Hope Bancorp(HOPE) - 2025 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited consolidated financial statements and notes for Q2 2025, including impact from Territorial Bancorp acquisition Consolidated Statements of Financial Condition (Unaudited) Consolidated Financial Condition Summary | Metric | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | Change (Thousands) | % Change | | :----------------------------------- | :-------------------------- | :---------------------------- | :----------------- | :------- | | Total assets | $18,547,017 | $17,054,008 | $1,493,009 | 8.75% | | Total liabilities | $16,322,900 | $14,919,503 | $1,403,397 | 9.41% | | Total stockholders' equity | $2,224,117 | $2,134,505 | $89,612 | 4.20% | | Loans receivable, net | $14,285,282 | $13,467,745 | $817,537 | 6.07% | | Total deposits | $15,943,355 | $14,327,489 | $1,615,866 | 11.28% | - The increase in total assets was primarily due to the acquisition of Territorial Bancorp Inc., which contributed $1.93 billion in identifiable assets[142][279] Consolidated Statements of (Loss) Income (Unaudited) Consolidated Income Statement Summary | Metric | Three Months Ended June 30, 2025 (Thousands) | Three Months Ended June 30, 2024 (Thousands) | Six Months Ended June 30, 2025 (Thousands) | Six Months Ended June 30, 2024 (Thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------------------ | :------------------------------------ | | Total interest income | $239,170 | $232,601 | $456,336 | $492,275 | | Total interest expense | $121,637 | $126,741 | $237,986 | $271,368 | | Net interest income before provision for credit losses | $117,533 | $105,860 | $218,350 | $220,907 | | Provision for credit losses | $15,000 | $1,400 | $19,800 | $4,000 | | Total noninterest income | $(22,956) | $11,071 | $(7,268) | $19,357 | | Total noninterest expense | $109,473 | $80,987 | $193,334 | $165,826 | | Net (loss) income | $(27,881) | $25,270 | $(6,785) | $51,134 | | Basic (Losses) Earnings Per Common Share | $(0.22) | $0.21 | $(0.05) | $0.42 | | Diluted (Losses) Earnings Per Common Share | $(0.22) | $0.21 | $(0.05) | $0.42 | - The Company reported a net loss for Q2 2025 and YTD 2025, primarily due to $38.9 million in net losses on sales of investment securities AFS as part of a strategic repositioning and $17.3 million in merger and restructuring-related costs from the Territorial acquisition[15][231][260][262] Consolidated Statements of Comprehensive Income (Unaudited) Consolidated Comprehensive Income Summary | Metric | Three Months Ended June 30, 2025 (Thousands) | Three Months Ended June 30, 2024 (Thousands) | Six Months Ended June 30, 2025 (Thousands) | Six Months Ended June 30, 2024 (Thousands) | | :------------------------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------------------ | :------------------------------------ | | Net (loss) income | $(27,881) | $25,270 | $(6,785) | $51,134 | | Other comprehensive income (loss), net of tax | $34,908 | $(10,852) | $56,468 | $(28,392) | | Total comprehensive income | $7,027 | $14,418 | $49,683 | $22,742 | - Other comprehensive income (loss) significantly improved in 2025, primarily due to a $43.2 million change in unrealized net holding gains on AFS securities for the six months ended June 30, 2025, compared to a $23.1 million loss in the prior year[17][114] Consolidated Statements of Changes in Stockholders' Equity (Unaudited) Consolidated Stockholders' Equity Summary | Metric | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | Change (Thousands) | | :--------------------------------- | :-------------------------- | :---------------------------- | :----------------- | | Total stockholders' equity | $2,224,117 | $2,134,505 | $89,612 | | Common stock | $146 | $138 | $8 | | Additional paid-in capital | $1,520,129 | $1,445,373 | $74,756 | | Retained earnings | $1,139,913 | $1,181,533 | $(41,620) | | Accumulated other comprehensive loss, net | $(171,404) | $(227,872) | $56,468 | - Stockholders' equity increased by $89.6 million, driven by the issuance of 6,976,754 common shares ($73.3 million) for the Territorial acquisition and a $56.5 million decrease in accumulated other comprehensive loss, partially offset by a net loss and cash dividends[18][19][112][323] Consolidated Statements of Cash Flows (Unaudited) Consolidated Cash Flow Summary | Cash Flow Activity | Six Months Ended June 30, 2025 (Thousands) | Six Months Ended June 30, 2024 (Thousands) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net cash provided by operating activities | $36,048 | $4,045 | | Net cash provided by investing activities | $656,016 | $426,167 | | Net cash used in financing activities | $(460,529) | $(1,705,135) | | Net change in cash and cash equivalents | $231,535 | $(1,274,923) | | Cash and cash equivalents, beginning of period | $458,199 | $1,928,967 | | Cash and cash equivalents, end of period | $689,734 | $654,044 | - Net cash provided by operating activities increased significantly to $36.0 million for the six months ended June 30, 2025, from $4.0 million in the prior year, while net cash used in financing activities decreased substantially, reflecting reduced repayments of FRB borrowings[21] - Non-cash activities for the six months ended June 30, 2025, included the merger with Territorial, acquiring $1.84 billion in identifiable assets (net of cash) and assuming $1.87 billion in liabilities, with $73.3 million in common stock issued as consideration[21] Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation - Hope Bancorp, Inc. (the 'Company') is the holding company for Bank of Hope, operating 46 full-service branches and nine loan production offices across multiple states, and 29 branches in Hawaii under the trade name Territorial Savings following the acquisition