Hope Bancorp Inc

NASDAQ:HOPE

Earnings Call Analysis

Second Quarter 2024 Financial Performance and Outlook

In the second quarter of 2024, Hope Bancorp reported a net income of $25.3 million, or $0.21 per diluted share, with an adjusted net income of $26.6 million when excluding notable items. The quarter saw an expansion in the net interest margin, a decrease in operating expenses, and an improved return on assets. The merger with Territorial Bancorp is progressing, expected to close by year-end, which will diversify their loan portfolio. Additionally, asset quality remains stable, with nonperforming assets decreasing by 37% to $67 million. The company anticipates low single-digit loan growth in the coming months and a decline in fourth-quarter net interest income by approximately 10%.

Strong Earnings Performance

In the second quarter of 2024, Hope Bancorp reported a net income of $25.3 million, translating to earnings of $0.21 per share. When adjusted for notable items, the net income rose to $26.6 million, or $0.22 per share. This reflects a continuous improvement in financial performance following a strategic reorganization late last year that has begun to yield positive results.

Improvements in Financial Metrics

The company experienced a notable increase in its net interest margin, which expanded by 7 basis points to 2.62%. Operating expenses decreased by 4% quarter-over-quarter to $79 million, indicating effective cost management. Additionally, the return on assets showed improvement, signaling more efficient use of assets. As of June 30, 2024, Hope Bancorp maintained robust capital ratios: a total capital ratio of 14.42% and a tangible common equity ratio of 9.72%.

Solid Deposit Base amid Strategic Changes

Total deposits as of June 30, 2024, stood at $14.7 billion, stable compared to the previous quarter. The bank successfully increased its noninterest-bearing demand deposits and other customer deposits, effectively offsetting planned reductions in brokered deposits. This stability in deposits is crucial as the bank prioritizes a more customer-centric deposit strategy in the wake of its recent restructuring.

Loan Portfolio Dynamics

At the end of the second quarter, gross loans totaled $13.6 billion, a slight decrease of 0.6%, primarily due to $30 million in SBA loans sold. However, residential mortgage growth remained robust, with expectations for positive loan growth in the upcoming third quarter. There is a strengthening pipeline, particularly in commercial loans, notwithstanding elevated payoffs observed in the previous quarter.

Asset Quality and Nonperforming Loans

The overall asset quality remains stable, with nonperforming assets at $67 million, down 37% from the previous quarter. The nonperforming asset ratio improved to 39 basis points of total assets. This was coupled with manageable net charge-offs of $4.4 million, reflecting a low annualized ratio of 13 basis points relative to average loans.

Future Guidance and Market Expectations

Looking ahead, the bank expects average loans to grow at a low single-digit percentage rate through the fourth quarter of 2024. The outlook for net interest income anticipates a decline of approximately 10% from $126 million reported in the fourth quarter of 2023. The bank plans to engage in disciplined expense control, projecting a decrease in operating expenses (excluding notable items) of more than 7% year-over-year for the fourth quarter.

Merger with Territorial Bancorp

Hope Bancorp is diligently working on merging with Territorial Bancorp, which is projected to close by year-end 2024. This merger is expected to significantly enhance Hope's deposit base and double its residential mortgage portfolio, contributing to the institution's growth trajectory and financial stability.

Strategic Focus for Growth

Overall, 2024 is characterized as a building year, emphasizing core deposit strategies, operational efficiencies, and systemic enhancements to facilitate scalable and profitable growth. The company aims for medium-term financial targets, including high single-digit loan growth, over 10% revenue growth, and an efficiency ratio under 50%, ultimately leading to a return on assets exceeding 1.2%.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the Hope Bancorp 2024 Second Quarter Earnings Conference Call.

[Operator Instructions]

Please note, this event is being recorded.

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

[Angie Yang, executive]

Thank you, Megan. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2024 second 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 IR 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 proposed transaction between Hope Bancorp and Territorial Bancorp. The closing of the proposed 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 the 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 1 hour for this call. Presenting from the management side today will be Kevin Kim, Hope Bancorp's Chairman, President and CEO; 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, executive]

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. For the second quarter of 2024, we earned net income of $25.3 million or $0.21 per diluted share. Excluding notable items, our net income was $26.6 million, and our earnings per share were $0.22. Notable items this quarter included merger and restructuring-related costs and a partial reversal of a prior accrual for the FDIC special assessment. Our results this quarter reflect continued progress in improving our financial performance following our strategic reorganization late last year.

