Hope Bancorp, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are primarily against December 31, 2022. The unaudited consolidated filing covers Hope Bancorp and its principal subsidiary, Bank of Hope, a commercial and retail bank serving businesses and consumers across multiple U.S. states.
Financial performance and condition
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $133.9 million | $133.2 million in Q1 2022; up 0.5% |
| Net interest margin | 3.02% | 3.21% in Q1 2022 |
| Net income; diluted EPS | $39.1 million; $0.33 | $60.7 million; $0.50 in Q1 2022 |
| Noninterest income / expense | $11.0 million / $90.4 million | $13.2 million / $75.4 million in Q1 2022 |
| Total assets | $20.57 billion | $19.16 billion at December 31, 2022 |
| Loans receivable, before allowance | $15.06 billion | $15.40 billion at December 31, 2022 |
| Deposits | $15.83 billion | $15.74 billion at December 31, 2022 |
| Cash and cash equivalents | $2.21 billion | $506.8 million at December 31, 2022 |
| FHLB and FRB borrowings | $2.13 billion | $865.0 million at December 31, 2022 |
| Stockholders’ equity | $2.06 billion | $2.02 billion at December 31, 2022 |
- Profitability and margins: Net income fell 35.6% year over year. Higher interest income was largely offset by much higher funding costs: interest expense rose to $104.5 million from $11.7 million. Deposit costs averaged 2.41%, versus 0.24% a year earlier; net interest margin contracted 19 basis points.
- Revenue and expenses: Net interest income plus noninterest income was approximately $144.9 million, compared with $146.4 million in Q1 2022. Lower loan-sale gains and swap fees weighed on noninterest income. Noninterest expense increased 19.9%, notably due to salaries and benefits and earnings-credit rebates.
- Cash flow: Operating activities provided $76.1 million, investing activities provided $304.9 million, and financing activities provided $1.325 billion. Cash and cash equivalents increased $1.706 billion during the quarter, primarily reflecting substantial FRB borrowing to bolster liquidity.
- Credit: The allowance for credit losses was $163.5 million, or 1.09% of loans, versus $162.4 million, or 1.05%, at year-end. Nonaccrual loans were $78.9 million and nonperforming assets were $80.2 million, or 0.39% of assets. Management cited an $18.2 million loan as a principal contributor to higher nonaccruals; it described the loan as fully secured and expected resolution by mid-2023 with minimal loss.
- Capital and shareholder returns: Bank regulatory capital ratios remained above “well-capitalized” thresholds; the Bank’s common equity Tier 1 ratio was 11.17% and total capital ratio 12.06%. The quarterly dividend was $0.14 per share. Tangible common equity to tangible assets was 7.91%, compared with 9.05% at March 31, 2022.
Material changes versus comparable periods
- Q1 2023 net income decreased $21.6 million year over year. The filing attributes the decline principally to higher provision for credit losses and higher noninterest expense. Q1 2022 included a large loan recovery that contributed to a negative credit-loss provision; Q1 2023 recorded a $1.7 million provision.
- Loan balances declined 2.2% from year-end, mainly due to lower commercial business lending, including reduced utilization of warehouse lines and principal paydowns. Commercial real estate represented 63% of loans at quarter-end.
- Deposit balances increased only 0.6%, but the mix shifted materially: time deposits rose to $6.76 billion from $4.99 billion, while money market/NOW and noninterest-bearing deposits declined. Brokered deposits increased to $2.27 billion from $1.18 billion.
- Available-for-sale securities had a net unrealized loss of approximately $286.1 million at March 31, 2023, down from approximately $317.3 million at year-end. The accumulated other comprehensive loss was $214.3 million. Management attributed securities valuation changes primarily to interest rates and reported no credit-loss allowance on securities.
- Net loan charge-offs were minimal in Q1 2023; the prior-year quarter included $17.9 million of net loan recoveries.
Liquidity, outlook, risks and unusual items
- Liquidity response: In response to March 2023 banking-sector disruption, the Company drew on available borrowing sources and used the Federal Reserve Bank’s Bank Term Funding Program (BTFP). Quarter-end borrowings included $1.40 billion from the BTFP. Management reported $7.99 billion in combined borrowing capacity, cash and cash equivalents, and unpledged securities, and said liquidity sources were more than sufficient for reasonably foreseeable needs.
- Funding and depositor risk: Estimated uninsured and uncollateralized deposits were $6.19 billion, about 38% of deposits. Time deposits exceeding $250,000 totaled $2.47 billion. Management added that market-wide loss of depositor confidence or disruption among financial institutions could cause deposit outflows and impair routine funding.
- Interest-rate and credit risks: Management identified interest-rate movements, higher deposit competition and costs, economic weakness, CRE prices, and the assumptions underlying credit-loss estimates as material risks. The March economic forecast used for reserves projected a 4.4% decline in CRE prices for 2023; management also added qualitative reserves for potential banking-industry disruption. Actual credit losses may exceed estimates.
- Cost actions: Q1 salaries and benefits included $1.7 million of severance, primarily related to staffing rationalization. Management estimated annual cost savings of $12.0 million; this is a stated estimate, not formal earnings guidance.
- Debt and near-term event: The Company repurchased $10.7 million principal of its 2.00% convertible notes during Q1, recognizing a $236,000 extinguishment gain. In April, it notified holders of their right to require cash repurchase on May 15, 2023. The filing does not provide a formal earnings forecast.
- Other disclosed items: The Company recorded $225,000 in legal loss contingencies; additional losses were described as reasonably possible but not estimable, and management did not expect them to be material. A post-quarter disclosure describes the CEO’s election under an executive survivor income plan, including a potential death benefit of up to $3 million subject to stated conditions. The Company also purchased an $11.0 million BOLI policy during Q1.
Important facts for investors to verify
- Deposit stability, brokered and uninsured deposit levels, and actual liquidity availability and utilization after quarter-end.
- The outcome and funding effect of the May 15, 2023 convertible-note put right.
- Whether management’s estimated $12.0 million annual staffing savings are realized, and the ongoing trend in operating costs and deposit pricing.
- Developments in nonaccrual loans, CRE collateral values, criticized loan exposures, and the adequacy of the credit-loss allowance.
- Potential effects of unrealized securities losses, interest-rate changes, and future securities pledging or sales on liquidity and capital.