Q4 2024 Hope Bancorp Inc Earnings Call
Okey-dokey, I'm ready.
Thank you very much!
Thank you for everything.
Speaker Change: Good day and welcome to the Hope Bancorp 2024 fourth quarter earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
Speaker Change: To ask a question, you may press star then 1 on your touchtone phone and to withdraw your question, please press star then 2 Please note this event is being recorded. I would now like to turn the conference over to Miss Angie Yang, Director of Investor Relations Please go ahead ma'am
Angie Yang: Thank you Chuck. Good morning everyone and thank you for joining us for the Hope Bank Corp 2024.
Speaker Change: Thank you for joining us for today's fourth quarter investor conference call. As usual, we will be using a slide presentation to accompany our discussion this morning, which is available in the presentations page of our investor relations website.
Speaker Change: Beginning on slide 2, let me start with a brief statement regarding forward-looking remarks.
Speaker Change: The call today contains forward-looking projections regarding the future financial performance of the company and future events, as well as statements regarding the pending transaction between Hope Bank Corp. and Territorial Bank Corp.
Speaker Change: The closing of the pending transaction is subject to regulatory approvals and other customary closing conditions.
Speaker Change: Forward-looking statements are not guarantees of future performance. Actual outcomes and results may differ materially. Hope Bank Corp. assumes no obligation to revise any forward-looking projections that may be made on today's call.
Speaker Change: In addition, some of the information referenced on this call today are non-GAAP financial measures.
Speaker Change: financial measures, please refer to the company's filings with the SEC, as well as the safe harbor statement in our press release issued this morning.
Speaker Change: Now we've allotted one hour for this call. Presenting from the management side today will be Kevin Kim.
Speaker Change: our Chief Financial Officer. Peter Ko, our Chief Operating Officer, is also here with us, as usual, and will be available for the Q&A session. With that, let me turn the call over to Kevin Kim. Kevin?
Kevin Kim: Thank you, Angie. Good morning, everyone, and thank you for joining us today. Before we get into our results, let me just take a moment to comment about the greater Los Angeles area fires. We are truly heartbroken to see the unprecedented destruction across our region.
Kevin Kim: As one of the largest independent banks headquartered in this great city, we are committed to taking a leadership role in addressing the immediate and rebuilding needs of those impacted by the fires.
Kevin Kim: Our recent cash donation to the United Way of Greater Los Angeles Wildfire Response Fund underscores our unwavering commitment to our community.
Speaker Change: I am confident that the impacted areas will be rebuilt stronger and better in the foreseeable future. Now, moving on to our results, let's begin on slide 3 with a brief overview of the quarter.
Speaker Change: For the fourth quarter of 2024, we earned net income of $24.3 million, or 20 cents per diluted share. And our pre-provisioned net revenue was $40 million, up 14% from September 30, 2024.
Speaker Change: quarter of a quarter revenue grew and expenses decreased, improving our efficiency and pre-provision profitability.
Speaker Change: 2024 was a building year as we worked to position our balance sheet for future growth and improved profitability.
Speaker Change: We focused on strengthening our deposit base, lowering broker deposits down to 7% of total deposits as of December 31, 2024.
Speaker Change: compared with 10% as of December 31, 2023, and down from a peak of 15% in April, 2023.
Speaker Change: We turn the corner on loan growth in the second half of 2024 with loans receivable of $13.6 billion as of December 31, 2024, up 1% on an annualized basis from June 30, 2024.
Speaker Change: Quarter of a quarter, fourth quarter average growth loans increased 2% on an annualized basis from the third quarter.
We are optimistic in our outlook.
Speaker Change: for 2025 and look forward to accelerating our earnings growth and profitability driven by an improved deposit mix.
organic loan growth, and strong C-income growth.
Furthermore,
The addition of territorial bank corps, low-cost core deposits,
Speaker Change: and residential mortgage loans with pristine asset quality will be meaningful, positive contributors to the combined company in 2025.
On slide four.
Speaker Change: you can see our strong capital ratios with a tangible common equity ratio over 10% and a total capital ratio of nearly 15% as of December 31, 2024.
