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Edited Transcript of HOPE earnings conference call or presentation 17-Jul-19 4:30pm GMT

Q2 2019 Hope Bancorp Inc Earnings Call

LOS ANGELES Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Hope Bancorp Inc earnings conference call or presentation Wednesday, July 17, 2019 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alex Ko

Hope Bancorp, Inc. - Executive VP & CFO

* Angie Yang

Hope Bancorp, Inc. - Senior VP and Director of IR & Corporate Communications

* Kevin Sung Kim

Hope Bancorp, Inc. - Chairman, President & CEO

* Peter Koh

Hope Bancorp, Inc. - Executive VP & Chief Credit Officer - Bank of Hope

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Conference Call Participants

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* Christopher Edward McGratty

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* David John Chiaverini

Wedbush Securities Inc., Research Division - Senior Analyst

* Donald Allen Worthington

Raymond James & Associates, Inc., Research Division - Research Analyst

* Gary Peter Tenner

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Matthew Timothy Clark

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

* Timothy O'Brien

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Timothy Norton Coffey

Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts

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Presentation

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Operator [1]

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Good day and welcome to the Hope Bancorp Second Quarter 2019 Earnings Conference Call and webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Ms. Angie Yang, Director of Investor Relations. Please proceed.

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Angie Yang, Hope Bancorp, Inc. - Senior VP and Director of IR & Corporate Communications [2]

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Thank you, Ian. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2019 Second Quarter Investor Conference Call. As usual, we will begin with -- 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.

Moving to Slide 2. I'd like to begin with the 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 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, 2019, 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 2019 second quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures. Now we have allotted 1 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 today and will participate in the Q&A session.

With that, let me turn the call over to Kevin Kim. Kevin?

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Kevin Sung Kim, Hope Bancorp, Inc. - Chairman, President & CEO [3]

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Thank you, Angie. Good morning, everyone, and thank you for joining us today. Let's begin with Slide 3. In the second quarter, we noted positive trends in a number of key financial metrics. We recognized a higher level of loan production while continuing to focus on originating credits with more attractive risk-adjusted yields.

We continue to do a better job in managing our deposit costs, and we have substantial improvement in asset quality, which further supports that the one-off credit issues that we experienced in the first quarter were not reflective of the overall health of our portfolio. From a net income perspective, we generated $42.7 million in net income during the second quarter or $0.34 per diluted share, which was comparable with the $42.8 million or $0.34 per diluted share in the preceding first quarter.

Moving on to Slide 4. We also recognized increases in loan production across all of our major lending areas in the second quarter, with a particularly nice pick-up in C&I originations, which is consistent with our balance sheet diversification strategy. We booked $597 million in new loan commitments and funded $504 million during the second quarter. This is up from $462 million in new loan commitments and $442 million in loans funded during the first quarter.

However, payoffs and paydowns were significantly higher this quarter at $599 million compared with $364 million in the first quarter. This higher level of payoffs was largely driven by aggressive pricing among mainstream banks. This aggressive pricing picked up midway through the quarter as the probability for lower interest rates increased. We took advantage of this market dynamic to exit some of our lower-rated credits from the bank, which Alex will discuss later in the call.

We also continue to sell loans out of our retained mortgage portfolio this quarter as we look to reposition our portfolio towards higher-yielding assets. In the second quarter, we sold $50 million of loans from our retained mortgage portfolio. With the impact of higher level of payoffs and the sale of the residential mortgage loans, our total loan portfolio declined by approximately 1% from the end of the prior quarter.

Looking at the breakdown of our loan production by major category. Commercial real estate loans comprised 50% of total production this quarter. Commercial loans accounted for 35% and consumer loans comprised primarily of residential mortgage loans accounted for 15%. We originated $253 million in CRE loans for the quarter, up modestly from $236 million in the preceding first quarter. The aggressive pricing among mainstream banks that resulted in higher payoffs also impacted our CRE loan originations, as we declined a number of deals that did not meet our pricing criteria. And the overall market for new CRE transactions continues to be sluggish, which is impacting the number of available lending opportunities for us.

