Hope Bancorp Inc (HOPE) 2014 Q3 法說會逐字稿

Good morning, and welcome to the BBCN Bancorp Q3 2014 conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Angie Yang, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Kate. Good morning, everyone, and thank you for joining us for the BBCN 2014 third-quarter investor conference call. Before we begin, I'd like to make a brief statement regarding forward-looking remarks.

The call today may contain forward-looking projections regarding future events and the future financial performance of the Company. These statements constitute forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995 and are not statements of historical fact. We wish to caution you that those forward-looking statements reflect our expectations based on information currently available, are not guarantees of future performance, and involve certain risks, uncertainties, and assumptions that are difficult to assess. Actual results may differ materially as the result of risks and uncertainties that pertain to the Company's business.

We refer you to the documents the Company files periodically with the SEC as well the as safe harbor statement in the press release issued yesterday. BBCN 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 should be included in the quarterly report on Form 10-Q for the quarter ended September 30, 2014, could differ materially from the financial results being reported today.

As usual, we have allotted one hour for this call. Presenting from management's side today will be Kevin Kim, BBCN's Bancorp Chairman and CEO; Kyu Kim, our Chief Operating Officer; and Doug Goddard, our Chief Financial Officer. Chief Credit Officer Mark Lee; Chief Lending Officer Jason Kim; and Chief Retail Banking Officer Cha Park are 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 me begin today with some brief comments on the quarter before asking Kyu and Doug to provide more details on the financial results. When they are finished, I will close with some final comments before we open up the call for questions.

We had another quarter of consistent execution, highlighted by steady loan growth with total loan originations of $382 million for the quarter. With our larger market presence in Southern California and in New York/New Jersey markets, we continue to generate a high volume of attractive lending opportunities in our core markets. And at the same time, we are beginning to get more traction in the business development in our newer markets in the Pacific Northwest and Chicago. However, our overall level of net loan growth this quarter was mitigated by higher levels of pay ups and pay downs than in recent quarters.

In aggregate, payoffs and pay downs were $312 million during the third quarter, up from $231 million in the prior quarter. Given that the third quarter was seasonally the strongest quarter in terms of new loan originations, it is expected that the third quarter also be seasonally higher in terms of payoffs. In the third quarter, we also had a number of notable large transactions which contributed to the high level of payoffs. This includes an aggregate of $24 million in payoffs from three large sales transactions.

In other large payoff situations, we allowed certain loans to be refinanced by other banks that were willing to be more flexible in pricing and structure than we are. Despite the headwind of high level of payoffs, we have still been able to grow our loan portfolio up by 2% on a sequential basis and 7% through the first nine months of 2014. Overall, we generated $21.4 million in net income or $0.27 per share for the 2014 third quarter. And despite all of the investments that we are making in our franchise in terms of people, products, and geographic expansion, we continue to operate at a high level of efficiency with an efficiency ratio under 50%.

Following the launch of our commercial equipment leasing business, late in the first quarter of this year, we are set to begin the launch of our residential mortgage platform before the end of the year. We are also on schedule to launch a significantly enhanced credit card product as well as a new wealth management offering in the first half of 2015. And before the end of the year, we are slated to open BBCN's rep office in Seoul, Korea, representing the first ever formal expansion by a Korean American bank into South Korea.

While we do not expect to see the benefits of all of these investments to our bottom line until 2015 and beyond, we are pleased that the fast focus and financial performance has resulted in another strong quarter of profitability with our higher than industry pre-tax pre-provision earnings to assets of 2.32%. Now, let me turn the call over to Kyu who will provide additional details on our business development efforts in the third quarter. Kyu?

Thank you, Kevin. As Kevin mentioned, we had $382 million in loan originations for the third quarter. Commercial real estate continues to be the area of lending with a heightened demand in the market and it accounted for 86% of our total loan production in the quarter. We also continue to make progress in our C&I lending efforts and we funded approximately $48 million in C&I loan originations during the third quarter.

