Ladies and gentlemen, welcome to the Hanmi Financial Corporation’s Third 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 third 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’ll 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 and/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 morning, Hanmi Financial issued a news release outlining our financial results for the third 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 third quarter results. In what continues to be a challenging and competitive banking environment, Hanmi maintained its track record of solid financial performance during the third quarter. Let me briefly summarize the key highlights. Loans receivable increased 3% in the quarter and 12% for the first nine months of 2016. Deposit gathering activities were exceptionally robust. Thanks to the strength of our retail franchise, we achieved a 5% increase in total deposits for the quarter, and 7% increase year-over-year. In spite of the flat yield curve, we have been able to sustain a strong net interest margin in the third quarter and throughout the year. We also remained focused on enhancing efficiencies across the franchise. During the quarter, we opened a new branch in Glenview, Illinois, and completed two branch office consolidations in California. While noninterest expense was marginally higher in the third quarter, we have successfully reduced total noninterest expense by approximately 6% through the first nine months of 2016 compared with the prior year. During the same time, our efficiency ratio excluding merger and integration costs has improved by 99 basis points. And importantly, shareholders had been rewarded by Hanmi’s strong results. During the third quarter, our Board of Directors increased the quarterly common stock dividend by 36% to $0.19, reflecting our strong recent performance and the Board’s confidence in our ability to generate sustained profitable growth going forward. Looking in more detail at our third quarter results, we reported net income of $13.1 million, or $0.41 per diluted share. On our linked quarter basis, net income decreased $1 million or $0.03 per diluted share compared with the second quarter of 2016. This was primarily as a result of $1.2 million lower…

Thank you, C.G., and good afternoon all. Before I begin, I would like to bring to your attention that there was a nonmaterial error in average balance data as presented in the earnings release, in particular, average loan and average total assets. This circumstance does not however change in any respect reported yields or margins. A corrected version of the earnings release will appear on our Investor Relations website this evening. Third quarter net interest income was $39.6 million, a slight decrease compared with $40 million for the second quarter. While average loans increased 4.5% to $3.5 billion, average money market and savings deposits grew 21% and the average rate paid on these deposits increased 12 basis points leading to the slight decline in net interest income. Third-quarter net interest margin on a taxable equivalent basis decreased 16 basis points to 3.86% from 4.02% in the second quarter of 2016. The decline was due to a combination of factors, including 7 basis points from lower acquisition accounts effects, 2 basis points from lower loan yields, and 3 basis points from higher interest-bearing deposit rates. Compared with 2015 third quarter, net interest income was up 10% from $36 million, and net interest margin increased 5 basis points from 3.81%. This year-over-year increases reflect a 20% increase in average loans and the jump in the mix of interest earning assets, where a year-ago were only 77% of average interest earning assets. Net interest margin, after excluding acquisition accounting increased 26 basis points from the growth in loans and the change in the mix of interest earning assets. Year-to-date, net interest income improved 6.9% to $118.1 million from $110.5 million for the nine months of 2015, and net interest margin was 3.95% compared with 3.89% for the year-ago period. Turning to noninterest income,…

Thank you, Ron. Even though, we were impacted by extraordinary items highlights for the quarter included continued growth in top-line revenues, lower core expense line items and good growth in loans and core deposits. Hanmi is well-positioned to finish the year strong with a healthy pipeline of loans entering the fourth quarter and a franchise that is well-positioned to take advantage of market opportunities. I look forward to sharing our continued progress when we speak with you again next quarter. Thank you. Christina?

Operator, let’s open the call for questions.

Thank you, ladies and gentlemen. We’ll now begin our question-and-answer session. [Operator Instructions] One moment please, while we poll for questions. Our first question comes from the line of Bob Ramsey with FBR Capital Markets.

Hey, good afternoon.

Good afternoon.

I was hoping you could maybe elaborate a little bit on the growth in money market deposits this quarter. Obviously, the growth rate was strong, but they did come on at materially higher cost. Just kind of curious how you’re thinking about [whether promotions run this quarter widest products,] [ph] sort of how you’re thinking about the mix?

