Hope Bancorp, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 1, 2021. This is an annual report, with fourth-quarter results noted separately below. Hope Bancorp operates Bank of Hope, a commercial and retail bank focused on small and midsize businesses and individuals, with 58 branches and 11 loan production offices.
Financial results and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net interest income | $467.5 million | $466.6 million |
| Provision for credit losses | $95.0 million | $7.3 million |
| Noninterest income | $53.4 million | $49.7 million |
| Noninterest expense | $283.6 million | $282.6 million |
| Net income | $111.5 million | $171.0 million |
| Diluted earnings per share | $0.90 | $1.35 |
| Net interest margin | 3.00% | 3.27% |
| Return on average assets / equity | 0.68% / 5.49% | 1.12% / 8.63% |
Net interest income was nearly flat as lower asset yields and interest income were largely offset by lower funding costs. Interest income fell 13% to $598.9 million, while interest expense declined 40% to $131.4 million. The lower yield on interest-earning assets (3.84%, versus 4.81%) reflected rate cuts and loan repricing; lower deposit costs helped offset this pressure.
Fourth quarter: Net income was $28.3 million, versus $43.0 million in Q4 2019. Net interest income before provision was $120.8 million, compared with $113.5 million; provision for credit losses was $27.5 million, versus $1.0 million.
Balance sheet at year-end: Assets were $17.11 billion, up 9.2%; loans were $13.56 billion, up about 10.5%; and deposits were $14.33 billion, up about 14.4%. Available-for-sale securities totaled $2.29 billion. Cash and cash equivalents were $350.6 million, down from $698.6 million. Stockholders’ equity was $2.05 billion.
Cash flow and liquidity: Operating cash inflow was $165.9 million; investing cash outflow was $1.83 billion, primarily reflecting securities purchases and loan growth; financing cash inflow was $1.32 billion, mainly from deposit growth. Cash and cash equivalents declined by $348.0 million during the year. Management reported $2.23 billion in liquid assets, $3.92 billion of remaining FHLB borrowing capacity, and $616 million of FRB discount-window capacity.
Debt and capital: Year-end balances included $250 million of FHLB advances, $204.6 million of convertible notes (net), and $104.2 million of subordinated debentures (net). The company prepaid $300 million of FHLB advances and incurred a $3.6 million fee. Hope Bancorp and Bank of Hope remained above regulatory minimums, including the fully phased-in capital conservation buffer; their CET1 ratios were 10.94% and 12.90%, respectively.
Material changes versus 2019
- Net income declined 35%, principally because the credit-loss provision rose by $87.7 million and interest income fell; lower interest expense partly offset those effects.
- The company adopted CECL on January 1, 2020. The adoption increased the allowance by $26.2 million and reduced retained earnings by approximately $18.9 million after tax. The year-end allowance was $206.7 million, or 1.52% of loans, compared with $94.1 million, or 0.77%, in 2019.
- Nonperforming assets increased to $143.3 million from $122.1 million; nonaccrual loans rose to $85.2 million from $54.8 million. Criticized loans increased to $551.5 million from $400.7 million.
- Commercial business loans grew to $4.16 billion, including $452.7 million of SBA PPP loans outstanding at year-end. Commercial real estate represented approximately 65% of loans, excluding one-to-four-family residential loans.
- Noninterest income included $7.5 million in net gains on securities sales, compared with $0.3 million in 2019. Deposit service fees fell 31%, reflecting reduced account activity during the pandemic.
- The company closed five branches in December and recorded $2.4 million in restructuring costs; management estimated annual savings of about $2.6 million beginning in 2021. A 4% staff reduction was expected to save about $6.4 million annually.
Outlook, risks and unusual items
- The filing gives no specific earnings or financial guidance. Management said the continuing effects of COVID-19, its duration, vaccine effectiveness, and economic recovery were uncertain; further deterioration or a prolonged recession could pressure credit quality, capital, and liquidity.
- At December 31, COVID-related loan modifications totaled $1.38 billion, or 10.2% of loans, down from $3.12 billion at June 30. About 73% of year-end modified balances were secured by hotel/motel or retail properties. Management projected modifications could fall to 2–3% of loans by June 30, 2021, assuming no new modifications.
- Key credit exposures include commercial real estate and hospitality: hotel/motel loans were about 12% of total loans. Actual losses may exceed the allowance, which depends on economic forecasts, collateral values, and other significant estimates.
- Other stated risks include interest-rate changes, the transition away from LIBOR, regional economic concentration (including Southern California), liquidity and deposit competition, regulatory requirements, and cybersecurity and operational risks.
- Goodwill was $464.5 million. The company performed quarterly impairment assessments during 2020 and reported no impairment at year-end. The auditor identified the CECL allowance estimate and goodwill impairment assessment as critical audit matters.
- Accrued legal contingencies were approximately $1.3 million; management did not expect the matters to be material, but said additional losses were reasonably possible and not estimable. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Track subsequent performance of pandemic-modified loans, especially hotel/motel and retail borrowers, and whether modifications convert to delinquencies, nonaccruals, or charge-offs.
- Assess whether the $206.7 million CECL allowance remains adequate as economic forecasts and commercial real estate collateral values change.
- Monitor net interest margin, deposit costs and mix, loan yields, and the effect of the low-rate environment on earnings.
- Confirm liquidity and regulatory capital remain resilient as deposits, commitments, and credit needs evolve.
- Review the timing and terms of the LIBOR transition and the 2023 conversion, call, and put features of the $217.5 million convertible notes.