In terms of total C&I loan commitments made during the quarter, we extended $72 million in commitments to commercial customers. Overall, we have a little more than $1 billion in total credit commitments outstanding to commercial customers with a utilization rate of 53% on lines of credit at September 30, 2014. Our SBA loan business was a strong contributor to total loan originations this quarter. Of the $382 million in loan production for the third quarter, nearly $70 million were SBA loans. Of this amount, $40 million were sellable SBA 7(a) loans.

Since the creation of BBCN, we have proven quarter after quarter that BBCN is definitely the leading lender in our niche market, a position that we are not going to walk away from. It is our goal to remain the go-to bank for our core community.

In light of the ongoing high demand for commercial real estate loans beginning in the current quarter, we are planning to take a more strategic and proactive spend in terms of balancing the product and geographic mix of our portfolio. This will involve a number of actions including, among others, participating out portions of certain CRE loans as determined by the impact that any given monitor have in terms been contributing to our target loan portfolio mix. However, we do not expect that this will involve any loan pool sales as our goal is to maintain and strengthen customer relationships.

While our loan pipeline continues to remain strong as a result of this strategy, as well as the tendency for the third quarter to be, seasonally the highest, in terms of loan production and the highly variable level of payoff in any given quarter. Net loan growth for the near term quarters may be somewhat moderated to the levels of the current third quarter. At least until the launch of our residential mortgage platform and other new product lines take root.

Going back to our loan production for the third quarter, from a geographic perspective, we are very pleased with the more balanced geographic mix of loan originations. In aggregate, our branches in Northern California, the Pacific Northwest, and Chicago regions contributed approximately 16% of our total loan production in the third quarter. Having passed the one year anniversary of the Foster acquisition and with the leadership structure now in place for this region, we are definitely seeing signs of a firming loan pipeline for this market.

In terms of the mix of fixed and variable rate loans, for the third quarter of 2014, we are more successful this quarter in booking a higher volume of variable rate loans. We believe variable rate loans will provide longer-term interest rate risk protection in what we should eventually be a rising interest rate environment. The mix of originations in the third quarter was 55% variable rate and 45% fixed rate and this compares to 39% variable rate and 61% fixed rate in the prior quarter.

As a result of this mix shift, new loan originations this quarter, and given that variable rate loans that typically booked at lower rates than fixed rate loans, we saw a decline in the rate of new loan originations averaging 4.31% in the third quarter compared with 4.52% in the preceding quarter. With that, let me turn the call over to Doug to go over our financial results in more detail. Doug?

Thank you, Kyu. As usual, let me just discuss a few items where I think some additional color is warranted, given that we provide quite a bit of detail in our press release and the quarter was relatively consistent with recent performance. Let's begin with some brief remarks on deposit trends.

Going into the third quarter, we had a significant amount of excess liquidity that resulted from our strong deposit growth in the second quarter. We utilized this liquidity to let approximately $33 million of wholesale deposits roll off. This strategic runoff moderated our overall level of deposit growth in the quarter.

Outside of the wholesale deposit category, our core deposit trends remain positive and were up by $71 million driven primarily by a 6% increase in money market accounts from the end of the prior quarter. Our net interest income increased by 1% in the preceding second quarter, primarily reflecting the increase in average loan balances, which was up a little less than 3% over the second quarter, offset by a 15 basis point decline in the average loan yield.

Compared to the second quarter of 2014, our net interest margin decreased by 5 basis points to 4.15%. However, on a core basis, excluding the effects of purchase accounting adjustments, our net interest margin increased by 1 basis point. The increase in our net interest margin on a core basis was primarily attributable to a more favorable mix of earning assets, as a significant amount of our excess liquidity held in cash and cash equivalents during the second quarter was redeployed into the loan portfolio.

We recognized $6 million in accretable discount on both performing and credit impaired acquired loans for the third quarter of 2014 compared with $6.7 million in the preceding quarter. At September 30, we had approximately $28 million in accretable discount remaining on all of the acquired portfolios. As a reminder, while there are fluctuations quarter to quarter as we would expect the trend in the discount recognized each quarter will be lower, though not necessarily on a linear basis.

