Hope Bancorp, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; balance-sheet figures are as of September 30, 2019, compared with December 31, 2018 unless noted. Hope Bancorp is the holding company for Bank of Hope, with branches across eight U.S. states and a representative office in Seoul. Unaudited consolidated results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Interest income | $172.4 million | $167.8 million | $519.0 million | $478.1 million |
| Net interest income | $116.3 million | $123.1 million | $353.1 million | $366.0 million |
| Provision for loan losses | $2.1 million | $7.3 million | $6.3 million | $12.1 million |
| Noninterest income | $13.0 million | $13.4 million | $36.7 million | $48.6 million |
| Noninterest expense | $70.0 million | $67.5 million | $212.2 million | $207.5 million |
| Net income | $42.6 million | $46.4 million | $128.0 million | $145.1 million |
| Diluted EPS | $0.34 | $0.36 | $1.01 | $1.09 |
Q3 net income fell 8.2% year over year; nine-month net income fell 11.8%. Net interest margin was 3.25% for Q3 and 3.31% for the nine-month period, down from 3.47% and 3.58%, respectively. Q3 return on average assets was 1.12% (1.24% prior year); the efficiency ratio was 54.15% (49.38%).
Financial position, funding and cash flow
- Total assets were $15.38 billion; loans receivable were $12.10 billion, nearly unchanged from year-end 2018. Commercial business loans grew to $2.48 billion from $2.13 billion, while total commercial real estate loans declined to $8.24 billion from $8.40 billion.
- Deposits were $12.23 billion, up 0.7% from year-end. Noninterest-bearing deposits were $3.03 billion. Brokered deposits declined to $1.25 billion from $1.57 billion. FHLB advances were $625 million, down from $821 million; the company also reported $198.2 million of convertible notes and $102.8 million of subordinated debentures.
- Cash and cash equivalents were $549.4 million, up from $459.6 million. Nine-month operating cash flow was $148.9 million, investing cash flow was positive $110.6 million, and financing cash flow was negative $169.7 million; cash increased $89.8 million.
- Management reported $1.87 billion in liquid assets, $3.18 billion of unused FHLB borrowing capacity and $766.4 million of unused Federal Reserve discount-window capacity, and considered liquidity sufficient for reasonably foreseeable needs.
- Stockholders’ equity was $2.03 billion. Company regulatory capital ratios included CET1 of 11.89%, Tier 1 risk-based capital of 12.65%, total risk-based capital of 13.38%, and leverage capital of 11.18%. The Bank was categorized as well-capitalized.
Material changes, risks and outlook
- Margin pressure: Q3 net interest income declined 5.6%, despite higher interest income, as interest expense rose 25.7%, mainly from higher deposit costs and deposit balances. Deposit cost was 1.62% in Q3 versus 1.24% a year earlier. Management reduced some deposit rates during the quarter following Federal Reserve rate cuts.
- Lower SBA sale gains: The company stopped regularly selling guaranteed SBA loans in late 2018 and retained them on balance sheet. No SBA loans were sold in the first nine months of 2019, versus $149.6 million sold in the comparable 2018 period; associated gains declined $9.3 million. Management cited lower secondary-market premiums and the goal of supporting net interest margin.
- Expenses and one-off factors: Nine-month expenses rose 2.2%, including higher professional fees (CECL implementation and consulting) and salaries. Lower FDIC assessments included a $1.5 million small-bank assessment credit in Q3. Six branches were closed, with the final closures in Q2 2019.
- Credit: The allowance for loan losses was $93.9 million, or 0.78% of loans. Nonaccrual loans were $42.2 million versus $53.3 million at year-end; total nonperforming assets were $96.7 million versus $113.0 million. OREO increased to $19.4 million from $7.8 million, including $14.6 million of loans transferred into OREO during the nine months. Management viewed the allowance as adequate but cautioned actual losses could exceed estimates.
- CECL: Adoption was planned for January 1, 2020. Based on then-current expectations, management estimated the allowance could rise approximately 30%–40%, with a fully phased-in CET1 ratio reduction of about 22–29 basis points. Estimates remained subject to change with portfolio composition, credit quality, economic conditions and model assumptions.
- Other risks and contingencies: Management highlighted economic deterioration, interest-rate and liquidity risk, credit losses, allowance estimation and regulatory risk. LIBOR-indexed instruments extend beyond 2021; the company had not yet determined the transition’s overall effect. Accrued legal loss contingencies were $285,000; additional losses were reasonably possible but not estimable, and management did not expect a material impact. No material risk-factor changes were reported.
- Guidance: The filing provides no specific earnings or revenue guidance. It describes plans and estimates, including CECL adoption, but these are forward-looking and uncertain.
Important facts for investors to verify
- Whether deposit pricing stabilizes enough to arrest net interest margin compression and the rise in funding costs.
- Whether retaining SBA loans improves recurring interest income enough to offset foregone sale gains and servicing revenue.
- Credit performance in commercial business and commercial real estate portfolios, OREO dispositions, and the adequacy of reserves as CECL is implemented.
- The final CECL allowance and capital impact, and the company’s progress addressing model, data, process and control requirements.
- Funding concentration and liquidity, including brokered and large time deposits, as well as the LIBOR transition plan.