Hope Bancorp - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 EPS of $0.17 GAAP ($0.19 ex-notables) and “Revenue” (company-defined) of $116.5M; Primary EPS beat S&P Global consensus by ~$0.01 while S&P revenue missed as definitions differ (company revenue $116.5M vs S&P “revenue” actual $109.7M). EPS upside was driven by a 4 bps NIM expansion and a lower provision on sequentially lower net charge-offs.
• Deposit mix improved: total deposits +1% QoQ to $14.49B with brokered deposits falling to <7% of total; cost of interest-bearing deposits fell 24 bps QoQ to 4.14% helping NIM +4 bps to 2.54%.
• Territorial Bancorp acquisition closed Apr 2 (after quarter-end): adds ~$1.7B low-cost deposits (1.96% WA cost) and ~$1.0B residential mortgages; 2025 accretion income now ~+$14M; one-time Q2 acquisition costs expected at ~$18M.
• 2025 guidance updated: NII growth trimmed to high single-digits (from low double-digits), noninterest income raised to mid-20s% growth, loans still high single-digit, opex (ex-notables) low double-digit; dividend maintained at $0.14/share.

What Went Well and What Went Wrong

• What Went Well

  • NIM inflected +4 bps QoQ to 2.54% as interest-bearing deposit costs fell; management highlighted lower Fed funds and mix efforts as drivers.
  • Deposit quality improved: customer deposits rose, brokered time deposits reduced to <7% of total; total deposits +1% QoQ to $14.49B; loan-to-deposit ratio improved to 92%.
  • Credit trends stabilizing: NPAs down 8% QoQ to 0.49% of assets; net charge-offs fell to 0.25% (from 0.38%); ACL coverage steady at 1.11%.
  • Quote: “Our healthy levels of capital and ample liquidity provide us a robust cushion to support prudent growth opportunities...” – Kevin S. Kim, CEO.

• What Went Wrong

  • Net interest income modestly down 1% QoQ (two fewer days, lower floating loan yields, lower average loans), partially offset by deposit cost relief.
  • Noninterest expense up to $83.9M GAAP (ex-notables $81.3M; +6% QoQ) on seasonal payroll taxes/bonus true-ups/vacation accruals and merger costs.
  • Loan balances declined 2% QoQ; C&I −5% and CRE −2% as aggressive pricing, paydowns/payoffs, and selective renewals weighed on growth.

Transcript

Operator (participant)

Good day, and welcome to the Hope Bancorp 2025 First 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. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Angie Yang. Please go ahead.

Angie Yang (Head of Investor Relations)

Thank you, Chuck. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2025 First 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 two, 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. 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 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. We also note that our press release and remarks in our call today present preliminary, unaudited financial information for Territorial Bancorp, which may be subject to change. Purchase accounting adjustments are preliminary, and we estimate deposits and loans net of fair value adjustments. 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?

Kevin Kim (Chairman, President and CEO)

Thank you, Angie. Good morning, everyone, and thank you for joining us today. Let us begin on slide three with a brief overview of the quarter. For the first quarter of 2025, we earned net income of $21.1 million, or 17 cents per diluted common share. Excluding notable items, net income for the first quarter of 2025 was $22.9 million, or $0.19 per diluted common share. This compares with $0.20 per diluted common share for the fourth quarter of 2024. For the first quarter, net interest income after provision expense was $96 million, up 4% quarter-over-quarter from $92 million in the fourth quarter of 2024. This reflected a modest decrease in net interest income, which was more than offset by a lower provision for credit losses driven by a sequential improvement in net charge-offs.

First quarter non-interest expense, excluding notable items, of $81.3 million increased quarter over quarter due to typical first quarter increases in salary and employee benefits expense. In the first quarter, we received regulatory approvals for our merger of Territorial Bancorp, which we completed on April 2, 2025. As of the merger close, Territorial contributed approximately $1.7 billion of stable low-cost deposits at a weighted average cost of 1.96% and approximately $1 billion after accounting discounts of residential mortgage loans with pristine quality. On slide four, you can see the details of our strong capital ratios, all of which expanded quarter over quarter and year-over-year. Our healthy capital levels and ample liquidity provide us a healthy cushion with which to navigate emerging macroeconomic volatility, support prudent balance sheet growth, and continue to invest in our company.

As part of the Territorial transaction, Hope issued 7 million shares, or $73 million of equity. Our Board of Directors declared a quarterly common stock dividend of 14 cents per share, payable on May 16 to stockholders of record as of May 2, 2025. Continuing to slide five, we remain focused on strengthening our deposit mix, a key priority as we position our balance sheet for prudent growth. At March 31, 2025, our total deposits were $14.5 billion, an increase of 1% from the end of the prior quarter. Overall growth in customer deposits more than offset planned reductions in brokered deposits, which decreased to less than 7% of our total deposits as of March 31, 2025. Moving on to slide six. At March 31, 2025, our loans receivable of $13.3 billion were down 2% from year-end of 2024.

