HOPE BANCORP, INC. The following discussion and analysis should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and the unaudited consolidated financial statements and notes set forth elsewhere in this Quarterly Report on Form 10-Q. GENERAL We offer a full range of commercial and retail banking loan and deposit products throughBank of Hope . We have 58 banking offices inCalifornia ,New York /NewJersey, Illinois ,Washington ,Texas ,Virginia , andAlabama . We have loan production offices located inAtlanta ,Dallas ,Denver ,Portland ,Seattle ,Fremont , and inSouthern California . We offer our banking services through our network of banking offices and loan production offices to our customers who typically are small to medium-sized businesses in our market areas. We accept deposits and originate a variety of loans including real estate loans, commercial business loans, residential mortgage loans, SBA loans, and consumer loans. Our principal business involves earning interest on loans and investment securities that are funded primarily by customer deposits, wholesale deposits, and other borrowings. Our operating income and net income are derived primarily from the difference between interest income received from interest earning assets and interest expense paid on interest bearing liabilities and, to a lesser extent, from fees received in connection with servicing loan and deposit accounts and income from the sale of loans. Our major expenses are the interest we pay on deposits and borrowings, provisions for loan losses and general operating expenses, which primarily consist of salaries and employee benefits, occupancy costs, and other operating expenses. Interest rates are highly sensitive to many factors that are beyond our control, such as changes in the national economy and in the related monetary policies of the FRB, inflation, unemployment, consumer spending and political changes and events. We cannot predict the impact that these factors and future changes in domestic and foreign economic and political conditions might have on our performance. COVID-19 Pandemic OnMarch 11, 2020 , theWorld Health Organization declared the novel coronavirus ("COVID-19") a global pandemic. The COVID-19 pandemic has had a material and adverse impact on our business, financial condition and results of operations, and further impact will depend on future developments that cannot be predicted, including the scope and duration of the pandemic, the economic implications of the same, and the actions taken by governmental authorities in response to the pandemic. The COVID-19 pandemic has substantially and negatively impactedthe United States economy, disrupted global supply chains, considerably lowered equity market valuations, created significant volatility and disruption in financial markets, and materially increased unemployment levels. In addition, the pandemic has resulted in temporary closures of countless businesses and the institution of social distancing and sheltering in place requirements in most states and communities. As a result, the demand for our products and services has been and likely will continue to be significantly adversely impacted, which could materially and adversely affect our financial condition and results of operations. Furthermore, the pandemic could result in the recognition of amplified credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain closed and our customers draw on their lines of credit. Similarly, because of changing economic and market conditions, we may be required to recognize impairments on goodwill or impairment on other financial instruments we hold. Our business operations may also be further disrupted if significant portions of our workforce are unable to work effectively, because of challenges arising as a result of circumstances related to working from home, illness, quarantines, government actions, or other restrictions in connection with the pandemic, and we have already temporarily closed certain of our branches. In response to the pandemic, we have also suspended residential property foreclosure sales, evictions, and involuntary automobile repossessions, and are offering payment deferrals and other expanded assistance for credit card, mortgage and small business lending customers, and future governmental actions may require these and other types of customer-related responses. In addition, we may take capital actions in response to the COVID-19 pandemic. The extent to which the COVID-19 pandemic continues to impact our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments that cannot be predicted, including the scope and duration of the pandemic, the economic implications of the same and actions taken by governmental authorities and other third parties in response to the pandemic. OnMarch 27, 2020 , PresidentDonald Trump signed into law the Coronavirus Aid, Relief, and Economic Security ("CARES") Act in response to the global pandemic. The CARES Act provides approximately$2.2 trillion in emergency economic relief funds, expands SBA lending through the Paycheck Protection Program ("PPP"), and provides temporary relief of modifications from TDR classification. In response, we have begun actively assisting our customers in taking advantage of the concessions offered through the CARES Act through this difficult time by originating SBA PPP loans on a full-time basis and providing loan modifications to borrowers consisting of mostly initial payment deferrals for up to three months. We expect the number of loan modifications under the CARES Act will increase significantly in the next few quarters based on the current number of requests. 