Good day and welcome to the Hope Bancorp's 2020 Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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, Sarah. Good morning everyone and thank you for joining us for the Hope Bancorp 2020 fourth 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 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 annual report on Form 10-K for the year ended December 31, 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 fourth 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 Ko, 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 on slide three with a brief overview of our financial results. In the fourth quarter, we were able to deliver upon the stronger commercial banking platform we have developed, another positive quarter of quality loan and core deposit growth, as well as further improvement in our net interest margin and efficiency ratio. These positive trends resulted in another solid quarter of earnings and pretax pre-provision income. We generated net income of $28.3 million or $0.23 per diluted share in the fourth quarter compared with $30.5 million or $0.25 per diluted share in the preceding third quarter. We had $61.1 million of pretax pre-provision income in the fourth quarter of 2020, down slightly from $61.7 million in the preceding quarter, but up from $56.1 million for the fourth quarter of 2019. Excluding the $2.4 million in branch restructuring costs recognized in the fourth quarter as well as the $7.5 million gain on sale of securities and the $3.6 million FHLB prepayment penalty in the preceding third quarter, our pretax pre-provision income in the 2020 fourth quarter was up 10% from the preceding quarter, which reflects a significant increase in our core earnings power quarter-over-quarter. This increase is largely attributable to our continued progress with our strategic initiative of developing full banking relationships that provide both high-quality loans with attractive risk-adjusted yields and low-cost transaction deposits. Our success in attracting new commercial customers has had a very positive impact on our deposit composition causing a reduced reliance on retail time deposits, while significantly lowering our cost of deposits which have been the primary drivers of the margin expansion we saw in the fourth quarter, as well as throughout 2020. During the fourth quarter, our non-interest-bearing deposits increased…

Thank you, Kevin. Beginning with Slide 8, I will start with our net interest income which totaled $120.8 million, an increase of 3% from $117.6 million in the preceding third quarter. The growth in net interest income was primarily due to a significant reduction in interest expense as a result of the lower cost of deposits redeployment of excess liquidity and higher average loan balances. During the fourth quarter we recognized $2.4 million of net PPP loan fees compared with $2.6 million in the preceding third quarter and have a net $6.4 million remaining to be recognized in the future. In the fourth quarter we had our second consecutive quarter of net interest margin expansion which increased 11 basis points to 3.02%. This was primarily driven by the lower deposit cost that Kevin mentioned and the redeployment of our excess liquidity into loans and investment securities. Excluding purchase accounting adjustment our net interest margin expanded 15 basis point quarter-over-quarter in the fourth quarter of 2020. We continue to have additional opportunities to bring our deposit costs down as we have $1.6 billion in time deposits maturing in the first quarter at an average -- weighted average rate of 107 basis points and $1.1 billion in time deposits maturing in the second quarter, at a weighted average rate of 80 basis points. This should provide an opportunity to continue to recognize margin expansion through the first half of this year. Now moving on to Slide 9. Our non-interest income was $11.4 million for the 2020 fourth quarter down from $17.5 million in the preceding third quarter primarily due to the $7.5 million gain on sale of securities that we recognized in the preceding quarter. Excluding the security gains our non-interest income increased $1.4 million. The increase was largely due to a…