Quarter-over-quarter, residential mortgage loans increased 7%, offset by a 5% decrease in commercial and industrial loans and a 2% decrease in commercial real estate loans. Loan production in the first quarter increased 11% year over year. We continue to see elevated paydowns and payoffs in the first quarter. Market pricing competition and spread compression continue to be aggressive, and commercial customers are refinancing loans before maturity. We also passed on some renewals due to pricing or potential credit concerns, and this impacted our net loan growth for the quarter. That being said, we remain positive about supporting prudent balance sheet growth and our loan pipelines are strengthening. We continue to invest in people to grow our teams, which is positively impacting production.

Furthermore, although we are cautious about the backdrop of macroeconomic volatility and increasing probabilities of a recession, we note positive outlook from our Korean subsidiary sector customers. We have been seeing an acceleration of direct investments in the United States by Korean companies. In part, current geopolitical tensions are accelerating the timing of previously planned investments in manufacturing. We believe this should translate into improved loan demand and line utilization, as well as greater opportunities to expand our deposit relationships and ancillary fee-based services. As the largest Korean American bank in the United States, Hope is best positioned to meet the growing lending, deposit, and banking service needs of this customer segment. On slides seven and eight, 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 46% at March 31, 2025, and the profile of our commercial real estate portfolio has not changed meaningfully, as the quality remains stable. With that, I will ask Julianna to provide additional details on our financial performance for the first quarter. Julianna?

Julianna Balicka (CFO)

Thank you, Kevin. Good morning, everyone. Beginning with slide nine, our net interest income totaled $101 million for the first quarter of 2025, down 1% from the immediately preceding fourth quarter. This reflects the aggregate impact of the federal funds target rate cuts on our floating rate loans, lower average loan balances, as well as the first quarter having two fewer days than the fourth quarter of 2024. Overall, net interest margin increased by four basis points quarter over quarter to 2.54%, up from 2.50% for the fourth quarter of 2024. On slide 10, we show you the quarterly trends in our average loan and deposit balances and our weighted average yields and costs. Our cumulative spot deposit rate data since the Fed started cutting rates in September 2024 has been 54% for interest-bearing deposits. On to slide 11.

Our non-interest income was $15.7 million for the first quarter, compared with $15.9 million in the immediately preceding fourth quarter. Excluding the one-time gain from the sale of our Virginia branches in the fourth quarter, our non-interest income for the first quarter was up 5% from $14.9 million. Overall, our other income and fees continue to grow, reflecting positive momentum across a number of smaller non-interest income lines. In the first quarter, we sold $50 million of SBA loans, compared with $48 million in the fourth quarter. Gains on sale of SBA loans were $3.1 million in both quarters. Moving on to non-interest expense on slide 12. Our non-interest expense was $84 million in the first quarter. Excluding notable items, non-interest expense was $81 million, down 1% year over year and up 6% quarter over quarter.

The quarter-over-quarter increase in non-interest expense reflected typical first quarter increases in compensation-related line items, such as payroll taxes, bonus expense true-ups, and vacation accruals. This was partially offset by a 33% reduction in earned interest credit expense, which reflected lower average balances of related deposits and the Fed funds target rate cuts. The year-over-year decrease in non-interest expense, excluding notable items, reflected our continued close expense management. Now, moving on to slide 13, I will review our asset quality. Our non-performing assets as of March 31, 2025, decreased 8% quarter over quarter, representing 49 basis points of total assets. Non-performing assets were down 21% year-over-year. Net charge-offs totaled $8 million or annualized 25 basis points of average loans for the first quarter, down from $13 million or annualized 38 basis points of average loans in the fourth quarter.

Accordingly, we recorded a provision for credit losses of $4.8 million in the first quarter, down sequentially quarter-over-quarter with a reduction in net charge-offs. Our allowance coverage of loans was 1.11% as of March 31, 2025, unchanged quarter-over-quarter. Now, moving on to slide 14. Before I turn the call back to Kevin for closing remarks, let me provide some additional commentary on the Territorial merger. As of the close of this transaction, Territorial had approximately $87 million in cash and cash equivalents. The investment securities portfolio was sold alongside the close of the merger at a market value of $531 million. FHLB borrowings totaled $160 million before March, of which $125 million was paid off. Territorial's non-performing assets totaled less than $2 million. The preliminary discount on Territorial's loan portfolio is $220 million or 17%.

This compares with $270 million in January of 2025, and the change reflects a change in the 10-year treasury rate. Our updated accretion income expectations for 2025 are $14 million, which reflects both the updated discount and updated prepayment expectations. As a result of this transaction, we expect our 2025 second quarter results will include one-time pre-tax acquisition-related expenses of approximately $18 million. With that, let me turn the call back to Kevin.

