HOPE Financial Analysis

Analysis Date: 1/28/2025

Business Model

Hope Bancorp generates revenue primarily through net interest income from lending activities and noninterest income from services such as deposit account fees and SBA loan sales.

Revenue Sources

• Net Interest Income: Derived from the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowings.
• Service fees on deposit accounts
• Net gains on sales of SBA loans
• Other income and fees, including swap fee income and foreign exchange solutions.

Income Statement Analysis

• Net interest income before provision decreased by 2.55% QoQ due to lower loan yields and reversed interest income, partially offset by lower deposit costs. (Con)
• Provision for credit losses increased significantly by 204.88% QoQ, impacting net interest income after provision. (Con)
• Noninterest income increased significantly by 34.14% QoQ, driven by net gains on sales of SBA loans and swap fee income. (Pro)
• Noninterest expense decreased by 4.52% QoQ, primarily due to lower earned interest credit expense and salaries and employee benefits. (Pro)
• Despite decrease in net interest income and increase in provision for credit losses, net income remained relatively stable with a slight increase of 0.74% QoQ, thanks to strong growth in noninterest income and expense management.

Balance Sheet Analysis

• Cash and due from banks decreased significantly by 32.70% QoQ, likely due to payoff of BTFP borrowings in previous quarters and branch sales. (Con)
• Investment securities decreased by 4.72% QoQ. (Con)
• Gross loans remained relatively stable QoQ, indicating stable lending activity. (Neutral)
• Deposits decreased by 2.73% QoQ, including deposits sold with Virginia branches and typical Q4 outflows. (Con)
• FHLB and FRB borrowings increased significantly by 139.00% QoQ, potentially to offset deposit decrease and manage liquidity. (Neutral/Con depending on cost)
• Total stockholders' equity decreased slightly by 1.63% QoQ, influenced by accumulated other comprehensive losses.
• Strong capital ratios are maintained, with TCE ratio at 10.05% and total capital ratio at 14.78%.

Capital Allocation

Hope Bancorp focuses on capital return through dividends. They declared a quarterly common stock dividend of $0.14 per share, or $0.56 per share annualized, representing a dividend yield of 4.56% at 12/31/24. The company is also focused on strategic acquisitions, as evidenced by the pending merger with Territorial Bancorp. Reinvestment is implied in their outlook for 2025, where they plan to invest in talent and technology to support franchise growth.

Management Commentary

For the 2024 fourth quarter, our pre-provision net revenue increased 14% to $40.4 million, up from $35.4 million in the preceding third quarter.

Our asset quality improved with an 11% decrease in criticized loans and nonperforming assets down 13% since September 30, 2024.

In 2024, we focused on strengthening our deposit base, reducing brokered deposits to 7% of total deposits as of December 31, 2024, down from 10% as of December 31, 2023.

Net interest income before provision for credit losses for the 2024 fourth quarter totaled $102.1 million, a decrease of $2.7 million, or 3%, from $104.8 million in the immediately preceding third quarter.

Total deposits of $14.33 billion at December 31, 2024, decreased $402.0 million, or 3%, from $14.73 billion at September 30, 2024.

The quarter-over-quarter change in net charge offs reflected the problem loan resolution activity in the fourth quarter.

Overall Sentiment: Cautiously Optimistic. Management expresses optimism about PPNR growth, asset quality improvement, and capital position. However, there are concerns regarding net interest income and deposit decreases, and increased net charge-offs, leading to a cautiously optimistic outlook overall, focusing on the upcoming merger and future growth prospects.

Recommendation

Rating: Hold

Reason for Rating: Hold rating is recommended due to mixed financial performance in Q4 2024. While PPNR and asset quality improved, net interest income and deposits declined QoQ. The pending merger with Territorial Bancorp presents both opportunities and integration risks. Strong capital ratios provide a buffer, but near-term performance shows headwinds.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 1/28/2025, 5:32:07 AM