Hope Bancorp(HOPE) - 2020 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements Unaudited consolidated financial statements as of September 30, 2020, reflect COVID-19 and CECL impacts, showing asset growth and decreased net income due to higher credit loss provisions Consolidated Statements of Financial Condition (Unaudited) Total assets grew to $16.73 billion by September 30, 2020, driven by increased net loans and deposits, while stockholders' equity remained stable Consolidated Balance Sheet Highlights (in millions) | Account | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $16,733.8 | $15,667.4 | | Cash and cash equivalents | $629.1 | $698.6 | | Loans receivable, net | $12,940.4 | $12,181.9 | | Total Liabilities | $14,693.2 | $13,631.4 | | Total deposits | $14,008.4 | $12,527.4 | | FHLB advances | $200.0 | $625.0 | | Total Stockholders' Equity | $2,040.6 | $2,036.0 | Consolidated Statements of Income (Unaudited) Net income significantly decreased in Q3 and the first nine months of 2020, primarily due to a substantial increase in the provision for credit losses Income Statement Summary (in millions, except per share data) | Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $117.6 | $116.3 | $346.7 | $353.1 | | Provision for Credit Losses | $22.0 | $2.1 | $67.5 | $6.3 | | Noninterest Income | $17.5 | $13.0 | $42.0 | $36.7 | | Noninterest Expense | $73.4 | $70.0 | $212.6 | $212.2 | | Net Income | $30.5 | $42.6 | $83.2 | $128.0 | | Diluted EPS | $0.25 | $0.34 | $0.67 | $1.01 | Consolidated Statements of Cash Flows (Unaudited) Net cash used in investing activities significantly impacted overall cash flow, offset by strong financing activities driven by deposit growth Cash Flow Summary for Nine Months Ended Sep 30 (in millions) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $122.3 | $148.9 | | Net Cash (used in) from Investing Activities | ($1,154.1) | $110.6 | | Net Cash from (used in) Financing Activities | $962.4 | ($169.7) | | Net Change in Cash and Cash Equivalents | ($69.4) | $89.8 | Notes to Consolidated Financial Statements (Unaudited) Notes detail CECL adoption, significant loan modifications due to COVID-19, and the company's well-capitalized regulatory status - The company adopted the CECL accounting standard (ASU 2016-13) on January 1, 2020, resulting in a day-one increase to the allowance for credit losses of $26.2 million[57][60][75] - As of September 30, 2020, the company had provided loan modifications totaling $1.15 billion due to hardships from the COVID-19 pandemic. These modifications, made under the CARES Act, were not classified as Troubled Debt Restructurings (TDRs)[86] - The company and its subsidiary, Bank of Hope, were categorized as "well-capitalized" under the regulatory framework for prompt corrective action as of September 30, 2020, with all capital ratios exceeding the required minimums[174][176] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A discusses the adverse impact of COVID-19, including decreased net income due to higher credit loss provisions, asset growth, and balance sheet management Results of Operations Net income declined in Q3 2020 due to increased provision for credit losses, despite stable net interest income and higher noninterest income from securities sales Q3 2020 vs Q3 2019 Performance (in millions) | Metric | Q3 2020 | Q3 2019 | Change | | :--- | :--- | :--- | :--- | | Net Income | $30.5 | $42.6 | ($12.1) | | Provision for Credit Losses | $22.0 | $2.1 | +$19.9 | | Net Interest Income | $117.6 | $116.3 | +$1.3 | | Noninterest Income | $17.5 | $13.0 | +$4.5 | | Noninterest Expense | $73.4 | $70.0 | +$3.4 | - The net interest margin decreased to 2.91% in Q3 2020 from 3.25% in Q3 2019, primarily due to the decline in loan yields resulting from lower market interest rates[209] - Noninterest income was boosted by a $7.5 million net gain on the sale of securities available for sale, which was executed to offset a $3.6 million prepayment penalty on FHLB advances[228][235][215] Financial Condition Total assets and loans grew significantly, driven by PPP loans, while the allowance for credit losses increased due to CECL and pandemic impacts Loan Portfolio Composition (in billions) | Loan Category | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Commercial Real Estate | $8.35 | $8.32 | | Commercial Business | $3.70 | $2.72 | | Residential Mortgage | $0.66 | $0.84 | | Total Loans Receivable | $13.12 | $12.28 | - The increase in commercial business loans was significantly impacted by the origination of $480.1 million in SBA PPP loans during Q2 2020, with a remaining balance of $464.6 million at September 30, 2020[262] Allowance for Credit Losses (ACL) | Metric | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | ACL Balance | $179.8 million | $94.1 million | | ACL to Loans Receivable | 1.37% | 0.77% | - As of September 30, 2020, COVID-19 related loan modifications decreased significantly to $1.15 billion (8.8% of total loans) from $3.12 billion at June 30, 2020[273] Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk as its primary market risk, with simulations indicating asset sensitivity to rate changes and ongoing LIBOR transition efforts Interest Rate Sensitivity Analysis (as of Sep 30, 2020) | Simulated Rate Change | Estimated Net Interest Income Sensitivity | Market Value of Equity Volatility | | :--- | :--- | :--- | | +200 bps | +8.31% | +7.26% | | +100 bps | +4.19% | +4.45% | | -100 bps | -0.79% | -7.63% | - The company is actively managing the transition from LIBOR, which is set to be discontinued after 2021. A committee has been formed to oversee the process and assess the impact on its various financial instruments indexed to LIBOR[311] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal controls during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period, September 30, 2020[316] - No material changes to the company's internal control over financial reporting occurred during the third quarter of 2020[317] PART II - OTHER INFORMATION Legal Proceedings The company is involved in various legal claims with accrued loss contingencies of approximately $1.4 million, not expected to be material to financial statements - Accrued loss contingencies for legal claims were approximately $1.4 million at September 30, 2020[320] Risk Factors A new risk factor addresses increased credit risk from the COVID-19 pandemic, potentially impacting profitability through higher loan losses and delinquencies - A new risk factor was added to address the increased credit risk from the COVID-19 pandemic, which could adversely impact profitability through higher loan losses and delinquencies[322] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - None