Hope Bancorp Inc (HOPE) 2018 Q3 法說會逐字稿

Good afternoon, and welcome to the Hope Bancorp Third Quarter 2018 Earnings Conference Call.

(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, Laura.

Good morning, everyone, and thank you for joining us for the Hope Bancorp 2018 Third Quarter Investor Conference Call.

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 2. I'd like to 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 business and markets in which a 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 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-K for the quarter ended September 30, 2018, 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 the 2018 third quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures.

Now as usual, we have allotted 1 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.

Let's begin with Slide 3. We had another slow quarter of business development and recorded a reduction in our expenses.

We generated $46.4 million in net income during the third quarter, an increase of 4% over the prior year period.

On an EPS basis, we reported $0.36 per diluted share compared with $0.33 in the year-ago third quarter.

Compared with the preceding second quarter, our earnings per share was unchanged as the deposit environment and a sea of factors impacted our bottom line results.

During the third quarter, we completed the $100 million stock repurchase program that we initiated in May.

Given our strong capital position and our long-term opportunities to continue enhancing the value of our franchise, the Board of Directors authorized a new $50 million share repurchase program in September.

We believe the repurchase of our common stock represents an attractive investment opportunity for the company, and it is an important component of our balanced approach to capital management.

Moving on to Slide 4. Despite a challenging environment, we had another strong quarter of business development.

Although, overall production and fundings was slightly lower than the previous quarter.

We built $890 million in new loan commitments and funded $784 million in loan originations.

Compared with the third quarter of 2017, our new loan commitments increased by approximately 13%.

Our strong production resulted in net loan growth of $256 million in the third quarter of 2018 or 8.8% growth on an annualized basis.

Through the first 9 months of the year, our total loans have increased by approximately 7%, keeping us on track to meet or exceed the higher end of our targeted loan growth.

We are pleased that we have been able to drive solid loan growth despite weaker demands within our commercial real estate markets.

As has been the case for the past few quarters, we are seeing fewer CRE financing opportunities, resulting from the lower overall transaction volume in our market.

Relatively low cap rates, lack of inventory and uncertainty of our future interest rates have combined to make CRE investors more cautious and reduce the number of attractive deals available.

That said, the third quarter has historically been a seasonally stronger period for CRE lending for Bank of Hope.

And despite the challenging CRE market, we had an increase in our origination volumes and funded $402 million in new CRE loans compared with $248 million in the preceding quarter.

Looking at the breakdown of our loan production by major category.

Commercial real estate loans, including our SBA CRE originations, comprised 61% of total production in the quarter.

Commercial loans, including our SBA C&I production, accounted for 18%; and consumer loans, comprised primarily of residential mortgage loans, accounted for 21%.

We had $121 million in new C&I originations in the third quarter, down from the prior quarter, when we booked more loans through our corporate banking and syndicated lending groups in order to put the liquidity from our convertible issuance to work as quickly as possible.

Our C&I loan production in the third quarter was more heavily weighted towards relationship lending to our small and medium-sized commercial customers.

Turning to residential mortgage originations, which makes up the vast majority of our consumer loans, we continued to have solid production from this business although we are seeing the impact of higher mortgage rates and limited housing inventory on overall demand in the seasonally slower third quarter for mortgage originations.

We had $166 million in originations, which, as expected, is down from the seasonally stronger second quarter but 39% higher than the third quarter of 2017.

The strong production drove an 11% increase in our consumer loan portfolio on a linked-quarter basis, and year-over-year, this portfolio has increased by 86%, now accounting for 8% of the total loan portfolio as of September 30 of 2018.

Despite the overall headwinds in the mortgage market, we have been able to maintain relatively strong production due to the progress we have made on a couple of our growth strategies of this business.

First, we have improved the origination process for loans generated from our retail branches by assigning dedicated branch support staff.

This has resulted in a higher level of production coming from this channel.

Compared with the third quarter of 2017, the residential mortgage production from our branch net worth has approximately doubled.

