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

Thank you, Matt and thank you all for joining us today. With me to discuss Hanmi Financial’s second quarter 2018 earnings are 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 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 second quarter of 2018, which can be found at 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 second quarter results. In a highly competitive environment, our performance in the quarter was driven by strong loan and lease growth, stable asset quality and careful expense management. Here are some highlights for the quarter. Net income was solidly higher on both a sequential quarter and year-over-year basis. Importantly, we have been diligent in carefully managing expenses and, as a result, non-interest expense declined nearly 1% from the prior quarter and more than 2% after excluding merger and integration costs. Production of new loans and leases was exceptionally strong. Loan and leases receivable grew nearly 3% on a linked quarter basis and nearly 12% from a year ago. We have been able to achieve this growth, while applying our normal conservative underwriting standards. Overall asset quality remains excellent. Deposits were up 4% on an annualized basis and nearly 4% year-over-year, primarily driven by growth in time deposits. However, the flattening of the yield curve along with strong competition has resulted in pressure on our net interest margin. And finally, to augment our organic growth, during the quarter, we announced the acquisition of SWNB Bancorp, Inc., which will significantly expand Hanmi’s presence in attractive markets throughout Texas as well as provide excess liquidity to help fund future growth. Looking in more detail at our second quarter results, we reported net income of $15.5 million, or $0.48 per diluted share. On a linked quarter basis, net income per share increased by $0.02 or nearly 5%, compared to the first quarter of 2018. Compared to the second quarter last year, net income per share increased by nearly 8%, or $0.03 per share, primarily due to the growth of core sustainable earnings generated by the expanding portfolio of…

Thank you, C. G. During the quarter, organic loan and lease production totaled $309 million, which increased nearly 26% from the prior quarter and up 11% year-over-year. As a result, our portfolio of loans and leases expanded by nearly 12% during the second quarter on an annualized basis and 12% from a year ago. Importantly, the diversification of our portfolio continues to improve. At the end of the second quarter, CRE loans comprised 71% of our portfolio compared with over 75% a year ago. We anticipate CRE loans as a percentage of the total portfolio will continue to decline. Second quarter production consisted primarily of $198 million of commercial real estate loans, $30 million of SBA loans and $19 million of C&I loans. We also originated more than $60 million of commercial equipment leases. Newly generated leases for the quarter had a weighted average lease yield of 5.76%, an improvement from the previous quarter’s weighted average yield on new production of 5.50%. This portfolio continues to generate a higher yield than other loan categories as the weighted average yield on new organically generated loans for the first quarter was 5.02%. In terms of new loan production, our branches in Illinois and Manhattan had solid contributions to our overall production total. Looking ahead, in the third quarter and beyond, our loan and lease pipeline remains healthy. Moving on to deposits, we continue to operate in a highly competitive Asian American banking landscape for deposit gathering activities. Total deposits of $4.43 billion increased 1% during the second quarter on a linked quarter basis, while deposits have expanded by approximately 4% from a year ago. It is worth noting that our non-interest-bearing demand deposits as a percentage of total deposits have remained stable over the last year in a range of 30% to 31%, even as total deposits have increased. Competition in the retail CD market has significantly increased this past quarter as several of our competitors have driven up the pricing of CDs at a level not consistent with the Fed’s interest rate moves. However, we are confident that Hanmi’s strong core deposit franchise, particularly in the non-interest bearing demand deposit category, will help mitigate the rising deposit costs. With that, I would like to turn the call over to Ron Santarosa, our Chief Financial Officer, to discuss the second quarter operating results in more detail. Ron?

