Hope Bancorp, Inc. (NASDAQ:HOPE) Q2 2022 Earnings Conference Call July 20, 2022 12:30 PM ET

Company Participants

Angie Yang - Director of IR & Corporate Communications
Kevin Kim - Chairman, President & CEO
Alex Ko - Senior EVP & CFO
Peter Koh - Senior EVP & COO

Conference Call Participants

Gary Tenner - D.A. Davidson
Chris McGratty - KBW
Matthew Clark - Piper Sandler
Tim Coffey - Janney Montgomery Scott

Operator

Good morning, and welcome to the Hope Bancorp 2022 Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.

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

Angie Yang

Thank you, Joe. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2022 second quarter investor conference call. As usual, we will be using a slide presentation to accompany our discussion this morning. If you have not done so already, please visit the Presentations page of our Investor Relations website to download a copy of the presentation. Or if you are listening into the webcast, you should be able to view the slides 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, including any impact as a result of the COVID-19 pandemic as well as the businesses and markets in which the company does and is expected to operate. These statements constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.

These statements are not guarantees of future performance, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. We refer you to the documents the company files periodically with the SEC as well as the safe harbor statements in our press release issued yesterday.

Hope Bancorp assumes no obligation to revise any forward-looking projections that may be made on today's call. The company cautions that the complete financial results to be included in the quarterly report on Form 10-Q for the quarter ended June 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 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, 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?

Kevin Kim

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 very strong performance for the second quarter of 2022, highlighted by the highest level of loan production in the history of the bank. Loan production for the second quarter increased 25% quarter-over-quarter or 44% year-over-year and drove a 16% increase in our loans outstanding on an annualized basis, excluding PPP loans. Our net interest margin expanded 15 basis points from the preceding first quarter, and we continue to have success in driving down our criticized loan balances.

We reported net income of $52.1 million or $0.43 per share in the second quarter.

In terms of pre-provision net revenue, we generated $73.9 million, which represents an increase of 4% from the preceding first quarter and 15% from the year ago second quarter. This performance resulted in our pre-provision net revenue return on assets increasing to 1.65% in the second quarter, up from 1.6% in the preceding first quarter, while pre-provision net revenue return on equity increased to 14.66% from 13.58%.

Moving on to Slide 4. In the second quarter, we funded a record $1.3 billion in new loans. This represents the fourth consecutive quarter in which we produced more than $1 billion in total loan funding as we continue to benefit from the investments we have made to add banking talent and build expertise in new asset classes and vertical markets. We disbursed a record $557 million in new commercial loans during the second quarter resulting in our commercial loan portfolio increasing at an annualized rate of 26%.

As these commercial loans are variable rate loans, we are well positioned to benefit with the expected increases in interest rates. And I'm pleased to report that we also saw a significant increase in the average rate of new commercial loans from the preceding first quarter.

The $557 million in commercial loan fundings accounted for approximately 43% of our total loan fundings in the second quarter, which represents the progress we have made in strengthening our commercial banking platform and diversifying our business model and loan portfolio.

Our corporate banking group generated approximately 90% of our commercial loan fundings during the second quarter, which reflects the progress we have made in moving upmarket and expanding our commercial client base to include more middle market enterprises.

We are also benefiting from the teams we have built within our corporate banking group to focus on vertical markets like telecom, health care and financial institutions, including broker dealers and asset managers. These verticals have been less impacted by supply chain constraints and inflationary pressures and have been more resistant to recessionary environment and geopolitical issues.

In terms of commercial real estate, loan demand was relatively consistent with the prior quarter. We had $545 million of commercial real estate loan production, which also was booked at much higher rates than the preceding first quarter. The production was well diversified across property types with the single largest contributor this quarter being multifamily, which accounted for 32% of our total CRE loan production in the quarter and continues to increase as a percentage of our overall CRE portfolio.

Despite higher interest rates and a significant decline in demand for mortgage refinancing industry-wide, we had a 75% increase in residential mortgage production, while maintaining strong underwriting criteria with average LTVs in the high 50% to low 60% range. The higher level of production reflects the successful expansion of our team into our -- into our Eastern region, which has contributed to increased levels of purchase transactions.

