Hope Bancorp, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; financial statements are unaudited. Hope Bancorp is the holding company for Bank of Hope.
Financial performance and position
| Metric | Q3 2018 / Sept. 30, 2018 | Comparable period / prior date |
|---|---|---|
| Net income | $46.4 million; diluted EPS $0.36 | Q3 2017: $44.6 million; $0.33 |
| Net interest income, before provision | $123.1 million | Q3 2017: $123.3 million |
| Net interest margin | 3.47% | Q3 2017: 3.83% |
| Noninterest income / expense | $13.4 million / $67.5 million | Q3 2017: $16.2 million / $61.8 million |
| Loans, net of allowance | $11.84 billion | Dec. 31, 2017: $11.02 billion |
| Deposits | $12.05 billion | Dec. 31, 2017: $10.85 billion |
| Cash and cash equivalents | $522.7 million | Dec. 31, 2017: $492.0 million |
| Total assets / stockholders’ equity | $15.23 billion / $1.90 billion | Dec. 31, 2017: $14.21 billion / $1.93 billion |
Nine-month results: Net income was $145.1 million ($1.09 diluted EPS), up 19.5% from $121.5 million ($0.90). Net interest income before provision rose 3.1% to $366.0 million. Provision for loan losses was $12.1 million, versus $13.8 million.
Cash flows, nine months: Operating activities provided $180.4 million; investing activities used $1.02 billion, mainly reflecting $812.7 million of net loan growth and securities purchases; financing activities provided $868.3 million, primarily from $1.20 billion of deposit growth and convertible-note proceeds, partly offset by debt repayments, dividends, and share repurchases. Cash increased $30.7 million.
Debt and liquidity: FHLB advances were $836.6 million, down from $1.16 billion at year-end; no federal funds were purchased at quarter-end. Convertible notes had a $193.3 million carrying value, and subordinated debentures were $101.7 million. Available unused borrowing capacity was $2.87 billion at the FHLB and $784.5 million at the Federal Reserve discount window. Management said liquidity sources were sufficient for reasonably foreseeable short- and intermediate-term needs.
Credit and capital: Allowance for loan losses was $90.6 million, or 0.76% of loans. Nonperforming assets were $118.2 million; nonperforming assets to loans and OREO were 0.99%. The Bank was categorized as well capitalized. Company ratios included 11.61% common equity Tier 1, 13.10% total risk-based capital, and 10.13% leverage.
Material changes versus comparable periods
- Q3 net income rose 4.1% even as pretax income fell to $61.8 million from $72.3 million; the lower tax provision was the principal reason. The effective tax rate fell to 25.00% from 38.34%, largely following the federal corporate tax rate reduction and increased affordable-housing tax credits.
- Q3 net interest income was nearly flat: higher loan interest income was offset by sharply higher funding costs. Interest expense rose 83.3% year over year; the average cost of deposits increased to 1.24% from 0.75%, while net interest margin declined 36 basis points.
- Q3 noninterest income decreased 17.2%, notably from lower gains on SBA and other loan sales and lower deposit and loan-servicing fees. Noninterest expense increased 9.1%, including higher staffing, professional fees, FDIC assessments, and credit-related expenses.
- Loans grew $824.6 million and deposits grew $1.20 billion from year-end. Time deposits and brokered deposits increased; brokered deposits were $1.40 billion, versus $797.0 million at year-end.
- Unrealized losses on available-for-sale securities increased: gross losses were $78.4 million at September 30, 2018, versus $33.1 million at year-end. The company attributed market declines primarily to interest-rate movements and recognized no other-than-temporary impairment.
- The company issued $217.5 million principal amount of 2.00% convertible senior notes in Q2 and repurchased $100 million of stock (5.6 million shares). A further $50 million repurchase authorization was approved in September; no shares had been repurchased under that authorization by quarter-end.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or financial guidance. Management highlighted loan growth and higher loan yields, while noting rising deposit costs, deposit competition, and margin pressure.
- Interest-rate sensitivity modeling estimated that an immediate +200 basis-point rate change would increase net interest income 6.78% and reduce market value of equity 4.22%; a -200 basis-point change would reduce net interest income 9.49%. These are model estimates, not forecasts.
- Credit risks include potential deterioration in the company’s markets, higher losses, and uncertainty in allowance estimates. Nonaccrual loans increased to $56.3 million from $46.8 million at year-end; total troubled debt restructurings declined to $73.7 million from $78.5 million.
- CECL adoption is expected to require an additional allowance and could materially affect financial statements and regulatory capital; the amount was not yet clear. Lease accounting adoption in 2019 was expected to affect the balance sheet and capital ratios, but not materially affect income.
- Legal claims had $0.5 million of accrued loss contingencies. Additional losses were possible, but management could not estimate a range and did not expect the amounts to be material.
- Assets exceeded $15 billion during Q3, changing the regulatory treatment of trust preferred securities: they no longer qualified as Tier 1 capital and were included in Tier 2. The company said capital ratios remained sufficient to meet the fully phased-in conservation buffer.
Important facts for investors to verify
- Whether deposit pricing and the mix of time and brokered deposits continue to pressure net interest margin.
- Loan-loss trends, especially the rise in nonaccrual loans and Q3 net charge-offs, and whether the allowance remains adequate.
- How much of the securities portfolio’s unrealized losses may persist or affect capital if securities must be sold.
- The eventual CECL allowance impact, lease-accounting balance-sheet effect, and related regulatory-capital changes.
- Convertible-note terms, dilution or cash-settlement implications, and use of the additional $50 million repurchase authorization.