Hope Bancorp, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. Hope Bancorp is the holding company for Bank of Hope, a California-chartered bank serving business and retail customers through 54 branches and 10 loan production offices. Amounts below are in U.S. dollars; financial amounts are rounded to millions unless otherwise noted.
Financial performance and position
| Metric | FY / year-end 2022 | Comparable 2021 |
|---|---|---|
| Net interest income | $578.4 million | $512.8 million |
| Provision (credit) for credit losses | $9.6 million | $(12.2) million |
| Net income | $218.3 million | $204.6 million |
| Diluted earnings per share | $1.81 | $1.66 |
| Net interest margin | 3.36% | 3.09% |
| Efficiency ratio | 51.47% | 52.72% |
| Total assets | $19.16 billion | $17.89 billion |
| Loans, net of allowance | $15.24 billion | $13.81 billion |
| Deposits | $15.74 billion | $15.04 billion |
| Stockholders’ equity | $2.02 billion | $2.09 billion |
- Revenue and earnings: Interest income rose 26% to $716.1 million, while interest expense increased to $137.7 million from $53.8 million. Net interest income increased 13%; net income rose 7%. Noninterest income was $51.4 million and noninterest expense was $324.2 million.
- Quarterly trend: Fourth-quarter 2022 net income was $51.7 million versus $51.6 million in Q4 2021. Q4 net interest income was $150.5 million versus $133.3 million; deposit interest expense rose to $73.7 million from $11.9 million.
- Cash flow: Net cash provided by operating activities was $485.5 million; investing activities used $1.47 billion; financing activities provided $1.18 billion. Cash and cash equivalents ended the year at $506.8 million, up from $316.3 million.
- Credit quality: Nonperforming assets declined to $69.4 million from $111.8 million; criticized loans declined to $261.3 million from $499.6 million. The allowance for credit losses was $162.4 million, or 1.05% of loans, versus $140.6 million, or 1.01%. The bank recorded $24.6 million of loan recoveries and $12.4 million of charge-offs during 2022.
- Capital: Hope Bancorp’s CET1 ratio was 10.55% and Bank of Hope’s was 12.03%; both exceeded regulatory minimums and the capital conservation buffer. Tangible common equity to tangible assets declined to 8.29% from 9.31%.
Material changes versus 2021
- Higher loan yields and average loan balances lifted interest income; average loan balances increased about $1.29 billion. Rising rates also increased the average cost of interest-bearing deposits to 1.20% from 0.46%, contributing to substantially higher funding expense.
- Loans grew 10% to $15.40 billion. Commercial business loans increased 21% to $5.11 billion, while commercial real estate remained the largest loan category at approximately 60% of loans. Management said commercial business growth was intended to diversify the portfolio.
- Deposits rose 4.6%, but the mix shifted: noninterest-bearing demand deposits fell $902 million, while time deposits increased $2.20 billion. Brokered deposits rose to $1.18 billion, or 7.5% of deposits, from $810.9 million, or 5.4%.
- Available-for-sale securities had $317.3 million of net unrealized losses at year-end, versus $19.4 million in 2021. The decline, principally associated with rising rates, contributed to a $219.4 million after-tax other comprehensive loss and lower reported equity. Management reported no credit-loss allowance on the securities.
- In Q2, the company transferred securities with $239.0 million fair value to held-to-maturity classification; the transfer-date unrealized loss was $36.6 million before tax and will be amortized over the securities’ remaining lives.
- Noninterest expense increased 11%, mainly reflecting higher salaries and benefits and earnings-credit rebates. Net gains on SBA loan sales increased to $16.3 million from $8.4 million.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management reported that it believed liquidity sources were stable and adequate and was not aware of demands or trends reasonably likely to materially adversely affect liquidity at year-end.
- Management’s year-end credit-loss forecast used a consensus economic scenario projecting 2023 GDP growth of 0.3%, unemployment of 4.6%, and commercial real estate price growth of negative 2.6%. A more adverse sensitivity scenario would have increased the allowance by approximately $15.1 million.
- Key risks include the concentration in commercial real estate and Southern California, interest-rate and deposit repricing pressure, potentially weaker economic conditions, credit-loss estimation uncertainty, securities valuation losses, and liquidity or funding-market disruption. The company reported approximately $10.19 billion of uninsured deposits at year-end.
- Liquidity resources included $3.98 billion of remaining FHLB borrowing capacity; year-end FHLB and Federal Reserve borrowings totaled $865 million and were largely short-term. Management also noted that approximately $4.97 billion of time deposits were scheduled to mature in 2023.
- The $217.5 million principal amount of 2.00% convertible notes may be put to the company for cash on May 15, 2023. Management said it was assessing options. This is a material near-term funding consideration.
- Other notable items: the allowance increase reflected loan growth and recession concerns, partly offset by improved credit quality and a large recovery on a previously charged-off relationship. The company repurchased $14.7 million of shares and paid $67.1 million in dividends in 2022. Legal claims accrued were $229,000; management did not expect legal contingencies to be material, though additional losses were reasonably possible and not estimable.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The allowance for credit losses on commercial real estate loans was identified as a critical audit matter because of model assumptions and economic forecasts.
Important facts for investors to verify
- How deposit pricing, deposit retention, uninsured deposit levels, and 2023 time-deposit maturities affect funding costs and liquidity.
- How the company plans to address the May 2023 convertible-note put and whether repayment would require cash, refinancing, or another settlement method.
- Commercial real estate exposures, collateral values, geographic and property-type concentrations, and performance of criticized or restructured loans.
- Whether loan growth and economic developments require further credit-loss provisions, including changes in the allowance’s qualitative components.
- How securities losses, accumulated other comprehensive loss, and any future asset sales or transfers affect capital and reported results.
- Whether dividends and share repurchases remain consistent with capital, earnings, regulatory requirements, and liquidity needs.