Business context and reporting period
Hope Bancorp, Inc. is a bank holding company whose principal subsidiary, Bank of Hope, provides commercial and retail banking, with a focus on small and midsize businesses and Korean-American communities. This Form 10-K covers the fiscal year ended December 31, 2018; quarterly data is unaudited. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Interest income | $650.2 million | $572.1 million |
| Net interest income | $487.9 million | $481.4 million |
| Net income | $189.6 million | $139.4 million |
| Diluted earnings per share | $1.44 | $1.03 |
| Net interest margin | 3.53% | 3.80% |
| Return on average assets | 1.29% | 1.02% |
| Return on average equity | 9.92% | 7.31% |
- Pre-tax income declined 3% to $255.5 million. Net income rose 36%, principally because the Tax Cuts and Jobs Act lowered the federal corporate tax rate; the effective tax rate fell to 25.79% from 47.15%.
- Net interest income increased just 1% as higher asset yields and loan growth were offset by sharply higher deposit and borrowing costs. Average cost of deposits rose to 1.16% from 0.70%; the efficiency ratio worsened to 50.67% from 48.67%.
- Noninterest income decreased 9% to $60.2 million, including lower deposit fees, loan servicing fees, and gains on SBA loan sales. Noninterest expense increased 4% to $277.7 million.
- At year-end, total assets were $15.31 billion, gross loans $12.10 billion, deposits $12.16 billion, and stockholders’ equity $1.90 billion. Loans grew 9% and deposits 12% year over year.
- Credit metrics: provision for loan losses was $14.9 million; net charge-offs were $6.9 million, or 0.06% of average loans. Nonperforming assets were $113.0 million (0.74% of assets), down from $125.2 million (0.88%) in 2017. The allowance was $92.6 million, or 0.77% of loans.
- Cash and cash equivalents were $459.6 million. Liquid assets totaled $1.83 billion; unused FHLB borrowing capacity was $2.97 billion. Operating cash flow was $219.9 million, investing cash outflow $1.15 billion, and financing cash inflow $895.1 million.
- FHLB advances were $821.3 million, down from $1.16 billion, with no federal funds purchased at year-end. The company also reported $194.5 million of convertible notes, net, and $101.9 million of subordinated debentures. Regulatory capital ratios remained above applicable requirements: company CET1 was 11.44% and Bank of Hope CET1 was 13.63%.
Material changes and Q4 detail
- Net interest margin fell 27 basis points year over year, while net interest spread fell 42 basis points to 3.04%. Interest expense rose 79%, including an 80% increase in deposit interest expense, as rates rose and time deposits expanded.
- Loan growth was led by commercial business loans, up 19% to $2.13 billion, and consumer loans, up 62% to $1.05 billion. Commercial real estate remained the largest category at 71% of loans, down from 76%.
- Brokered deposits increased to $1.57 billion, or 12.9% of deposits, from $797 million, or 7.3%. Time deposits increased to $5.87 billion from $4.27 billion.
- Q4 2018 net income was $44.4 million, versus $18.0 million in Q4 2017; Q4 2017 included a substantial tax provision. Q4 2018 net interest income was $121.9 million, provision for loan losses $2.8 million, and diluted EPS $0.35.
- Unrealized losses on available-for-sale securities increased to $47.4 million before tax, from $31.2 million. Management attributed the decline in fair value to higher interest rates and reported no other-than-temporary impairment.
Outlook, commentary, risks and unusual items
- The filing provides no formal earnings, revenue, or margin guidance. Management reported adequate liquidity and no known demands, commitments, trends, or uncertainties reasonably likely to materially adversely affect liquidity.
- The company decided in Q4 to retain most newly originated guaranteed SBA 7(a) loans rather than regularly sell them, citing reduced secondary-market premiums. This may reduce sale gains and servicing income while increasing on-balance-sheet loans and interest income.
- A branch rationalization plan affecting six offices was announced in December 2018, subject to regulatory non-objection and expected to be implemented by Q2 2019. The company recorded $1.7 million in restructuring costs and projected approximately $1.9 million in annual pre-tax savings.
- CECL, effective for the company in 2020, is expected to require an additional loan-loss allowance and could materially affect financial statements and regulatory capital; the amount was not yet determined. Adoption of the lease standard in 2019 was expected to add $64.3 million each in right-of-use assets and lease liabilities, without a material income-statement impact.
- Key risks include geographic and commercial-real-estate concentration (about 80% of loans were real-estate secured; 68.1% of loans were in California), rising funding costs, credit losses, liquidity and deposit-renewal risk, cybersecurity and operational threats, regulatory compliance, and adverse economic conditions in the company’s markets or South Korea.
- The company recorded $755,000 in accrued legal loss contingencies. Additional losses were reasonably possible but not estimable; management did not expect the matters to be material. No material unresolved staff comments or auditor disagreements were reported.
Important facts for investors to verify
- Whether deposit growth and funding costs remain manageable, particularly given the increase in brokered and time deposits and their maturity schedule.
- Whether commercial real-estate concentrations, criticized loans, nonaccrual loans, and allowance coverage remain acceptable as the portfolio grows.
- The realized effects of retaining SBA loans on interest income, sale gains, servicing fees, and capital and liquidity needs.
- The eventual CECL allowance and capital impact, and whether projected branch savings and reduced core-platform fees are achieved.
- The effect of convertible-note conversion, put or cash-settlement features on future liquidity, dilution, and capital allocation; the company repurchased $150 million of stock in 2018 and paid $71.6 million in dividends.
- Whether unrealized securities losses recover and whether regulatory, legal, or other contingencies change materially.