Ladies and gentlemen, welcome to the Hanmi Financial Corporation's Second Quarter 2016 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 Ms. Christina Lee, First Vice President of Investor Relations and Corporate Strategy. Please go ahead.

Thank you, Operator. And thank you all for joining us today. With me to discuss Hanmi Financial's second quarter 2016 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 and credit quality. 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-Qs. In particular, we direct you to the discussion in our 10-K of certain risk factors affecting our business. This morning, Hanmi Financial issued a news release outlining our financial results for the second quarter of 2016, which can be found on our website at hanmi.com. I will now turn the call over to Mr. Kum.

Thank you, Christina. Good afternoon, everyone. Thank you for joining us today to discuss our 2016 second quarter results. It was another excellent quarter for Hanmi highlighted by solid earnings, strong loan production, expanding net interest margin and successful deposit gathering activities. Let me take a moment to briefly summarize our key accomplishments. Net income increased year-over-year as continued strong loan growth more than offset a modest increase in expenses. Our ongoing success in repositioning the balance sheet to deploy liquidity into higher yielding loans is reflected in our higher net interest margin. Importantly, loan production remains strong. Second quarter new organic loan production jumped 27% from the prior quarter and 28% from a year ago. Given that consistency - consistently strong loan production over the past year, loans receivable were up 4.3% from the first quarter and 20% from a year ago. Maintaining a strong credit quality is a tough priority and we have achieved this loan growth while maintaining disciplined underwriting standards and not at the expense of increased risk. And even though expenses were marginally higher, improvements in revenue from the significant growth in earning assets helped to improve Hanmi's efficiency ratio by 79 basis points in the quarter. And finally, as evidence of a deposit gathering prowess of our retail branch network, money market and savings balances increased 10% in the quarter while DDAs increased by 1.5%. Looking in more detail at our second quarter results. We reported a net income of $14.1 million or $0.44 per diluted share, an increase of 1.2% from the second quarter last year. On a linked-quarter basis, net income increased 4% - excuse me, net income decreased 4% compared to the first quarter of 2016, primarily as a result of several non-recurring benefits to non-interest expense in the first quarter…

Thank you, C. G. and good afternoon all. Second quarter net interest income increased 3.7% or $1.4 million to $40 million from $38.6 million for the first quarter due to loan growth and loan prepayment penalties. Quarter-over-quarter, average loans increased 4% to $3.3 billion and represent 82% of average interest-earning assets. Loan prepayment penalties increased 835,000 principally from the pay off of a one large loan. Second quarter net interest margin, on a taxable equivalent basis also increased to 4.02% from 3.98%. Importantly, net interest margin after excluding acquisition accounting increased 16 basis points reflecting the growth in the loans, as well as the effective loan prepayment penalties. Compared with the 2015 second quarter, net interest income was up 7.8% from $37.1 million and net interest margin increased 5 basis points from 3.97%. This year-over-year increases reflect the 17% increase in average loans and the jump in the mix of interest earning assets were a year ago loans were only 76% of average interest earnings assets. Again net interest margin after excluding acquisition accounting increased 36 basis points from the growth in loans and the change in the mix of interest earning assets. Year-to-date net interest income improved 5.4% to $78.6 million from $74.6 million for the first six months of 2015 and net interest margin was 4% compared with 3.93% for the year ago period. Turning to non-interest income, we recorded a sequential increase principally because of higher gains from SBA and PCI loan sales. On a year-over-year basis, non-interest income decreased principally from security transactions that is there were no security transactions in either quarter of 2016 while the second quarter of last year included gains of $1.9 million. In addition there were lower games from PCI loans. Gains on the sales of the guaranteed portion of SBA…

Thank you, Ron. We’ve had a good first half of 2016 driven by continued top line revenue enhancement as we transition the acquired book from the CBI transaction to core book. In addition, Hanmi’s loan production capabilities combined with our ability to sustain a strong net interest margin in a difficult environment will enable us to continue to outperform our peers. I am grateful for all the hard work of our dedicated employees across the country and continued support of our shareholders. I look forward to sharing our continued progress with you again next quarter. Thank you. Christina?