During the second quarter of 2024, our net interest margin expanded. Our operating expenses decreased and our return on assets improved. We are diligently working on our merger integration planning with Territorial Bancorp and look forward to closing the pending transaction by year-end. Territorial will contribute stable and low-cost deposits to our franchise and their loans will more than double Hope's residential mortgage portfolio.

On Slide 4, you can see that we ended the quarter with strong capital and all our capital ratios expanded from March 31, 2024. As of June 30, 2024, our total capital ratio was 14.42% and our tangible common equity ratio was 9.72%. Our high capital ratios are a strong base with which to support emerging growth opportunities. Our Board of Directors declared a quarterly common stock dividend of $0.14 per share, payable on August 22 to stockholders of record as of August 8, 2024.

Continuing to Slide 5. At June 30, 2024, our total deposits were $14.7 billion, essentially stable quarter-over-quarter. Our front line continued to execute well with an increase in our noninterest-bearing demand deposits and other customer deposits, largely offsetting a planned runoff of brokered deposits.

Moving on to Slide 6. At June 30, 2024, our gross loans totaled $13.6 billion, a decrease of $87 million or less than 1% quarter-over-quarter. $30 million of this decrease was from SBA loans sold in the second quarter. Overall, loan production improved this quarter. Residential mortgage growth was, once again, robust, and commercial real estate loans were stable. However, this was offset by elevated payoffs and paydowns within C&I loans. Based on our strengthening pipeline, we are looking forward to positive loan growth in the third quarter.

On Slide 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 remained low with a weighted average of approximately 47% at June 30, 2024, and the profile of our CRE portfolio has not changed. Asset quality is stable and 98% of the commercial real estate portfolio was pass-graded at June 30, 2024.

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

[Julianna Balicka, executive]

Thank you, Kevin. Beginning with Slide 9. Our net interest income totaled $106 million for the second quarter of 2024, a decrease of $9 million from the first quarter. Approximately $4 million of the sequential decrease was attributable to the net impact of the payoff of our bank term funding program borrowings in late March and early April, which we paid off in full with interest-earning cash. Quarter-over-quarter, our net interest margin expanded by 7 basis points to 2.62%.

A notable highlight is the deceleration in the quarterly increase of our cost of deposits. Quarter-over-quarter, our average cost of total deposits increased by only 3 basis points, the lowest quarterly rates have changed since the first quarter of 2022.

On Slide 10, we show you the quarterly trends in our average loan and deposit balances and our weighted average cost of yields. On to Slide 11. Our noninterest income was $11 million for the second quarter, an increase of 34% from $8 million in the first quarter. We resumed sales of SBA 7(a) loans as secondary market conditions improved. We sold $30 million this quarter and booked a $2 million net gain on sale. We plan to continue selling SBA loans in the second half of the year.

Moving on to noninterest expense on Slide 12. Our second quarter 2024 GAAP noninterest expense was $81 million compared with $85 million in the first quarter. Excluding notable items, noninterest expense for the second quarter was $79 million, down 4% quarter-over-quarter and down 9% year-over-year. The largest component is salary and employee benefits expense, which was down 7% quarter-over-quarter and 16% year-over-year. You can see the positive impact of the restructuring in the year-over-year comparisons.

Now moving on to Slide 13. I will review our asset quality, which continues to remain stable. Nonperforming assets at June 30, 2024, were $67 million, down 37% quarter-over-quarter. The nonperforming asset ratio improved to 39 basis points of total assets at June 30, down from 59 basis points as of March 31. Net charge-offs for the 2024 second quarter were $4.4 million or annualized 13 basis points of average loans, compared with 10 basis points annualized in the first quarter. Net charge-off levels continue to be low and manageable.

For the second quarter, the provision for credit losses was $1.4 million, compared with $2.6 million last quarter. At June 30, 2024, our allowance for credit losses was $156 million, representing 115 basis points of loans receivable. The reserve coverage ratio has been essentially stable comparing with 116 basis points as of March 31, 2024, or 115 basis points as of December 31, 2023.

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

[Kevin Kim, executive]

Thank you, Julianna. Moving on to the outlook on Slide 14. In terms of our fourth quarter 2024 outlook, relative to the fourth quarter 2023 actual results, we have the following updates. Fourth quarter to fourth quarter, our outlook for average loans to grow at a percentage rate in the low single digits remains unchanged. Residential mortgage loan growth continues to be robust. Commercial loan production continues to strengthen, and we expect the pace of paydowns and payoffs to moderate. Accordingly, we are looking forward to positive loan growth in the second half of the year.

