Hope Bancorp, Inc. (HOPE) Q3 Earnings Conference Call Transcript

Hope Bancorp, Inc. (HOPE 0.64%)
Q3 2018 Earnings Conference Call
October 17, 2018, 12:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the Hope Bancorp third quarter 2018 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the * key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press * then 1 on your touchstone phone. To withdraw your question, please press * then 2. Please note, this event is being recorded.

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

Angie Yang -- Director of Investor Relations and Corporate Communications

Good morning, everyone and thank you for joining us for the Hope Bancorp 2018 third quarter investor conference call. We will be using a slide presentation to accompany our discussion this morning. If you have not done so already, please visit the presentations page of our investor relations website to download a copy of the presentation. Or if you are listening in to the webcast, you should be able to view the slides from your computer screen as we progress through the presentation.

Beginning on slide two, 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 business and markets in which the company does and is expected to operate.

These statements constitute forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995. These statements are not guaranteed the future performance. Actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. We refer you to the documents the company files periodically with the SEC as well as safe harbor statements in our press release issued yesterday.

Hope Bancorp assumes no obligation to revise any forward-looking projections that may be made on today's call. The company cautions that the complete financial results to be included in the quarterly report on Form 10-K for the quarter ended September 30, 2018 could differ materially from the financial results being reported today. In addition, some of the information referenced on this call are non-GAAP financial measures. Please refer to the 2018 third quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures.

Now, as usual, we have allotted one hour for this call. Presenting from the management side today will be Kevin Kim, Hope Bancorp's President and CEO, and Alex Ko, our Chief Financial Officer. Chief Credit Officer Peter Ko 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?

Kevin S. Kim -- President and Chief Executive Officer

Thank you, Angie. Good morning, everyone, and thank you for joining us today. Let's begin with slide three. We had another strong quarter of business development and recorded a reduction in our expenses. We generated $46.4 million in net income during the third quarter, an increase of 4% over the prior year period.

On an EPS basis, we reported $0.36 per diluted share compared with $0.33 in the year ago third quarter. Compared with the preceding second quarter, our earnings per share was unchanged as the deposit environment and a few factors impacted our bottom line results. During the third quarter, we completed the $100 million stock repurchase program that we initiated in May.

Given our strong capital position and our long-term opportunities to continue enhancing the value of our franchise, the board of directors authorized a new $50 million share repurchase program in September. We believe the repurchase of our common stock represents an attractive investment opportunity for the company and it is an important component of our balanced approach to capital management.

Moving on to slide four, despite a challenging environment, we had another strong quarter of business development, although overall production and funding was slightly lower than the previous quarter. We booked $819 million in new loan commitments and funded $784 million in loan originations.

Compared with the third quarter of 2017, our new loan commitments increased by approximately 13%. Our strong production resulted in net loan growth of $256 million in the third quarter of 2018 or 8.8% growth on an annualized basis.

Through the first nine months of the year, our total loans have increased by approximately 7%, keeping us on track to meet or exceed the higher end of our targeted loan growth. We are pleased that we have been able to drive solid loan growth despite weaker demand within our commercial real estate markets.

As has been the case for the past few quarters, we are seeing fewer CRE financing opportunities resulting from the lower overall transaction volume in our markets. Relatively low Fed rates, lack of inventory, and uncertainty about future interest rates have combined to make CRE investors more cautious and reduce the number of attractive deals available.

That said, the third quarter has historically been a seasonally stronger period for CRE lending for Bank of Hope. Despite the challenging CRE market, we had an increase in our origination volumes and funded $402 million in new CRE loans compared with $248 million in the preceding quarter.

Looking at the breakdown of our loan production by major category, commercial real estate loans, including our SBA/CRE originations comprised 61% of total production in the quarter. Commercial loans, including our SBA/C&I production accounted for 18%. And consumer loans comprised primarily of residential mortgage loans accounted for 21%.

We had $121 million in new C&I originations in the third quarter, down from the prior quarter when we booked more loans through our corporate banking and syndicated lending groups in order to put the liquidity from our convertible issuance to work as quickly as possible. Our C&I loan production in the third quarter was more heavily weighted toward relationship lending to our small and medium-sized commercial customers.

Turning to residential mortgage originations, which makes up the vast majority of consumer loans, we continued to have solid production from this business, although we are seeing the impact from higher mortgage rates and limited housing inventory on overall demand and the seasonally slower mortgage originations. We had $166 million in originations, which, as expected, is bound from the seasonally stronger second quarter, but 39% higher than the third quarter of 2017.

