HOPE Bancorp, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Hope Bancorp is the holding company for Bank of Hope, a multi-regional bank headquartered in Los Angeles, with 53 full-service branches across nine states. Financial statement amounts below are in millions unless otherwise noted.
Financial performance and position
- Q3 earnings: Net income was $30.0 million, or $0.25 diluted EPS, versus $53.7 million, or $0.45, a year earlier. For the first nine months, net income was $107.2 million and diluted EPS was $0.89, versus $166.6 million and $1.38.
- Interest income and margin: Q3 interest income rose to $275.8 million from $189.2 million, but interest expense increased to $140.4 million from $36.0 million. Net interest income fell 11.6% to $135.4 million. Net interest margin was 2.83%, down 66 basis points year over year. For nine months, net interest income declined 6.5% to $399.9 million and margin fell 52 basis points to 2.84%.
- Credit costs and other income: Q3 provision for credit losses was $16.8 million versus $9.2 million; nine-month provision was $27.4 million versus $1.4 million. Q3 noninterest income fell 37.8% to $8.3 million, chiefly reflecting no SBA loan sale gains and lower swap fees. Nine-month noninterest income declined 7.6% to $36.3 million.
- Expenses and profitability: Q3 noninterest expense increased 3.5% to $86.9 million; nine-month expense increased 10.4% to $264.6 million. Higher deposit interest credits and FDIC assessments were notable contributors. Q3 return on average assets was 0.60% versus 1.17%; efficiency ratio was 60.46% versus 50.39%.
- Loans and credit quality: Loans receivable were $14.31 billion, down 7.1% from year-end 2022 as paydowns and sales exceeded originations and the company intentionally reduced mortgage warehouse lines. CRE loans were $8.97 billion and C&I loans $4.45 billion. Nonperforming assets were $61.7 million, or 0.31% of assets. The allowance for credit losses was $158.8 million, equal to 1.11% of loans. Q3 included a $23.4 million full charge-off for a borrower that entered Chapter 7 liquidation; nine-month net charge-offs were partly offset by a $17.3 million CRE recovery.
- Deposits, debt, and liquidity: Deposits totaled $15.74 billion, essentially unchanged from year-end, but shifted toward higher-cost time deposits, which rose to $6.63 billion. Brokered deposits increased to $1.96 billion. Borrowings rose to $1.80 billion, including $1.70 billion from the Federal Reserve’s Bank Term Funding Program (BTFP); $1.70 billion of BTFP borrowings mature in the first half of 2024. Cash and cash equivalents rose to $2.50 billion. The company reported $5.49 billion of remaining borrowing capacity and $8.29 billion in combined borrowing capacity, cash, and unpledged securities, and said liquidity was sufficient for reasonably foreseeable needs.
- Capital and cash flow: Stockholders’ equity was $2.03 billion. Bank regulatory capital ratios were above “well-capitalized” thresholds: CET1 12.08%, Tier 1 12.08%, total capital 13.00%, and leverage 9.65%. Nine-month operating cash flow was $395.2 million; investing activities provided $936.5 million, mainly reflecting loan portfolio contraction; financing activities provided $661.8 million.
Material changes and notable items
- Rising market rates and deposit competition increased funding costs: Q3 average deposit cost rose to 2.98% from 0.79% a year earlier; average cost of FHLB and FRB borrowings rose to 4.35% from 2.12%. Higher asset yields only partly offset the increase.
- Cash increased substantially following the banking-sector disruption in early 2023, as the company drew on available borrowing capacity, primarily through the BTFP. The company also reported $5.85 billion of estimated uninsured and uncollateralized deposits, or 37% of total deposits.
- Available-for-sale securities had $385.4 million of gross unrealized losses at September 30, mainly attributed to interest-rate movements. The company reported no credit-loss allowance on AFS or HTM securities and said it intended and was able to hold HTM securities to maturity.
- On October 20, 2023, after quarter-end, the company announced a strategic reorganization, including a 13% headcount reduction. It expected related one-time costs in Q4 2023; the filing did not quantify those costs.
- The company repaid $197.1 million principal of convertible notes in May 2023 after holders exercised their put option and repurchased another $19.9 million principal during the first nine months. Only $0.4 million remained outstanding at September 30.
Outlook, risks, and contingencies
The filing provides no specific earnings or financial guidance. Management cited sensitivity to interest rates, deposit competition, liquidity conditions, economic weakness, CRE values, and geopolitical events. Its economic forecast used for credit-loss estimates projected CRE price declines in 2023 and 2024 before a rebound in 2025. Management considered the loan-loss allowance adequate, while cautioning that actual losses may exceed estimates. Interest-rate simulation showed estimated one-year net interest income sensitivity of +2.14% under a +200-basis-point scenario and -6.73% under a -200-basis-point scenario; these are model scenarios, not forecasts.
Legal loss contingencies accrued were $325,000; management said additional losses were reasonably possible but could not estimate their range, and did not expect the claims to have a material adverse effect. The filing reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether deposit mix, brokered funding, uninsured deposits, and reliance on short-term BTFP borrowings evolve favorably as borrowings mature in 2024.
- Whether deposit costs and funding competition continue to pressure net interest margin and earnings.
- Whether C&I and CRE credit performance, charge-offs, delinquencies, and the allowance remain consistent with management’s estimates.
- How the $385.4 million AFS unrealized loss position and the broader accumulated other comprehensive loss respond to interest-rate movements.
- The amount and timing of Q4 reorganization costs, and whether the announced restructuring delivers expected benefits.