Good day and welcome to the Hope Bancorp 2022 Third Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded today. I would now like to turn the conference over to Angie Yang, Director of Investor Relations. Please go ahead.

Thank you, Joe. Good morning, everyone and thank you for joining us for the Hope Bancorp 2022 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, 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 the – from your computer screen as we progress through the presentation. Beginning on Slide 2, 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 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 maybe 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 September 30, 2022 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 2022 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 Ko, Senior Executive Vice President and Chief Financial Officer. Peter Koh, Senior Executive Vice President and Chief Operating Officer, 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?

Thank you, Angie. Good morning, everyone, and thank you for joining us today. Let’s begin on Slide 3 with a brief overview of our financial results. We delivered a strong performance in the third quarter, which reflects the improved earnings power of our franchise and ability to perform well in a variety of economic environments. Despite the macroeconomic headwinds of inflationary pressures, and concerns about a potential recession, we generated an increase in earnings per share and pre-provision net revenue compared with the prior quarter, with all of our PPNR profitability metrics improving as well. We reported net income of $53.7 million or $0.45 per share in the third quarter, up from $0.43 in the preceding second quarter while our pre-provision net revenue increased 12% to $82.6 million, a record level for the company. Most importantly, due to strong loan production, margin expansion, enhanced efficiencies and meaningfully improved asset quality, we are generating profitable growth with our pre-provision net revenue return on average assets increasing to 1.79% from 1.65% in the preceding quarter, while our pre-provision net revenue return on average equity increased to 16.26% from 14.66% in the prior quarter. Moving on to Slide 4. In the third quarter, we funded $1.35 billion in new loans, which was 5% higher than the preceding quarter, a 34% increase over the third quarter of 2021 and another record level for the company. Our strong loan production in the third quarter resulted in 6.5% loan growth quarter-over-quarter or 11% year-to-date. As expected, given the investments we have made to build our corporate banking group, commercial lending was the largest contributor to our overall loan production, accounting for 55% of our total loan funding in the third quarter. We disbursed a record $747 million in new commercial loans during the third quarter and…

Thank you, Kevin. Beginning with Slide 6, I will start with our net interest income, which totaled $153.2 million for the third quarter of 2022, an increase of 8.2% from the preceding second quarter. The strong growth in net interest income was largely driven by a 4% quarter-over-quarter increase and average loans receivable, a 59 basis point increase in the average loan yield and expansion of our net interest margin. Our net interest margin increased 13 basis points quarter-over-quarter to 3.49%. The expansion in our net interest margin was driven by a favorable shift in our mix of earning assets as well as higher loan yields resulting from the repricing of variable rate loans and higher pricing on new loan production. Overall, the yield on interest-earning assets increased by 56 basis points quarter-over-quarter. These benefits were partially offset by an increase in deposit costs, resulting from higher rates paid on interest-bearing deposits. With the lag in deposit cost catching up to the increase in yield on interest-earning assets, we may see flat to slight margin compression in the fourth quarter potentially offsetting to a small degree to the year-to-date margin expansion. Moving on to Slide 7, we remain in an asset-sensitive position as of September 30, 2022 and are positioned to benefit from higher interest rates. Of our new loan production in the third quarter, 57% represented variable rate loans and as of September 30, 2022, variable rate loans increased to 46% of our total loan portfolio. Now moving on to Slide 8. Our non-interest income was $13.4 million for the third quarter, an increase of 5% over the preceding second quarter. We had a lower gains on sale of SBA loans, reflecting a lower volume of loans sold and the lower net premiums on SBA loan sales. We also…

Thank you, Alex. Now moving on to Slide 13. I will wrap up with a few comments about our outlook. While the operating environment has certainly become more challenging, we expect to continue benefiting from the significant shift we have made to a more relationship-focused commercial banking model over the past few years. With the growth we had in the third quarter, commercial loans now represent one-third of our total loan portfolio, which reflects the success we have had in building our corporate banking group. This has had a positive impact on our loan production volumes, our deposit gathering and the diversification of our franchise. With each passing year, our CBG Group has made a larger contribution to our growth and diversification strategies, accelerating our progression to a lower-risk, high-performing regional bank. With the success we have had with the CBG initiative, we have also steadily built Bank of Hope’s reputation as an attractive destination for experienced commercial bankers, which in turn has enhanced our ability to recruit banking talent to continue our expansion and target new industries and geographic markets. More recently, we have added teams in Florida, Chicago, Boston and San Francisco with the Boston team focused on private banking and the San Francisco team focused on the tech industry. We expect to continue to see growth in commercial loans and deposits, further diversification and stronger asset quality over the longer-term, given our reduced CRE concentration and the stronger, more liquid commercial enterprises that now comprise a larger percentage of our client base in due – in part due to the stronger commercial banking capabilities that we have built, we have been able to effectively manage through the macroeconomic headwinds that have accelerated throughout the year. Through the first 9 months of 2022, we generated a loan growth…

[Operator Instructions] And our first question here will come from Clark Wright with D.A. Davidson. Please go ahead.

