Good day, and welcome to the Hope Bancorp Fourth Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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 for Hope Bancorp. Please go ahead.

Thank you, Phil. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2017 fourth quarter investor conference call. Before we begin, I would like to make 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, forecast, projections and management’s assumptions about the future performance of the company, as well as the business 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 the 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-K for the quarter ended December 31, 2017 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 2017 fourth quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures. As usual, we have allotted one hour for this call. Presenting from the management side today will be Kevin Kim, Hope Bancorp’s President and CEO; and Alex Ko, our Chief Financial Officer; Chief Credit Officer, Peter Koh is also here with us today and will participate in 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. We completed our first full-year of operations as the representative bank of the Korean-American community with a solid performance on numerous fronts and a quarter that reflects the consistency in our execution and business model. Relative to the preceding third quarter and looking at the core operating performance of the company, we had higher revenue, increased loan production volumes and positive trends in credit quality, although, this was somewhat offset by higher expense levels. We reported $80 million in net income during the fourth quarter, or $0.13 per diluted share. This includes a $0.19 per share impact from the revaluation of our deferred tax assets and our low income housing tax credit investments, or LIHTC, due to the recent reduction in federal corporate tax rate. Excluding this impact, our earnings per share would have come in at $0.32 for the fourth quarter. New loan originations topped the preceding quarter volume of $611 million, totaling $664 million for the 2017 fourth quarter. This resulted in net growth of $140 million in our end of period loan balances versus September 30, 2017. We continue to see an improved mix of loan production. Commercial real estate loans, including our SBA CRE originations comprised 58% of total production in the quarter. Consumer loans comprised primarily of residential mortgage loans accounted for 29% and commercial loans, including our SBA C&I production accounted for 13%. Overall, CRE loan demand continues to be softer than a year ago. The appreciation that has occurred in CRE assets has contributed to a lower level of inventory available in the market. Investors are also taking a more cautious stance in the current environment. As a result, the majority of our recent CRE loan production consist of refinancings.…

Thank you, Kevin. As I review our financial results, I will limit my discussion to just some of more significant items in the quarter. I will start with our net interest margin, which increased by 1 basis point to 3.84%. Similar to last quarter, we had additional income related to acquired loans that was one-time in nature and resulted in additional discount accretion income of approximately $3 million in the fourth quarter, which helped to keep our reported margin relatively stable. We do not present any meaningful one-time events that would impact our interest income in the first quarter of 2018. Without this positive impact and since we are expecting deposit cost to continue increasing in a rising interest rate environment, we would expect to see some pressure in our net interest margin in the next quarter. Moving to non-interest income. Our most significant variance linked quarter was a decline in the net gain on sale of SBA loans, which was $1 million lower than in the third quarter. We entered the fourth quarter with a lower inventory of SBA loans held for sale of $4.9 million, and the holiday season limited the time in which we could complete our execution of sales during the quarter. These two factors accounted for a lower level of SBA loan sales. During the fourth quarter, we sold $36.6 million of SBA loans, down from $49.9 million in the preceding third quarter. As a result, we ended the year with a higher inventory of SBA loans held for sale of $27.6 million. We believe this positions us well to deliver increased levels of loan sales and SBA gain on sale revenue for 2018. The lower gain from SBA loan sales was partially offset by $461,000 increase in gain on sale of residential mortgage loans,…

Thanks, Alex. Although the 2017 fourth quarter included several non-core items that impacted our bottom line results, most notably the tax reform, we expect to recover the incremental tax charge by approximately the end of the third quarter of 2018 through lower quarterly tax provision expenses. Looking back at 2017, it was a year of important achievements in terms of successfully completing the integration and making progress toward our vision to build upon our Korean-American heritage and national presence to be a top performer for our shareholders, customers, staff and communities. At the same time, however, and admittedly, 2017 was also a challenging year for Bank of Hope, as we stood amongst a new and broader peer group of mainstream banks. Having crossed the $10 billion threshold by just a small margin, we’re subject to higher regulatory standards and requirements, and higher levels of investments in our risk infrastructure and DFAST preparedness weighed against our financial performance. We also modified our front-line organization to enhance our progress with diversifying our revenue streams and to accelerate our transformation to be a diversified financial institution. And I believe this transformation will eventually lead to stronger and healthier growth for Bank of Hope for the long-term. All of these events contributed to what I would describe as growing pains in our first full-year as a regional bank. But this growing pains are temporary in nature and to be expected at the beginning stages of new development. Importantly, we believe these changes create greater opportunities and are critical and ultimately shaping a stronger future for Bank of Hope. Constant change is the new norm in today’s business environment. What was the possibility of dramatic tax reform just a few months ago has now become reality, and one which we believe creates even greater opportunity…

Okay, thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Aaron Deer with Sandler O’Neill. Please go ahead.

