Hope Bancorp, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021 unless noted. Hope Bancorp is the parent of Bank of Hope, a commercial and retail bank operating across several U.S. states. Financial statements are unaudited.
Financial performance
| Metric | Q1 2022 | Comparable period / change |
|---|---|---|
| Net interest income | $133.2 million | Up 8.6% year over year |
| Net interest margin | 3.21% | 3.06% in Q1 2021 |
| Noninterest income | $13.2 million | Up 49.8%; included $5.6 million in SBA loan-sale gains |
| Noninterest expense | $75.4 million | Up 7.0%; salaries and benefits rose 15.8% |
| Credit-loss provision | Credit of $11.0 million | Compared with $3.3 million provision in Q1 2021 |
| Net income / diluted EPS | $60.7 million / $0.50 | $43.7 million / $0.35 in Q1 2021 |
| Cash flow from operations | $183.7 million | $58.1 million in Q1 2021 |
| Assets / loans / deposits | $17.80 billion / $14.07 billion / $14.52 billion | Assets down 0.5%; loans up $113.9 million; deposits down $525.3 million from year-end |
| Borrowings / stockholders’ equity | $772.0 million / $2.04 billion | Borrowings were $300.0 million at year-end; equity was $2.09 billion |
Material changes and balance-sheet details
- Net income increased 39.0% year over year, principally reflecting higher net interest income and the credit provision reversal.
- The $11.0 million credit was materially affected by $19.4 million of recoveries, including $17.3 million tied to one relationship previously charged off in 2021. The allowance for credit losses nevertheless rose to $147.5 million, or 1.05% of loans, from $140.6 million, or 1.01%, at year-end.
- Nonperforming assets declined to $102.4 million from $111.8 million at year-end; nonperforming assets were 0.58% of total assets. Commercial real estate represented 64% of loans, leaving the portfolio concentrated in that category.
- Available-for-sale securities were $2.49 billion. Rising market rates drove net unrealized losses to $160.6 million from $19.4 million at year-end; the after-tax amount included in accumulated other comprehensive loss was $112.6 million. Management reported no credit-loss allowance for the securities.
- Deposits fell 3.5%, including a temporary decline in one large demand-deposit relationship and lower time deposits. Brokered deposits declined to $459.2 million from $810.9 million.
- Cash and cash equivalents ended at $280.4 million, down from $316.3 million. Management reported $3.76 billion of unused FHLB capacity and $677.4 million of unused FRB discount-window capacity, and said liquidity was sufficient for reasonably foreseeable needs.
- Net cash used in investing activities was $147.7 million and net cash used in financing activities was $71.8 million. The company paid $0.14 per share in dividends and authorized a $50 million repurchase program; no repurchases had occurred by March 31.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management cited ongoing uncertainty from COVID-19, inflation, rising interest rates, the war in Ukraine, and recession concerns. It added qualitative credit reserves for risks it said were not fully reflected in the economic forecast.
- Management expected competitive staffing pressures to continue weighing on salary expense during the remainder of 2022. It also expected most remaining COVID-related loan modifications to expire by year-end; modified loans were $10.6 million at March 31, down from $22.8 million at year-end.
- Interest-rate risk is significant. In the company’s model, an immediate parallel rate increase of 200 basis points was associated with a 5.71% increase in estimated net interest income and a 1.75% decline in market value of equity; modeled results are estimates, not forecasts.
- Management warned that actual credit losses could exceed estimates if the effects of COVID-19 or the war in Ukraine are worse or more prolonged than expected. The Bank was reported as well-capitalized; its common equity Tier 1 ratio was 12.59% and total risk-based capital ratio was 13.39%.
- Legal claims were described as ordinary-course matters; no loss contingency was accrued at quarter-end. Management said it could not estimate the range of possible additional losses but did not expect them to be material.
- After quarter-end, the company amended the CEO’s employment agreement on April 22, 2022, eliminating accelerated vesting of outstanding equity awards in the specified circumstance where the CEO elects not to extend the agreement.
Important facts for investors to verify
- Whether the unusually large loan recoveries recur and how credit costs and the allowance change in subsequent quarters.
- Deposit stability, including large depositor activity, brokered funding, and reliance on short-term FHLB and overnight FRB borrowings.
- Commercial real estate credit quality, loans held for sale with elevated credit risk, and trends in nonaccrual and modified loans.
- Whether unrealized securities losses remain primarily rate-related and how rate movements affect tangible equity, liquidity, and regulatory capital.
- Durability of earnings excluding the Q1 credit reversal and SBA loan-sale gains, alongside rising compensation costs.