Well, on money markets, I think had an average cost about 60-some-odd basis points for the third quarter. Our focus has been to continue to deemphasize the CD part of our portfolio. And as you may recall, we had inherited a substantial portfolio from United Central Bank or CBI. The CDs continue to run off and adjusting for acquisition accounting that had about roughly about a 120 basis point cost to us. And so, as we generate money markets which we believe are more relationship and then sticky than - stickier than the CDs. That helps us I think overall in the long run as far as our net interest margin is concerned. Also we have been positioning ourselves for additional liquidity on our balance sheet to match some of the strategical options that we have been evaluating. So to be able to tap into the money markets and have it react in the way that it did, which is to stay in a positive way, it’s been, I would say, a big plus for us. And it positions us well to evaluate some options that are out there right now.

Okay. And I know you mentioned average cost is 64 basis points, yeah, I think a couple quarters ago is in the 40s. Is that reflective of sort of what the market rate is now or are you adding at a higher rate in that sort of what it blends down to?

I would say, it’s closer to the market rate. We’re not by any stretch of the imagination the market leader in our community, that is to say Korean-American community.

Yeah. This is Bonnie. Within our Korean community banking space there are some banks that are offering over 1% on money market rates.

Wow, okay. And then, I guess, shifting gears a little bit, I think you guys mentioned in the press release there are about $46 million of loans that were purchased this quarter. Could you maybe provide a little bit of detail on what you guys acquired or bought?

Yeah. These are the same ones that we acquire every quarter, no difference. It’s from the same vendor, a similar profile in terms of yield characteristics, loan to value. And so this is a kind of repeat of what we’ve been doing for the last, almost two years now.

Okay, great. Then last question, I’ll pass on to someone else. So maybe you could talk a little bit about the SBA business. Certainly, we hear a lot of talk about it being increasingly competitive and your margins were a good deal narrower this quarter. I’m just kind of curious what’s going on in that business for you and how you’re thinking about it going forward.

Well, first of all the - what you noted in terms of the competitiveness of the business is absolutely correct. And then, some of that is reflected in the lower premium gains that we demonstrated or reported in the third quarter. And unfortunately that’s the reality of that particular business that I think is going to be in place through 2017. So the - our goal, our revised focus on the SBA production is to generate higher volume to try to maintain, if not slightly increase the premium income for 2017, but without compromising asset quality. We have made some commitments as to the human resource dedication to enable us to accomplish what I just mentioned.

Okay. So I guess it sounds like if the goal is to maintain the income in 2017 as opposed - compared to 2016, the business will still be running below sort of where it was in 2015 for the full year, right?

Well, no, what I said was that the goal is to hopefully increase it slightly over what we are projecting for 2016 with the additional human resource dedication that we have made. So I think that we may be able to get closer to 2015 numbers with the kind of commitments that we have made.

Okay. All right, great, thanks. I’ll let someone else have a chance.

Okay.

Our next question comes from Matthew Clark of Piper Jaffray.

Good afternoon. Curious to what the weighted average rate was on new production in the quarter?

Weighted average?

Approximately 4.25%.

Okay, yield? Okay.

Great. And then it looks like you guys closed those two branches here in the third quarter. And your expense run rate, excluding that FDIC charge, was in the range. I think you guys were looking for 26.5 to 27. I think that was what you were hoping to keep it at in the fourth quarter. But just curious about how you think about that run rate of expense, particularly as we get into next year, and the investments that you might need to make?

Well, I think - well, that’s definitely the target for us, I mean, that’s all I can say at this point. That’s we are going to do our best maintain that level of expenses in 2017. Now, absent some, I would say, additional business lines or pick up of additional lending teams that’s a reasonable expectation.

Okay. Great. And then on the classified loan increase, I think it was $9.5 million in the quarter, just curious what the source of that increase was in terms of type?

Yeah, so commercial real estate, and it’s a temporary - we believe it’s a temporary aberration, and that the - those issues that led to a proactive downgrading will enable us to bring it back up into, I would say, a pass grade situation fairly soon.