Hi, good morning, everyone.

Good morning, Aaron.

Good morning, Aaron.

I appreciate the guidance on a number of curious or that was helpful. The one area where I’d like to explore a little deeper is on the expectations for deposit pricing, and I guess, the net interest margin in general. It seems like the deposit cost ticked up a good deal here in the fourth quarter, and you’re obviously very focused on that as a priority for 2018. So I’m just curious what kind of further cost increase do you see on the deposit side as we head into 2018? And what kind of impact do you expect that to have on the margin?

Sure, Aaron. Yes, as you see, we do have a sizable increase on deposit costs, and we would expect to actually continue to increase our deposit pricing based on the overall interest rate environment, as well as competition in deposit arena. So in terms of how much it will increase, let me give you a little bit more colors of our CDs maturing next year. But we have a total sizable CDs maturing next year, about $3.8 billion, because our CD is mainly like a 12-month CD. And the rate that we see varies from 1.15% to as high as 1.5%. So it depends on the market rates going forward, let’s say three times rate increases based on our current deposit beta above overall 35, but our higher deposit beta on CD. So I would expect to have a double-digit increase of our deposit cost in terms of a basis point. And relate to that impact to net interest margin, let me give you net interest margin overall and also include the deposit component. As I mentioned, due to the reasons the cost on the deposit will have a negative impact on the pressure to the margin. But we do see, there will be an increase on our pricing on the loan side, given the rate increases, our pricing will increase slightly. And also, we do have a accretion impact for the purchase accounting, and obviously, that will be a decreasing trend. So on a reported net interest margin basis, we might see slightly reduction. But on a core basis of net interest margin, mainly increase on the loan yield offset by the deposit price increases, we would expect the core net interest margin will be kind of constant like a 3.5% or 3.6% ranges going forward.

Okay, that’s very helpful. I appreciate that. And then on the expenses, I know you gave some guidance with respect to the efficiency ratio. But I guess, just given some of the non-recurring items in the fourth quarter, I’m just trying to also get at maybe a run rate in terms of what to expense on a dollar basis. And it looks like you’re probably running around $68 million, maybe $69 million per quarter. Is that kind of the right level to think about where you’ll be here as we head into the New Year? And then is some of these current investments drop off, I think, to about $2 million or so quarterly, it sounds as though, those are going to be offset by other planned investments that are going to be made as the year goes on, is that correct?

Yes, Aaron, you’re correct. So you touched two component, efficiency ratio and also run rate for the non-interest expenses, obviously, those efficiency ratio will be the function of non-interest expenses, as well as non-interest income and other sources. So as we discuss efficiency ratio, we gave you guidance for 2017 like a mid-40% ranges. But because of the investment and special projects, we would expect to increase like a 47% or 48%. And move on to non-interest expense component, clearly, 2017 fourth quarter, we have a lot of noises, and we do believe that’s not core or is one-time nature, such as LIHTC invest – impairment of $3.3 million and $1 at BOLI post-retirement benefit obligation and other special related fees. Excluding those one-time, we would expect, as you mentioned Aaron, around like $68 million would be our run rate. And also I also wanted to echo what you mentioned, we would expect to have additional investment on the professional fees in preparation for the enhancing our infrastructures. So that can be added and probably spread throughout the remaining quarters of 2018.

Okay, great. Thanks for helping me out there, Alex, and I’ll step back.

Thank you, Aaron.

The next question comes from Chris McGratty with KBW. Please go ahead.

Hey, good morning. Thanks for taking the question. The loan growth, Kevin, you talked – you didn’t give a specific number. You said, it was just going to be, I believe, stronger than 2017. What – given the inclusion of the deal, what is the – what was the full-year organic loan growth during 2017 to work with?

Our actual loan growth for 2017 was a little higher than 5%. And we believe, as I said, 2018 growth will be higher than that. How much higher will be dependent upon a number of variables. And we believe it will take a couple of quarters before we have more clarity as to the ultimate impact of tax reform on how the consumers and borrowers will behave, as well as how the competitors may react. And other variables include how the CRE transaction market trends, how successful we will be in gathering core deposits, and whether the strengthening economy will actually translate into more C&I loan demand and et cetera.

Great. Thank you for that. If I could on the accretion, kind of a modeling question on the accretion income. In the outlook, can you remind me, number one, how much accretion income is left in the plan in terms of timing for that to come into margin?

