Earnings call transcript: Hope Bancorp beats Q4 2024 EPS estimates but stock dips

Hope Bancorp reported its Q4 2024 earnings, surpassing analyst expectations with an earnings per share (EPS) of $0.20, compared to the forecasted $0.14. Despite this positive earnings surprise, the company’s stock fell by 3.38% in pre-market trading, closing at $11.71, and further slipping to $11.66 in aftermarket trading. According to InvestingPro analysis, the stock appears slightly overvalued at current levels, with a P/B ratio of 0.66 and a beta of 1.15 indicating moderate market sensitivity.

Key Takeaways

• Hope Bancorp reported a higher-than-expected EPS of $0.20.
• Total (EPA:TTEF) deposits decreased by 3% from the previous quarter.
• The company anticipates moderate loan growth and strategic benefits from its pending merger with Territorial Bancorp (NASDAQ:TBNK).
• Stock declined by 3.38% post-earnings announcement, reflecting market concerns.

Company Performance

Hope Bancorp demonstrated robust financial performance in Q4 2024, with a net income of $24.3 million, translating to an EPS of $0.20. The company experienced a 14% increase in pre-provision net revenue from the previous quarter, despite a 3% decline in total deposits. Loans receivable grew by 1% on an annualized basis, indicating steady demand for the bank’s lending products. Notably, InvestingPro data shows the bank has maintained dividend payments for 14 consecutive years, currently offering an attractive 4.8% dividend yield. For deeper insights into Hope Bancorp’s financial health and future prospects, investors can access the comprehensive Pro Research Report, available exclusively on InvestingPro.

Financial Highlights

• Revenue: $118.02 million, slightly below the forecast of $120.05 million.
• Earnings per share: $0.20, exceeding the $0.14 forecast.
• Net interest margin: 2.50%, a 5 basis points decline from the previous quarter.

Earnings vs. Forecast

Hope Bancorp’s EPS of $0.20 surpassed the forecast of $0.14 by approximately 42.9%, marking a significant earnings surprise. However, revenue fell short of expectations, coming in at $118.02 million against a projected $120.05 million.

Market Reaction

Despite the earnings beat, Hope Bancorp’s stock declined by 3.38% in pre-market trading. The stock’s performance contrasts with its 52-week high of $14.54, as investors appear cautious about future growth prospects amid a competitive deposit pricing environment.

Outlook & Guidance

Looking forward, Hope Bancorp expects moderate loan growth in the high single-digit percentage range and net interest income growth in the low double-digit percentage range. The company is optimistic about its pending merger with Territorial Bancorp, which is expected to close in Q1 2025, potentially enhancing its loan accretion income by $15 million in 2025. InvestingPro analysis indicates the bank maintains a "Fair" overall financial health score, though three analysts have recently revised their earnings expectations downward for the upcoming period. Additional ProTips and detailed financial metrics are available to InvestingPro subscribers.

Executive Commentary

CEO Kevin Kim expressed optimism for 2025, stating, "We are optimistic in our outlook for 2025 and look forward to accelerating our earnings growth and profitability." CFO Giuliana Beliska highlighted the competitive deposit pricing environment, which may pose challenges in maintaining profit margins.

Risks and Challenges

• Declining deposit levels and net interest margin may impact future profitability.
• Competitive pressures in deposit pricing could affect market share.
• Execution risks associated with the Territorial Bancorp merger.
• Potential macroeconomic headwinds, including interest rate changes.

Q&A

During the earnings call, analysts inquired about the competitive deposit pricing environment and the potential impact of the Territorial Bancorp merger on expenses. Management also addressed strategies for balance sheet optimization and loan growth expectations across different segments.

Full transcript - Hope Bancorp Inc (NASDAQ:HOPE) Q4 2024:

Chuck, Conference Operator: Good day, and welcome to the Hope Bancorp 20 24 4th Quarter Earnings Conference Call. All participants will be in a listen only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ms.

Angie Yang, Director of Investor Relations. Please go ahead, ma’am.

Angie Yang, Director of Investor Relations, Hope Bancorp: Thank you, Chuck. Good morning, everyone, and thank you for joining us for the Hope Bancorp 20 24 Q4 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 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 statement in our press release issued this morning. Now we’ve allotted 1 hour for this call. Presenting from the management side today will be Kevin Kim, Hope Bancorp’s Chairman, President and CEO and Giuliana Beliska, our Chief Financial Officer. Peter Koh, our Chief Operating Officer is also here with us as usual and will be available for the Q and A session. With that, let me turn the call over to Kevin.

Kevin?

Kevin Kim, Chairman, President and CEO, Hope Bancorp: 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 disruption across our region. 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.

