Ladies and gentlemen, welcome to the Hanmi Financial Corporation’s Third Quarter 2019 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. Lasse Glassen, Managing Director at Addo Investor Relations. Please go ahead.

Thank you, operator, and good afternoon and thank you for joining us today. With me to discuss Hanmi Financial’s third quarter 2019 earnings are Bonnie Lee, President and Chief Executive Officer, and Ron Santarosa, Chief Financial Officer. Ms. Lee 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 our 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 Form 10-Q. In particular, we direct you to the discussion in our Form 10-K of certain risk factors affecting our business. This afternoon, Hanmi Financial issued a news release outlining our financial results for the third quarter of 2019, which can be found on our website at hanmi.com. I will now turn the call over to Bonnie Lee. Bonnie?

Thank you, Lasse. Good afternoon, everyone. Thank you for joining us today to discuss Hanmi’s 2019 third quarter results. Hanmi’s third quarter performance reflects the continuation of our strategy to protect net interest margin with a moderate growth in loans and leases. The following are some of the key financial and operational highlights from this past quarter. Net income per diluted share increased significantly from the prior quarter, which included a $15.7 million allowance relating to a troubled $40 million loan relationship. Earnings in the quarter benefited from a six basis points increase in net interest margin resulting from a decline in cost of deposits and an improvement in the yields on interest earning assets. As a result, net interest income was up 2.5% from the prior quarter. However, these gains are partially offset by elevated noninterest expense arising in part from the affirmation troubled loans as well as other charges. By design, we were selective in our loan and lease production in the quarter and total loan and lease balances increased modestly from the prior quarter, while average loans and leases increased 2.5% in the quarter on an annualized basis. Importantly, we believe our keen focus on high-quality, well-priced loans and leases will serve our shareholders well in these increasingly volatile and uncertain times. Although total deposits decreased slightly in the quarter, cost of deposits were lower driven by a favorable mix of a lower time deposits and growth in noninterest bearing demand deposits reflecting our efforts to increase core deposit relationship and respond to the recent decline in the general level of interest rates. And finally Hanmi remains very well capitalized. The bank’s regulatory capital ratios remain very strong and we are well positioned to continue growing in a safe and sound manner. Our second quarter results were…

Thank you, Bonnie and good afternoon all. Looking at our top line revenue results, net interest income for the third quarter was $44.1 million, up from $43 million for the second quarter, reflecting an improved margin and one extra day in the period. Overall yields improved during the quarter and mixed with higher average balances led to a 1.1% sequential increase in interest income. Further benefiting our net interest income was a 2% decrease in total interest expense to $18.1 million mostly driven by a 4.4% decrease in interest on deposits. Net interest margin for the quarter was 3.36%, up six basis points from 3.3% in the linked quarter. The cost of deposits fell four basis points to 1.37% mostly due to the decline of higher-costing time deposits. In addition to lower funding costs, we realized a two basis point increase in average yield on our interest earning assets to 4.74%. Although individual yields mostly remain flat quarter-over-quarter, we saw a mix shift in average balances out of lower yielding interest bearing deposits with other banks and it’s a higher yielding loans and leases. Turning to noninterest income, we had an 11.2% decrease from the second quarter to $6.9 million. In the second quarter we had a $1.2 million gain from the sale of a branch building. In addition, we sold the remaining position in our tax-exempt municipal securities portfolio in the second quarter. The absence of the building sale gain and the securities gain account for the large part of the decline in noninterest income on a linked quarter basis. Gains from the sales of SBA loans, however, increased to $1.8 million from $1.1 million last quarter. SBA trading premiums were very favorable in the third quarter, averaging 9.15%, up from 8.6% for the prior quarter. The volume of…

Thank you, Ron. As we look ahead for the fourth quarter, we continue to see headwinds from the persistently, competitive market for loans and deposits. However, our recent success in shifting toward a higher yielding asset and lower cost of deposits give me confidence that we can meet challenges ahead. Hanmi is poised for a strong finish in 2019 while generating solid returns for our shareholders. I look forward to sharing our continued progress with you next quarter.