Moving on to non-interest income, the most significant change from the prior quarter was an increase in our net gain on sale of SBA loans. Our net gain was $3.6 million in the third quarter, an increase of 27% from the prior quarter. As you may recall from last quarter's conference call, we had guided that our SBA gain on sale could be higher in the third quarter given the increased volume of sellable, 7(a) loans booked during the second quarter. During the third quarter, we sold approximately $40 million in SBA loans versus $31 million in the second quarter. The premium in the wholesale market has held steady and averaged approximately 10% for our sales in the third quarter.

Turning to non-interest expense, most items were in the normal range of variance. The most notable difference from the prior quarter was a $1.2 million increase in our salaries and employee benefits, which was primarily due to an increase in headcount and the fact that the third quarter has one additional day versus the second quarter.

Turning to asset quality, we had some mixed trends in the third quarter with a modest increase in early stage problem loans and restructured loans but a decline in non-accrual loans and classified loans as well as a continuation of our relatively low level of credit losses. While our special mention loans increased to $113.4 million at September 30, up from $92.5 million at the end of the prior quarter, for the third consecutive quarter we saw a decline in classified loans, which dropped another $10 million to total $231.8 million at September 30. Since the beginning of the year, our total classified loans have declined by approximately 13%.

Our non-accrual loans at September 30 declined to $39.6 million or 0.73% of total loans from $42.7 million or 0.8% of total loans. However, our accruing restructured loans, or TDRs, increased by $12 million, largely reflecting extensions made to existing but maturing classified loans. As in the past, we had a large majority of total non-performing loans including non-accrual and TDRs, current and paying as agreed, and as of September 30, that percentage was in excess of 77%.

Our net loan charge-offs for the quarter were $2.9 million or 21 basis points of average loans on an annualized basis, up a bit from 14 basis points in the prior quarter. We recorded a provision for loan losses of $4.3 million in the third quarter. This provision covers our charge-offs, accounts for the growth in the portfolio, and enabled us to keep an overall allowance at a fairly consistent level. This put our allowance to total loans at 1.26% and our coverage of non-performing loans of 71.4% at September 30, 2014.

With that, I will turn the call back to Kevin.

Thanks, Doug. We continue to build on the foundation for the healthy long-term growth of our franchise. As noted in our earnings news release yesterday, in addition to the progress we are making with new products and services to better diversify our business mix, we have achieved a number of milestones with our efforts to establish a presence in South Korea.

During the month of September, we signed cooperative agreements with the City of Los Angeles and the Seoul metropolitan government to work together and support our respective strategic objectives. The agreement with the City of Los Angeles Mayor, Garcetti, exemplifies the growth and importance of the Korean American business community to the City of Los Angeles. The agreement is a first for any Korean American company with the City and we are appreciative of the Mayor's support of BBCN's expansion into Korea.

We are also appreciative of the support from Mayor Park of the Seoul metropolitan government, and this agreement is an important step forward in our expansion into Korea. We believe the planned opening of our Seoul representative office before the year end significantly enhances our ability to capture more business with Korean national companies operating in the United States. In addition, this expansion will strengthen our overall enterprise risk management and due diligence capabilities.

The Korean economy has a direct correlation with many of our customers based in the United States and with a physical presence in the country, we will be much better informed of the economic state and business trends in Korea, thereby enabling us to better identify potential risks to our customers businesses.

Given the consistency of our financial performance and the tangible achievements being made with our strategic initiatives, we believe the prospects for BBCN are stronger than ever and we look forward to keeping you apprised of further developments. With that, let's open the call to answer any questions you may have. Operator, please open up the call.

(Operator Instructions)

Our first question comes from Aaron Deer from Sandler O'Neill.

Hi, good morning, everyone.

Good morning.

So, I guess let's start with the credit trends in the quarter. I can appreciate that your classifieds are down, but I guess I'm a little puzzled as to why this deep into the credit recovery that most banks have seen, you guys are continuing to see your NPAs click up and criticize assets click up. I would expect that particularly given the commercial real estate prices bounce back so hard, that you'd be seeing much better performance at this point.

Good morning, Aaron. With regards to the NPL, we did have some pick up in the performing TDR mainly due to the substandard credit that's coming to maturity and we provide an extension to the maturity and by definition, that makes them a TDR; but that's the story behind the increase in the TDR. But they are performing and paying as agreed.