Looking at our C&I originations. We had $176 million in new production in the second quarter, up from $135 million in the prior quarter. We have a nicely diversified portfolio of commercial customers and we are pleased with the consistent progress we are making in our C&I lending business. Over the past year, we have had success in 2 particular areas: subsidiaries of Korean companies operating in the U.S.; and supermarkets in the Northeastern United States. The reputation and expertise we have built up within these areas is producing a consistent stream of new business development opportunities that has contributed to driving the higher C&I loan production that we are seeing. As a percentage of new loans, C&I continues to represent a larger component within our overall mix of loan production. In the second quarter, C&I loans accounted for 35% of our total loan production, up from 31% in the first quarter and 23% in the fourth quarter of 2018.

Turning to our SBA business. Our total production was impacted by a number of loans that have slipped into the third quarter. We originated $37 million in SBA loans compared with $48 million in the preceding first quarter. The average rate on new SBA originations continues to be approximately 7%. And since we are retaining this production, we are seeing the positive impact on our average loan yields. Given the loans that slipped out of the second quarter, we have a strong pipeline that should lead to higher SBA loan production in the third quarter.

In terms of residential mortgage originations, we benefited from the seasonally stronger trends in the second quarter, which pushed up our originations to $74 million compared with $64 million in the preceding quarter.

With the lower interest rate environment for residential mortgage loans, we have also seen an increase in refinance transactions and expect solid mortgage origination volumes in the third quarter. We continue to see the positive impact on average loan yields from our shift in loan production strategy. The average rate on our new loan originations was 5.46% in the second quarter, down 6 basis points from the preceding first quarter, but still up considerably from our average rate on originations of last year.

This is the first period since the third quarter of 2017 that the average rate on new loans has decreased quarter-over-quarter. This decrease in rates was primarily due to the rapidly changing rate environment, with LIBOR rates moving down throughout the quarter and the 5-year swap rate down by more than 50 basis points during the course of the second quarter. We believe these events led to the very aggressive pricing environment that we have been experiencing since the middle of the second quarter.

With that, as an overview of our business development efforts, I will ask Alex to provide additional details on our financial performance for the second quarter. Alex?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [4]

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Thank you, Kevin. As I review our financial result, I will limit my discussion to just some of the more significant items in the quarter.

Beginning with Slide 5. I will start with our net interest income, which totaled $117.2 million compared with $119.6 million in the preceding first quarter. The reduction was primarily due to a slight decrease in our average loan balances, coupled with lower net interest margin.

Our net interest margin declined by 8 basis point to 3.31%. On a core basis, excluding purchase accounting adjustment, our net interest margin declined by 6 basis points, which was an improvement from the 7 basis point decline in the first quarter of 2019. The decline was primarily due to a 5 basis point increase in our cost of deposits. While we are still seeing a modest increase in deposit costs, we saw a significant moderation in the rate of increase this quarter. The 5 basis point increase was down from a 17 basis point increase in the prior quarter and reflects the progress we are making with the various initiatives we are employing to enhance our core deposit gathering and better manage our deposit cost.

We also continue to see positive trends in the repricing gap on time-deposit renewals or the delta between the CD's expiring rate and the renewal rate. During the second quarter, the repricing gap was 18 basis point, down significantly from the 50 basis point repricing gap in the preceding first quarter. The moderation of the repricing gap should lead to further improvement in our ability to manage our deposit cost going forward. Our average loan yield, excluding purchase accounting adjustment, was relatively flat quarter-over-quarter.

Now with regard to our net interest margin projection for the year, in the past couple of months, the prevailing sentiment has now turned towards the expectation of interest rate cuts in 2019. If interest rates decline in 2019, this will have an adverse impact on our net interest margins. Based on our projections, a 25 basis point decline in interest rate would initially result in a decline in our net interest margin of approximately 5 to 8 basis point as loans reprice to lower rates. Some of this decline obviously would be offset as deposits also price lower in the following months.