56 -------------------------------------------------------------------------------- AtMarch 31, 2020 , all of our regulatory capital ratios for theHolding Company and Bank were in excess of the minimum requirements set by our regulators. While we currently believe that we have sufficient excess capital and liquidity to withstand the economic impact of the COVID-19 pandemic, further economic deterioration or an extended recession could adversely impact our capital and liquidity positions. Pandemic Response Plan With the onset of the COVID-19 virus, we activated a Pandemic Response Plan inJanuary 2020 , well in advance of the declaration of the COVID-19 pandemic. As part of the Pandemic Response Plan, aPandemic Response Team and a Business Continuity Program Team was formed which closely monitors the COVID-19 situation, identifying issues and developing responses to reduce risks related to COVID19 to our customers, employees, and communities. As part of our overall efforts to help contain the spread of the virus, we made a number of adjustments in our branch operations: • Nationwide, we reduced the operating hours;
• For our branches with drive-thru service facilities, we limited in-branch
services by appointment only;
• We have also temporarily closed a number of branches that are in close
proximity to another branch location;
• We implemented social distancing procedures limiting the number of
customers in a branch at a given time; requiring the use of hand
sanitizers by all customers entering a branch, and added aisle lines tohelp guide customers in maintaining a minimum of 6 feet of separation;
• We limited operations to every other teller station as warranted to
maintain the minimum 6-feet distance;
• We installed sneeze guards at all teller stations and customer service areas;
• We have provided our branch staff with facial masks, as well as face
shields; and
• We implemented enhanced cleaning and disinfecting protocols at all of our
branches.
We have also implemented a number of changes to our back-office operations including: • Enabling the majority of our employees with remote work capabilities and
implementing a remote rotation strategy with the general goal of having
approximately 50% of the department staff working onsite and the remainder
working remotely;
• In-person meetings have been prohibited to the extent possible;
• In line with social distancing guidelines, employee workstations have been
temporarily modified to allow for a minimum separation of approximately
six feet between each employee;
• Common break areas have been closed; and
• We have implemented enhanced cleaning and disinfecting protocols for our
non-branch locations.
For the communities in which we serve, we are in the process of donating 20,000+ KN-95 masks to various organizations, including elderly homes, police stations, and fire stations, among others. The goal of the Pandemic Response Plan is to protect the health of our customers, employee and communities while continuing to meet the needs of our customers.The Pandemic Response Team and Business Continuity Program Team will continue to monitor the COVID-19 situation and take additional actions as necessary to ensure the safe continued operations of the Bank. We have also implemented a number of programs to help support our customers through this difficult time including actively participating in the SBA's PPP and implementing loan modification programs for customers affected by the COVID-19 pandemic (see "COVID-19 Pandemic" section above and footnote 20 "Subsequent Events" for more information). 57 -------------------------------------------------------------------------------- Selected Financial Data The following tables set forth a performance overview concerning the periods indicated and should be read in conjunction with the unaudited consolidated financial statements and notes set forth elsewhere in this Quarterly Report on Form 10-Q and the following Results of Operations and Financial Condition sections in the MD&A. At or for the Three Months EndedMarch 31, 2020 2019 (Dollars in
thousands, except share and per
share data)
Income Statement Data:
Interest income $ 166,868 $ 173,130
Interest expense 47,577 53,522
Net interest income 119,291 119,608
Provision for credit losses 28,000 3,000
Net interest income after provision for credit losses 91,291 116,608
Noninterest income 13,264 11,422
Noninterest expense 72,140 70,833
Income before income tax provision 32,415 57,197
Income tax provision 6,462 14,439
Net income $ 25,953 $ 42,758
Per Share Data:
