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

Thank you, [Name of Operator]. And thank you all for joining us today. With me to discuss Hanmi Financial’s fourth quarter and full year 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 full year, 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 fourth quarter and full year of 2016, which can be found on 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 our 2016 fourth quarter and full year results. We concluded 2016 with solid fourth quarter results driven by strong growth across the Hanmi franchise along with the early contributions from a strategic acquisition that we completed during the quarter. Let me take a moment to summarize the highlights from this past quarter and year. Net income was higher compared to the prior quarter due to a combination of strong loan growth and significantly lower expenses. Fourth quarter net interest income increased 6 percent and net interest margin expanded 10 basis points from the prior quarter reflecting the acquisition and commencement of our new Commercial Equipment Leasing division. Loans receivable increased 8 percent in the quarter and nearly 21 percent during the year as a result of solid loan production coupled with the acquired equipment leasing portfolio. I am pleased to report that we have been able to achieve this growth while maintaining our conservative underwriting standards and excellent asset quality. Deposit activities remained strong. Despite the normal seasonal slowdown in fourth quarter deposit gathering, we achieved a 1 percent increase in total deposits for the quarter and 9 percent growth for the full year. In addition, our ongoing commitment to enhancing efficiencies across the franchise was reflected in a significant improvement in our efficiency ratio. And importantly, along with our strong operational execution in the quarter, the acquisition and commencement of our new Commercial Equipment Leasing division was an important strategic accomplishment that is immediately accretive to earnings and helps diversify our loan portfolio. Looking in more detail at our fourth quarter results, we reported net income of $14.4 million, or 45 cents per diluted share. On a linked quarter basis, net income increased by nearly…

Thank you C.G. and good afternoon all. Fourth quarter net interest income increased 6 percent or $2.5 million to $42.1 million from $39.6 million in the third quarter. Our net interest margin, on a taxable equivalent basis, also increased 10 basis points to 3.96 percent from 3.86 percent. The increase in our net interest revenues and margin reflects the growth of our loan portfolio and the positive impact of the acquisition and commencement of the new leasing division. Quarter-over-quarter, average loans increased 6 percent to $3.7 billion and the average yield on interest-earning assets increased 13 basis points while the cost of interest-bearing liabilities rose only 5 basis points. Compared with the 2015 fourth quarter, net interest income was up 12 percent from $37.6 million and net interest margin increased 3 basis points from 3.93 percent. These year-over-year increases further illustrate solid loan growth and the improvement in the mix of interest-earning assets. Average loans increased 21 percent year-over-year with loans at 86 percent of average interest-earnings assets, compared with 80 percent for the year-ago period. For the 2016 year, net interest income increased 8 percent or $12.1 million to $160.2 million from $148.1 million for 2015 principally because of the 18 percent increase in average loans. Net interest margin, on a taxable equivalent basis and adjusted for the effects of acquisition accounting, increased to 3.79 percent from 3.47 percent driven by an 8 percent growth in average interest-earning assets. Turning to noninterest income, we reported a sequential decrease of 7 percent primarily due to the $1.0 million third quarter gain from the sale of a branch facility, offset by an increase in disposition gains on PCI loans. On a year-over-year basis, noninterest income decreased 31 percent primarily because of the decrease in gains on sale of securities, SBA loans…

Thank you, Ron. The fourth quarter was the culmination of an excellent year driven by strong loan and deposit growth, sustainable expansion in core earnings, significant expense reductions and continued credit quality. Overall, I was very pleased with our performance throughout 2016 and I believe Hanmi is well-positioned to continue generating profitable growth in 2017 and beyond. I look forward to sharing our continued progress when we speak with you again next quarter. Thank you. Richard?

Operator, let’s open the call for questions.

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes Chris McGratty from Keefe, Bruyette & Woods. Please go ahead.

Hey, good afternoon. Thanks for taking the question. Could you maybe start with loan growth? Now that you’ve got the acquisition closed, can you maybe provide an update on growth expectations for 2017 and maybe partially between portfolios where the growth is likely to come from?

Historically, since I’ve been here, we’ve been able to generate organic growth in the low double digits to mid double digits, and I believe that that’s sustainable or achievable in 2017. That does include some level of acquisition of the single-family mortgages as we have done over the last several years, but I expect that to be a relatively small portion. So, just dialing out the acquisition and strictly focusing on the organically generated loans, I think it’s definitely achievable for us to be in the low double digits to mid double digits in 2017.

Okay, great. Maybe if we just move to credit quality and provisioning, obviously 2016 was another strong year. But with the reserve kind of within [ph] and the new portfolio being added in the quarter, can you help us with provisioning expectations in light of what seems to be a pretty good growth outlook?

