Hope Bancorp, Inc. — 2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2021; it is not a standalone fourth-quarter filing. Hope Bancorp is a Los Angeles-based bank holding company operating Bank of Hope, with 54 banking offices and 11 loan production offices. Its business is primarily commercial and retail lending funded by customer deposits, with significant commercial real estate exposure.
Financial performance and position
| Metric | 2021 | 2020 |
|---|---|---|
| Net interest income | $512.8 million | $467.5 million |
| Provision (credit) for credit losses | $(12.2) million | $95.0 million |
| Noninterest income | $43.6 million | $53.4 million |
| Noninterest expense | $293.3 million | $283.6 million |
| Net income / diluted EPS | $204.6 million / $1.66 | $111.5 million / $0.90 |
| Net interest margin | 3.09% | 3.00% |
| Return on average assets / equity | 1.17% / 9.88% | 0.68% / 5.49% |
- Balance sheet: Total assets were $17.89 billion, up 4.6%. Gross loans were $13.95 billion, up from $13.56 billion; deposits were $15.04 billion, up from $14.33 billion. Available-for-sale securities totaled $2.67 billion.
- Credit quality: Allowance for credit losses (ACL) fell to $140.6 million, or 1.01% of loans, from $206.7 million, or 1.52%. Nonperforming assets declined to $111.8 million (0.62% of assets) from $143.3 million (0.84%). Net charge-offs increased to $54.0 million, or 0.40% of average loans, from $8.6 million, or 0.07%.
- Cash flow and liquidity: Operating cash flow was $324.2 million; investing cash flow was $(993.0) million; financing cash flow was $634.5 million. Cash and cash equivalents ended at $316.3 million, down $34.3 million. Management reported liquid assets of $2.57 billion and remaining FHLB borrowing capacity of $4.13 billion.
- Debt and capital: Year-end borrowings included $300.0 million of FHLB advances, $216.2 million of convertible notes, and $105.4 million of subordinated debentures. The Bank’s regulatory capital ratios exceeded minimums, including the capital conservation buffer; its common equity Tier 1 ratio was 12.96% and total risk-based capital ratio was 13.68%.
- Shareholder returns: The company paid $0.56 per share in dividends for the year and repurchased $50.0 million of shares. Book value per share was $17.44.
Material changes versus 2020
- Net income rose 83%, mainly as the $95.0 million credit-loss provision in 2020 became a $12.2 million credit in 2021, while lower deposit costs reduced interest expense. Interest income nevertheless declined 5% as asset yields fell and acquired-loan discount accretion decreased.
- Net interest margin improved to 3.09% from 3.00%. Average cost of interest-bearing deposits declined to 0.46% from 1.14%; yield on interest-earning assets declined to 3.42% from 3.84%.
- Noninterest income fell 18%, partly reflecting no securities-sale gains in 2021 versus $7.5 million in 2020. Resumption of SBA guaranteed-loan sales generated $8.4 million of gains in 2021.
- COVID-19-modified loans fell from $1.38 billion (10.2% of loans) to $22.8 million (0.2%). The company sold approximately $275.3 million of loans with elevated credit risk as part of a portfolio de-risking effort.
- Unrealized losses on available-for-sale securities increased; year-end fair value was $19.4 million below amortized cost, compared with a $46.2 million net unrealized gain position in 2020. The company attributed declines primarily to interest rates and recorded no investment-securities credit-loss allowance.
Outlook, commentary, risks, and unusual items
- Guidance: The filing provides no specific earnings, margin, or growth guidance. Management said capital and liquidity were sufficient to withstand the pandemic’s economic impact, while warning that further deterioration or a prolonged recession could weaken both.
- Credit and concentration risks: Commercial real estate represented 63% of loans; total real estate loans were 65%. Lending is concentrated geographically, with 59% of loans in California and 52% in Southern California. Hotel and motel borrowers remain a notable risk, as do other commercial-property and business sectors.
- Interest-rate exposure: A modeled instantaneous +200-basis-point rate shock indicated a 6.95% increase in estimated net interest income; a −200-basis-point shock indicated a 4.25% decrease. These are scenario estimates, not forecasts, and depend on assumptions about repricing, prepayments, and deposit behavior.
- COVID-19 and loan modifications: Remaining COVID-19 modifications were expected to expire in 2022. Temporary relief from certain troubled-debt-restructuring accounting requirements applied to eligible loans; investors should monitor performance as that relief expires.
- Funding and other risks: Estimated uninsured deposits were approximately $9.57 billion. The filing highlights liquidity, cybersecurity, regulatory and compliance, natural-disaster, and LIBOR-transition risks. Management stated the LIBOR transition was not expected to materially affect consolidated financial statements, though outcomes remain uncertain.
- Accounting and unusual items: Early adoption of ASU 2020-06 changed convertible-note accounting and reduced 2021 interest expense by approximately $4.2 million. The auditor issued unqualified opinions on the financial statements and internal control; the ACL estimate, particularly the commercial real estate models and assumptions, was identified as a critical audit matter.
- Contingencies: Accrued legal loss contingencies were approximately $52,000. Additional losses were reasonably possible but not estimable; management did not expect legal matters to be material to the consolidated financial statements.
Important facts for investors to verify
- Whether the reduced ACL remains adequate given 2021 net charge-offs of $54.0 million and the portfolio’s commercial real estate and geographic concentrations.
- Subsequent performance of the $22.8 million of COVID-19-modified loans, existing TDRs, and loans sold or transferred to held-for-sale status.
- Deposit stability and pricing, particularly for uninsured deposits and time deposits approaching maturity, as market rates change.
- The effect of interest-rate movements on loan yields, deposit costs, securities values, and net interest margin; compare actual outcomes with the filing’s modeled scenarios.
- Post-year-end capital allocation: the January 2022 authorization for an additional $50 million share repurchase program had no repurchases reported as of the filing date.