Now moving on to Slide 6. Our noninterest income was $12.3 million, up from $11.4 million in the preceding first quarter. The primary variance from the preceding quarter was attributable to higher net gains on loan sales. During the quarter, we sold $76 million of residential mortgage loans to the secondary market, approximately 65% of which represented sales from our seasoned mortgage portfolio.

We recorded $1.1 million in net gains this quarter versus $741,000 in the preceding quarter. Also during the quarter, we repositioned a portion of our investment securities and recognized a gain of $129,000. This compares with no sales of investment security in the comparable quarters. All of our other major sources of noninterest income were relatively consistent with the preceding quarter.

Moving on to noninterest expenses on Slide 7. Our noninterest expense was $71.4 million in the second quarter, which is up by a little more than $0.5 million from the prior quarter but still within our projected range of expenses. We have done a good job in controlling our salary and benefit expenses, which was down by approximately 3% from the prior quarter.

Our full-time equivalent employee count decreased by 21, quarter-over-quarter, to 1,446 as of June 30, 2019 and was down by 45 year-over-year. But this decrease was offset by increases in a number of other expense items. Most notably, our professional fees increased by approximately $600,000, which reflect higher expenses related to our CECL implementation effort and ongoing investment that, we believe, enhanced the operations of our bank. We also had a $900,000 increase in credit-related expenses this quarter, which tends to be a volatile line item quarter-to-quarter. The higher expense level combined with the lower level of average interest-earning assets raised our annualized noninterest expense to average assets to 1.88%, up 3 basis point from the prior quarter.

Looking ahead to the third quarter. We will start to see the positive impact of our recent branch rationalization plan, which was completed at the end of the second quarter. We consolidated 6 branches and we will see the benefit of a full quarter of cost savings beginning in the third quarter. This will help offset higher expenses in other areas.

Now moving on to Slide 8. Our total deposits declined by approximately 1% from the end of the prior quarter, although we saw a very favorable shift in our mix of deposits. We have nice increases in all of our lower-cost deposit categories, which reflects our increased focuses on core deposit gathering and the initial result of our more aggressive sales effort for our treasury management services.

Our noninterest-bearing demand deposits increased 2% from the end of the prior quarter, while money-market deposits were up approximately 5%. As part of our deposit strategy, we have become more competitive on our money-market rates, which has made them an attractive alternative to certificate of deposits for our customers. As a result, the time -- as time deposits are maturing, we have been able to successfully convert some deposit customers into money-market accounts, which has been a factor in contributing to our improved deposit cost management. Given our success in other deposit-gathering areas, we were also able to be more strategic in our CD pricing. This led to a decrease in our time-deposit balances during the second quarter and the overall improvement in our deposit mix.

Now moving on to Slide 9. I will review our asset quality. As you may recall, we had noticeable increases in nonaccrual loans and criticized loans last quarter that were driven by a handful of unique credit relationships that presented minimal potential loss exposures. We were confident that the underlying health of the broader portfolio was solid and the credit trends that we experienced in the second quarter provided strong support for that perspective. We have across-the-board improvement in all of our asset-quality categories, with significant declines in nonperforming assets, criticized and classified loans and past due loans. The primary driver of the decline in problem loans was payoffs and paydowns, much of which resulted from our workout efforts that encouraged those borrowers to seek refinancing from other banks.

Specific to the handful of problem credits that we discussed on our last conference call, we were paid off on 2 loans related to 1 large relationship that was placed on nonaccrual in the first quarter. These payoffs totaled approximately $50 million. We also received a payoff on the $16 million CRE loan for mixed-use condominium that was downgraded through a criticized loan in the first quarter. There was no additional deterioration in any of the other loans that we discussed on our last quarter call.

