Angie Yang; Senior Vice President - Director of Investor Relations & Corporate Communications; Hope Bancorp Inc
Kevin Kim; Chairman of the Board, President, Chief Executive Officer; Hope Bancorp Inc
Julianna Balicka; Chief Financial Officer, Executive Vice President; Hope Bancorp Inc
Peter Koh; Chief Operating Officer, Senior Executive Vice President; Hope Bancorp Inc
Andrew Leischner; Analyst; Keefe, Bruyette & Woods North America
Operator
Good day and welcome to the Hope Bancorp 2025 first quarter earnings conference call. (Operator Instructions) 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
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 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. 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 un audited financial information for Territorial Bancorp Inc, 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
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 first quarter of 2025, we earned net income of $21.1 million or $0.17 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 HR jobs.
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 asset quality.
On slide 4, 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 $0.14 per share, payable on May 16 to stockholders of record as of May 2, 2025.
Continuing to slide 5, 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 broker deposits, which decreased to less than 7% of our total deposits as of March 31, 2025.
Moving on to slide 6. 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 pay downs and payoffs in the first quarter. Market pricing competition, and spread compression continued 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 balanced 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 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 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
Thank you, Kevin, and good morning, everyone. Beginning with slide 9, 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 4 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 continued 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 in 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 total $8 million are 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 marks, of which $125 million was paid off, and Territorial's non-performing assets totaled less than $2 million.
The preliminary discount on Territorial loan portfolio is $220 million or 17%. This compares with $270 million in January of '25, and the change reflects a change in the 10-year treasury rate. Our updated accretion income expectations for '25 are $14 million which reflects both the updated discount and updated pre-payment 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
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 has 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-20% range compared with our previous guidance of mid-teen percentage growth. This reflects first quarter results and stronger momentum across a number of our 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 storied history.
With that operator, please open up the call for questions.
Operator
(Operator Instructions)
Chris McGratty, KBW.
Andrew Leischner
Hey, this is Andrew Leischner on Chris McGratty. Just start out on -- hi, 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, and I guess what is the annual impact to NII for each 25 basis points rate cuts? Thank you.
Julianna Balicka
So if we get fewer rate cuts, then what is assumed in the 2025 impact, will be relatively new 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 linked loans do compress. So net-net, it kind of washes out with somewhat modest downward impact.
Andrew Leischner
Okay. Great, thank you. And then 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 and then maybe provide any insights into the conversations you're having with clients that give you confidence in maintaining the guidance.
Julianna Balicka
Sorry, could you repeat your question? We had a little bit of a trouble on the line speaking in the beginning.
Andrew Leischner
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 the conversation you're having with clients that give you confidence in maintaining your growth guidance.
Julianna Balicka
Yeah. So 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
Okay, great. Thanks, Julianna. I'll step back.
Operator
(Operator Instructions)
Gary Tenner, D.A. Davidson.
Hey guys, I'm [Asher] on for Gary Tenner. So the drivers of that 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. So I'm talking about like specific segments that we might see loan growth on.
Julianna Balicka
Yeah. I just -- 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, et cetera. So that's what's building up in our pipeline.
All right, thank you for that. And you kind of talked about it earlier in the previous question, but can you remind us the specific NIM impact of each '25 basis cut all else equal?
Julianna Balicka
All else equal the base 25 basis points cut in the first year will more or less offsets 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. So net-net, it washes out and it's slightly with a slight downward shift, but it all kind of depends on execution. And no I'm not providing you a precise basis point answer.
All right. And then, maybe on credit, you guys maintain pretty good asset quality this quarter. Any specific color there, any points of stress, anything maybe you're looking more closely?
Peter Koh
Asher, this is Peter. So far as the quality has remained stable, and I think obviously there's a lot of uncertainty around the tariff environment and things like that, but we've been very proactive with our portfolio. We're monitoring very closely. So far we think our borrowers are being proactive to mitigate some of the impact, potential impact from terrorists by diversifying supply chains and things like that. So we are, closely monitoring as everyone's doing, but so far our asset quality is definitely healthy and stable.
Right. Thank you for taking my questions.
Peter Koh
Thank you.
Operator
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
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
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
