HOPE Bancorp, Inc. — 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016; the filing also presents unaudited fourth-quarter results. Hope Bancorp is a bank holding company operating Bank of Hope, focused on commercial and retail banking, particularly in Korean-American communities. The July 29, 2016 all-stock acquisition of Wilshire Bancorp substantially expanded the company, which ended the year with 73 branches and eight loan production offices. Wilshire’s results are included only from the acquisition date.
Key financial results
| Metric | 2016 | 2015 | Change / note |
|---|---|---|---|
| Interest income | $421.9 million | $313.7 million | Up 35%, primarily from Wilshire acquisition and larger earning-asset balances |
| Net interest income | $363.4 million | $273.0 million | Up 33% |
| Provision for loan losses | $9.0 million | $8.0 million | Up 13% |
| Noninterest income | $51.8 million | $43.7 million | Up 19%; lower SBA loan-sale gains partly offset other increases |
| Noninterest expense | $215.0 million | $153.4 million | Up 40%, including $16.9 million of merger and integration expense |
| Net income | $113.7 million | $92.3 million | Up 23% |
| Diluted earnings per share | $1.10 | $1.16 | Down 5%; increased share count following stock issuance for Wilshire |
| Net interest margin | 3.75% | 3.88% | Declined as asset yields fell and deposit costs rose |
| Return on average assets / equity | 1.10% / 8.47% | 1.25% / 10.11% | Both declined |
Fourth quarter: Net income was $40.6 million and diluted EPS was $0.30, compared with $22.9 million and $0.29, respectively, in fourth-quarter 2015. Fourth-quarter 2016 included $0.8 million in loan-loss provision and $66.7 million in noninterest expense.
Balance sheet, liquidity, and credit
- Total assets were $13.44 billion, up 70% from $7.91 billion; loans, net of allowance, were $10.46 billion and deposits were $10.64 billion. Growth was primarily acquisition-related.
- Cash and cash equivalents were $437.3 million. Liquid assets were reported at $1.53 billion. Operating cash flow was $130.6 million; investing activities used $463.4 million, and financing activities provided $471.7 million.
- FHLB advances totaled $754.3 million; subordinated debentures were $99.8 million. Available FHLB borrowing capacity was $2.61 billion. Average gross loans to average deposits were 99%.
- Regulatory capital ratios remained above minimums: company common equity Tier 1 was 12.10%, and Bank of Hope’s was 12.75%. Management said the company and bank met applicable capital requirements.
- Nonperforming assets were $111.2 million, or 0.83% of assets, versus $110.2 million and 1.39% in 2015. Criticized loans increased to $556.7 million from $307.8 million. The allowance for loan losses was $79.3 million, or 0.75% of gross loans, compared with 1.22% a year earlier.
- About 78% of loans were real estate loans; approximately 74.5% of loans were in California, with 69.1% in Los Angeles County. Commercial real estate exposure is concentrated in property types including retail and hotels/motels.
Material changes versus the prior year
- The Wilshire acquisition added approximately $4.63 billion of assets at fair value and $357.6 million of goodwill. Hope issued 55.5 million shares as merger consideration. Goodwill at year-end totaled $463.0 million.
- Year-end assets, loans, deposits, and stockholders’ equity increased sharply, largely due to the acquisition. Merger and integration expense was $16.9 million in 2016, mostly Wilshire-related.
- Net interest margin declined from 3.88% to 3.75%; loan yields decreased while funding costs increased. SBA loan-sale gains fell to $8.8 million from $12.7 million.
- Net income rose, but diluted EPS declined as the weighted-average share count increased after the merger. The annual common dividend was $0.45 per share, versus $0.42 in 2015.
Outlook, risks, and unusual items
- No numerical earnings or financial guidance is provided. Management expected further branch consolidation in 2017, which could reduce occupancy expense, and anticipated closing the U & I Financial Corp. merger in the third quarter of 2017, subject to approvals and other conditions. The proposed stock transaction valued U & I at approximately $48.8 million, subject to contractual adjustments.
- The principal risks include interest-rate and liquidity exposure; credit and collateral risk, especially in commercial real estate; economic concentration in Southern California and ties to South Korea; acquisition integration and goodwill impairment; cybersecurity and regulatory compliance; and increased costs and supervision after crossing $10 billion in assets.
- Management and the auditor reported material weaknesses in internal control over financial reporting, including acquired-loan controls, IT conversion, staffing, cash-flow reporting, and controls over impaired loans and the allowance for loan losses. The auditor issued an adverse opinion on internal control effectiveness. Management reported remediation efforts underway; the weaknesses had not yet been considered remediated. The auditor’s opinion on the financial statements was unmodified.
- Legal claims had $557,000 of accrued loss contingencies. Additional losses were reasonably possible but not estimable; management did not expect the matters to be material.
- The 2015 cash-flow presentation was revised to remove unfunded affordable-housing commitments from reported cash flows; the company said the correction was not material and did not require amendment of prior filings. No impairment was recorded on goodwill or securities in unrealized-loss positions.
Most important facts for investors to verify
- Whether criticized-loan growth, credit quality, and the 0.75% allowance-to-loans ratio are adequately captured by reserves, particularly after the acquisition.
- Progress and independent testing of remediation for the disclosed material weaknesses, including acquired-loan records and cash-flow controls.
- Wilshire integration results, realized cost savings, merger expenses, and the assumptions supporting $463.0 million of goodwill.
- Trends in net interest margin, deposit pricing and retention, brokered deposits, and sensitivity to interest-rate changes.
- Status, final consideration, approvals, and integration risks for the proposed U & I transaction.