We also have been successful in recruiting purchase-focused mortgage loan officers, which has helped us to offset the decline in demand for refinancings.

In terms of the CRE market, although we continued to see aggressive pricing among many competitors, we are remaining disciplined in our new loan production.

As a result, the average rates on our new CRE loan originations was approximately 5.2%.

Overall, the average rate on new loan originations was 4.97% in the third quarter, up 18 basis points from 4.79% in the preceding second quarter.

The increase in the average rate was primarily due to a higher mix of CRE loans in our third quarter loan originations, together with upward trends in the average rates across our product offerings.

Turning to our SBA business.

We originated $71.4 million in SBA loans compared with $87 million in the preceding second quarter.

The lack of commercial real estate purchase transactions also appears to be impacting 7(a) production volumes for many SBA lenders across the country.

While most of our niche peers have seen a year-over-year decrease in SBA 7(a) volumes, Bank of Hope achieved a 25% increase in our 7(a) loan approvals for the SBA fiscal year ended September 30, 2018, compared with fiscal 2017.

We are currently evaluating additional opportunities in our footprint, and we expect to see continued strength in our SBA origination volumes.

Now moving on to Slide 5. To support the strong loan growth we are seeing, we continued to be active in our deposit gathering strategies, keeping our loan-to-deposit ratio within our targeted range.

During the third quarter, our total deposits increased by approximately 3%, a little higher than our total loan growth.

This brought our loan-to-deposit ratio down by approximately 0.5 percentage point from the end of the preceding 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 third quarter.

Alex?

Thank you, Kevin.

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

Beginning on Slide 6. I will start with our net interest income, which increased by approximately $300,000 compared with the preceding second quarter.

This was due to our higher levels of earning assets.

Our net interest margin declined by 14 basis points to 3.47% or by 10 basis points on a core basis, excluding purchase accounting adjustment.

The decline was driven by an 18 basis point increase in our cost of deposits, reflecting higher balances of time deposits and the higher average rates on those deposits.

Although we had expected our loan yield to increase this quarter and largely offset the rising deposit costs, the payoff of higher rate variable loans and relatively lower loan data led to our loan yield remaining flat on a reported basis.

Excluding purchase accounting adjustment, our average yield on the loans increased 5 basis points to 4.89% from the preceding quarter, primarily due to repricing in our variable rate loans as well as average rates of our new loan productions coming in above the yield on our already existing portfolio.

Now moving on to Slide 7. Our net noninterest income declined by 12% from the preceding second quarter.

The most significant variance from the preceding quarter was a 33% decline in the gain on sale of SBA loans, which was due to a -- both a lower amount of loans sold and a decline in the average premium.

We sold $48.5 million of SBA loans in the third quarter, down from $52.5 million in the preceding quarter as average premium declined to 6% from 8.5% in the second quarter of 2018.

Across the industry, there has been an increase in prepayment speeds on SBA loans, resulting from more borrowers refinancing into conventional loan with lower interest rates.

The faster prepayments have reduced the duration that investors are seeing on SBA loans and the lower duration has driven down the premiums in the secondary market.

And as interest rates have increased, we are also seeing some margin compression on new production, which is also impacting the premium.

In addition, this quarter's sale of SBA loans included several larger loans, which tend to have lower margins than the smaller ones.

For the near term, we expect that the premiums will likely remain in the 6% range unless we see a change in the prepayment speed.

With the fourth quarter trending to be a slower quarter in terms of SBA loan sales due to the holiday season, we will expect some gain on sale income will likely trend down for the fourth quarter before ramping back up to more normalized levels.

In addition to SBA gains on sale variance, our noninterest income for the 2018 third quarter was reduced by $4.6 million, which is a reduction in the fair value of the equity investment.

This lowered our earnings per share by approximately $0.01.

In comparison, the reduction was just $1,000 in the second quarter of 2018.

Moving on to noninterest expenses on Slide 8. Our noninterest expense declined by $4.1 million compared with the preceding second quarter.

