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Edited Transcript of HOPE earnings conference call or presentation 22-Oct-19 4:30pm GMT

Q3 2019 Hope Bancorp Inc Earnings Call

LOS ANGELES Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Hope Bancorp Inc earnings conference call or presentation Tuesday, October 22, 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

* 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

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Presentation

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Operator [1]

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Good day, and welcome to the Hope Bancorp Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, the event is being recorded. I would now like to turn the conference over to Angie Yang, Director of Investor Relations. Please go ahead.

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

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Thank you, Nick. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2019 Third Quarter Investor Conference Call. As usual, we will begin with the slide -- 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, 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 September 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 third quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures.

Now we have allotted one hour for this call, as usual. Presenting from the management's 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 third quarter, we executed well on our strategic priorities and delivered a quarter that we view as positive on all fronts and reflecting a continuation of the many improving trends that we experienced in the preceding quarter.

In a very challenging environment for generating revenue growth, we delivered consistently strong profitability by: one, further improving our deposit mix to lower cost in core deposits; two, originating, a well-balanced mix of new loans; three, maintaining disciplined expense controls and efficient cost structure relative to our [asset size]; and last to note, but certainly not the least in terms of importance, making meaningful improvements in our credit metrics with a 35% reduction in nonaccrual loans and a 20% decrease in total criticized assets outstanding as September 30 of 2019.

From a net income perspective, we generated $42.6 million during the third quarter or $0.34 per diluted share, which was comparable with our results in the preceding second quarter. One of the clear highlights of the quarter was the continued progress we are making on our deposit-gathering initiatives. We saw growth in all of our lower-cost deposit categories in the third quarter with the strongest growth coming in money market accounts, which increased by $530 million or 16% from the end of the prior quarter. Our noninterest-bearing demand deposits were also up this quarter by 1% or $24 million. The growth in these core deposit segments enabled the bank to reduce time deposit balances by 9%, improving our overall deposit mix.

We -- as we have previously mentioned, we have a number of initiatives in place to enhance our core deposits, and they have all contributed to our progress this year. But more than anything, the key factors have been the greater emphasis that we have placed on deposit gathering and deposit cost control and how these initiatives have been embraced at all levels. Our branches are doing an excellent job in engaging with customers and attracting more retail deposits for lower-cost categories, which have significantly reduced our reliance on time deposits to fund our loan growth.

As a result of the excellent progress we have made in this area, we saw our deposit costs plateau from -- during the third quarter. For the 2019 third quarter, our cost of deposits was 1.62%, the same as in the second quarter. Alex will provide additional color on our deposit costs. But from a cost perspective, we are starting from a higher point than most mainstream banks. So we believe we have greater opportunities to reduce our deposit costs. We do, however, intend to take a gradual approach and closely monitor the pricing environment in our markets as we continue to grow deposits while reducing costs.

Moving on to Slide 4. As we mentioned on our last call, we had a strong loan pipeline that we expected to result in a higher level of loan originations in the second half of the year. We delivered on our business development goals in the third quarter as our total loan originations increased 38% from the preceding second quarter. We had $694 million in new loan originations funded in the third quarter, up from $504 million in the second quarter. Payoffs and paydowns totaled $633 million in the quarter, up from $599 million in the preceding quarter.

We continue to see larger mainstream banks becoming increasingly more aggressive in the pricing and terms they are offering, particularly on long-term commercial real estate loans, and we have been and will continue to be judicious in our pricing as it relates to securing new clients as well as retaining existing ones. With our higher level of loan originations, our total loans increased $128 million or 1.1% from the end of the preceding quarter.

Looking at the breakdown of our loan production by major category. Commercial real loans comprised 50% of total production in the quarter. Commercial loans accounted for 41%, and consumer loans, comprised primarily of residential mortgage loans, accounted for 9%. We originated $349 million in CRE loans for the quarter, up from $253 million in the preceding second quarter. With interest rates declining and a flattening of the yield curve, we saw pickup in demand for CRE loans, and we were able to capitalize on the greater volume of opportunities that we had in our markets.