of Territorial Bancorp Inc. on April 2, 2025[23][30] - The consolidated financial statements are unaudited, prepared in accordance with SEC rules, and include all necessary adjustments for fair presentation, with certain reclassifications made to prior period amounts[24][25] 2. Investment Securities Investment Securities Portfolio Summary | Metric | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | | :----------------------------------- | :-------------------------- | :---------------------------- | | Investment securities AFS, at fair value | $2,021,643 | $1,823,243 | | Investment securities HTM, at amortized cost | $247,246 | $252,385 | | Total investment securities | $2,268,889 | $2,075,628 | | Gross unrealized losses on AFS securities | $(221,043) | $(299,774) | | Net (losses) gain on sales of AFS securities (3 months) | $(38,856) | $425 | | Net (losses) gain on sales of AFS securities (6 months) | $(38,856) | $425 | - In June 2025, the Company sold $417.9 million of lower-yielding AFS securities, resulting in $38.9 million in realized losses, to redeploy proceeds into higher-yielding investments[34][260] - The Company acquired $18.5 million in AFS and $516.7 million in HTM investment securities as part of the Territorial Merger, which were immediately categorized as AFS and sold for $535.2 million with no gain or loss impact[33][283] - No allowance for credit losses was required for investment securities AFS or HTM at June 30, 2025, as the majority are U.S. Government agency securities with zero loss expectation, and other securities are expected to be paid in full[43][44][45][285] 3. Equity Investments Equity Investments Summary | Metric | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | | :----------------------------------------- | :-------------------------- | :---------------------------- | | Total equity investments | $88,152 | $39,946 | | Equity investments with readily determinable fair values | $50,500 | $4,300 | | Equity investments without readily determinable fair values | $37,600 | $35,600 | | Net gains from changes in fair value (6 months) | $743 | $(65) | - Equity investments increased by 120.7% to $88.2 million at June 30, 2025, primarily due to $45.5 million in purchases of Community Reinvestment Act (CRA) mutual funds[47][286] 4. Loans Receivable and Allowance for Credit Losses Loan Portfolio Composition | Loan Portfolio Composition | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | % of Total (June 30, 2025) | | :------------------------- | :-------------------------- | :---------------------------- | :------------------------- | | Commercial real estate (CRE) loans | $8,385,764 | $8,527,008 | 58% | | Commercial and industrial (C&I) loans | $3,725,295 | $3,967,596 | 26% | | Residential mortgage loans | $2,273,427 | $1,082,459 | 16% | | Consumer and other loans | $50,301 | $41,209 | 0% | | Total loans receivable, net of deferred costs and fees | $14,434,787 | $13,618,272 | 100% | | Allowance for credit losses (ACL) | $(149,505) | $(150,527) | N/A | - Loans receivable increased by 6.0% to $14.43 billion, primarily due to $1.07 billion in loans acquired from the Territorial Merger, significantly increasing residential mortgage loans' share of the portfolio[54][290] ACL Activity | ACL Activity | Three Months Ended June 30, 2025 (Thousands) | Six Months Ended June 30, 2025 (Thousands) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | | Balance, beginning of period | $147,412 | $150,527 | | Provision for credit loss on loans | $14,000 | $19,200 | | Net loan charge-offs | $(11,970) | $(20,285) | | Balance, end of period | $149,505 | $149,505 | | ACL to loans receivable | 1.04% | 1.04% | | Nonaccrual loans | $110,739 | $110,739 | | Nonperforming assets | $112,888 | $112,888 | | ACL to nonaccrual loans | 135.01% | 135.01% | - The provision for credit losses increased to $15.0 million for Q2 2025 (from $1.4 million in Q2 2024), including $4.5 million of merger-related provision expenses, driven by increases in C&I and residential mortgage loan provisions[74][252][253] - Nonperforming assets increased by 24.3% to $112.9 million at June 30, 2025, primarily due to the migration of a well-secured CRE loan[296] 5. Goodwill, Intangible Assets, and Servicing Assets Goodwill, Intangible Assets, and Servicing Assets Summary | Metric | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | | :-------------------------- | :-------------------------- | :---------------------------- | | Goodwill | $478,104 | $464,450 | | Core deposit intangible assets, net | $47,324 | $2,331 | | Servicing assets, net | $11,822 | $10,051 | - Goodwill increased by $13.7 million due to the Territorial Merger, with no impairment recorded. A core deposit intangible asset of $46.5 million was also recorded from the merger, amortizing over 15 years[83][86] - Servicing assets, primarily SBA and mortgage-related, increased to $11.8 million at June 30, 2025, from $10.1 million at December 31, 2024, with no valuation allowance for impairment[88][89] 6. Deposits Deposit Composition | Deposit Type | June 30, 2025 (Thousands) | % of Total | December 31, 2024 (Thousands) | % of Total | | :-------------------------- | :-------------------------- | :--------- | :---------------------------- | :--------- | | Noninterest bearing | $3,485,502 | 22% | $3,377,950 | 24% | | Money market and NOW accounts | $4,910,645 | 31% | $4,515,251 | 31% | | Savings deposits | $1,192,354 | 7% | $660,484 | 5% | | Time deposits | $6,354,854 | 40% | $5,773,804 | 40% | | Total deposits | $15,943,355 | 100% | $14,327,489 | 100% | - Total deposits increased by 11.3% to $15.94 billion, primarily due to $1.67 billion in deposits assumed from the Territorial Merger[93][307] - Brokered deposits decreased to $797.1 million at