarter 2017 figure of 5.29%. This portfolio continues generate a higher yield than the other loan categories as the weighted average yield on new organically generated loans for the first quarter was 4.91%.

I continue to be pleased with the ongoing success of our C&I lending effort, which is benefitting from previous investments to extend our reach geographically with a coast-to-coast footprint and into new areas of focus such as specialty and entertainment lending.

During the first quarter, C&I commitments booked totaled $62 million which was 35% higher on a year-over-year basis and 11% higher on a linked quarter basis. As of the end of first quarter, the balance of C&I loans outstanding, excluding leases, was up 2.6% on a quarter-over-quarter basis and was up 29% on a year-over-year basis.

Due in part to the strength of our C&I and Commercial Equipment Leasing division, the diversification of our portfolio continues to improve. At the end of the first quarter, CRE loans comprised 71% of our portfolio compared with 76% a year ago. We expect CRE loans as a percentage of the total portfolio to continue to decline throughout the year.

Looking ahead in the second quarter and beyond, our loan and lease pipeline remains healthy and we are confident that we can generate double-digit growth in loans and leases for the full-year. I am also confident that the SBA loan production, which typically slows in the first quarter, will ramp back up to the $40 million per quarter level.

In terms of deposits, we continue to operate in a highly competitive Asian American banking landscape for deposit gathering activities. Total deposits of $4.38 billion increased nearly 1% during the first quarter on a linked quarter basis while deposits have expanded more than 7% from a year ago.

Similar to recent prior quarters, growth over the last year is coming from core deposit categories including non-interest bearing demand deposits, which are up nearly 9% year over year, and retail CD’s, which have grown 21% year-over-year.

It appears the retail CD market competition has heated up with banks having funding pressures driving up the pricing of CDs at a level not consistent with Fed’s interest rate moves. However, our ability to generate core deposits, particularly in the non-interest bearing demand deposit category, will allow us to better control our cost of funds.

I’d like to provide some color on our first quarter net interest margin of 3.7%, which compares with 3.79% and 3.89% in the prior quarter and year ago quarter, respectively. On a linked quarter basis, approximately 8 points of the 9 basis point reduction in NIM was related to prepayment fees that benefitted the fourth quarter.

In fact, prepayment fees in the first quarter were only $83,000, compared with a quarterly average of $497,000 over the last four quarters. Furthermore, nearly half of the year-over-year contraction in NIM is attributed to the additional interest expense associated with the $100 million sub debt that was issued late in the first quarter of 2017.

Given the competitive market and rising deposit costs, I am pleased that we have been able to maintain our net interest margin in a relatively tight range over the past year.

Hanmi’s ability to generate higher yielding assets combined with our ability to generate core deposits will allow us to maintain a strong net interest margin in a challenging environment. And finally, our asset quality metrics continue to remain strong. Nonperforming loans declined slightly to $15.4 million or 35 basis points of loans.

We also recorded net recoveries for the first quarter of 2018of $85,000. All of the other asset quality metrics have improved quarter over quarter. Finally, our allowance for loan losses was maintained at 72 basis points of loans and leases at quarter end.

Even as we generate loan growth on a double digit annualized basis, we continue to maintain a culture of disciplined credit underwriting. For the first quarter 2018, consistent with prior quarters, the weighted average loan-to-value and debt coverage ratios on new commercial real estate loan originations were 54% and 1.78times, respectively.

Before turning it over to Ron, I’d like to reiterate that our first quarter cash dividend increased by 14% to $0.24 per share and was paid on February 23rd. This represents an annual dividend yield of 3.1% based on yesterday’s closing stock price.

The increase in our dividend highlights the earnings power of the Hanmi franchise and the Board’s confidence in our ability to continue to deliver profitable growth to our shareholders. With that, I’d like to turn the call over to Ron Santarosa, our Chief Financial Officer, to discuss the first quarter operating results in more detail.

Ron?.

Thank you, C.G. and good afternoon all. First, let’s discuss our net interest revenues in a bit more detail. First quarter net interest income of $44.9 million decreased 3.1% or approximately $1.4 million from $46.3 million in the fourth quarter, and increased 6.1% or $2.6 million over the same quarter a year ago.

Following a very strong fourth quarter, our first quarter results reflect upward pressure on deposit rates as deposit interest expense increased by $383 thousand and borrowing interest expense increased by $316 thousand as well on higher borrowings.

Total interest expense for the first quarter was $10.2 million, up 7.6% from the fourth quarter’s $9.4 million. The linked quarter decline in net interest revenues was further compounded by a higher level of pre-payment fees experienced in the fourth quarter versus a lower level in the first quarter.

Interest and fees on loans and leases were down 1.2% or $602 thousand from the prior quarter, but increased 13.7% or $6.2 million from the first quarter of 2017. Our loan and lease portfolio continued to see solid loan growth, up $109.1 million, or 2.5% from the prior quarter.