Thank you, Bonnie and good afternoon all. Starting with our net interest revenues, the second quarter increased 0.4% to $45.1 million from $44.9 million in the first quarter and 4.5% from the same quarter a year ago. Those increases reflect the growth in earning assets, more specifically in loans and leases, where the quarterly average balance grew 2.4% quarter-over-quarter and 11.7% year-over-year. Notwithstanding the increase in our net interest revenues, net interest margin declined 10 basis points to 3.60% for the second quarter and 21 basis points from a year ago. As C. G. and Bonnie said earlier, the flattening of the yield curve coupled with stiff competition in our markets resulted in attracting deposits at higher rates while loan rates changed little. The average rate on loans and leases receivable for the second quarter was 4.88%, up 3 basis points from the first quarter, while the average rate paid on interest-bearing deposits for the first quarter increased 19 basis points to 1.24%. We funded the second quarter growth in earning assets with time deposits as well as with overnight borrowings increasing our loan-to-deposit ratio to 103% at the end of the second quarter compared with 101% last quarter. Turning to non-interest income, the second quarter saw a quarter-over-quarter decrease of 1.9% to $5.9 million. Service charges on deposits declined on lower NSF activity and other charges, while servicing income declined on lower servicing assets. Gains on sales of SBA loans were slightly lower on a linked quarter basis as sales volumes and trade premiums also declined slightly. SBA loan sales aggregated $19.9 million and $19.2 million for the second and first quarters while the trade premium averaged 9.3% and 9.4% respectively. Non-interest expenses for the second quarter were $29.5 million, a decrease of just under 1% from the first…

Thank you, Ron. Hanmi’s solid first half results were driven by strong loan and lease growth, continued stable credit quality and good expense management. While this momentum provides a tailwind, we anticipate a challenging operating environment for the back half of the year as a result of the flat yield curve environment and strong competitive pressure for loans and deposits. On a positive note, Hanmi’s re-energized SBA team has built a strong pipeline of SBA 7a loans for the third quarter and beyond. We are currently targeting for the third quarter 7a production of $45 million to $50 million and a target of $40 million to $50 million for the fourth quarter. In addition, in conjunction with the closing of the SWNB acquisition, we will re-evaluate our branch network and other cost trimming opportunities to be more efficient and profitable in 2019. I look forward to sharing our continued progress with you when we report our third quarter results in October. Thank you.

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

[Operator Instructions] Our first question is from Gary Tenner from D.A. Davidson.

So I guess I’ll start with your last comment, C. G., just regarding the SBA team and the kind of outlook there. That was a big delta in terms of, I think production this quarter or at least our expectations for this quarter and where you came in, it’s safe to assume that the majority of that production would be slated to be sold over the back half of the year.

Yeah. I mean, we sell all of the 7A loans that we generate, but to give you a perspective on the delta between the second quarter and the projected production for the third quarter, it has to do with the fact that we lost $13 million in loans, specifically to Wells Fargo. Wells Fargo US bank and Chase are out there, offering 25-year fixed rate SBA 7a loans. And so we lost 30 million. So when you look at that in the context of 30 million that we generated for the second quarter, the delta relative to the third quarter projected production is not as big.

And then, obviously, if the industry kind of near and in your niche, deposit costs are going to be an ongoing and increasing issue. Do you have any sense of, from a competitor front, the special that kind of ran off the retail CD prices that Bonnie discussed? I mean, are your competitors just ongoing, are they in and out of the market or is it sort of up until the right type of phenomenon on the retail CD side right now?

I would say today, the competition is much broader. It used to be almost exclusively our Korean-American friends. But today, the competition involves, as an example today, I was looking at bankrate.com, the Citizens Bank out of Rhode Island has got a 2.5% CD promotion going on. And so the promotion within the Korean-American space, has I think slowed down much more slow than, as compared to, I shall say the mainstream market, but the good news there is that, our largest market, which is Southern California, we don't seem to be as impacted by what's going on in the mainstream. So I guess longwinded way of saying, I think the competition has slowed down somewhat as it relates to the CDs.

Our next question is from Matthew Clark from Piper Jaffray.

Can you give us a sense for the rates, the CD rates that are maturing here in the second half? What those rates are and what there, you expect in the REIT pricing too?

Sure. For the second quarter actually, let me just do that. We had about 360 million CDs that were maturing at 1.23 that matured and we retained above 80% at the average weighted cost at 1.87. And we are expecting about the similar in terms of what’s maturing coming into third quarter.

And I guess, what’s your current CD promotion rate right now? I guess, the lead promotion in terms of rate and duration?

So, the rates that we’re offering to our CD customer, it ranges anywhere from 2% to 2.3%, where it looks at each relationship and we evaluate the CD rate for each customer.

