Hope Bancorp, Inc.

Good morning and welcome to Hope Bancorp's 2020 Second Quarter Earnings Conference Call. All participants will be in lesson-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. Now I'd like to turn the conference over to Ms. Angie Yang, Director of Investor Relations. Please go ahead.

Thank you, Nick. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2020 Third 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 US 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 and the quarterly report on Form 10-Q for the quarter ended September 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 third 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 Kim, 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, as usual, 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. Despite the ongoing challenges presented by the COVID-19 pandemic, we are very pleased to have delivered a solid performance this quarter, highlighted by positive trends in many key areas, including among other things, quality loan and core deposit growth, as well as an expansion in our net interest margin. We generated net income of $30.5 million, or 25 cents per diluted share, in the third quarter, compared with $26.8 million, or 22 cents per diluted share, in the preceding second quarter. We also recognized a 14% increase in our pre-tax, pre-provision income to $61.7 million in the third quarter, from $54 million in the second quarter of 2020. More importantly, we were encouraged by trends we observed in the health of our borrowers this quarter, with many deferred loans returning to regular payment schedules, as well as recognizing a decline in non-performing loans. The trends we are seeing strengthen our perspective that we are well positioned from a capital and reserve standpoint to effectively manage through the current economic environment. Our performance this quarter is also reflective of the progress we are making on our long-term initiatives designed to enhance the value of our franchise, particularly in terms of improving the characteristics of our deposit composition and expanding beyond our traditional legacy customer base. Over the past few years, we have discussed our strategies designed to develop broader banking relationships with commercial customers and investments we have made in personnel and technology to enhance our ability to gather lower cost core deposits including upgrading our treasury management capabilities. We are now beginning to see meaningful results from these efforts as evidenced by the growing deposit relationships with our larger commercial customers. During the third quarter, our non-interest bearing deposits increased by Thank you very much. Our non-interest-bearing deposits have increased from 24.8% of our total deposits to 32.1%, while time deposits have declined from 42.4% to 31.7%. In the third quarter, the significant improvement in our deposit mix combined with an overall reduction in the rate environment helped to drive a 23 basis point reduction in our cost of deposits which was a primary driver in the margin expansion we achieved in the third quarter. Moving on to slide four, we had a strong quarter of business development with total loans increasing at an annualized rate of approximately 8%. We originated $1.2 billion in new loans in the third quarter with total fundings of $782 million excluding PPP loans Our total loan fundings increased by $430 million, more than double the level of fundings in the second quarter, which reflects the improvement we are seeing in loan demand as the economy strengthens. For the 2023 quarter, we funded $244 million in commercial real estate loans, $433 million of CNI loans, $105 million of consumer loans, primarily consisting of residential mortgages, and SBA loan production, which is included in the CRA and CNI fundings just discussed, totaled $48 million for the third quarter. The important takeaway from our third quarter loan production is that, as evidenced by our growth in demand deposits, we are now getting full commercial banking relationships, meaning both loans and deposits, with a greater percentage of our customers, which is a key priority for the bank. Another important note is that commercial loans accounted for 28% of our loan portfolio at September 30 of 2020, up considerably from 22% a year earlier, underscoring the successful growth of our corporate banking group. Now moving on to slide five. Let me provide an update on the loan modification program we implemented to help our borrowers manage through the impact of the pandemic. At September 30th, we had approximately $1.1 billion granted in phase two of our modification program, accounting for 8.8% of our total loan portfolio. This represents a significant decrease from the 24.2% of loans modified as of June 30th. For the bank to consider a second round of modification support, we are requiring borrowers whenever possible to provide credit enhancements in the form of additional collateral or personal guarantees in order to mitigate potential losses in the event of a default. The vast majority of the COVID modifications to date in phase two have been related to our CRA portfolio with just $31 million for CNI loans and $99 million in consumer loans, which largely represents residential mortgage loans. Hotel, motel and retail properties account for the majority of modifications, representing 41% and 21%, respectively, of all modifications. Moving on to slide six, let me briefly comment on the type and duration of modifications being granted under phase two of our modification program. It is apparent that the impact COVID-19 is having on the economy is longer lasting than we first expected on the onset of the pandemic crisis. While phase one modifications were predominantly 90-day full payment deferrals, under phase two, we have been offering for the most part either full payment deferrals or interest-only payments or a hybrid combination that includes deferrals for a period followed by interest only payments for the rest of the modification term. In phase two, we have also offered some longer term modifications, particularly for our hotel, motel and retail borrowers. In exchange for the longer term durations, we have been collecting additional collateral or guarantees whenever possible that we believe will effectively work to reduce our loss potential. So moving on to slide seven, I would like to provide an update on the two segments of our portfolio that are viewed to be the most impacted from the pandemic crisis, beginning with our Hotel Motel portfolio. At September 30th, we had $474 million of loan modifications in our Hotel Motel portfolio, down from $1 billion at June 30th. All but a handful of these modifications represent borrowers that have been granted a second modification. As part of our heightened portfolio monitoring, we are getting current financial data and occupancy trends from our borrowers on a much more frequent basis. In general, we have seen improving trends over the past few months as the majority of our borrowers operate limited service properties, which have benefited from more travelers opting for drive-to hotels versus the destination type of properties that involve air travel. As a result, many more of these properties have started operating at closer to a break-even level. The occupancy and revenue for available room or red part trends that we are seeing with our borrowers are also generally consistent with the industry-wide trends reported for the type of limited service hotels and motels in our markets. In our discussions regarding any extension of loan modifications for our COVID-impacted Hotel Motel customers, our goal is to put these borrowers on the best possible path back to regular payment schedules with the unique circumstances of each customer determining the solution that we put in place. And you can see in the upper right pie chart of slide seven that nine months, 12 months, and six months hybrid agreements account for 26%. The primary goal of this approach is to provide time for our borrowers to stabilize their operations and build the liquidity they need to go back to full payment status after the modification period ends. Although we continue to track recent positive trends within our hotel portfolio, we are cognizant that the pandemic will weigh on the speed of the recovery for this industry. As such, during the third quarter, we increased our allowance on the hotel-motel portfolio in excess of 140% quarter over quarter, which brought our coverage to 3.01% of total hotel-motel loans from 1.23% at June 30th, 2020. We have also provided on this slide The geographic distribution of our hotel motel properties, 70% of which is located in California, followed by 10% in the Pacific Northwest. Moving on to slide eight, looking at our retail CRE portfolio, at September 30th, we had $236 million of loan modifications in our retail CRE portfolio, which is down significantly from $809 million at June 30th. This equates to just 10% of our retail CRE portfolio currently under modification, underscoring the improving conditions for this segment of our portfolio. As we have mentioned many times before, the majority of our retail CRE portfolio is represented by strip-mull types of properties, many of the larger properties of which are anchored by grocery markets. Given the service-oriented nature of most of the tenants of these retail properties, our borrowers are receiving at least partial rent payments. So we are pleased to see greater stability for these borrowers. As discussed earlier, we have taken as many opportunities as possible to shore up the bank's position with additional collateral or guarantees, particularly when offering longer term modifications that we believe will increase the likelihood of these borrowers returning to normalized payment. In terms of geographic distribution of our modified retail CRA properties, 63% is located in California and 20%, 28% in New York and New Jersey. Now, I will ask Alex to provide additional details on our financial performance for the third quarter. Alex?