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

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

First, we have improved the origination process for loans generated from our retail branches by assigning dedicated branch support staff. This has resulted in a higher level of production coming from this channel. Compared with the third quarter of 2017, the residential mortgage production from our branch network has approximately doubled. We also have been successful in recruiting purchase-focused mortgage loan officers, which has helped us to offset the decline in demand for refinancing.

In terms of the CRE market, although we continue to see aggressive pricing among many competitors, we are remaining disciplined in our new loan production. As a result, the average rate on our new CRE loan originations was approximately 5.2%. Overall, the average rate of new loan originations was 4.97% in the third quarter, up 18 basis points from 4.79% in the preceding second quarter. The increase in the average rate was primarily due to a higher mix of CRE loans in our third quarter loan originations together with upward trends in the average rates across our product offerings.

Turning to our SBA business, we originated $71.4 million in SBA loans compared with $87 million in the preceding second quarter. The lack of commercial real estate purchased transactions also appears to be impacting 7(a) production volumes for many SBA lenders across the country.

While most of our niche peers have seen a year over year decrease in SBA 7(a) volumes, Bank of Hope achieved a 25% increase in our 7(a) loan approvals for the SBA fiscal year ended September 30th, 2018 compared with fiscal 2017. We are currently evaluating additional opportunities in our footprint and we expect to see continued strength in our SBA origination volume.

Now, moving on to slide five -- to support the strong loan growth we are seeing, we continue to be active in our deposit gathering strategies, keeping our loan to deposit ratio within our targeted range. During the third quarter, our total deposits increase by approximately 3%, a little higher than our total loan growth. This brought our loan to deposit ratio down by approximately half a percentage point from the end of the preceding quarter.

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

Alex Ko -- Executive Vice President and Chief Financial Officer

Thank you, Kevin. As I review our financial results, I will limit my discussion to some of the more significant items in the quarter. Beginning with slide six, I will start with our net interest income, which increased by approximately $300,000.00 compared with the preceding second quarter. This was due to our higher levels of assets.

Our net interest margin declined by 14 basis points to 3.47% or by 10 basis points on a core basis excluding purchase accounting adjustments. The decline was driven by an 18-basis point increase in our cost of deposits, reflecting higher balances of time deposit sand the higher average rates on those deposits.

Although we had expected our loan yield to increase this quarter and largely offset the rising deposit costs, the payoff of higher rate variable loans and relatively lower loan beta led to our loan yield remaining flat on a reported basis. Excluding purchase accounting adjustments, our average yield on the loans increased 5 basis points to 4.89% from the preceding quarter, primarily due to repricing in our variable rate loans, as well as the average rate for our new loan productions coming in above the yield on our existing portfolio.

Now, moving on to slide seven, our net non-interest income declined by 12% from the preceding second quarter, the most significant variance from the preceding quarter was a 33% decline in the gain or sale of SBA loans, which was due to a lower amount of loans sold and a decline in the average premium. We sold $48.5 million of SBA loans in the third quarter, down from $52.5 million in the preceding quarter. The average premium declined to 6% from 8.5% in the second quarter of 2018.

Across the industry, there has been an increase in pre-payments on SBA loans resulting from more borrowers refinancing into conventional loans with lower interest rates. The faster pre-payments have reduced the duration that investors are seeing on SBA loans and the lower duration has driven down the premiums in the secondary market.

And as interest rates have increased, we are also seeing some margin compression on new compression, which is also impacting the premium. In addition, this quarter's sale of SBA loans included several larger loans, which tend to have lower margins than the smaller ones. For the near-term, we expect that the premiums will likely remain in the 6% range unless we see a change in the pre-payment space.

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

In addition to SBA gains on sale variance, our non-interest income for the 2018 third quarter was reduced by $1.6 million due to the reduction in the fair value of equity investment. This lowered our earnings per share by approximately $0.01. In comparison, the reduction was just $1,000.00 in the second quarter of 2018.

Moving on to non-interest expenses on slide eight -- our non-interest expense declined by $4.1 million compared with the preceding second quarter. The decrease was primarily due to a $3.6 million decline in salary and benefit expenses resulting from proactive management of employee-related cost.

We also had a $751,000.00 decrease in advertising and marketing expenses as well as a $524,000.00 decrease in professional fees. These expenses tend to fluctuate somewhat quarter to quarter and were within the normal range. These decreases were offset by an $854,000.00 increase in other expenses, which was primarily due to an increase amortization of low-income tax housing credit investment following a new investment made during the third quarter.

Overall, our low-income tax housing credit investments have been an important contributor to our strategies in reducing our tax provision. With a reduction in operating expenses, our efficiency ratios improve to 49.4% compared with 51.9% last quarter.

