Hope Bancorp(HOPE) - 2020 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section encompasses the unaudited consolidated financial statements, management's analysis, market risk, and internal controls Item 1. Financial Statements This section presents the unaudited consolidated financial statements, notes on accounting policies, CECL adoption, and COVID-19 impacts Consolidated Statements of Financial Condition (Unaudited) This section details the company's unaudited financial condition, including assets, liabilities, and equity, as of June 30, 2020 Financial Condition Highlights (as of June 30, 2020 vs. December 31, 2019) | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $17,169,062 | $15,667,440 | +9.6% | | Total Cash and Cash Equivalents | $1,468,949 | $698,567 | +110.3% | | Loans Receivable, net | $12,710,063 | $12,181,863 | +4.3% | | Total Liabilities | $15,138,286 | $13,631,429 | +11.1% | | Total Deposits | $14,123,532 | $12,527,364 | +12.7% | | Total Stockholders' Equity | $2,030,776 | $2,036,011 | -0.3% | Consolidated Statements of Income (Unaudited) This section presents the unaudited consolidated income statements, detailing revenue, expenses, and net income for the periods presented Income Statement Highlights | Metric (in thousands, except per share data) | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $109,814 | $117,221 | $229,105 | $236,829 | | Provision for Credit Losses | $17,500 | $1,200 | $45,500 | $4,200 | | Net Income | $26,753 | $42,681 | $52,706 | $85,439 | | Diluted EPS | $0.22 | $0.34 | $0.42 | $0.67 | Consolidated Statements of Comprehensive Income (Unaudited) This section presents the unaudited consolidated comprehensive income statements, including net income and other comprehensive income Comprehensive Income Highlights | Metric (in thousands) | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $26,753 | $42,681 | $52,706 | $85,439 | | Other Comprehensive Income, net of tax | $1,700 | $22,781 | $29,000 | $40,128 | | Total Comprehensive Income | $28,453 | $65,462 | $81,706 | $125,567 | Consolidated Statements of Changes in Stockholders' Equity (Unaudited) This section presents the unaudited consolidated statements of changes in stockholders' equity, detailing capital, retained earnings, and comprehensive income - The company declared cash dividends of $0.14 per common share in Q2 2020, totaling $17.2 million[20] - For the six months ended June 30, 2020, the company repurchased 2,716,034 shares of treasury stock for $36.2 million and recorded a day 1 CECL impact that reduced retained earnings by a net $18.8 million[21] Consolidated Statements of Cash Flows (Unaudited) This section presents the unaudited consolidated cash flow statements, categorizing cash movements from operating, investing, and financing activities Cash Flow Summary (Six Months Ended June 30) | Cash Flow Activity (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $99,756 | $89,420 | | Net Cash (Used in) Provided by Investing Activities | ($727,982) | $204,973 | | Net Cash Provided by (Used in) Financing Activities | $1,398,608 | ($144,204) | | Net Change in Cash and Cash Equivalents | $770,382 | $150,189 | Notes to Consolidated Financial Statements (Unaudited) This section provides detailed notes to the unaudited consolidated financial statements, covering accounting policies, CECL adoption, and COVID-19 impacts - The company acknowledges that the COVID-19 pandemic has had, and could continue to have, a material and adverse effect on its business and that estimates are subject to significant uncertainty[30] - On January 1, 2020, the company adopted the CECL standard (ASU 2016-13), which resulted in a day 1 increase to the allowance for credit losses of $26.2 million[61][76] - As of June 30, 2020, the company had granted COVID-19 related loan modifications on loans totaling $3.12 billion, representing approximately 24.2% of the total loan portfolio[86][275] - Due to the economic impact of COVID-19 and a decline in its stock price, the company performed an interim goodwill impairment test in Q2 2020 and concluded that goodwill was not impaired[125] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the COVID-19 pandemic's impact on financial condition and results, highlighting increased credit loss provisions, compressed net interest margin, and balance sheet growth COVID-19 Pandemic The company activated a Pandemic Response Plan, adjusted operations, and assisted customers through CARES Act programs, including PPP loans and payment deferrals - The company is actively assisting customers under the CARES Act, including funding $480.1 million in SBA PPP loans in Q2 2020 and providing loan modifications[188] - A Pandemic Response Plan was activated, which included reducing branch hours, implementing social distancing and enhanced cleaning protocols, and enabling a majority of employees to work remotely on a rotational basis[190][191] Results of Operations Net income decreased significantly in Q2 2020 due to higher credit loss provisions, alongside declines in net interest income, noninterest income, and noninterest expense Q2 2020 vs Q2 2019 Performance | Metric (in millions) | Q2 2020 | Q2 2019 | Change | | :--- | :--- | :--- | :--- | | Net Income | $26.8 | $42.7 | -37.3% | | Net Interest Income | $109.8 | $117.2 | -6.3% | | Provision for Credit Losses | $17.5 | $1.2 | +1358% | | Noninterest Income | $11.2 | $12.3 | -8.5% | | Noninterest Expense | $67.0 | $71.4 | -6.1% | Key Performance Ratios | Ratio | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | Return on Average Assets (ROA) | 0.64% | 1.12% | | Net Interest Margin (NIM) | 2.79% | 3.31% | | Efficiency Ratio | 55.37% | 55.11% | Financial Condition Total assets grew to $17.17 billion, driven by cash and loan growth, deposits increased, and the allowance for credit losses significantly expanded due to CECL and pandemic impacts - Total assets grew to $17.17 billion, an increase of $1.50 billion (9.6%) from Dec 31, 2019, largely due to a precautionary increase in cash and cash equivalents to $1.47 billion[256] - The allowance for credit losses (ACL) increased to $161.8 million (1.26% of loans) from $94.1 million (0.77% of loans) at year-end, driven by the CECL adoption and increased reserves for the COVID-19 pandemic's impact[269][271] - The company maintained strong liquidity with $3.46 billion in available FHLB borrowing capacity and $726.6 million from the FRB Discount Window[303] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk through ALCO, assessing NII and MVE sensitivity to rate changes, and is actively managing the transition away from LIBOR Interest Rate Sensitivity Analysis (as of June 30, 2020) | Simulated Rate Change | Estimated Net Interest Income Sensitivity | Market Value of Equity Volatility | | :--- | :--- | :--- | | +200 basis points | +9.96% | +8.02% | | +100 basis points | +5.01% | +4.89% | | -100 basis points | -0.63% | -6.42% | - The company has formed a committee to oversee the transition away from LIBOR, as it is expected to be discontinued after 2021[311] - The FASB has issued optional guidance (ASU 2020-04) to ease the accounting burden of this transition, which the committee is evaluating[312] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting - The Chairman, President, and CEO, along with the CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[316] - No material changes to the company's internal control over financial reporting occurred during the quarter ended June 30, 2020[317] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings The company is involved in various legal claims, accruing approximately $1.2 million for loss contingencies, with no expected material financial impact - Accrued loss contingencies for all legal claims totaled approximately $1.2 million at June 30, 2020[320] Item 1A. Risk Factors This section refers to previously disclosed risk factors in the company's Annual Report on Form 10-K and Quarterly Report on Form 10-Q Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None[323] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - None[324] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not Applicable[325] Item 5. Other Information The company reported no other information - None[326] Item 6. Exhibits This section refers to the Index to Exhibits, listing certifications and XBRL data files submitted with the report