Business context and reporting period
Hope Bancorp, Inc. is the holding company for Bank of Hope, a commercial and retail bank serving businesses and consumers through branches and loan offices. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022. Unless otherwise noted, comparisons are with 2021 for income-statement and cash-flow measures, and with December 31, 2021 for balance-sheet measures.
Financial performance and condition
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $153.2 million | $130.3 million | $427.9 million | $379.5 million |
| Provision (credit) for credit losses | $9.2 million | $(10.0) million | $1.4 million | $(13.7) million |
| Noninterest income | $13.4 million | $10.6 million | $39.3 million | $30.5 million |
| Noninterest expense | $83.9 million | $75.5 million | $239.7 million | $219.1 million |
| Net income | $53.7 million | $55.5 million | $166.6 million | $152.9 million |
| Diluted EPS | $0.45 | $0.45 | $1.38 | $1.23 |
| Net interest margin | 3.49% | 3.07% | 3.36% | 3.08% |
| Efficiency ratio | 50.39% | 53.58% | 51.30% | 53.43% |
At September 30, 2022, total assets were $19.08 billion, up 6.7% from year-end 2021. Loans receivable were $15.49 billion, up $1.54 billion; deposits were $15.50 billion, up $461.8 million. Stockholders’ equity was $1.98 billion, down from $2.09 billion, principally reflecting a $225.1 million after-tax decline in accumulated other comprehensive income (AOCI), as well as dividends and share repurchases.
- Funding and liquidity: Cash and cash equivalents were $331.3 million. Liquid assets, as defined by the company, totaled $2.03 billion, versus $2.57 billion at year-end. FHLB borrowing capacity was $4.52 billion, of which $3.81 billion was unused; FRB discount-window capacity was $792.6 million, of which $420.6 million was unused. Management said liquidity sources were sufficient for reasonably foreseeable short- and intermediate-term needs.
- Deposits and debt: Total deposits included $1.56 billion of brokered deposits, up from $810.9 million at year-end, as the company used brokered time deposits to help fund loan growth. FHLB and FRB borrowings totaled $1.07 billion, versus $300 million at year-end; the balance included $372 million of overnight FRB borrowing. Convertible notes were $216.9 million and subordinated debentures were $106.3 million.
- Credit: The allowance for credit losses was $160.6 million, or 1.04% of loans, compared with $140.6 million, or 1.01%, at year-end. Nonperforming assets were $97.0 million, down from $111.8 million; nonaccrual loans were $64.6 million. Nine-month recoveries included $17.3 million tied to a single relationship previously charged off.
- Cash flow: For the first nine months, operating activities provided $367.2 million, investing activities used $1.52 billion, and financing activities provided $1.17 billion. Cash and cash equivalents increased $15.1 million to $331.3 million.
- Capital: The Bank was categorized as well-capitalized. At September 30, its common equity Tier 1 ratio was 11.81%, total risk-based capital ratio 12.62%, and leverage ratio 11.08%.
Material changes versus comparable periods
- Q3 net income declined 3.2% year over year, while nine-month net income rose 8.9%. Management attributed the quarterly decline mainly to higher credit-loss provision and noninterest expense, partly offset by increased net interest income.
- Q3 net interest income rose 17.6%; nine-month net interest income rose 12.8%. Higher market rates and loan growth increased asset yields, while deposit and borrowing costs also rose. Q3 interest expense nearly tripled to $36.0 million from $12.6 million.
- Noninterest expense increased 11.1% in Q3 and 9.4% year to date, particularly from salaries and benefits and earnings-credit rebates. Salary and benefit expense rose 13.2% in Q3; employee headcount increased to 1,539 from 1,449 a year earlier.
- Net gains on SBA loan sales increased, while residential mortgage loan-sale gains declined. Nine-month SBA sale gains were $14.2 million, compared with $4.8 million in 2021.
- Available-for-sale securities had a $328.4 million gross unrealized loss at quarter-end, primarily attributed to higher market rates. AFS fair value was $1.99 billion, compared with $2.67 billion at year-end; the company transferred $238.9 million fair value of securities to held-to-maturity during Q2. AOCI was a $236.5 million loss, versus an $11.4 million loss at year-end.
Outlook, commentary, risks and unusual items
The filing provides no numerical earnings or financial guidance. Management said the allowance was adequate for estimated lifetime loan losses and liquidity was sufficient for foreseeable needs, but cautioned that actual credit losses could exceed estimates. Its allowance forecast incorporated expectations of slower growth, higher unemployment, and weaker commercial real estate prices.
Key stated risks include rising interest rates, inflation and a potential recession, changes in deposit funding and liquidity, credit deterioration and uncertainty in allowance assumptions, COVID-19 effects, geopolitical instability, and regulatory risk. Interest-rate sensitivity modeling estimated net interest income would increase 6.53% under an immediate parallel 200-basis-point rise and decline 6.59% under a 200-basis-point fall; modeled market value of equity would decline 5.61% in the rising-rate case.
Unusual or notable items include the $17.3 million recovery on a previously charged-off relationship; the $36.6 million pretax unrealized loss retained in AOCI on securities transferred to HTM; and a $9.2 million Q3 provision compared with a $10.0 million provision credit in Q3 2021. The company repurchased $14.7 million of stock during the first nine months under a $50 million authorization, with $35.3 million remaining. Legal loss contingencies accrued were approximately $20,000; management did not expect litigation contingencies to be material but could not estimate a range of additional possible losses.
Important facts for investors to verify
- Whether loan growth and higher asset yields continue to offset rising deposit costs, brokered-deposit reliance, and short-term borrowings.
- Whether credit quality, nonaccrual loans, and the allowance remain adequate if economic conditions or commercial real estate prices worsen.
- How unrealized securities losses and AOCI affect tangible book value, capital, and flexibility if securities must be sold.
- Whether operating expenses, particularly compensation and deposit-related rebates, remain controlled as the business grows.
- Whether regulatory capital, available borrowing capacity, and liquidity remain sufficient under deposit outflows or adverse market conditions.