In the financial highlight table of our earnings release, we are also now providing the non-interest expenses to average asset ratio. Going forward-we will focus our efficiency discussion on non-interest expense to average assets because we believe it provides for a more accurate perspective to how we are managing our expenses for a growing institution.

For the third quarter of 2018, our non-interest expense to average asset annualized improved to 1.8% from 1.96% in the preceding second quarter and actually represent the lowest base of this ratio since our merger.

Now, moving on to the slide nine, I will review our asset quality. Our asset quality continues to show stability. Although, we had some mixed trends in the portfolio this quarter. Our non-accrual loans decreased by $11.9 million or 17% from June 30th, 2018. Our total non-performing assets declined by $10.9 million or 8% from the preceding second quarter.

These improvements were driven by the migration of certain loans out of non-approved status as well as charge off. Our classified loans declined by $55 million during the quarter, while our total criticized loan balance increased by $23 million, primarily driven by a handful of loans that were downgraded to special mention.

As we have discussed over the last year, given where we are in the credit cycle, we have been very actively monitoring our portfolio for potential deterioration. There was no significance among the loans downgraded to special mention other than the fact that our review of the current financials indicated some modest deterioration in the coverage ratios. Most special mention loans that were downgraded during the quarter are performing. We believe the lowest content in this pool is minimal.

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

Moving on to net charge-offs, we had $6.6 million in net charge-offs in the quarter. The elevated level of credit losses this quarter was primarily related to a $5.3 million charge-off of a commercial real estate loan that was placed on non-accrual and fully reserved in the prior quarter.

Overall, we are not seeing any trends that would indicate systemic deteriorations as we continue to view our portfolio with cautious optimism. Although, economic conditions remain relatively healthy in our market, we are mindful of where we are I the credit cycle and the possibility that higher interest rates could put pressure on the economy at large. Accordingly, it is our intent to maintain our overall allowance ratio at least at this level so that we remain sufficiently reserved for any broader credit deterioration that may occur in the future in our market.

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

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

Kevin S. Kim -- President and Chief Executive Officer

Thank you, Alex. Although we continue to be successful in our new business development efforts, our overall performance certainly has room for improvement. We recognize that we must improve in certain key areas, most notably in managing our deposit costs and maintaining greater stability in our net interest margins. With that in mind, we have implemented a number of strategies designed to enhance our deposit mix.

First, we are targeting commercial customers with a more aggressive sales effort for our treasury management services. Our new TMS manager, who joined us in the second quarter of this year from a larger mainstream bank has concluded his due diligence and has identified an initial target list of commercial borrowers for which we believe we can provide greater value through our TMS offerings.

We believe that a focused sales effort targeting these customers can help us win a greater share of their deposit balances and bring in more DDA accounts to the bank. As such, we expect to add a number of highly qualified personnel focused on this core development solicitation and development effort.

We are also focusing our business development efforts to pursue commercial customers that are rich in core deposits. As well, our frontline compensation program was redesigned earlier this year to reword and have a greater emphasis on core deposit growth.

Finally, our new Chief Information Officer is leading an effort to enhance our online banking platform in order to improve our ability to generate digital account openings from retail depositors. We expect the enhancements will improve our ability to market CDs to retail depositors by the first quarter of 2019 with further improvements in attracting online checking and money market account openings occurring later in the year.

While we make improvements in the liability side of the balance sheet, we also plan to enhance our mix of earning assets as well. As you know, the residential mortgage lending business has been an important contributor to our growth and diversification, growing from 4% of our total loan portfolio to 8% over the past two years.

But in the current environment, given our cost of funds and the yields generated from these residential mortgage loans, we plan to shift our focus to originating mortgage loans for sale into the secondary market. As such, while we are planning for continued growth in our residential mortgage business, we expect the pace of growth in our consumer portfolio as a percentage of total loans will not be as high as it has been recently.

Our own balance sheet lending focus will shift more toward floating rate, C&I, and SBA loans. Given the higher yields these loans produce, we believe we can alleviate some of the pressure that we have been seeing on our net interest margin.

As with any deposit strategy, we recognize that it will take some time before we see the impact on our financial result, but we are confident that our efforts will improve our market sensitivity and ultimately lead to enhanced profitability longer term.

We remain confident about the prospects for Bank of Hope and are focused on driving value creation for all of our stakeholders. With that, let's open up the call to answer any questions you may have. Operator, please open up the call.