Earnings per common share - basic $ 0.21 $ 0.34
Earnings per common share - diluted $ 0.21 $ 0.34
Book value per common share (period end) $ 16.38 $ 15.37
Cash dividends declared per common share $ 0.14 $ 0.14
Tangible book value per common share (period end) (1) $ 12.52
$ 11.59
Number of common shares outstanding (period end) 123,169,404 126,635,584
Weighted average shares - basic 124,295,327
126,640,464
Weighted average shares - diluted 124,676,296
126,819,672
Tangible common equity to tangible assets (1) 9.92 % 9.84 % Average Balance Sheet Data: Assets$ 15,446,807 $ 15,290,338 Securities available for sale 1,712,033 1,827,612 Loans receivable and loans held for sale 12,259,848 12,088,169 Deposits 12,342,022 12,089,643 Stockholders' equity 2,027,595 1,920,492 58
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For the Three
Months Ended
2020 2019
Selected Performance Ratios:
Return on average assets (2) 0.67 % 1.12 %
Return on average stockholders' equity (2) 5.12 % 8.91 %
Return on average tangible equity (1) (2) 6.69 % 11.86 %
Dividend payout ratio (dividends per share / diluted EPS) 67.24 % 41.52 %
Efficiency ratio (3) 54.42 % 54.06 %
Net interest spread 2.77 % 2.79 %
Net interest margin (4) 3.31 % 3.39 %
At March 31,
2020 2019
(Dollars in thousands) Statement of Financial Condition Data - at Period End: Assets
$ 16,021,434 $ 15,398,669 Securities available for sale 1,718,702 1,818,343 Loans receivable 12,583,416 12,054,004 Deposits 12,836,567 12,249,196 FHLB advances 675,000 720,000 Convertible notes, net 200,716 195,754 Subordinated debentures 103,318 102,201 Stockholders' equity 2,018,088 1,946,211 Regulatory Capital Ratios (5) Leverage capital ratio 10.88 % 10.66 % Common equity Tier 1 capital ratio 11.44 % 11.59 % Tier 1 risk-based capital ratio 12.19 % 12.36 % Total risk-based capital ratio 13.08 % 13.10 % Asset Quality Ratios: Allowance for credit losses to loans receivable 1.15 % 0.78 % Allowance for credit losses to nonaccrual loans 199.51 % 108.75 % Allowance for credit losses to nonperforming loans (7) 124.06 % 71.25 % Allowance for credit losses to nonperforming assets (8) 103.62 % 68.03 % Nonaccrual loans to loans receivable 0.58 % 0.72 % Nonperforming loans to loans receivable (7) 0.93 % 1.10 % Nonperforming assets to loans receivable and OREO (8) 1.11 % 1.15 % Nonperforming assets to total assets (8) 0.87 % 0.90 %
__________________________________
(1) Tangible book value per common share, tangible common equity to tangible
assets, and return on average tangible equity are non-GAAP financial
measures that we believe provide investors with information useful in
understanding our financial performance and position. A reconciliation of
GAAP to non-GAAP financial measures is provided on the following page.
(2) Annualized.
(3) Efficiency ratio is defined as noninterest expense divided by the sum of net
interest income before provision for credit losses and noninterest income.
(4) Net interest margin is calculated by dividing annualized net interest income
by average total interest earning assets.
(5) The ratios generally required to meet the definition of a "well-capitalized"
financial institution under certain banking regulations are 5.0% leverage
capital, 6.5% common equity tier 1 capital, 8.0% Tier 1 risk-based capital,
and 10.0% total risk-based capital.
(6) Calculations are based on average quarterly asset balances. (7) Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest, and accruing restructured loans (excludes PCI loans atMarch 31, 2019 ). (8) Nonperforming assets consist of nonperforming loans and OREO. 59 -------------------------------------------------------------------------------- Non-GAAP Financial Measurements We provide certain nonGAAP financial measures that we believe provide investors with meaningful supplemental information that is useful in understanding our financial performance and position. The methodologies for determining non-GAAP measures may differ among companies. The following tables reconciles non-GAAP financial measures used in this Form 10-Q to the most comparable GAAP performance measures: At March 31, 2020 2019 (Dollars in thousands, except share data) Total stockholders' equity$ 2,018,088 $ 1,946,211 Less: Goodwill and core deposit intangible assets, net (475,752 ) (477,954 ) Tangible common equity$ 1,542,336 $ 1,468,257 Total assets$ 16,021,434 $ 15,398,669 Less: Goodwill and core deposit intangible assets, net (475,752 ) (477,954 ) Tangible Assets$ 15,545,682 $ 14,920,715 Common shares outstanding 123,169,404 126,635,584 Tangible book value per common share$ 12.52 $ 11.59 Tangible common equity to tangible assets 9.92 %
9.84 %
Tangible book value per common share is calculated by subtracting goodwill and
core deposit intangible assets from total stockholders' equity and dividing the
difference by the number of shares of common stock outstanding. Tangible common
equity to tangible assets is calculated by subtracting goodwill and core deposit
intangible assets from total stockholders' equity and dividing the difference by
total assets after subtracting goodwill and core deposit intangible assets.
