Hope Bancorp, Inc. (HOPE) Q3 2024 Earnings Report, Transcript and Summary

Good day and welcome to the Hope Bancorp 2024 Third Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Angie Yang, Director of Investor Relations. Please go ahead.

Thank you, Nick. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2024 Third 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. Beginning on Slide 2, let me start with a brief statement regarding forward-looking remarks. 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 Bancorp and Territorial Bancorp. The closing of the pending transaction is subject to regulatory approvals, the approval of the stockholders of Territorial Bancorp and other customary closing conditions. Forward-looking statements are not guarantees of future performance. Actual outcomes and results may differ materially. Hope Bancorp assumes no obligation to revise any forward-looking projections that may be made on today's call. In addition, some of the information referenced on this call today are non-GAAP financial measures. For a more detailed description of the risk factors and a reconciliation of GAAP to non-GAAP financial measures, please refer to the company's filings with the SEC as well as the Safe Harbor statements in our press release issued this morning. Now we have allotted one hour for this call. Presenting from the management side today will be Kevin Kim, Hope Bancorp's Chairman, President and CEO; and Julianna Balicka, our Chief Financial Officer. Peter Koh, 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?

Thank you, Angie. Good morning, everyone, and thank you for joining us today. Let us begin on Slide 3 with a brief overview of the quarter. Our 2024 third quarter financial results were highlighted by continued success in our core deposit growth and a turnaround in our loan growth trend, reflecting higher levels of productivity from our banking teams. Customer deposits grew a strong 11% annualized from June 30, 2024, supporting loan growth and offsetting a planned reduction in brokered deposits. Loans receivable, which excludes loans held for sale, grew 2% annualized from June 30, 2024. For the third quarter of 2024, we earned net income of $24.2 million or $0.20 per diluted share. Excluding notable items, our net income was $25.2 million and our earnings per share were $0.21. Notable items this quarter were primarily merger-related. On Slide 4, Hope Bancorp's September 30, 2024 risk-based capital ratios were highest yet since merging with Wilshire in 2016. All our risk-based capital ratios expanded quarter-over-quarter from June 30, 2024. As of September 30, our total capital ratio was 14.8% and our tangible common equity ratio was 10.1%. Together with our prudent balance sheet management and ample liquidity, our strong capital ratios position us well to increase our market share, support merger activity, add new client relationships, and generate profitable growth as economic conditions and loan demand improve in the coming year. Our Board of Directors declared a quarterly common stock dividend of $0.14 per share payable on November 21 to stockholders of record as of November 7, 2024. Continuing to Slide 5. At September 30, 2024, our total deposits were $14.7 billion, essentially stable quarter-over-quarter with robust growth in customer deposits, offsetting a $351 million planned reduction of brokered deposits. You can see on this slide that we reduced brokered deposits in our mix to 7% as of September 30, 2024, down from 14% as of June 30, 2023. In addition, I would highlight that more than two-thirds of the noninterest-bearing demand deposit growth this quarter came from our small business accounts. On October 1, 2024, the sale of our two branches in Virginia closed, totaling approximately $129 million of deposits. This outflow will be offset by organic customer deposit growth from elsewhere in our network. Moving on to Slide 6. At September 30, 2024, our loans receivable, excluding loans held for sale, increased by $51 million from June 30, equivalent to 2% annualized growth and reflecting higher balances of residential mortgage and commercial loans. During the third quarter, we sold $41 million of SBA loans. Quarter-over-quarter, commercial and SBA loan production increased while residential mortgage loan production was relatively consistent. On Slides 7 and 9, I'm sorry, 7 and 8, we provide more details on our commercial real estate loans, which are well diversified by property type and granular in size. The loan-to-values remain low with a weighted average of approximately 47% at September 30, 2024, and the profile of our commercial real estate portfolio has not changed. Asset quality remained stable with 98% of the commercial real estate loans pass-graded at September 30, 2024. With that, I will ask Julianna to provide additional details on our financial performance for the quarter. Julianna?