June 30, 2025, from $1.06 billion at December 31, 2024, reflecting planned reductions[95][307][308] - Estimated insured deposits were approximately 62% of total deposits at June 30, 2025, with uninsured deposits totaling $6.15 billion (38%)[309] 7. Borrowings Borrowings Summary | Borrowing Type | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | | :-------------------------- | :-------------------------- | :---------------------------- | | FHLB and FRB borrowings | $29,752 | $239,000 | | Total borrowing capacity | $5,826,036 | $6,200,266 | | Available borrowing capacity | $5,796,036 | $5,961,266 | | Weighted average effective rate (June 30, 2025) | 1.72% | N/A | | Weighted average effective rate (Dec 31, 2024) | N/A | 4.66% | - Total borrowings significantly decreased to $29.8 million at June 30, 2025, from $239.0 million at December 31, 2024, consisting entirely of FHLB borrowings[97][311] - The Company assumed $160.0 million in FHLB advances from the Territorial acquisition, of which $125.0 million was paid off immediately[98][312] 8. Convertible Notes and Subordinated Debentures Convertible Notes and Subordinated Debentures Summary | Metric | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | | :-------------------------- | :-------------------------- | :---------------------------- | | Convertible notes, net | $444 | $444 | | Subordinated debentures, net | $109,819 | $109,140 | | Total | $110,263 | $109,584 | - The Company had $444 thousand in convertible senior notes outstanding at June 30, 2025, with an initial conversion price of $22.18 per share, which was anti-dilutive for EPS calculations[101][103][119] - Subordinated debentures totaled $109.8 million at June 30, 2025, with variable interest rates tied to the three-month SOFR rate, and are treated as capital for regulatory purposes[104][105][107][244][315] 9. Commitments and Contingencies Commitments and Contingencies Summary | Commitment Type | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | | :------------------------------------------------- | :-------------------------- | :---------------------------- | | Commitments to extend credit | $2,239,010 | $2,255,785 | | Standby letters of credit | $129,138 | $134,548 | | Other letters of credit | $36,791 | $22,874 | | Commitments to fund affordable housing partnerships and CRA investments | $29,902 | $18,845 | | Reserve for unfunded loan commitments | $3,300 | $2,700 | - Loss contingencies for all legal claims totaled $302 thousand at June 30, 2025, with management believing no material adverse effect on financial condition[110][348] 10. Stockholders' Equity Stockholders' Equity Summary | Metric | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | | :-------------------------- | :-------------------------- | :---------------------------- | | Total stockholders' equity | $2,224,117 | $2,134,505 | | Accumulated other comprehensive loss, net | $(171,404) | $(227,872) | | Cash dividends declared per common share (Q2) | $0.14 | $0.14 | | Cash dividends declared per common share (YTD) | $0.28 | $0.28 | - Stockholders' equity increased by $89.6 million, primarily due to the issuance of 6,976,754 common shares ($73.3 million) for the Territorial acquisition and a $56.5 million decrease in accumulated other comprehensive loss[111][112][323] - The Company has $35.3 million remaining under its $50.0 million share repurchase program approved in January 2022[113][324][352] 11. (Losses) Earnings Per Share ("EPS") Earnings Per Share Summary | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Basic (Losses) EPS | $(0.22) | $0.21 | $(0.05) | $0.42 | | Diluted (Losses) EPS | $(0.22) | $0.21 | $(0.05) | $0.42 | | Weighted-Average Shares – Basic | 128,001,605 | 120,664,472 | 124,426,400 | 120,425,886 | | Weighted-Average Shares – Diluted | 128,223,991 | 120,939,429 | 124,859,880 | 120,964,149 | - Diluted EPS for Q2 2025 was $(0.22), down from $0.21 in Q2 2024, reflecting the net loss. Stock options and restricted share awards were anti-dilutive and excluded from diluted EPS calculations for both periods[15][118][121] - Shares related to convertible notes were not included in diluted EPS as the conversion price exceeded the market price of the Company's stock[119] 12. Segment Reporting - The Company operates as a single reportable segment, primarily banking operations, with the CEO as the chief operating decision maker (CODM) evaluating performance based on revenue streams, comparative product pricing, and significant expenses[122][123] - The Territorial Merger did not result in additional operating segments, as Territorial branches integrated into the Company's existing single segment[123] 13. Revenue Recognition - Revenue recognition primarily follows ASC 606 for noninterest revenue streams like deposit-related fees and wire transfer fees, with performance obligations satisfied over time for service charges and at a point in time for transaction-based fees[125][126] Revenue Streams Summary | Revenue Stream | Three Months Ended June 30, 2025 (Thousands) | Three Months Ended June 30, 2024 (Thousands) | Six Months Ended June 30, 2025 (Thousands) | Six Months Ended June 30, 2024 (Thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------------------ | :------------------------------------ | | Total service fees on deposit accounts | $3,106 | $2,681 | $6,027 | $5,268 | | Total wire transfer and foreign currency fees | $1,058 | $974 | $2,044 | $1,786 | 14. Stock-Based Compensation - The 2024 Equity Incentive Plan, approved in May 2024, reserved 4,500,000 shares for grants, with 2,555,341 shares remaining available at June 30, 2025[128][129] Stock-Based Compensation Summary | Metric | Six Months Ended June 30, 2025 (Thousands) | | :----------------------------------------- | :--------------------------------------- | | Total