Speaker Change: This positions us well to support organic and strategic growth in the coming year. We expect to close the pending transaction with Territorial Bancorp during the first quarter subject to regulatory approvals.
Speaker Change: Our Board of Directors declared a quarterly common stock dividend of $0.14 per share payable on February 20th to stockholders of record as of February 6, 2025.
Continuing to slide 5.
Speaker Change: Our total deposits were $14.3 billion, down 3% from the end of the prior quarter. This included a decrease of $128 million from the sale of our Virginia branches, which closed on October 1st.
Speaker Change: In addition, during the fourth quarter, we saw typical year-end fluctuations in certain commercial deposits in the residential mortgage industry. Lastly, we exited some deposits due to high costs.
Speaker Change: Moving on to slide 6, at December 31, 2024, our loans receivable of $13.6 billion, excluding loans held for sale, were up slightly from September 30.
Speaker Change: Fourth quarter average gross loans increased 2% on an annualized basis from the third quarter of 2024. We sold $48 million of SBA loans in the fourth quarter compared with $41 million in the third quarter.
Speaker Change: In regard to the direct impact from the wildfires, we reviewed our loan portfolio to identify commercial, SBA, and residential mortgage properties located in and surrounding the fire zones.
Speaker Change: Thus far, our exposure has been minimal, or less than $5 million in aggregate of loans outstanding from a handful of customers.
On slides seven and eight.
Thank you.
Speaker Change: We provide more details on our commercial real estate loans, which are well diversified by property type and granular in size.
Speaker Change: The loan-to-values remain low, with a weighted average of approximately 47% at December 31, 2024, and the profile of our commercial real estate portfolio has not changed.
Speaker Change: Asset quality remains stable with over 98% of the commercial real estate loans past graded at year-end.
Speaker Change: With that, I will ask Julianna to provide additional details on our financial performance for the fourth quarter.
Julianna?
Thank you, Kevin, and good morning, everyone.
Speaker Change: Beginning with slide 9, our net interest income totaled $102 million for the fourth quarter of 2024, a decrease of $3 million or 3% from the third quarter.
Speaker Change: Our weighted average cost of interest-bearing deposits in the fourth quarter was 4.38 percent down 21 basis points from the third quarter.
Speaker Change: The spot rate on our interest bearing deposits was 4.21% as of December 31st, 2024, down 42 basis points from 4.63% as of August 31st.
Speaker Change: This translates to a cumulative beta of 42% on a spot basis for interest-bearing deposits relative to the cuts in the Fed Fund's target rate over the same period.
Speaker Change: The fourth quarter 2024 net interest margin declined by five basis points, quarter over quarter to 2.50%.
Speaker Change: In terms of net interest margin, the positive impact from lower deposit costs in the fourth quarter offset the pressure from lower loan yields. However, we reversed $1.7 million of interest income due to loans moving to non-accrual status in the fourth quarter.
Speaker Change: Excluding the impact of the reverse interest income, our fourth quarter net interest margin would have been 2.54%.
Speaker Change: On slide 10, we show you the quarterly trends in our average loan and deposit balances and the weighted average yields and costs.
Speaker Change: On to slide 11. Non-interest income was $16 million for the fourth quarter, an increase of $4.1 million or 34% from the third quarter. During the fourth quarter, we reported $3.1 million of net gains on the sale of SBA loans.
Speaker Change: Swap fee income increased to $1.4 million, up from $21,000 in the third quarter, reflecting improved customer activity. We also record a $1 million gain on the sale of our Virginia branches.
Speaker Change: Moving on to non-interest expense on slide 12, we continue to closely manage our expenses.
Speaker Change: Our non-interest expense was $78 million in the fourth quarter, down 5% from the prior quarter. This was driven by a decrease in earned interest credit expense, reflecting the Fed Fund's rate cuts and lower average balances of the underlying deposits, as well as lower salaries and benefits expense.
Excluding notable items, non-interest expense was down 4% linked quarter.
