HOPE Bancorp, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Financial statements are unaudited; comparisons are with the corresponding 2017 periods unless otherwise noted. Dollar amounts below are in millions except per-share data and ratios.
Business context and financial position
Hope Bancorp is the holding company for Bank of Hope, operating across multiple U.S. states and with a representative office in Seoul, Korea. At June 30, 2018, total assets were $14.87 billion, up $663 million (4.7%) from December 31, 2017, mainly reflecting loan and securities growth.
| Metric | June 30, 2018 | Prior comparison |
|---|---|---|
| Loans receivable, gross | $11.67 billion | $11.10 billion at Dec. 31, 2017 |
| Deposits | $11.73 billion | $10.85 billion at Dec. 31, 2017 |
| Cash and cash equivalents | $466 million | $492 million at Dec. 31, 2017 |
| Available-for-sale securities | $1.84 billion | $1.72 billion at Dec. 31, 2017 |
| Stockholders’ equity | $1.91 billion | $1.93 billion at Dec. 31, 2017 |
Results, margins, cash flow and funding
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income before provision | $122.8 | $116.8 | $242.9 | $231.7 |
| Noninterest income | $15.3 | $16.1 | $35.1 | $33.7 |
| Noninterest expense | $71.6 | $64.0 | $140.1 | $131.7 |
| Net income | $47.5 | $40.7 | $98.8 | $76.9 |
| Diluted EPS | $0.36 | $0.30 | $0.73 | $0.57 |
| Net interest margin | 3.61% | 3.75% | 3.64% | 3.76% |
| Efficiency ratio | 51.87% | 48.17% | 50.39% | 49.63% |
- Net income rose 16.8% in Q2 and 28.4% for the first half. Management attributed the improvement largely to higher loan balances and yields and the lower federal corporate tax rate; higher deposit and borrowing costs partly offset revenue growth.
- Interest expense increased 70.8% in Q2 and 70.5% in the first half, while loan yields rose. The weighted-average deposit cost reached 1.06% in Q2, up from 0.68% a year earlier.
- Noninterest expenses increased, principally from higher salaries and benefits, staffing, technology, compliance and professional costs. Q2 noninterest income declined, including lower deposit-service and servicing fees; first-half noninterest income increased, partly due to $3.5 million of equity-investment fair-value gains recognized in earnings under newly adopted accounting guidance.
- Operating cash flow was $105.5 million for the first half, compared with $93.9 million in 2017; investing activities used $727.7 million, largely reflecting loan growth and securities purchases. Financing activities provided $596.6 million, including deposit growth and convertible-note proceeds, partly offset by debt repayments, dividends and stock repurchases. Cash declined $25.6 million to $466.4 million.
- Funding included $836.994 million of FHLB advances, $101.4 million of subordinated debentures and $192.1 million carrying value of convertible notes. FHLB advances declined from $1.16 billion at year-end; federal funds purchased were repaid. The company reported $2.76 billion of unused FHLB capacity, $609 million of unused Federal Reserve discount-window capacity, and $1.85 billion of liquid assets.
Credit, capital and material changes
- The allowance for loan losses was $89.9 million, or 0.77% of loans, versus $84.5 million, or 0.76%, at year-end. First-half provision was $4.8 million versus $8.4 million; the company recorded net recoveries of $0.5 million, compared with net charge-offs of $7.6 million in the first half of 2017.
- Nonperforming assets were $129.1 million, up from $125.2 million at year-end. Nonaccrual loans increased to $68.2 million from $46.8 million; total nonperforming loans were $120.5 million. Total troubled debt restructurings fell to $69.6 million from $78.5 million.
- Deposits grew 8.2% from year-end. Brokered deposits rose to $1.20 billion from $797 million. Time deposits over $250,000 were $1.54 billion. These funding sources and deposit pricing merit attention.
- The company issued $217.5 million of 2.00% convertible senior notes due 2038, with conversion and cash repurchase features. It repurchased 4.36 million shares for $79.0 million at an average $18.1032 per share under a $100 million authorization, leaving approximately $21.0 million authorized. The notes’ initial conversion price was about $22.18 per share.
- Unrealized losses on available-for-sale securities increased: gross losses were $65.6 million at June 30, 2018 versus $33.1 million at year-end. Management considered the losses temporary and reported no other-than-temporary impairment.
- Capital remained above applicable requirements. The company’s CET1 ratio was 11.74%, total risk-based capital ratio 13.24%, and leverage ratio 11.06%; the Bank was categorized as well-capitalized.
Outlook, risks and contingencies
- The filing provides no numerical earnings or growth guidance. Management said available liquidity was sufficient for reasonably foreseeable short- and intermediate-term needs and described ongoing investment in lending, compliance, risk, technology and accounting capabilities.
- Key stated risks include economic deterioration in operating markets, interest-rate and asset-liability mismatch risk, liquidity and funding risks, credit losses and regulatory changes. The filing’s interest-rate simulation estimated net interest income sensitivity of +6.43% for a +200 basis-point shock and −9.22% for a −200 basis-point shock; modeled market value of equity fell 4.52% in the +200-basis-point scenario.
- The company expects CECL adoption, effective for it in 2020, to increase the required loan-loss allowance and potentially materially affect financial statements and regulatory capital ratios. Lease accounting adoption was expected in 2019; financial impact was still being evaluated.
- Legal claims had $420,000 of accrued loss contingencies. Additional losses were reasonably possible, but management could not estimate a range and did not expect amounts to be material. Unrecognized tax benefits were $2.4 million; management said they could decrease by that amount within 12 months through a state-tax settlement.
- Convertible-note conversions or holder repurchase rights could require significant cash payments and adversely affect liquidity. The company also identified risks from rising rates, deposit competition, and possible credit deterioration.
Most important facts for investors to verify
- Whether higher deposit costs and brokered-deposit reliance continue to pressure net interest margin and liquidity.
- Whether rising nonaccrual loans and nonperforming assets lead to increased provisions, charge-offs or collateral losses.
- The sustainability of earnings growth after separating tax-rate benefits, acquired-loan accretion and equity fair-value gains from core operating performance.
- The future impact of the convertible notes, including cash settlement obligations, dilution, and remaining share-repurchase authorization.
- The effect of CECL implementation on reserves and regulatory capital, and whether securities unrealized losses remain recoverable without forced sales.