Hope Bancorp(HOPE) - 2019 Q4 - Annual Report

Part I Business Hope Bancorp operates as a regulated bank holding company, generating net interest income through its subsidiary Bank of Hope by serving commercial and retail clients in ethnic communities - Hope Bancorp operates through its subsidiary, Bank of Hope, offering commercial and retail banking products with a focus on ethnic communities in metropolitan areas including California, New York/New Jersey, Chicago, and Texas[12] - The company's primary revenue is derived from the net interest income spread between interest earned on loans and securities and interest paid on deposits and borrowings[16][152] - The Bank operates a network of 58 branches and 11 loan production offices, offering a range of services including commercial loans, real estate loans, SBA loans, and wealth management[17] - As a banking organization with assets exceeding $10 billion, the company is subject to heightened supervision and regulation under the Dodd-Frank Act, including examination by the Consumer Financial Protection Bureau (CFPB)[56][75] Lending, Investing, and Funding Activities The Bank's operations include diverse lending, a conservative investment strategy for liquidity, primary funding from customer deposits, and long-term debt for strategic initiatives - The Bank's lending activities are diverse, covering commercial business loans, various types of real estate loans, SBA 7(a) and 504 loans, and consumer loans such as mortgages and auto loans[18][22][24][28] - The investment strategy focuses on providing liquidity and managing interest rate risk, with a portfolio consisting of government-sponsored agency bonds, mortgage-backed securities (MBS), and collateralized mortgage obligations (CMOs), all classified as available for sale[29] - Primary funding sources are FDIC-insured customer deposits, and the Bank also utilizes borrowings from the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank for liquidity and longer-term strategies[31][32] - The company has long-term debt including $126.0 million in trust preferred securities and $217.5 million in convertible senior notes issued in 2018 to fund a common stock repurchase program[34][35] Supervision and Regulation The company and its bank subsidiary are subject to extensive supervision by federal and state agencies, including Basel III capital rules and the Community Reinvestment Act - Hope Bancorp, as a bank holding company, and Bank of Hope are subject to extensive regulation and supervision by the Federal Reserve Board (FRB), the FDIC, and the California Department of Business Oversight (DBO)[40][42][48] - The company and the Bank are subject to the Basel III Capital Rules, and as of December 31, 2019, both entities met all requirements to be considered "well-capitalized"[51][54][55] - The Bank is subject to the Community Reinvestment Act (CRA) and received a "Satisfactory" rating in its most recent evaluation in 2018[64] - The ability of Hope Bancorp to pay dividends and repurchase stock is restricted by Delaware law and FRB policy, which emphasizes maintaining the company's role as a source of strength for its bank subsidiary[73] Risk Factors The company faces significant credit, market, operational, and regulatory risks, including high real estate loan concentration and the upcoming LIBOR transition - Credit Risk: A significant portion of the loan portfolio (approximately 77% as of Dec 31, 2019) is secured by real estate, exposing the company to downturns in the real estate market[80][81][82] - Accounting Risk: The allowance for loan losses may not cover actual losses, and the adoption of the new CECL standard is expected to increase the allowance by 30% to 40%[85][86][87] - Market Risk: Profitability is highly sensitive to changes in interest rates and faces uncertainty from the scheduled phase-out of LIBOR at the end of 2021[88][90] - Operational & Geographic Risk: The company is exposed to risks from natural disasters due to its concentration in Southern California and also faces cybersecurity risks[94][102] - Regulatory Risk: As an institution with over $10 billion in assets, the company is subject to increased compliance costs and regulations under the Dodd-Frank Act[114][128][129] Properties The company operates from its Los Angeles headquarters, a network of 58 branches, and 11 loan production offices, utilizing both owned and leased properties - As of year-end 2019, the company operated 58 full-service branches (51 leased, 7 owned) and 11 leased loan production offices[132] Legal Proceedings The company faces various legal claims in the normal course of business, with total loss contingencies of $440 thousand not expected to be material - Loss contingencies for legal claims totaled approximately $440 thousand at December 31, 2019, and management does not expect any material impact on the financial statements[133] Part II Market for Common Equity and Share Repurchases The company's stock trades on NASDAQ under "HOPE", and a $50 million share repurchase program was active in Q4 2019 - The company's common stock is traded on the NASDAQ Global Select Market under the symbol "HOPE"[137] Q4 2019 Share Repurchase Activity | Period | Total Shares Purchased | Average Price Paid per Share | Total Cost (in millions) | | :--- | :--- | :--- | :--- | | Oct 2019 | — | — | $0.0 | | Nov 2019 | 462,307 | $14.53 | $6.7 | | Dec 2019 | 480,787 | $14.77 | $7.1 | | Total Q4 2019 | 943,094 | $14.65 | $13.8 | - As of December 31, 2019, approximately $36.2 million remained available for repurchase under the authorized program[142] Selected Financial Data Fiscal year 2019 saw a decline in net income to $171.0 million and diluted EPS to $1.35, alongside decreased ROA and ROE, despite asset growth to $15.67 billion Selected Financial Data (2019 vs. 2018) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net Income | $171.0 M | $189.6 M | | Diluted EPS | $1.35 | $1.44 | | Total Assets (Year-End) | $15.67 B | $15.31 B | | Net Loans Receivable (Year-End) | $12.28 