Thank you, Alex. Let's move on to Slide 15. As we wrap up, I would like to first summarize what I see as a successful year of achievements against the backdrop of an extremely challenging year plagued by a global pandemic. A year ago I discussed our priorities and expectations for 2020. First I said that we would be highly focused on deposit gathering and controlling expenses. I believe you will all agree with me that we made tremendous progress on both of these fronts. The total deposits increased 14% year-over-year. And more importantly, our deposit composition improved dramatically with non-interest-bearing deposits increasing from 25% at December 31, 2019 to 34% at December 31, 2020. And despite a 9% year-over-year growth in total assets, we had minimal increase in non-interest expense. And as a percentage of average assets, non-interest expense declined from 1.86% for 2019 to 1.72% for 2020. Second, we projected organic loan growth to range in the mid- to – in the low to mid single-digits and said that our focus will be on generating profitable growth and expanding our lending capacity beyond our traditional core markets. And again, we achieved these goals. As we mentioned earlier, at December 31, 2020, loans receivable increased year-over-year by 10% or 7% excluding PPP loans. And the increase in our loan portfolio was almost entirely in commercial loans resulting in a much more diversified loan portfolio. But more importantly, the value of the commercial relationships that we have won this year considering the related deposit relationships, significantly enhances the profitability of this loan growth which was largely led by our Corporate Banking group. Third, I said that we would remain committed to strong capital management and we have certainly delivered on this front. But even beyond these priorities we achieved even…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Chris McGratty with KBW. Please go ahead.

Hi. Great. Hey, Kevin. I wanted to dig into the loan growth a little bit, if we could. The comment in the outlook about non-CRE growth, I'm interested in your comments about the warehouse business that you've been growing. Maybe some numbers around how big it is? How large you'd like it to be and kind of where more new yields are coming on? Thanks.

Okay. Let me respond to that. Our non-CRE loan growth is coming primarily from our corporate banking group. And our corporate banking group has three different business lines, one of which is warehouse lending business line. And at the end of 2020 the ending balance of our warehouse lending unit was a little in excess of $1 billion. The limit commitment was $1.5 billion and average yield for the Q4 was 2.2%. And we expect significant continued growth in warehouse lending. Although, the market itself will not grow as a lot of people say, I think we will continue to gain more relationships into our business. So, I think, the total warehouse lending business line will have more commitment and higher ending balances. And another unit of corporate banking is the middle market lending group, middle market C&I lending group and we have different industry verticals that we are concentrating within that group and we also see significant growth from that unit.

That's great color. Thanks. If I could ask one more just on the balance sheet. I'm interested in how you're thinking about deposit growth in 2021. Obviously, it was pretty strong this year. Should we expect some further remixing of the earning asset base out of cash and bonds into loans? But any thoughts on the balance sheet growth would be great.

Sure. Chris, our balance sheet will continue to grow, because as we delivered our strong growth in 2020, main increase resulted from non-interest-bearing deposits as well. So we have good liquidity position. And actually we -- even we reduced excess liquidity in Q4. When we need it we have sufficient liquidity. So I don't anticipate any challenges to support our loan growth that Kevin indicated earlier in the remarks. So it will be fine. And secondary, kind of allocation to investment security, those are the alternatives, if we have still excess liquidity after we funded our loans. So we would expect mid-90s of loan-to-deposit ratios for 2021.

Great. And if I could just ask one more on the PPP. Could you just, Alex, remind me what was in the quarter in terms of fee recognition? And what's left from round one? Thanks.

Sure. We have recognized -- in Q4 total $3.6 million we recognized. That includes 1% of, like, interest income as well as net deferred loan fees. And the remaining we still to be recognized is net deferred loan fee of $6.4 million. And we would expect to have forgiveness of this PPP starting this Q1, but much more in the second half of the year.

Great. Thank you.

Sure.

[Operator Instructions] Our next question comes from Matthew Clark with Piper Sandler. Please go ahead.

Hi. Good morning.

Good morning, Matthew.

Maybe just as a follow-up question on the warehouse. Can you give us a sense for the number of relationships you have there, the number of broker relationships? And what percentage of those relationships are you consider the primary line of credit?

Yes. Maybe I can add a little bit of color. So most of our warehouse line -- I don't have an exact number of count here, but most of our warehouse lines are quite sizable. So anywhere from say, on the lower end maybe $30 million upwards of $100 million to $150 million and our largest maybe $200 million. And typically -- and so, I think with that we're probably looking at -- exact number I'm not sure maybe 10 to 20 meaningful relationships there. And I think in terms of primary lines generally speaking these mortgage companies maintain multiple lines so we are generally one of their primary lines.