Questions and Answers:

Operator

Thank you. At this time, we would like to begin the question and answer session. To ask a question, you may press * then 1 on your touchstone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 2. At this time, we will pause momentarily to assemble our roster.

And our first question will come from Aaron Deer of Sandler O'Neill.

Aaron Deer -- Sandler O'Neill -- Managing Director

Hi, good morning, everyone. As I may start on credits, Peter, the $5.3 million charge-off on the commercial real estate, it seemed like a big number given that commercial real estate prices have generally been trending higher. Can you tell me how big was the credit that was tied to? What was the property type behind that? When was it originated and also at what LTV was that originated at?

Peter Koh -- Executive Vice President and Chief Credit Officer

So, Aaron, yes. This loan was kind of a very isolated case. This was a season loan, I think, back in 2012 this was originated. This was on the books for quite a while. We identified a very unique situation with this borrower. This loan actually was not all that big. This was a full charge-off, actually, where we picked up the issue earlier in the second quarter and we fully reserved for it and identified it and kind of monitored the situation, but there is some unique situation going on with that borrower.

So, anyway, we really don't think it's particularly credit-related in a sense, where there's a credit weakness here, but there are situations that are developing. We don't see this as anything representative of the rest of the portfolio. We are being very active. We are still working or having that with the borrower or trying to recoup some of this. So, we felt it was necessary to do the charge-off this quarter. The property type is considered CRE retail, but I would not consider it typical, in a sense. It's a little bit more downstream than the e-commerce type of retail we're talking about in the marketplace.

Aaron Deer -- Sandler O'Neill -- Managing Director

Okay. Very good. Thank you. Then a question around the SBA business -- I'm curious to know where the current spreads are, prime 1.75 or where are we today on new production?

Kevin S. Kim -- President and Chief Executive Officer

For the real estate, the SBA loans, the spread is less than 1.75%. it ranges from 1% to 1.5%.

Aaron Deer -- Sandler O'Neill -- Managing Director

So, I guess it seems to me that if you're funding that, take your highest cost of funding, 2.5% on your CDs, that still seems like a better spread than where the current margin is. So, given the narrower premiums that you're seeing in the secondary market, have you given thought to just retaining all of this production?

Obviously, that takes a hit on your current near-term outlook for the gain on sale, but it will benefit your NII longer term. It doesn't seem -- looking at the stock price, it doesn't seem like you're really getting paid or getting a premium for the gain on sale income anyway, so why not just help with the dynamics of your loan growth and your margin if you just retained it versus selling, no?

Alex Ko -- Executive Vice President and Chief Financial Officer

Aaron, I think that's an excellent point. Actually, there was a lot of internal discussion as to whether we should retain or sell the SBA loans at this lower premium environment. Nonetheless, we have decided to continue to sell our SBA 7(a) loan production because the current premium, although much lower than what it used to be in the past, still results in better loan from profitability than retaining these loans.

We are constantly monitoring the situation. If the premium continues to go down, then there may be a point where we will decide to retain those loans than selling the secondary market. At this point, our position is that we will continue to sell.

Aaron Deer -- Sandler O'Neill -- Managing Director

Okay. Very good. Then I'll ask one more and then I'll step back into the queue -- on the expenses, those came down pretty sharply in the quarter. I'm just curious -- how much of that is reflective of, as we say, your bonus accrual versus something that would be ongoing? In other words, another way to look at it would be where can we expect your compensation total to come in in the fourth quarter on kind of an ongoing basis?

Alex Ko -- Executive Vice President and Chief Financial Officer

Sure, Aaron. As we discussed during the prepared remarks, we had managed more proactively in terms of the compensation and actual impact for this reduction on the salary and benefit was about $3.6 million reduction. Going forward, because we were more proactively managing those costs, run rate for those salary benefits, obviously more annual, like a CPI index increased those normalized increased and also, as we hire more production-related individuals, there could be a salary increase, but in terms of bonus of those managing the incentives, we believe this can be a constant run rate going forward as well.

Aaron Deer -- Sandler O'Neill -- Managing Director

Okay. That's encouraging. Great. Thank you. I'll step back into the queue.

Operator

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

Matthew Clark -- Piper Jaffray -- Analyst

Hi, good morning. First one, just wanted to ask about your deposit pricing strategy, I guess, from here given the increased focus on core deposit gathering and improving the overall mix.

Angie Yang -- Director of Investor Relations and Corporate Communications

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

Matthew Clark -- Piper Jaffray -- Analyst

It was. I was asking if there was any change in deposit pricing strategy, given the increased focus on gathering core deposits and whether or not it's more the same.