The decrease was primarily due to a $3.6 million decline in salary and benefit expenses, resulting from proactive management of employee-related costs.

We also had a $751,000 decrease in advertising and marketing expenses as well as a $524,000 decrease in professional fees.

These expenses tend to fluctuate somewhat quarter-to-quarter and well within the normal range.

This decrease were offset by an $854,000 increase in other expenses, which was primarily due to an increase in amortization of low income tax housing credit investment, following a new investment made during the third quarter.

Overall, our low income housing tax credit investment has been an important contributor to our strategies in reducing our tax provision.

With the reduction in operating expenses, our efficiency ratio improved to 49.4% compared with 51.9% last quarter.

With the financial highlights table of our earnings release, we are also now providing the noninterest expenses to average asset ratio.

Going forward, we will focus our efficiency discussion on noninterest expense through average assets because we believe it provides for more accurate perspective to how we are managing our expenses while growing expectation.

For the third quarter of 2018, our noninterest expense to average assets annualized improved to 1.8% from 1.96% from the preceding second quarter and actually represents the lowest base of this ratio since our merger.

Now moving on to the Slide 9. I will review our asset quality.

Our asset quality continued to show stability, although we had some mixed trends in the portfolio this quarter.

Our nonaccrual loans decreased by $11.9 million or 17% from June 30, 2018, and our total nonperforming assets declined by $10.9 million or 8% from the preceding second quarter.

These improvements were driven by the migration of certain loans out of nonaccrual status as well as charge-offs.

Our classified loans declined by $55 million during the quarter, while our total criticized loan balance increased by $23 million, primarily driven by a handful of loans that were downgraded in special mention.

As we have discussed over the last year, given where we are in the credit cycle, we have been very actively monitoring our portfolio for potential deterioration.

There were no significant [remunerates] or other loans downgraded to a special mention other than the fact that our review of the current financials indicated some modest deterioration in their debt coverage ratios.

Our special mention loans that were downgraded during the quarter are performing, and we believe the loss content in this pool is minimal.

On a year-over-year basis, our total criticized loans have declined 9% as of September 30, 2018, and our total criticized loans was a percentage of the gross loans improved to 4.36% from 5.23% as of September 30, 2017.

Moving on to net charge-offs.

We had a $6.6 million in net charge-offs in the quarter.

The elevated level of credit losses this quarter was primarily related to a $5.3 million charge-off of a commercial real estate loan that was placed on nonaccrual and fully reserved for in the prior quarter.

Overall, we are not seeing any trends that would indicate systemic deteriorations, and we continue to view our portfolio with cautious optimism.

Although economic conditions remain relatively healthy in our market, we are mindful of where we are in the credit cycle and the possibility that higher interest rates could put pressure on the economy at large.

Accordingly, it is our intent to maintain our overall allowance ratio at least at this level so that we remain sufficiently reserved for any broader credit deterioration that may occur in the future in our market.

This, together with the higher charge-offs this quarter, the increase in criticized loans and the growth in the loan portfolio drove a provision for credit losses of $7.3 million, keeping our allowance to total loans ratio relatively stable at 76 basis points.

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

Thanks, Alex.

Although we continue to be successful in our new business development efforts, our overall performance certainly has room for improvement.

We recognize that we must improve in certain key areas, most notably, in managing our deposit costs and maintaining greater stability in our net interest margin.

With that in mind, we have implemented a number of strategies designed to enhance our deposit mix.

First, we are targeting commercial customers with a more aggressive sales effort for our treasury management services.

Our new TMS manager who joined us in the second quarter of this year from a larger mainstream bank has completed his due diligence and has identified an initial target list of commercial borrowers for which we believe we can provide greater value through our TMS offerings.

We believe that a focused sales effort targeting these customers can help us win a greater share of their deposit balances and bring in more DDA accounts to the bank.

As such, we expect to add a number of highly-qualified personnel focused on this core deposit solicitation and development effort.

We are also focusing our business development efforts to pursue commercial customers that are rich in core deposits.

