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Julianna Balicka

Thank you, Kevin and good morning everyone. Beginning with slide 9. Our net interest income totaled $102 million for the fourth quarter of 2024, a decrease of $3 million or 3% from the third quarter. Our weighted average cost of interest-bearing deposits in the fourth quarter was 4.38%, down 21 basis points from the third quarter.
The spot rate on our interest bearing deposits was 4.21% as of 31 December, 2024 down 42 basis points from 4.63% as of 31 August. This translates to a cumulative beta of 42% on a spot basis for interest bearing deposit relative to the cuts in the fed funds target rate over the same period.
The fourth quarter 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 fourth quarter offset the pressure from lower loan yields. However, we reversed $1.7 million of interest income due to loans moving to nonaccrual status in the fourth quarter.
Excluding the impact of the reversed interest income, our fourth 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 million for the fourth quarter, an increase of $4.1 million or 34% from the third quarter. During the fourth quarter, we reported $3.1 million of net gains on the sale of SBA loan. Swap fee income increased to $1.4 million up from $21,000 in the third quarter, reflecting improved customer activity. We also recorded a $1 million 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 million in the fourth 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% in 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 fourth quarter or 9% growth in PPNR, excluding notable item. 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 fourth quarter effective tax rate was 20% compared with 25% in the third 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 million as of 31 December 2024, equivalent to 53 basis points of total assets. Criticized loans were also down 11% quarter over quarter to $450 million as of 31 December or 3.30% of total loans compared with 3.71% of total loans as of 30 September. These meaningful decreases reflected payoffs, workouts and note sales in the fourth quarter.
Fourth quarter net charges of $13 million or annualized 38 basis points of average loans and provision for credit losses of $10 million reflected the activity to improve problem loans. The full year 2024 net charge operation was 19 basis points down slightly from 22 basis points in 2023.
At 31 December 2024, our allowance coverage ratio was 111 basis points compared with 113 basis points at 30 September. 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

Thank you, Julianna. Moving on to slide 14, I will now review our outlook for 2025. Our outlook includes the impact of the Territorial Bancorp transaction, the close of which we anticipate in the first quarter 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 double digit percentage range, which includes moderate organic growth from Bank of Hope and the addition of Territorial, we are assuming approximately $15 million of accretion income in 2025.
Underpinning our net interest income outlook, our two fed funds target rate cuts of 25 basis points each in May and October consistent with the forward rate curve. In 2025, we expect noninterest income to grow in the mid teen percentage range, reflecting continuing trends from the fourth 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 million 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.

Question and Answer Session

Operator

(Operator Instructions)
Matthew Clark, Piper Sandler.

Matthew Clark

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%, that you're looking to match this cycle or you know, what are your updated thoughts there?

Julianna Balicka

No. Hi, Matthew. This is Julianna. 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 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. And hopefully we'll reach 80%. But 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

Okay. Got it. And then just on the expense run rate, you got it to load double digits with Territorial. It seems a little higher than I would have expected. Can you just maybe speak to the latest $77 million run rate? You know, what might have quantified, maybe what was reversal of [campa cruls] and then the moving parts to get you to that kind of low double-digit growth off the base that you provide in the deck.

Julianna Balicka

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. You know, when it comes to the addition of the Territorial expenses for the three quarters of 2025, we're expecting to close the transaction during the first quarter. But for the ease of modeling, we're starting with 01 April, 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, stand alone, we are looking at moderate expense growth as well. And part of that is continued investment in the franchise and 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 vis a vis 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 three quarters of territorial versus having the deal close at year end and b, a longer time period of transition versus full run rate of cost savings if you will.

Matthew Clark

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.

Julianna Balicka

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 the cost saves that we're looking at are coming in lower than what we had initially penciled out at deal announcement. Frankly, because integrating the two 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 you know, as you kind of go through the process, you find that you need maybe more operation support, et cetera and all in it kind of reduces maybe the cost save that one thinks about initially from an investment banking perspective. But I think over time we will achieve that.

Kevin Kim

Okay, thanks.

Operator

Chris McGratty, KBW.

Chris McGratty

Oh, great. Thanks for the question. Julianna, just a quick modeling question on the territorial accretion. It says $15 million for the loans. What are you assuming for the securities accretion or is that all in the low double-digit guide? I'm just trying to parse out the accretion.

Julianna Balicka

Yes. So we pointed out the loan increase and 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

Okay, great. And then that 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?

Kevin Kim

Chris, maybe you can rephrase that question?

Chris McGratty

Oh, sure. 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 restructure. 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?

Julianna Balicka

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, it's premature while the transaction is still pending.

Chris McGratty

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

Chris, as we have repeatedly shared in the past, we think it is premature to comment about that 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

Understood. Thanks, Kevin. Appreciate it.

Operator

Gary Tenner, D.A. Davidson.

Gary Tenner

Thanks. Good morning. I wanted to ask a question about the deposit trends in the quarter. Obviously a little bit of mix shift away from interest bearing, and heavier and 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 you know to what degree that's maybe hampered efforts to reduce overall funding costs.

Julianna Balicka

Well, first of all, I will say that what you saw in the fourth quarter is similar that you see in the fourth quarter for us. Typically we have some depositors, commercial depositors in the residential mortgage industry where you see outflows of those DDAs in the fourth quarter related around property tax payments and the like. So that is the effect on the DDAs that you are noting.
Vis a vis, 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 costs 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

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 a full year of sales and SBA. Are you kind of assuming this the kind of back half of the year '24? And that kind of $270 million or $2.7 million to $3 million range? Is that kind of the range you would expect on a quarterly basis for next year.

Kevin Kim

SBA loan sale? Gains on a loan sales? I think the fourth quarter is generally a good run rate and as we said, we would expect to continue selling SBA loans in 2025.

Gary Tenner

Thank you.

Operator

Matthew Clark, Piper Sandler.

Matthew Clark

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 CNI I will grow at a decent cliff, 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

Well, Matthew, we had a turnaround in the second quarter of 2024. So from the whole organic side, we still expect a moderate low single digit growth in our loan portfolio before we add the Territorial portfolio. The majority will be coming from the CNI side. And for CRE, if there is any growth, that will be nominal.

Matthew Clark

Okay. Sounds good. And then just on the charge offs this quarter, a little higher than expected. Is there something to call out there? And in terms of some losses that might have been attributed to one or two credits. Just trying to get a sense for the kind of the normalized or the normalized run rate of net charge off and where we might reset to.

Kevin Kim

Well, the fourth 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 2023 when we had 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 ups will continue to be at manageable levels.

Matthew Clark

Okay. Fair enough. Thank you.

Operator

(Operator Instructions).
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

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.

Operator

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