Three Months Ended March 31,
2020 2019
(Dollars in thousands)
Net income $ 25,953 $ 42,758
Average stockholders' equity $ 2,027,595 $ 1,920,492
Less: Average goodwill and core deposit intangible
assets, net (476,053 ) (478,309 )
Average tangible equity $ 1,551,542 $ 1,442,183
Return on average tangible equity 6.69 % 11.86 %
Return on average tangible equity is calculated by dividing net income for the
period by average stockholders' equity for the period after subtracting average
goodwill and core deposit intangible assets for the period.
60
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Results of OperationsOverview
Net income for the first quarter of 2020 was$26.0 million , or$0.21 per diluted common share, compared to$42.8 million , or$0.34 per diluted common share, for the same period of 2019, which was a decrease of$16.8 million , or 39.3%. The decrease in net income was due mostly to an increase in the provision for credit losses. Net interest income before provision for credit losses decreased by$317 thousand for the first quarter of 2020 to$119.3 million compared to$119.6 million in the first quarter of 2019. The following table summarizes the accretion and amortization adjustments resulting from prior acquisitions that are included in net income for the three months endedMarch 31, 2020 and 2019: Three months endedMarch 31, 2020 2019 (Dollars in thousands)
Accretion of discounts on purchased performing loans
$ 2,166 Accretion of discounts on PCD (formerly PCI) loans 9,449
5,833
Amortization of premiums on purchased investments in affordable housing partnerships
(71 ) (76 )
Amortization of premiums on assumed FHLB advances - 1,280
Accretion of discounts on assumed subordinated debt (283 ) (273 ) Amortization of core deposit intangibles (531 ) (557 ) Total$ 9,623 $ 8,373 The annualized return on average assets was 0.67% for the first quarter of 2020 compared to 1.12% for the same period of 2019. The annualized return on average stockholders' equity was 5.12% for the first quarter of 2020 compared to 8.91% for the same period of 2019. The efficiency ratio was 54.42% for the first quarter of 2020 compared to 54.06% for the same period of 2019. Net Interest Income and Net Interest Margin Net Interest Income A principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits, borrowed funds, and convertible notes. Net interest income expressed as a percentage of average interest earning assets is referred to as the net interest margin. The net interest spread is the yield on average interest earning assets less the cost of average interest bearing liabilities. Net interest income is affected by changes in the balances of interest earning assets and interest bearing liabilities and changes in the yields earned on interest earning assets and the rates paid on interest bearing liabilities. Comparison of Three Months EndedMarch 31, 2020 with the Three Months EndedMarch 31, 2019 Net interest income before provision for credit losses was$119.3 million for the first quarter of 2020 compared to$119.6 million for the same period of 2019, a decrease of$317 thousand , or 0.3%. The decrease in net interest income was due to the reduction in interest income on loan and investments securities for the first quarter of 2020 compared to the first quarter of 2019 offset partly by a decrease in deposit interest expense. Interest income for the first quarter of 2020 was$166.9 million , a decrease of$6.3 million , or 3.6%, compared to$173.1 million for the same period of 2019. The decrease in interest income was primarily attributable to the decline in interest rates which impacted a portion of our variable rate loans as well as a reduction in interest rates on new loan originations. TheFOMC reduced the federal funds target rate by 25 basis points each in July, September, andOctober 2019 . More recently, as a result of the COVID-19 pandemic and its impact to the US economy, theFOMC lowered the target federal funds rate by a total of 1.50% inMarch 2020 to 0.00%-0.25%. The reduction in interest rates inMarch 2020 , only had a minimal impact on loan yields and interest income and is expected to have a larger impact in the second quarter of 2020 as most of our variable rate loans reprice on a monthly basis. Interest expense for the first quarter of 2020 was$47.6 million , a decrease of$5.9 million , or 11.1%, compared to$53.5 million for the same period of 2019. The decrease in interest expense was due to the repricing of time deposits to lower rates as well as a reduction in rates on money market and now accounts. 