Yes, it’s likely that in 2017, we’ll start to provision. There is a question as to whether or not we are going to be required to provision in the first quarter or not. It depends on the asset quality; it depends on the level of new loan production that we’re generating. Having said that though, I think it’s likely that for the year as a whole, we may provision at the level of somewhere around maybe 50 to 100 basis points, depending on various factors.

That’s helpful. Thanks a lot. Maybe one for you Ron, and then I’ll step back. I believe you said the PCI portfolio is down about $10 million. What’s the expectation or what left in terms of potential recovery that will run through the non-interest income line and also maybe the pipeline of net recoveries just in the general portfolio? Thanks.

I think with PCI loans being about half of where they were a year ago, I would expect some, but very small; it will be sporadic, not a large contributor in 2017. So, I think most of the purchase accounting effects that we obtained or most of the benefits we obtained from the acquisition of the distressed organization back in 2014, have been recognized. We’ll be surprised from time-to-time, but I don’t think they will be a large part of our story going forward.

Our next question comes from Bob Ramsey from FBR. Please go ahead.

Hi there. I was wondering if you could just clarify, I think you said provision would be 50 to 100 basis points. Is that of net loan growth or just what is that else?

Yes, the growth; the net loan growth.

Okay, perfect. Got it. And then, the expense level looks really good this quarter, especially figuring you did have a partial quarter impact to the equipment finance guys. Just wondering if you could talk about sort of how we should think about expenses headed into 2017?

That’s a good question, because we’ve had some fluctuations in the expense level translating into the expense ratio -- excuse me, the efficiency ratio fluctuating as a result. Our goal has been to keep the efficiency ratio around the mid-50s and we get lucky maybe in the low-50s. So, we have some growth aspirations in 2017 that’s organic. And shortly we’ll be making an announcement in terms of additional, I would say, producers who are going to be joining us along with perhaps another options that we maybe opening. So, that will contribute to, perhaps the short-term increase in the expenses, but over a 12-month period, we hope that it’s going to fell down to a low to mid-50 kind of an efficiency ratio.

Okay, fair enough. Is that -- what you’re alluding to, is that hiring individuals and put them in new office or is it more of an acquisition of a business?

At this point, it’s hiring of individuals. We are evaluating acquisition of another business line, but there is no assurance that that’s going to happen. And so, at this point, it’s going to be couple of producers who are primarily in the C&I space.

Got it, very good. And then, you mentioned also evaluating another possible acquisition. Maybe just share your thoughts a little bit on capital here and the avenues you may have to deploy, what the acquisition pipeline looks like, what opportunities might be out there et cetera?

We have plenty of callers who are looking at Hanmi as a potential partner. And in that regard, we have couple of different categories, one of which is in the traditional Korean-American banking space; other is in the other Asian space, which includes the Chinese Americans and the South Asian; and thirdly, there are some specialty finance entities that after finding out about our partnering with the equipment leasing division folks, they have approached to us about partnering with us. And so, we have quite a few options that we’re sorting through as we speak to pick the best path possible. That’s going to consume some of the capital, as you may gather. And I guess to answer your potential next question in terms of our optimum kind of capital common equity, Tier 1 capital ratio, we think that we’re going to be heading towards more of 9 to 9.5 kind of a number.

Our next question comes from Matthew Clark from Piper Jaffray. Please go ahead.

On the core margin outlook, just curious with the remixing that you guys have been doing and getting that contribution of loans to earnings assets, I’m just curious how much more of that might be left whether or not we also might see some additional benefit in the securities portfolio from higher reimbursement rates in the upcoming quarter? And lastly, just the full quarter impact of CSF deal, whether or not that might also help the margin? I guess just curious if that core margin could creep a little bit higher here in the first quarter before maybe moderating?

I’m going to tag team with Ron in terms of answering this question, but the part that I’ll take on is that I do believe that the equipment leasing division is going to continue to contribute in a significant way towards enhancing our margin in the forward periods. Having said that though, like all banks, what’s dragging our -- dragging down our net interest margin is the higher cost of funds. Well, I think entire industry in a rising rate environment is experiencing that; I think we are to a lesser extent, but that’s a kind of a headwind that we have and we will continue to face. But I think the equipment leasing division will along with the kind of quality assets that Bonnie and her team have been generating I think is going to more than offset that. Ron?

Yes. I would just echo C.G. a bit. With the addition of the leasing portfolio, I’m a bit more optimistic or comfortable that the margin will be able to hold or improve slightly, at least in respect of the near term. But, as you know, with interest rates rising, I would expect as we move out to 2017, there will be some cost pressures. And so that will start to subside, whatever benefit or reduce whatever benefit that might be in front of us in the near term.

Also, I’d like to just add that based on the asset liability position within Hanmi, we get the biggest bang for the buck as the rate increases head towards 1.5% to 2%. We are above -- we are past 50 basis points. So, this year, if the Fed is kind enough to move the rate more and with the little higher speed, obviously like all banks, it’s going to really help us tremendously.