We also saw a very nice increase in C&I loan originations in the quarter. We had $283 million in new C&I production in the third quarter, up from $176 million in the prior quarter. Aside from the opportunities that we are capitalizing on in the supermarket industry in the Northeast and with the subsidiaries of Korean national companies operating in the U.S., we continue to see a steady stream of business opportunities from our middle market corporate banking team that is focusing more on mainstream clientele.

We also had a strong quarter of growth during the third quarter in our warehouse line of business with the addition of a new customer and expansion of existing credit facilities. We view this as an attractive business given the very low loss rates and the opportunities it provides to continue diversifying our portfolio.

With our higher level of C&I loan production, we continue to make progress on diversifying our loan portfolio. Over the past 12 months, commercial loans have increased from 19.4% of our total loans to 21.9%, while real estate loans have declined from 72.4% of total loans to 71.0%.

Turning to our SBA business, we originated $54 million in SBA loans compared with $37 million in the preceding second quarter. The average rate on new SBA 7(a) originations was approximately 7%. And since we are retaining this production, we are seeing the positive impact this strategy is having on our average loan yields. While we saw nice growth in SBA production this quarter, the overall environment for SBA has become increasingly competitive.

We are seeing more banks lending on projections or making optimistic assumptions about improvements in debt coverage ratios over the life of the loan. We are more conservative and do not rely on projections to meet our underwriting standards. As a result, we have elected not to close on all of the opportunities that we had during the quarter. At this point, in the credit cycle, we feel it is more important than ever for us to be prudent in our underwritings.

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?

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

Beginning with Slide 5, I will start with our net interest income, which totaled $116.3 million compared with $117.2 million in the preceding second quarter. The reduction was primarily due to a $1.4 million sequential decline in our accretion income. Our net interest margin declined by 6 basis points to 3.25%. On a core basis, excluding purchase accounting adjustment, our net interest margin declined by only 2 basis points. This reflects continued moderation in the rate of compression in our net interest margin that we have experienced. A small decrease in our core net interest margin was due to a 1 basis point decline in our core loan yield, which excludes accretion income. The decline in core net interest margin reflects variable rate loans repricing downwards as well as a lower rate on new originations in a declining interest rate environment.

As Kevin indicated earlier, our cost of deposits was unchanged from the prior quarter at 1.62%. While we saw a small bump in the average rate on time deposits, this increase was offset by a 7% decrease in average balance of time deposits. We also recognized an increase in the average balances of our demand deposits, both interest-bearing and noninterest-bearing, as well as savings account. In particular, the average balance of interest-bearing demand deposit increased 12%, reflecting growth in the money market account balance. Overall, the favorable shift in the mix of deposit to lower-cost deposit categories helped to mitigate the impact of the declining interest rate environment.

Now the expectations for the interest rate movements has continued to remain volatile. So we will not make a [projection] for the number of interest rate cuts. As we did last quarter, we will continue to provide guidances as to the impact of interest rate cuts. Last quarter, we guided that with each 25 basis point decline in interest rates, we expected an initial impact of approximately 5 to 8 basis points loans repriced to lower rates. With the success we are having with lower -- our deposit cost following the interest rate cuts, we are now expecting an initial impact of 5 to 7 basis point reduction, which -- with each 25 basis drop in the fed fund rates.

Now moving on to Slide 6. Our noninterest income was $13 million, up from $12.3 million in the preceding second quarter. The increase recognized from the preceding quarter was attributable to a number of items that positively affected other income and fees. In an effort to mitigate the impact of current rate environment, we have expanded our interest rate swap program, which drove higher fee income this quarter compared with the preceding quarter, resulting in the increase in other income and fees.

Service fees on deposit accounts were up 6%, which is the second quarter in a row that we have seen an increase in this area, and we attribute this to the growth in our core deposits in recent quarters. These increases were partially offset by our net gains on sale of residential mortgage loan, which declined by $262,000. As you may recall, last quarter, we sold $49.6 million of seasoned loans from our mortgage portfolio, which accounts for the higher gain in the second quarter.