Overall, we saw very good trends in loan pricing in the second quarter with the average rate on new loan originations increasing from the preceding quarter in each asset class. Combined with the higher mix of commercial loan production, this resulted in our average rate on total loan production, increasing by 72 basis points compared with the preceding quarter.

The investments we have made to strengthen our commercial banking platform have not only positively impacted loan production, but has made us less reliant on CRE lending as a growth driver and this positions us well going into the second half of 2022.

In addition, our expanded commercial banking platform has enhanced our deposit gathering capabilities. Deposits from larger commercial enterprises, primarily generated through our corporate banking group as well as our efforts to target U.S. subsidiaries of Korean Corporation now account for approximately 23% of our total deposits. And we are consistently generating new commercial deposit relationships each quarter, which is providing a steady inflow of core deposits.

Now I will ask Alex to provide additional details on our financial performance for the second quarter. Alex?

Alex Ko

Thank you, Kevin. Beginning with Slide 5. I will start with our net interest income, which totaled $141.5 million for the second quarter of 2022, an increase of 6.3% from the preceding first quarter. Our net interest margin increased basis points quarter-over-quarter to 3.36%. The increase was largely due to increases in our loan yields driven primarily by the repricing of variable rate loans as well as higher average loan balances, which contributed to a more favorable mix of higher yielding earning assets.

Overall, the yield on interest-earning assets increased by 26 basis points quarter-over-quarter. These benefits were partially offset by higher cost related to interest-bearing deposits and borrowings as a result of the rate hike since March 2022. Given our asset-sensitive position, we expect to continue to benefit from rising interest rates.

Looking at the third quarter of 2022, we expect another quarter of margin expansion, but at modestly lower levels than we had in the second quarter as a lag in interest-bearing deposit cost increases will offset some of these benefits.

Moving on to Slide 6. We remain in asset-sensitive position as of June 30, 2022 and are positioned to benefit from higher interest rates. Of our new loan production in the second quarter, 41% represented variable rate loans. And as of June 30, 2022, variable rate loans accounted for 44% of our total loan portfolio.

Now moving on to Slide 7. Our noninterest income was $12.7 million for the second quarter, down by $440,000 from the preceding first quarter. We had increases in most of our major fee generating areas, but we did not sell much of our residential mortgage loan production in the second quarter.

During the quarter, we recorded a loss of $547,000 on the sale of $35 million of previously identified problem CRE relationship that was transferred to held for sale as of March 31, 2022. Excluding this nonrecurring transaction, our core noninterest income trended higher quarter-over-quarter.

Moving on to noninterest expense on Slide 8. Our noninterest expense was $80.4 million, representing an increase of 7% from the preceding first quarter. The most significant variance was a 7% increase in our salary and benefit expenses, largely due to the impact of annual merit increases that took effect at the beginning of the second quarter, plus new additions to support the continued growth of the company and higher costs associated with the retaining employees and an extremely competitive staffing market.

Our advertising and marketing expenses were also higher as the second quarter includes the seasonal impact of our LPGA sponsorship.

Our credit-related expenses increased by approximately $1.8 million due to a higher provision for accrued interest receivables and the legal collection expense that was higher than usual. Reflecting the higher salaries and benefit expenses, our efficiency ratio trended higher, but still remained in our target range in the low 50s.

Now moving on to Slide 9. I will discuss our key deposit trends. As of June 30, 2022, our total deposits increased 3.5% from the end of the prior quarter primarily due to growth in our demand deposits and time deposit balances.

As part of our interest rate management strategy, we increased our time deposits in the second quarter in order to lock in some longer-term funding before further increases in interest rates. The cost of our interest-bearing deposits increased by 16 basis points quarter-over-quarter due to higher rates on interest-bearing checking and time deposits. However, with the stability in our average noninterest-bearing demand deposits, our overall cost of deposits increased by only 9 basis points.

Now moving on to Slide 10. I will review our asset quality. We saw generally positive trends in the portfolio in the second quarter, driven primarily by the continued upgrading of credits out of the criticized loan category as the borrowers demonstrate sustained performance. This resulted in total criticized loans declining by another 14% in the second quarter and represented our fourth consecutive quarter of steady reduction.

Nonaccrual loans increased by $16.8 million, reflecting an $18.6 million relationship that was moved from troubled debt restructure status to nonaccrual during the quarter.