Okay. And then, just curious what the weighted average rate was on the loan production this quarter. I think about four and a quarter last quarter, just curious whether or not that might have changed given what happened with rates in the quarter?

Sure, during the fourth quarter, new loan interest rate is at 4.69 and compare that from the third quarter which was actually 4.37. So, it was actually much higher.

And then just last one. I think Ron mentioned that in your net charge-off that $5 million was related to a PCI loan that still suggests about $1.7 million in net charge-offs. Just curious if there was anything else that might be lumpy in there and whether or not that might be the new normal or whether or not we might return to a more benign the net charge-off level here at least in the near term?

Well, my expectation is to return to the more benign history that we have had. We are not seeing anything in the horizon that would manifest in terms of a material level of charge-off.

Okay. And then, just on the tax rate, it’s been creeping here the last few quarters, what should we use for 2017?

40% would be a good estimate.

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

Thanks, guys. Couple of quick questions. Ron and C.G., both, I guess you have mentioned that the leasing division helped on the margin benefit. I assume you were talking about just the impact it had on the mix of assets in the quarter, because it looked like loan yields were basically flat or up 1 basis-point in the quarter. So, unless I am missing something there, I just wanted to confirm what you were saying.

The leasing portfolio in and of itself contributed leasing to roughly about 8 to 9 basis points in terms of improvement in the NIM for the quarter.

Okay. And again, that was due to just the mix, just adding that mix of loans?

Yes, correct. It’s the dollar volume of the income contribution. While the leases do have a higher coupon, the coupon on the 200 some odd million dollar portfolio, doesn’t come true as much on the margin as -- if that’s where you’re going, Gary. It’s more of a dollar contribution than the coupon contribution.

That’s perfect; just wanted to confirm that that’s what you were saying. And then regarding the -- on the fee income side, deposit service charges peaked sort of mid-2015; they have been trending downward ever since. Can you kind of talk about what you’re seeing there and what the outlook would be just for that line item, because it’s a meaningful part of your fee income line?

So, in deference to line item, industry as a whole you know -- people are writing less checks. So therefore, traditional income contribution coming from the deposit fee income has been gradually coming down, not only for us, I think that’s an overall industry.

Okay. That’s fine. And then last question I had on the deposit cost side, C.G., you mentioned some upward pressure there and obviously some interest bearing deposits were up about 4 basis points or up about 10 basis points over a two-quarter period. And last quarter some of the rationale was that you were sort of pre-funding the expected acquisition of the leasing division, which you ultimately announced of course and did, and then up another up 4 basis points this quarter. How much more upward pressure do you think there is let’s say over the next two quarters? How much more pass-through is there to keep the deposits coming in commensurate with loan growth?

I think the fourth quarter trend is probably going to repeat itself in the first quarter at least. And once again that’s a function of the environment and rate environment in particular. But I think it’s likely that what happened in the fourth quarter is going to portend what’s going to happen in the first quarter of this year.

[Operator Instructions] And our next question comes from Don Worthington from Raymond James. Please go ahead.

Other companies have reported receiving a special FHLB dividend, I assume you got one as well. How much was that and where is that reported?

That was 559,000. And I’ll let Ron say where it was recorded.

It’s in the security interest income.

And then, in terms of the FHLB advances were up you mentioned in the press release, it was to fund the leasing purchase. Were those basically short-term advances that will be paid back with deposits?

Yes. That’s the goal.

Okay. And then lastly, there was, I guess a net positive or net income from OREO during the quarter. Can you give any more color on that?

We had some recoveries on some property taxes and some other claims. So, goes back to a large part of the 2014 acquisition.

Our next question comes from Chris McGratty from Keefe, Bruyette & Woods. Please go ahead.

Yeah, thanks for taking the follow-up. Ron, just I want to make sure I’m good on the balance sheet mix. With the remix that has been going on in support of the margin, the bond portfolio declined year-over-year. At what point do you believe it troughs or do we still see a little bit of a downward pressure on the $530 million kind of bond book?

We are at the trough, so we may decline a bit, but we are kind of hitting -- the bottom idea is at about 10% of assets.

Okay, great. And was there any -- just thinking on the margin, was there any benefit from bond premium amortization in the quarter? And if not, is there something we should be thinking about the first quarter?

I’m sorry, I didn’t catch the first part of the question.

I’m sorry, just lower bond premium amortization, what was -- was there material change, quarter-on-quarter.

On the bond portfolio? No, not at much at all.

Thank you. I’d now like to turn the floor back over to management for any closing comments.

Thank you for listening to Hanmi Financial’s fourth quarter and full year conference call. We are looking-forward to speaking to you next quarter.