Total deposits increased by just under 1% in the first quarter to 4.38 billion, from 4.35 billion at the end of fourth quarter, and were up 7% year-over-year from 4.08 billion. Non-interest-bearing deposits finished the quarter at $1.4 billion, up 3% from last quarter and up 9% from a year ago.

Our loan to deposit ratio for the first quarter was 101%, up from 99% last quarter. Since March 2017, the Federal Reserve increased the benchmark Fed Funds rate four times for a total of 100 basis points, including a 25 basis points increase on March 21st of this year.

The quarterly average rate paid on interest bearing deposits over the same time period increased 27 basis points representing 27% of the change in the Fed Funds rate. For the first quarter of 2018, the 8 basis point increase in the average rate paid on interest-bearing deposits represented 32% of the most recent change in the Federal Funds rate.

Net interest margin for the first quarter was 3.70%, down 9 basis points from the prior quarter. The average rate paid on loans and leases was 4.85% down 5 basis points primarily from prepayment fees.

The average rate paid on interest-bearing deposits for the first quarter increased by 8 basis points to 1.05% from the fourth quarter while the average cost of overall deposits saw a more muted sequential uptick of 5 basis points to 0.73%. Switching now to noninterest income, the first quarter saw a decrease of 21% to $6.1 million.

The primary driver was a $428 thousand realized loss on the sale of CRA mutual funds that were mostly holdovers from the UCB transaction. Additionally, SBA loan sales were seasonably lower at $19.2 million in loans, down from $27.5 million in the fourth quarter.

Changes in servicing income, service charges and fees, and other operating income account for the remaining decrease in noninterest income in the first quarter.

Noninterest expenses for the first quarter, excluding OREO which tends to be lumpy, were relatively steady from last quarter with a 1.1%, or $320 thousand sequential increase to $29.7 million.

Salaries increased $1.4 million due to annual bonus payouts and payroll taxes; however this was mostly offset by lower costs for Professional fees, Marketing costs, and Other Expenses.

The increase in noninterest expense, coupled with the decrease in our noninterest income, resulted in a higher efficiency ratio of 58.4% in the first quarter versus 54.2% last quarter and 55% a year ago. The effective tax rate for the first quarter was 27.8%.

This was down from an effective rate of 53.2% in the fourth quarter which included additional income tax expenses many banks experienced at the end of 2017 stemming from the re-measurement of deferred tax assets.

In Q1, our return on average assets and return on average stockholders’ equity both increased to more normalized levels at 1.16% and 10.65%, respectively. Very importantly, the quality of our asset base continues to be strong with nonperforming assets coming in at $17 million for the quarter, or 32 basis points of total assets.

Our delinquent loans to total loans decreased by 4 basis points to just 16 basis points and our non-performing loans and leases to total loans and leases fell 2 basis points to 35 basis points for the first quarter.

Our provision expense increased to 649,000, up from 220,000 at the end of the fourth quarter and our allowance coverage ratio remained unchanged at 72 basis points. Lastly, our tangible book value finished the quarter at $16.98 per share, pretty much flat from $16.96 per share from the prior quarter.

Our tangible common equity ratio remains strong at 10.43% as do all of our regulatory capital ratios. With that, I will turn the call back to C.G..

Thank you, Ron. Hanmi’s performance in the first quarter represents a solid start to the New Year. With strong growth in conservatively underwritten loans and leases, excellent asset quality and expanding earnings, Hanmi is well-positioned to deliver strong financial results throughout the year.

I look forward to sharing our continued progress with you when we report our second quarter results in July. Thank you for your attention and have a nice day. .

Dianna let’s open up the call for questions. .

Thank you. Ladies and gentlemen, we will now begin our question and answer session. [Operator Instructions] Our first question comes from the line of Chris McGratty from KBW. Please proceed with your question..

Ron, maybe start on the margins, I am interested in any commentary about deposit gathering in the quarter, one of your peers was reiterating the message of competitive nature of deposits.

I'm interested if you ran any CD campaigns in the quarter, if so what the duration were? And how should we thinking about rising funding costs and a flatter curve as it relates to the margin outlook? Thanks..

So maybe C.

G., Bonnie you might want to take the first part of that question?.

This is Bonnie. We haven’t really ran any CD campaigns, we had a strategy of more of a defensive yet competitive strategy where we are looking at each relationship customers, individually and match the competition, when we look at it when we saw overall profitability..

And then with respect to the cost of deposits, we did notice a small increase and as we try to point out it appears that the CD deposit pricing is basically running independent of what the Fed may or may not do, but as C. G.

also mentioned that we do have the benefit of a higher yielding portfolio if not only in recent but in other elements of the portfolio. So we do envision some pressure, don’t exactly know how it’s going to play out for the entire year, but I think we have a good chance of being about where we’re at..

