Hope Bancorp, Inc. — Q1 2024 Form 10-Q
Business context and reporting period. This unaudited report covers the three months ended March 31, 2024, with balance-sheet comparisons to December 31, 2023 and operating comparisons to Q1 2023. Hope Bancorp operates Bank of Hope, a multi-regional commercial bank headquartered in Los Angeles, with 48 branches and nine loan production offices at quarter-end.
Key financial results
Unless otherwise noted, amounts are in millions of dollars. Bank earnings primarily reflect net interest income: interest income from loans and securities less interest expense on deposits and borrowings.
| Metric | Q1 2024 / Mar. 31, 2024 | Comparable period / prior date |
|---|---|---|
| Interest income | $259.7 | $236.7 in Q1 2023 |
| Net interest income | $115.0 | $133.9 in Q1 2023 |
| Net interest margin | 2.55% | 3.02% in Q1 2023 |
| Provision for credit losses | $2.6 | $3.3 in Q1 2023 |
| Noninterest income / expense | $8.3 / $84.8 | $11.0 / $88.7 in Q1 2023 |
| Net income; diluted EPS | $25.9; $0.21 | $39.1; $0.33 in Q1 2023 |
| Total assets | $18,088.2 | $19,131.5 at Dec. 31, 2023 |
| Loans receivable, before allowance | $13,719.2 | $13,853.6 at Dec. 31, 2023 |
| Total deposits | $14,753.4 | $14,753.8 at Dec. 31, 2023 |
| Cash and cash equivalents | $1,185.3 | $1,929.0 at Dec. 31, 2023 |
| FHLB and FRB borrowings | $795.6 | $1,795.7 at Dec. 31, 2023 |
| Stockholders’ equity | $2,112.3 | $2,121.2 at Dec. 31, 2023 |
| Operating cash flow | $29.6 | $76.1 in Q1 2023 |
Material changes and management commentary
- Net income declined 33.9% year over year. Management attributed the decrease mainly to lower net interest income and noninterest income, partly offset by lower operating expenses.
- Net interest income fell 14.1%, and net interest margin declined 47 basis points. Higher deposit and borrowing costs, increased average interest-bearing funding, and lower average loan balances outweighed higher yields on loans, securities, and interest-earning cash. The average cost of deposits rose to 3.36% from 2.37%.
- Loans decreased 1.0% from year-end as payoffs and paydowns exceeded originations, which management linked partly to prudent loan growth and subdued demand in a high-rate environment. CRE was 64% and C&I 29% of the loan portfolio.
- Deposits were essentially flat, while the mix shifted: noninterest-bearing demand deposits declined to 24.7% from 26.5% of deposits, and interest-bearing money market, NOW, and savings deposits increased to 36.0% from 33.0%. Brokered deposits declined to $1.42 billion from $1.54 billion, reflecting a planned reduction.
- Cash declined by $743.7 million during the quarter, principally as the Company repaid $1.00 billion of BTFP borrowings using cash. Ending borrowings included $695.6 million from the BTFP, due in Q2 2024; all reported FHLB and FRB borrowings had maturities under 12 months. Management reported $5.07 billion of remaining borrowing capacity and total liquidity sources of $7.69 billion, including cash and unpledged securities, and said sources were adequate for reasonably foreseeable needs.
- Noninterest expense decreased 4.4%, with salaries and benefits down $9.3 million following restructuring. Full-time-equivalent employees declined to 1,227 from 1,467 a year earlier. Higher FDIC assessments, a $1.0 million FDIC special assessment, earned interest credits, and $1.0 million of merger-related costs partly offset the savings.
- Operating cash flow was $29.6 million; investing activities provided $247.1 million and financing activities used $1,020.4 million. The financing outflow primarily reflects the repayment of FRB borrowings.
Credit quality, capital, and risks
- Nonperforming assets rose to $106.8 million from $45.5 million at year-end; the ratio to total assets increased to 0.59% from 0.24%. The increase was largely driven by one relationship comprising three CRE loans, which the Company said were fully secured and had property-sale agreements in place. Accruing loans 90 or more days past due were $47.3 million, compared with $0.3 million at year-end.
- The allowance for credit losses was $158.8 million, or 1.16% of loans, versus $158.7 million, or 1.15%, at year-end. Q1 net charge-offs were $3.5 million, primarily C&I. Management considered the allowance adequate but cautioned actual losses could exceed estimates if economic or geopolitical conditions worsen or persist.
- Available-for-sale securities had $303.3 million of gross unrealized losses at quarter-end; management attributed the losses primarily to interest rates and recorded no credit-loss allowance on AFS or HTM securities. Most of the portfolio consisted of U.S. government agency or government-sponsored enterprise securities. The fair value of HTM securities was $242.7 million versus $261.6 million carrying value.
- The Bank remained “well-capitalized.” At March 31, the Bank’s CET1, Tier 1, total capital, and leverage ratios were 12.99%, 12.99%, 14.01%, and 10.27%, respectively. Tangible common equity was 9.33% of tangible assets, compared with 7.91% a year earlier.
- Estimated uninsured deposits were $5.91 billion, or 40% of deposits, up from $5.67 billion, or 38%, at year-end. The filing identifies liquidity, deposit funding conditions, interest rates, credit losses, CRE conditions, and economic uncertainty as relevant risks.
- Accrued legal loss contingencies were $0.45 million. Management said additional losses were reasonably possible but could not estimate a range, and did not expect the claims to have a material adverse effect.
Outlook, transactions, and contingencies
- The filing provides no specific earnings or financial guidance. Management’s discussion emphasizes sensitivity to interest rates, competition for deposits, deposit behavior, loan demand, and economic conditions.
- On April 26, 2024, after quarter-end, Hope Bancorp agreed to acquire Territorial Bancorp Inc. Shareholders of Territorial would receive 0.8048 Hope shares per Territorial share; the filing cited an indicative value of $8.82 per Territorial share based on Hope’s April 26 closing price. Closing was expected by year-end 2024, subject to approvals and other conditions. Risks include approval or closing delays, integration challenges, costs, deposit attrition, and business disruption.
- On March 28, 2024, Bank of Hope agreed to sell deposits, other liabilities, and certain assets of its Annandale and Centreville, Virginia branches to PromiseOne Bank. Completion was expected in the second half of 2024, subject to approvals and customary conditions.
- The filing reports no material changes to the risk factors in the 2023 Form 10-K. Disclosure controls were assessed as effective at March 31, 2024.
Important facts for investors to verify
- Track net interest margin, deposit costs, deposit mix, and the sustainability of earnings as funding rates and market rates change.
- Monitor the Q2 2024 maturity and repayment of the remaining BTFP borrowing, available liquidity, and the level and cost of uninsured and brokered deposits.
- Follow performance, collateral sales, and any further deterioration in the three CRE loans driving the increase in nonperforming assets, as well as broader delinquency and charge-off trends.
- Assess the securities portfolio’s unrealized losses and potential effects of interest-rate changes on fair value, capital, and liquidity.
- Verify regulatory approvals, shareholder approval, transaction costs, and integration and funding implications for the proposed Territorial merger; also track completion of the Virginia branch sale.