Hope Bancorp, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Hope Bancorp is the holding company for Bank of Hope, a commercial and retail bank serving businesses and consumers across several U.S. states and South Korea.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Interest income | $142.9 million | $145.2 million | $421.4 million | $457.1 million |
| Net interest income, before credit provision | $130.3 million | $117.6 million | $379.5 million | $346.7 million |
| Provision (credit) for credit losses | $(10.0) million | $22.0 million | $(13.7) million | $67.5 million |
| Noninterest income | $10.6 million | $17.5 million | $30.5 million | $42.0 million |
| Noninterest expense | $75.5 million | $73.4 million | $219.1 million | $212.6 million |
| Net income | $55.5 million | $30.5 million | $152.9 million | $83.2 million |
| Diluted EPS | $0.45 | $0.25 | $1.23 | $0.67 |
| Net interest margin | 3.07% | 2.91% | 3.08% | 2.99% |
| Return on average assets | 1.25% | 0.72% | 1.18% | 0.68% |
| Efficiency ratio | 53.58% | 54.31% | 53.43% | 54.68% |
Q3 net income increased 82% year over year; nine-month net income rose 84%. Lower funding costs and credit-loss provision (including provision credits) drove the improvement, partly offset by lower interest income and noninterest revenue.
Financial condition, cash flow, and capital
- At September 30, 2021, total assets were $17.80 billion, deposits $15.06 billion, and stockholders’ equity $2.07 billion. Net loans were $13.28 billion after a $136.8 million allowance for credit losses.
- Deposits increased $728.6 million from year-end 2020. Noninterest-bearing deposits were $6.01 billion, or about 40% of deposits; time deposits declined $1.12 billion. Brokered deposits fell to $375.3 million from $1.14 billion.
- Cash and cash equivalents were $627.4 million, up from $350.6 million at year-end 2020. For the first nine months, operating cash flow was $222.9 million, investing cash outflow $522.3 million, and financing cash inflow $576.2 million.
- FHLB advances were $200.0 million; convertible notes, net, were $216.0 million; subordinated debentures, net, were $105.1 million. Available borrowing capacity was $4.15 billion at the FHLB and $517 million at the Federal Reserve discount window. Management said liquidity was sufficient for foreseeable needs.
- The Bank was categorized as well-capitalized. At September 30, the Bank’s common equity Tier 1, total risk-based, Tier 1 risk-based, and leverage ratios were 12.97%, 13.70%, 12.97%, and 11.07%, respectively.
- Available-for-sale securities totaled $2.67 billion. Their net unrealized gain declined to $3.1 million from $46.2 million at year-end 2020, primarily reflecting changes in interest rates; the nine-month other comprehensive loss was $29.2 million.
Material changes and notable items
- Net interest income rose 10.8% in Q3 and 9.4% for the first nine months. Deposit repricing lowered interest expense, while lower market rates and reduced acquired-loan discount accretion reduced asset yields. Q3 deposit cost was 0.26%, versus 0.64% a year earlier.
- The allowance for credit losses declined to $136.8 million, or 1.02% of loans, from $206.7 million, or 1.52%, at year-end 2020. Management cited improved economic forecasts and reduced credit exposure. Nine-month net charge-offs were $56.3 million; Q3 net charge-offs were $42.7 million.
- Nonperforming assets declined to $113.7 million from $143.3 million at year-end; nonperforming assets were 0.85% of loans and OREO. Nonaccrual loans were $54.4 million. COVID-related modified loans fell to $122.0 million, or 0.9% of loans, from $1.38 billion, or 10.2%, at year-end 2020.
- As part of a credit-quality strategy, the Company sold $148.9 million of higher-risk loans during 2021 and transferred $131.2 million of substandard loans to held-for-sale. After quarter-end, $74.6 million of those transferred loans had been sold; $56.6 million remained for sale and were expected to be sold by year-end.
- Noninterest income fell 39% in Q3, including because the prior-year quarter included $7.5 million in securities-sale gains. Noninterest expense increased 2.9% in Q3; higher compensation included a $2.5 million increase in bonus reserves. The nine-month results also included a $2.1 million software impairment.
- The Company repurchased 3.49 million shares for $47.2 million under a new $50 million authorization, leaving $2.8 million available at September 30. Quarterly dividends declared were $0.14 per share.
- Early adoption of ASU 2020-06 changed convertible-note accounting, increased reported carrying value, and reduced 2021 interest expense compared with 2020.
Outlook, risks, and contingencies
- No quantified earnings or financial guidance was provided. Management expected interest expense to decline slightly as higher-cost time deposits renewed, while noting renewal-rate savings were nearing their limit.
- Management described the economic recovery as improving but cautioned that COVID-19 variants, the pace and durability of recovery, and related government actions remained uncertain. A weaker or prolonged downturn could increase credit losses and adversely affect liquidity and capital.
- Interest-rate risk is material: modeled net interest income sensitivity was +11.16% under an immediate +200 basis-point shock and −2.89% under a −100 basis-point shock. These are model estimates, not forecasts.
- The Company had $2.37 billion of commitments to extend credit, $117.1 million of standby letters of credit, and $55.9 million of other letters of credit. Legal claims had $144,000 accrued; additional losses were reasonably possible, but management could not estimate a range and did not expect a material financial-statement impact.
- The LIBOR transition affected certain loans, securities, derivatives, and debt; management did not expect the transition to materially affect consolidated financial statements. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the remaining $56.6 million of transferred substandard loans was sold by year-end, and the realized proceeds or losses.
- Whether credit quality and charge-offs remain consistent with the lower allowance, given Q3 net charge-offs of $42.7 million and continued sensitivity to economic assumptions.
- How deposit mix, deposit costs, and loan yields develop as rates and time-deposit renewals change.
- Whether securities valuation changes materially affect accumulated other comprehensive income and tangible capital.
- How post-quarter share repurchases, dividends, and regulatory capital levels affect capital flexibility.