HOPE Bancorp, Inc. — Q1 2019 Form 10-Q
Business context and period. Hope Bancorp is the holding company for Bank of Hope, a regional bank operating across multiple U.S. states and with a representative office in Seoul. This unaudited filing covers the three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018 unless noted.
Financial performance and condition
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $173.1 million | $150.4 million in Q1 2018 |
| Net interest income, before provision | $119.6 million | $120.1 million in Q1 2018 |
| Net interest margin | 3.39% | 3.66% in Q1 2018 |
| Provision for loan losses | $3.0 million | $2.5 million in Q1 2018 |
| Noninterest income | $11.4 million | $19.9 million in Q1 2018 |
| Noninterest expense | $70.8 million | $68.5 million in Q1 2018 |
| Net income / diluted EPS | $42.8 million / $0.34 | $51.2 million / $0.38 in Q1 2018 |
| Total assets | $15.40 billion | $15.31 billion |
| Loans receivable, net of allowance | $11.96 billion | $12.01 billion |
| Deposits | $12.25 billion | $12.16 billion |
| FHLB advances | $720.0 million | $821.3 million |
| Convertible notes, net; subordinated debentures | $195.8 million; $102.2 million | $194.5 million; $101.9 million |
| Cash and cash equivalents | $612.9 million | $459.6 million |
| Stockholders’ equity | $1.95 billion | $1.90 billion |
Cash flow. Operating activities provided $72.8 million in Q1 2019, investing activities provided $104.8 million, and financing activities used $24.4 million. Cash and cash equivalents increased $153.3 million to $612.9 million. In Q1 2018, the corresponding cash flows were $52.3 million provided by operations, $213.2 million used in investing, and $281.3 million provided by financing.
Profitability and capital. Return on average assets was 1.12%, return on average equity 8.91%, and the efficiency ratio 54.06%, compared with 1.44%, 10.61%, and 48.92%, respectively, in Q1 2018. At quarter-end, Hope Bancorp’s common equity Tier 1, Tier 1 risk-based, total risk-based, and leverage ratios were 11.59%, 12.36%, 13.10%, and 10.66%. Bank of Hope was categorized as well-capitalized and management reported capital above fully phased-in conservation-buffer requirements.
Material changes and management commentary
- Net income fell 16.5% year over year. Management attributed the decline mainly to lower noninterest income, especially the absence of SBA loan-sale gains and lower fair-value gains on equity investments.
- Net interest income was nearly flat despite 15.1% growth in interest income: interest expense rose 76.4%, primarily from higher deposit costs, deposit mix, and the convertible notes. Deposit cost increased to 1.57% from 0.91%; net interest margin declined 27 basis points.
- Noninterest income declined 42.5%. The company discontinued regular sales of guaranteed SBA loan portions in late 2018 and retained them on balance sheet; it sold no SBA loans in Q1 2019 versus $48.6 million in Q1 2018. Other income also reflected lower equity-investment fair-value gains.
- Noninterest expense increased 3.5%, including higher professional fees for audit, consulting, and CECL implementation. The efficiency ratio consequently worsened.
- Loans receivable declined modestly from year-end, while deposits rose 0.8%. Commercial real estate and commercial business loans increased, offset by declines in other categories. Commercial real estate represented about 70% of loans outstanding.
- Nonperforming assets increased to $138.5 million from $113.0 million at year-end; nonaccrual loans rose to $86.6 million from $53.3 million. The allowance for loan losses was $94.2 million, or 0.78% of loans. Total troubled debt restructurings were $67.3 million, up from $64.0 million.
- Cash liquidity and borrowing capacity were substantial: liquid assets were $1.99 billion, unused FHLB capacity $3.09 billion, and unused Federal Reserve discount-window capacity $844.1 million. Brokered deposits were $1.57 billion, and $1.84 billion of time deposits exceeded $250,000.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or operating guidance. Management stated that available liquidity sources were sufficient for reasonably foreseeable short- and intermediate-term needs.
- Management expects adoption of CECL, effective for the company in 2020, to require an additional loan-loss allowance that could potentially materially affect consolidated financial statements and regulatory capital ratios.
- Key disclosed risks include economic deterioration in operating markets, interest-rate and asset-liability mismatch risk, liquidity risk, credit losses and non-earning assets, and regulatory risk. Interest-rate simulations show estimated net interest income sensitivity of +5.11% under a +200-basis-point shock and -6.45% under a -200-basis-point shock.
- Legal claims had $100,000 of accrued loss contingencies. Additional losses were reasonably possible but not estimable; management did not expect the amounts to be material.
- The company adopted lease accounting on January 1, 2019, recognizing operating lease right-of-use assets of $62.4 million and lease liabilities of $62.8 million at quarter-end; adoption did not require an opening retained-earnings adjustment.
- Unrealized losses on available-for-sale securities were considered temporary; no other-than-temporary impairment was recognized. The filing reports no material change to previously disclosed risk factors and no material internal-control changes.
Most important facts for investors to verify
- Whether rising nonaccrual loans, nonperforming assets, and troubled restructurings continue, and how credit quality and allowance coverage evolve.
- Whether deposit pricing and funding mix continue to pressure net interest margin, particularly given brokered deposits and large time-deposit balances.
- Whether retaining SBA loans offsets lost sale gains with sufficient recurring interest and servicing economics.
- The expected size and timing of CECL’s allowance and regulatory-capital impact.
- Whether higher professional fees and other operating costs persist, and how management addresses efficiency.
- Reconcile the filing’s common-share counts: 126,635,584 shares at March 31 versus 126,663,405 outstanding as of May 1, 2019.