Alex Ko -- Executive Vice President and Chief Financial Officer

Sure. This quarter, management would like to give more color because the deposit pricing is one of the top priorities. Management takes it seriously. We created, actually, a separate page on the slide deck on page ten, which includes the deposit building. It will include the deposit pricing. We had actually a substantial increase on the CD for this quarter, but it is like a year or so in terms of the terms.

The pricing, yes, it is really competitive in this market. We are not going to have too much of a high price on CD or deposit going forward because it has gone off already substantially. Our deposit beta for this quarter, two quarters in a row, is very high. So, given the loan yield is kind of increasing, loan beta is lower than the deposit beta we see. So, our deposit pricing will be much more disciplined pricing going forward. We didn't see substantial increase on the CD side because it is the most competitive.

On the other money market, it is a much lower rate. So, we'll focus on the money market, not to mention non-interest-bearing deposit, a DBA. We did have a number of initiatives to bring DBA accounts, for example, enhanced treasury management services and also fundamentally changing our compensation structures, including incentives directly tied to our core deposit production and also rebuilding our online banking platform to bring CD and other checking account, money market account, in a time horizon that we would expect to get benefits starting next year, first quarter.

It's kind of step by step. It can be a long journey, but management is taking very proactive deposit strategy including the deposit pricing as well.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. Great. Then just on the overheard ratio, 1.8% to 1.9%, I guess, in the near-term would suggest some maybe upward pressure from here. But how do you think about that ratio as you look beyond the fourth quarter and into 2019? Is there an opportunity to improve upon that or are there some other things going on that we may or may not be thinking about?

Alex Ko -- Executive Vice President and Chief Financial Officer

Sure. You know, as I mentioned, the deposit cost has a larger impact on our efficiency ratio. We feel the non-interest expense ratio is a percentage of average asset represents better measurements for our operating expenses, as you mentioned. So, we would expect like 1.8% ranges or slightly increase to 1.9%, but that is relatively lower compared to our historical -- because we are managing non-interest expenses.

So, run rate for like non-interest expenses for next quarter, we did see the reduction on the [inaudible], which is one of the key components of the non-interest expenses -- we would expect to see it slightly increase from the third quarter level, largely due to investment in these implementations as well as market sensitivity analytical tool. We just bought it and we are using it.

Those investments have partially replaced some of the expenses that we have gone away with the Dodd-Frank and the stress test requirements. So, however we believe those market sensitivity analytical tool investment will enable us to enhance our profitability going forward in 2019.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. Great. Go ahead.

Kevin S. Kim -- President and Chief Executive Officer

Go ahead.

Matthew Clark -- Piper Jaffray -- Analyst

Just a couple of housekeeping items. I just wanted to get the amount of shares repurchased in the second quarter. I think you quantified in total, part of which I think came from the first quarter and the release, but I'm just curious how much were repurchased in the second quarter and at what price.

Alex Ko -- Executive Vice President and Chief Financial Officer

Sure, in the second quarter --

Matthew Clark -- Piper Jaffray -- Analyst

Excuse me, the third quarter.

Kevin S. Kim -- President and Chief Executive Officer

I can give you both, actually. Third quarter, we purchased total 1.2 million shares at an average rate of $17.4 per share. Second quarter, we purchased 4.3 million shares at an average rate of $18.1. So, that's kind of a total to 5.5 million to 6 million shares.

Alex Ko -- Executive Vice President and Chief Financial Officer

I was going to finish the run rate for the non-interest expenses, the last point we are also in the midst of implementing additional short-term cost-saving initiatives, which will benefit next few quarters, as well as finalizing long-term initiatives for savings beyond 2019 as well. So, we will keep you updated on those initiatives as those plans become firm.

Matthew Clark -- Piper Jaffray -- Analyst

Great. And then last one on the tax rate and the outlook there?

Kevin S. Kim -- President and Chief Executive Officer

Yeah. Tax rate, we did get the benefit from the low-income tax housing credit. We lowered a little bit our effective tax rate at a rate of 25%. Going forward, I think it will be pretty much at this level, 25% because we continue to expect to have a benefit of the low-income tax housing credit. That will be the main driver to lowering the tax rate from statutory rate.

Matthew Clark -- Piper Jaffray -- Analyst

Thank you.

Peter Koh -- Executive Vice President and Chief Credit Officer

Matthew, before you go, let me clarify our answer to your first question on the new deposit strategy or deposit pricing strategy, whether it is more of the same with the existing ones, where we have our strategy is a little different -- I don't think it is not more of the same with the old strategies. Our strategies that we explained in this print portion is more disciplined strategies, more defined strategies.