Moving on to noninterest expenses on Slide 7. Our noninterest expense declined 2% to $70 million. We benefited from a full quarter's impact of our recent branch consolidation efforts and a benefit from the FDIC that eliminated our assessment expense this quarter. We also had a 12% decrease in professional fees on a linked quarter basis. These cost savings were partially offset by a 6% increase in our salaries and benefit expenses from the preceding second quarter. This was primarily due to an increase in our self-funded group insurance cost, which fluctuates each quarter based on the volume of insurance claims in a given quarter. From an overall standpoint, we continue to focus on controlling expenses related to our [exercise] and our noninterest expense to average asset ratio improved to 1.85%.

Going forward, we believe we are in an excellent position to continue to effectively manage our expense levels as we're making progress with our growth strategies. In particular, we should see reduction in our professional fees now that we are in the final stage of our work with third-party consultants as part of our CECL implementation.

Now moving on to Slide 8. Kevin already mentioned some of our key deposit trends. So I would just quickly run through a few highlights. Our total deposits increased by approximately 1% from the end of the prior quarter with all of the growth coming in our lower-cost categories. As a result of the improvement in our deposit mix, on-time deposits increased to 57.6% of our total deposits compared with 53.3% at the end of prior quarter. As a result of the strong progress we have made in this area, we saw our cost of deposits plateau in the third quarter at 1.62%. From a month-to-month perspective, our deposit cost went up in July, but then declined in August and September. So we are clearly seeing the fruits of our efforts and expect this trend to continue.

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 third quarter, and for the first time in many quarters, we repriced CDs at a lower rate than the maturing rate. And this certainly improves our ability to manage deposit cost going forward.

Now moving on to Slide 9. I will review our asset quality, which is certainly another one of highlights for this quarter. We delivered a second consecutive quarter of significant improvement in our credit quality as our nonaccrual loans declined by $22.7 million and our criticized loans declined by more than $100 million from the end of prior quarter. We can attribute much of the improvement this quarter to our proactive identification and management efforts. As mentioned in our earnings release, $26 million of substandard loans were transferred to loans held for sale during the third quarter. We also had a number of payoffs of loans, which we proactively identified and have been working with the borrowers to move them off our balance sheet. In addition, we had a number of upgrade, which contributed to the overall reduction in our criticized loan balance.

Our asset quality trends over the past several quarters reflect a continuing of the proactive approach to credit management that we consider a core imperative for the bank. We have a rigorous process in place for identifying potential problem credits at an early phase that includes enhanced covenant monitoring procedures. When we identify a potential problem loan, as we did with a number of large credits in the first quarter of this year, we adequately reserved for the expected loss and developed an action plan for the workout and eventual resolution of each loan.

With the economy still being relatively healthy, we have taken advantage of the aggressive posture that many banks have taken in their underwriting and pricing to manage many of these lower-rated credits out of the bank. We believe this proactive approach to credit management has resulted in improving trend in the overall health of our portfolio and has helped us keep our losses at very low levels. We had $1.8 million in net charge-offs, which included approximately $600,000 from loans that were transferred to held for sale.

Net charge-offs represented just 6 basis points of average loans on an annualized basis for the 2019 third quarter. On a year-to-date basis, our net charge-offs amounted to 4 basis points of average loans. Our provision for loan losses was $2.1 million reflecting our higher level of loan growth and charge-off related to note sales.

Moving on to Slide 10. Before I turn the call back to Kevin for closing remarks, let me provide some color on where we stand on CECL implementation. We are running [indiscernible] test and are on track for a successful adoption of CECL effective January 1, 2020. While our findings are still preliminary, we wanted to provide a preview to our current expectations.

Based on the current economic forecast and our portfolio balance at the end of the third quarter, we would expect our allowance for loan losses to increase by approximately 30% to 40% or approximately $28 million to $37 million to our existing allowance for loan losses. This estimation is driven primarily by the higher reserve requirement under the CECL methodology for the longer-duration CRE and consumer loans in our portfolio. We anticipate ther1e will be no material impact for our shorter-duration C&I loans as a result of the change from the incurred loss method to CECL.