Delinquent loans 90 days or more on accrued status increased by $12.5 million as of June 30, 2022. $10.7 million of this has already been addressed following the close of the quarter. $3.4 million represented a delay in renewing maturing loans, which have since been renewed and are no longer delinquent. Another $7.3 million relationship was paid off in the first week of the third quarter.

Overall, our loss experience remains very low. We had just $712,000 in the charge-offs during the second quarter and $1.6 million in recoveries, resulting in net recoveries of $930,000. This is our third consecutive quarter of net recovery.

We recorded a provision for credit losses of $3.2 million, which primarily reflects the growth in the loan portfolio during the second quarter and an adjustment in our outlook utilizing Moody's S2 economic scenario, which has a more recessionary outlook.

Over the last 2 years, during the epidemic. We have significantly increased our credit administration processes, which better enables us to address portfolio risk. These enhancements include, among others, updated borrower financial statements on a more frequent basis. A more aggressive strategy to address nonmonetary default in real time and the requirement for projections as part of the underwriting process that includes at least a 300 basis point interest rate sensitivity analysis that helps drive tighter loan covenants and transaction structures.

We have also further tightened our underwriting criteria in preparation for a possible recession. And for our corporate banking group, we conduct quarterly portfolio reviews to identify key risks for each industry vertical.

So all in all, we believe our enhanced credit administration processes and tightened underwriting criteria has improved our ability to mitigate the recessionary downside risk.

At June 30, 2022, our allowance for credit losses coverage ratio was 1.04% of loans compared with 1.05% as of March 31, 2022. While our coverage of nonperforming assets decreased to 137% from 144%.

Now moving on to Slide 11. Let me provide an update on our capital position and returns. The increase in interest rates during the second quarter resulted in unrealized losses in our investment securities portfolio that negatively impacted tangible common equity to tangible asset ratio by approximately 37 basis points.

Our tangible common equity to tangible asset ratio remained strong at 8.68% as of June 30, 2022, and there was no impact from changes in unrealized losses to our regulatory capital positions.

During the quarter, we repurchased approximately 1 million shares of our stock at an average price of $14.10 per share. As of today, we have $35.3 million remaining of our $50 million stock repurchase program.

Despite the increase in unrealized losses in the second quarter and our stock repurchase activity, we remained at strong capital levels to support our continued balance sheet growth as shown on this slide. During the second quarter, we completed the transfer of $239 million of available-for-sale security to held-to-maturity securities. These securities reflected CRA investment that the bank normally would have held to maturity nonetheless.

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

Kevin Kim

Thank you, Alex. Now moving on to Slide 12. I will wrap up with a few comments about our outlook. Although the operating environment is becoming increasingly challenging with greater uncertainties, we still see a number of catalysts that should support continued strong financial performance.

As we look ahead to the second half of the year, we believe the investments we have made to strengthen our commercial banking platform and diversify our business model over the past few years will become even more valuable and result in solid loan growth for 2022.

With the rise in interest rates, the demand for commercial real estate loans is expected to soften in the second half of the year, and we expect to see a lower level of CRE production over the remainder of the year. The aggressive pace at which interest rates are expected to rise this year will undoubtedly also challenge the mortgage and SBA lending markets. We expect the geographic expansion of our residential mortgage platform will shift to higher levels of purchase transactions and support continued growth of this portfolio notwithstanding the broad declines in refinancing.

In terms of our SBA business, we have gone through many economic cycles during our 30-plus years as a preferred lender and recognize that the current rising rate environment will only temporarily impact volumes. Our C&I pipeline, however, remains strong and should continue to result in a high level of production.

Initially, as we built our corporate banking group, we pursued relationships with more middle-market enterprises in our Texas and California markets, where our teams were positioned. With the success of this initiative, we have started extending it in additional geographic markets where we have been able to recruit experienced commercial lenders, including the Southeast and the Northeast. We are pleased to see increasing contributions from these newer C&I teams to our commercial loan production. The continued strength in our commercial lending should help to offset the industry-wide headwinds in other areas of lending.

As a result, and despite the challenges of the rising interest rate environment, based on our current pipeline and projections, we have greater confidence that we will achieve the higher end of our full year guidance of high single-digit to low double-digit loan growth.