As we discussed, we have a number of strategies, each of which has a different timeframe, but hopefully, we will begin to see traction for a number of our initiatives by early 2019. By the second half of 2019, I think the better deposit mix and better cost of funds will be evident our financial statements.

Matthew Clark -- Piper Jaffray -- Analyst

Great. Thank you.

Operator

The next question will come from Chris McGratty of KBW.

Christopher McGratty -- KBW -- Managing Director

Great. Thanks for the question. In the earnings release, I believe it said core loan yields excluding accretion were up about 5 basis points sequentially. Was any of that lack of improvement LIBOR-related? If so, how much was LIBOR a drag on loan yields in the quarter?

Kevin S. Kim -- President and Chief Executive Officer

Yeah. So, we have about $1.2 billion of variable rate loans tied to the LIBOR.

Christopher McGratty -- KBW -- Managing Director

Okay. And so, if looking out, we should get, I guess, more improvement in the loan yields next quarter. You talked about the deposit initiatives. But if I'm thinking about direction of NIM, putting the pieces together, this quarter was fairly pronounced, is the expectation for the maybe Q4 and first half of next year until these initiatives kick in for the compression to somewhere be on a quarterly basis between what occurs in the first quarter and this quarter or how would you assess the rate of NIM erosion near-term? Thanks.

Alex Ko -- Executive Vice President and Chief Financial Officer

Sure. We would expect further compression in our net interest margin in Q4 due to the increase of the deposit cost. However, some of those deposit cost increases will be offset by an increase in loan yield as a rate change at the end of September as well as we expect another increase in the middle of December because it might not have a real impact in Q4. But having said that, the compression in net interest margin is expected, but we have a substantial core compression of 10 basis points. We don't expect that much of compression that we have experienced in the Q3.

Christopher McGratty -- KBW -- Managing Director

Okay. If I heard that right, the 10 basis points this quarter and next quarter will be not as severe. Is that right?

Alex Ko -- Executive Vice President and Chief Financial Officer

Right. Ten-basis point reduction was in Q3 based on the number of the reasons we explained, but also based on our new strategy on the deposit pricing and loan pricing. We would expect to see compression, but not as high as we experienced, i.e. 10 basis points in Q3.

Christopher McGratty -- KBW -- Managing Director

Okay. Very helpful. If you have it, I'm interested in if you have the spot rate on the deposit cost as of September 30th. I think the average for the quarter was something like 124 basis points. Do you have where deposit cost ended the quarter?

Alex Ko -- Executive Vice President and Chief Financial Officer

Yeah. Let me give you a breakdown on the money market and CD. The money market was about 1.27% and the CD was about 2.3%.

Christopher McGratty -- KBW -- Managing Director

Great. Thank you very much.

Operator

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

Gary Tenner -- D.A. Davidson & Company -- Managing Director

Good morning. Two questions -- the first just on the low-income housing tax credit and the incremental expense this quarter -- is that a run rate or was that catch up for the prior quarters or is that number we should be thinking about?

Alex Ko -- Executive Vice President and Chief Financial Officer

Yeah. It would be run rate. As I indicated, we will continue to utilize the benefit of the loan [inaudible] and credit going forward.

Gary Tenner -- D.A. Davidson & Company -- Managing Director

Okay. And that should extend as well into 2019, so your outlook for tax rate and related expense would be similar?

Alex Ko -- Executive Vice President and Chief Financial Officer

Yes.

Gary Tenner -- D.A. Davidson & Company -- Managing Director

Okay. Great. Just to follow-up on that large portion of real estate charge-off, I understand you were saying this was a unique situation, but for it to be a full charge-off suggests something pretty negative. Was this some sort of specialty real estate that doesn't have any other use or is there something else that occurred that was a more recent development with that credit?

Peter Koh -- Executive Vice President and Chief Credit Officer

So, without going into too much detail, this was a lease hold interest. So, there was a ground lease on this property that really was unique. So, it really came down to, I guess, the security and the collateral. That posed an issue for us. I think that's really where we had an issue third quarter here.

Gary Tenner -- D.A. Davidson & Company -- Managing Director

So, was that a lien that was not perfected or something?

Peter Koh -- Executive Vice President and Chief Credit Officer

No. It was perfected. But through the course of the credit, there were some disputes that occurred in that credit. So, without going into more detail than that, to me, really, it's an isolated issue. It's nothing that the bank, I think, had an issue. It really just developed over time. We were able to pick up on it second quarter and charge off this quarter.

Gary Tenner -- D.A. Davidson & Company -- Managing Director

So, just to clarify, this is not necessarily a true collateral value issue, just more of the secured interest in the collateral. Is that a fair summation?