This, in turn, should result in a day 1 impact of reduction to our Tier 1 common equity ratio of 22 to 29 basis points and a reduction to our tangible common equity ratio of 18 to 24 basis points. We do want to make it clear that these estimates are still preliminary. We will continue to refine our estimation through year-end to incorporate any change in the economic outlook as well as other key drivers under the CECL methodology.

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 11. I will conclude with a few comments about our outlook. While the operating environment has been quite challenging this year, I'm very pleased with how we have executed on our strategic priorities. We have made significant progress on our deposit-gathering initiatives, improved our deposit mix and more effectively controlled our deposit costs. We have been disciplined in our expense management.

For the first 9 months of the year, our noninterest expense to average assets was 1.86%, down from 1.89% in the first 9 months of 2018. We have continued to strengthen our asset quality and have kept our credit losses at very low levels. And we have effectively diversified our lending capabilities to have a more balanced mix of new loan production that is less reliant on CRE with stronger emphasis on loans with higher risk-adjusted yields.

Our loan pipeline is robust going into the fourth quarter, and we believe we will see another strong quarter of loan production to close out the year. Through our continued execution on all of our strategic priorities, we believe we can continue to deliver consistently strong earnings and create additional value for our shareholders.

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) First question comes from Chris McGratty, KBW.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

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Alex, maybe start with the margin and net interest income for a second. Just want to make sure I understand the guide. The compression was a lot less than we thought this quarter. And you guys -- seem like you're lowering deposit costs fairly quickly. Is the guidance of 5 to 7 basis points per cut, is that off the reported number or is that off the adjusted number, excluding accretion?

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

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It is a reported number.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [4]

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Okay. So if we get -- so if we got the September cut, if we get October, we should be somewhere -- reported number should be down roughly 10 basis points or so?

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

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Yes. Because it can be accumulative of July, September as well as October. As we indicated, once we have a 25 basis point reduction of the market rate, the full impact we expect a 5 to 7 basis points decline in the net interest margin. So we did see the 6 basis point reduction in the first quarter, but it did not have a much full impact of the rate cut on September. So going forward, again, we don't have a really crystal ball of how many rate cuts we will have. But we can give you guidance as 25 basis point cuts, the full impact will be 5 to 7 basis point decline in net interest margin.

And give you a little bit more color, we do have a success on the deposit cost control. We have about 40% of loans on a variable rate loans. And as the rate goes down, we have probably immediate repricing on the loan side. But I think, as part of the deposit cost control, which we already seeing a improvement and the renewal rate for the CD is actually lower than the existing portfolio, so we would expect to see some deposit cost control will mitigate or offset a little bit on the -- further compression on the loan yield side.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [6]

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Understood. But given that we are -- the rapid succession of the rate cuts, the fourth quarter might look, on a comparable period, a little bit worse than what we saw this quarter. Okay. In terms of the accretion expectation, that number continues to kind of slowly decline as expected. What's -- can you remind us what's left to be accreted? Maybe how CECL might affect that? And expectations for just the the next few quarters for accretion income?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [7]

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Sure. The last quarter, we had a higher accretion income. In terms of dollar amount, it was $8.7 million. What I mean last quarter is Q2. And Q3, we have a total of $7.3 million. So there was about $1.4 million reduction in the accretion that did have a impact, about 4 basis points impact on the margin. So going forward, as we have been talking in the past on several call, the remaining -- the accretion -- accretable balances keep decreasing, so I think it will be in the neighborhood of $7 million in Q4 and it will continue to go down.

In terms of a CECL impact, those accretion income for the credit-related component, if that amount is within the additional CECL-related allowance for loan losses, those balance will be added on to the allowance for the CECL impact. And we don't have that much of the credit-related unaccreted balances. I think it's less than $8 million, and we are in the final stage of quantifying exact amount, but it will be a relatively small amount that will have impact from the CECL implementation.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [8]

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That's great color. And one more maybe for Kevin and then I'll step back. Can you offer your updated thoughts on the buyback. You obviously were not active in the quarter. Wondering if the expectations that you could resume the program. And maybe what would it take for the buyback to be utilized?

