HOPE BANCORP INC quarterly report, Q1 FY2020

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Hope Bancorp, Inc. — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are against December 31, 2019 unless noted. Hope Bancorp is the holding company for Bank of Hope, serving commercial and retail banking customers. Amounts below are in U.S. dollars; financial amounts are rounded to millions unless otherwise stated.

Financial performance and position

  • Earnings: Net interest income before credit-loss provision was $119.3 million, down 0.3% year over year. Net income was $26.0 million, down 39.3% from $42.8 million; diluted EPS was $0.21 versus $0.34. Pretax income was $32.4 million and the effective tax rate was 19.94%.
  • Credit costs: Provision for credit losses was $28.0 million versus $3.0 million. The allowance for credit losses (ACL) was $144.9 million, or 1.15% of loans, compared with the prior-period-end allowance of $94.1 million, or 0.77%.
  • Income and expenses: Interest income was $166.9 million (down 3.6%) and interest expense was $47.6 million (down 11.1%). Noninterest income rose 16.1% to $13.3 million, including higher loan-sale gains and other income. Noninterest expense increased 1.8% to $72.1 million.
  • Margins and returns: Net interest margin was 3.31%, down from 3.39%; net interest spread was 2.77%, versus 2.79%. Return on average assets was 0.67% versus 1.12%; return on average equity was 5.12% versus 8.91%. Efficiency ratio was 54.42%, compared with 54.06%.
  • Loans and credit quality: Loans were $12.58 billion, up $307 million from year-end, principally reflecting $346 million of commercial business loan growth and higher line utilization. Nonperforming assets rose to $139.9 million from $122.1 million; nonperforming loans were $116.8 million. Net charge-offs were $3.4 million versus $0.5 million a year earlier.
  • Balance sheet and liquidity: Total assets were $16.02 billion, up 2.3%; deposits were $12.84 billion, up 2.5%. Cash and cash equivalents increased to $802.0 million from $698.6 million. Reported liquid assets were $2.08 billion; unused borrowing capacity was $3.20 billion at FHLB and $762.1 million at the Federal Reserve discount window.
  • Cash flows: Operating activities provided $71.9 million; investing activities used $272.6 million, largely reflecting loan growth; financing activities provided $304.2 million, including net deposit growth and FHLB borrowings. Cash and cash equivalents increased $103.5 million during the quarter.
  • Capital and debt: Stockholders’ equity was $2.02 billion. Holding-company ratios were 11.44% common equity Tier 1, 12.19% Tier 1 risk-based, 13.08% total risk-based, and 10.88% leverage. The Bank was categorized as well capitalized. Period-end borrowings included $675.0 million of FHLB advances, $200.7 million of convertible notes (net), and $103.3 million of subordinated debentures.

Material changes and notable items

  • Hope adopted CECL on January 1, 2020. Adoption increased the loan ACL by $26.2 million and reduced retained earnings by $18.8 million after tax. The quarterly provision also reflected COVID-19-related economic deterioration.
  • Management’s March credit-loss forecast assumed a sharp GDP decline and higher unemployment in Q2, followed by recovery in GDP by year-end. April forecast updates indicated greater deterioration and were not included in the March 31 ACL; management said further deterioration could increase the ACL and provision.
  • Unrealized gains on available-for-sale securities lifted other comprehensive income by $27.3 million after tax; accumulated other comprehensive income was $36.4 million at quarter-end.
  • The company repurchased 2.72 million shares for $36.2 million during the quarter, completing its $50 million repurchase authorization. It declared dividends of $0.14 per share.

Outlook, risks and contingencies

  • The filing gives no quantified earnings or full-year financial guidance. Management said the March Federal Reserve rate cuts would have a larger effect on loan yields and interest income in Q2 as variable-rate loans reprice.
  • COVID-19 is identified as a material and uncertain risk to results, asset quality, liquidity, capital, customer demand, and operations. Management reported no meaningful deposit runoff through the filing period and believed liquidity and excess capital were sufficient, while warning that a prolonged downturn could weaken both.
  • After quarter-end, the Bank had processed approximately $500 million of PPP loans by May 6, 2020. It had also processed COVID-related modifications for borrowers with aggregate balances of approximately $1.41 billion, including hospitality and retail exposures. Management expected modification requests to increase.
  • Commercial modifications included interest-only payments and deferrals; residential mortgage borrowers could receive initial 90-day forbearance, and eligible credit-card customers could defer minimum payments. The filing notes regulatory guidance that qualifying good-faith COVID-19 modifications need not be classified as TDRs.
  • Other watch items include commercial real estate exposure, higher nonaccrual balances and TDRs ($61.2 million versus $46.7 million at year-end), increased brokered deposits ($1.75 billion versus $1.48 billion), and $1.8 billion of commitments and letters of credit. Accrued legal loss contingencies were $595,000; management did not expect them to be material but could not estimate additional reasonably possible losses.

Most important facts for investors to verify

  1. Whether subsequent economic forecasts and COVID-related borrower stress required materially higher ACL and credit-loss provisions in later periods.
  2. Performance, delinquencies, and modification outcomes in commercial real estate—especially hospitality and retail—and the evolution of nonperforming assets and TDRs.
  3. Whether PPP lending, deposit trends, brokered-deposit dependence, and available borrowing capacity sustain liquidity through the downturn.
  4. How rapid rate cuts and loan repricing affect net interest margin, loan yields, funding costs, earnings, and capital ratios.
  5. Whether reported capital strength remains adequate after credit losses, potential capital actions, and the scheduled phase-in of CECL’s regulatory capital impact.