HOPE Bancorp, Inc. — Q3 2017 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2017. Hope Bancorp is the holding company for Bank of Hope, operating across nine states. The Wilshire Bancorp merger closed July 29, 2016; accordingly, Q3 2017 includes three months of combined operations, while Q3 2016 includes one month of standalone and two months of combined operations, limiting comparability.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $123.3 million | $103.5 million | $355.0 million | $246.1 million |
| Provision for loan losses | $5.4 million | $6.5 million | $13.8 million | $8.2 million |
| Noninterest income | $16.2 million | $14.1 million | $50.0 million | $33.6 million |
| Noninterest expense | $61.8 million | $67.8 million | $193.6 million | $148.2 million |
| Net income | $44.6 million | $26.1 million | $121.5 million | $73.1 million |
| Diluted EPS | $0.33 | $0.22 | $0.90 | $0.79 |
- Margins and returns: Q3 net interest margin was 3.83%, versus 3.77%; nine-month margin was 3.78%, versus 3.76%. Q3 return on average assets was 1.30% and return on average equity 9.26%. The Q3 efficiency ratio improved to 44.32% from 57.68%.
- Balance sheet at September 30: Assets were $14.15 billion, up 5.3% from year-end 2016. Loans outstanding were $10.96 billion, up $419.8 million; available-for-sale securities were $1.87 billion, up $311.6 million. Deposits totaled $10.99 billion, up 3.3%.
- Credit quality: Allowance for loan losses was $83.6 million, or 0.76% of loans, compared with $79.3 million and 0.75% at year-end. Nonperforming assets were $125.7 million, including $108.5 million in nonperforming loans; nonperforming loans were 0.99% of loans versus 0.85% at year-end. TDRs increased to $75.7 million from $70.9 million.
- Cash flow and liquidity: Nine-month operating cash flow was $138.3 million; investing cash use was $742.8 million and financing cash provided was $572.4 million. Cash and cash equivalents ended at $405.3 million, down $32.0 million from year-end. Management reported $1.82 billion in liquid assets, $2.32 billion of unused FHLB capacity, and $555.2 million of unused FRB capacity, and believes liquidity is adequate for foreseeable needs.
- Debt and capital: FHLB advances were $1.02 billion, up from $754.3 million at year-end; subordinated debentures were $100.6 million. Stockholders’ equity was $1.93 billion. The Bank was categorized as well-capitalized; its CET1, total risk-based, Tier 1 risk-based, and leverage ratios were 12.94%, 13.65%, 12.94%, and 11.63%, respectively.
Material changes and management commentary
- Q3 net income rose 70.7% year over year, which management attributed principally to the greater contribution from Wilshire-acquired assets and loan growth. Nine-month comparisons are also affected by the merger’s timing.
- Q3 net interest income increased 19.1%; interest income growth from acquired and expanded earning assets and higher rates exceeded the effect of higher funding costs. The Q3 weighted-average deposit cost increased to 0.75% from 0.56%.
- Nine-month provision increased $5.6 million year over year, primarily reflecting higher net charge-offs and qualitative allowance factors; management cited a large customer relationship charged off in Q1. Nine-month net charge-offs were $9.5 million versus $4.6 million.
- Noninterest income growth included higher SBA loan-sale gains. The company sold $140.9 million of SBA loans in the first nine months, compared with $65.7 million in the prior-year period. Nine-month expenses increased partly because of the expanded post-merger business and staffing; Q3 expenses fell as merger costs declined.
Outlook, risks, contingencies and unusual items
- No specific earnings or financial guidance is provided. The company states that interim results are not necessarily indicative of full-year results.
- The proposed U & I Financial Corp. merger was mutually terminated September 15, 2017, after required regulatory approval was not obtained by the transaction deadline. Each party bears its own costs, with no termination fee.
- Control weakness: Disclosure controls and procedures were deemed ineffective at quarter-end because of material weaknesses previously identified in the 2016 Form 10-K. Remediation steps were underway, but management said the weaknesses would not be considered remediated until controls operated and were tested effectively.
- Interest-rate and liquidity risks remain important. In the company’s simulation, an immediate +200-basis-point rate shock indicated +0.93% estimated net interest income sensitivity and a 4.51% decline in market value of equity; a -200-basis-point shock indicated a 9.29% decline in estimated net interest income.
- Off-balance-sheet commitments included $1.57 billion to extend credit, $68.4 million of standby letters of credit, $60.0 million of other letters of credit, and $42.4 million of affordable-housing investment commitments. Accrued legal loss contingencies were $428,000; additional losses were reasonably possible, but management could not estimate a range and did not expect a material financial-statement impact.
Important facts for investors to verify
- How much reported earnings growth reflects underlying operations versus Wilshire merger timing, acquired-loan discount accretion, and large loan payoffs.
- Whether asset quality and allowance coverage remain adequate as nonperforming loans and TDR balances rise and charge-offs increase.
- Whether deposit costs, brokered deposits ($808.4 million), and higher FHLB borrowing continue to affect margins and funding stability.
- Progress and testing of remediation for the disclosed material weaknesses, particularly allowance and impaired-loan controls.
- Potential outcomes of legal claims, tax examinations, and the company’s significant credit and affordable-housing commitments.