Ladies and gentlemen, welcome to the Hanmi Financial Corporation's Fourth Quarter and Full Year 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 turn our conference over to Mr. Richard Pimentel, Senior Vice President and Corporate Finance Officer. Please go ahead..

C. G. Kum, our Chief Executive Officer; Bonnie Lee, President and Chief Operating Officer; and Ron Santarosa, Chief Financial Officer. Mr. Kum will begin with an overview of the quarter, Ms. Lee will discuss loan and deposit activities, and Mr. Santarosa will then provide more detail 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 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-Q. 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 fourth quarter of 2018, which can be found on our website at hanmi.com. I will now turn over the call to Mr. Kum..

investments in technology and systems to ultimately reduce costs through improvements in operational efficiency. We are also taking steps to centralize and streamline certain back office activities to improve processing speed along with enhanced consistency across the enterprise in adjudicating credits.

With that, I'd like to turn the call over to Bonnie Lee, our President and Chief Operating Officer, to discuss the fourth quarter loan and lease production results and deposit gathering activities.

Bonnie?.

Thank you, C. G. I will discuss loan and lease production and deposit gathering activities and then turn it over to Ron Santarosa for additional details on our fourth quarter financial results. During the quarter, organic loan and lease production totaled $246.2 million, which increased 3% over the prior quarter.

However, due to elevated levels of payoffs as well as the higher amortization during the quarter, our portfolio of loans and leases expanded by just 1.6% on an annualized basis and the portfolio grew 6.9% for the full year.

Consistent with our strategy, fourth quarter production activity reflected our shifting emphasis towards higher-yielding categories with the strong asset quality such as C&I loans, as well as equipment leases, while we reduced our exposure to lower yielding asset classes such as the single family residential loans.

In line with our longer term objective to diversify our loan and lease portfolio, CRE loans comprised 70.8% of our portfolio at the end of the 2018 compared with over 76.5% two years ago. Fourth quarter production consisted primarily of $87.5 million of commercial real estate loans, $30.8 million of SBA loans and $68.1 million of C&I loans.

We also originated $59 million of commercial equipment leases. Of note, C&I loan originations in the fourth quarter were more than two times higher than the previous quarter, while equipment lease production remained consistently strong throughout the year.

Newly generated loans and leases for the quarter had a weighted average yield of 5.89%, an improvement from the previous quarter's weighted average yield on new production of 5.57%. As a result, average loan and lease yields for the portfolio improved to above 5%, even after adjusting for prepayment fees in the fourth quarter.

Looking ahead in the first quarter of 2019, our pipeline remains healthy and supports the annual growth objective range of 5 to 7% that C. G. noted in his remarks. Moving on to deposits, we continue to operate in a highly competitive Asian American banking landscape for deposit gathering activities.

Total deposits of $4.75 billion increased 2.9% during the fourth quarter on a linked quarter basis and 9.2% from a year ago. Most of the growth in the quarter came from the interest bearing deposits, with the money market and savings increasing 6.4% and time deposits increasing 4%.

As a result of the fourth quarter loan production and deposit gathering activities, our loan-to-deposit ratio for the fourth quarter was 97%, down from 99% in the fourth quarter last year. I'd now like to turn the call over to Ron Santarosa, our Chief Financial Officer.

Ron?.

Thank you, Bonnie, and good afternoon all. First, I'd like to dive a bit deeper into our effective tax rate for the fourth quarter. As reported, our provision for income taxes included a charge of $2.7 million.

That charge included $2.1 million increase to the valuation allowance for the State of Illinois net operating loss carryforwards, a $1.4 million adjustment to temporary differences from the change in the Federal income tax rate and a $772,000 benefit from the lapse of the statute of limitations on certain unrecognized tax benefits.

These adjustments increased the effective tax rate to 41.9% for the quarter and to 31.1% for the year. Absent these adjustments, the effective tax rate would have been 28.1% for the fourth quarter and 27.9% for the year. Our net interest income was $45.6 million for the fourth quarter, up slightly from $45.3 million for the third quarter.

Even though the fourth quarter included $266,000 from the special FHLB dividend and $352,000 in prepayment fees, we saw loan and lease income increase $1.2 million as yields improved. In addition, as deposits replaced borrowings, borrowing expense fell $844,000 as deposits expense increased $2.4 million.

Again, loans-to-deposits ended the year at 96.9%. Net interest margin for the fourth quarter was 3.51%, up three basis points from 3.48% for the third quarter. Again, while the special dividend and prepayment activity contributed five basis points to the fourth quarter margin, we saw loan and lease yields increase 12 basis points sequentially.