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Kevin Sung Kim, Hope Bancorp, Inc. - Chairman, President & CEO [9]

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Well, we have been very aggressive in our prior buyback programs. But we do not think we will be as aggressive as we used to be because a lot of factors are being monitored at this time, and we will be opportunistic as we said before. So we are ready to buy back our shares when we believe it is the right time, but we haven't had that time yet. And hopefully, based upon our performance of our stock during the past several weeks, or a few months, we thought that the opportunistic time has not come yet.

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Operator [10]

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Our next question comes from Tim O'Brien, Sandler O'Neill + Partners.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [11]

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First question for you. Do you guys happen to know the dollar amount of CDs that are maturing -- scheduled to mature in the fourth quarter?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [12]

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Yes, we do have. Next quarter, total $1.7 billion will be maturing, and actually rate for that $1.7 billion is about 2.35%. And let me give you a little bit more color on the rate. Our recent offering of those like [calling a] CD, like a 12 month, is under 2%. So we will see those renewal for those CD that will mature, it will be repriced at a lower rate.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [13]

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And that's for the fourth quarter, the $1.7 billion?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [14]

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Yes.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [15]

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Now, Alex, would you happen to have the first quarter maturity number also just by chance?

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Kevin Sung Kim, Hope Bancorp, Inc. - Chairman, President & CEO [16]

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Yes. I do have. That is a $1.2 billion at a rate of 2.5%, a little bit higher. But going forward, Q2 2020 and going forward, the rate is 2.3% and 2.29%. So it's a little bit lower and Q2 2020, the dollar amount, in case you need as well, is under $1 billion, and Q3 is in the neighborhood of $1 billion its respective quarter.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [17]

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Do you get a sense that there might be some opportunity to lower rates on money market or another nonterm deposits here in this quarter?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [18]

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Yes. Tim, as you recall, Bank of Hope, we have a higher deposit beta when the interest rate was rising the earlier of this year. So that's why we had an increase on the balance of the CD as well as a high deposit cost. But I think we are actually in a reverse situation, meaning we had started with a higher deposit cost, but as the market rate goes down, we take actually strategy to lower our deposit costs gradually. What I mean gradually is anticipation of the rate cut, we have like a 5 basis points reduction and also next time, we have additional 5, and also when it -- market actually cuts, we reduce small amounts.

So gradually, we decreased those rate and that gradual reduction strategy has been in place for 1 or 2 quarters. And now we see the fruit of those strategy. And we do believe this will continue to be our top priority or strategy to control our deposit cost going forward. And especially if the market rate goes down, I think we do have a room for further reduce and that is, I think, relatively Bank of Hope's deposit position is better than our peers.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [19]

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Thanks for that color. And then switching gears, looking at the loan funding -- C&I loan fundings, $283 million this quarter. Do you have a sense, Alex, of what the -- how much the dollar amount of that, that was funded with active floor at current level? Or if any, were you able to impose active floors on some of that production?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [20]

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Yes. We do have a policy to impose those on the floor, but we don't have that much. We have only small amount of those variable rates. But I think the $400 million of the actual floors in place, and the rate that we actually have about $280 million origination was relatively low because we did have a C&I and warehouse loan portfolio. But we are actively seeking for the opportunity to put in place the floor kind of a kick in. But again, we don't have much dollar volume that is subject to this floor rate at this moment.

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Peter Koh, Hope Bancorp, Inc. - Executive VP & Chief Credit Officer - Bank of Hope [21]

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And just to add, this is Peter. I think on the new originations particularly, I don't think that there's many opportunities to put the floors in as we are looking at them. So I think we will be opportunistic there, but in terms of originations, I think most of them are already being priced without the floors.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [22]

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So it's fair to say that a selling feature for you guys to generate that business is not imposing floors like some other folks seem to be doing or having success doing. And that allows you to -- that's something that is in demand in the marketplace for your clients. Is that fair?