Peter Koh -- Executive Vice President and Chief Credit Officer

You know, I think it's a little bit of both. There is collateral devaluation as well because of this issue. But ultimately, yes, it comes down to our assurance that we have enough collateral here to support the credit, if that makes sense.

Gary Tenner -- D.A. Davidson & Company -- Managing Director

I think it does. I may follow-up offline. Thank you very much.

Peter Koh -- Executive Vice President and Chief Credit Officer

Thank you.

Operator

Again, if you would like to ask a question, please press * and then 1 at this time. Our next question will come from David Chiaverini from Wedbush Securities.

David Chiaverini -- Wedbush Securities -- Analyst

Hi, thanks. A couple questions for you -- you mentioned about how one of the new strategies is hiring C&I lenders in the existing footprint to focus on expanding sales efforts beyond the core Korean American customer base. I was curious -- is this a sign that you're seeing kind of a diminishing opportunity in targeting the Korean American niche or is this additive?

Kevin S. Kim -- President and Chief Executive Officer

That is more like an additive strategy. As you know, the markets remain very competitive for C&I loans in California and New York areas, which happen to be our two largest markets. So, rather than chasing aggressive deals, we have been looking into expanding our C&I lending in the areas that we have not adequately served to date. So, we have identified several key markets that can be further cultivated and have plans in place.

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

David Chiaverini -- Wedbush Securities -- Analyst

Got it. Okay. Similar sort of question on the deposit side with the deposit strategies you guys are putting in place -- should we expect any kind of demographic mix change or is Korean American still going to be the focus? I guess it's probably going to be split in that I would presume on the CD side, it's probably going to stay focused on Korean American, but on the new C&I lenders that are brought on board, it's clearly going to be businesses that are focused more on mainstream.

Alex Ko -- Executive Vice President and Chief Financial Officer

Yeah. As you indicated, yes, we would expect to have it coming from both ends. Obviously, Korean American customers are the main customers and there's plenty of opportunity for us to serve them our deposit services. Also, the rate that we are offering compared to mainstream, we have advantage in terms of competing for deposit pricing. So, there's plenty of opportunity for us to bring non-Korean, specifically geographically if we have enhanced online platforms, we will have much better exposure and more competitive deposit pricing so it will open up a great opportunity to non-Korean depositors as well.

David Chiaverini -- Wedbush Securities -- Analyst

Okay. Thanks for that. Shifting gears to the net interest margin discussion -- you mentioned about how payoffs of higher yielding variable rate loans contributed to the decline in the margin. I was curious what is driving that and then secondarily, do you see those payoffs subsiding at all.

Alex Ko -- Executive Vice President and Chief Financial Officer

As the rate is expected to continue to go up, we did see more variable rate loans paid off, just as we expected again in the context of the rising interest rate environment. But it can fluctuate. It depends on a quarter by quarter basis.

David Chiaverini -- Wedbush Securities -- Analyst

Okay. They're simply refinancing. Would you say that most of these borrowers are refinancing with Hope Bancorp?

Alex Ko -- Executive Vice President and Chief Financial Officer

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

David Chiaverini -- Wedbush Securities -- Analyst

In terms of the trend, are you seeing any -- is that trend subsiding at all early on in the fourth quarter or is it still kind of an aggressive level of payoffs of these higher yielding loans?

Alex Ko -- Executive Vice President and Chief Financial Officer

Just compared to quarter over quarter, slight changes, but I don't see any big increased on the high yield variable loans in Q3 specifically. I would say it is increasing, but steadily increasing.

David Chiaverini -- Wedbush Securities -- Analyst

Okay. Then the last question for me on expenses -- with the $3.5 million decrease in compensation expense in the quarter, I was curious what areas were cut.

Kevin S. Kim -- President and Chief Executive Officer

It is mainly the restructuring of our compensation and incentive plans. As you may be aware, we are periodically evaluating our compensation structure and incentive plans and make adjustments as warranted. During the third quarter, we restructured overall compensation plan, including incentive bonuses which resulted in a decrease in salary expenses. Part of the reduction was due to a true up of our bonus accruals we made in prior quarters.

David Chiaverini -- Wedbush Securities -- Analyst

I see. So, you didn't cut in any areas. It's just your employees are essentially making less.

Kevin S. Kim -- President and Chief Executive Officer

Well, I'm not saying that. We are trying to keep our compensation structure as competitive as possible in the market, but there are many different ways to compensate our employees and our compensation and human resource committee is spending a lot of time to make sure that our current compensation level is competitive in the market.

