Hope Bancorp, Inc.

Good day, and welcome to the Hope Bancorp's 2021 Second Quarter Earnings Conference Call. All participants will be in a listen-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. To ask a question, you may press star then one on your touchtone phone. And 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 Ms. Angie Yang. Please go ahead.

Thank you, Chuck. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2021 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, let me 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 in the quarterly report on Form 10-Q for the quarter ended June 30, 2021 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 2021 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 Kim, Hope Bancorp's Chairman, President, and CEO, Alex Koh, Senior Executive Vice President and Chief Financial Officer. Peter Koh has transitioned to a broader role as a Deputy Chief Operating Officer and continues to work closely with our Credit Admin Department and our new Chief Credit Officer, Richard Marshall. Peter is 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?

Kevin Kim Thank you, Angie. Good morning, everyone, and thank you for joining us today. Let's begin on slide three with a brief overview of our financial results. Second quarter results underscore the sound management of our operations, and we saw the positive trends we were expecting in loan production, net interest margin, and revenue with linked quarter increases in both net interest income and non-interest income. Together with a modest reserve release this quarter, this resulted in a strong quarter earnings with net income of $53.8 million or 43 cents per diluted share and pre-tax, pre-provision income of $64.5 million an increase of 6% over the preceding first quarter. I would like to highlight a few notable items that were key factors in driving our performance in the second quarter. First, we continue to have success in attracting new commercial deposit relationships to the bank and expanding our deposit relationships with existing customers. This continues to support inflows of low-cost deposits. During the second quarter, our non-interest-bearing deposits increased 4% quarter-over-quarter, while money market deposits increased 16%. Combined, non-interest-bearing deposits and money market account balances now represent 78% of our total deposits, up from 63% one year ago. The significant shift in our deposit mix away from time deposits has substantially reduced our cost of deposits and driven the 32 basis point increase we have seen our net interest margin over the past year, despite the pressure on earning asset yields. Second, with premiums having increased in the secondary market, we resumed selling our SBA loans to take greater advantage of the strong SBA platform that we have built. The $2.4 million in gains we recognized this quarter helped drive the increase in our non-interest income at a time when many other fee-generating areas are under pressure. And third, and most importantly, we saw the steady improvement in our hotel, motel, and retail commercial real estate portfolios that we expected as the economy continued to reopen. With more borrowers returning to regularly scheduled payments, upon expiration of their modification period, our loan modifications declined to 2.4% of total loans at June 30 of 2021. During the quarter, we sold $119 million of higher-risk, special-mention, and substandard-graded hotel-motel loans. These loans were sold at a discount that was less than the reserves we held against these loans, which reflects the conservative approach that we took to building our allowance for credit losses. The sale of these loans at a discount less than the reserve held against them, combined with the decline in modified loans and improving economic forecasts, contributed to a reserve release this quarter. Moving on to slide four, as we expected, based upon our growing pipeline, we had a significant increase in loan production. Excluding PPP loans, we had $874 million in loan production, which was 61% higher than the preceding first quarter. It is also a record level of loan originations for the bank, so we have quickly surpassed even pre-pandemic levels of loan production. Excluding PPP loans in the second quarter, we funded $520 million in commercial real estate loans, $301 million of CNI loans, and $53 million of consumer loans consisting primarily of residential mortgages. SBA loans, which I included in the CRE and CNI production just discussed, totaled $78 million, including $65 million of 7 loans in the second quarter of 2021. We continue to be successful in attracting new commercial relationships, and the $301 million in commercial loan production represents one of the larger quarters of originations for commercial lending. The record level of loan production we had this quarter along with the purchase of $96 million in 30-year fixed-rate residential mortgage loans, was offset by a number of factors that resulted in total loans at quarter end decreasing 2 percent from the prior quarter. We had a $231 million quarter-over-quarter decline in warehouse line ending balances as demand for refinancing has decreased with the rise in mortgage rates and a lack of housing inventory in many markets has impacted purchase originations. Aggregate payoffs and paydowns were higher than usual at $891 million versus $572 million in the first quarter of 2021, reflecting in large part a significant increase in payoffs. We attribute the increase in payoffs to a number of factors, including highly competitive lending environment. Excess liquidity of our borrowers was also a contributing factor to the higher levels of payoffs. And as well, PPP forgiveness ramped up in the second quarter of 2021 and totaled $164 million versus $30 million in the preceding quarter. But even excluding PPP forgiveness, payoffs were higher quarter over quarter. During the quarter, we also completed the sale of an aggregate $119.3 million from our hotel-motel portfolio that were viewed to be higher risk. In addition to the sale of $42.6 million in residential mortgage loans, we resumed the sale of SBA 7A loans to the secondary market and sold $30 million during the 2021 second quarter. Now moving on to slide five, let me provide an update on our loan modification program under the CARES Act. We continue to see a steady decrease in the balances of our active loan modifications. At June 30, modified loans decreased to 2.4% of total loans, down from more than 6.9% as of March 31 of 2021. And we are pleased to report that virtually all the loans for which the CARES Act modifications have expired are current and performing. Based on our COVID-19 modifications expiration schedule, we expect active modifications to decrease to approximately 1% of total loans by the end of the third quarter of this year. So moving on to slide six, we have provided updated information on the modification program for our hotel-motel and retail CRE properties, the two sectors that have been most impacted by the pandemic. At June 30, the level of loans modified in our hotel-motel portfolio decreased to 8% of the portfolio, from 33% as of March 31 of 2021. We have approximately $82 million of modifications in this portfolio, maturing by the end of the third quarter, so this percentage will be reduced to minimal levels within the next three months. As I mentioned earlier, we sold $119 million of hotel-motel loans which we believed would require a longer recovery period. As a result of these sales, we have been able to significantly de-risk this portfolio. The red part data that we are tracking for our markets and the current financial data we are receiving on a monthly basis are demonstrating significant improvements, and we expect the performance of our hotel-motel borrowers will continue to improve. Looking at our retail CRE portfolio at June 30, we have $74 million of retail CRE loans that are currently operating on the modified terms representing 3% of our retail CRE portfolio. This is down from approximately 8% as of March 31 of 2021. For this portfolio, we have approximately $24 million of modifications expiring during the third quarter. Now, I will ask Alex to provide additional details on our financial performance for the second quarter. Alex?