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Peter Koh, Hope Bancorp, Inc. - Executive VP & Chief Credit Officer - Bank of Hope [23]

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Right. I think for the types of originations that we are pursuing right now, I think there are less opportunities to put floors. But we will seek those opportunities as we move forward as well.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [24]

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Great. And then last quick question. Just a point of clarification on the new NIM guidance with rate cuts. Is that instantaneous kind of effect? Is that how you're looking at the 5 to 7 basis point compression? Or is that extended over 12 months per cut?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [25]

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Sure. That is a full cycle of the -- repricing our deposit and I don't think it is repriced and take a year. It will be more in a quarter or 2. For that time frame, we would expect to have a margin compression about 5 to 7 basis points.

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Operator [26]

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Our next question comes from Matthew Clark, Piper Jaffray.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [27]

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First question just on the core loan yields down 1 basis point. I was wondering if there was any prepayment fees in that number. I'm just trying to square the repricing that occurred during the quarter from the fed cuts and the new production that was down, I think, about 74 basis points?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [28]

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Yes. I don't think -- no, yes, you're correct. We have about 1 basis point reduction on the NIM, that is from the reduction of the loan yield. The rest is the combination of investment securities and others. And there is about prepayment impact, it was relatively small, about -- in the neighborhood of about $1.5 million. So I don't think it does have a impact substantially on the loan yield as well as net interest margin.

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Kevin Sung Kim, Hope Bancorp, Inc. - Chairman, President & CEO [29]

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And let me give you a color on the average rate on new loan production in the third quarter, which was somewhat lower than the rates that we had in the second quarter. I think the lower overall rate environment and a flattening of the yield curve and the larger volume of warehouse credit lines in our new loan production contributed to a lower average rate on our new loan originations in the third quarter, which was 4.72%.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [30]

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Okay. And then on the expense to average asset ratio, I think previously you provided guidance on that, at least a range of expectations for the upcoming quarter. I think last quarter you targeted 1.85% to 1.88%, you did when 1.85% at least on a reported basis. Any update there at least for the upcoming quarter with the savings on the professional side?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [31]

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Yes. Let me give you a little bit more details on the Q3 noninterest expense component. We did have a FDIC fee assessment. This quarter, we have 0 balances. And the reason for that was we got the full credit. We offset it completely from the onetime nature of the FDIC assessment. So in Q4 and going forward -- because that credit was intended for the small banks that happen to be under $10 billion, but we were able to claim for that. So I don't expect Q4 those FDIC fee assessment benefit will continue. So on a quarterly basis, about $1.4 million, $1.5 million, we have that should have been in Q4. But also Q3, we did have a kind of unusual increase on the salary and benefit coming from the insurance claims.

We have self-funded insurance claim and it happened to be in Q3, large claims came in and we have about equal amount of increase on the salary and benefit expenses. So with that -- and I would expect to have a professional fee will slightly decrease. As I indicated on the prepared remarks, CECL is -- we are in the tail end. And going forward, 2020, we will have a better efficiency or expense controls. So with that, I would still keep the same guidances in terms of net interest expense over average asset and between 1.85% to 1.88% range.

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Operator [32]

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

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [33]

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Wanted to just ask a follow-up as it relates to the margin and kind of the third quarter delta with the fed rate cut. So you guided to a decline of 5 to 8 basis points. You came in at 6 on a GAAP basis, but there was 4 basis points less benefit from accretion. So really it seemed like you outperformed the guidance and your guidance for the fourth quarter didn't really change materially. So I'm just wondering, is your guidance for the fourth quarter, does that include the full sort of projected benefit of the CD repricing gap that you may have in the fourth quarter? Or would that act as an offset to that 5 to 7 basis points impact?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [34]

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Yes. 5 to 7 basis point, it does have a impact from both loan side as well as the deposit side. The deposit cost reduction will definitely offset the full impact of the loan yield compression.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [35]

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So the 5 to 7 is net of the CD repricing?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [36]

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Yes.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [37]

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All right. And then do you have the average mortgage warehouse balances for the third quarter?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [38]

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Average warehouse mortgage?

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [39]

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Yes.

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [40]

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Yes. We do have. Let me see.

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Kevin Sung Kim, Hope Bancorp, Inc. - Chairman, President & CEO [41]

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That is average balance for the quarter is $208 million and ending balance is $432 million.

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Angie Yang, Hope Bancorp, Inc. - Senior VP and Director of IR & Corporate Communications [42]

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$288 million.