So there's no rate accommodation? It's just that -- or is it the LTV ratios that are high? What's characterizing these? Can't they just refinance into a new credit?

Most of these new TDR this quarter were performing commercial line of credits.

And then on the expense side, your credit related expenses continue to run high as well. Can you talk about exactly what that is? Are those write-downs on REO or is that cost related to REO? Can you talk about that and just expenses in general seem to be high and I wanted to ask, too, about what your -- how you guys feel about your back office position currently, particularly with respect to your compliance issues related to BSA?

Let me address the credit cost side which was a little higher than prior quarter. We had about a $400,000 that was associated with the property tax on a loan that had a delinquent property tax and that [we serviced that] and that's part of the credit cost, and we had some slight increase in the REO valuation.

So yes, a good part of the credit cost really was REO related and it's simply that's not a linear expense, that it's going to go up and down a little bit. The rest of the G&A expense net, really as I mentioned in my remarks, does relate to the headcount which was not concentrated in any one area. We have some headcount associated with the ongoing process of upgrading our compliance to prepare for being a larger bank.

We have a little bit going with the new initiatives. We have a little bit going with in terms of new front line people for lending and production efforts. We had a disproportionate amount of that hitting one quarter so I would not normally expect to see this level of increase in one quarter.

Okay. So on the first batch, the credit related expenses, what was the real valuation impact on the quarter? You mentioned the $400,000 in property tax. What was the actual REO valuation in adjustment?

Probably $600,000 was my memory and I'm looking across the table at Mark to see if he corroborates that. I'm pretty sure that's correct.

Yes.

Okay. And then if I may, there's a 21 point basis drop in new loan yields. I'm wondering if you can give specifically what the new loan yields were on commercial real estate this quarter relative to the prior quarter and then also, the new loan yields and C&I credits this quarter relative to the prior quarter.

We don't usually break it out that way so, I frankly prefer not to, for competitive reasons, among others. But really, the change in the rate had as much to do with a shift of variable from fixed, rather than by product.

Okay, that's fair. Okay. Thanks for taking my questions.

Thank you.

Next question comes from Scott Valentin from FBR & Company.

Thanks for taking my question. Just with regard to loan growth rates, you mentioned continuation next quarter should be similar to this quarter. I'm just wondering how much of that do you expect continued high payoff rates or how much is implementing the new commercial real estate participation program, I guess, that will limit overall loan growth?

I'm going to give the first answer here and some other people may chime in. I mean, overall, I think what we're saying is this is probably more variability in the possible outcomes to our growth rate for one individual quarter.

We still believe our organic growth rate on an annual basis is going to be in the high-single digits on any annualized for any 12-month period, but with the fourth quarter may be more impacted than most by the seasonal pay-offs we're seeing and by our ongoing effort that we're going to have to manage some of our concentration risk with some participation sales, so we're not guiding to a number. We're guiding to probably there's going to be little bit more variability off of the annualized run rate for one quarter.

Okay. That's fair enough. And then with regard to the core margin, you mentioned, obviously, the equitable yield moves around quarter to quarter, but core margin was up 1 basis point. I guess wondering, given what's happened with the loan yields, and I agree from a long-term perspective more variable loans make sense; but are there opportunities still for more mix shifting to go on where you can help increase the core margin somewhat?

No, not in terms of earning assets. Not absolutely no, but there's not as much as we had this quarter. I think there's a level of investment on balance sheet liquidity. Cash and cash equivalents is at a much more normalized level on average for the first quarter. So we won't see an ongoing benefit in the fourth quarter like we did in the third quarter.

Okay, and then one final question. With just to clarify so I make sure I understand, on the salary and comp and benefit; does that include all the necessary hires for the real estate mortgage lending program and any other kind of initiatives you guys have planned for the next, call it two quarters [throughout] three quarters?

It includes a good part of the single -- the residential lending. There's certainly individual things where we're opening individual branches and at some point, we'll hire some more lender specialists in the mortgage area but it includes the preponderance of the cost for the single family.

Okay, thanks very much.

Our next question comes from Gary Tenner from D.A. Davidson.

