Hope Bancorp, Inc. (the “Company”) (NASDAQ: HOPE), the holding company of Bank of Hope (the “Bank”), today reported unaudited financial results for its third quarter and nine months ended September 30, 2023. For the three months ended September 30, 2023, net income totaled $30.0 million, or $0.25 per diluted common share. This compares with net income of $38.0 million, or $0.32 per diluted common share, in the preceding second quarter.
“Our third quarter 2023 net interest margin expanded 13 basis points, and our net interest income grew 4% quarter-over-quarter,” stated Kevin S. Kim, Chairman, President and Chief Executive Officer. “We maintained disciplined expense control and our noninterest expenses decreased 1% over the same period. However, we recorded a provision for credit losses of $17 million for the third quarter, and certain one-time gains in the second quarter 2023 noninterest income did not reoccur. As a result, our net income declined compared with the prior quarter.”
“Our balance sheet continued to strengthen. Total deposits grew to $15.7 billion at September 30, 2023, up 1% from June 30, 2023, reflecting growth in customer deposits, partially offset by a planned reduction of brokered time deposits. Our total capital ratio increased to 13.23% as of September 30, 2023, and all our regulatory capital ratios expanded quarter-over-quarter,” continued Kim. “Our deposit growth, taken together with our expanding capital and ample liquidity, positions us well to take advantage of profitable growth opportunities going forward.”
Strategic Reorganization
The Company also announced today a strategic reorganization designed to enhance shareholder value over the long term. Accordingly, the Company realigned its structure around lines of business and product delivery channels, optimized its production capacity and reduced headcount. The restructuring is expected to generate over $40 million in estimated annualized cost savings, largely related to the reduction in staffing, savings from a planned branch rationalization, subject to customary notices and approvals, and operational process improvements. The Company expects to recognize one-time charges of approximately $12 million in the fourth quarter of 2023 related to the reorganization.
“As the largest Korean American bank in the United States, Bank of Hope has made great strides in transitioning from a traditional community bank into a regional bank serving a wide range of consumer, small business, commercial and corporate customers,” commented Kim. “Today’s strategic reorganization further evolves our business model. As a result, we expect to operate our Bank more efficiently, strengthen our franchise, enhance the customer experience and expand our customer relationships, benefiting all our stakeholders through sustainably improved profitability.”
Financial Summary
At or for the Three Months Ended | |||||||||||
(dollars in thousands, except per share data) (unaudited) | 9/30/2023 | 6/30/2023 | 9/30/2022 | ||||||||
Net income | $ | 30,049 | $ | 38,022 | $ | 53,748 | |||||
Diluted earnings per share | $ | 0.25 | $ | 0.32 | $ | 0.45 | |||||
Net interest income before provision for credit losses | $ | 135,378 | $ | 130,689 | $ | 153,186 | |||||
Pre-provision net revenue (“PPNR”) (1) | $ | 56,810 | $ | 60,370 | $ | 82,627 | |||||
Loans receivable | $ | 14,306,193 | $ | 14,864,810 | $ | 15,491,187 | |||||
Deposits | $ | 15,739,859 | $ | 15,619,352 | $ | 15,502,209 | |||||
Total assets | $ | 20,076,364 | $ | 20,366,138 | $ | 19,083,388 | |||||
Total equity | $ | 2,030,424 | $ | 2,067,998 | $ | 1,975,725 | |||||
Total capital ratio | 13.23 | % | 12.64 | % | 11.72 | % | |||||
Tangible common equity (“TCE”) ratio (1) | 7.96 | % | 8.04 | % | 8.09 | % | |||||
Allowance for credit losses to loans receivable | 1.11 | % | 1.16 | % | 1.04 | % | |||||