As Alex mentioned, we also expect to see further expansion in our net interest margin as variable rate loans continue to reprice and new loan originations reflect the higher interest rate environment that we are in. And the enhancements we have made in credit administration in terms of initial underwriting criteria, stress testing and loan monitoring have improved, both the quality of the loan portfolio and our ability to identify early signs of stress among borrowers, and mitigate any potential loss exposure we may have.

I am comforted in knowing that we have significantly improved the profile of our franchise in recent years. As a more diversified financial institution with a stronger enterprise risk management infrastructure, we are much better positioned today than in the past to withstand the challenges of weakened economic conditions.

We have a lower risk, more diversified CRE loan portfolio, largely reflecting the growth in our multifamily lending portfolio and a meaningful reduction in our hospitality portfolio. As well, our commercial portfolio is increasingly becoming more diversified with our corporate banking group more focused on larger, stronger enterprises and more recession resistant industries.

One of our strategic goals has been to differentiate Bank of Hope from the characteristics that had typically been associated with Korean-American banks. Most notably, a loan portfolio that was concentrated in commercial real estate and more susceptible during times of economic stress, along with a deposit base that was too reliant on high-cost retail funding.

Over the past few years, I believe we have achieved this goal, significantly differentiating ourselves from our niche peers and substantially strengthening our institution in the process. As a result of the investments we have made in our organization, we have significantly expanded our business development capabilities and have the ability to effectively target a much broader customer base, which will progressively transform our loan portfolio into a more diversified one that is more resistant to economic cycles. And we also have improved our ability to continue delivering strong financial results even when the economic environment is less favorable for commercial real estate lending.

We believe that we have built a strong commercial banking franchise that can effectively capitalize on favorable economic conditions to generate profitable growth, while also having a lower risk balance sheet that will serve us well during times of weakened economic conditions. And I look forward to keeping you apprised of our ongoing progress.

With that, we would be happy to take your questions and add any additional color as requested. Operator, please open up the call.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Gary Tenner with D.A. Davidson.

Gary Tenner

I wanted to -- about the cost side of things as well as the NIM outlook. On Slide 9, you provided inter-quarter monthly deposit trend up pretty significantly over the course of the quarter at 41 basis points in June. Can you give us a June 30 spot rate for deposit cost to give us some sense of a jumping off point into 3Q?

Alex Ko

Sure, Gary. As you know, during the second quarter, the market rate has gone up substantially than what we expected. So even though we have targeting to lower our deposit beta to fund our loans, we had a deposit cost increase. So as you can see, especially each month of the second quarter, we did increase quite a bit.

In terms of the spot rate that you asked, we have a total interest-bearing deposit spot rate of 77 basis points. And total deposit wise is a 48 basis point, is our spot rate.

And just to give you a little bit more color on our spot rate as of June 30 versus the market competition that we see now, as of yesterday, the rate that we are offering is even higher than the June 30 rate, reflecting those competition. So as of yesterday, our spot rate for the total deposit was about 56 basis points.

Gary Tenner

That's very helpful. I appreciate it. And then just to put some context around the expectations for NIM expansion, I mean, A, I guess the first question is what options you have embedded in your model in terms of the expectation of less margin expansion than we saw in the second quarter? I asked because, obviously the 75 basis point hike in June, you may get a full benefit of that, presumably another 75 basis point next, next week, and that will be impact in the quarter as well. So can you just talk about what's embedded in your rate assumptions that kind of limit the NIM expansion maybe versus what we'd expect?

Alex Ko

Sure. Net interest margin expansion, as we said, it will continue to expand on that to the level that we have seen 15 bps increase in the second quarter. But the reason why we still expect to increase the net interest margin is our variable rate loans, obviously. There will be most, of those variable rate loans will be repriced except a small amount of SBA which will be quarterly reset.

But there will be obviously deposit side offsetting impact, which we expect to increase. There is a little bit tendency of the lagging, the increase of those deposit rates as the market rate goes up. So that's the main driver that we would expect to see less extent of margin expansion. But given our asset-sensitive position as the rate goes up, we will see the net interest margin to continue to be expanded.