charged against income | $3,600 | | Income tax benefit recognized | $1,100 | | Unrecognized compensation expense (restricted stock/performance units) | $16,800 | | Weighted average vesting period (restricted stock/performance units) | 2.38 years | 15. Income Taxes Income Tax Summary | Metric | Three Months Ended June 30, 2025 (Thousands) | Three Months Ended June 30, 2024 (Thousands) | Six Months Ended June 30, 2025 (Thousands) | Six Months Ended June 30, 2024 (Thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------------------ | :------------------------------------ | | Pretax (loss) income | $(29,896) | $34,544 | $(2,052) | $70,438 | | Income tax (benefit) provision | $(2,015) | $9,274 | $4,733 | $19,304 | | Effective tax rate | 6.74% | 26.85% | (230.65)% | 27.41% | - The effective tax rate changes were significantly impacted by merger-related expenses, securities portfolio sales, and a $4.9 million incremental tax expense due to a change in California's state tax apportionment law, effective January 1, 2025[137][272][275] - The Company recorded an income tax provision of $4.7 million on a pretax loss of $2.1 million for the six months ended June 30, 2025, resulting in a negative effective tax rate[136] 16. Business Combinations - On April 2, 2025, the Company completed the acquisition of Territorial Bancorp Inc. in an all-stock transaction, issuing 6,976,754 shares of common stock valued at $73.3 million[30][112][142][143] - The acquisition expanded the Company's domestic presence to Hawaii, increased its low-cost deposit base, and diversified its loan portfolio, adding $1.07 billion in loans and assuming $1.67 billion in deposits[142][145] Territorial Acquisition Financial Impact | Acquired Assets / Assumed Liabilities (April 2, 2025) | Amount (Thousands) | | :---------------------------------------------------- | :----------------- | | Total consideration paid | $73,331 | | Cash and cash equivalents acquired | $86,701 | | Investment securities acquired | $535,195 | | Loans receivable acquired | $1,067,238 | | Deposits assumed | $(1,670,633) | | Borrowings assumed | $(160,770) | | Goodwill recognized | $13,654 | | Core deposit intangible recognized | $46,520 | - Merger-related provision for credit losses was $4.46 million and merger-related expenses were $17.14 million for the three months ended June 30, 2025[162] 17. Derivative Financial Instruments Derivative Financial Instruments Summary | Derivative Type | Notional Amount (June 30, 2025, Thousands) | Fair Value (Other Assets, Thousands) | Fair Value (Other Liabilities, Thousands) | | :----------------------------------- | :--------------------------------------- | :----------------------------------- | :-------------------------------------- | | Derivatives designated as cash flow hedges | $1,125,000 | $291 | $0 | | Derivatives not designated as hedges | $2,728,493 | $38,226 | $(39,401) | - The Company uses interest rate swaps, collars, caps, floors, foreign exchange contracts, and risk participation agreements for interest rate risk management and customer services[164] - During the six months ended June 30, 2025, the Company terminated $600.0 million in notional value of receive fixed swaps to reduce exposure to higher interest rates, resulting in $6.5 million in pre-tax losses in AOCI to be amortized[169] 18. Fair Value Measurements - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs requiring significant management judgment)[177][183] Fair Value Measurements by Level | Asset/Liability | June 30, 2025 (Thousands) | Level 1 (Thousands) | Level 2 (Thousands) | Level 3 (Thousands) | | :----------------------------------------- | :-------------------------- | :------------------ | :------------------ | :------------------ | | Investment securities AFS | $2,021,643 | $0 | $2,020,836 | $807 | | Equity investments with readily determinable fair value | $50,538 | $50,538 | $0 | $0 | | Interest rate contracts (assets) | $38,198 | $0 | $38,198 | $0 | | Interest rate contracts (liabilities) | $38,872 | $0 | $38,872 | $0 | | Collateral-dependent loans receivable at fair value | $49,818 | $0 | $0 | $49,818 | | Loans held for sale, net | $6,329 | $0 | $0 | $6,329 | - Loans receivable, net, and subordinated debentures are primarily classified as Level 3 fair value measurements due to the use of unobservable inputs like discounted cash flow analysis and credit risk assessments[194][195] 19. Leases - The Company's operating leases primarily consist of real estate for bank branches and offices, with terms ranging from 1 to 13 years. No finance leases were held at June 30, 2025[197] Lease Metrics Summary | Metric | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | | :----------------------------------- | :-------------------------- | :---------------------------- | | Operating lease ROU assets | $58,372 | $39,432 | | Long-term lease liabilities | $44,217 | $30,113 | | Net lease cost (6 months) | $10,403 | $8,789 | | Weighted-average remaining lease term | 5.3 years | 3.8 years | | Weighted-average discount rate | 3.87% | 2.91% | - The Territorial acquisition added $22.7 million in ROU assets and $21.1 million in related lease liabilities, including 26 real estate and 1 equipment leases[198] 20. Investments in Tax Credit Structures - The Company invests in affordable housing partnerships and renewable solar energy projects, generating low-income housing tax credits (LIHTC) and other tax benefits[203] Tax Credit Investments Summary | Investment Type | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | | :----------------------------------------- | :-------------------------- | :---------------------------- | | Investments in solar tax credit (PAM) | $2,787 | $3,425 | | Investments in affordable housing partnerships (Equity method) | $30,848 | $32,354 | | Unfunded commitments (solar tax credit) | $2,758 | $2,758 | | Unfunded commitments (affordable housing) | $23,726 | $11,283 | | Total tax credits and benefits (6 months) | $6,397 | $5,534 | | Total amortization (6 months) | $5,029 | $4,417 | 21. Regulatory Matters - Both Hope Bancorp, Inc. and Bank of Hope exceeded all regulatory minimum capital ratios, including the conservation buffer, at June 30, 2025[209][212] - The Bank was categorized as 'well-capitalized' under regulatory frameworks at June 30, 2025, and December 31, 2024[210][325] Regulatory Capital Ratios | Capital Ratio (Company) | June 30, 2025 | December 31, 2024 | | :----------------------------------- | :------------ | :---------------- | | Common equity Tier 1 capital ratio | 12.06% | 13.06% | | Tier 1 capital ratio | 12.76% | 13.79% | | Total capital ratio | 13.76% | 14.78% | | Leverage capital ratio | 10.57% | 11.83% | | Capital Conservation Buffer (Required) | 7.00% (CET1), 8.50% (Tier 1), 10.50% (Total) | 7.00% (CET1), 8.50% (Tier 1), 10.50% (Total) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes Q2 2025 financial condition and results, including Territorial acquisition and non-GAAP reconciliation GENERAL - Hope Bancorp, Inc. is the holding company of Bank of Hope, with $18.55 billion in total assets at June 30, 2025. The acquisition of Territorial Savings expanded its presence to Hawaii, making it the largest regional bank serving multicultural customers across the U.S. and Hawaii[215] - The Bank's principal business involves earning interest on loans and investment securities, funded by deposits and borrowings, and generating income from fee-based products and loan sales. Major expenses include interest on deposits/borrowings, credit loss provisions, and operating expenses[216] Selected Financial Data Selected Financial Performance Data | Metric | Q2 2025 (Thousands) | Q2 2024 (Thousands) | YTD 2025 (Thousands) | YTD 2024 (Thousands) | | :----------------------------------------- | :------------------ | :------------------ | :------------------- | :------------------- | | Net (loss) income (GAAP) | $(27,881) | $25,270 | $(6,785) | $51,134 | | Net income, excluding notable items (Non-GAAP) | $24,531 | $26,579 | $47,405 | $54,170 | | Diluted EPS (GAAP) | $(0.22) | $0.21 | $(0.05) | $0.42 | | Diluted EPS, excluding notable items (Non-GAAP) | $0.19 | $0.22 | $0.38 | $0.45 | | ROA (GAAP) | (0.60)% | 0.59% | (0.08)% | 0.56% | | ROA, excluding notable items (Non-GAAP) | 0.52% | 0.62% | 0.53% | 0.60% | | Efficiency ratio (GAAP) | 115.75% | 69.26% | 91.59% | 69.02% | | Efficiency ratio, excluding notable items (Non-GAAP) | 69.09% | 67.67% | 69.43% | 67.23% | - Notable items for Q2 2025 totaled $52.4 million after tax, including $30.5 million from investment securities repositioning losses, $17.1 million in merger-related costs, and a $4.9 million impact from a California state tax apportionment law change[231][225] Selected Balance Sheet Data | Balance Sheet Data | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | | :----------------------------------- | :-------------------------- | :---------------------------- | | Total assets | $18,547,017 | $17,054,008 | | Total loans receivable | $14,434,787 | $13,618,272 | | Total deposits | $15,943,355 | $14,327,489 | | Stockholders' equity | $2,224,117 | $2,134,505 | | Tangible Common Equity (TCE) | $1,698,689 | $1,643,699 | | TCE ratio | 9.43% | 9.72% | Results of Operations Overview - Net loss for Q2 2025 was $27.9 million, or $(0.22) per diluted share, a $53.2 million decrease YoY, primarily due to $52.4 million in notable items including investment securities losses and merger-related costs[230][231] - Excluding notable items, Q2 2025 net income was $24.5 million, or $0.19 per diluted share, down from $26.6 million, or $0.22 per diluted share, in Q2 2024, mainly due to lower noninterest income and higher noninterest expense and provision for loan losses[232] Net Interest Income and Net Interest Margin Net Interest Income and Margin Trends | Metric | Q2 2025 (Thousands) | Q2 2024 (Thousands) | YTD 2025 (Thousands) | YTD 2024 (Thousands) | | :----------------------------------------- | :------------------ | :------------------ | :------------------- | :------------------- | | Net interest income before provision for credit losses | $117,533 | $105,860 | $218,350 | $220,907 | | Net interest margin | 2.69% | 2.62% | 2.62% | 2.58% | | Weighted average yield on loans | 5.88% | 6.20% | 5.88% | 6.23% | | Weighted average cost of deposits | 2.96% | 3.39% | 3.07% | 3.37% | - Q2 2025 net interest income increased by 11.0% YoY to $117.5 million, driven by lower cost of deposits and increased average interest-earning assets, despite lower loan yields[235] - The net interest margin for Q2 2025 increased to 2.69% (from 2.62% in Q2 2024), primarily due to lower weighted average costs of interest-bearing deposits and increased average loan balances[238] - Accretion of discount on acquired loans from the Territorial Merger contributed $4.1 million to net interest income for the three and six months ended June 30, 2025[237] Provision for Credit Losses Provision for Credit Losses Summary | Metric | Q2 2025 (Thousands) | Q2 2024 (Thousands) | YTD 2025 (Thousands) | YTD 2024 (Thousands) | | :----------------------------------- | :------------------ | :------------------ | :------------------- | :------------------- | | Provision for credit losses | $15,000 | $1,400 | $19,800 | $4,000 | | Merger-related provision for credit losses | $4,461 | $0 | $4,461 | $0 | | Provision for unfunded loan commitments | $1,000 | $(300) | $600 | $(1,300) | - The Q2 2025 provision for credit losses increased by $13.6 