Operator, let’s open the call for questions.

[Operator Instructions] Our first question comes from Chris McGratty from KBW.

Thanks for taking my question. Ron, maybe to start on the prepayment penalty income, I think you said it was up $835,000 sequentially, which to me looks like about half the reason for the core margin expansion. Do you have the absolute level of prepayment penalty income, what the base was?

The absolute prepayment penalty was approximately a $1 million and the basis point affect of prepayments on the second quarter was about 9 basis points.

Okay. I guess looking ahead, obviously the number can bounce around, and so can the accretable. Given what's happened to the yield curve, can you maybe opine about what you expect for margin trends in the back half?

Well this is C.G., Chris. Good afternoon to you. First like you mentioned accretable, the prepayment as you may know only relates to the legacy Hanmi book of loans that we have. In a flat yield curve environment like ours, there is a risk that all banks have that there could be more prepayments depending on the - I would say the efforts of some of the big banks like Wells and BofA who have had historically a tendency to drift on to our space, at the community banks and regional banks with rates and terms that we typically do not want to compete against. So that's a risk that we have. However having said that, we’ve been in this kind of environment for a bit and notwithstanding some of those potential threats, we’ve been - our production has been very - has been very good, very strong and also the rates that we're able to obtain on our new loans have - is slightly north of 4.4%. So while that risk does exist, it seems that we’re more than holding our own at this point.

Okay, great. Maybe we could switch to the PCI gains, which obviously are inherently volatile. Could you maybe remind us the size of the portfolio that is still in kind of wind-down mode, and what you might expect for future gains in the coming quarters?

Well first of all on the future gains it’s hard to speak to that because we are at the mercy of some of the resolutions where the payout were successful workouts, I believe that PCI's total is about $17 million or so.

Not it is $15 million.

Okay.

And against the $15 million, we have about a $5 million loss against it. So our net carries about $10 million.

Okay, so it sounds like there could be - it's tough to predict exactly when, but there should be some level of additional gains in subsequent quarters. Maybe just switching to the expenses, lastly, in your prepared remarks I think you said that you plan to close a couple of branches. Last quarter I believe you talked about potentially some more announcements in the coming months. Is this what you were alluding to, a couple - one or two branches here or there? Or is this setting the stage for additional consolidation down the road?

Well at this point, we have two branches that are scheduled to close I think any day now. We’ve been going through the regulatory time period and I think any day now those two branches will close. That will generate about on an annualized base about $1 million a year. We don’t have any plans at this time to close any more branches but it’s a process that’s ongoing as we continue to evaluate the performance and the strategic opportunities and benefits of some of these branches. We may or may not make any of more of those branch closure decisions but at this point in time there is nothing else in the cards.

Okay, that's helpful. And just C. G., on the expense run rate going forward, once it come through, you said $1 million a year. But with the expenses ticking up from unusually low first quarter, I guess can you help us with a run rate on the expense line?

Yes, I think the unofficial guidance that I provided in the past is that we’re expecting a quarterly run rate of somewhere between mid 26 to high 26. And so if you average out the first two quarters we're pretty close to that and so that’s probably a good estimate from which to work off.

Great, thanks for taking my questions.

Thank you. Our next question comes from Bob Ramsey from FBR.

Hi good afternoon guys. I was hoping maybe you could talk a little bit about the SBA business. There was a pretty notable increase in the balance of loans held for sale. How much of that is related to the SBA business? And what does the pipeline look like for sale activity in the back half of the year?

Well the loans held for sale line item is all SBA. As part of our business model, we don’t generate loans for sale. I would say for the second half of the year - I would say if you were to just extrapolate or extend the second quarter performance for the second half of the year that's probably a good way of prognosticating what our second half performance could be.