Is that one credit or is that more than…?

I would say its two credits at this point.

Okay. I’ll step back. Thanks.

Our next question comes from Chris McGratty with Keefe, Bruyette & Woods.

Good afternoon, thanks for taking the question. Maybe first on the provision, you are still getting recoveries, C.G., in the book. What’s the, I guess, the outlook for pipeline for further recoveries at this point?

Well, if I knew, what that was we’d plan better. So not to sound facetious, it’s just that you just don’t know. We don’t have anything imminent, right now, but those recoveries tends to be, I would say bumpy, to say the least. But on the non-PCI loans, we have had a history of doing a pretty good job on the recovery side to where we will - I would say generate seven figure recoveries. But it’s hard to predict the timing of those recoveries. Similarly on the PCI loans, the same thing the gains on those - it just that - we think that there are opportunities for more gains there, but I just can tell you when or how much.

Yes, that was my follow-up, the PCI number; flat on a year-over-year but down a little bit - I’m sorry, it was down meaningful year-over-year. I guess what the pool that we’re drawing from? How should we be thinking about when this source of earnings kind of dries up?

Yeah, it’s a little under $16 million as we speak. And once again the timing is difficult to ascertain. But my estimate, at this point is that, I think there is enough lift in the recovery side of PCIs to get us into the first half of next year, at least.

So still coming out a bit, okay.

Yeah.

Great. Maybe if we could switch to the margin a bit. I think last quarter you indicated, Ron, I think there was I think 9 basis points of prepayments. Do you have that number that ran through this quarter?

I think we had zero. [Multiple Speakers]

Yes, it’s nil, and there were prepayments but nothing to create a bip [ph].

Okay. So if we take the accretion and accretable yield out of the equation, which is obviously bumpy, what’s the messaging on kind of the core margin at this point for next few quarters? Should it be similar to most of your peers that are still - absent any kind of move in the Fed and the curves staying flat we should see a little bit of pressure?

Well, the answer is generally yes. But we think that the core NIM at around 3.75% is sustainable, absent some activities on our part to enhance the yield coming from the asset side of the balance sheet. We’re working on some things that may enable us to realize upon that which we’re not ready to discuss at this point. But I don’t see the margin - based on that I don’t see the margin dipping below what you saw in the third quarter.

Okay. Without going into details, would that kind of imply a little bit of a balance restructuring, given where rates are?

Not a restructure, but something that’s additive.

Got it, okay. Great, thanks for taking the questions.

Sure.

Our next question comes from Gary Tenner of D.A. Davidson.

Thanks. Good afternoon, guys.

Good afternoon.

A question on the deposit piece again. I think I heard - C.G. I don’t if it was you or Ron, I apologize - say that the time deposits that ran off were 1.2 all-in. Is that right?

Yeah.

Or is it your trouble CD cost first off for the…

Yeah, Gary, that was me that was talking. We have inherited - we had inherited a CD portfolio primarily centered around Illinois marketplace, that we’re like three to five - we had three to five year maturities. And I think on a gross basis it was about 180 basis points, but net of the accounting, acquisition accounting, it was down to about 120 net to us. And those have on schedule, have been running off. And we’ve been replacing them with the lower cost money markets and in some cases noninterest bearing DDAs.

Okay. I guess, this is what I’m confused, but I would have expected there to be a decline then in your time deposit rates on your average balance sheet, but they’ve been actually been ticking up. So am I missing something in that?

Yeah, so to maybe be helpful, so as C.G. mentioned the rates paid on the deposits that were acquired are quite high; from 110, 120, 150. The last - there first quarter of 2017 will be the last quarter where that effect is going to be with us. And then, we’re pretty much down to normal or more market ideas with respect to time deposits. So when you then look at the average rate, which includes the purchase accounting effect, as those higher cost CDs which had a beneficial mark to them, as that erodes the underlying cost, it will continue to rise as it meets the average CD rates which around here is going to be somewhere between 75 to 100 basis points.