million YoY to $15.0 million, including $4.5 million from merger-related expenses, driven by higher provisions for C&I and residential mortgage loans[252][253] - Net loan charge-offs as a percentage of average loans (annualized) increased to 0.33% in Q2 2025 from 0.13% in Q2 2024, primarily due to C&I loan charge-offs[301] Noninterest Income Noninterest Income Summary | Metric | Q2 2025 (Thousands) | Q2 2024 (Thousands) | YTD 2025 (Thousands) | YTD 2024 (Thousands) | | :----------------------------------- | :------------------ | :------------------ | :------------------- | :------------------- | | Total noninterest income | $(22,956) | $11,071 | $(7,268) | $19,357 | | Net losses on sales of investment securities AFS | $(38,856) | $425 | $(38,856) | $425 | | Net gains on sales of SBA loans | $3,998 | $1,980 | $7,129 | $1,980 | | Swap fees | $1,662 | $25 | $2,307 | $168 | | Other income and fees | $5,544 | $4,290 | $12,582 | $8,000 | - Total noninterest income decreased by $34.0 million YoY to $(23.0) million in Q2 2025, primarily due to $38.9 million in net losses from the strategic repositioning of AFS investment securities[256][260] - Offsetting the decline, net gains on SBA loan sales increased by 101.9% YoY to $4.0 million in Q2 2025, and swap fees surged by 6,548% due to increased loan originations[257][258][259] Noninterest Expense Noninterest Expense Summary | Metric | Q2 2025 (Thousands) | Q2 2024 (Thousands) | YTD 2025 (Thousands) | YTD 2024 (Thousands) | | :----------------------------------- | :------------------ | :------------------ | :------------------- | :------------------- | | Total noninterest expense | $109,473 | $80,987 | $193,334 | $165,826 | | Merger and restructuring-related costs | $17,281 | $2,165 | $19,800 | $3,611 | | Salaries and employee benefits | $52,834 | $44,107 | $101,294 | $91,684 | | Occupancy expense | $8,884 | $6,906 | $16,050 | $13,692 | | Furniture and equipment | $7,817 | $5,475 | $13,530 | $10,815 | | Earned interest credit expense | $3,310 | $6,139 | $6,397 | $11,973 | - Total noninterest expense increased by 35.2% YoY to $109.5 million in Q2 2025, primarily driven by $17.3 million in merger and restructuring-related costs from the Territorial acquisition[262][268] - Salaries and employee benefits increased by 19.8% YoY due to higher headcount from the Territorial acquisition, while occupancy and furniture/equipment expenses also rose due to increased Bank locations and depreciation[264][265][266] - Earned interest credit expense decreased by 46.1% YoY due to reductions in the Federal Funds rate[267] Provision for Income Taxes Income Tax Provision Summary | Metric | Q2 2025 (Thousands) | Q2 2024 (Thousands) | YTD 2025 (Thousands) | YTD 2024 (Thousands) | | :----------------------------------- | :------------------ | :------------------ | :------------------- | :------------------- | | Income tax (benefit) provision | $(2,015) | $9,274 | $4,733 | $19,304 | | Effective tax rate | 6.74% | 26.85% | (230.65)% | 27.41% | | Total tax credits (6 months) | $6,397 | $5,534 | | Amortization on renewable energy investment (6 months) | $638 | $0 | - The effective tax rate for Q2 2025 was 6.74% (on a pretax loss), significantly lower than 26.85% in Q2 2024, influenced by merger-related expenses, securities sales, and a California state tax apportionment law change[270][272][275] - The Company recorded an incremental tax expense of $4.9 million in Q2 2025 due to the change in California's state tax apportionment law[275] Financial Condition Cash and Cash Equivalents Cash and Cash Equivalents Balances | Metric | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | | :-------------------------- | :-------------------------- | :---------------------------- | | Cash and cash equivalents | $689,734 | $458,199 | - Cash and cash equivalents increased to $689.7 million at June 30, 2025, from $458.2 million at December 31, 2024, partly due to $86.7 million acquired in the Territorial acquisition[280] Investment Securities Portfolio Investment Securities Portfolio Balances | Metric | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | | :----------------------------------- | :-------------------------- | :---------------------------- | | Investment securities AFS, at fair value | $2,021,643 | $1,823,243 | | Investment securities HTM, at amortized cost | $247,246 | $252,385 | | Net unrealized loss on AFS securities | $(217,400) | $(299,400) | - The net unrealized loss on AFS securities decreased to $217.4 million at June 30, 2025, from $299.4 million at December 31, 2024, reflecting market interest rate movements and Q2 sales[281] - The Company purchased $686.7 million, sold $953.1 million, and had $84.3 million in pay-downs and $35.1 million in calls of investment securities during the six months ended June 30, 2025[282] Equity Investments Equity Investments Balances | Metric | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | | :----------------------------------------- | :-------------------------- | :---------------------------- | | Total equity investments | $88,152 | $39,946 | | Equity investments with readily determinable fair values | $50,500 | $4,300 | | Equity investments without readily determinable fair values | $37,600 | $35,600 | - Equity investments increased by 120.7% to $88.2 million, primarily driven by $45.5 million in purchases of CRA mutual funds[286] Loans Held For Sale Loans Held For Sale Balances | Metric | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | | :-------------------------- | :-------------------------- | :---------------------------- | | Loans held for sale | $12,051 | $14,491 | | SBA loans sold (YTD) | $117,300 | N/A | | Residential mortgage loans sold (YTD) | $7,900 | N/A | | C&I loans sold (YTD) | $60,000 | N/A | - Loans held for sale decreased by 16.8% to $12.1 million, consisting of C&I, residential mortgage, and consumer credit card loans[289] Loans Receivable Loans Receivable Composition | Loan Portfolio Composition | June 30, 2025 (Thousands) | % of Total | December 31, 2024 (Thousands) | % of Total | | :------------------------- | :-------------------------- | :--------- | :---------------------------- | :--------- | | CRE loans | $8,385,764 | 58% | $8,527,008 | 63% | | C&I loans | $3,725,295 | 26% | $3,967,596 | 29% | | Residential mortgage loans | $2,273,427 | 16% | $1,082,459 | 8% | | Consumer and other loans | $50,301 | 0% | $41,209 | 0% | | Total loans receivable | $14,434,787 | 100% | $13,618,272 | 100% | - Loans receivable increased by 6.0% to $14.43 billion, primarily due to $1.07 billion in loans acquired from the Territorial Merger, which significantly increased residential mortgage loans' share of the portfolio to 16%[290] CRE Loan Portfolio Breakdown | CRE Loan Type (June 30, 2025) | Amount (Thousands) | % | Weighted Average LTV | | :---------------------------- | :----------------- | :- | :------------------- | | Multi-tenant retail | $1,589,994 | 19% | 41% | | Industrial warehouses | $1,260,991 | 15% | 40% | | Multifamily | $1,211,785 | 14% | 59% | | Gas stations and car washes | $1,106,007 | 13% | 49% | | Hotels/motels | $754,449 | 9% | 41% | | Office | $340,329 | 4% | 56% | | Total CRE loans | $8,385,764 | 100% | 46% | Nonperforming Assets Nonperforming Assets Summary | Metric | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | | :----------------------------------- | :-------------------------- | :---------------------------- | | Nonaccrual loans | $110,739 | $90,564 | | Accruing delinquent loans past due 90 days or more | $2,149 | $229 | | Total nonperforming loans | $112,888 | $90,793 | | Total nonperforming assets | $112,888 | $90,793 | | Nonperforming assets to total assets | 0.61% | 0.53% | | Nonaccrual loans to loans receivable | 0.77% | 0.67% | - Nonperforming assets increased by 24.3% to $112.9 million at June 30, 2025, primarily due to the migration of a well-secured CRE loan[296] Allowance for Credit Losses Allowance for Credit Losses by Loan Segment | Loan Segment | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | | :-------------------------- | :-------------------------- | :---------------------------- | | CRE loans | $77,300 | $88,374 | | C&I loans | $62,547 | $57,243 | | Residential mortgage loans | $9,113 | $4,438 | | Consumer and other loans | $545 | $472 | | Total ACL | $149,505 | $150,527 | | ACL to loans receivable | 1.04% | 1.11% | - The ACL decreased slightly to $149.5 million at June 30, 2025, from $150.5 million at December 31, 2024, with the coverage ratio decreasing to 1.04% from 1.11%[298] - The decrease in ACL was primarily due to a decline in CRE loan ACL, offset by increases in C&I and residential mortgage loan ACLs, the latter driven by the Territorial acquisition[300] Investments in Tax Credit Structures Tax Credit Investments and Commitments | Investment Type | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | | :----------------------------------------- | :-------------------------- | :---------------------------- | | Investments in affordable housing partnerships | $30,800 | $32,400 | | Investments in solar tax credits | $2,800 | $3,400 | | Unfunded commitments (affordable housing) | $23,700 | $11,300 | | Unfunded commitments (solar tax credits) | $2,800 | $2,800 | - Investments in affordable housing partnerships decreased to $30.8 million due to amortization, while unfunded commitments for these partnerships more than doubled to $23.7 million[305] Deposits, Borrowings, Convertible Notes, and Subordinated Debentures Deposits, Borrowings, and Debentures Summary | Deposit Type | June 30, 2025 (Thousands) | % of Total | December 31, 2024 (Thousands) | % of Total | | :-------------------------- | :-------------------------- | :--------- | :---------------------------- | :--------- | | Demand, noninterest bearing | $3,485,502 | 22% | $3,377,950 | 24% | | Money market, interest bearing demand and savings | $6,102,999 | 38% | $5,175,735 | 36% | | Time deposits | $6,354,854 | 40% | $5,773,804 | 40% | | Total deposits | $15,943,355 | 100% | $14,327,489 | 100% | | Brokered deposits | $797,100 | N/A | $1,060,000 | N/A | | FHLB and FRB borrowings | $29,800 | N/A | $239,000 | N/A | | Convertible notes, net | $444 | N/A | $444 | N/A | | Subordinated debentures | $109,800 | N/A | $109,100 | N/A | - Total deposits increased by 11.3% to $15.94 billion, primarily due to $1.67 billion from the Territorial acquisition, while brokered deposits decreased due to planned reductions[307][308] - Borrowings significantly decreased to $29.8 million (all FHLB) from $239.0 million, with $125.0 million of assumed FHLB advances from Territorial paid off immediately[311][312] Off-Balance-Sheet Activities and Contractual Obligations - The Company engages in traditional off-balance-sheet credit-related financial instruments (commitments to extend credit, standby letters of credit), interest rate swap contracts, foreign exchange contracts, and commitments related to affordable housing partnership investments[316][317][318][319][320][321] - These activities are part of normal business to meet customer financing needs and manage risk, with no anticipated material impact on future operations or financial condition[317][322] Stockholders' Equity and Regulatory Capital Stockholders' Equity and Capital Summary | Metric | June 30, 2025 (Thousands) | December 31, 2024 (Thousands) | | :----------------------------------- | :-------------------------- | :---------------------------- | | Total stockholders' equity | $2,224,117 | $2,134,505 | | Common stock