Okay. And that is in terms of volume. I take it margin, you think will be relatively stable over the second quarter as well.

When you say margin, are you referring to the premium income?

The gain on sale on the SBA loan business - margin.

Yes, I think so. Although we've had a slight drop in terms of the premium level from - I think it was like [99s to 97s] [ph] in the second quarter, but I think in the kind of the rate environment that we're in I think high 9s is reasonable to expect in the second half.

Okay, great. Then, I guess we sort of touched on net interest margin and it's a little bit difficult to predict prepayments and accretion. But outside of those two factors, how are you guys thinking about the core margin trends in this rate environment?

We've been able to sustain our core margin and actually we’ve been able to improve on that over the last couple of quarters. And I think that's a reasonable expectation for the second half of the year to be challenging, but we still have some room left as far as some of the high cost CDs from the CBI transaction that are scheduled to roll off in the second half of the year. Combined with our - this franchise has fantastic ability to generate low cost deposits. It's allowing us to actually frankly it's allowing me to have some more confidence that the core margin that we are able to sustain ex the prepayment penalty benefit that we've received in the second quarter I think it's pretty reasonable. I'm beginning to feel a lot better about that.

Okay, great. Maybe you could talk a little bit about commercial real estate. It obviously is a pretty key piece of your business. There has been a lot of talk out there about regulators giving increased scrutiny to companies that do a lot of commercial real estate lending. Just kind of curious what interaction you have had with regulators on the subject and maybe what you are seeing in your markets, maybe that others do, that give you pause or thoughts more generally.

We have not had any interactions with the regulators about our CRE concentration, generation or anything relating to our commercial real estate portfolio. I've have not got any kind of inquiries or questions or phone calls from the regulators, which is the good news in that if you don't hear from them that means that I don't have a thing to worry about at least for the short term. And so the - we do have some level of CRE concentration, and it's quite likely that we will be pushing across that 300% threshold either early third quarter or certainly sometime in the second quarter, a second half of the year. From the environmental side one of the things that we are very mindful of is the some of the Class A commercial real estate properties in all the markets that we operate in, but in particularly in Southern California and Northern California the cap rates that are being assigned are just ridiculous. And so generally speaking, we shy away from Class A real estate financing and specifically multifamily. Once again the values that are generated from the low cap rate environment that we're in is just very difficult to rationalize as far as our underwriting is concerned. So we shy away from those, but within the core markets, the core products that we deal with, which are primarily B and C types of a commercial real estate properties, we're still able to generate good coupon with I would say a very reasonable rate of loan to value as an example for all of the second quarter commercial real estate originations, weighted average loan to value was 54% and weighted average debt coverage ratio was 1.96%. So that tells me that with quality lenders that we have, with quality clients that we have, we can generate good loan growth without compromising our asset quality.

Okay. Great, thank you very much.

Thank you. Our next question comes from Matthew Clark from Piper Jaffray.

Hi, good afternoon all. First one, just the first one for me was on thinking through how much more you might be able to remix the balance sheet. I know we talked about other parts of the core margin outlook, but just trying to get a sense for how much the security portfolio, how much more could come down, and what your targeted range of liquidity and security is, relative to assets.

Well generally speaking, we like to have the securities as a percentage of total assets in the 10 to 15% range. And so not depending on the rate environment and the income opportunities - it will fluctuate within that kind of a narrow band. As far as remixing is concerned, I think we're pretty close to the end of that process. With the leveraging that we've been able to accomplish on the balance sheet we think that we’re pretty close to being there. The only other opportunity that's there is to transition more of our CDs. And I'm just referring specifically to the - the ones that we picked up from the CBI transaction and replace them with the, I would say more of the money market savings and preferably also DDAs.

Got it. Okay, and then, Ron, just on the tax rate housekeeping item, kind of - I think you have talked about 38%, going forward a little bit higher this quarter. Just wondered if 38% was still the right number.