The combination of payoffs and modest inflow into our problem asset categories resulted in the strong improvement we saw in the credit metrics in the second quarter, with nonaccruals down by 25% and the criticized loan balance down by 9%.

We also had another quarter of very low credit losses. We had $1.4 million in net charge-offs, which represented just 5 basis points of average loans on an annualized basis. On a year-to-date basis, our net charge-offs are just 3 basis points of average loans. Our provision for loan losses of $1.2 million increased our allowance to total loan ratio to 79 basis points from 78 basis points.

With that, let me turn the call back to Kevin.

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Kevin Sung Kim, Hope Bancorp, Inc. - Chairman, President & CEO [5]

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Thank you, Alex. Let's move on to Slide 10. While we have experienced a flatness in our balance sheet during the first half of the year, we remain positive with respect to the initiatives that we have in motion. To provide a brief recap, we have embarked on a balance sheet diversification strategy and we expect to continue to see a favorable shift in the mix of new loan production. We are very focused on continuing to gain more traction with our deposit-gathering initiatives, improving our deposit mix and enhancing our ability to control our deposit costs. We also expect to see our good credit quality to continue, and we will continue to improve our expense management.

Now in terms of our outlook in a rapidly evolving and more challenging business environment for banks, we expect many of the positive trends we have experienced in the half of the year will continue as we progress through the year.

Given the strong pipeline we have in SBA and the consistent production we are getting in commercial lending, we expect to see stronger loan origination volumes in the back half of the year. However, due to the highly competitive environment that is driving elevated payoffs, we are facing stronger headwinds than we initially expected at the beginning of the year. As a result, we now expect loan growth for the full year to be more in the 2% to 3% range.

Now as we announced yesterday, our Board of Directors authorized the repurchase of up to $50 million of our company's common stock. We believe having the plan in place gives us greater flexibility to create additional value for our shareholders, especially in times of market disruption. It also enhances our ability to maintain a balanced capital-allocation strategy while providing a steady return of capital to our shareholders through our quarterly dividend. Altogether with our quarterly cash dividend that has a payout ratio in excess of 40%, our management and Board are committed to delivering solid financial performance and enhancing shareholder returns.

With that, let's open up the call to answer any questions you may have. Operator, please open up the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Gary Tenner of D.A. Davidson.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [2]

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I wanted to ask, I guess, first off, on the deposit side, you talked about some of the initiatives this quarter and kind of the repricing gap narrowing in the second quarter and I think also maybe expecting it for the third quarter. But wonder if you could actually talk about where you do expect it in the third quarter based on what you know today? And then, the follow-up to that is, with the margin impacted 5 to 8 basis points based on a 25 basis point cut, I wasn't clear if that was inclusive or not of the expected ability to work down deposit costs?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [3]

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Okay, Gary, this is Alex. Deposit initiatives, as I indicated, we are making progresses especially for treasury management services and also our deposit cost management strategy by shifting the mixture of the deposit component, especially for lower cost deposits, DDA is increasing while we have a cannibalization between the CD and the money market. We saw reduction on the CD while those core deposit, money market and DDA, was increasing. So we are making the progresses in terms of our initiatives, and we'd like to continue to see those progresses.

Related to repricing gap, as we said, the CD especially maturing versus the new offering rate, the gap has substantially narrowed, especially for this quarter. And as you'll recall, last year or so, there was a rapid and a big gap between those CD maturing and the new offering rate. But I think that has come down substantially. And I would expect to see the narrowing gap continue as our CD pricing will be stabilized. And if the aftermarket rate goes down, we might be able to lower little bit so that the repricing gap again, I would expect to continue to decrease.