Our recent cash donation to the United Way of Greater Los Angeles Wildfire Response Fund underscores our unwavering commitment to our community. 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. For the Q4 of 2024, we earned net income of $24,300,000 or $0.20 per diluted share and our pre provision net revenue was $40,000,000 up 14% from September 30, 2024. Quarter over quarter revenue grew and expenses decreased improving our efficiency and pre provision profitability.

2024 was a building year as we work to position our balance sheet for future growth and improved profitability. We focused on strengthening our deposit base, lowering broker deposits down to 7% of total deposits as of December 31, 2024 compared with 10% as of December 31, 2023 and down from a peak of 15% in April 2023. We turned the corner on loan growth in the second half of twenty twenty four with loans receivable of $13,600,000,000 as of December 31, 2024, up 1% on an annualized basis from June 30, 2024. Quarter over quarter, 4th quarter average gross loans increased 2% on an annualized basis from the 3rd quarter. We are optimistic in our outlook for 2025 and look forward to accelerating our earnings growth and profitability driven by an improved deposit mix, organic loan growth and strong fee income growth.

Furthermore, the addition of territorial Bancorp’s low cost core deposits and residential mortgage loans with pristine asset quality will be meaningful positive contributors to the combined company in 2025. On Slide 4, 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. 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 Q1 subject to regulatory approvals. Our Board of Directors declared a quarterly common stock dividend of $0.14 per share payable on February 20 to stockholders of record as of February 6, 2025.

Continuing to Slide 5, at December 31, 2024, our total deposits were $14,300,000,000 down 3% from the end of the prior quarter. This included a decrease of $128,000,000 from the sale of our Virginia branches, which closed on October 1. In addition, during the Q4, we saw typical year end fluctuations in certain commercial deposits deposits in the residential mortgage industry. Lastly, we exited some deposits due to high cost. Moving on to slide 6, at December 31, 2024, our loans receivable of $13,600,000,000 excluding loans held for sale were up slightly from September 30.

4th quarter average gross loans increased 2% on an annualized basis from the Q3 of 2024. We sold $48,000,000 of SBA (LON:SBA) loans in the 4th quarter compared with $41,000,000 in the 3rd quarter. 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. Thus far, our exposure has been minimal or less than $5,000,000 in aggregate of loans outstanding from a handful of customers. 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 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. Asset quality remains stable with over 98% of the commercial real estate loans past graded at year end. With that, I will ask Juliana to provide additional details on our financial performance for the Q4. Juliana?

Giuliana Beliska, Chief Financial Officer, Hope Bancorp: Thank you, Kevin, and good morning, everyone. Beginning with Slide 9, our net interest income totaled $102,000,000 for the Q4 of 2024, a decrease of $3,000,000 or 3% from the 3rd quarter. Our weighted average cost of interest bearing deposits in the 4th quarter was 4.38 percent, down 21 basis points from the 3rd quarter. The spot rate on our interest bearing deposits was 4.21% as of December 31, 2024, down 42 basis points from 4.63 percent as of August 31. This translates to a cumulative beta of 42% on a spot basis for interest bearing deposits relative to the cuts in the Fed funds target rate over the same period.

The Q4 2024 net interest margin declined by 5 basis points quarter over quarter to 2.50%. In terms of net interest margin, the positive impact from lower deposit costs in the 4th quarter offset the pressure from lower loan yields. However, we reversed $1,700,000 of interest income due to loans moving to non accrual status in the 4th quarter. Excluding the impact of the reversed interest income, our 4th quarter net interest margin would have been 2.54%. On Slide 10, we show you the quarterly trends in our average loan and deposit balances and the weighted average yields and costs.

On to slide 11. Non interest income was $16,000,000 for the 4th quarter, an increase of $4,100,000 or 34% from the 3rd quarter. During the 4th quarter, we reported $3,100,000 net gains on the sale of SBA loans. Swap fee income increased to $1,400,000 up from $21,000 in the 3rd quarter, reflecting improved customer activity. We also recorded a $1,000,000 gain on the sale of our Virginia branches.

Moving on to non interest expense on slide 12. We continue to closely manage our expenses. Our non interest expense was $78,000,000 in the 4th quarter, down 5% from the prior quarter. This was driven by a decrease in earned interest credit expense, reflecting the Fed Funds 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.

Together with the quarter over quarter growth in total revenue, the reduction in expenses led to 14% growth in reported pre provision net revenue for the 4th quarter or 9% growth in PP and R excluding notable items. For the full year of 2024 notable items. Lastly, 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 4th quarter effective tax rate was 20% compared with 25% in the 3rd quarter. For the full year 2024, the effective tax rate was 25%.