Matt, this is Ron. I think 38%, 38.5% it will bounce in that. The overall rate for the year should be somewhere close to 36%. So it depends on how the quarters behave but I would say 38.5% is probably a good number for now.

Okay. And then just on reserve coverage, I know it's just probably a number that just falls out at the end of the day. But just thinking about your reserve coverage on loans, down another 9 basis points this quarter, I would assume there are still some room to go, but just curious how much might be left. And your pipeline to recovery might still be there, too.

Well, yes, my suspicion – as you said, I mean this is a quarter by quarter analytical process that we undertake to determine the adequacy of the loan loss we serve. So, as we sit and talk right now, I don’t have a number for you. But my sense is that, given the continued improvement in asset quality and given the methodology that we employ one of which is kind of a look back period, looking back into the dark years and with those quarters dropping off, my sense is that we might have an extra quarter of negative provisioning still left. I'm not sure more than that, but I’d say, as we sit and talk right now, I think there’s a likelihood of another quarter of a negative provisioning but beyond that I just don’t know.

Thank you.

Our next question comes from Tim Coffey from FIG Partners.

It's been a long day. So, the prepared remarks talked about 21% of 2Q loan production coming from Texas and Illinois. I was wondering if you can kind of talk about what you are seeing in terms of deposit growth in those two states.

Well the deposit growth that's not significant part of what they’re doing in terms of growth, net growth. What they're charged to do is transition as much as possible the CD portfolios that are in this two market and convert them into money market savings and DDAs. So in terms of absolute net growth, as far as that is best concern that hasn't happened but what’s been happening nicely is that we’re able - we seem to be able to retain some of the CDs at a rate that's more palatable to us which is market. And so as an example in the - in the third quarter we have about 52 million of CDs that are supposed to roll off in Texas and Illinois with a gross rate of about - I think it's about 180 basis points - excuse me, about 170 basis points and when you mark that to - adjust that for the acquisition accounting, that’s about 110 to 115 basis point net charge to us. The replacements CDs is around about 80 basis points if that and so if we can just dollar for dollar replace those CDs that are rolling off and replace them with our market CDs, immediately we gain 30 to 35 basis points. And furthermore, if we can transition them into even a low cost deposit products, we’re better off obviously.

Thanks for the color on that. And then looking at what you have left in the PCI loan bucket, are you actively marketing in any of those loans? Or are they rolling off as they roll off?

Yes, we are not selling off any loans. They are rolling off through a workout - workout successes primarily.

Okay, okay. And then as far as where we see in the big merger in your market in Southern California, are you seeing any benefits from that as that deal appear to be close to closing?

Yes, we're seeing some benefit in terms of - that situation is focused on getting the two companies together is creating some consternation with employee base and the customers. So particularly we had couple of situations where the customers have come to us because they were not able to get the attention of the parties - the right parties that the other organization and so they just decided to come to us. In any large acquisition/merger like this you just - you are going to have that, that’s just a natural part of byproduct of a two companies that are trying to get together. And so we’ll see what happens in the future, but it's just a natural byproduct of M&A situation like that.

Right, okay. Those are my questions. Thanks C.G.

Thank you. Our next question comes from Don Worthington from Raymond James.

Good afternoon, everyone. In light of the strong loan growth in the quarter, are you thinking for the full year you may get a little bit better than the low double digit loan growth you are expecting? Or would you expect some slowdown off of the second quarter into the second half?

Don, to clarify, I have said over the last year or two that we as a company should be able to generate low double digit growth year-in and year-out through various different parts of the economic cycle. I did not infer that in 2016 the expectation was low double digits. I would say it’s more reasonable to expect given the success that we have generated in the first half and given the momentum that we have going into the second half, I think the mid double digit is a reasonable expectation for 2016.

Okay, great. That's good clarification there. And then was there anything in particular that drove the payoffs in the quarter, where you are just seeing borrowers refi elsewhere, or just paying down due to liquidity events or anything of that nature that drove the payoffs?