Related to the margin, we did say, if the case of a 25 basis point reduction, we would expect about 5 to 8 basis point further compression on the margin because we see the pricing on the loan side will be kind of a pressure, while the deposit pricing can be -- we can proactively manage, but we would expect to have a further compression from the rate decreases.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [4]

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Okay. Just one quick follow-up on the expense side. You mentioned the branch consolidation that would benefit the third quarter. I wasn't clear from your comments. It sounded like that would, sort of, largely be offset by growth in other areas? Or do you expect an actual absolute decline in operating expenses in the third quarter?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [5]

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Sure. I would actually expect the run rate for the noninterest expense for the third quarter of 2019 to be approximately the same as we saw in Q2. This is around like $71.5 million. I think we would expect slightly increase on the salary and benefits in Q3. However, as we indicated, the branch consolidation will complete in the second quarter, and we will have a full benefit of those cost savings starting Q3. So those will decrease our overhead cost about $390,000 on a quarterly basis. And for other expenses, no, I don't expect after Q4 of this year any substantial professional fee increase. But for the rest of the year, we are working very hard on the CECL and the CECL fee, we would expect to continue to be same level, elevated level for the third quarter and the fourth quarter. But again, after the year-end, once the CECL is completed, we would expect to have those professional fee remain flat or decrease. So with that, we did have a little bit increase on the noninterest expense to average asset ratio in Q2. But I think going forward, the rate, we still expect to -- between 1.5% to 1.88% going forward.

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Operator [6]

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Our next question comes from Chris McGratty of KBW.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [7]

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Alex, if we could just go into the margin a little bit. So working off -- because I want to make sure I understand the guide, working off the second quarter of 3.31%, I think the forward curve assumes a couple cuts this year. So that would kind of put the margin exiting the year in the 3.15% to 3.20% range, roughly. I'm interested if that scenario plays out and your deposit costs eventually catch up to your assets, how we should think about margins entering 2020? I know it's -- a lot of assumptions need to be made. But is there -- in a static rate environment, do you get NIM -- is NIM stability kind of the goal, given what you're doing with the balance sheet? Or do you think there'll be pressure or expansion, one way or the other?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [8]

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Yes. Chris, that's a really tough question to answer at this moment because so much -- so many variables. As you mentioned, the rate curve in very -- all those kind of things, it does impact significantly on our projection, on the net interest margin. So that's why we were not comfortable giving a immediate impact of 25 basis point reduction, how is that impact in our 2019 net interest margin, resort to like a 5 to 8 basis point reduction. But moving on to 2020 forecast, it's again kind of a tough, given the number of variables. But I think we are making a success on the deposit cost control and also core margin. We did say about 1 basis point improvement in terms of contraction. In Q1, we had a 7 basis point reduction but in Q2, we have only 6 basis points. So we are still -- our priority is to deposit cost control. So with the help from the deposit cost control, we would like to see in 2020, there will be a better margin. But I think it's important for me to mention that our previously expectation for the second half of the margin kind of turnaround to improve, I think there might be some changes necessary given all the macroeconomic and the interest-rate environment, we would expect to extend that margin compression period a few more quarters. So we'll definitely see, in the 2020 I'm hoping better margin but I would like to continue to see in 2019 for margin to be further compressed.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [9]

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Okay. If I could add another one on the margin. The accretion outlook, it's been ticking down slowly in the last couple of quarters. So how should we be thinking about accretion contribution for next several quarters? And obviously, when CECL hits? Any kind of thoughts on impact there?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [10]

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Yes. We have about $23 million of credit-related, undiscounted accretion. If CECL is affected 1/1/2020 those $23 million will be added on to allowance for loan losses and we will have a slight reduction on the accretion of those discounts, which will have a impact to net interest margin. But I don't think that's a big impact to our margin.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [11]

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Okay. And then maybe I'll -- one for Kevin and I'll hop out. The -- Kevin, the buyback announcement -- obviously, the balance sheet was flat to down a little in the quarter and it sounds like the growth -- whatever growth you're going to have in the balance sheet is going to be -- clearly be able to be supported by your capital levels. So should we think of this buyback as being a flexibility? Or is it something where -- given where your stock is, analysts and investors should assume that this is going to be executed in kind of the next couple quarters?