Gary Tenner

Okay. I apologize. Not been clear with my question. I guess in terms of the expectations that you've got, is it basically the forward curve for the remainder of the year, just in terms of your expectations being fully loaded for the market rate expectations? Is that fair?

Alex Ko

Yes. Sorry. Maybe I was not clear earlier, my responses. Yes, our projection for the interest rate 75 basis points in July and maybe 50 basis points in September and the remaining 25 bps each, that's the market consensus or a forward curve that the market expects. We have same view on that rate increases, and that is actually reflected in our net interest margin forecast.

Gary Tenner

Okay. Perfect. And then if I kind of apologize for going on, but in terms of the expense increase and the increase in the guide, I mean, was the expense side a surprise at all in terms of any one particular part of the upward pressure on expenses? Call you off guard?

Alex Ko

Not necessarily. As you know, the competition on the salary and benefits, that's not only our bank but industry-wise. Also, we have in March, there is a merit increase. That's an annual merit increase. We have about 6.8% merit increases. Obviously, that merit increase does have a little bit higher merit increase than the previous rate increases to maintain the talented employees and the market condition. So that was not really a total surprise. And going forward, run rate-wise, I don't think there will be any continuation of the further increase as much as we saw in the second quarter. So we would expect to have the salary and benefit expenses will be pretty much at the same level that we have seen in the second quarter.

And just to note, the increase on the salary and benefit, the main reason comes from the -- again, the merit increase, but also we have a hiring increase. During the second quarter, our FTE increase was at 54%, and they were mainly from the front line generating those revenue. So even though noninterest expenses will increase, we will see some benefit increasing -- including the revenue increases as well.

Operator

Our next question will come from Chris McGratty with KBW.

Chris McGratty

Kevin, maybe a comment on the buyback. You're opportunistic in the quarter, but your comments also struck a little bit of a conservative tone on the economy. How should we think about the remainder of the buyback from here given the growth outlook?

Kevin Kim

Well, we will continue to monitor the market for good opportunities to purchase our shares in -- and as you know, we have approximately $35 million remaining under the existing plan. Even after that $35 million, we would still have strong capital levels. So I do not see any reason to stop repurchase activities under the existing plan in the third or fourth quarter.

Chris McGratty

Okay. And then just on the balance sheet. Your loan-to-deposit ratio, you did keep pace with the deposit growth this quarter with loan growth. Is this about where you want to be kind of mid-90s in terms of loan to deposit? And with that, would the expectation be securities would continue to fund loan growth?

Kevin Kim

Yes. Mid-90s is the ballpark that we would plan to remain at.

Operator

Our next question will come from Matthew Clark with Piper Sandler.

Matthew Clark

First one for me, just on some additional color on the TDR that migrated into nonaccrual. Can you give us a sense for the type of properties or businesses that are underlying this relationship? What happened to the borrower situation? And how do you plan to resolve it?

Peter Koh

Sure. This is Peter. Yes, there was a migration from TDR to nonaccrual within our CRE retail bucket. This is really just an elongated work out with the customer. We feel the property is well secured. We really don't see much loss from this. But because it is a longer workout situation, we determine to go to nonaccrual for this period.

Matthew Clark

Okay. And then it sounds like you've gone through a more proactive process of getting updated financials from your business borrowers to see if they can withstand inflation and higher debt service costs. Is there some portion of your borrower base that you think may get a little thin on debt service coverage and cause you to offer some rate concessions to make sure they make it through the cycle or not?

Peter Koh

I think over the last couple of years, we've actually made a lot of enhancements through our credit administration process. We think we are better prepared to weather any type of possible recession at this point. There are a couple of areas we are closely monitoring, including, I would say that the retail sector as well as our SBA portfolio, where our SBA are generally all variable rate loans where the payments will continue to go up. And so we are keeping a close eye on that. We have regular asset quality meetings, more rigorous quality meetings with our credit department and our lenders.

And as a reminder, we went through a fairly robust derisking strategy last year that entailed all of our CRE, focusing heavily on the hotel and the retail sector. And in doing so, we have implemented a lot of stress testing processes, including portfolio-wide. We do very regular stress testing. And then on an individual loan basis, we also stress test these loans, interest rate stocks, P&L expense items and income aside, we do very rigorous stress testing there as well.