Thank you, Kevin, and good morning, everyone. Beginning with Slide 9, our net interest income totaled $105 million for the third quarter of 2024, down by $1 million from the preceding second quarter as growth in interest income was offset by increased interest expense, which reflected higher average deposit costs and growth in balances. Average total deposit cost increased five basis points quarter-over-quarter. However, our end-of-period total deposit costs decreased by nine basis points from June 30 to September 30, indicating an inflection point in our deposit cost by deposit type. Our third quarter net interest margin declined by seven basis points quarter-over-quarter to 2.55%. On Slide 10, we show you the quarterly trends in our average loan and deposit balances and our weighted average yields and costs. On to Slide 11. Our noninterest income was $11.8 million for the third quarter, an increase of 7% from the second quarter. The increase was primarily attributable to a higher level of gain on sale of SBA loans. In the third quarter, we sold $41 million of SBA loans for a gain of $2.7 million compared with $30 million of SBA loans sold for a gain of $2 million in the second quarter. Moving on to noninterest expense on Slide 12. Our noninterest expense was $81.3 million in the second quarter. Excluding notable items, which were primarily merger-related, our adjusted noninterest expense was $79.8 million, which compares with $79.1 million, excluding notable items for the second quarter. On a year-over-year basis, our noninterest expense excluding notable items was down 8%, reflecting the impact of the restructuring we executed late last year. Now moving on to Slide 13, I will review our asset quality. Nonperforming assets at September 30, 2024 were $104 million. The quarter-over-quarter change was due to the placement of one relationship on nonaccrual status after its loans matured. This relationship consists of three commercial real estate loans that are well secured by properties in primary locations with minimal to no loss content. The borrower is actively in the process of selling these properties. Total criticized loans increased by $58 million quarter-over-quarter, consisting of a decrease in special mention loans and an increase in substandard loans. We continue to work out previously identified problem loans. Fourth quarter to date, we have had favorable resolutions of more than $40 million of problem loans with more expected before year-end. Net charge-offs for the 2024 third quarter are moderate and manageable at $5.7 million or annualized 17 basis points of average loans. This compares to 13 basis points annualized in the second quarter. For the third quarter, the provision for credit losses was $3.3 million compared with $1.4 million in the preceding second quarter. At September 30, 2024, our allowance for credit losses was $153 million, representing 113 basis points of loans receivable compared with 115 basis points as of June 30, 2024 or 111 basis points as of September 30, 2023. The change in our allowance coverage reflects positive impact from improved macroeconomic variables, notably the CRE price index, partially offset by increased qualitative and individually evaluated loan reserves. With that, let me turn the call back to Kevin.

Thank you, Julianna. Moving on to the outlook on Slide 14. Our balance sheet management has positioned us well to grow our market share and expand our client relationships in the coming year, generating profitable growth. For now, let me provide a brief update for the quarter ahead. For simplicity, given that we have less than one quarter left in the year, we are presenting our outlook for the fourth quarter of 2024 compared with the third quarter of 2024. Our outlook does not include the impact of mergers and acquisitions. As is our custom, we will present the 2025 and medium-term expectations when we report fourth quarter results. Our outlook for average loans is to grow at a percentage rate in the low single-digits quarter-over-quarter, building on our momentum from the third quarter. Net interest income for the fourth quarter of 2024 is expected to grow in the low single-digits quarter-over-quarter. We expect interest income to benefit from positive loan growth and interest expense to benefit from continued deposit rate management. Our Fed Funds rate expectations are consistent with the current forward interest rate curve, which implies a 4.5% Fed Funds upper target rate as of December 31, 2024. We expect a similar level of gain on sale of SBA loans in the fourth quarter as in the third quarter. We expect operating expenses, excluding notable items, to be essentially stable quarter-over-quarter. And net-net, we are looking forward to positive operating leverage quarter-over-quarter. Lastly, we continue to assume an essentially stable reserve coverage, which was 113 basis points of loans as of September 30, 2024. We are excited about our pending merger with Territorial Bancorp and the value created through this compelling combination. However, we will not be taking questions about the transaction, given that the purpose of this call today is to discuss our financial results for the third quarter. With that, operator, please open up the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] And our first question today comes from Gary Tenner with D.A. Davidson. Please go ahead.

Thanks. Good morning. I wanted to just see if you could give us an update, I guess, first on the loan portfolio in terms of floating rate and then an idea of fixed rate and hybrid loan repricing in 2025?

Sorry, in 2025?

Sorry, say again?

Sorry. Are you talking about 2025?

Well, I was wanting to get the updated percentage of floating rate loans in the portfolio but then the amount of fixed rate repricing in 2025.

