Hope Bancorp, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. Hope Bancorp is the holding company for Bank of Hope, a commercial and retail bank serving businesses and consumers through branches and loan offices. This unaudited report covers the three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Dollar amounts below are in millions.
Key financial metrics
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior date |
|---|---|---|
| Net interest income | $122.6 | $119.3 in Q1 2020 |
| Provision for credit losses | $3.3 | $28.0 in Q1 2020 |
| Noninterest income / expense | $8.8 / $70.4 | $13.3 / $72.1 in Q1 2020 |
| Net income; diluted EPS | $43.7; $0.35 | $26.0; $0.21 in Q1 2020 |
| Net interest margin / spread | 3.06% / 2.80% | 3.31% / 2.77% in Q1 2020 |
| Return on average assets / equity | 1.02% / 8.53% | 0.67% / 5.12% in Q1 2020 |
| Total assets | $17,198.9 | $17,106.7 at Dec. 31, 2020 |
| Loans receivable, gross / net of allowance | $13,702.6 / $13,494.7 | $13,563.2 / $13,356.5 at Dec. 31, 2020 |
| Deposits | $14,301.3 | $14,333.9 at Dec. 31, 2020 |
| Cash and cash equivalents | $376.7 | $350.6 at Dec. 31, 2020 |
| Stockholders’ equity | $2,045.6 | $2,053.7 at Dec. 31, 2020 |
| FHLB advances / convertible notes / subordinated debentures | $400.0 / $215.5 / $104.5 | $250.0 / $204.6 / $104.2 at Dec. 31, 2020 |
Operating cash flow was $58.1, investing cash flow was negative $130.1, and financing cash flow was $98.0. Cash and cash equivalents increased $26.1 during the quarter. The company declared and paid a $0.14 per-share dividend.
Material changes and credit quality
- Net income rose 68.3% year over year, mainly because the credit-loss provision fell by $24.7. Net interest income increased 2.8% as sharply lower funding costs more than offset reduced interest income.
- Interest income declined 17.1%, reflecting lower rates on variable-rate loans and investments and lower acquired-loan discount accretion. Net interest margin fell 25 basis points to 3.06%; management cited lower yields on earning assets, partly offset by lower deposit and borrowing costs.
- Noninterest income declined 33.6%, primarily due to lower deposit service fees, swap fees, and other income. Noninterest expense decreased 2.4% to $70.4.
- Gross loans increased $139.4 from year-end, largely reflecting growth in commercial business and second-round PPP loans. PPP balances rose to $715.5 from $452.7; PPP loans are government-guaranteed and excluded from allowance coverage.
- The allowance for credit losses was $207.9, or 1.52% of loans, broadly unchanged from year-end. Nonaccrual loans increased to $109.9 from $85.2; nonperforming assets rose to $170.5 from $143.3. Management attributed a substantial individual-loan reserve increase to a large commercial real estate loan migrating to nonaccrual.
- COVID-19-modified loans declined to $949.1, or 6.9% of loans, from $1,380.2, or 10.2%, at year-end. About 55% of current modified balances were hotel/motel loans. Total TDR loans increased to $79.7 from $51.6.
- Available-for-sale securities declined to $2,233.7 from $2,285.6. Net unrealized gains fell to $5.4 from $46.2, primarily due to higher Treasury rates; the quarter recorded a $27.5 after-tax other comprehensive loss.
Outlook, risks, contingencies, and unusual items
- No formal earnings or financial guidance was provided. Management expected deposit interest expense to continue declining over the next few quarters as higher-cost time deposits renew at lower rates. It expected active COVID-19 modifications to fall to approximately 2%–3% of loans by the end of Q2 2021.
- Branch consolidations closed five offices in early 2021; management projected approximately $2.6 in annual cost savings. It recorded about $2.4 in related restructuring costs in Q4 2020.
- Management said improved economic forecasts, vaccinations, stimulus, and reopening supported the lower Q1 credit provision, but warned that a worse or prolonged pandemic downturn could cause actual credit losses to exceed estimates and adversely affect earnings, capital, and liquidity.
- Liquidity included $2.22 billion in liquid assets, $3.86 billion of unused FHLB capacity, and $667.3 million of unused Federal Reserve discount-window capacity. Management reported no meaningful pandemic-related deposit runoff and considered available liquidity sufficient for foreseeable needs.
- The Bank was categorized as well-capitalized. At March 31, the Bank’s CET1, total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios were 13.10%, 14.35%, 13.10%, and 11.29%, respectively.
- The company early adopted ASU 2020-06 for convertible debt accounting on January 1, 2021. Adoption increased beginning retained earnings by $10.7 and reduced quarterly convertible-note interest expense by about $1.0 versus Q1 2020.
- LIBOR-linked instruments remain exposed to transition risk; the company was evaluating alternatives and the related accounting relief. Legal claims were accrued at $0.145; additional losses were possible but not estimable, and management did not expect the amounts to be material.
- Management identified COVID-19, credit-loss estimation uncertainty, liquidity, interest-rate exposure, and regulatory changes among material risks. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether rising nonaccrual and nonperforming assets, particularly commercial real estate and hotel/motel exposures, lead to further reserves or charge-offs.
- How modified loans perform as deferrals expire, with particular attention to hotel/motel borrowers and accrued interest receivable on modified loans.
- Whether the margin decline stabilizes as deposit costs fall, and how rate movements affect loan yields and securities valuations.
- Progress in PPP forgiveness and repayment, deposit mix and brokered-deposit trends, and use of short-term FHLB advances.
- Whether the projected branch cost savings and reduction in active COVID-19 modifications are realized, and whether LIBOR transition risks are adequately managed.