HOPE BANCORP INC Q3 FY2024 earnings call

• Core deposit growth of 11% annualized and loan growth turnaround. - Risk-based capital ratios highest since 2016; total capital ratio was 14.8% and tangible common equity ratio was 10.1%. - Declared a quarterly common stock dividend of $0.14 per share. - Sold two Virginia branches with $129 million deposits, offset by organic customer deposit growth. - Noninterest income increased due to higher gain on sale of SBA loans. - Noninterest expense down 8% year-over-year excluding notable items. - Asset quality remained stable, and the pending merger with Territorial Bancorp was mentioned.

Deposits: Customer deposits grew 11% annualized from June 30, 2024. Total deposits at September 30, 2024 were $14.7 billion, with brokered deposits reduced to 7% from 14% as of June 30, 2023. More than two-thirds of noninterest-bearing demand deposit growth came from small business accounts. Loans: Loans receivable (excluding loans held for sale) grew 2% annualized from June 30, 2024, with growth in residential mortgage and commercial loans. $41 million of SBA loans were sold in the third quarter. Net Interest Income: Totaled $105 million in Q3, down $1 million from Q2 due to interest expense increase. Net interest margin was 2.55%, down 7 basis points quarter-over-quarter. Noninterest Income: $11.8 million in Q3, up 7% from Q2 primarily due to higher gain on sale of SBA loans. Noninterest Expense: $81.3 million in Q3, adjusted noninterest expense excluding notable items was $79.8 million, down 8% year-over-year. Asset Quality: Nonperforming assets were $104 million, criticized loans increased, net charge-offs were $5.7 million, provision for credit losses was $3.3 million, and the allowance for credit losses was $153 million (113% of loans receivable).

• Outlook for Q4 2024: Average loans expected to grow in the low single-digits quarter-over-quarter. Net interest income expected to grow in the low single-digits quarter-over-quarter, with interest income benefiting from loan growth and interest expense from continued deposit rate management. Expected SBA loan sale gains similar to Q3. Operating expenses excluding notable items expected to be essentially stable quarter-over-quarter, expecting positive operating leverage, and reserve coverage expected to be essentially stable at 113% of loans as of September 30, 2024.

• The pending merger with Territorial Bancorp is subject to regulatory approvals, stockholder approvals, and other customary closing conditions. - Fluctuations in interest rates could impact the net interest margin. - Asset quality risks related to commercial real estate loans, including potential issues with criticized loans. - Challenges in managing deposit costs, including fluctuating CD rollover rates and deposit beta assumptions.

Q: Could you give an update on the loan portfolio in terms of floating rate and fixed rate repricing in 2025?

A: The amount of variable rate loans in the portfolio is 45%, 31% is hybrid (still in fixed period), and 24% is fixed. The amount of fixed rate loans repricing in 2025 is $766 million.

Q: On the deposit side, could you tell us about deposit pricing after the September rate cut and CD rollover rates?

A: We moved all deposit costs down for money market, savings, and CDs. For example, money market and savings accounts had rates adjusted, with beta on some accounts ~60%. CDs continue to roll over and reprice down; quarter-to-date, average CD costs were down another six basis points in October from September 30, and we're originating CDs at an approximately 4.25% blended rate.

Q: What are you assuming for full cycle deposit betas?

A: We are assuming a high 60% on the interest-bearing deposit cost in full cycle, but it will take time to reach that.

Q: Could you provide more detail on the relationship added to nonaccrual status?

A: This relationship consists of three well-secured commercial real estate loans in primary locations with minimal to no loss content. The borrower is actively selling the properties, and it's a manageable situation but we're being proactive in resolution.

Q: Could you be more specific about CD maturities and offer rates in the fourth quarter?

A: We are originating CDs in an approximately 4.25% blended rate.

Q: What about spot yields on the investment portfolio and potential repositioning?

A: The average spot yield on our investment portfolio was 2.96% at the end of September. We are incrementally taking advantage of moments to reposition the lowest-yielding securities to current market rates, though not considering a major transaction like some other banks have done.

Q: Could you clarify on the truly floating rate loans?

A: The truly variable rate loans are 45%, the hybrid is 31% (fixed to floating in the future), and the fixed rate loans are 24%.

Q: What's the adjusted net interest margin in September?

A: Our net interest margin for September was 2.51%, and it's trending up nicely month-to-date.