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Kevin Sung Kim, Hope Bancorp, Inc. - Chairman, President & CEO [12]

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Well, we are in a very rapidly evolving market for financial institutions, and we will be actively monitoring market indicators. And we'll do the repurchase when all the factors taken into consideration indicate that a repurchase at a given time is in the best interest of the company and our shareholders. So there are so many moving parts and uncertainties but we will be quick when the right time comes. So it's hard to answer whether the execution will take place within the next few months or within the next few quarters, we will closely monitor the market situation.

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Operator [13]

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Our next question comes from Matthew Clark of Piper Jaffray.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [14]

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On -- just on the expense-to-average-asset ratio, just want to make sure I heard you correctly, 1.85% to 1.88% is the expectation in the upcoming quarter? And wanted to get your thoughts as it relates to outlook, looking beyond the third quarter, whether or not we could get back down to that 1.80% to 1.85% range again?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [15]

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Yes. I think that's our expectation. The reason why we have a little bit higher for this quarter was in combination of $0.5 million or so increase on the expenses but also denominator, our average earning asset slightly decreased. However, we are projecting our average balance will continue to go up and also, the cost management is one of our priority. Especially when the CECL is completed, I'm not aware of any big ticket items that would require substantial investment under professional fee or other expense items. So I would expect normalized after 1 or 2 quarters and also including Q3, our run rate will be between 1.85% to 1.88%.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [16]

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Okay. And then just on SBA, any change in appetite there based on the premiums you're seeing? Or are you going to continue to just retain the foreseeable future?

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Kevin Sung Kim, Hope Bancorp, Inc. - Chairman, President & CEO [17]

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Well, as you may see, the premiums have increased in recent months and the economics of selling the loans is now back to the level where it is a more attractive option. But we will consider it in the overall scheme of our 2019 priorities that favor higher-yielding loans in our portfolio and that we have not yet made any change in our strategy to retain SBA loans in our portfolio.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [18]

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Okay. And then just on the gain on sale this quarter, the margins look better. Anything unusual there? Or do you think that, that's a good gain on sale margin to use going forward?

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Kevin Sung Kim, Hope Bancorp, Inc. - Chairman, President & CEO [19]

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Well, we have -- the gain on sale of our mortgage loans, if you look at that, we have the sale of loans in second quarter, that includes a bulk sale from our existing portfolio. And whether we will continue to sell our loans from the retained mortgage portfolio, I think that the keyword is opportunistic in our decision-making process for selling our retained mortgage loans. So if you want to have a run rate for gain on sale of mortgage loans, I would probably focus on the new loan originations volume. And we have produced about $74 million in second quarter and we expect a comparable production level in Q3. So I think you should expect a lower number than the second quarter because the second quarter number included the bulk sale, and we do not know at this time whether we will have the bulk sale in the third quarter.

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Operator [20]

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Our next question comes from Timothy Coffey of Janney.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [21]

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Kevin, the competition from the mainstream banks that you mentioned during your prepared remarks, is that a function of banks coming down-market?

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Kevin Sung Kim, Hope Bancorp, Inc. - Chairman, President & CEO [22]

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Yes. We have a tremendous competition from the national banks and money center banks, even money center banks for our customer base. And I think we have a lot more competition from the larger banks than the peer space banks in terms of our lending opportunities. In terms of our deposit efforts, I think we have severe competition from the space peers. But in terms of lending, during the several quarters, previous quarters, we see a lot more competition from the mainstream banks than the space peers.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [23]

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Okay. And the competition from the mainstream banks, does it feel any different than it did a couple years ago when rates were declining? Or is it about the same?

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Kevin Sung Kim, Hope Bancorp, Inc. - Chairman, President & CEO [24]

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Well, I think they are more aggressive in terms of pricing these days than they used to be.

