Hope Bancorp, Inc.

Good day and welcome to HOPE Bancorp's 2020 second quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Angie Yang, Director of Investor Relations. Please go ahead.

Thank you, Andrew. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2020 Second Quarter Investor Conference Call. As usual, we will be using a slide presentation to accompany our discussion this morning. If you have not done so already, please visit the Presentations page of our Investor Relations website to download a copy of the presentation. Or if you are listening in through the webcast, you should be able to view the slides from your computer screen as we progress through the presentation. Beginning on slide two, I'd like to begin with a brief statement regarding forward-looking remarks. The call today may contain forward-looking projections regarding The future financial performance of the company and future events. These statements are based on current expectations, estimates, forecasts, projections, and management assumptions about the future performance of the company, including any impact as a result of the COVID-19 pandemic, as well as the businesses and markets in which the company does and is expected to operate. These statements constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance. Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. We refer you to the documents the company files periodically with the SEC as well as the safe harbor statements in our press release issued yesterday. Hope Bancorp assumes no obligation to revise any forward-looking projections that may be made on today's call. The company cautions that the complete financial results to be included in the quarterly report of Form 10-Q for the quarter ended June 30, 2020 could differ materially from the financial results being reported today. In addition, some of the information referenced on this call today are non-GAAP financial measures. Please refer to our 2020 second quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures. Now, we have allotted one hour for this call. Presenting from the management side today will be Kevin Kemp, Hope Bancorp's Chairman, President, and CEO, and Alex Koh, our Executive Vice President and Chief Financial Officer. Chief Credit Officer Peter Koh is also here with us today. and will be available for the Q&A session. With that, let me turn the call over to Kevin Kim. Kevin?