Hi. Sorry. This is Gary Tenner actually from D.A. Davidson. A quick question in terms of what the September 30, deposit spot rates were interest-bearing or total?

Sure, Gary. Deposit spot rate as of 9/30, total interest-bearing deposit spot rate was 1.84%. And if you want to have a total deposit spot rate was 1.21%.

Thank you. And so the commentary in terms of the NIM compression for the fourth quarter, as you think about kind of ongoing deposit growth and costs going higher, does that NIM compression potentially accelerate in the first half of 2023 or maybe just characterize how you see the margin first half of next year.

Yes, Gary, that’s a good question. Actually, we are trying to evaluate that hard. But given there is a lot of uncertainties and the variables, we are not actually giving a guidance for NIM for 2023. We kind of limited given our guidance for Q4 with a flat or small compression as the lag in deposit pricing for our CD, it will catch up. So, I don’t think it will continue, but there is a lot of variables for 2023.

Great. Thank you. And then just last question, if I could. Just in terms of capital, total risk-based capital under 12%. It was up over 13%, probably a year ago. Any thoughts on doing anything to augment the total risk-based capital number in terms of sub debt or otherwise?

Yes, sure. We believe this capital ratio as of today is a strong. And obviously, we will assess the need for any augmentation of the capital as we move forward, especially, there is a convertible bond that is scheduled, can be potentially to be put, but we are well aware of that. But given our strong core earnings power, we maintained our dividend at $0.14 per share. Even though we started repurchasing our shares, but again, we believe our capital ratios in all measures remains strong. But again, we need to assess on a regular basis for any augmentation of the capital going forward.

Thank you.

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

Good morning everyone. Just following up on the interest-bearing deposit costs and I think your interest-bearing deposit beta this quarter is 50%, 40% so far for the cycle? What are you guys assuming for your deposit beta through the cycle on either interest-bearing or total basis?

Yes. Matthew, it’s really difficult to have a 2023 deposit beta. Again, given volatilities and in the interest rate hike that we recently saw. So, we will try to give data guidance for next 2023 in the next quarter when we have a conference call.

Okay. And then just – go ahead.

No, go ahead.

Okay. Understood. And then just shifting to your outlook on the loan-to-deposit ratio crept up a little bit to 100%. It does sound like loan growth is going to slow pretty dramatically here. But what are your plans for managing the loan-to-deposit ratio going forward and what’s your limitation?

Yes. Matthew, let me start with kind of some sort of assessment of our increased net loan-to-deposit ratio to 3, and we will give you some sort of guidance as well. As we mentioned during the earlier remarks, there was one kind of isolated large outflow. it was in excess of around $600 million of deposit. So, without that – if we didn’t have that outflow because we believe that is isolated, and we expect – we still maintain a good relationship with that particular large depositor, and we expect that will come back even though it was run out due to their investment opportunity that they had in Q3. So, if we didn’t have that outflow, our loan-to-deposit ratio would have been in the neighborhood of 96%. So, the bank, we have been managing our loan-to-deposit ratio, 96%, 95% level throughout the quarter. So, that is still our target loan-to-deposit ratio going forward, even though later on, we might even further lower, but it will take a longer time perspective. So, I think higher loan-to-deposit ratio for Q3 was relatively temporary basis.

Okay. And then on expense growth, I think we can easily back into your guidance for the upcoming quarter. It looks like there was an uptick in earnings credits within other expense, which would probably continue here in 4Q. But I guess how are you thinking about inflationary pressures as we get into next year and whether or not the rate of increase in terms of comp is higher than years past or not?

Matthew, let me respond to that. First of all, on the loan demand side, obviously, the fourth quarter is seasonally soft quarter. But in addition to that, the significant pace of rate increases and also uncertainties about the timing and depth of the recession, we believe that a lot of investors will be more reluctant to move forward with their planned investments. So, that goes to the result of softer loan demand. And in addition to that, higher interest rates make it more challenging for them to meet our stringent underwriting criteria. So, the loan growth in the third quarter was pretty robust. And our fourth quarter loan production will be at a lower volume relative to the fourth quarter. In terms of non-interest expense side, as you mentioned, the ECR expense will be higher in the fourth quarter than in the third quarter. And I think that is pretty predictable. So, our non-interest expense in the fourth quarter will be higher than the non-interest expense of the third quarter, and we expect a little uptick in the total non-interest expense in the fourth quarter. If I add one more thing, Matthew, in terms of loan demand side in connection with that, our loan growth for the year will be at the higher end of the high single to low-double digit range as we previously guided. But there is a good chance for us to even to exceed that range on an ex PPP basis for full year 2022.

Okay. Thanks again.

[Operator Instructions] This will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. End of Q&A:

Once again, thank you all for joining us today. We hope everyone stays safe and healthy, and we look forward to speaking with you again next quarter. Thank you everyone.