This is Bonnie. Among the payoffs during the quarter we had a two large pay offs. One relationship, multiple loans, a total of $36.5 million that was - it’s our long-time customer, however, the offer that we had gotten from a regional bank was price set the long term tenure fixed at around 2%. And much relax the underwriting credit requirement in terms of loans to value and the collateral requirements. So the customer had communicate that to us earlier on, so we advised the customer that we are not going to be able to refi. And another loan was actually hotel property loan, $10 million and similar situation much long term fixed rate and much more pricing than as well as the collateral requirements that's being offered by - it's actually hotel lender. So we communicate that earlier on as well and then we were not going to have the opportunity to take that. So that's our two relationships there was about $46.5 million out of the 104 to 120.

But of that two relationships down, the first one for $36.5 was gas station secured. And so I didn’t shed any tears about we are losing that deal because we have strategically since my arrival have been trying to right size that gas station portfolio here at Hanmi.

Okay, great. Thanks. That's great color. That’s all I have got. Thank you.

[Operator Instructions] Our next question comes from Gary Tenner from D.A. Davidson.

Thanks. Good afternoon, guys. My question has been largely answered, but I will just ask you to provide some detail, C. G., on the purchased loans in the quarter and progress in the healthcare business as well.

Sure. First of all on the healthcare business, that division continues to perform beyond our initial expectations and both on the loan and depository side. As far as depository is concern, they basically generate their interest-bearing DDA, which is fantastic. And I will let Bonnie talk about what the exact numbers are because I can't remember what they are to be honest with you as we speak. But the - I am sorry, what was the other question? Purchase loans?

Yes, purchase loans.

The first one was the regularly scheduled one and in fact because the amount that we purchased in the first quarter was slightly below our expectations, they allowed us to make it up by increasing it to $51 million in the second quarter. So we were - we have an unofficial understanding with this other company that we are going to get about $40 million a quarter and I think as my memory serves me the first quarter was about 30 or so. So they basically made that up in the second quarter. Once again it's a low loan to value, relatively higher coupon, and these properties are all in our markets. The second one is for about $50 million or so and it’s a small $15 million multifamily portfolio based in Illinois and you may ask why. Well, there is a small thing called CRA where the regulators expect us to be lending out at some level, the dollars of deposits that we take in a given market and lending those out in the form of loans if you will. And so in preparation for our 2017 examination, we just want to - we're proactively making sure that through organic and through inorganic means that we show the regulators that we understand CRA and that we are doing our best to comply with their expectations.

Great. And that regularly scheduled $40 million a quarter, that is single-family, correct?

Yes.

Okay. And one last question on the loan production. The $66.5 million of loan purchases in the quarter, that's captured in the $265 million total production, yes? Or is that a separate number?

No, that's a separate number.

That is separate number.

That's organic production of 265 and the purchases in the addition to the 265. So going back to your question on the progress on our healthcare, in second Q the single department produced about $22 million but the CBU sinks under perspective for the year-to-date that department generated over close to 65 million by outstanding and then by commitment about 73 million as they represent a 14% contribution to the year-to-date production.

Okay, that's very helpful. And then one last question if I could. C. G., if you could give us some sort of update or just results in terms of M&A environment for Hanmi.

Well, we are not lacking potential partners let me just say that. We've been approached. I have not actually solicit anyone, but I have been solicited quite a bit by the investment banking community as far as a potential partner or partners are concern. We are evaluating. We have and we will continue to evaluate all of these opportunities and when they make sense, we will move forward. But up until just recently the banks valuation market has created some challenges for potential acquirer like ourselves but the market has gotten better and we think that we will be active under the right set of circumstances in that particular field in the second half of the year.

Great. Thanks very much.

Thank you. At this time we have no further questions. I'd turn the call back over to Christina Lee for closing comments.

Thank you for listening to Hanmi Financial's second quarter conference call. We look forward to speaking to 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.