As well, our frontline compensation program was redesigned earlier this year to reward and have a greater emphasis on core deposit growth.

And finally, our new Chief Information Officer is leading an effort to enhance our online banking platform in order to improve our ability to generate digital account openings from retail depositors.

We expect the enhancements will improve our ability to market CDs to retail depositors by the first quarter of 2019 with further improvements in attracting online checking and money market account openings occurring later in the year.

While we make improvements in the liability side of the balance sheet, we also plan to enhance our mix of earning assets as well.

As you know, the residential mortgage lending business has been an important contributor to our growth and diversification, growing from 4% of our total loan portfolio to 8% over the past 2 years.

But in the current environment, given our cost of funds and the yields generated from these residential mortgage loans, we plan to shift our focus to originating mortgage loans for sale into the secondary market.

As such, while we are planning for continued growth in our residential mortgage business, we expect the pace of growth in our consumer portfolio as a percentage of total loans will not be as high as it has been recently.

Our on-balance sheet lending focus will shift more towards floating rates, C&I and SBA loans.

Given the higher yields, these loans produce, we believe we can alleviate some of the pressure that we have been seeing on our net interest margin.

As with any deposit strategy, we recognize that it will take some time before we see the impact on our financial results.

But we are confident that our efforts will improve our market sensitivity and ultimately lead to enhance profitability longer term.

We remain confident about the prospects for Bank of Hope and are focused on driving value creation for all of our stakeholders.

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

Operator, please open up the call.

(Operator Instructions) And your first question will come from Aaron Deer of Sandler O'Neill.

If I may, let's start on credits.

Peter, the $5.3 million charge-off on the commercial real estate, it seemed like a big number given that commercial real estate prices have generally been trending higher.

Can you tell me how big was the credit that that was tied to?

What is the property type behind that?

And when it was originated?

And also, maybe at what LTV that was originated at?

So Aaron, yes, this loan actually was kind of a very isolated case.

This was a season loan.

I think back in 2012, it was originated, so this was on the books for quite a while.

We identified a very unique situation with this borrower and this loan actually was not all that big.

This is a full charge off, actually, where we picked up the issue earlier in second quarter.

And we fully reserved for it and identified and kind of monitored the situation that there is some unique situation that's going on with that borrower.

So anyway, we really don't think it's particularly credit-related in a sense where there's a credit weakness here, but there are -- a situation that is developing.

We don't see this as anything representative of the rest of the portfolio.

We are being very active.

We are still working -- I mean, now with the borrower, to try recoup some of this, but we felt it was necessary to do the charge-off this quarter.

The property type is considered CRE retail.

But I would not consider it typical, in a sense.

It's a little bit more downstream than the e-commerce type of retail that we're talking about in the marketplace.

Okay.

Very good.

And then a question around the SBA business.

I'm curious to know where the current spreads are and that is -- would -- prime 1.75% or where are we today on new production?

For the real estate SBA loans, the spread is less than 1.75%.

It ranges from 1% to 1.5%.

So I guess, it just -- it seems to me that if you're funding that at -- just take your highest cost at funding at about -- what 2.5% on your CDs, the -- that still seems like a better spread than where the current margin is.

So given the narrower premiums that you're seeing in the secondary market, what -- have you given thought to just retaining all of this production?

Obviously, that takes a hit on your current near-term outlook for the gain on sale but will benefit your NII longer term.

And it doesn't seem -- looking at the stock price, it doesn't seem like you're really getting paid or getting a premium for the gain on sale income anyway.

So why not just help with the dynamics of your loan growth and your margin if you just retained it versus selling, no?

Aaron, I think that's an excellent point.

And actually, there was a lot of internal discussion as to whether we should retain or sell the SBA loans at this lower premium environment.

Nonetheless, we have decided to continue to sell our SBA 7(a) loan production because the current premium, although much lower than what it used to be in the past, still results in better loans and profitability than retaining these loans.

And we are constantly monitoring the situation.

And if the premium continues to go down, then there may be a point where we will decide to retain those loans than selling the secondary markets.