Combined with the shift from borrowings to deposits, net interest margin, adjusted for the special dividend and prepayment activity, declined two basis points sequentially. Turning to noninterest income for the fourth quarter, we saw a 1.4% improvement from the third quarter to $6.3 million.

This increase reflects higher levels of deposit service charges and other operating income, offset by lower gains on SBA loans. SBA gains were just under $1.0 million for the fourth quarter on a lower volume at $17.9 million and lower trade premiums at 6.5%. For noninterest expenses, we had a 1.0% increase from the prior quarter to $29.3 million.

As noted, we lowered incentive compensation, closed two branch offices and reduced staff late in the fourth quarter incurring about $400,000 in severance, retention and other costs. Later in this 2019 first quarter, we will close four additional branch offices that come with additional costs.

In addition to these cost saving actions, we will continue to invest in our business. In the fourth quarter, we continued with our seasonal advertising efforts and investment in technology. Last, because the increase in noninterest expenses outpaced the increase in revenues, our efficiency ratio for the fourth quarter increased to 56.40% from 56.28%.

Return on average assets for the fourth quarter was 0.83% and 1.08% for the year, while the return on average equity was 7.92% for the fourth quarter and 10.07% for the year. Our tangible book value at the end of the year increased to $17.47 per share and our tangible common equity ratio was strong at 9.84%. With that, I'll turn it back to C. G..

Thank you, Ron. Hanmi results in the fourth quarter reflect our decision to grow in a safe and prudent manner, protect net interest margin and to improve our cost structure. Given the competitive environment coupled with further headwinds from a flat yield curve, we are convinced that this approach is most judicious at this point in the credit cycle.

Our strategic growth targets, coupled with our cost reduction and operational efficiency initiatives, will put Hanmi in a very good position to drive profitable growth as we look ahead to 2019, and beyond. I look forward to sharing our continued progress with you when we report our first quarter 2019 results in April. Thank you..

Matt, that concludes our prepared remarks. We would now like to open up the call for questions..

Great. Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Chris McGratty from KBW. Please go ahead..

Ron, maybe a question for you; you guys are very, very aggressive with the buyback in the quarter given the volatility in the market. So you're done with the buyback.

I guess, my question is with the stock a couple of bucks below your average cost and growth slowing a bit, like can you talk through the potential for another buyback or maybe remind us the capital target that you're managing to? Thanks..

Okay, Chris, Ron is looking at me. So, yes, we will be going to the Board with a proposal to have another buyback plan. And the - our target, capital target, tangible common equity capital target is between 9% to 9.5%..

Okay. And then, I assume the Board meets in the next couple weeks.

Is that fair to assume that the authorization might come at that point?.

Possible, yes..

Okay. If I could switch to expenses, it seems like some of the benefits of the strategy are making their way into numbers, which is a good sign. Can you help us with the kind of the trajectory? I think you talked about saving the $5 million and $0.12 by the end of 2019.

I guess, how much is in the numbers already and maybe just help us with the kind of the glide towards full realization in terms of the dollar expenses on a quarterly basis..

So about half of that $5 million idea is through branch consolidation, and the remainder of the branches will be consolidated as we complete the 2019 first quarter. A little bit more takes us up to about two-thirds of the total, say just related to staff reductions. The staff reductions will be on the same path as the branch consolidations.

The remaining third of the save comes from ferreting out areas in the organization where we can save costs or renegotiate contracts, things of that like. That will take a little bit longer. I would expect that last third to come in by the time we finish out the third quarter of next year.

So I would anticipate that that the full save is manifested as we get to the second half of the year and more so as we get to the fourth quarter..

Yeah, third quarter of this year, not next year..

I'm sorry. Sorry, my years are mixed up. But you're right..

We're already in 2019, Ron..

Correct. Thank you..

Okay.

And just to make sure I'm clear, Ron, the quarterly trajectory should kind of make it down to that 29-ish range by the end of the year, is that the run rate?.

I would be hopeful that we hit more like 28 by the time we get to the fourth quarter. So, first quarter will be a little bit elevated if you will because of payroll taxes and the rest. Second quarter, you will start to see a bit more because of the branch consolidation, staff reductions would have taken into effect.

And then, the timing of the last third, that's the one that's a little bit more difficult to predict. So I'm very confident that in the second half of 2019, as C. G. corrected me, we will start to see it and definitely by the fourth quarter..