Right. The amount of variable rate loans in our portfolio is 45% and the remainder are fixed and hybrid. 31% is hybrid, still in fixed period and 24% is fixed. And that percentage of fixed that's repricing in 2025 is, let me see, $766 million.

All right. Great. Thank you. And then just on the deposit side, you gave us the quarter-over-quarter decline in spot rate. Can you just tell us kind of where -- what you were able to do on the pricing side in the wake of the September rate cut and particularly as it relates to the kind of CDs that are rolling over in the fourth quarter, what your offer rate is on those right now?

So we moved all of our deposit costs down in terms of the deposit cost on money market, savings, and CDs. And for the, for example, I'll say that for money market accounts and savings accounts are we moved rates down for the accounts because some accounts obviously were already low rate to begin with but you wouldn't move a rate down for an account with like a 3% handle rate, right? But for the accounts where we moved rates down, the beta on those accounts was approximately 60%. And I'll say that our CDs continue to roll over and reprice down. So quarter-to-date, our average CD, our CD costs are down another six basis points in October from September 30. And we continue to evaluate and reduce rates across the board.

Thank you.

[Operator Instructions] And our next question today comes from Chris McGratty with KBW. Please go ahead.

Great. Thanks. Julianna, sticking with the margin for a second. What are you assuming for full cycle deposit betas? I mean, you mentioned 60% on the stuff you moved. What's your either total or interest-bearing deposit beta you're assuming in your modeling?

Yes, one second. And that was just on the incremental that I was sharing, right, not like the whole, obviously, because you can see the change in the numbers. So one second. By the time we get to a full cycle beta, we're assuming high 60% on the interest-bearing deposit cost, but it's going to take us a while to get there.

Okay. Great. And then if we could maybe switch to the credit discussion for a minute. The relationship that was added to nonaccrual, again, no loss. Any more detail on, I guess, what drove it, whether there's -- whether it was a surprise or there was reserves on those loans already, any color there would be helpful.

This is Peter. We're a little limited right now because of it’s an active workout. But again, these are well secured, very well-positioned properties. Really don't anticipate much loss and the borrower is in the process of selling the property. So we feel like it's a manageable situation right now but we are being proactive with this resolution.

Okay. Thank you.

And our next question today comes from Gary Tenner of D.A. Davidson with a follow-up. Please go ahead.

Thanks. I just want to follow up on that CD question that I had. I guess, first, I know that last quarter, the projected fourth quarter CD maturities were around a 5.20% rate, I think. Could you be a little more specific as to what your offer rate is? I mean are they 4% on a quarter right now? What level are CDs rolling down to in fourth quarter based on what you see today?

Yes. Just opening up my great, right here. We are originating CDs in an approximately, I would say, 4.25% blended rate.

Okay, helpful. Thank you.

[Operator Instructions] And our next question today comes from Chris McGratty of KBW with a follow-up. Please go ahead

Great. Really quickly on the, it looks like you did a mini bond restructuring in the quarter. I'm interested in kind of spot yields on the investment portfolio and whether this is -- you'd be considering potentially more into the year. Thanks.

Well, the average, I mean, hold on for a second. Spot yield on our loan portfolio, I mean, excuse me, investment portfolio was 2.96% at the end of -- at the moment, which is up from 2.89% at the end of September. Bear in mind, we have quite a bit of low-yielding securities in our portfolio that are pulling down the blended spot yields of the whole portfolio. And as far as continuing to kind of move the lowest-yielding securities off our book and repricing them to current market rates, while we are not, at the moment, considering a bigger transaction of the kind of perhaps you are referring to in your question that other banks may have done, we are incrementally taking advantage of moments where we can reposition securities.

Okay. Thanks, Julianna.

And our next question today comes from Matthew Clark of Piper Sandler. Please go ahead.

Hey. Good morning, everyone. The contribution of truly floating rate loans that you said, I think, variable you said was 40.5% or so. Is that truly all floating or is there adjustables in there?

Or is that what?

Are there adjustables in that variable?

No, that's the truly floating. The hybrid, the 30% hybrid, that's the fixed to floating in the future. The variable that we quoted is truly variable.

Okay, okay. And then the average margin in September, if you had it on an adjusted basis or an adjusted other one?

The net interest margin? Our net interest margin for September was 2.51% and adjusted margin but it's trending up month-to-date, it's up nicely.

Okay. That's adjusted for any interest reversals?

That's right.

Okay. Great. Thank you.

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

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

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