Business context and reporting period
Hope Bancorp, Inc. is a Los Angeles-based bank holding company operating through Bank of Hope. It provides commercial and retail banking, with lending focused on commercial real estate, business, SBA and trade finance. This Form 10-K covers the fiscal year ended December 31, 2019; quarterly results are also provided.
Financial results and position
Amounts are in millions of dollars unless otherwise noted.
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Interest income | $684.8 | $650.2 | +5% |
| Net interest income | $466.6 | $487.9 | -4% |
| Provision for loan losses | $7.3 | $14.9 | -51% |
| Noninterest income | $49.7 | $60.2 | -17% |
| Noninterest expense | $282.6 | $277.7 | +2% |
| Net income | $171.0 | $189.6 | -10% |
| Diluted EPS | $1.35 | $1.44 | -6% |
| Net interest margin | 3.27% | 3.53% | -26 bps |
| Return on average assets / equity | 1.12% / 8.63% | 1.29% / 9.92% | Lower |
- Balance sheet: Total assets were $15.67 billion (+2%); deposits $12.53 billion (+3%); gross loans $12.28 billion (+1%); and stockholders’ equity $2.04 billion (+7%). Commercial business loans grew 20% to $2.56 billion, while consumer loans fell 15% to $889 million.
- Cash flow: Operating activities provided $183.9 million, investing activities used $36.8 million and financing activities provided $91.9 million. Cash and cash equivalents ended the year at $698.6 million, versus $459.6 million.
- Credit quality: The allowance for loan losses was $94.1 million, or 0.77% of loans. Net charge-offs were $4.4 million. Nonperforming assets rose to $122.1 million from $113.0 million, primarily reflecting OREO growth; criticized loans declined to $400.7 million from $481.4 million.
- Debt and liquidity: Year-end carrying amounts included $625.0 million of FHLB advances, $199.5 million of convertible notes and $103.0 million of subordinated debentures. Available FHLB borrowing capacity was $3.19 billion; total liquid assets were $1.95 billion. Brokered deposits were $1.48 billion, or 11.8% of deposits.
- Capital: Company CET1 and total risk-based capital ratios were 11.76% and 13.23%; Bank ratios were 13.72% and 14.44%. The Bank was categorized as well-capitalized. Tangible common equity to tangible assets was 10.27%, up from 9.61%.
Material changes versus the prior comparable period
- Net interest income declined as interest expense rose 34% to $218.2 million. Deposit costs increased: average cost of deposits rose to 1.58% from 1.16%, while yield on interest-earning assets increased only to 4.81% from 4.71%.
- Noninterest income fell mainly because Hope stopped regularly selling guaranteed SBA 7(a) loan portions in late 2018 and retained them instead. SBA loan sale gains dropped to zero from $9.7 million; loan servicing fees also declined. Residential mortgage loan sale gains increased.
- The lower loan-loss provision reflected lower net charge-offs and management’s assessment of improved credit quality. Meanwhile, compensation and professional fees increased; 2019 professional fees included CECL implementation costs.
- Interest rates and securities values contributed to a marked improvement in accumulated other comprehensive income: available-for-sale securities moved from a $47.4 million net unrealized loss to a $12.1 million net unrealized gain.
- Fourth-quarter net income was $43.0 million, versus $44.4 million in fourth-quarter 2018; quarterly net interest income was $113.5 million versus $121.9 million.
Outlook, risks, contingencies and unusual items
- No earnings or revenue guidance is provided. Management said liquidity was stable and adequate and was not aware of known demands, commitments, trends or uncertainties reasonably likely to materially adversely affect liquidity. No material capital expenditure commitments were identified.
- The Company planned to adopt CECL in the first quarter of 2020. Management estimated an initial allowance increase of approximately 30%–40% versus the incurred-loss model and an estimated fully phased-in CET1 risk-based ratio reduction of 22–29 basis points; these estimates remained subject to change.
- Key risks include real-estate and commercial credit concentration, economic weakness in Southern California and other markets, interest-rate and funding-cost pressure, liquidity, and the transition away from LIBOR after 2021. Approximately 77% of loans were secured by real estate; 62% of loans were in California, including 55% in Southern California.
- Legal claims were accrued at $440,000. Additional losses were reasonably possible, but management could not estimate a range and did not expect the matters to be material.
- The Company repurchased 943,094 shares for $13.8 million in 2019 under a $50 million authorization; dividends declared were $0.56 per share. A $1.8 million tax benefit from settlement of prior uncertain tax positions contributed to the lower effective tax rate of 24.44% (25.79% in 2018).
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The allowance for loan losses, particularly management’s qualitative adjustments, was identified as a critical audit matter.
Important facts for investors to verify
- Whether deposit pricing stabilizes or improves enough to support net interest margin after the 2019 rise in funding costs.
- How the SBA loan-retention strategy affects recurring interest income, fee income and liquidity compared with prior loan sales.
- Whether CECL’s actual allowance, retained-earnings and capital effects align with management’s estimates.
- Trends in OREO, loans past due 90 days, criticized loans and real-estate credit concentrations, including Southern California and commercial property types.
- The maturity, repricing and conversion or put features of the convertible notes and subordinated debentures, alongside the Company’s LIBOR transition plans.