Kevin Kim (Chairman, President and CEO)

Thank you, Julianna. Moving on to the outlook on slide 15. There is a lot of uncertainty around the economy and forward interest rates, but let me provide some brief updates to our outlook for 2025. We continue to expect annual 2025 loan growth at a high single-digit percentage rate, albeit at a lower end of the range than previously. This reflects the positive impact of Territorial, as well as organic loan growth in the second half of the year, driven in part by recent and continued hiring plans. We now expect net interest income growth to be in the high single-digit percentage range for 2025. This is changed from our prior outlook of low double-digit percentage growth. This reflects updated merger accretion income expectations, the impact of the first quarter results, and updated loan growth expectations. Offsetting our lower net interest income outlook is stronger fee income growth.

We now expect non-interest income to grow in the mid-20s % range, compared with our previous guidance of mid-teen percentage growth. This reflects first quarter results and stronger momentum across a number of our fee income lines. Our outlook for non-interest expense is unchanged at low double-digit percentage growth, excluding notable items. We began the second quarter by welcoming our new Territorial Savings team members to the Hope family, or the Hope Ohana, as we say in Hawaii. I would like to thank all our teams, our teammates at Territorial Savings and Bank of Hope, for their hard work and dedication on this merger. We are excited by the enhanced opportunities of our combined future and look forward to building on Territorial's storied history. With that, operator, please open up the call for questions.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we'll pause momentarily to assemble our roster. The first question will come from Chris McGratty with KBW. Please go ahead.

Andrew Leischner (Assistant VP of Equity Research)

Hey, this is Andrew Leischner for Chris McGratty. Hey, just starting out on NII, how would the high single-digit NII growth outlook change if we get less than the three rate cuts you have assumed? I guess, what is the annual impact to NII for each 25-basis point rate cut? Thank you.

Julianna Balicka (CFO)

If we get fewer rate cuts than what is assumed, the 2025 impact will be relatively muted because offsetting in our NII impact that the rate cuts, on one hand, we benefit from being able to cut deposit costs more. On the other hand, our variable rate loans do compress. Net-net, it kind of washes out with somewhat modest downward impact.

Andrew Leischner (Assistant VP of Equity Research)

Okay, great. Thank you. Just switching gears over to the loan growth guide, can you provide detail on the loan verticals that you're expecting this moderate organic growth from? Maybe provide any insights into conversations you're having with clients that give you confidence in maintaining the guidance.

Julianna Balicka (CFO)

Great. Could you repeat your question? We had a little bit of trouble on the line speaking in the beginning.

Andrew Leischner (Assistant VP of Equity Research)

Oh, sorry. Yeah. Can you provide detail on the loan verticals that you're expecting moderate organic growth from? And then maybe provide any insight into conversations you're having with clients that give you confidence in maintaining your growth guidance?

Julianna Balicka (CFO)

Yeah. Kevin discussed the Korean subsidiary conversations that we're having that are a positive component. We're also seeing some pipelines building nicely in our specialized commercial lending verticals. For example, we've had healthcare, for example, project finance, for example, structured finance. There's a number of specialized verticals, and we've recently also added team members to those verticals to help grow those pipelines.

Andrew Leischner (Assistant VP of Equity Research)

Okay, great. Thanks, Julianna. I'll step back.

Operator (participant)

Again, if you have a question, please press star, then one. Our next question will come from Gary Tenner with D.A. Davidson. Please go ahead.

Hey, guys. I'm Matta Sanon for Gary Tenner. The drivers of you alluded to second-half loan growth in your guidance, and you talked about having new hires, and you've already done some work on it. I'm talking about specific segments that we might see loan growth on.

Julianna Balicka (CFO)

Yeah. As I just told Andrew, where we are seeing good kind of momentum in our pipelines, as Kevin discussed, is in the Korean subsidiary sectors and also in the specialized C&I teams, which include healthcare, project finance, structured finance, etc. That's what's building up in our pipeline.

All right. Thank you for that. You kind of talked about it earlier in the previous question, but can you remind us the specific NIM impact of each 25-basis point cut, all else equal?

All else equal, each 25-basis point cut in the first year will more or less offset itself with the we won't compress on our loan yields, but then we won't be able to bring down deposit costs as much. Net-net, it washes out, and it's slightly with a slight downward shift, but it all kind of depends on execution. No, I'm not providing you a precise basis point answer.

All right. Maybe on credit, you guys maintained pretty good asset quality this quarter. Any specific color there? Any points of stress? Anything maybe you're looking more closely?

Peter Koh (COO)

Sure. This is Peter. So far, asset quality has remained stable. I think, obviously, there is a lot of uncertainty around the tariff environment and things like that. We have been very proactive with our portfolio. We are monitoring very closely. So far, we think our borrowers are being proactive to mitigate some of the potential impact from tariffs by diversifying supply chains and things like that. We are closely monitoring, as everyone's doing. So far, our asset quality is definitely healthy and stable.

All right. Thank you for taking my questions.

Thank you.

Operator (participant)

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

Kevin Kim (Chairman, President and CEO)

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

Operator (participant)

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