But the primary product that we’re marketing right now is our premier savings rate, savings account, excuse me. And we have not promoted this account in the past. Rather than to promote money market, which has a kind of a rising tide negative impact to the other money market clients, we chose to – for the first time in a while, go after the savings account and that rate is, I believe, 1.8. And so we’re going to market the headcount of that one and that will have, not only impact of maybe reducing our reliance on the CDs, but the – our highest cost of funds in the second quarter was the borrowing costs from the FHLB, which is 1.9%. So we’re hoping that we can swap out the 1.9% borrowings from FHLB with lower cost premier savings account, if I can say it.

Okay. And then C. G., I mean we can obviously run our own numbers, but I guess based on kind of the repricing within your loan portfolio that you expect and given the deposit pricing pressure, I guess any desire to kind of talk about the margin outlook here, at least in the second half.

I will have to turn that over to my CFO, but he's not looking very enthusiastic. So, let me kind of try to answer it this way. The – our interest income is rising at a little bit faster rate currently or will rise at a faster rate in the third quarter than in the second quarter, principally because of the fact that we have had this 3% increase quarter-over-quarter in terms of loan growth. And we're also now promoting within the bank, a focus on higher loan rates. And so, there's lot more, I would say, discipline as it relates to how we price loans and leases. And then conversely, on the deposit side, much more emphasis on the premier savings account. And as I mentioned earlier, it's been -- it's not scientific, but our perception is that the velocity of the movement, as it relates to the interest rates on the liability side seem to have slowed down. And so if our perceptions are correct, I think the conservative view should be that the banks like us will continue to face a little bit more of the margin pressure, but I don't think it's going to be anywhere near as significant as the contraction that we expressed – we experienced from first quarter to second quarter.

[Operator Instructions] And our next question is from Chris McGratty from KBW.

C. G. or Ron, the reprising of the loan portfolio, I think it was [indiscernible]. Certainly, the flat curve is a big factor there. But, a lot less of an expansion rate than some of your peers. I’m wondering where new production rates were in Q2 versus Q1 and any expectation for that to improve at all in the back half of the year? Is it really just as simple as, if the curve stays flat that we’re not going to see much movement on the assets?

Well, if I recall, I think Bonnie had mentioned the 5.02%, right.

And that was up from about 4.91 on average for the first quarter.

Right. And what we have done is create an internal requirement of – as it relates to commercial real estate, we want to see a pricing minimum of prime plus a quarter, which would be 5.25% and then the management, having the authority to price it upwards or downwards relative to 5.25. So that’s our primary commercial real estate product. On the leasing side, we have put a similar program in there to where we'd like to see a 1.25 spread over prime. Now, these are then existing prime rates because the prime rate is moving fairly rapidly, we don't want to get tied up with, making our forward commitment on a loan by giving a fixed number. So what we're seeing is prime plus a quarter, then existing prime plus a quarter at the time of the close and similarly, for the leases, we're seeing then existing prime rate plus 125 basis points. And once again, management has the ability to and authority to price it above it or below it, but we're pushing now that kind of discipline in a challenging environment like today.

Maybe on the expenses. I'm trying to get an estimate, this quarter is obviously very, very tight on the expenses, the magnitude of what you might be considering with kind of after the closing of the branches, will this serve to mitigate, do you think a portion of the top line pressure for this year or just trying to get a sense of magnitude of what we want to be thinking about? Thanks.

Chris, you're talking about not the Southwest transaction, you're talking about the other ideas, correct?

Yeah. The other like the legacy bank, how do you offset some of the top line pressures in to next year?

Yes. So we’re looking at nothing draconian, but in the range of about $0.06 to $0.08 a year. As far as cost save is concerned, it could move up and down, depending on further analysis that we will do, but we will look at the branch system first, particularly, evaluating them on the basis of, their ability to generate lower cost deposits. In other words, ones that are highly dependent on the high cost CDs as a primary deposit generator, those will be the ones that will be taken a closer look at and then the other overhead structure that we think that we need to reevaluate, given the organization that we will be after the Southwest National Bank transaction, but at this point, we're targeting somewhere in the range of about $0.06 to $0.08 a year as a starting point and then we'll see where it goes.

And lastly, Ron, on the tax rate, how should we be thinking about the back half of the year.

Still about 27.5% to 30% or I’m sorry, 28%.

[Operator Instructions] And if there are no further questions, I’d like to turn the floor back over to management for any closing comment.

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

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