61 -------------------------------------------------------------------------------- Net Interest Margin Our net interest margin is impacted by the weighted average rates we earn on interest earning assets and pay on interest bearing liabilities and the effect of acquisition accounting adjustments. The net interest margin for the first quarter of 2020 was 3.31%, a decrease of 8 basis points from 3.39% for the same period of 2019. The weighted average yield on loans decreased to 5.06% for the first quarter of 2020 from 5.31% for the first quarter of 2019. The decrease in loan yields for the three months endedMarch 31, 2020 compared to the same period in 2019 was mostly due to the decrease in interest rates experienced in 2019. The decrease in interest rates led to a decrease in rates on our variable rate loans and decrease in rates for new loan originations, which resulted in a decline in loan yields. AtMarch 31, 2020 , variable interest rate loans made up 39% of the loan portfolio and the remaining 61% of the loan portfolio consisted of loans with fixed interest rates. Fixed rate loans include hybrid loans that had fixed interest rates at the end of the period but will eventually change to a variable interest rate after a certain period of time. For the three months endedMarch 31, 2020 , the average weighted rate on new loan originations was 3.98% compared to 5.52% for the three months endedMarch 31, 2019 . Discount accretion income on acquired loans was$10.5 million for the three months endedMarch 31, 2020 compared to$8.0 million for the three months endedMarch 31, 2019 . The increase in accretion income on acquired loans for 2020 compared to 2019 was largely due to$5.6 million in discount accreted from a large loan payoff during the first quarter of 2020. The weighted average yield on securities available for sale for the first quarter of 2020 was 2.49% compared to 2.73% for the same period of 2019. The change in weighted average yield on securities available for sale for the three months endedMarch 31, 2020 compared to the same period of 2019 was due to fluctuations in the overall investment portfolio due to the purchase, sale, and calls/maturities of investment securities during the twelve months endedMarch 31, 2020 . The weighted average yield on FHLB stock and other investments for the first quarter of 2020 was 1.57% compared to 2.67% for the same period of 2019. The decrease in weighted average yield on FHLB stock and other investments for the three months endedMarch 31, 2020 compared to the same period of 2019 was due to the decreases in interest rates experienced in 2019 and 2020. The decline in interest rates led to a decrease in interest earned on interest bearing cash balances at theFederal Reserve and with other banks which resulted in a decrease in yield on FHLB stock and other investments. The dividend rate on FHLB stock has remained the same throughout 2019. The weighted average cost of deposits for the first quarter of 2020 was 1.34%, a decrease of 23 basis points from 1.57% for the same period of 2019. The decline in interest rates experienced in 2019 and 2020 resulted in a decrease in the weighted average cost of deposits for the three months endedMarch 31, 2020 compared to the same period of 2019. Management reduced rates on certain deposits during the second half of 2019 and more recently inMarch 2020 in light of theFOMC rate cuts. The weighted average cost of FHLB advances for the first quarter of 2020 was 1.79%, an increase of 48 basis points from 1.31% for the same period of 2019. The increase in cost of FHLB advances for the first quarter of 2020 compared to the same period of the prior year was due to the accelerated amortization of$1.0 million in premiums for FHLB advances that were paid off during the first quarter of 2019. The amortization of the remaining premiums had the effect of reducing interest expense on FHLB advances, which lowered the overall cost of FHLB advances for the first quarter of 2019. The carrying balance of our convertible notes are net of discount to be amortized and issuance costs to be capitalized. The weighted average cost of our convertible notes was 4.64% for the three months endedMarch 31, 2020 compared to 4.71% for the three months endedMarch 31, 2019 . The cost of our convertible notes consists of the 2.00% coupon rate, the non-cash conversion option rate, and the issuance cost capitalization rate. In 2023, the cost of the convertible notes will decline as the non-cash conversion discount will be fully amortized and the issuance costs will be fully capitalized leaving the coupon rate as the only remaining cost. The weighted average cost of other borrowings (subordinated debentures) for the first quarter of 2020 was 5.86%, a decrease of 133 basis points from 7.19% for the same period of 2019. Subordinated debentures have variable interest rates that are tied to the three month LIBOR rate. The decline in the three month LIBOR rate during the twelve months endedMarch 31, 2020 resulted in a decline in the weighted average cost of other borrowings. 