But at this point, we -- our position is that we will continue to sell.

Okay.

Very good.

And then I'll ask one more and then I'll step back into the queue.

On the expenses, I -- those came down pretty sharply in the quarter.

I'm just curious, how much of that is reflective of like I said, true-up of your full year bonus accrual versus something that would be ongoing?

In other words, and maybe another way to look at it is, where can we expect your compensation total to come in, in the fourth quarter and just kind of on a run -- ongoing basis?

Sure.

Aaron, as we discussed during the prepared remarks, we have managed more proactively in terms of compensation.

And actual impact for this reduction on the salary and benefit was about $3.6 million reduction.

And going forward, because we were more proactively managing those costs, run rate for this salary benefit, obviously, annual KPI index increased, those normalized increase.

And also, as we hire more production-related individuals, there could be a salary increase in terms of bonus or just managing the incentive, we believe this can be a constant run rate going forward as well.

The next question will come from Matthew Clark of Piper Jaffray.

First one, just wanted to ask about your deposit pricing strategy.

I guess, from here, given the increased focus on core deposit gathering, improving the overall mix.

Matthew, I'm not sure that that was a question.

Yes, it was.

I was asking if there was any change in deposit pricing strategy given the increased focus on gathering core deposits.

So whether or not it's more -- just more of the same?

Sure.

Well, actually this quarter, management would like to give more color because the deposit pricing is one of the top priority.

Management take it serious.

We created actually a separate page on the slide deck on Page 10, which includes the deposit building.

Obviously, it will include the deposit pricing.

We had, actually, substantial increase on the CD for this quarter, it is like a year or so in terms of the term.

The pricing, yes, it is really competitive in this market.

We are not going to have too much of a high price on CD or deposit going forward because it has gone off already substantially.

Our deposit beta for this quarter, 2 quarters in a row, is very high.

So given the loan yield is kind of increasing, but loan beta is slower than the deposit beta we see.

So our deposit pricing will be much more disciplined pricing going forward, and we did see a substantial increase on the CD side because it is the most competitive.

But on the other money market, it is a much lower rate.

So a little bit more focus on the money market, not to mention non-interest-bearing deposit DDA.

We did have a number of initiatives to bring DDA accounts.

For example, enhanced treasury management sales services and also, we're fundamentally changing our compensation structures, including incentives, directly tied to our core deposit productions.

And also rebuilding our online banking platform to premium CD and other checking account, money market account in a time horizon that we would expect to get benefit, starting next year, first quarter.

It's kind of step by step.

It can be a long journey, but management is taking a very proactive deposit strategy, including the deposit pricing as well.

Okay, great.

And then just on the overhead ratio, 1.8% to 1.9%, I guess, in the near term, would suggest some maybe upward pressure from here.

But I guess, how do you think about that ratio as you look out maybe beyond the fourth quarter and into 2019?

Is there an opportunity to improve upon that?

Or are there some other things going on that we may or may not be thinking about?

Sure.

As I mentioned, the deposit cost has a larger impact on our efficiency ratio.

We feel the noninterest expense ratio as a percentage of average asset represents better measurement for our operating expenses, as you mentioned.

So we would expect like 1.8% range or slightly increased, 1.9%, but that is relatively lower compared to our historical because we are managing noninterest expenses.

So run rate for like a noninterest expenses for next quarter, we did see the reduction on the professional fees, which is kind of one of the key components of the noninterest expenses.

We would expect to see slightly increase from the third quarter level, largely due to investment in (inaudible) implementation as well as market sensitivity analytical tools.

We just bought it, and we are using it.

And those investments are particularly -- partially replace some of the expenses that we have gone away with the Dodd-Frank stress test requirements.

However, we believe those new market sensitivity analytical tool investment will enable us to enhance our profitability going forward 2019.

Okay, great.

And then just a couple of housekeeping items.

Just wanted to get the amount of shares repurchased in the second quarter.

I think you quantified in total that -- part of which, I think, came from the first quarter in the release.