We now expect net interest income for the fourth quarter of 2024 to decline approximately 10% from $126 million in the fourth quarter of 2023. Approximately 3% of this decrease comes from the net impact of the payoff of the bank term funding program, which contributed a positive $4 million to our net interest income in the fourth quarter of 2023. Relative to our initial budgeting, our net interest income expectations are lower, reflecting the cumulative impact of payoffs and paydowns in the first half of the year, market-wide loan spread compression on new originations and the year-to-date shift in deposit mix. We successfully controlled deposit costs in the second quarter, but deposit pricing remains very competitive as long as the rates -- interest rates remain high.

In our outlook, we are factoring in One Fed fund's target rate cut of 25 basis points in September of 2024. Overall, we expect the second quarter of 2024 to be at or near the trough in terms of net interest income with quarterly growth by the fourth quarter of 2024, mainly driven by loan growth.

In the second quarter, we resumed SBA loan sales and expect to continue to sell SBA loans in the second half of the year. We remain very focused on disciplined expense control. We now expect our fourth quarter 2024 operating expenses, excluding notable items, to decrease by more than 7% from $85 million in the fourth quarter of 2023. This is an update compared with our prior outlook for an expense decrease of over 5%.

Lastly, we continue to assume an essentially stable asset quality backdrop and stable reserve coverage, which was 115 basis points of loans as of June 30, 2024.

Overall, as you see on Slide 15, we are right on track toward realizing our medium-term financial goals, namely high single-digit loan growth plus revenue growth over 10% and efficiency ratio under 50%, leading to a return on assets over 1.2%. Following our reorganization in the 2023 fourth quarter, 2024 is a building year as we focus on core deposit initiatives, operating efficiencies and process improvements to support scalable and profitable growth.

We are excited about our pending merger with Territorial Bancorp whose contribution will accelerate the achievements of our medium-term targets.

With that, operator, please open up the call for questions.

[Operator]

[Operator Instructions]

Our first question comes from Matthew Clark with Piper Sandler.

[Matthew Clark, analyst]

Just the first one on the loan growth outlook. Backing into what you need to do to get to low single digits on average for the fourth quarter implies a decent step-up in the second half here. Can you just talk through what's going to drive that growth and what the pipeline looks like at this stage?

[Kevin Kim, executive]

Well, Matthew, as you may remember, historically, we have been very strong in terms of our new loan originations. Our loan production engine was the main driver for our organic growth at a much faster pace than most of the peers in the pre-COVID times. But when we had industry-wide challenges such as what we saw in the past 2 years, most of the issues we had were deposits in the liability side of the balance sheet. So when we had a strategic reorganization in October of '23, it was designed to support high-quality loan and deposit growth. Obviously, we wanted to focus more on enhancing our deposit franchise before we strive to achieve a meaningful loan growth.

Our 2024 second quarter numbers indicate that we began to see the results of our priority on deposit front, such as meaningful reduction in broker time deposits, growth in customer deposits, very nominal quarter-over-quarter increase in our average cost of deposits, expansion of NIM and so on. So now we expect our loan balances to grow in the second half of '24 as we focus high-quality growth in both loans and deposits. And our pipeline -- loan pipeline is -- has been nicely building up actually. And I think our loan growth, when we have a better deposit environment will be accelerated, and we feel pretty confident as we had shown in the past that our loan production will be the engine for the growth in the second half of the year.

[Julianna Balicka, executive]

And Matthew, this is Julianna, if I could add just a couple more comments. Quarter today, for example, our commercial loans are up. And when we look at the second quarter, the issue for us in the second quarter or the headwind for us in the second quarter has been the elevated payoffs and paydowns as opposed to production beating budget to actuals and our commercial real estate was able to beat budget. So we feel comfortable when we look out into the second half of the year that the drivers are aligning well.

[Matthew Clark, analyst]

Okay. Great. And then on the loan yields, they were down this quarter. I'm not sure if that was just due to the SBA loan sales or not. Just any commentary there and the related outlook.