Operator that concludes our prepared marks, you can now open the call for questions.

Thank you. We will now begin our question-and-answer session. [Operator Instructions] Our first question is from Matthew Clark, Piper Jaffray, please proceed with your question.

Hey, good afternoon. First one from me just wanted to know how much prepaid penalty income may have contributed to the margin this quarter and last quarter as well?

Matthew, this is Ron. Very slight, about $300,000 in the third quarter and about a $100,000 in the second quarter.

Okay. Okay, great. And then was there a tax benefit this quarter that contributed to the lower tax rate, as well that you could quantify?

No, actually I would just observe in the first quarter, our tax rate was particularly high because of some matters bearing in the first quarter. As I mentioned, we would probably have an effective tax rate for the year of about 29%. We’re still headed towards that. And so the subsequent quarters would naturally have to be below that mark to get to the 29% for the year.

Okay. And then honing in on the commercial real estate portfolio that’s kind of drifted lower here year-to-date, I guess, should we not expect that portfolio to grow as we look out in the next year as you kind of – as you get more selective and maybe rework some of the portfolio or should we expect some net growth?

I think we would expect moderate growth. Growth of the portfolio is a function of not only the new production, but of course the pay off that some of the payoffs are – come in unexpectedly and if we are not really in control of the – when the pay are happening. But I do hope to have a little bit of a moderate growth in the portfolio.

Okay. And then just last one from me on the leasing portfolio, you guys want to continue to grow that portfolio. I know it comes at higher yields. I guess how should we think about kind of lost content or charge offs on that portfolio as it seasons?

So, leasing portfolio has performed actually fairly well. And we expected about 1% loss when we actually first started the business. But I think it’s actually – the actual loss is coming much lower than that, the 1% target we originally expected.

Okay. Thanks.

Our next question is from Gary Tenner, D.A. Davidson & Co. Please proceed with your question.

Thanks, good afternoon.

Good afternoon.

Question Ron on the FDIC credit, how much of that is left or rather just how long should that continue to be a positive driver for chances?

I believe that would just be for this quarter unless the agency does another reassessment.

Okay. There are some banks that are suggesting it goes into the even first quarter of next year. So I don’t know, it probably depends on the pace of recognizing that credit. And then I wonder just on the expense side, or rather as you go back to kind of the troubled loan issue in the second quarter and your comments in the Q about kind of efforts to remediate some of those issues, what is involved there is it technology as a processes, is it headcount in any particular business lines?

I’m sorry Gary can you repeat the question? Are you talking about the resolution efforts to the troubled loan or the charge…

I think – in the queue, I think the commentary suggested that there is some weaknesses that you needed to address internally. So I’m just wondering what’s involved from a expense or investment or action in terms of that activity.

I understand now. Thank you. So the material weakness that we cited in the filing of our second quarter Form 10-Q that’ll continue again for the third quarter. Remediation efforts are underway. It will not command an unreasonable amount of effort on our part or additional resources. That’s something that we can resolve pretty much what we have. So I don’t anticipate any real charges coming from the remediation efforts.

Thank you.

[Operator Instructions] Our next question is from Matthew Clark, Piper Jaffray. Please proceed with your question.

The outlook on the loan yields given the repricing within your portfolio. And again, the increased contribution from leasing, I haven’t made the adjustment yet on kind of the core loan yield ex the recoveries – or not the recoveries, prepaid penalty income. But it was fairly steady, I guess, how do you, I know when a new business came in, but I guess, how do you feel about that loan yield relative to the recent fed cuts and what you’re putting on?