But just curious how much you repurchased in the second quarter and at what price?

Sure.

In the second quarter...

Excuse me, the third quarter.

No problem.

I can give you both, actually.

So third quarter, we purchased total 1.2 million shares at an average rate of $0.174 per share.

Second quarter, we purchased 4.3 million shares at an average rate of $0.181.

So that's kind of the total to 5.5 million, 6 million shares.

And that was kind of -- I'm sorry, I was going to kind of finish the run rate for the noninterest expenses.

Kind of last point was we are also in the midst of implementing additional short-term cost-saving initiatives which will benefit the next few quarters as well as finalizing long-term initiatives for savings beyond 2019 as well.

So we will keep you updated on those initiatives as those plans become more firm.

Great.

And then just last one on the tax rate, the outlook there.

Yes.

Tax rate, we did get the benefit from the low income housing tax credit, and we lowered a little bit our effective tax rate at a rate of 25%.

And going forward, I think we will be pretty much at this level, 25%.

Because we continue to expect to have a benefit of low income tax housing credit.

That will be the main driver to lowering those tax rates from statutory rates.

Matthew, before you go, let me just clarify our answer to your first question on the new deposit strategy or deposit pricing strategy, whether it is more of the same with the existing ones that we -- where we have -- our strategy is a little different.

I don't think it is not more of the same with the old strategies.

And our strategies that we explained in the script portion is more disciplined strategies, more defined strategies.

As we discussed, we have a number of strategies, which -- each of which has a different timeframe, but hopefully, we will begin to see traction for a number of our initiatives by early 2019.

And by the second half of 2019, I think the better deposit mix and better cost of funds will be evident on our financial statements.

The next question will come from Chris McGratty of KBW.

In the earnings release, I believe it said the core loan yields, excluding accretion, were up about 5 basis points sequentially.

Was any of that lack of improvement LIBOR related?

And maybe if so, how much was LIBOR a drag on loan yields in the quarter?

Yes.

So we had about $1.2 billion of variable rate loans tied to the LIBOR.

Okay.

And so if I think, looking out, we should get, I guess, more improvement in the loan yields perhaps next quarter.

You talked about the deposit initiatives.

But if I'm thinking about direction of NIM, putting the pieces together, this quarter was fairly pronounced.

Is the expectation for the maybe Q4 and first half of next year until these initiatives kick in for the compression to somewhere be, on a quarterly basis, between what occurred in the first quarter and this quarter?

Or how would you assess kind of the rate of NIM erosion near term?

Sure.

We would expect there will be further compression in our net interest margin in Q4 due to the increase of deposit costs.

However, some of those deposit costs increases will be offset by an increase in loan yield as a rate change in the end of September as well as we expect another increase in the middle of December which might not have a real big impact into Q4.

But having said that, the compression in net interest margin is expected, but we have a substantial core compression, 10 basis points.

But we don't expect that much of a compression that we have experienced in Q3.

Okay.

So if I heard that right, the 10 basis points this quarter and next quarter will be not as severe.

Is that, right?

Right.

10 basis point reduction was, in Q3, based on the number of the reasons we explained.

But also, based on our new strategy of the deposit pricing and loan pricing, we will expect to see compression, but not as high as we experienced, i.e., 10 basis points in Q3.

Okay.

Very helpful.

If you have it, I'm interested in if you have the spot rate on the deposit costs as of September 30.

I think the average for the quarter was something like 124 basis points.

But do you have where deposit costs ended the quarter?

Yes.

So we have -- let me give you like a breakdown on the money market and CD.

The money market was about 1.27%, and the CD was about 2.8%.

The next question comes from Gary Tenner of D.A. Davidson.

Two questions.

The first, just on the low income tax housing credit and the incremental expense this quarter.

Is that a run rate or was that catch-up for the prior quarters?

Or was that the number we should be thinking about in terms of the -- in the fourth quarter?

Yes.

It will be run rate.

As I indicated, we will continue to utilize the benefit of the low income tax housing credit going forward.