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Kevin Sung Kim, Hope Bancorp, Inc. - Chairman, President & CEO [43]

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$288 million. That's the average balance.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [44]

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Okay. What was the average?

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Kevin Sung Kim, Hope Bancorp, Inc. - Chairman, President & CEO [45]

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What?

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Angie Yang, Hope Bancorp, Inc. - Senior VP and Director of IR & Corporate Communications [46]

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Second quarter?

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [47]

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What was the average rate?

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Kevin Sung Kim, Hope Bancorp, Inc. - Chairman, President & CEO [48]

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Second quarter, the average was $247 million and ending balance was $301 million.

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Operator [49]

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Our next question comes from David Chiaverini, Wedbush Securities.

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David John Chiaverini, Wedbush Securities Inc., Research Division - Senior Analyst [50]

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Couple of questions. Starting with growth. I know your guidance for 2019 for loan growth is 2% to 3%, and that assumes, or I should say, incorporates an elevated level of payoffs and paydowns. As we look out to 2020 and assuming that payoffs and paydowns kind of trend back to a more normalized level, should we think about loan and deposit growth more in the mid-single-digit neighborhood?

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Kevin Sung Kim, Hope Bancorp, Inc. - Chairman, President & CEO [51]

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So you're talking about 2020?

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David John Chiaverini, Wedbush Securities Inc., Research Division - Senior Analyst [52]

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That's correct.

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Kevin Sung Kim, Hope Bancorp, Inc. - Chairman, President & CEO [53]

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Not 2019? Well, I think it is a little premature to give you a meaningful guidance for our 2020 loan growth or deposit growth. But hopefully, the growth that we will have in 2020 will be bigger than what we will have in 2019. So in 2019, we are targeting at 2% to 3% loan growth and hopefully, we will achieve higher growth than that in the next year. So I think mid-single digit could be a reasonable expectation at this time, which can be further finalized as we get closer to the year-end.

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David John Chiaverini, Wedbush Securities Inc., Research Division - Senior Analyst [54]

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Appreciate those comments. And then shifting over to credit quality. Overall credit quality looks very good. I was curious about credit quality in your SBA portfolio now that you have been holding on to those SBA loans for a few quarters now. Are they performing as expected?

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Peter Koh, Hope Bancorp, Inc. - Executive VP & Chief Credit Officer - Bank of Hope [55]

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Yes. I think SBA portfolio is actually performing just in line with the rest of our portfolio. So we are not seeing any additional stress or anything like that there are so far.

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Operator [56]

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(Operator Instructions) Our next question comes from Chris McGratty, KBW.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [57]

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Thanks for the follow-up. Alex, with respect to the whole funding structure, I mean you do have $600 million or $700 million of FHLB advances. I'm interested maybe in your thoughts on whether there might be something to do there to be paid a higher cost and maybe strike the investor portfolio. How do we think about that dynamic over the next several quarters given where rates are?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [58]

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Sure. I think given we have some success in loan portfolio increase especially comes from the core loans, the C&I, and we would like to maintain sufficient liquidity or funding sources obviously including the core deposit that we have seen a 1% growth that is good, but we also reduced the broker deposit substantially for this quarter. And FHLB advance is not our primary sources of funding for our loan growth, and the current level is kind of adequate, but we will make sure we were optimizing the cost of the FHLB advance fees because sometimes, we are comparing this with the core deposits and others, so we'll be much flexible. So I don't expect substantial reduction, again, given our growth potential on the lending side, we will be very mindful paying off if we see a success in our deposit gathering from our core deposit.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [59]

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Okay. Great. And then same for the consequence, I'll be just curious, what probably stays about at current levels in terms of $1.8 billion or so or 16% of asset or something like that?

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Alex Ko, Hope Bancorp, Inc. - Executive VP & CFO [60]

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Yes. Given the rate cycle, I don't anticipate substantial change on the investment portfolio.

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Operator [61]

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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 [62]

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Okay. Thank you. Once again, thank all for joining us today. And we look forward to speaking with you in 3 months for the next quarter. So long.

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Operator [63]

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Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.