Just so I can make sure I understand that right, Ron, the 3.70, that’s kind of where we’re going to have a little bit of pressure and hopefully stability in the next few quarters?.

Let me take a stab at that, I think the 3.70 -- we had a pretty good shot at maintaining and depending on what the Federal Reserve does relative to the future rate increases, we have a chance to move that number up in a hopefully meaningful way. As I tried mentioning earlier, we have an ability to generate the loans that very few banks have.

And because of that even though we have a fair number of loans that are in this hybrid pricing structure, we have the ability to in essence increase pricing, I would say with a little bit higher level of elasticity than you might envision for the type of asset liability position that we have.

So the leasing portfolio and even the commercial real estate. We think that under Bonnie's leadership and her cracking the whip a little bit more, we can get a better yield, better return, on the loans that we’re going to be generating. .

Okay, thank you for that. May be while I have you Ron on the expenses, I think last quarter you said flat and that’s exactly where they came in.

The $30 million run rate is that modest inflation off of that number, is that fair?.

Yes, I believe so. .

Our next question comes from the line of Gary Tenner from D. A. Davidson and Company. Please proceed with your question. .

You sort of answered the question I think at the interim report, C.G [indiscernible] with outlook for keeping the margin, whichever, maybe good or better but, could you just remind us sort of overtime, where your payment penalties tend to be, understanding that there has been volatility there, but I guess did the million in the fourth quarter unusually high or just quarter has been just unusually low or is the truth somewhere in the middle?.

You’re right that the fourth quarter number, the actual figure was 964,000 and that was unusually high. That followed the third quarter figure of 793,000.

So for the year last year, we averaged slightly under 0.5 million and so the prepaid and penalty is an unpredictable number obviously and frankly I was a bit surprised that the level of prepayments that we had in the second half of the year.

Going forward in what I believe to be a rapidly rising rate of environment, I don't think that we are going to have a high level of prepayment penalty.

Having said that the flipside is the more the loans that we have generated will stick in our portfolio and so whether the income comes from, as I said going forward in 2018, whether there's a prepayment penalty, or there is a higher loan value yield or loan totaled in our portfolio, we’re going to be just fine.

I think that the 2018 is going to have a high level of prepayment penalty given that the rates have already started to move fairly significantly in a category like commercial real estate. So we may not get the prepayment penalty but more of the loans that we generate is going to stick on our books. .

And then just a follow up, I know that overtime, you guys have been interested in pursuing M&A opportunities.

You talk about kind of where things stand there, what the activities out there and the discussion levels and then whether perhaps improvements in the tax rates and higher interest rates, are these all things that are conspiring to slow down potential M&A opportunities for you?.

I don’t know if its conspiring to slow it down, I would say that the smaller institution are concerned with the impact of the kind of interest rate environment that we all have been experiencing.

And so I made the mistake a little while ago of signaling that there was a deal eminent and it didn’t happen for reasons that we cannot control, but let's just say that we have been very active in discussions with interested parties.

And given where we are in terms of the stock price and frankly given where we are relative to the clean position of the organization from regulatory or whatever viewpoints they are looking at us from. We're looked at as one of the potential partners by quite a few potential solos out there..

[Operator Instructions] Our next question comes from the line of Don Worthington from Raymond James. Please proceed with your question..

So, in terms of loan purchases would you expect the run rate to be the similar amount it was purchased in Q1? I know you had some large size purchase last quarter but….

Yes, we did, we did, and that was because we thought that there was going to be a large relationship that was going to get paid off. I’d say that given the pipeline that we have of potential organically produced loans, it will be at the level that we did in the first quarter, maybe even less..

And then in terms of the tax rate, what's your outlook there?.

So, Don again I expect it between 27 to 28, we are closer to the 28 side. So I think we will still be around between those two marks. Not sure exactly where the decimal point will come in at each quarter..

And then Ron what was the rough dollar amount of the seasonal salary benefits number in the first quarter?.

About 1.4, pretty much if I compare to the fourth quarter I’d say probably about 80% of that increase maybe 75% of that increase kind of reflects the year end incentives, the incremental taxes, incremental benefits..

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

Just one quick follow up. As you talk about the margin and maintaining it around 3.70, maybe pushing it a bit higher. Does that contemplate any additional change in the growing asset mix initial run off with securities to replace some of higher yielding loans or is it a similar [indiscernible]..

I don’t think we're -- our security book is not that big, so we are not expecting any significant change to that particular portfolio. So in terms of a mix it might be leaning little bit more towards leases and C&I than CRE but other than that I don’t expect a significant change in the mix over the next couple of quarters..

We have no further questions in the queue at this time. Please continue..

Thank you for listening to Hanmi Financial’s first quarter 2018 results conference. We look forward to speaking with you next quarter..

Thank you. Ladies and gentlemen, this does conclude today’s teleconference, you may disconnect your lines at this time and thank you for your participation..