So for now, we feel that we are very well positioned. I think 2Q, we were still in a fairly healthy economic environment, but we are -- we feel very well prepared for any downside potential here.

Matthew Clark

Okay. And can you remind us how big the non-guaranteed SBA portfolio is on the balance sheet?

Peter Koh

Can you -- just waiting for the number here. Yes, $420 million.

Matthew Clark

Okay. Great. And then just shifting gears to the loan pipeline coming out of second quarter. How does that compare to the end of 1Q? Have you started to see any projects get delayed because of higher prices? Or is there -- has there been some portion of the pipeline dry up because of higher rates? Just trying to get a sense for the fluidity of that pipeline.

Kevin Kim

Yes. Let me cover that. Actually, loan pipeline is pretty different from CRE sector from the commercial sector. And let me first cover CRE. We expect demand for CRE loans will soften in the second half of the year because of the higher rates would impact demand in the refinance market.

And third quarter has traditionally been one of the strongest quarters of the year for Bank of Hope, but our current CRE pipeline is meaningfully lower than what we had in the second quarter.

So given the expectation in the market and our current pipeline, we are not really anticipating a meaningful growth in our CRE portfolio. Rather, we expect that to remain relatively flat for the balance of the year.

On the other hand, C&I side, we have not seen any significant impact in the demand for C&I loans as a result of recent hikes. And going into the third quarter, we have a very strong pipeline of commercial loans and many of them are in the latter stages. So we are not really expecting any meaningful impact to our C&I volumes in the third quarter, even with another interest rate hike in a very near future.

On the other hand, the fourth quarter traditionally has been seasonally slower in terms of commercial lending. So we may have less robust loan volumes at year-end. But as far as the third quarter is concerned, we feel pretty strong about C&I loan demand as well as expected production of commercial loans.

Operator

[Operator Instructions] Our next question will come from Tim Coffey with Janney.

Tim Coffey

Alex, I just want to go back to the expense question because so I can fully appreciate the guide here. Does the guide include future hirings? Or is it just kind of the current employee base right now?

Alex Ko

It does take into the consideration of the future hirings as well. But just for a caveat, we will continue to grow, but the exact hiring number is yet to be decided, but it does capture our best expected hiring as of now, but it might change a little bit.

Tim Coffey

Okay. And then how does the future hiring FTEs relate to the second quarter? I mean, do you anticipate growing 50 FTEs a quarter?

Alex Ko

I don't think it will -- again, Tim, it will depend on our strategy and especially the growth will be -- depends on our revenue generation. So -- it was like a 54 FTE increase in the second quarter was a little bit higher than the historical trends. So I think it might be lower than 54 FTE increase in the next quarter or so.

Tim Coffey

Okay. And just one more question on the FTEs. The ones that you hired in the second quarter, that you're looking to hire later this year. Is there a specific category? Is it mortgage? Is it C&I?

Alex Ko

Not -- no, I'm not thinking it's specific to one sector, but it's a more overall lending side. And we had actually increased our FTE for the back office function in the past. So I think it is, again, CBG and other lending-related business. I think that are the main driver for the increase of FTE.

Tim Coffey

Okay. Okay. That's super helpful. And then I just had a question on SBA premiums and what you're seeing in the marketplace.

Alex Ko

Yes. SBA premium was a pretty high last time. But as the interest rate goes up, we see it's coming down quite a bit. So as of second quarter, we see it's a lower level, like 4.5% to 5.5% level. However, as the rate goes up -- and as a reminder, SBA loans are repriced on a quarterly basis. So there's a view that the current 4.5% to 5.5% range, maybe it bottomed. So there is expectation that it will go up in the third quarter or so. But I do not have that exact expectation.

Tim Coffey

Okay. Okay. Is there a level at which you consider port following the SBA loans again? Because I know you've done that in years past.

Alex Ko

Yes, we did, but we resumed to selling it. And we believe the like a lower premium will be one of the factors that we will consider to portfolio versus continue to sell. And also, the total production for the SBA, we expect it will be slowed, but we still have some portfolio if we choose to continue to sell. So as of today, we do not expect to portfolio it in the near term. But again, it depends on the premium and the secondary market demand and so forth. .

Operator

[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.

Kevin Kim

Okay. 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.

Operator

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