Okay.

And that should extend as well into 2019?

So your outlook for tax rate and the related expense would be similar?

Yes.

Okay, great.

And then just to follow up on that large commercial real estate charge-off.

I understand you're saying that this was a unique situation, but for it to be a full charge-off, I mean, suggest something pretty negative.

Was this a -- some sort of our specialty real estate that doesn't have any other use?

Or is there something else that occurred that was a more recent development with that credit?

So without going into too much detail, this was a leasehold interest, so there was a ground lease on this property that really was unique.

So it really came down to, I guess, the security and the collateral.

That was an issue for us.

And so I think that's really where we had an issue in the third quarter here.

So it really...

That was not perfected or something?

No, it was perfected.

But due to course of the credit, there were some disputes that occurred in that credit.

And so without going into a little more detail than that, to me, really, it's an isolated issue.

It's nothing that the bank, I think, had an issue.

It really just developed over time, and we were able to pick up on it second quarter, the charge-off in the quarter.

So just to clarify, this is not necessarily a true collateral value issue?

Just more the secured interest in the collateral?

Is that a rougher estimation?

I think it's a little bit of both.

There is collateral, devaluation as well because of this issue.

But ultimately, yes, it comes down to our assurance that we have enough collateral here to support the credit.

Does that make sense?

I think it does.

I may call offline.

(Operator Instructions) Our next question will come from David Chiaverini of Wedbush Securities.

A couple of questions for you.

You mentioned about how one of the new strategies is hiring C&I lenders in the existing footprint to focus on expanding sales efforts beyond the core Korean-American customer base.

I was curious, is this a sign that you're seeing kind of a diminishing opportunity and targeting the Korean-American niche?

Or is this more just additive?

That is more like an additive strategy.

As you know, the markets remain very competitive for C&I loans in California and New York areas, which happen to be our 2 largest markets.

So rather than chasing aggressive yields, we have been looking into expanding our C&I lending in the areas that we have not adequately served to date.

So we have identified several key markets that can be further cultivated and have plans in place.

So that is why we have been making progress with recruiting middle market C&I lenders in California and Texas who will focus on expanding beyond our core Korean-American customer base.

Got it.

Okay.

And then similar sort of question on the deposit side with the deposit strategies you guys are putting in place.

Is there going to be any -- should we expect any kind of demographic mix change or is Korean-American still going to be the focus and, I guess, it's probably going to be split in that -- I would presume, on the CD side, it's probably going to stay focused on Korean-American.

But on the new C&I lenders that are brought on board, it's clearly going to be businesses that are focused more on mainstream.

Yes.

As we indicated, yes.

We would expect to have -- coming from both ends.

Obviously, Korean-American customers are our main customers and there is plenty of opportunities for us to serve them our deposit services.

And also, the rate that we are offering compared to mainstream, we have advantage in terms of competing those deposit pricing.

So there's plenty of opportunities for us to bring non-Korean, specifically geographically, if we have enhanced the online platform, we will have a much better exposure and more competitive deposit pricing, so it will open up a great opportunity to non-Korean depositors as well.

Okay.

And then shifting gears to the net interest margin discussion.

You mentioned about how payoffs of higher yielding variable rate loans contributed to the decline in the margin.

I was curious, what is driving that?

And then secondarily, do you see those payoffs subsiding at all?

As the rates expected to continue to goes up, we didn't see more variable rate loans paid off.

That's as we expected again in the context of the rising interest rate environment.

As you know, it can be -- you know, fluctuate, depends on a quarter-by-quarter basis.

Okay.

So they're simply refinancing.

And would you say that most of these borrowers are refinancing with Hope Bancorp?

I don't have that -- the exact percentage, but I think I would guess, that will be the case.

And in terms of the trend, are you seeing any -- is that trend subsiding at all here early on in the fourth quarter?

Or is it still kind of an aggressive level of payoffs of these higher-yielding loans?