Now moving on to Slide 13, I’ll review our asset quality metrics. Non performing assets were down 13% quarter over quarter to $91,000,000 as of December 31, 2024, equivalent to 53 basis points of total assets. Criticized loans were also down 11% quarter over quarter to $450,000,000 as of December 31 or 3.30 percent of total loans compared with 3.71 percent of total loans as of September 30. These meaningful decreases reflected payoffs, workouts and note sales in the 4th quarter. 4th quarter net charge offs of $13,000,000 or annualized 38 basis points of average loans and provision for credit losses of $10,000,000 reflected the activity to improve problem loans.

The full year 2024 net charge off ratio was 19 basis points, down slightly from 22 basis points in 2023. At the December 31, 2024, our allowance coverage ratio was 111 basis points compared with 113 basis points at September 30. 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.

Kevin Kim, Chairman, President and CEO, Hope Bancorp: Thank you, Juliana. I will moving on to Slide 14, I will now review our outlook for 2025. Our outlook includes the impact of the territorial Bangkok transaction, the close of which we anticipate in the Q1 of 2025 subject to regulatory approvals. We are excited about the pending merger and the value created through this compelling combination. For 2025, we expect loan growth in the high single digit percentage range, which reflects moderate organic loan growth in Bank of Hope and the addition of territorial loans.

We expect net interest income growth in the low single in the low double digit percentage range, which includes moderate organic growth from Bank of Hope and the addition of territorial. We are assuming approximately $15,000,000 of accretion income in 2025. Underpinning our net interest income outlook are 2 Fed funds target rate cuts of 25 basis points each in May 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 4th quarter and a full year of gains on SBA loan sales. We expect non interest expenses excluding notable items to increase in the low double digit percentage range year over year.

This reflects the addition of operating expenses from territorial and disciplined expense management while continuing to invest in talent and technology to support franchise growth. We anticipate that one time expenses related to the close of the territorial transaction will be approximately $30,000,000 in 2025. 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. Moving on to Slide 15 for a brief look at our medium term financial targets. Our bottom line financial target is a return on average assets of 1.2% and higher.

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. 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. 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. 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.

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

Chuck, Conference Operator: Thank you. We will now begin the question and answer session. And the first question will come from Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark, Analyst, Piper Sandler: Hey, good morning everyone. Just first on your outlook on the deposit beta, I think interest bearing this past cycle rates up was just over 80%. You’re looking to match that this cycle or what are your updated thoughts there?

Giuliana Beliska, Chief Financial Officer, Hope Bancorp: Well, hi Matthew, this is Juliana. In terms of this cycle, obviously one would want to achieve a high beta as possible, 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, down interest rate cycles, 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.

But and hopefully we’ll reach 80%, but we need the we need the rate cuts to help us. And I know that we’re being more proactive this cycle around than in past cycles.

Matthew Clark, Analyst, Piper Sandler: Okay, got it. And then just on the expense run rate, you got it to low double digits with territorial. It seems a little higher than I would have expected. Can you just maybe speak to the latest $77,000,000 run rate? What might have quantify maybe what was reversal of comp accruals and then just kind of the moving parts to get you to that kind of low double digit growth off the base that you provided in the deck?

Giuliana Beliska, Chief Financial Officer, Hope Bancorp: Yes. Let me just maybe start with the kind of let me just talk more about the forward look rather. I think that’ll help you a little bit more. When it comes to the addition of the territorial expenses for the 3 quarters of 2025, because we’re expecting to close the transaction during the Q1, but for the ease of modeling, we’re starting with April 1, 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. So the run rate in 2026, the annualized run rate, exit annualized run rate in 2026 will be lower in 2025, but that’s kind of contributing to the guide for 2025. And also on Hope standalone, we are looking at moderate expense growth as well. And part of that is continued investment in the franchise, in talent and technology to help support growth, albeit, as you saw from our performance this year, we’re continuing to practice disciplined expense management. But visavis, kind of your statement that this is a little higher than you would have expected.

I think, maybe the difference could be coming from a, closing only 3 quarters of territorial versus having the deal closed at year end and B, a longer time period of transition versus full run rate of cost savings, if you will.

Matthew Clark, Analyst, Piper Sandler: Okay. And the contribution you’re assuming from territorial in terms of operating expense and any updated thoughts on the amount of cost saves? We obviously know what you provided months ago, but just any update on those numbers?

Giuliana Beliska, Chief Financial Officer, Hope Bancorp: 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 cost saves that we’re looking at are coming in lower than what we had initially penciled out at the announcement. Frankly because integrating the 2 franchises we’re being conscientious about building in a well thought out transition plan. And also if you recall, we at our announcement, we did talk about maintaining, the branch network and the customer facing employees and not changing the experience for customers. So, as you kind of go through the process, you find that you need maybe more operation support, etcetera.

