HOPE Bancorp, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and six months ended June 30, 2016. At quarter-end the company was still BBCN Bancorp; it completed its merger with Wilshire Bancorp on July 29, 2016, changed its name to Hope Bancorp and its bank subsidiary to Bank of Hope, and began trading under HOPE. Wilshire’s balances and operations are not included in this quarter’s financial statements. The merger consideration was approximately $1.0 billion; Wilshire reported June 30 assets of about $4.9 billion, gross loans of $3.9 billion and deposits of $4.0 billion.
Financial performance and condition
| Metric | Q2 2016 / June 30, 2016 | Comparison |
|---|---|---|
| Net income; diluted EPS | $23.4 million; $0.29 | Q2 2015: $22.9 million; $0.29 |
| Six-month net income; diluted EPS | $47.0 million; $0.59 | Six months 2015: $44.3 million; $0.56 |
| Net interest income, before loan-loss provision | Q2: $71.1 million; six months: $142.7 million | Up 5.5% and 7.7%, respectively, year over year |
| Noninterest income | Q2: $10.7 million; six months: $19.5 million | Q2 up 2.1%; six months down 9.5% |
| Noninterest expense | Q2: $40.3 million; six months: $80.4 million | Up 4.5% and 3.5%, respectively |
| Net interest margin | Q2: 3.67%; six months: 3.75% | Down 24 and 14 basis points year over year |
| Return on average assets; efficiency ratio | Q2: 1.15%; 49.34% | Q2 2015: 1.26%; 49.58% |
| Total assets; net loans | $8.34 billion; $6.51 billion | December 31, 2015: $7.91 billion; $6.17 billion |
| Deposits; FHLB advances; subordinated debentures | $6.64 billion; $610.4 million; $42.4 million | December 31, 2015: $6.34 billion; $530.6 million; $42.3 million |
| Stockholders’ equity; cash and cash equivalents | $971.7 million; $286.2 million | December 31, 2015: $938.1 million; $298.4 million |
- Revenue, margins and earnings: Growth in net interest income primarily reflected larger loan and securities balances. Lower loan yields, higher deposit costs, and reduced acquisition-accounting accretion pressured margin. The six-month increase in net income was partly offset by lower noninterest income; Q2 earnings also absorbed higher interest and operating expenses.
- Cash flow: For the six months, operating activities provided $28.5 million, investing activities used $399.8 million, and financing activities provided $359.1 million. Cash declined $12.2 million to $286.2 million. Financing included $296.6 million net deposit growth and $80.0 million net FHLB borrowing; cash dividends paid were $17.5 million.
- Credit and loan mix: Loans outstanding were $6.59 billion, up $336.0 million from year-end; commercial and industrial real estate represented 78% of loans. The allowance was $76.4 million, or 1.16% of loans. Nonperforming assets were $109.8 million; nonperforming loans were $93.4 million. Modified loans totaled $75.9 million, including $50.8 million of accruing troubled debt restructurings. The filing reports nonperforming assets at 1.66% of loans plus OREO.
- Liquidity and capital: Management reported $1.08 billion of liquid assets, $1.90 billion of unused FHLB borrowing capacity and $559.3 million of unused FRB capacity, and stated liquidity was sufficient for reasonably foreseeable needs. The Bank was categorized as well-capitalized. Company capital ratios were 11.66% common equity Tier 1, 12.22% Tier 1 risk-based, 13.28% total risk-based and 11.14% leverage.
- Shareholder returns: The company declared a $0.11 per-share Q2 dividend ($0.22 per share for the first six months). Book value per share was $12.21; tangible book value per share was $10.85.
Material changes versus comparable periods
- Six-month net income rose 6.1%, while Q2 net income rose 2.0%; Q2 diluted EPS remained $0.29.
- Six-month interest income increased 10.1%, but interest expense rose 27.3%. Reported net interest margin fell to 3.75% from 3.89% for the first half.
- Six-month noninterest income declined $2.0 million, mainly from lower SBA loan-sale gains, deposit service fees and securities gains. Noninterest expense increased $2.7 million, including $2.7 million of merger and integration costs versus $78,000 a year earlier.
- At June 30, assets, net loans and deposits were higher than at December 31, 2015. The allowance was essentially unchanged; nonperforming assets declined slightly from $110.2 million at year-end, while nonaccrual loans increased to $42.4 million from $40.8 million.
- Q2 comprehensive income included $3.8 million of after-tax other comprehensive income, and accumulated other comprehensive income was $11.0 million versus a $1.8 million accumulated loss at year-end.
Outlook, management commentary, risks and unusual items
- The filing gives no numerical earnings or revenue guidance. Management says liquidity is adequate and the allowance is adequate for probable incurred losses, while cautioning that actual credit losses may exceed estimates.
- Management identified margin pressure from loan pricing, a greater mix of lower-yielding fixed-rate loans, rising deposit costs and lower acquisition-related accretion. Fixed-rate loans were 53% of the portfolio, versus 51% a year earlier.
- Merger and integration expense was a notable current-period item. The July 29 merger occurred after the reporting date, so the reported results do not include Wilshire; integration execution and combined-company results remain important uncertainties.
- Key disclosed risks include economic deterioration in operating markets, interest-rate and asset-liability risks, liquidity, credit losses and non-earning assets, merger integration, and regulatory requirements. Commercial real estate concentration is significant. A California Franchise Tax Board examination for 2009, 2010, 2012 and 2013 was ongoing; management expected no material adjustment. Routine litigation was not expected to have a material adverse effect.
- Interest-rate sensitivity modeling estimated net interest income would increase 2.50% under an immediate +200-basis-point scenario and decrease 0.29% under a -200-basis-point scenario; modeled market-value-of-equity volatility was negative in both cases. These are model estimates, not forecasts.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Post-merger financial reporting, integration costs and realized synergies, including the effects of adding Wilshire’s approximately $4.9 billion in assets.
- Whether loan growth can be sustained without further net interest margin compression, and the trajectory of deposit costs and acquired-loan accretion.
- Credit quality and reserve adequacy, especially commercial real estate concentrations, acquired-portfolio nonaccruals, charge-offs, restructured loans and the trend in criticized loans.
- Funding mix and liquidity resilience, including brokered and other wholesale deposits, certificate maturities, FHLB borrowing and the availability of contingent funding.
- Capital ratios and dividend capacity after merger accounting and integration, as well as the potential effects of changing interest rates.