Hope Bancorp - Q3 2024

Transcript

Operator (participant)

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 (SVP and Director of Investor Relations)

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 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, 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 Baliska, 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. 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 four, 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 21st to stockholders of record as of November 7th, 2024. Continuing to slide five.

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 non-interest-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 six.

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 seven and nine, I'm sorry, 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 47% as of September 30, 2024, and the profile of our commercial real estate portfolio has not changed. Asset quality remains stable, with 98% of the commercial real estate loans pass rated as of September 30, 2024.

With that, I will ask Julianna to provide additional details on our financial performance for the quarter. Julianna?

Julianna Balicka (EVP and CFO)

Thank you, Kevin, and good morning, everyone. Beginning with slide nine, 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 costs increased five basis points quarter-over-quarter. However, our end-of-period total deposit costs decreased by nine basis points from June thirtieth to September thirtieth, indicating an inflection point in our deposit costs 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 non-interest 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 non-interest expense on slide 12. Our non-interest expense was $81.3 million in the second quarter. Excluding notable items, which were primarily merger-related, our adjusted non-interest 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 non-interest 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. Non-performing assets at September 30, 2024, were $104 million. The quarter-over-quarter change was due to the placement of one relationship, a non-accrual 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 on more than $40 million of problem loans, with more expected before year-end. Net charge-offs for the 2024 third quarter were moderate and manageable at $5.7 million or annualized 17 basis points of average loans. This compares with 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 thirtieth, 2024, our allowance for credit losses was $153 million, representing 113 basis points of loans receivable, compared with 115 basis points as of June thirtieth, 2024, or 111 basis points as of September thirtieth, 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.

Kevin Kim (Chairman, President, and CEO)

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 twenty twenty-four, compared with the third quarter of twenty twenty-four. 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 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.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press Star, then One on your touchtone phone. If you are 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. In the interest of time, we ask that you please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster, and our first question today comes from Gary Tenner with D.A. Davidson. Please go ahead.

Gary Tenner (Managing Director and Senior Research Analyst)

Thanks. Good morning. I wanted to 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.

Julianna Balicka (EVP and CFO)

Sorry, in 2025?

Gary Tenner (Managing Director and Senior Research Analyst)

Sorry, say again?

Julianna Balicka (EVP and CFO)

Sorry, are you talking about 2025?

Gary Tenner (Managing Director and Senior Research Analyst)

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?

Julianna Balicka (EVP and CFO)

Oh, 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.

Gary Tenner (Managing Director and Senior Research Analyst)

All right, great. Thank you. And then just on the deposit side, you know, gave us the, you know, quarter-over-quarter decline in a 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 kind of CDs that are rolling over in the fourth quarter, what your offer rate is on those right now?

Julianna Balicka (EVP and CFO)

So we moved all of our deposit costs down in terms of the deposit costs on money markets, savings, and CDs. And for the, for example, I'll say that for money market accounts and savings accounts, where we moved rates down, for the accounts, because some accounts obviously were already low rate to begin with, so 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, you know, quarter to date, our average CD, our CD costs are down another six basis points in October from September thirtieth.

And we continue to, you know, evaluate and reduce rates across the board.

Gary Tenner (Managing Director and Senior Research Analyst)

Thank you.

Operator (participant)

Again, if you have a question, please press star and then One. And our next question today comes from Chris McGratty with KBW. Please go ahead.

Chris McGratty (Managing Director)

Oh, 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 50 bps move. What's your either total or interest-bearing deposit beta you're assuming in your modeling?

Julianna Balicka (EVP and CFO)

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

Chris McGratty (Managing Director)

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

Peter Koh (Senior EVP and COO)

Hi, this is Peter. Yeah, we're a little limited right now because it's an active workout, but, again, these are well-secured, you know, 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.

Chris McGratty (Managing Director)

Thank you.

Operator (participant)

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

Gary Tenner (Managing Director and Senior Research Analyst)

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 five twenty rate, I think. Could you be a little more specific as to what your offer rate is? I mean, are they four and a quarter right now? What level are CDs rolling down to in fourth quarter based on what you see today?

Julianna Balicka (EVP and CFO)

Yeah, just opening up my rate right here. We are originating CDs at approximately, I would say, four and a quarter blended rate.

Gary Tenner (Managing Director and Senior Research Analyst)

Okay, helpful. Thank you.

Operator (participant)

Again, if you have a question, please press star and then one. And our next question today comes from Chris McGratty of KBW with a follow-up. Please go ahead.

Chris McGratty (Managing Director)

Oh, 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 end of the year. Thanks.

Julianna Balicka (EVP and CFO)

I mean, hold on for a second, let me get you the spot yield on our loan portfolio. I mean, excuse me, investment portfolio was 2.96% at the end of the quarter, 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.

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 that perhaps you are referring to in your question than other banks may have done, we are incrementally taking advantage of moments where we can reposition securities.

Chris McGratty (Managing Director)

Okay. Thanks, Jules.

Operator (participant)

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

Matthew Clark (Managing Director and Senior Research Analyst)

Hey, good morning, everyone. The contribution of truly floating rate loans that you said, I think variable you said was 40%-45% or so, is that truly all floating or is there adjustables in there?

Julianna Balicka (EVP and CFO)

Or is there what?

Matthew Clark (Managing Director and Senior Research Analyst)

Are there adjustables in that variable?

Julianna Balicka (EVP and CFO)

Oh, 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.

Matthew Clark (Managing Director and Senior Research Analyst)

Okay. Okay, and then the average margin in September, if you had it on an adjusted basis or unadjusted, either one?

Julianna Balicka (EVP and CFO)

The net interest margin? Our net interest margin for September was 2.51, an adjusted margin, but it's trending up. Month to date, it's up nicely.

Matthew Clark (Managing Director and Senior Research Analyst)

Okay, that's adjusted for any interest reversals?

Julianna Balicka (EVP and CFO)

That's right.

Matthew Clark (Managing Director and Senior Research Analyst)

Okay, great. Thank you.

Operator (participant)

This concludes 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.