David Chiaverini -- Wedbush Securities -- Analyst

Thanks very much.

Operator

And once again, if you'd like to ask a question, please press * then 1. The next question comes from Don Worthington of Raymond James.

Don Worthington -- Raymond James -- Analyst

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

Kevin S. Kim -- President and Chief Executive Officer

On and off we do, but we check the market rate and we give some discretionary rate to the front line. We didn't really run the campaign, per se, but monitoring what is a competitive rate in our market. Again, we gave a competitive discretionary rate to the branch and the frontline offices.

Don Worthington -- Raymond James -- Analyst

Okay. And then can you tell if there was any movement in the CDs from other accounts at the bank? In other words, did people money market accounts or transaction accounts into CDs?

Kevin S. Kim -- President and Chief Executive Officer

Yeah. Not much in the transaction account, but we did see it from both the interest-bearing liability, especially from the money market account to CD. Those are some migrations that we have. Yes.

Don Worthington -- Raymond James -- Analyst

In terms of the provision -- maybe this is for Peter -- do you have a rough breakdown as to how the provision was allocated to support growth versus set aside for the increase in criticized assets.

Peter Koh -- Executive Vice President and Chief Credit Officer

We don't have an exact breakdown, but as we kind of explained on the script, it really was kind of a combination of some items. A key item obviously was the higher charge-off this quarter. We did have a little uptick in the criticized loans, which also contributed, then we also got some contribution from the loan volume increase in the portfolio.

So, really, kind of a combination of those three, but definitely, I think the kind of unique charge-off this quarter definitely drove that a little bit here. The provision, I think, this quarter to me is somewhat of a spike and barring any other kind of one-off surprises like this, I think going forward. It still will be lumpy, in a sense, but I think it should normalize based on the previous quarter averages.

Don Worthington -- Raymond James -- Analyst

Okay. Great. Then I guess my last one is do you have an outlook for loan growth in 2019 yet? Would you expect it to kind of continue at a similar pace to 2018?

Kevin S. Kim -- President and Chief Executive Officer

Don, I would say so. Our current guidance for 2018 is mid to high single digits. I think it will not be much different from the base that we have for 2018. In addition to the growth of loans, we are also focusing carefully on the mix of the loan growth and we are putting a lot of emphasis to allocate more resources to the high-yield, high-rate type of portfolio than the lower yield type of loan.

Don Worthington -- Raymond James -- Analyst

Okay. All right. Thanks, Kevin. That's all I had.

Operator

Thanks, Don. Next, we have a follow-up from Aaron Deer of Sandler O'Neill.

Aaron Deer -- Sandler O'Neill -- Managing Director

My apologies -- just one quick follow-up on the share repurchases -- given the new buyback that's out there, can you give me a sense of how aggressive you might plan to be on that? Do you have any capital targets in mind? Is CRE concentration any sort of limiting factor on that?

Kevin S. Kim -- President and Chief Executive Officer

Well, CRE concentration is always some consideration that we take into account. I think with the issuance of senior debt a few quarters ago, our CRE concentration situation has improved significantly. So, it is much of a lesser issue today than it was two quarters ago. After the $50 million program is completed, as was the case in the past, our board will continue to review our capital situation to make sure that we maintain the appropriate level of capital for future growth.

At the same time, we want to maximize efficiency of the utilization of our capital. So, it will be something that will continue to be evaluated on an ongoing basis.

Aaron Deer -- Sandler O'Neill -- Managing Director

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

Kevin S. Kim -- President and Chief Executive Officer

That's our intention.

Aaron Deer -- Sandler O'Neill -- Managing Director

Great. Thanks for taking my questions, Kevin.

Kevin S. Kim -- President and Chief Executive Officer

Thank you.

Operator

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

Kevin S. Kim -- President and Chief Executive Officer

Okay. Thank you again and we look forward to speaking with you next quarter. So long, everyone.

Operator

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

Duration: 61 minutes

Call participants:

Angie Yang -- Director of Investor Relations and Corporate Communications

Kevin S. Kim -- President and Chief Executive Officer

Alex Ko -- Executive Vice President and Chief Financial Officer

Peter Koh -- Executive Vice President and Chief Credit Officer

Aaron Deer -- Sandler O'Neill -- Managing Director

Matthew Clark -- Piper Jaffray -- Analyst

Christopher McGratty -- KBW -- Managing Director

Gary Tenner -- D.A. Davidson & Company -- Managing Director

David Chiaverini -- Wedbush Securities -- Analyst

Don Worthington -- Raymond James -- Analyst

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