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Operator [25]

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(Operator Instructions) Our next question comes from Timothy O'Brien of Sandler O'Neill + Partners.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [26]

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Just one question. I have little follow-up on the credit situation, you guys had good progress this quarter. Could you give a little color on -- if the remaining workouts related to the loans that you guys talked about in the first quarter is on track to exit or resolve fairly quickly? Or what your thoughts are there for credit outlook here in the second -- heading into the second half of this year?

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Peter Koh, Hope Bancorp, Inc. - Executive VP & Chief Credit Officer - Bank of Hope [27]

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Sure. This is Peter. So the first quarter credits that we described that popped up, I think we really didn't see any further deterioration in any of those credits that remained. I think from the overall portfolio, look, I think we have been very proactive in identifying potential problem credits. I think as we move forward into the third quarter, there will be some just natural lumpiness in terms of quarter-to-quarter results, but I think we do anticipate credit quality to continue to improve.

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Operator [28]

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Our next question comes from David Chiaverini of Wedbush Securities.

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David John Chiaverini, Wedbush Securities Inc., Research Division - Senior Analyst [29]

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Question on loan growth. So you mentioned about how you're expecting stronger originations going forward but yet you did lower loan guidance. Now is the -- is that a function of expecting continued elevated payoffs? Or is that more of a function that the second quarter was weak, so we'll be kind of making up for the weakness in the second quarter?

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Kevin Sung Kim, Hope Bancorp, Inc. - Chairman, President & CEO [30]

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Well, first of all, I want to say that I'm not that much concerned about the flat balance of our portfolio during the first half of the year because we don't think it is not a result of lack of new loan originations but it is more attributable to unusually high payoffs during the second quarter. As we commented, we were able to take advantage of the aggressive lending of some other banks to move a significant amount of lower-rated credits off our books during the quarter. And those relationships amounted to approximately $75 million and we don't have as many loans now that we are looking to proactively exit. So that eliminates one of the factors contributing to the higher level of payoffs during the second quarter. Although, we expect payoff levels to remain high, I don't think it's likely that they will remain at the level that we saw in the second quarter. And at the same time, we have a stronger pipeline in SBA. We are gaining traction from our C&I efforts. So I think our second half loan originations will be stronger than the first half of the year. So that is why I'm not that much concerned about the flat balance of the loan portfolio during the first half of the year.

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David John Chiaverini, Wedbush Securities Inc., Research Division - Senior Analyst [31]

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And then a housekeeping related to that. The 2% to 3% loan growth guidance, is that period end, like December 31, 2018, to December 31, 2019, or is that average?

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Kevin Sung Kim, Hope Bancorp, Inc. - Chairman, President & CEO [32]

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Yes. Yes, that is correct. That is correct.

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Operator [33]

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(Operator Instructions) The next question comes from Don Worthington of Raymond James.

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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [34]

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Maybe just to clarify or a little more color in terms of the credit-related costs, this quarter, was that largely related to the problem assets that were cleaned up in the quarter and therefore you'd expect that to drop back down?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [35]

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Yes. That is actually fluctuating quarter-over-quarter. And this quarter, it happened to have a elevated level of a foreclosure -- I'm sorry, the forced insurance and also kind of legal fees related to collection effort. So as we expect to have a credit improve, those credit-related expenses is naturally expected to go down.

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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [36]

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Okay. And then, Alex, you mentioned raising the money market deposit rate. What did that go to? And then, what was it before?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [37]

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Yes. We were -- very strategically had a money-market pricing be competitive because we did expected some cannibalization from the CD to money market but we were sensitive on the controlling the overall deposit cost. So we were competitive in the money market rate. For competition purposes, I will refrain from the disclosing exactly our offering rate, but there was a slight increase on the money-market rate that we offered in Q2 compared to previous quarters.

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Operator [38]

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

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Kevin Sung Kim, Hope Bancorp, Inc. - Chairman, President & CEO [39]

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

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Operator [40]

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