Yes. In terms of number of the customers we have a total of 13 relationship -- the warehouse customers which have $1 billion of outstanding balances as of year-end.

Okay. Great. And then just on the expense outlook you obviously gave some pretty explicit guidance. But when you look at your expense to average asset ratio I guess when do you get -- where do you think that can bottom? When do you get to a point where you don't think it can go any lower?

That's a good question because there's so many moving parts here. But I think if I may give you kind of an expectation for next two, three quarters I think it will not deviate too much. We would expect to realize the benefit from the branch restructuring cost which we expect about $2.4 million of annual savings. It will help to maintain the efficiency ratio and those non-interest expense over average asset ratio to be maintained. But we also expect to see some minor increase in the professional fees and what are your expenses. And so with that I think we would maintain the similar level let's say $70 million level for the next two, three quarters. And after that, I think we can say that it will increase because we will continue to invest in technology and compliance on those. But I think we have invested quite a bit so far. So I'm hoping to see margin -- I'm sorry the efficiency and the non-interest expense or average asset ratio to be meaningfully improved maybe Q4 or 2022.

Okay. Great. And then just on reserving is it fair to assume that we'll continue to see you all build reserves here maybe for the next couple of quarters before you start to release or is assuming releasing begins in the second half maybe too early based on what you know today?

So there's -- obviously in this uncertain environment there's a lot of pandemic-related variables that are still out of our control. But we do feel that the fourth quarter we have really embedded the appropriate reserve levels for what we're seeing in the hotel portfolio as it continues to progress through the pandemic. And so I think with the vaccine use and the stimulus programs that the government is currently working on and the additional round of PPP funding that will really help a lot of our customers extend their bridges here. I think we're in a very good position to start seeing some lower level of provisions in 2021. It's hard to pinpoint exactly, you know, quarter-to-quarter we'll have to see the circumstances surrounding all of these variables. But we do feel confident that we will start to see some lower levels of provision or provision release some time in 2021.

Okay. Thank you.

Our next question comes from David Chiaverini with Wedbush Securities. Please go ahead.

Hi, thanks. A couple of questions. And really starting off with what you guys were just talking about with the Hotel/Motel. Was there anything surprising to you in that portfolio in the fourth quarter? It seems like some of your peers -- some other banks are seeing improving trends with Hotel/Motel or at least stabilization where it seems like you guys saw, I guess some degradation or deterioration in operating trends in the fourth quarter. Can you talk about occupancy levels and sponsor support in the Hotel/Motel portfolio?

Sure. What we experienced I think in the fourth quarter was really diving into the CECL modeling process where we really looked at the industry data in the hotel area and we saw a lot of things there. To answer your question about our portfolio, we had a few cases where we identified some downgrades, but our portfolio itself we believe is actually performing consistently, and consistently better I think than the general hotel industry. So our hotels as we mentioned in our prepared remarks are really geared towards the limited service hotels. And we follow the industry data very. very closely right now. So what we do is we look at the industry data for the particular region that we service and then we also compare that to our actual performance of our hotels in those regions. And what we are seeing actually is indication that both the industry in terms of limited service, which are our -- most of our hotels and motels and then our own hotel/motel performance have actually done better than industry averages in a sense starting with third quarter. Second quarter was a very -- as everyone knows it was a very down period. The third quarter saw a lot of recovery in terms of the hotel performances. Many hotels reached breakeven or were very close. Fourth quarter we're going to be entering a period here. We are picking up data based on the impact of the virus spread and the prolonged recession in a sense for the hotel industry. We took it upon ourselves to continue to be in a reserve building time frame for the hotel industry for fourth quarter. But in our outlook right now, I would say that we feel very good actually. As you notice, our modification levels are…

That's really helpful. Thanks for that. And then shifting gears to the mortgage warehouse business. You mentioned about how you're taking share. I guess a multi-part question. Just curious who you're taking share from? Are there any big banks that are pulling back, because it seems like there's a few western banks that are talking about taking share in the mortgage warehouse business. So that's I guess the first part of the question. And then the second part is really just from a competitive standpoint. How are you able to win the business from others? You mentioned about the average yield being 2.2%. Is that a competitive rate and that you're undercutting the competition? Just talk about how you're winning this business.