[Julianna Balicka, executive]

It does reflect to the mix of the loans that were being originated vis-a-vis just kind of what was running off. And in terms of the commercial loans, there has been spread compression this year in terms of originations. So that does kind of factor into the loan yields plus, of course, you have the accounting-related items, not accounting really, but the non-yield items such as quarter-over-quarter changes in prepayment fees and quarter-over-quarter changes in nonaccrual income reversals but also when you look at the origination yields of, say, commercial real estate compared to 2023 or for commercial loans compared to 2023, their housing market widespread compression. And that does factor into the outlook, which is part of the reason why we did lower the NII outlook in our outlook slide.

[Matthew Clark, analyst]

Got it. And then on the margin, do you have the average for the month of June and the spot rate on deposits at the end of June?

[Julianna Balicka, executive]

I have the spot rate for the end of June, which is a 3.43.

[Matthew Clark, analyst]

And then on the SBA loan sales...

[Julianna Balicka, executive]

Just to make sure we're talking about the same number, 3.43 spot rate of total deposits.

[Matthew Clark, analyst]

Got it. And then on the SBA loan sales, should we assume a similar amount gets sold in the second half year per quarter?

[Kevin Kim, executive]

Yes, I believe so. We began to sell the SBA loans in the second quarter, and we are currently selling more loans in the third quarter, and I expect the total loans to be sold in the third quarter will be more than the number that we had in the second quarter.

[Operator]

Our next question comes from Chris McGratty with KBW.

[Christopher McGratty, analyst]

Kevin, Slide 15, the medium-term targets, which are '26 and beyond. If I look at current profitability, I mean that's basically a doubling of your ROA. You talked about the expenses, what rate outlook is incorporated into this medium-term target?

[Julianna Balicka, executive]

It's based on the current forward curve, although for the rate cuts for the rest of this year, as you can see, we're only factoring September just because things near term, there's so much variability. But in the longer term, we are factoring in the current forward curve on Fed funds, which eventually settles at 3.75, let me get you the 2026 and '27 numbers in a second. Go on to your next question.

[Christopher McGratty, analyst]

Okay. Great. I was -- I guess, the follow-up would be what betas are you assuming in the down rate for both deposits and for your assets?

[Julianna Balicka, executive]

Well, the variable rate assets, floating rate assets, as you know, that is loans. Those are going to have a high beta because those reprice automatically. It's just a matter of timing within the month of when the kind of rate cuts happen. And for deposits, we are assuming a lagged beta, a low beta upfront for the first several cuts before we kind of get to a more normalized beta over time.

One thing I will point out -- go ahead. One thing I'll point out is in this quarter, we have gone through an exercise of reviewing our deposit pricing and making sure that all the exception pricing and exceptions are warranted, so to start to control our deposit costs ahead of rate cuts. And so we're not assuming a high deposit beta upfront, but we are assuming that we will be able to continue to be disciplined in how we approach deposit pricing post our reorganization. That is a change to our practice vis-a-vis before and an improvement.

[Christopher McGratty, analyst]

Okay. Great. And then just the last one I had would be just tax rate. How should we be thinking about the tax rate from here?

[Julianna Balicka, executive]

We are assuming 26% for the full year. So that does have a lower tax rate in the second half of the year based on when certain tax credit investments and the amortizations kind of hit our P&L.

[Operator]

[Operator Instructions]

Our next question comes from Gary Tenner with D.A. Davidson.

[Gary Tenner, analyst]

Hoping you could provide the CD maturity schedule for the back half of the year with the rates that are coming off.

[Julianna Balicka, executive]

And let me just answer back to finish Chris' question for 2026. We've got the terminal Fed funds at the end of 2026 at 4.25 and 3.75 the following here in 2027. And the maturity of -- our CDs maturing in the second half of the year, we've got -- the rates are coming off are 5.10, 5.12, kind of neighborhood and the maturities that are coming off in the third quarter is $1.56 billion and in the fourth quarter, we've got $2.1 billion.

[Gary Tenner, analyst]

And what's your sense was going to the third quarter, what the renewal rate outlook would be?

[Julianna Balicka, executive]

I think the renewal rate outlook will be hopefully lower than the current one for the simple reason that we have recently reduced pricing.

[Gary Tenner, analyst]

Okay. And then my other questions were mostly answered. But on the -- I noticed in your kind of walk-through of the nonrecurring items in the quarter, the tax provision was different on the press release versus the deck. I'm assuming one on the press release is the correct one, but just wanting -- hoping you could confirm that.

[Julianna Balicka, executive]

I would use the earnings release and the tables as your primary source document.

[Operator]

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

[Kevin Kim, executive]

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

[Operator]

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