B | $12.10 B | | Total Deposits (Year-End) | $12.53 B | $12.16 B | | Return on Average Assets (ROA) | 1.12% | 1.29% | | Return on Average Stockholders' Equity (ROE) | 8.63% | 9.92% | | Net Interest Margin (NIM) | 3.27% | 3.53% | | Nonperforming Assets to Total Assets | 0.78% | 0.74% | Management's Discussion and Analysis of Financial Condition and Results of Operations Net income decreased 10% in 2019 due to net interest margin compression, though this was partly offset by a lower loan loss provision, while assets and deposits grew Critical Accounting Policies Management's critical accounting policies involve significant subjective judgments, particularly for the allowance for loan losses, goodwill, and income taxes - Management identifies several critical accounting policies that require subjective and complex judgments, including: - Allowance for Loan Losses: Estimating probable incurred losses in the loan portfolio - Business Combinations: Determining the fair value of assets and liabilities acquired - Investment Securities: Evaluating for other-than-temporary impairment - Purchased Credit Impaired (PCI) Loans: Estimating expected cash flows to determine accretable yield - Goodwill: Assessing for impairment using qualitative factors and, if necessary, quantitative tests - Income Taxes: Determining deferred tax asset valuation allowances and reserves for uncertain tax positions[156][163][169] Results of Operations A 10% net income decline in 2019 was driven by lower net interest income and noninterest income, despite a significantly reduced provision for loan losses Consolidated Income Statement Summary (2019 vs. 2018) | (In thousands) | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $466,595 | $487,927 | (4.4)% | | Provision for Loan Losses | $7,300 | $14,900 | (51.0)% | | Noninterest Income | $49,683 | $60,180 | (17.4)% | | Noninterest Expense | $282,628 | $277,726 | 1.8% | | Net Income | $171,040 | $189,589 | (9.8)% | - Net income decreased by 10% in 2019 primarily due to a $21.3 million decline in net interest income, driven by a 34% increase in interest expense that outpaced the 5% growth in interest income[182][183] - Net interest margin (NIM) compressed by 26 basis points to 3.27% in 2019 from 3.53% in 2018, mainly caused by an increase in the cost of interest-bearing deposits[188][193] - Noninterest income fell 17% primarily due to a $9.7 million (100%) decrease in gains on sales of SBA loans, following a strategic decision to retain these loans[210][213] - Noninterest expense increased by 2%, driven by higher salaries and benefits ($7.7M increase) and professional fees ($6.2M increase)[220][221] Financial Condition Total assets grew to $15.67 billion, supported by loan and deposit growth, while credit quality saw a slight increase in nonperforming assets Balance Sheet Summary (Year-End) | (In billions) | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Assets | $15.67 | $15.31 | | Net Loans Receivable | $12.18 | $12.01 | | Total Deposits | $12.53 | $12.16 | | Total Stockholders' Equity | $2.04 | $1.90 | Loan Portfolio Composition | Loan Type | Dec 31, 2019 (in billions) | % of Total | | :--- | :--- | :--- | | Total Real Estate | $8.66 | 71% | | Commercial Business | $2.56 | 21% | | Consumer and Other | $0.89 | 7% | | Trade Finance | $0.16 | 1% | | Total Loans | $12.27 | 100% | - Nonperforming assets increased to $122.1 million (0.78% of total assets) at year-end 2019 from $113.0 million (0.74% of total assets) at year-end 2018[265] - The allowance for loan losses was $94.1 million, or 0.77% of gross loans, at December 31, 2019, unchanged from the year-end 2018 ratio[272] - Total deposits grew by $372 million (3%) in 2019, driven by increases in money market and demand deposits[289][290] - The company's and the Bank's capital ratios exceeded all regulatory requirements to be deemed "well-capitalized", with the holding company's Common Equity Tier 1 ratio at 11.76%[304][667] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate sensitivity, with models showing varied impacts on net interest income from rate changes, alongside emerging LIBOR transition risk Interest Rate Sensitivity Analysis (as of Dec 31, 2019) | Simulated Rate Change | Estimated Net Interest Income Sensitivity | Market Value of Equity Volatility | | :--- | :--- | :--- | | +200 basis points | +1.57% | (1.84)% | | +100 basis points | +0.88% | (0.42)% | | -100 basis points | (1.10)% | (1.12)% | | -200 basis points | (2.68)% | (4.43)% | - The company's interest rate sensitivity gap analysis shows a liability-sensitive position in the short term, with a cumulative negative gap of $3.25 billion for instruments repricing within one year[329] - The company acknowledges the upcoming LIBOR transition after 2021 and is assessing the impact on its financial instruments indexed to LIBOR[333] Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective as of year-end 2019 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[341] - Based on an assessment using the COSO framework, management believes the company's internal control over financial reporting was effective as of December 31, 2019[345] Part III Directors, Executive Compensation, and Corporate Governance Required disclosures on directors, compensation, governance, and related matters are incorporated by reference from the 2020 Annual Meeting proxy statement - Detailed information regarding directors, executive officers, corporate governance, executive compensation, and other related matters is incorporated by reference from the forthcoming 2020 Proxy Statement[351][352][354][355] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed with the Form 10-K, with financial statements beginning on page F-1 - The Consolidated Financial Statements of Hope Bancorp are filed as part of this report, beginning on page F-1[335][358] - A list of exhibits filed with the report is provided, including corporate governance documents, indentures for debt instruments, and executive compensation plans[359][361]