Hope Bancorp, Inc. — Second-Quarter 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The filing is unaudited. Hope Bancorp is the holding company for Bank of Hope, a commercial and retail bank serving businesses and consumers across several U.S. states and South Korea.
Financial performance and position
| Metric | Q2 2021 | Comparable period / change |
|---|---|---|
| Net income | $53.8 million; diluted EPS $0.43 | $26.8 million; $0.22 diluted EPS in Q2 2020 |
| Net interest income | $126.6 million | Up 15.3% from $109.8 million |
| Net interest margin | 3.11% | 2.79% in Q2 2020 |
| Provision (credit) for credit losses | $(7.0) million credit | $17.5 million provision in Q2 2020 |
| Noninterest income / expense | $11.1 million / $73.1 million | Income down 1.5%; expense up 9.1% year over year |
| Six-month net income | $97.5 million; diluted EPS $0.78 | $52.7 million; $0.42 diluted EPS in first half 2020 |
For the first half, net interest income was $249.2 million, up 8.8%; net interest margin was 3.09%, versus 3.04%. Net interest income benefited from sharply lower funding costs, partly offset by lower yields on loans and securities. Q2 return on average assets was 1.25%, return on average equity 10.41%, and the efficiency ratio 53.12%.
- Balance sheet at June 30: Assets were $17.47 billion; loans receivable were $13.42 billion ($13.23 billion net of allowance); deposits were $14.73 billion; and stockholders’ equity was $2.09 billion.
- Funding and liquidity: Cash and cash equivalents were $837.0 million, up from $350.6 million at year-end 2020. The company reported $2.68 billion in liquid assets, $4.08 billion of unused FHLB borrowing capacity, and $616.4 million of unused FRB discount-window capacity. Deposits increased $392.3 million from year-end; brokered deposits fell to $378.5 million from $1.14 billion.
- Debt: FHLB advances were $200.0 million; convertible notes, net, were $215.7 million; subordinated debentures were $104.8 million. The company reported no FRB discount-window borrowings.
- Capital: Company CET1, Tier 1 risk-based, total risk-based, and leverage ratios were 11.44%, 12.14%, 13.16%, and 10.43%, respectively. The Bank was categorized as well-capitalized.
- Cash flow: First-half operating cash flow was $141.8 million, investing cash flow was $39.9 million, and financing cash flow was $304.6 million. Cash and cash equivalents increased $486.4 million.
Material changes and notable items
- Year-over-year Q2 earnings roughly doubled, principally reflecting the swing from a credit-loss provision to a credit, alongside lower interest expense. Interest income fell 3.3% in Q2 and 10.7% for the first half, while interest expense fell 61.3% and 64.6%, respectively.
- Loans declined $138.9 million from December 31, 2020. Lower warehouse lines, PPP loan forgiveness, and the sale of hotel/motel loans more than offset commercial real estate growth and residential mortgage purchases. Commercial real estate originations were $831.0 million in the first half.
- Asset-quality indicators weakened versus year-end: nonperforming assets rose to $183.7 million from $143.3 million; nonaccrual loans rose to $111.0 million from $85.2 million. The allowance for credit losses fell to $189.5 million from $206.7 million, or 1.41% of loans versus 1.52%.
- Q2 net charge-offs were $11.5 million, including $11.8 million of charge-offs associated with the sale of $119.3 million of higher-risk hotel/motel loans. The loans were sold at a 9.9% discount to amortized cost; the charge-offs had been reserved in earlier quarters.
- COVID-19-modified loans declined to $318.7 million, or 2.4% of loans, from $1.38 billion, or 10.2%, at year-end 2020. Troubled debt restructurings increased to $88.5 million from $51.6 million.
- Noninterest expense included a one-time $2.1 million software impairment. Professional fees increased, primarily due to litigation-related legal fees. First-half noninterest income declined 18.9%, including lower deposit service fees and swap fees.
- Available-for-sale securities were $2.27 billion. Their net unrealized gain fell to $19.6 million from $46.2 million at year-end, which the company attributed to higher Treasury rates; the first-half decline in securities-related AOCI was $17.7 million after tax.
Outlook, risks, and contingencies
- Management expected interest expense to continue declining over the next one to two quarters as higher-cost time deposits renewed at lower rates. It expected active COVID-19 modifications to fall below 1% of loans by Q3 2021. These are management expectations, not formal earnings guidance.
- Management said the economic forecast used in the credit allowance improved considerably, reflecting projected growth, lower unemployment, higher commercial real estate prices, stimulus, vaccination, and business reopenings. It cautioned that actual credit losses could exceed estimates, particularly if the pandemic’s effects worsened or lasted longer than expected.
- COVID-19, including the Delta variant, remained a significant source of uncertainty for borrower performance, demand, asset values, capital, and liquidity. Other cited risks include interest-rate movements, liquidity, credit concentrations, allowance-estimation assumptions, regulatory changes, and the transition away from LIBOR. The company could not predict the overall effect of LIBOR discontinuation.
- Commitments to extend credit were $2.48 billion; standby and other letters of credit totaled $171.2 million. The company said it did not expect current off-balance-sheet activities to materially affect future results or financial condition.
- Accrued legal loss contingencies were approximately $25,000. Additional losses were reasonably possible but not estimable; management did not expect the matters to be material. The company also reported $2.8 million of unrecognized tax benefits and a New York City tax examination, with no material adjustment expected.
- On July 22, 2021, the board authorized a new stock repurchase plan of up to $50 million. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether rising nonaccrual loans, past-due loans, TDRs, and the large individually evaluated commercial real estate reserve indicate further credit deterioration, despite the release of general reserves.
- Performance and remaining exposure of COVID-19-modified borrowers, especially hotel/motel and retail commercial real estate loans, as modifications expire.
- Whether lower deposit costs and deposit mix can sustain net interest margin as asset yields, market rates, and deposit competition change.
- The earnings and balance-sheet effects of loan sales, PPP forgiveness, loan growth, and further changes in securities’ unrealized gains or losses.
- Execution and potential capital impact of the $50 million repurchase authorization, alongside dividends and regulatory capital requirements.