Thank you, Angie. Good morning, everyone, and thank you for joining us today. Let's begin with slide three with a brief overview of our financial results. We executed well despite the continuing challenges presented by the COVID-19 pandemic and delivered a solid quarter of earnings We generated net income of $26.8 million, or 22 cents per diluted share in the second quarter, up from $26 million, or 21 cents per diluted share in the preceding first quarter. To some extent, the environment created by the pandemic has accelerated our progress on a number of the longer-term strategic initiatives that we have in place to enhance our profitability and franchise value. First, we are more effectively leveraging our cost structure. With the solid balance sheet growth we were able to generate while maintaining disciplined expense control, our non-interest expense to average assets ratio improved to 1.60% in the second quarter from 1.87% in the preceding first quarter. Next, during the second quarter, we made significant progress with our deposit initiatives and had very strong inflows of core deposits, which has enabled us to continue improving our deposit mix. Our total deposits increased 10% from the end of the prior quarter, with the vast majority of that growth coming in non-interest-bearing deposits. As a result, non-interest-bearing deposits increased to 28.6% of total deposits on June 30, up from 24.7% a year earlier. Over the same time period, our time deposits have decreased from 46.7% to 35.1% of total deposits. The improved deposit mix combined with our ability to pass through rate cuts to our deposit customers helped to reduce our cost of deposits to 87 basis points in the second quarter, a decline of 47 basis points from the preceding quarter. Moving on to slide four, we had a strong quarter of business development with total loans increasing at an annualized rate of approximately 9%. We originated $832 million in new loans in the second quarter, which was 33% higher than the preceding first quarter and 65% higher than the same quarter in 2019. $480 million of our loan production was attributable to the PPP program. The remaining $352 million of loan production came from our traditional business development efforts. Excluding the PPP loans, we had $216 million in commercial real estate loan production, nearly $62 million of CNI loan production, and $74 million of consumer loan production, primarily consisting of residential mortgages. With our concentrated efforts to process PPP loans during the quarter, We had just a small amount of traditional SBA originations this quarter, approximately $6 million. Moving on to slide five, I would like to share some additional information about the PPP loans that we originated in the second quarter. Excluding approximately $6 million of PPP loans that were paid off within 21 days of funding, we had a net for which we expect to earn, in aggregate, $18.7 million in lenders' fees. As shown on this slide, the vast majority of the PPP loans that we process were in amounts less than $350,000 and earning a 5% fee. Looking at the number of PPP applications processed, you can see that 96% of PPP applications percent of these loans were under $350,000, underscoring Bancorp's continued leadership position for the small business customers. While the vast majority of the PPP loans process were for existing customers, we added 246 new customers that we hope to grow into larger relationships in the future. Now moving on to slide six. Let me discuss the loan modification program we implemented to help our borrowers manage through the impact of the pandemic. At June 30th, we had approximately $3.1 billion in loan modifications granted, accounting for 24.2% of our total loan portfolio. The majority of the modifications are payment deferrals related to our CRE portfolio, with just $151 million for CNI loans and $147 million in consumer loans, which largely represents residential mortgage loans. In terms of timing, you can see in the chart at the bottom of the slide that the peak of our modifications was from mid-April to mid-May, and these modifications have fallen off significantly since then. As you can see in the pie chart, The vast majority of our loan deferrals or more than 95% of loans modified were for a short duration of 90 days or less. We are now in the process of having discussions with these borrowers to determine their need, if any, for additional deferral support. We have been proactively reaching out to our customers throughout this pandemic crisis. While it is still too early to project with a high degree of accuracy due to the fluid situation. Based on our discussions to date, we currently expect approximately 60% plus or minus of our commercial borrowers will request a second deferral. For those borrowers that will consider a second round of modification support, we will be requesting on a best effort basis Concessions in the form of additional collateral, payment reserves, or some other type of credit enhancement like additional guarantees. Moving on to slide seven. The hospitality sector is clearly one of the industries that have been most heavily impacted by the pandemic. As such, we would anticipate the majority of our business customers requesting a second round of modifications will be from our hotel and motel borrowers. However, as previously noted, our hotel-motel portfolio is largely composed of limited service facilities, and these properties have been much less impacted by the lockdown than the destination full-service hotel properties. We believe the rebound for these properties will be felt much sooner than the other type and other property types in the hospitality sector. It is also a positive factor that 73% of our portfolio is represented by flagged properties and 93% of our hotel-motel exposure is located in major MSAs in which we operate. On another positive note, we are pleased to see that month-to-month occupancy trends have stabilized for a number of our larger hotel operators, and they have been able to operate at or near break even during the month of June. We also have some hotel borrowers who have already indicated they will not require a second deferral. Even though occupancy trends are down year over year, they have other sources of income or liquidity that will enable them to resume servicing their debt as agreed upon. That said, The duration of the pandemic and the impact it is having on customer behavior and the economy have been longer lasting than any of us would like. As a result, we expect the majority of our hotel-motel borrowers may need some additional support by way of payment relief until their cash flows further improve. Over the last quarter, we have undertaken a very comprehensive review We analyzed each credit and placed them into one of the three categories, low, medium, or high, in terms of how long we believe it will take the property to stabilize and return to a more normalized level of occupancy and cash flow. This review took into account factors such as the location, the type of hotel, The customer base and current operating trends were available. Based on this review, approximately 75% of our hotel loans were placed in the low or medium categories. The remaining 25% that were placed in the high category include properties such as airport hotels, where we expect occupancy rates to lack a general economic recovery given our assumption that Business Travel will remain muted for an extended period of time. However, when factoring in the low LTV and guarantor support on these loans, we believe should this scenario of an extended recovery period play out, any potential losses to be experienced on these loans will be manageable. With regard to our retail portfolio, the majority of this is represented by street mall types of properties, Many of larger properties of which are anchored by grocery markets. And as we have noted before, the tenants of our retail CRA properties are largely service-oriented businesses. As most cities and states across the country are in various phases of reopening, many of these tenants are operating at some degree of limited service, observing social distancing requirements. As such, our retail property owners, by and large, are beginning to receive some level of rent payments from their tenants, and thus, we are beginning to see some stability for these borrowers. Based on our discussion to date with our retail CRE customers, we currently anticipate that a fair number of these borrowers will also need an additional round of deferrals but not to the same extent of our hotel-motel operators. Underscoring the impact of the COVID-19, we have further increased our coverage ratio as of June 30 of 2020 for these two segments of our portfolio. For hotel-motel properties, the coverage ratio increased to 1.23% from 1.04% as of March 31 of 2020. Excluding impact of purchase accounting discount, the coverage would be 1.41% for our hotel-motel portfolio. For retail CRA properties, the coverage ratio increased to 1.46% from 1.15% as of March 31 of 2020. And excluding the impact of purchase accounting discount, the coverage ratio would be 1.6% for our retail CRA portfolio. Now, I will ask Alex to provide additional details on our financial performance for the second quarter. Alex?