So Matthew, this is Ron. So in the quarter, as we mentioned, our loan yields came in favorable, particularly relative to the yields that left us through payoffs. If that were to repeat again for the fourth quarter, I think we should be able to see our yields basically holding. We do have the repricing that occurred late in the third quarter. However, when we look at the loan book that will be maturing in the fourth quarter, which came on about four to five years ago. The distance between what those loans came on back in 2014, 2015 to what we might be experiencing here in 2019 isn’t all that great. So there’s an opportunity that the loan yield could stay at that five level. It could also dip below in front of four handle. But it would be a combination of those ideas manifesting in the fourth quarter.

Okay. And then just on the increase in criticized loans, I know it wasn’t that substantial, but just was wondering what was behind that increase.

So in the criticized and classified category, we have in each category – respected category, we have a three loans. And most all loans are actually paying. And but there is a sign of a stress. So we have downgraded the loans and then we look at the supporting collaterals and then we don’t expect any loss from any of those credits.

You just give us a little more color on what types of industries, those are types of customers.

It’s a pretty broad based. There are some real estate loans. There’s a small C&I loans. So in terms of aside, it ranges from less than $1 million to the $3 million.

Okay, great. Thank you.

Our next question is from Kelly Motta, Keefe, Bruyette & Woods Incorporated. Please proceed with your question.

Hi. Thank you so much for taking my question. My – first thing I wanted to ask, I wanted to circle back to expenses. I believe Ron, in the prepared remarks you mentioned there were some elevated expenses related to CECL, some related to the workout. Just wondering what in there could potentially go away on a go forward basis and how we should be thinking about modeling it going forward.

The CECL element will come to a close here in the fourth quarter. And so in large part, there’ll be a piece that will continue on into 2020. But I expect that in aggregate, we probably will be down about a million dollars from the third quarter, taking a look at the troubled loan from the delay, the legal matters in the CECL. So I would guess about a million dollars.

Great, thanks a lot. And then on to another question on loan growth, you mentioned that you expect loans fee modestly up, that implies bit stronger in Q4. I was wondering, what gives you the confidence of the kind of boost backup and how you were also thinking about loan purchases, which is something you had been doing a couple of quarters before pausing, if that was something you’d be looking into getting into again. Thanks.

So in terms of a loan purchases, we haven’t had any purchases done for last couple of quarters and we don’t intend to have any purchases within the coming quarter. And what was the first part of the question.

Just where – what gives you the confidence that loan is going to kind of boost back up after the first three quarters of this year? What drive that?

Looking into the – going into the fourth quarter – looking at the pipeline, we have somewhat increased in the pipeline compared to the third quarter. But as I had mentioned previously, a net expansion of the loan portfolio is a function of the production as well as the payoff. We have been ranging the last couple of quarters in terms of a payoff, anywhere from $80 million, $90 million up to $130 million. So whether we actually going to have a net expansion of the portfolio to be determined by those loans. But in summary, I think the pipeline going into fourth quarter is a stronger than the third quarter or other periods.

That’s helpful. Thank you, Bonnie.

Our next question is from Don Worthington, Raymond James. Please proceed with your question.

Thank you. Good afternoon.

Go ahead, Don.

Sorry. I didn’t make sure I was in. Just to touch on loan sales. Look like, you had pretty good quarter this quarter versus last as the SPA premium holding up this quarter and where you might expect the gain on sale to run going forward.

So in terms of the premiums on the SPA loans in the third quarter, we saw the premium rates coming in around 9%. But I think this quarter, we made the little bit of a reduction in there, maybe to a about 8% level incomes overall premium level.

Okay. And it sounds like the volumes are kind of holding where they have been in terms of originations on SPA.

We had a pretty good production. This is actually the highest production within the last eight quarters.

Okay. And then on provisioning, you basically just looking to cover any charge-offs you might have and maybe some for loan growth.

Yes. I mean we’ll have to see how they – was both numbers coming along in the fourth Q. So we will provide the reserves accordingly.

All right, thank you.

Sure.

We have reached the end of the question-and-answer session. And I will now turn the call back over to Lasse Glassen for closing remarks.

Thank you for listening to Hanmi’s third quarter 2019 results conference call. We look forward to speaking with you again 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.