HOPE Bancorp, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Hope Bancorp is the holding company for Bank of Hope, a multi-regional U.S. bank headquartered in Los Angeles. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2023 / June 30, 2023 | Comparable period / prior date |
|---|---|---|
| Net interest income | $130.7; net interest margin 2.70% | $141.5 and 3.36% in Q2 2022 |
| Net income; diluted EPS | $38.0; $0.32 | $52.1; $0.43 in Q2 2022 |
| Six-month net income; diluted EPS | $77.1; $0.64 | $112.8; $0.93 in first half 2022 |
| Noninterest income / expense | $17.0 / $87.3 | $12.7 / $80.4 in Q2 2022 |
| Total assets | $20,366 | $19,164 at December 31, 2022 |
| Loans receivable, gross of allowance | $14,865 | $15,404 at December 31, 2022 |
| Deposits | $15,619 | $15,739 at December 31, 2022 |
| Cash and cash equivalents | $2,302 | $507 at December 31, 2022 |
| FHLB and FRB borrowings | $2,260 | $865 at December 31, 2022 |
| Allowance for credit losses | $173; 1.16% of loans | $162; 1.05% at December 31, 2022 |
| Stockholders’ equity; tangible common equity ratio | $2,068; 8.04% | $2,019 at December 31, 2022; TCE ratio 8.68% at June 30, 2022 |
For the six months, operating cash flow was $202.4, investing cash flow was positive $570.7, and financing cash flow was positive $1,022.4. Cash increased $1,795.6, largely alongside a build in cash and borrowings. The company declared dividends of $0.14 per share in Q2 and $0.28 per share for the first half.
Material changes versus comparable periods
- Q2 net income fell 27.0% year over year; first-half net income fell 31.6%. The company attributed the decline to lower net interest income, higher credit-loss provisions, and higher noninterest expense.
- Q2 net interest income declined 7.7% year over year even though interest income rose substantially: funding costs increased faster. Q2 deposit cost was 2.79%, versus 0.33% a year earlier; total interest expense rose to $136.5 from $16.3.
- Loan yields rose to 5.99% in Q2 from 4.06%, while the net interest margin contracted 66 basis points. Management cited rising rates, deposit repricing and competition, and increased borrowing as key factors.
- Loans declined 3.5% from year-end, as paydowns and sales exceeded originations amid high rates, customer demand, and disciplined pricing. CRE represented 62% and C&I 32% of the loan portfolio.
- Deposits shifted toward time deposits: time deposits increased about $2.0 billion while noninterest-bearing deposits fell about $620 million. Brokered deposits rose to $2.28 billion from $1.18 billion, which management linked to banking-sector disruption.
- Q2 noninterest income increased 33.5%, including a $5.8 million affordable-housing partnership distribution gain; SBA loan-sale gains fell to $1.9 million from $5.8 million.
Outlook, management commentary, and risks
- No numerical earnings or operating guidance is provided. Management said available liquidity sources were more than sufficient for reasonably foreseeable short- and intermediate-term needs. At June 30, the company reported $5.27 billion of available borrowing capacity, $2.30 billion of cash and cash equivalents, and $173.8 million of unpledged AFS securities.
- The $2.26 billion of borrowings included $1.70 billion from the Federal Reserve’s Bank Term Funding Program (BTFP), at a weighted average rate of 4.47%, maturing in the first half of 2024. Total borrowings had maturities under 12 months. Liquidity, refinancing, and funding costs remain important monitoring points.
- Estimated uninsured and uncollateralized deposits were $5.58 billion, or approximately 36% of deposits. About $2.43 billion of time deposits exceeded $250,000; their renewal rates and retention warrant attention.
- Nonperforming assets were $77.4 million, or 0.38% of assets, versus $69.4 million, or 0.36%, at year-end. Nonaccrual loans rose to $61.3 million from $49.7 million. The ACL increase reflected a weaker economic forecast and higher reserves for individually evaluated loans, including a downgraded commercial relationship. Management considers the allowance adequate but cautioned actual losses could exceed estimates.
- The company reported a $317.1 million net unrealized loss on AFS securities and a $14.4 million fair-value shortfall on HTM securities. It attributed AFS losses primarily to interest rates and reported no credit-loss allowance on either portfolio. A large share of securities was pledged as collateral; market-value changes and liquidity needs merit review.
- Q2 and first-half noninterest expense reflected higher FDIC assessments and earned interest credits. The FDIC had proposed a special assessment beginning in 2024; the filing does not quantify a final company-specific assessment.
- Other items include $1.7 million of first-quarter severance costs, the May 2023 cash repayment of $197.1 million of convertible-note principal plus note repurchases, and a $405,000 first-half debt-extinguishment gain. The company reported $225,000 of accrued legal contingencies and said additional losses were possible but not expected to be material; it could not estimate a range of additional losses.
- Key stated risks include liquidity and deposit competition, interest-rate changes, credit losses and CRE values, economic weakness, and regulatory developments. The company said it remained above regulatory capital minimums and the Bank was categorized as well-capitalized.
Most important facts for investors to verify
- Deposit stability, uninsured-deposit levels, brokered funding, time-deposit renewals, and the cost and availability of borrowing facilities, including BTFP maturities.
- Whether deposit costs continue to outpace loan and asset-yield repricing, and the resulting effect on net interest margin and earnings.
- Developments in CRE and C&I credit quality, past-due and nonaccrual loans, individually assessed exposures, and the adequacy of the allowance.
- The impact of AFS unrealized losses, pledged securities, and any future need to sell securities or obtain additional liquidity.
- Actual FDIC assessment costs, including the outcome and impact of the proposed special assessment, and whether unusual income items recur.