62 -------------------------------------------------------------------------------- The following table presents our consolidated average balance sheet information, together with interest rates earned and paid on the various sources and uses of funds for the periods indicated: Three Months Ended March 31, 2020 2019 Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate* Balance Expense Rate* (Dollars in thousands) INTEREST EARNINGS ASSETS: Loans(1) (2)$ 12,259,848 $ 154,230 5.06 %$ 12,088,169 $ 158,136 5.31 % Securities available for sale(3) 1,712,033 10,609 2.49 % 1,827,612 12,319 2.73 % FHLB stock and other investments 519,309 2,029 1.57 % 405,660 2,675 2.67 % Total interest earning assets 14,491,190 166,868 4.63 % 14,321,441 173,130 4.90 % Total noninterest earning assets 955,617 968,897 Total assets$ 15,446,807 $ 15,290,338 INTEREST BEARING LIABILITIES: Deposits: Demand, interest bearing$ 4,204,406 $ 14,880 1.42 %$ 3,042,524 $ 12,987 1.73 % Savings 274,075 808 1.19 % 223,531 565 1.03 % Time deposits 4,900,405 25,425 2.09 % 5,936,842 33,295 2.27 % Total interest bearing deposits 9,378,886 41,113 1.76 % 9,202,897 46,847 2.06 % FHLB advances 594,890 2,647 1.79 % 810,857 2,614 1.31 % Convertible notes, net 199,960 2,346 4.64 % 194,969 2,298 4.71 % Other borrowings, net 99,252 1,471 5.86 % 98,126 1,763 7.19 % Total interest bearing liabilities 10,272,988 47,577 1.86 % 10,306,849 53,522 2.11 % Noninterest bearing liabilities and equity: Noninterest bearing demand deposits 2,963,136 2,886,746 Other liabilities 183,088 176,251 Stockholders' equity 2,027,595 1,920,492 Total liabilities and stockholders' equity$ 15,446,807 $ 15,290,338 Net interest income/net interest spread$ 119,291 2.77 %$ 119,608 2.79 % Net interest margin 3.31 % 3.39 % Cost of deposits 1.34 % 1.57 %
__________________________________
* Annualized
(1) Interest income on loans includes loan fees
(2) Average balances of loans consist of loans receivable and loans held for
sale
(3) Interest income and yields are not presented on a tax-equivalent basis
63
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Changes in net interest income are a function of changes in interest rates and
volumes of interest earning assets and interest bearing liabilities. The
following table sets forth information regarding the changes in interest income
and interest expense for the periods indicated. The total change for each
category of interest earning assets and interest bearing liabilities is
segmented into the change attributable to variations in volume (changes in
volume multiplied by the old rate) and the change attributable to variations in
interest rates (changes in rates multiplied by the old volume). Nonaccrual loans
are included in average loans used to compute this table.
Three Months Ended
March 31, 2020 over March 31, 2019
Net Change due to:
Increase
(Decrease) Rate Volume
(Dollars in thousands)
INTEREST INCOME:
Loans, including fees $ (3,906 ) $ (6,456 ) $ 2,550
Securities available for sale (1,710 ) (996 ) (714 )
FHLB stock and other investments (646 ) (1,285 ) 639
Total interest income $ (6,262 ) $ (8,737 ) $ 2,475
INTEREST EXPENSE:
Demand, interest bearing $ 1,893 $ (2,575 ) $ 4,468
Savings 243 99 144
Time deposits (7,870 ) (2,526 ) (5,344 )
FHLB advances 33 834 (801 )
Convertible notes, net 48 (26 ) 74
Other borrowings, net (292 ) (313 ) 21
Total interest expense $ (5,945 ) $ (4,507 ) $ (1,438 )
NET INTEREST INCOME $ (317 ) $ (4,230 ) $ 3,913
Provision for Credit Losses
The provision for credit losses reflects our judgment of the current period cost
associated with credit risk inherent in our loan portfolio. The provision for
credit losses for each period is dependent upon many factors, including loan
growth, net charge offs, changes in the composition of the loan portfolio,
delinquencies, assessments by management, third parties' and regulators'
examination of the loan portfolio, the value of the underlying collateral on
problem loans, the general economic conditions in our market areas, and future
projections of the economy. Specifically, the provision for credit losses
represents the amount charged against current period earnings to achieve an
allowance for credit losses that, in our judgment, is adequate to absorb
probable lifetime losses inherent in our loan portfolio. Periodic fluctuations
in the provision for credit losses result from management's assessment of the
adequacy of the allowance for credit losses; however, actual credit losses may
vary in material respects from current estimates. If the allowance for credit
losses is inadequate, we may be required to record additional provision, which
may have a material adverse effect on our business, financial condition, and
results of operations.