Okay. That's helpful. Thanks a lot..

Our next question is from Gary Tenner from D.A. Davidson. Please go ahead..

Guys, good afternoon..

Good afternoon..

I just have a couple of questions. I guess, first, I just want to ask about the provision with the $2.1 million charge-off representing most of the charge-offs for the quarter, and as specific reserve being carried against that. I'm curious as to the decision to increase the provision and build that reserve back given strong credit metrics in general.

Can you talk about the thought process on where we are in credit and your decision to build that reserve back up?.

Well, that one credit is an impaired credit that we started to deal with several years ago. So from a quantitative standpoint, as the asset quality metrics have indicated, the - they're really, I mean, we're about as strong as you can get.

But in the environment that we're in, with some economic uncertainties, and then frankly, with the CEO’s pending departure, it made sense for us to start dealing with some issues relative with what we call the qualitative side. And so, the bulk of the provision is geared more towards the qualitative rather than the quantitative.

Does that make sense?.

Okay.

So you're not necessarily seeing anything in the environment or in your internal credit scoring today, but just my understanding, kind of where we are maybe in the expansion and any uncertainty?.

Correct. And as I mentioned, I mean, we've actually looked down to - tried to look down the road. And after discussions with my credit people, they're not seeing any type of meaningful charge-off activity in the first quarter, and their crystal ball only goes out that far.

So that was very, I would say positive, I would say positioning from the credit people for my benefit..

Okay. Thanks for that C. G.

And then just regarding SBA, given the government shutdown, is it just safe to say as long as that goes on, there would be no gain on sale activity or there would be - will there be SBA production, but maybe they would - their loans weren't qualified as SBA loans until after government shutdown is over, how does that work mechanically?.

Well, yeah, we can't sell - we can't conclude these SBA programs or loans with the government closed, but the activities are still ongoing, and so once the government shutdown is over, then we can immediately ramp up the closing in the sales activities.

And so, the marketing efforts have been ongoing and they seem to be holding up fairly well notwithstanding the government shutdown as we speak..

Great. Thank you..

Our next question is from Matt Clark from Piper Jaffray. Please go ahead..

Hi, good afternoon..

Good afternoon..

Just first one for me on deposit pricing and with the fed that could be on hold for a little while, can you just give us a sense for where your CDs are? What rate they're renewing into and your general competitive pressures that exist today, again with the fed that might be on hold for a bit..

So I'll cover that. During the fourth quarter, we had CD maturing at average cost at the 1.4%, we retained them at 1.76%. But in terms of new money that's coming in, as soon as like the competitors or some of the rates are offering as high as 2.7%. We are averaging about 2% for 12 months money for now..

Okay, great. And then - go ahead..

Also from the [financial] [ph] standpoint, it seems that the competition has eased somewhat and if the fed could sit on the sidelines for a while longer and let the market just kind of stabilize as far as these deposit products are concerned, I think that bodes well for not only us but the entire industry.

So there seem to be some early indications that the CD pricing environment seems to be stabilizing..

Okay. Then just switching gears to the loan side of things.

Can you give us the weighted average rate on new equipment leases in the quarter?.

Sure. The equipment leases came in at 5.82% for the quarter..

Okay. And Ron or C. G.

can you speak to that portfolio as that continues to increase on a relative basis, can you give us a sense for and what do you think the normalized loss rates are on that portfolio?.

I think I said this in one of our prior calls, when we acquired this portfolio from that bank in Southern California; we had modeled in a loss rate of 150 basis points. In reality the loss rate has been substantiated less than 150, in fact, well below 100 basis points.

Our model has been to trade-off yield for credit quality and so even though our weighted average on these leases is somewhere close to [go 6%] [ph]. The loss rate of the portfolio is very, very modest.

And so, if we stayed of course on this particular program, I see us maintaining a loss rate of 100 basis points or less and so we'll see how this type of product performs in a slower economy, but so far it has exceeded our expectations in terms of asset quality..

Okay.

And then just last one for me on the tax rate Ron, is 28 the right number going forward or?.

Yeah..

Okay, great. Thank you..

Next question is from Tim Coffey from FIG Partners. Please go ahead..

Good. Thanks. Good afternoon everybody. The SBA premium, I think Ron mentioned, it was in the end of his comments was 6.5%, that kind of suggest that there has been kind of a steep drop-off in premiums at the back half of '18.

Is there a point where it makes more economic sense to hold the SBA production rather than selling it, assuming of course, the government reopen?.

Yeah, I mean, there is.