Just compared to quarter-over-quarter, slight changes but I don't see any big increase on the high-yield variable loans in Q3 specifically.

So I will say, it is a little increasing but not steadily increasing.

Okay.

And then the last question for me.

On expenses, with the $3.5 million decrease in compensation expense in the quarter, I was curious what areas were cut.

It is mainly the restructuring of our compensation and incentive plans.

And as you may be aware, we are periodically evaluating our compensation structure and incentive plans and make adjustments as warranted.

And during the third quarter, we restructured our overall compensation plan, including incentive bonuses which resulted in a decrease in salary expenses.

And part of the reduction was due to a true-up of our bonus accruals we made in the prior quarters.

I see.

So you didn't cut in any areas.

It's just your employees are essentially making less.

Well, I'm not saying that.

We are trying to keep our compensation structure as competitive as possible in the market, but there are many different ways to compensate our employees.

And our compensation and Human Resources Committee is spending a lot of time to make sure that our current compensation level is competitive in the market.

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

Getting back to deposit growth in the quarter, did you run any special CD campaign during the quarter in order to raise deposits?

Yes, on and off, we do, but we check market rate and we give some discretionary rates to the front line.

And we didn't really run the campaign per se, but monitoring what is a competitive rate in our market.

And again, we gave a competitive discretionary rate to the branch and the frontline offices.

Okay.

Okay.

And then can you tell if there was any movement into CDs from other accounts at the bank?

In other words, did people move money market accounts or transaction accounts into CDs?

Yes, not much from the transaction account, but we did see it from both the interest-bearing liabilities, especially from the money market account to CD.

There was some migrations that we have seen, yes.

Okay, great.

And then in terms of the provision, maybe this is for Peter.

Give a rough breakdown as to how the provision was allocated to support growth versus set aside for the increase in criticized assets.

We don't have an exact breakdown, but as we kind of explained on the script, it really was kind of a combination of several items.

A key item obviously was the higher charge-off this quarter.

We did have a little uptick in the criticized loans, which also contributed.

And then we also got some contribution from the loan volume increase in the portfolio.

So really kind of a combination of those 3, but definitely, I think, the kind of unique charge-off this quarter definitely drove that a little bit here.

And you know the provision, I think, this quarter, to me, is somewhat of a spike and barring any other kind of one-off surprises like this, I think going forward, it should -- it still will be lumpy but -- in a sense, but I think it should normalize based on the previous quarter averages.

Okay, great.

And then I guess, my last one is do you have an outlook for loan growth in 2019 yet?

Would you expect it to kind of continue at a similar pace to 2018?

Don, I would say so.

Our current guidance is -- for 2018 is a mid- to high-single digits.

And I think it will not be much different from the pace that we have for 2018.

And in addition to the growth of loans, we are also focusing carefully on the mix of the loan growth, and we are putting a lot of emphasis to allocate more resources to the high yield, high rate type of portfolio than the lower-yield type of loan.

And next, we have a follow-up from Aaron Deer of Sandler O'Neill.

My apologies.

Just one quick follow-up on the share repurchases.

Given the new buyback that's out there, can you give me a sense of how aggressive you might plan to be on that?

Do you have any capital targets in mind?

And is the CRE concentration sort of a limiting factor on that?

Well, CRE concentration is always some consideration that we take into account.

But I think, with the issuance of senior debt a few quarters ago, our CRE concentration situation has improved significantly.

So it is much of a lesser issue today than it was 2 quarters ago.

And after the $50 million program is completed, as was the case in the past, our board will continue to review our capital situation to make sure that we maintain the appropriate level of capital for future growth.

At the same time, we want to maximize the efficiency of the utilization of our capital.

So it will be something that will be continue to be evaluated on an ongoing basis.

Okay.

But it sounds like you do intend to fully utilize those $50 million that's been authorized.

That's our intention.

This concludes our question-and-answer session.

I would like to turn the conference back over to management for any closing remarks.

Okay.

Thank you.

Thank you, again, and we look forward to speaking with you next quarter.

So long, everyone.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.