Speaker Change: Together, with the quarter-over-quarter growth in total revenue, the reduction in expenses led to 14% growth in reported pre-provisioned net revenue for the fourth quarter or 9% growth in PPNR-excluding notable items.
for the full year of 2024.
Notable items.
Lastly,
Speaker Change: While talking about expenses broadly here, we want to make one comment on income tax expense. Due to a solar tax credit investment that we made, the fourth quarter effective tax rate was 20%, compared with 25% in the third quarter. For the full year 2024, the effective tax rate was 25%.
Speaker Change: Now, moving on to slide 13, I'll review our asset quality metrics.
Speaker Change: Non-performing assets were down 13% quarter-over-quarter to $91 million as of December 31, 2024.
Equivalent to 53 basis points of total assets.
Speaker Change: Criticized loans were also down 11% quarter over quarter to $450 million as of December 31st, or 3.30% of total loans, compared with 3.71% of total loans as of September 30th. These meaningful decreases reflected payoffs, workouts, and note sales in the fourth quarter.
Speaker Change: Fourth quarter net charges of $13 million or annualized 38 basis points of average loans and provision for credit losses of $10 million reflected the activity to improve problem loans.
Speaker Change: The full year 2024 net charge-off ratio was 19 basis points, down slightly from 22 basis points in 2023.
compared with 113 basis points of September 30th.
Kevin Kim: Quarter over quarter, quantitative and individually evaluated loan reserves decreased, reflecting in part the reduction in criticized and non-performing loans. This was partially offset by an increase in qualitative reserves. With that, let me turn the call back to Kevin.
Thank you, Julianna.
Kevin Kim: Moving on to slide 14, I will now review our Outlook for 2025.
Kevin Kim: Our outlook includes the impact of the Territorial Bank Corp transaction, the close of which we anticipate in the first quarter of 2025, subject to regulatory approvals. We are excited about the pending merger and the value created through this compelling combination.
Kevin Kim: For 2025, we expect loan growth in the high single-digit percentage range, which reflects moderate organic loan growth in Banco Polo and the addition of territorial loans.
Kevin Kim: in May and October, consistent with the forward rate curve. In 2025, we expect non-interest income to grow in the mid-teen percentage range, reflecting continuing trends from the fourth quarter and a full year of gains on SBA loan sales.
Kevin Kim: and disciplined expense management while continuing to invest in talent and technology to support franchise growth.
Kevin Kim: We anticipate that one-time expenses related to the close of the territorial transaction will be approximately $30 million in 2025.
Kevin Kim: Lastly, we are planning for an effective tax rate of approximately 20% for the full year 2025 based upon utilization of low-income housing and investment tax credits.
Kevin Kim: Moving on to slide 15 for a brief look at our medium-term financial targets.
Kevin Kim: Our bottom line financial target is a return on average assets of 1.2% and higher.
Kevin Kim: To achieve this metric, we are targeting loan growth in the high single-digit percentage range and revenue growth over 10% on an annual basis, outpacing loan growth.
Kevin Kim: Revenue growth will reflect loan growth combined with strong fee income growth and an expanding net interest margin. Beyond changes in market interest rates, we expect to expand our net interest margin from an improved funding mix.
Kevin Kim: Over the medium term, we are also targeting an efficiency ratio of approximately 50%, which will be the outcome of the revenue growth and continued disciplined expense management.
Thank you.
Kevin Kim: With the strength of the balance sheet we have built, the improved productivity that we are seeing from our banking teams, and the synergies we expect to realize from territorial merger, we believe that we are well positioned to improve our financial performance and earnings growth in 2025 and beyond.
Kevin Kim: With that, operator, please open up the call for questions. Thank you. We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys.
Kevin Kim: If at any time your question has been addressed, and you would like to withdraw your question, please press star, then two. Please limit yourself to two questions, and then you can re-enter the queue. And at this time, we'll pause momentarily to assemble our roster.
Kevin Kim: And the first question will come from Matthew Clark with Piper Sandler. Please go ahead.
Thank you very much.
Speaker Change: Welcome to the Hollywood Report�s. Thank you for joining us for this one. We really appreciate it.