issued (Territorial acquisition) | $73,300 | N/A | | Decrease in AOCI | $56,500 | N/A | | Cash dividends paid | $(34,800) | N/A | | Net loss | $(6,800) | N/A | - Stockholders' equity increased by $89.6 million, driven by $73.3 million in common stock issued for the Territorial acquisition and a $56.5 million decrease in accumulated other comprehensive loss, partially offset by net loss and dividends[323] - The Bank was categorized as 'well-capitalized' at June 30, 2025, exceeding all regulatory minimum capital ratios[325][326] Liquidity Management - The Company manages liquidity risk to meet obligations without unacceptable losses, considering deposit stability, marketability of investments, alternative funding sources, and credit demand[327] - Primary liquidity sources include deposits, federal funds facilities, and FHLB/FRB borrowings, augmented by loan/securities payments and sales[328] - At June 30, 2025, total borrowing capacity, cash, and unpledged securities amounted to $8.44 billion, including $5.80 billion in available borrowing capacity from FHLB and FRB, and $1.95 billion in unpledged AFS securities[329] Item 3. Quantitative and Qualitative Disclosures About Market Risk Details market risk, primarily interest rate risk, and management strategies, including NII and EVE sensitivity Interest Rate Risk - Interest rate risk is the most significant market risk, measured by potential changes in Net Interest Income (NII) and Economic Value of Equity (EVE), encompassing repricing, basis, yield curve, and options risk[332][336] - The Asset and Liability Management Committee (ALM) manages interest rate risk, aiming to reduce earnings sensitivity to rate fluctuations while maintaining liquidity and capital[333][334] Net Interest Income Sensitivity Simulation Net Interest Income Sensitivity Analysis | Interest Rate Change (basis points) | June 30, 2025 NII Sensitivity | June 30, 2024 NII Sensitivity | | :---------------------------------- | :---------------------------- | :---------------------------- | | (300) | (5.7)% | (5.5)% | | (200) | (4.0)% | (3.3)% | | (100) | (2.0)% | (1.0)% | | +100 | 1.9% | (0.2)% | | +200 | 4.0% | (2.3)% | | +300 | 5.8% | (4.3)% | - The NII sensitivity profile shows increased positive sensitivity to rising rates and reduced negative sensitivity to falling rates at June 30, 2025, compared to June 30, 2024[339] - This change is attributed to the termination of the receive fixed swap portfolio and growth in time deposit balances, partially offset by increased fixed-rate mortgage balances from the Territorial acquisition[339] Economic Value of Equity Sensitivity Economic Value of Equity Sensitivity Analysis | Interest Rate Change (basis points) | June 30, 2025 EVE Sensitivity | June 30, 2024 EVE Sensitivity | | :---------------------------------- | :---------------------------- | :---------------------------- | | (300) | 6.7% | 3.2% | | (200) | 6.6% | 3.9% | | (100) | 4.2% | 2.7% | | +100 | (5.0)% | (5.5)% | | +200 | (10.6)% | (12.0)% | | +300 | (16.6)% | (19.0)% | - The EVE profile at June 30, 2025, shows increased positive sensitivity to falling rates and reduced negative sensitivity to rising rates compared to the prior year[341] - These changes are due to the active reduction of the investment portfolio duration, termination of receive fixed swaps, and an increase in low-beta, long-duration retail deposits, partially offset by fixed-rate residential mortgage loans from the Territorial acquisition[341] Item 4. Controls and Procedures Confirms effective disclosure controls and procedures, with no material changes to internal control over financial reporting Evaluation of Disclosure Controls and Procedures - Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2025, and determined they were effective[344] Changes in Internal Control over Financial Reporting - There have been no changes in internal control over financial reporting during the quarter ended June 30, 2025, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[345] PART II - OTHER INFORMATION Item 1. Legal Proceedings Details legal claims and accrued loss contingencies, with management expecting no material adverse financial impact - Accrued loss contingencies for all legal claims totaled approximately $302 thousand at June 30, 2025[348] - Management believes that none of these legal claims, individually or in the aggregate, will have a material adverse effect on the results of operations or financial condition of the Company[348] Item 1A. Risk Factors No material changes to risk factors from the prior Annual Report on Form 10-K were identified - No material changes to risk factors discussed in the Annual Report on Form 10-K for the year ended December 31, 2024, were identified[349] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity sales occurred; $35.3 million remains in the $50.0 million share repurchase program - No unregistered sales of equity securities occurred during the three months ended June 30, 2025[351] - The Company's $50.0 million stock repurchase program had $35.3 million remaining as of June 30, 2025, with no shares repurchased during the quarter[352][353] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities during the period - None[354] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Not Applicable[355] Item 5. Other Information No director or officer adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2025[356] Item 6. Exhibits Lists all exhibits filed with the Quarterly Report on Form 10-Q, including certifications and XBRL data - The exhibits include certifications from the CEO and CFO (31.1, 31.2, 32.1, 32.2), corporate governance documents (3.1, 3.2), and Inline XBRL Taxonomy Extension documents (101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[360]