Well, David, we are focusing on top 100 largest mortgage originators in the country, and each one of those top originators have multiple relationships with many other banks. So we are one of the many relationships that our customers have with multiple banks. And the 2.2% average yield that I quoted for the fourth quarter is at the market rate. We are not really underpricing our lines or advances to the customers. And the Corporate Banking group, we were able to attract a lot of good experienced originators and managers and they were really making the difference in 2020. And because this is revolving lines of credit and used for short-term financing, I think this is the type of business that we can really expand without much of the risk accompanied with the growth. So I think that is the difference that our investment in developing a stronger commercial banking platform development shows. And I expect that we will continue to see that expansion.

Great. Thanks for that. And then the last one is more of a clarification. On the loan growth outlook for 2021, the mid- to high single digit, is that including PPP or excluding PPP?

Yes. That is ex PPP loans.

Got it. Thanks very much.

Thank you

[Operator Instructions] Our next question comes from Larry Ring with Mutual of Omaha. Please go ahead.

Hi. Thanks for the call. I've been very interested in the questions and comments about warehouse lending. I don't think I'm going to beat that horse anymore. But I think you said you might have been growing in middle market lending as well. And I was wondering if you could expand on sort of where your growth is outside of warehouse space or mortgage?

Yes. As I mentioned, we have three different business lines under our Corporate Banking group and middle market lending is one of the three. Our growth strategies in the middle market is really on the specific industry verticals. And as I mentioned, we have already established and up and running for the financial services asset managers type of business vertical. We have telecom business vertical. We have mainstream large CRE loan group within that unit and we are currently building up healthcare group. And those guys are industry experts. And we are really expanding the geographic perspectives also. We started this group from out of – from Dallas in the Southwest and we are now expanding to East Coast and Upper Midwest and Chicago area. And also we have a plan to expand into Northwest areas – Pacific Northwest Washington areas.

So help me understand have you increased lending to say financial services? What does that look like? Who are those customers? And what does that look like?

Sure. Maybe I can add a little color. So financial institutions is a pretty broad area in a sense. So there are going to be a variety of different types of customer bases there. We look at lending to asset managers, fund managers, direct or indirect lenders. We have capital call lines. There's all sorts of different types of lending that we focus on. And I think one of the great things about the Corporate Banking group right now is that we have shifted our focus prior to the pandemic to really focus on areas where the pandemic is either not impacting as much or industries where it's actually benefited some industries. And so through our process of building these verticals, we have been able to pinpoint areas where we feel the opportunities to grow safely and meaningfully are there. And definitely we have the lenders now. I think we have very strong lenders in the marketplace that have good relationships to build these – this new growth level. And I think as we have proven not only in the mortgage warehouse space but also now in the middle market space over the last few years we are definitely building our experience and reputation as an actual player in this market – in the true middle market area. So we are excited about the growth opportunities here. And I think we'll see more success as we move forward.

Okay. Terrific. Thank you.

Thank you.

Our next question is a follow-up from Matthew Clark with Piper Sandler. Please go ahead.

Hey, Do you just happen to have the end-of-period PPP loan balance as well as the average for the fourth quarter? I didn't see it in the deck or the release.

Sure. The PPP balance at the end of the quarter was $459 million and we had $473 million. So the average balance is not much different from the quarter end balance. In fact, it's $10 million higher at – $470 million was our average balance for the Q4.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you everyone again for joining us today. And I hope everyone's today healthy and safe and we look forward to talking to you again in three months. So long everyone.

Thank you.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.