Okay, all right. That’s helpful, I appreciate it. A lot of my other questions were answered. But I wonder if you could perhaps, C.G., discuss the environment in your community right now or in the core part of your business as it relates to the BBCN Wilshire transaction, of what you’ve seen from a competitive environment, if there’s been any change in there?

Well, from my vantage point it’s a business as usual. We have not seen anything extraordinary come out of that organization other than, I think, they’ve been running a rate promotion on CDs. Bonnie, it was at - what was the rate?

1.2% [ph] in the CDs.

In the CDs. So on the loan front we have not seen anything that’s different than what we have seen in the past.

Just to add, not so much of our - within our Korean-American banks competing with us. On the commercial real estate loans and the transactions that we have been seeing the deals that we have to compete with the Wells Fargo type of the bank, where they offer 7 to 10 year fixed rate loans below 3.75. So we have pretty disciplined to pass on those deals. So it’s more of competing with the mainstream types of bank in terms of commercial real estate. And it seems like a number of transactions, we still do have inquiries, but the inquiries are coming, as I said on the 7 to 10 year fixed rate loans, but in terms of number of transactions as we have seen this quarter. In terms of a payout that it has gone down since last quarter, so which means the refinance activities has been pretty much slowed down.

Okay, so a slowdown in that price-driven competition, rather than a resurgence?

In terms of refis impacting us.

Okay, okay. That’s great. Thanks very much.

Okay. Thank you.

Our next question comes from Tim Coffey of FIG Partners.

Hey, good afternoon, everybody.

Hi, Tim.

Hi. C.G., could you just update us on your outlook for commercial real estate in your markets? I heard what Bonnie just said about some of the slowdowns and the price-driven competition. But has your outlook on making additional gains into that market slowed at all?

Well, the - we have been very competitive in this marketplace. And the environment here is, it’s not going gangbusters, but there’s still pretty good activity here in Southern California. So I don’t see us changing much. I mean over the first three quarters we generated I think in total 12% loan growth. That’s pretty darn good, given the kind of the credit metrics that we have reported. And so, we’ll see how the fourth quarter goes, but so far there are no real negative signs in the environment that would slow us down.

Okay, great. Thanks. The rest of my questions have been answered.

Okay. Thank you.

Our next question comes from Don Worthington of Raymond James.

Good afternoon, everyone.

Hi, Don.

Hi, Don.

A couple things, one, I noticed the Federal Reserve Bank stock number went from about $14 million down to zero on a linked-quarter basis. What was behind that?

Well, we are no longer a member bank of the Fed.

Okay.

Yes, we decided to go to FDIC California DBO as our primary regulators, so that’s the reason why you don’t see any more investment in the Federal Reserve.

Okay, got you. And then, do you plan any more branch openings? You mentioned the one in Illinois, anything else that you are planning at this point?

No. Not in the near term. The reason why we opened that branch is because, as I think I mentioned in the past, the CBI organization had an absence of a physical facility in the Korean part of Chicago Metroplex, which hindered our ability to grow in that market, particularly with the Korean-Americans. So that’s the reason why we did an infill de novo branch opening in Glenview. But for the foreseeable future, we don’t see additional branch openings on our part. To the extent possible, as we expand the branch network, it’s going to be more through acquisitions than through de novo branching.

Okay. And I guess, lastly, any feel for what the Texas and Illinois operations contributed to the loan production in the quarter?

Yeah, I mean, they perform at the level that they have in the past. Texas has slowed down a bit. And that was by our design, because we have not - we still want to see how the oil patch issues impacts the Houston and its surrounding areas. And so, that along with our - they’ve emphasized quite a bit on the hospitality side, which we are not as comfortable with at this point. So based on those components their productions for the quarter has slowed down compared to the prior quarters. But they are looking at some other things, and I am very confident that they will be well in excess of - well exceed the expectations that I have for them.

But overall in the year-to-date they did contributed about 17% of the total organic loan production. And then the competition of their deposits contributed about 20% of our bank’s overall. So on quarter-to-quarter there are ups and downs, but on an overall annual basis that they have been performing to our expectations.

Okay, great. Thank you.

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

Thank you for listening to Hanmi Financial’s third 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.