Sure. We did have total accretion on a dollar amount wise $12.8 million in Q4, and that did have a 39 basis points reduction in Q4. And that accretion amount will decrease substantially starting Q1 2018. And reason for that is, $4.8 million of accretion include a one-time nature of reclassification of SOPs, loans, about $3 million. So, obviously, we do not expect that we’ll continue in 2018’s first quarter, plus about $1 million per quarter of reduction based on the scheduled amortization amount. So with that, 2018 Q1, we would expect about $9 million of accretion dollar impact.

Okay. Just so I’m clear, the $9 million was that delta year-on-year that you’d expect?

Yes.

…the chain on the reduction? Okay, great. And maybe last one, given – Kevin, given the comments of – about the competitive deposit environment. Can you – you’re obviously reflecting what’s happened with lower taxes and higher retained earnings? Can you remind us if acquisitions are something that, number one, you were able to be considering in 2018, or if that’s not on the table given what happened last year? Thanks.

Well, Chris, we continue to monitor the opportunities as they become available in the marketplace, and we would be interested in anything that would be a good fit with our growth strategies. And particularly, we would be interested in those targets, which would enhance our loan portfolio diversification, or enhance our deposit base. So, obviously, M&A can be a means to add liquidity in the form of a deposit-rich institution. And hopefully, we will be able to find a good viable target sometime in the future.

Okay. In terms of like where M&A ranks in the priorities, do dividends, or perhaps even a buyback makes sense, or is it organic growth first and then everything else is kind of secondary?

Well, everything is on the table actually. We always constantly look at the way to maximize our shareholder value. And given the additional equity or capital that we may have from the reduction of tax expenses, we are currently looking into the way to maximize our most positively impacted shareholder value. And at this point, I think, the majority of the benefits will accrue to the company and the shareholders with a relatively small portion being passed along to customers and employees.

Okay. Thank you very much for taking the question.

Thank you.

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

Hi, good morning.

Good morning, Matt.

Just on the mortgage gain on sale this quarter, it look like a better gain on sale margin. I’m curious what your thoughts are in terms of volume or the amount of production you expect to sell maybe in 2018, and within that, it might come at a better margin?

Yes, we would like to sell more, because we have hired more mortgage officers and it was reflected in our – actually Q4 production. And we are actually strategizing our portfolio to keep or to sell to maximize our fee and also increase our interest income as well. So we would expect to continue to sell all those – most of the loans except some loan duration portfolio that we will keep on a minimum basis. So I think, the actual – the gain on the sale, I think, it will be also around like a 2% premium ranges going forward in terms of the mortgage loan sale.

Matthew, this is Kevin, and let me add a few comments. And we are expecting a very strong year of growth relative to our mortgage business unit. As such, we will have a higher gain on sale of mortgage loans, as well as we will have a higher balance of mortgage loans on our balance sheet.

Great. And then on the core deposit front, the comment about adding some additional resources there, can you just talk about what maybe some of your plans are, I assume, that’s hiring-related? And also, where you see your kind of the biggest opportunities within your customer base to generate low-cost core deposits?

Well, we are actively evaluating a number of strategies that we intend to implement later this year. But for competitive reasons, we would not want to provide specifics as yet.

Understood. Thanks.

[Operator Instructions] The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

Thanks. Good morning. My question has largely been answered. But I guess, Kevin, for you just a broad question on sort of risk management and maybe geopolitical risk. How do you think about given tensions on the Korean Peninsula, et cetera, and to the degree that you’re working towards doing larger business with larger companies that are related to – that are subs of South of our Korean companies. What – how do you think about that and how is it working to how you kind of view the risk side of the business?

Well, the geopolitical uncertainties surrounding Korean Peninsula is an issue for us. And the most notable result from that geographic – geopolitical concerns is to delay of our plan to open up a branch in South Korea. Currently, we see the timeline for our Seoul branch opening will be delayed to late 2018 at the oldest. And we want to make sure that the Korean Peninsula will be stable politically and otherwise before we have a physical operating unit there. In terms of the domestic business in the U.S., it may have some impact. But I don’t think it has as material impact as we would expect for a branch operating in Korea. Hopefully, the Trump administration and Kim Jong Un region in North Korea will be wise enough to deal with the situation in a peaceful and constructive manner, and I think that will be best case scenario for us. But even if something happens, I do not think, it will be as damaging as some of the financial institutions based and headquarteredin Korea. Our main business is in the U.S., not main business, but entire business is actually in the U.S., although some of our customers have bases and connections with Korea.

Okay. I appreciate the thoughts on that, Kevin.

[Operator Instructions] I’m seeing no further questions in the queue. This concludes our question-answer-session. I would like to turn the conference back over to management for any closing remarks.

Thank you, Phil. Once again, thank you all for joining us today, and we look forward to speaking with you again next quarter.

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