Thanks. Just a question about the fixed versus variable rate loan mix. You talked about I think 55% or 60% of the production this quarter was variable rate and yet the fixed rate loan percentage increased. Is that just a function of there being a heavier weighting of payoffs in a variable segment?

No, it's on the origination front and it's an ongoing battle. We're very happy with our overall interest rate risk position but on balance, we would like to not excessively add to our fixed versus variable. So where we have an opportunity to push some of our larger borrowers to variable, I think it helps our future interest rate risk management position. This quarter we were more successful than many, in terms of having some of our bigger deals go variable.

Well, I guess what I'm confused about then, if you funded more bigger deals that were variable or moved people to variable, why the mix just has continued to inch up on the fixed rate side.

Oh, I'm sorry. The other part of the equation, as you suggested, is the payoffs which can bounce around. So, it's part of that reason why we do like a quarter where we do more variable because the trend otherwise has been a rising rate and fixed rate loans.

Okay, and then just on the SBA, with the production in the third quarter, I know your held for sale balances are a bit lower than they were as of June 30. What are you thinking in terms of the amount of loans that are sold here in the fourth quarter? Would it be kind of more to the run rate prior to the third quarter or is that third quarter number a reasonable expectation?

Hi, Gary. Jason here. We evaluate (inaudible) on a quarter by quarter and SBA loan origination tends to be higher in the second half compared to first half. We do have a very strong pipeline going in through the Q4, so that's our position for the evaluation before the Q.

I'm sorry. I didn't make out that very last part.

Our pipeline also continues to be strong heading into the fourth quarter and our sales [all be] evaluated quarter-by-quarter basis.

Okay, thank you.

And Gary, as we guided on last quarter's conference call, the level of sellable 7(a) loan production in the second quarter was, I think, markedly higher than an average run rate, so I think the third quarter sellable or SBA gain on sale is probably not the run rate that we would guide you towards. And you should look at the production of 7(a) loans this quarter which was $40.2 million.

(Operator Instructions)

Our next question comes from Julianna Balicka of KBW. Please go ahead.

Good morning.

Good morning.

I have a few questions, a couple follow-ups to what's already been brought up and a couple other questions. One, on the expense run rate on salaries and the hiring, would you say then that the third quarter number is a full quarter run rate or was the hiring throughout the quarter and therefore fourth quarter there's an upward bias to salaries?

I would say there's a very slight upward bias.

Okay, and then in terms of the loan to deposit ratio as it is reaching 100%, how should we think about where you would like to operate as a bank and whether or not -- what are the targets around which, and parameters around which you are operating your loan and deposit growth?

Well, in the very near term and near term might be the next couple three quarters, I expect we'll remain in the mid-high 90%s. I think our longer-term strategic view will be to lower that in the high 80%s to 90% range.

Okay, and then in terms of your loan growth and your new initiatives, can you get into more details on each of the initiatives, and let's start with the residential mortgage? What exactly are you talking about when you say residential mortgage platform? Are you originating for portfolio? Are you originating conforming loans for sale? Are you bringing on mortgage bankers onto your staff or are you developing a mortgage broker network? And also what is the target of loan contribution to growth in 2015 from this platform?

This is Cha Park. First and foremost, for mortgage loan, we will be doing both, doing portfolio loans and sending it to the secondary market, and we will be doing both conforming and non-conforming. And our plan, in light of a lot of changes that's taking place in regulatory environments for mortgage loans, our position is that, initially we are going to be focused on direct loans, and eventually we will be branching out to wholesale.

As far as the production level, the first tier, especially because we will be launching it throughout the geographic areas, we don't foresee any first half of next year large pickup in volume but it will be inching up, because by midyear we should be fully rolled out in all of our geographic markets. So within a year, our projected volume is that we feel our origination volume will be in excess of $100 million per quarter; that is after one year or so in operation.

Okay, very good. And in terms of the residential mortgage, what kind of compliance costs are you incurring as a result of originating and portfolioing these kinds of loans?