Nonperforming assets to total assets (2) | 0.31 | % | 0.38 | % | 0.51 | % | |||||
Return on average assets (“ROA”) (3) | 0.60 | % | 0.74 | % | 1.17 | % | |||||
Return on average equity (“ROE”) (3) | 5.78 | % | 7.34 | % | 10.58 | % | |||||
Return on average TCE (“ROTCE”) (1) (3) | 7.47 | % | 9.49 | % | 13.77 | % | |||||
ROA (PPNR) (1) (3) | 1.13 | % | 1.18 | % | 1.79 | % | |||||
Net interest margin (3) | 2.83 | % | 2.70 | % | 3.49 | % | |||||
Efficiency ratio | 60.5 | % | 59.1 | % | 50.4 | % | |||||
(1) | PPNR, TCE ratio, ROTCE, and ROA (PPNR) are non-GAAP financial measures. Quantitative reconciliations of the most directly comparable GAAP to non-GAAP financial measures are provided in the accompanying financial information on Table Page 10. | |
(2) | Excludes delinquent Small Business Administration (“SBA”) loans that are guaranteed and currently in liquidation. | |
(3) | Annualized. |
Operating Results for the 2023 Third Quarter
Net interest income growth and net interest margin expansion. Net interest income before provision for credit losses for the 2023 third quarter totaled $135.4 million, growing 4% from $130.7 million in the preceding second quarter. Third quarter 2023 net interest margin expanded 13 basis points to 2.83%, up from 2.70% in the 2023 second quarter. The linked quarter net interest income growth and net interest margin expansion reflected higher yields on earning assets, a decrease in the average volume of borrowings and debt, and an increase in the average volume of interest-earning cash and deposits at other banks, partially offset by a higher cost of funds and a lower average volume of loans.
Third quarter 2023 weighted average yield on earning assets of 5.77% expanded 24 basis points quarter-over-quarter; the rate of change accelerated from the previous quarter. In comparison, the third quarter 2023 weighted average cost of funds of 3.16% increased 14 basis points quarter-over-quarter; the rate of change decelerated from the previous quarter.
Noninterest income. Noninterest income for the 2023 third quarter totaled $8.3 million, compared with $17.0 million in the preceding second quarter. Second quarter 2023 noninterest income included a one-time $5.8 million cash distribution from a gain on an investment in an affordable housing partnership and $1.9 million of gains on SBA loan sales. The Company did not sell any SBA 7(a) loans during the 2023 third quarter, retaining loan production on its balance sheet instead. In comparison, during the preceding 2023 second quarter, the Company sold $38.4 million of the guaranteed portion of SBA 7(a) loans for net gains on sale of $1.9 million.
Noninterest expense. Noninterest expense for the 2023 third quarter decreased 1% to $86.9 million, down from $87.3 million in the preceding second quarter. The linked quarter decrease was largely driven by lower salaries and employee benefits expense and lower FDIC assessment expense, partially offset by higher earned interest credit costs. Third quarter 2023 salaries and employee benefits expense decreased 2% to $51.0 million, down from $52.3 million in the 2023 second quarter. The Company’s efficiency ratio for the 2023 third quarter was 60.5%, compared with 59.1% in the preceding second quarter.
Tax rate. The effective tax rate for the 2023 third quarter was 24.9%, compared with 26.1% for the preceding second quarter. The year-to-date effective tax rate for the first nine months of 2023 was 25.7%.
Balance Sheet Summary
Strong Liquidity.At September 30, 2023, cash and cash equivalents increased to $2.50 billion, up from $2.30 billion at June 30, 2023, and up from $331.3 million at September 30, 2022. Available borrowing capacity, cash and cash equivalents, and unpledged investment securities totaled $8.29 billion at September 30, 2023, equivalent to 53% of total deposits and well exceeding the Bank’s uninsured deposit balances.
