Hope Bancorp(HOPE) - 2020 Q4 - Annual Report

Part I Business Hope Bancorp, Inc. operates as a bank holding company through Bank of Hope, serving ethnic communities with commercial and retail banking services - Hope Bancorp, Inc. is a bank holding company with its main subsidiary, Bank of Hope, focusing on commercial and retail banking in ethnic communities across major US metropolitan areas[13] - Primary revenue is generated from the interest spread between loans/investments and deposits/borrowings[17] - Operations are conducted through 58 branches and 11 loan production offices, offering diverse products including commercial, real estate, and SBA loans, and wealth management services[18] - The company is subject to extensive regulation by the FRB, FDIC, and California's DFPI, covering capital adequacy, lending, and consumer protection[42][44][50] - As of December 31, 2020, the company had 1,408 full-time equivalent employees and actively managed operations in response to the COVID-19 pandemic[82][83] Risk Factors Significant risks include credit concentration in real estate, interest rate fluctuations, and operational threats - The COVID-19 pandemic poses significant credit risk, potentially increasing nonperforming loans, charge-offs, and the allowance for credit losses[88][89] - A high concentration of loans, 65% of the portfolio as of December 31, 2020, are secured by real estate, with 12% in the hospitality sector, increasing vulnerability to market downturns[92][96] - The company faces risks from the scheduled phase-out of LIBOR at the end of 2021, potentially adversely affecting interest rates on assets and liabilities[103] - Operational risks include potential fraudulent activity and cybersecurity incidents, which are rising in the financial services industry[109][111] - The SBA lending program, a key business area, is dependent on the federal government; loss of Preferred Lender status or program changes could materially harm financial results[122] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None Properties As of December 31, 2020, the company operated 58 full-service branches and 11 leased loan production offices - As of December 31, 2020, the company operated 58 full-service branches (51 leased, 7 owned) and 11 leased loan production offices[142] Legal Proceedings Loss contingencies for legal claims totaled approximately $1.3 million as of December 31, 2020 - Loss contingencies for legal claims totaled approximately $1.3 million at December 31, 2020[143] Mine Safety Disclosures This item is not applicable to the company - Not applicable Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Hope Bancorp's common stock trades on NASDAQ under 'HOPE', underperforming key market indices from 2015-2020 - The company's common stock is traded on the NASDAQ Global Select Market under the symbol "HOPE"[147] Stock Performance Comparison (2015-2020) | Stock/Index | 12/31/2015 ($) | 12/31/2016 ($) | 12/31/2017 ($) | 12/31/2018 ($) | 12/31/2019 ($) | 12/31/2020 ($) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Hope Bancorp, Inc. | $100.00 | $130.87 | $112.02 | $75.22 | $98.05 | $76.36 | | NASDAQ Composite | $100.00 | $108.87 | $141.13 | $137.12 | $187.44 | $271.64 | | S&P 500 Index | $100.00 | $111.96 | $136.40 | $130.42 | $171.49 | $203.04 | Selected Financial Data 2020 net income declined due to increased credit loss provisions, with total assets growing to $17.11 billion Selected Financial Data (2018-2020) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Income (Millions) | $111.5 | $171.0 | $189.6 | | Diluted EPS ($) | $0.90 | $1.35 | $1.44 | | Total Assets (Billions) | $17.11 | $15.67 | $15.31 | | Total Loans (Billions) | $13.56 | $12.28 | $12.10 | | Total Deposits (Billions) | $14.33 | $12.53 | $12.16 | | Provision for Credit Losses (Millions) | $95.0 | $7.3 | $14.9 | | Return on Average Assets (%) | 0.68% | 1.12% | 1.29% | | Nonperforming Assets (Millions) | $143.3 | $122.1 | $113.0 | Management's Discussion and Analysis of Financial Condition and Results of Operations 2020 net income declined due to increased credit loss provisions from COVID-19 and CECL adoption, despite asset growth 2020 vs 2019 Performance Summary | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net Income (Millions) | $111.5 | $171.0 | | Diluted EPS ($) | $0.90 | $1.35 | | Net Interest Income (Millions) | $467.5 | $466.6 | | Provision for Credit Losses (Millions) | $95.0 | $7.3 | | Total Assets (Billions) | $17.11 | $15.67 | - The significant decrease in 2020 net income was primarily caused by an $87.7 million year-over-year increase in the provision for credit losses, driven by CECL adoption and COVID-19 economic impact[192][215] - The company provided substantial support to COVID-19 affected borrowers, with loan modifications totaling $1.38 billion (10.2% of the total loan portfolio) as of December 31, 2020[279][283] - Total assets increased by $1.44 billion (9.2%) to $17.11 billion, mainly due to growth in loans receivable and securities available-for-sale[256] - The company adopted the CECL accounting standard on January 1, 