Well, it comes in a number of ways. I mean, the people we've hired to work on bringing this product to the market for the last, nearly, year are very experienced and so having that staff is one cost. Another cost is working with third-party providers who are doing this back office, particularly for a lot of different people. That cost will come in on a variable basis, pretty much on an as-transaction basis, so you won't see a hit from that.

So in terms of compliance, and unless Cha tells me I'm missing something, those are the two big pieces; having experienced people in house and having a third-party provider who does this for people all over the country.

Okay, and then in terms of residential mortgage, what kind of yields are you thinking about getting? Are you going to be able to get a higher premium because you're originating to your core (Korean) American sector or are you basically going to be getting the same yields that other [trusts] are getting on mortgage banking banks around California or your other markets?

Well I think the mortgage market is pretty competitive, so I think our yields will be similar to the markets. Having said that, this is very important relationship building through. We've been getting a lot of requests from our existing clients and we would be able to leverage this platform, not only to generate additional income and also non-interest income, but also this will solidify our relationship with existing client base; so it will have a little bit bigger than financial impact.

Okay, thank you for that. And then in terms of your other initiatives, what kind of impact are you expecting from your representative office in Seoul to have in terms of either loan or deposit growth? What should we be thinking about tentatively on the balance sheet in 2015 or 2016?

Well, in terms of expenses, we do not really expect an immaterial impact on our financials because it's a rep office, and we will have one rep office manager and maybe another staff. And in terms of the impact on our revenue side, our target base, which we identified as a unique niche for us as the Korean national companies, which are currently doing business in the US or which plan to expand into the US, and although we do not have factored into the additional revenues in our budget for 2015, we expect a lot bigger impact on our revenue side than the corresponding impacts on our expense side from the Korean national market, Korean national companies.

And that specific niche is also in line with our efforts to reallocate the portfolio mix between CRE and C&I, and pretty much a majority of the portfolio that we expect to generate with the Korean national companies would be the C&I side than the CRE side. So, it is a little difficult to quantify the dollar impact at this time from our presence in Korea, but we expect very positive effects from many aspects of our business in operations.

Okay, but what kind of loan growth targets or loan generation targets -- and first of all, are you going to be originating those in Korea or are the loans still going to be underwritten and originated in the US? And second, what kind of dollars of loans are you hoping to generate through this office and also dollars of deposits?

Julianna, this is a rep office and not a full service branch office, so we will not be taking deposits or booking loans in Korea. The rep office, with our business loan officer, is there to facilitate and have an earlier stage kind of marketing for potential business with the US operations of the Korean conglomerates.

That's not going to contribute to loan growth?

Well, we would definitely expect and hope for it to contribute to loan growth, but you aren't going to see it as anything separated in Korean. We haven't actually -- we haven't formalized our expectations and guidelines for that yet.

Okay, that makes sense. And in terms of your commercial leasing that was already launched, what kind of contribution are you seeing? And I think you said, that you were not originating it for portfolio, right? It was only as a fee income product, so what are some of the results so far on commercial leasing?

Hi Julianna. This is Jason. We have seen a strong interest from our existing customer and [his follow-up]. While the dollar side of the transaction was relatively small, about $100,000, an overall impact of the portfolio is not material but we believe this is an important product in terms of deepening our commercial customer relationship.

Okay. That makes sense. And then finally on wealth management, can you elaborate a little bit more about what exactly does your wealth management platform entail? What kind of products will you be offering and what kind of structure? There's many forms of wealth management at various banks, so you can just elaborate more precisely on the products and what your expectations are for that.

We will be able to offer pretty much a full scope of management platform except private banks because it requires different licensing. We are going to utilize dollar, this I believe, third-party marketer, to ensure we are in full compliance with all of the regulatory requirement and also it will give us more flexibility with the type of product offering that we'll be able to offer to all of our clients.

And are you going to be offering products as pass through so it's only fee income? Or are you getting in the business of assets under management gathering?

At this point, it will be pass through. It will be doing basically revenue sharing with the third-party marketer. Eventually, once we are fully comfortable with the platform, we will be looking at expanding the route and potentially even include a trust offering but that will be further down the road.

Certainly, and then do you have any targets yet for the revenue contribution from wealth management once it's fully up and running?

Not at this point, Julianna. We will in a couple of quarters.