Loans. Loans receivable of $14.31 billion at September 30, 2023, decreased 4% from $14.86 billion at June 30, 2023, reflecting our prudent approach to loan growth, an intentional decrease in mortgage warehouse lines, and the impact of paydowns and payoffs in a high interest rate environment. Year-over-year, loans receivable decreased 8%. The following table sets forth the loan portfolio composition and percentage of total loans at September 30, 2023, June 30, 2023, and September 30, 2022:
(dollars in thousands) (unaudited) | 9/30/2023 | 6/30/2023 | 9/30/2022 | |||||||||||||||||
Balance | Percentage | Balance | Percentage | Balance | Percentage | |||||||||||||||
Commercial real estate (“CRE”) loans | $ | 8,972,886 | 62.7 | % | $ | 9,192,160 | 61.9 | % | $ | 9,504,893 | 61.3 | % | ||||||||
Commercial and industrial (“C&I”) loans | 4,450,341 | 31.1 | % | 4,805,126 | 32.3 | % | 5,124,421 | 33.1 | % | |||||||||||
Residential mortgage and other loans | 882,966 | 6.2 | % | 867,524 | 5.8 | % | 861,873 | 5.6 | % | |||||||||||
Loans receivable | $ | 14,306,193 | 100.0 | % | $ | 14,864,810 | 100.0 | % | $ | 15,491,187 | 100.0 | % | ||||||||
Deposits. Total deposits of $15.74 billion at September 30, 2023, grew 1% from $15.62 billion at June 30, 2023, reflecting growth in customer deposits, partially offset by a planned reduction of brokered time deposits. Year-over-year, total deposits increased 2%. The gross loan-to-deposit ratio was 91.0% at September 30, 2023, compared with 95.5% at June 30, 2023, and 100.2% a year ago at September 30, 2022. The following table sets forth the deposit composition and percentage of total deposits at September 30, 2023, June 30, 2023, and September 30, 2022:
(dollars in thousands) (unaudited) | 9/30/2023 | 6/30/2023 | 9/30/2022 | |||||||||||||||||
Balance | Percentage | Balance | Percentage | Balance | Percentage | |||||||||||||||
Noninterest bearing demand deposits | $ | 4,249,788 | 27.0 | % | $ | 4,229,247 | 27.1 | % | $ | 5,590,952 | 36.1 | % | ||||||||
Money market and interest bearing demand deposits | 4,424,918 | 28.1 | % | 4,188,584 | 26.8 | % | 5,885,093 | 38.0 | % | |||||||||||
Savings deposits | 430,765 | 2.8 | % | 224,495 | 1.4 | % | 317,841 | 2.0 | % | |||||||||||
Time deposits | 6,634,388 | 42.1 | % | 6,977,026 | 44.7 | % | 3,708,323 | 23.9 | % | |||||||||||
Total deposits | $ | 15,739,859 | 100.0 | % | $ | 15,619,352 | 100.0 | % | $ | 15,502,209 | 100.0 | % | ||||||||
Gross loan-to-deposit ratio | 91.0 | % | 95.5 | % | 100.2 | % | ||||||||||||||
Uninsured deposits at September 30, 2023, represented 37% of the Bank’s deposits.
Borrowings. Federal Home Loan Bank and Federal Reserve Bank borrowings totaled $1.80 billion at September 30, 2023, compared with $2.26 billion at June 30, 2023, and $1.07 billion at September 30, 2022. Linked quarter growth in deposits and decrease in loans reduced the need for borrowings in the 2023 third quarter.
Credit Quality and Allowance for Credit Losses
Nonperforming assets. Nonperforming assets totaled $61.7 million at September 30, 2023, a decrease of 20% from June 30, 2023. The quarter-over-quarter decrease in nonperforming assets reflects charge offs of nonaccrual loans, payoffs and workouts, partially offset by new inflows. The nonperforming assets ratio was 0.31% of total assets at September 30, 2023, an improvement from 0.38% at June 30, 2023.
The following table sets forth the components of nonperforming assets at September 30, 2023, June 30, 2023, and September 30, 2022:
(dollars in thousands) (unaudited) | 9/30/2023 | 6/30/2023 | 9/30/2022 | ||||||||
Loans on nonaccrual status (1) | $ | 39,081 | $ | 61,252 | $ | 64,571 | |||||
Accruing delinquent loans past due 90 days or more | 21,579 | 15,182 | 5,306 | ||||||||
Accruing troubled debt restructured loans (2) | — | — | 25,631 | ||||||||
Total nonperforming loans | 60,660 | 76,434 | 95,508 | ||||||||
Other real estate owned | 1,043 | 938 | |||||||||