Speaker Change: just first on the your outlook on the deposit beta I think interest bearing this past cycle you know rates up was just over 80% that you looking to match that
this cycle, or what are your updated thoughts there?
Thank you.
Speaker Change: Hi Matthew, this is Julianna. In terms of this cycle, obviously one would want to achieve a high beta as possible.
Speaker Change: in terms of interest-bearing deposit costs, and we certainly are looking to achieve a better beta than we have in past cycles.
So when you look at past hope cycles,
Hope's performance and predecessor banks in past cycles.
you'll see that on interest rate cycles.
Speaker Change: the beta was lower than what we've already achieved at the 42% on interest bearing.
and we're looking to continue to expand that.
Thank you.
Speaker Change: and hopefully we'll reach 80%, but we need the rate cuts to help us and I know that we're being more proactive this cycle around than in past cycles.
Okay.
Got it. And then just on the expense run rate,
Bye!
you got it to low double digits with territorial
Kampa Krolls and then just kind of the
Thank you. Bye.
Speaker Change: kind of the moving parts to get you to that kind of low double-digit growth.
Speaker Change: that you provide in the deck. Yeah, let me just maybe start with the kind of, let me just talk more about the forward look rather. I think that will help you a little bit more. You know, when it comes to the addition of the territorial expenses,
Speaker Change: for the three quarters of 2025 because we're expecting to close the transaction during the first quarter but for the ease of Modeling we're starting with April 1st, right? But of course
hopefully it will happen sooner, but regardless.
The 2025 still includes a transition period.
in terms of operating costs from territorial.
as we work on the integration.
to the guide for 2025.
and also on HOPE Stand Alone.
Speaker Change: We are looking at moderate expense growth as well, and part of that is continued investment in the franchise.
Speaker Change: and technology to help support growth. Albeit, as you saw from our performance this year, we're continuing to practice.
Thank you so much.
Speaker Change: Transition versus full run rate of cost savings if you will.
Speaker Change: Okay. And the contribution you're assuming from territorial in terms of operating expense and any updated?
Speaker Change: Thoughts on the amount of cost saves? We obviously know what you provided months ago, but just any update on those numbers?
Thank you.
Speaker Change: Well, I mean, the update that we're providing for you is the outlook that we have here for 2025 in terms of the expense growth, and that's for the combined company. I will say that the cost saves that we're looking at are coming in lower than what we had initially penciled out at deal announcement, frankly, because integrating the two franchises, you know, we're being conscientious about building in a well-thought-out transition plan.
Speaker Change: and also if you recall at our announcement we did talk about maintaining the branch network and the customer facing employees and not changing the experience for customers.
Speaker Change: So, you know, as you kind of go through the process, you find that you need maybe more operation support, et cetera, and all in, it kind of reduces maybe the cost base that one thinks about initially from an investment banking perspective, but I think over time we will achieve that.
Okay, thanks.
Thank you for joining us.
Speaker Change: The next question will come from Chris McGrady with KBW. Please go ahead.
Oh, great. Thanks for the question.
Speaker Change: Julianna, just a quick modeling question on the territorial accretion. It says $15 million from the loans. What are you assuming for the securities accretion? Or is that all in the low double-digit guidance?
trying to parse out the accretion.
Speaker Change: Yeah, so we pointed out the loan accretion specifically The securities income is in the low double-digit guidance, and we are evaluating How much of that securities book we want to keep versus reposition? So that's why we haven't specified that more precisely
Speaker Change: Okay, great. And then that was my follow-up to Kevin. Anything that you might be considering at close or shortly after close that could perhaps accelerate this transition to the ROA goals that you've laid out for the medium term?
Thank you for watching!
Chris, maybe you can rephrase that question.
Speaker Change: The balance sheet at close, is there anything you're considering more opportunistic from either your or the acquired balance sheet that could help improve the return? You've got the capital to absorb.
Speaker Change: some sort of a modest restructure. Is there anything being contemplated that could accelerate that transition from the ROA you're currently at to where you hope to be over the next two or three years?
Speaker Change: Yeah, Chris, that's a great question and I think it applies to both balance sheets rather than just the one.
Speaker Change: and that kind of activity is premature while the transaction is still pending.
Speaker Change: Great. If I could just sneak one more in on buybacks, Kevin. Could you just provide your latest thoughts on whether that could be something post-close that you would consider given where the stock's trading?
Speaker Change: Chris, as we have repeatedly shared in the past, we think it is premature to comment about that at this point before the actual consummation of the merger.
Speaker Change: Having said that, our board will continue to evaluate both short-term and long-term capital deployment opportunities in the best interest of the bank as well as in the best interest of the shareholders.
Thanks Kevin, appreciate it.
Speaker Change: Again, if you have a question, please press star, then 1. Our next question will come from Gary Tenor with DA Davidson. Please go ahead.
Thanks, good morning.
Speaker Change: Wanted to ask a question about the deposit trends in the quarter, obviously a little bit of a mix shift away from non-trust bearing you know and heavier money market balances.
Speaker Change: We've been hearing that even though you did have some success on the interest-bearing side that the competitive environment in the Korean-American space has remained very high. Can you talk about the competitive environment on the pricing side and to what degree that has hampered efforts to reduce overall funding costs?
Speaker Change: Well, first of all, I will say that what you saw in the fourth quarter is similar that you see in the fourth quarter for us typically. We have some depositors, commercial depositors in a residential mortgage industry where you see outflows of those DDAs in the fourth quarter related around property tax payments and the like. So that is the effect on the DDAs that you are noting.
vis-a-vis the other part of your question around competitive pricing.
I mean, deposit pricing remains competitive in the marketplace.
Speaker Change: That's just the reality of where we are today, but I will say that I think that achieving a 42% beta on our interest-bearing deposit costs across our network, that's a pretty good result for HOPE, and I would like to thank all of our front lines.
Speaker Change: across all of our segments for helping to drive that result.
All right, I appreciate the background there. And then.
Speaker Change: Just on your guide as it relates to the fee income side, you know, you noted obviously the benefit of a full year of sales in SBA
Speaker Change: Are you kind of assuming this, the kind of back half of the year 24 and that kind of 270 to, or 2.7 to 3 million range, is that kind of the range you would expect on a quarterly basis for next year?
Speaker Change: The SBA loan sales? Gains on SBA loan sales? Yeah, I think the fourth quarter is generally a good run rate. And as we said, we would expect to continue selling SBA loans in 2025.
Thank you for your time.
Thank you.
Speaker Change: The next question is a follow-up from Matthew Clark with Piper Sandler. Please go ahead.
Thank you. Thank you.
Thank you.
Speaker Change: On the loan growth outlook, high single digits, with territorial, just give us a sense for kind of the legacy hope.
I'm just trying to get a sense for the...
Speaker Change: I think it's fair to assume that C&I will grow at a decent clip, but commercial real estate might continue to shrink. I guess, what are your thoughts on shrinking that CRE portfolio and whether or not it might stabilize or just continue to shrink for the foreseeable future?
Speaker Change: Well, Matthew, we had a turnaround in the second quarter of 2024, so from the HOPE organic side, we still expect a moderate
Speaker Change: low single-digit growth in our loan portfolio before we add the territorial portfolio.
Speaker Change: The majority will be coming from the CNI side and for CRE, if there is any growth, that will be nominal.
Thank you.
Okay.
Speaker Change: in terms of some losses that might have been attributed to one or two credits, just trying to get a sense for the normalized run rate of NetChargeOS and where we might reset to.
The fourth quarter charge-offs...
Speaker Change: were a little elevated, but if you look at the entire year of 2024, it was 19 basis points, and that's quite at a manageable level.
Speaker Change: and it is even lower than 2023 when we had 2020.
two basis points of charge-offs.
Speaker Change: And it is really difficult to predict charge-offs with some kind of accuracy, but we still anticipate our 2025 charge-offs will continue to be at manageable levels.
Okay, fair enough. Thank you.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Please go ahead.
Speaker Change: Thank you, Matthew. Once again, thank you all for joining us today, and we look forward to speaking with you again soon, next quarter. Bye, everyone.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Thank you.