Got it. That makes sense, and then if I can just switch topics and then I'm going to step back. You are very asset sensitive in your 10-Q analyses, et cetera, so could you elaborate and give us a little bit more color as to the drivers of your asset sensitivity and just more of the qualitative side of how -- and the dynamic balance sheet, how you expect your income growth to develop when rates start to rise?

I may have missed part of that, but in terms of our asset sensitivity, that's driven by our split of fixed and variable rate loans and the fact that the fixed rate portion of that is comparatively short duration, and the fact a good part of our funding comes from a combination of non-interest bearing demand deposits and capital. And if you net all that out, you end up with a modest increase with rising rates in terms of our net interest income. We are within a range. We aren't trying to make a serious bet either way, but we're comfortable with a modest asset position and that's what we're continuing to manage to.

Great, and final question. Capital management, with an 11% TCE and a slowing loan growth, it sounds like since you are going to actively pull back on CRE on balance sheet, how should we think about the deployment of capital in the near future or lack thereof?

That's an ongoing analysis. We do a report, obviously. Right now, we still think that even though we may have some individual quarters where we're managing the mix of loan portfolio, we still see potential, and in fact, commitment to high-single-digit organic growth. We're looking at a number of initiatives. Right now those are still the highest return use of capital in our internal analysis. But we look at that every quarter in terms of all of the other alternatives you would have on your list.

Okay, thank you very much.

Our next question comes from Don Worthington from Raymond James.

Hi, good morning, everyone.

Good morning.

Want to get back to the large loan payoffs and I think the commentary was some of it was due to sales, I guess of either businesses or real estate properties, but then also allowing certain loans to go to competitors that maybe were pricing more aggressively. Anymore color on that or are these loans going to other Korean American banks, large regionals, mix, any comments on that?

I would say the general comment is that it's a mix. It's all of the above. That fair?

That's a very fair statement. We get to see the payout demand coming from larger banks and smaller banks, yes.

And it sounds like it's rate or structure or both?

Primarily it's more of a rate and in the marketplace, we're seeing a sub 4% for five year fixed and that's not a sale that we are going to compete in actively. We may do that on a case-by-case on a relationship basis, but that's not a rate that we're going to shoot for.

Okay, great, thank you. And then you mentioned the intentional run-off of some of the CDs. Do you expect anymore of that activity?

Not necessarily. We're in a pretty normal range in terms of managing our wholesale mix right now and so, there will be little bumps up and down for individual quarters, but we're in a very normal range right now.

Okay, thanks, Doug. That's all I've got.

Our next question is a follow-up from Aaron Deer, Sandler O'Neill.

Hi, guys. Just a quick follow-up and I guess related to Julianna's questions with respect to commercial real estate, the sales of positions within your production, as well as your thoughts on capital. Doug, do you have currently -- isn't, I guess, the regulatory definitions for investor commercial real estate, what that portfolio stands at as a position of regulatory capital today and is there a level toward which you're managing that toward?

I'm going to turn to Mark, but we obviously constantly monitor that but you haven't --

In terms of the regulatory concentration, we are currently a little over 500%, well below what the regulators consider as a red flag under the [agency] guideline. That's including all the real estate.

And as part of your thoughts on selling some of your commercial real estate production and your thoughts on capital management, is there a level to which you're looking to move that toward?

It's more of a dot on the portfolio mix. I mean, we're comfortable with the CRE as it is, but it's the thought on the rebalancing the outstanding within the CRE portfolio where we don't have a higher exposure on certain geographic locations or the property types. Our thought is more of a rebalancing the portfolio within the CRE rather than total CRE outstanding.

Okay, and I guess looking at it in that capacity, what would you prefer the mix to be overall? Or where are you working that mix toward?

I think without giving a specific number, I mean right now where we are, it's not to stop doing CRE. We'll continue to do that, and we have a number of other things, launch of other products, including residential mortgage, but longer term. If we had a targeted goal somewhere more along the lines of [70%] CRE concentration or slightly below, it's probably what might be right for a Korean American community focus bank.

Okay, great. Thanks for taking my questions.

There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

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

Thank you.

Thank you.

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