Hope Bancorp, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Hope Bancorp is the holding company for Bank of Hope, a commercial and retail bank operating across multiple U.S. states. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance and position
| Metric | Q2 2022 / June 30, 2022 | Comparison |
|---|---|---|
| Net income; diluted EPS | $52.1 million; $0.43 | Q2 2021: $53.8 million; $0.43 |
| Six-month net income; diluted EPS | $112.8 million; $0.93 | Six months 2021: $97.5 million; $0.78 |
| Net interest income before credit-loss provision | Q2: $141.5 million; six months: $274.7 million | Q2 year-over-year growth of 11.8%; six-month growth of 10.3% |
| Net interest margin | Q2: 3.36%; six months: 3.28% | Q2 2021: 3.11%; six months 2021: 3.09% |
| Noninterest income / expense | Q2: $12.7 million / $80.4 million | Q2 2021: $11.1 million / $73.1 million |
| Loans receivable; allowance for credit losses | $14.55 billion; $151.6 million (1.04% of loans) | Loans increased $593.3 million and allowance rose from $140.6 million since year-end 2021 |
| Assets; deposits; stockholders’ equity | $18.09 billion; $15.03 billion; $2.00 billion | Since year-end 2021: assets +1.1%; deposits nearly unchanged; equity down from $2.09 billion |
| Cash flows, six months | Operating +$266.6 million; investing −$596.8 million; financing +$211.0 million | Cash and cash equivalents fell $119.2 million to $197.1 million |
| Borrowings | FHLB advances $573.0 million; convertible notes $216.7 million; subordinated debentures $106.0 million | FHLB advances were $300.0 million at year-end 2021 |
The Q2 provision for credit losses was $3.2 million, versus a $7.0 million credit in Q2 2021. For the first half, the company recorded a $7.8 million credit, compared with a $3.7 million credit in 2021. Q2 return on average assets was 1.17%; the efficiency ratio was 52.09%.
Material changes versus comparable periods
- First-half earnings improved 15.8%, primarily on higher net interest income. Q2 earnings declined 3.1% as higher credit provision and operating expenses more than offset revenue growth.
- Rising rates and loan growth lifted Q2 interest income and net interest margin. Interest expense also increased year over year in Q2 as deposit costs rose.
- Noninterest expense increased 9.9% in Q2, principally from salaries and benefits, which rose 20.7%; management cited more employees, merit increases, and intensified hiring competition.
- Net gains on SBA loan sales rose to $5.8 million in Q2 from $2.4 million a year earlier. Mortgage loan sale gains fell to $0.1 million from $1.0 million; sales of loans with elevated credit risk generated a $0.5 million loss.
- Equity fell by $92.6 million from year-end, mainly because of a $160.3 million after-tax decline in accumulated other comprehensive income associated with investment-security valuation losses, partly offset by earnings. The company transferred $238.9 million fair value of securities from available-for-sale to held-to-maturity; the transfer included a $36.6 million pretax unrealized loss.
- The company repurchased 1.04 million shares for $14.7 million in Q2 under a $50 million authorization; $35.3 million remained authorized at June 30. Quarterly dividends were $0.14 per share.
Liquidity, capital, credit, and outlook
- Management reported $2.09 billion in liquid assets, $3.55 billion of unused FHLB borrowing capacity, and $747.6 million of unused Federal Reserve discount-window capacity. It believes liquidity is sufficient for reasonably foreseeable short- and intermediate-term needs. Brokered deposits were $867.5 million.
- The Bank was categorized as well-capitalized. At June 30, the company’s common equity Tier 1, total risk-based, Tier 1 risk-based, and leverage ratios were 10.69%, 12.13%, 11.33%, and 10.32%, respectively.
- Nonperforming assets were $110.6 million, or 0.76% of loans and OREO. Nonaccrual loans increased to $69.5 million; management attributed much of the rise to one $18.6 million lending relationship. The allowance was 218.03% of nonaccrual loans.
- Management selected Moody’s S2 economic scenario for its allowance analysis, reflecting recession concerns; that scenario projected a mild recession in the second half of 2022 and unemployment peaking at 6.5% in mid-2023. This is an input to the company’s credit-loss estimate, not company earnings guidance. The filing provides no quantified earnings or margin guidance.
- Principal risks include inflation, rising interest rates, recession and broader economic weakness, COVID-19 developments, credit-loss estimation uncertainty, liquidity, regulatory changes, and the war in Ukraine. Management cautioned that actual credit losses could exceed estimates if these pressures worsen or persist.
- Available-for-sale securities had $216.6 million of gross unrealized losses, primarily attributed to higher market rates; the company reported no credit-loss allowance on its investment securities. Legal claims had $10,000 accrued; management did not expect litigation losses to be material but could not estimate possible additional losses.
Important facts for investors to verify
- Whether subsequent rate changes improve net interest income or instead accelerate deposit repricing and funding costs.
- Loan growth, commercial real estate and commercial business credit quality, the status of the $18.6 million relationship, and changes in nonaccruals, delinquencies, and allowance coverage.
- Whether SBA loan-sale gains remain sustainable, given their significant contribution to noninterest income growth.
- The effect of securities valuation losses and the AFS-to-HTM transfer on tangible book value, capital, and future reported interest income.
- Deposit composition and concentration, brokered-deposit reliance, borrowing capacity, and capital ratios as balance-sheet conditions change.
- Progress against the share-repurchase authorization and the effect of repurchases and dividends on capital.