We've just intuitively, if we can get a premium in excess of seven that makes sense, but we're in the process of basically putting together a program, relative to profitability analysis that will enable us to determine when we - well, one of the elements associated with the decision to sell or to retain, but the other things have to do with as I mentioned earlier, the rate environment because it changes.

And the duration and the type of - the type of SBA loans that's originated, so depending on a loan, we'll make those decisions on a case by case basis, but probably somewhere in the range of about seven maybe above it, if we get a premium we'll probably sell..

Okay.

And then with the re-hike in December, should we expect to see a similar level of prepayments like we saw this past quarter or could it increase?.

The time to predict prepayment is, just, it does not work for us. It's just been all over the board. Many of the prepayments that have taken place is just basically because of the sale activity associated with the commercial real estate held by our customers rather than refinance. And so it's just very hard to predict where that's going to go.

But as I tried to allude to in my presentation, what I'm really feeling good about is the way our - our loan products have gotten traction in terms of the upward pricing of these loans, because of - or what I should say under Bonnie's leadership, we've been very focused on making sure that we get paid for the risks that we undertake when we make these loans.

And so the fourth quarter activity in terms of ramp-up from third to fourth quarter, in terms of increases in the interest rates, across all of our product lines, it just - it gives me hope that we are at or near the bottom. And maybe if we got lucky with the fed, maybe we will even see an uptick.

But I feel good about our net interest margin trajectory..

Okay, great. Thank you. All my other questions have been answered..

Okay..

Our next question is from Gary Tenner from D.A. Davidson. Please go ahead..

Hey, guys. I just had a follow-up question, just as it relates to CECL, obviously now it's 2019.

Can you update where you are? Are you already now running through current kind of systems to where you starting - continue to gather data? Any sort of initial thoughts to glean from anything you've seen so far?.

Yeah, now, we're well under way in terms of getting our CECL program up and running. We've been running some, I'd say, what-if scenarios, modeling if you will. And preliminarily, I don't think there is going to be any kind of a meaningful impact to our capital. But it's way too soon in the game.

But we're well underway in terms of conforming and meeting the expectations of the regulators and our shareholders as far as if and when CECL is implemented that we'll be ready..

Okay. Thank you for that. And I think this question may have been asked and answered to some degree.

But if there are no rate hikes over the course of 2019, just given your kind of discipline on pricing and where you see deposits, where do you think that sets your margin sort of directionally for 2019 from the fourth quarter level, if there is no further hikes?.

I'll - because as I said, I - the one of the things that we have done a good job of is to - and maybe we did it little bit earlier than on competition is to really focus and put a discipline in place as far as getting paid higher rates if you will on these loans.

And so, as I look at the data, every quarter - Bonnie has been very good about making sure that we get everything we can on each and every one of the loans. The trajectory is positive.

And so, if we can get a little bit of help on the liability side, i.e., deposit pricing, I believe that the market is finally willing to pay a little bit higher rate in the environment that we're in.

And I think ultimately, under your scenario, I'm fairly confident that not only us, but I think the entire industry - industry's net interest margin will have an upward movement..

And based on your commentary on what you're seeing competitively in the market on deposits, you're not fearful of just ongoing upward creep or lag on the deposit side?.

Well, that could happen. I mean, in particular, in our, I would say competitive arena, when a bank is having liquidity issues, they'll do something that is, I would say difficult to ignore. And then so, absent a bank having some liquidity issues that caused them to put some really ridiculous rate out there.

I think even in the Korean-American banking community, we're already seeing some signs of stability as far as deposit pricing is concerned..

Great. Thanks for the color..

You bet..

Our next question is from Don Worthington from Raymond James. Please go ahead..

Thank you, just a couple of small questions.

In terms of expenses during the quarter, how much would you consider to be kind of nonrecurring? Is it kind of that $400,000 number related to the branch closures?.

Yeah..

Okay, okay. And then looks like you had about roughly $400,000 of OREO income in the last two quarters.

Do you expect that to continue or kind of diminish?.

A very volatile number, Don, it's hard to predict when we get a benefit or when we have a charge..

Okay. And, I guess, lastly, Ron, you mentioned this but I missed it.

What was the amount of that special dividend you got from the FHLB?.

$266,000..

Okay. All right, great. Thank you..

Thank you. This concludes the question-and-answer session. I'd like to turn the floor back to management for any closing comments..

Thank you for listening to Hanmi Financial's fourth quarter and full year 2018 results conference call. We look forward to speaking to you next quarter..

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