And all in, it kind of reduces maybe the cost saves that one thinks about initially from an investment banking perspective. But I think over time we will achieve that.

Matthew Clark, Analyst, Piper Sandler: Okay. Thanks.

Chuck, Conference Operator: The next question will come from Chris McGratty with KBW. Please go ahead.

Chris McGratty, Analyst, KBW: Great. Thanks for the question. Julien, just a quick modeling question on the territorial accretion. I think it says $15,000,000 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.

Giuliana Beliska, Chief Financial Officer, Hope Bancorp: Yes. 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.

Chris McGratty, Analyst, KBW: 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? Chris, maybe you can rephrase that question. I think we’re just Sure.

Yes. 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 some sort of a modest restructuring. 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 2, 3 years?

Giuliana Beliska, Chief Financial Officer, Hope Bancorp: Yes. Chris, that’s a great question. And I think it applies to both balance sheets rather than just the one territorial balance sheet. And as I shared with you right now, we are evaluating what of the acquired securities portfolio we want to keep and or sell for other kind of usage purposes. But vis a vis commentary on our broader Bank of Hope balance sheet or any kind of optionality there, I think discussing that kind of activity is premature before while the transaction is still pending.

Chris McGratty, Analyst, KBW: 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 is trading?

Kevin Kim, Chairman, President and CEO, Hope Bancorp: 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. 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.

Chris McGratty, Analyst, KBW: Understood. Thanks, Kevin. Appreciate it.

Chuck, Conference Operator: Our next question will come from Gary Tenner with D. A. Davidson. Please go ahead.

Gary Tenner, Analyst, D.A. Davidson: Thanks. Good morning. I wanted to ask a question about the deposit trends in the quarter. Obviously, you had a little bit of mix shift away from non interest bearing and heavier money market balances. 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.

Could you talk about kind of the competitive environment on the pricing side and to what degree that’s maybe the hampered efforts to reduce overall funding costs?

Giuliana Beliska, Chief Financial Officer, Hope Bancorp: Well, first of all, I will say that what you saw in the Q4 is similar that you see in the Q4 for us typically. We have some depositors, commercial depositors in the residential mortgage industry where you see outflows of those DDAs in the 4th quarter related around property tax payments and the like. So that is the effect on the DDAs that you are noting. Visavis, the other part of your question around competitive pricing, I mean deposit pricing remains competitive in the marketplace. I mean, 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 cost across our network, that’s a pretty good result for Hope. And I would like to thank all of our front lines across all of our segments for helping to drive that result.

Gary Tenner, Analyst, D.A. Davidson: All right. I appreciate the background there. And then just on your guide as it relates to the fee income side, you noted obviously the benefit of the full year of sales in SBA. Are you kind of assuming this the kind of back half of the year 2024 in that kind of 270 to or $2,700,000 to $3,000,000 range. Is that kind of the range you would expect on a quarterly basis

Chris McGratty, Analyst, KBW: for next year?

Kevin Kim, Chairman, President and CEO, Hope Bancorp: SBA loan sales, gains on SBA loan sales? Yes. I think the 4th quarter is generally a good run rate. And as we said, we would expect to continue selling SBA loans in 2025.

Chris McGratty, Analyst, KBW: Thank you.

Chuck, Conference Operator: The next question is a follow-up from Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark, Analyst, Piper Sandler: Hey, thank you. On the loan growth outlook, high single digits with territorial, Just give us a sense for kind of the legacy hope trends. I’m just trying to get a sense for the I think it’s fair to assume that C and 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?

Kevin Kim, Chairman, President and CEO, Hope Bancorp: Well, Matthew, we had a turnaround in the Q2 of 2024. So from the hope organic side, we still expect a moderate low single digit growth in our loan portfolio before we add the territorial portfolio.

Matthew Clark, Analyst, Piper Sandler: Okay. And

Kevin Kim, Chairman, President and CEO, Hope Bancorp: that’s the majority of them will be coming from the C and I side. And for CRE, if there is any growth that will be nominal.

Matthew Clark, Analyst, Piper Sandler: Okay. Okay. Sounds good. And then just on the net charge offs this quarter, a little higher than expected. Is there something to call out there in terms of some losses that might have been attributed to 1 or 2 credits?

Just trying to get a sense for the kind of the normalized run rate of net charge offs and where we might reset to?

Kevin Kim, Chairman, President and CEO, Hope Bancorp: Well, the 4th quarter charge offs 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. And it is even lower than 2020 3 when we had 20 22 basis points of charge offs. 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.

Matthew Clark, Analyst, Piper Sandler: Okay, fair enough. Thank you.

Chuck, Conference Operator: 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.

Kevin Kim, Chairman, President and CEO, Hope Bancorp: 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.

Chuck, Conference Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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