2020, resulting in a day-one increase to the Allowance for Credit Losses (ACL) of $26.2 million[293] Quantitative and Qualitative Disclosures about Market Risk Interest rate risk is the primary market risk, managed through sensitivity analysis and simulation, with LIBOR transition underway - The company's primary market risk is interest rate risk, arising from the mismatch in repricing of assets and liabilities[342] Interest Rate Sensitivity Analysis (as of Dec 31, 2020) | Simulated Rate Change | Estimated Net Interest Income Sensitivity (%) | Market Value of Equity Volatility (%) | | :--- | :--- | :--- | | +200 basis points | 4.81 | 5.11 | | +100 basis points | 2.35 | 3.29 | | -100 basis points | (1.31) | (7.63) | | -200 basis points | (1.41) | 10.80 | - The company is preparing for the discontinuation of LIBOR after 2021, which will affect financial instruments indexed to this rate, including loans, derivatives, and subordinated debentures[351] Financial Statements and Supplementary Data Consolidated financial statements and independent auditor's report are incorporated, with supplementary quarterly data in Note 23 - This item references the main consolidated financial statements and the report from the independent auditor, Crowe LLP, beginning on page F-1[353] - Selected quarterly financial data is available in Note 23 of the Notes to the Consolidated Financial Statements[354] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes or disagreements with accountants on accounting principles, practices, or financial disclosure are reported - None Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[358] - Management assessed the company's internal control over financial reporting as effective as of December 31, 2020, based on the COSO framework[362] - No material changes in internal control over financial reporting occurred during the fourth quarter of 2020[364] Other Information The company reports no other information for this item - None Part III Directors, Executive Officers and Corporate Governance Director, executive officer, and corporate governance information will be provided in the 2021 Proxy Statement - Required information is incorporated by reference from the company's 2021 Proxy Statement[368] Executive Compensation Information regarding director and executive compensation will be provided in the 2021 Proxy Statement - Required information is incorporated by reference from the company's 2021 Proxy Statement[369] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated from the 2021 Proxy Statement, including equity compensation plan details - Security ownership information is incorporated by reference from the 2021 Proxy Statement[370] Equity Compensation Plan Information (as of Dec 31, 2020) | Plan Category | Securities to be issued upon exercise (Shares) | Weighted avg. exercise price ($) | Securities available for future issuance (Shares) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 851,580 | $15.25 | 921,709 | Certain Relationships and Related Transactions, and Director Independence Related-party transactions and director independence information will be provided in the 2021 Proxy Statement - Required information is incorporated by reference from the company's 2021 Proxy Statement[372] Principal Accountant Fees and Services Information regarding principal accountant fees and services will be provided in the 2021 Proxy Statement - Required information is incorporated by reference from the company's 2021 Proxy Statement[373] Part IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed as part of the Form 10-K - The financial statements listed under Item 8 are filed with this report[376] - A comprehensive list of exhibits is provided, including the Certificate of Incorporation, bylaws, debt indentures, and executive employment agreements[378][380] Form 10-K Summary The company provides no summary for this item - None Report of Independent Registered Public Accounting Firm Crowe LLP issued an unqualified opinion on financial statements and internal controls, noting CECL adoption and two critical audit matters Opinions on the Financial Statements and Internal Control over Financial Reporting Crowe LLP issued an unqualified opinion on financial statements and internal controls, noting CECL standard adoption - The auditor, Crowe LLP, provided an unqualified (clean) opinion on both the financial statements and the internal control over financial reporting[391] - The report notes a significant change in accounting principle effective January 1, 2020, due to the adoption of the Current Expected Credit Loss (CECL) standard (ASC 326)[392] Critical Audit Matters Two critical audit matters identified: Allowance for Credit Losses under CECL and Goodwill Impairment Evaluation - Critical Audit Matter 1: Allowance and Provision for Credit Losses – Loans, due to complexity and significant management judgment in CECL modeling for CRE and CB loans[400][402] - Critical Audit Matter 2: Goodwill Impairment Evaluation, due to high auditor judgment required for significant management assumptions in discounted cash flow analysis[407][408]