The provision for credit losses for the first quarter of 2020 was $28.0 million ,
an increase of $25.0 million from $3.0 million for the same period last year.
The increase in provision for credit losses for 2020 compared to 2019 was due to
the implementation of CECL which now estimates credit losses on the life of
loans. In addition, due to the recent COVID-19 pandemic, we recorded additional
reserves to reflect the economic decline that has resulted from the pandemic. We
used a third party economic forecast of economic performance which projects a
significant decline in macroeconomic variables during the second quarter 2020.
See the "Financial Condition" section of this MD&A for additional information
and further discussion.
64-------------------------------------------------------------------------------- Noninterest Income Noninterest income is primarily comprised of service fees on deposit accounts, international service fees (fees received on trade finance letters of credit), loan servicing fees, wire transfer fees, net gains on sales of loans, net gains on sales and calls of securities available for sale, and other income which includes earnings on bank owned life insurance, swap fee income, changes in the fair value of our equity investments with readily determinable fair value, and other miscellaneous income. Noninterest income for the first quarter of 2020 was$13.3 million compared to$11.4 million for the first quarter of 2019, an increase of$1.8 million , or 16.1%. Noninterest income by category is summarized in the table below: Three Months Ended March 31, Increase (Decrease) 2020 2019 Amount Percent (%) (Dollars in thousands)
Service fees on deposit accounts $ 4,133
(184 ) (4.3 )%
International service fees 790 933 (143 ) (15.3 )%
Loan servicing fees, net 365 730 (365 ) (50.0 )%
Wire transfer fees 998 1,089 (91 ) (8.4 )%
Net gains on sales of other loans 1,855 741 1,114 150.3 %
Other income and fees 5,123 3,612 1,511 41.8 %
Total noninterest income $ 13,264 $ 11,422 $ 1,842 16.1 %
The increase in noninterest income for the first quarter of 2020 compared to the
first quarter of 2019 was due mostly to an increase in in net gains on sales of
other loans and other income and fees offset by declines in other noninterest
income line items.
The decrease in service fees on deposit accounts for the first quarter of 2020
compared to the first quarter of 2019 was due to a decrease in non-sufficient
funds fees collected on deposit accounts.
International service fees declined for the three months ended March 31, 2020
compared to the same period of 2019 due to a decline in fees generated from
trade finance loans. International service fees are earned mostly from trade
finance loans and as the balance of these loans have declined, our associated
fee income has also declined. Trade finance loans declined to $151.2 million at
March 31, 2020 from $172.3 million at March 31, 2019 .
Loan servicing fees, net represents income earned from servicing SBA and
residential mortgage loans that were previously sold. We retain servicing on
most of the loans that we choose to sell. The decrease in loan servicing fees,
net for the three months ended March 31, 2020 compared to the three months ended
March 31, 2019 was due to the shift to not selling SBA loans and an increase in
payoffs of loans that we service. Payoffs of serviced loans results in the full
amortization of the remaining servicing asset, which is recorded as a reduction
to loan servicing fee income, net.
Net gains on sales of other loans represents net gains from the sale of
residential mortgage loans. Residential mortgage loans sold during the first
quarter of 2020 totaled $73.9 million compared to $69.8 million sold during the
first quarter of 2019. The increase in net gains on sales of other loans for the
three months ended March 31, 2020 compared to the three months ended March 31,
2019 was due discount accretion income recognized on residential mortgage loans
sold during the three months ended March 31, 2020 . During the first quarter of
2020, we sold $38.9 million in residential mortgage loans previously classified
as held for investment in a bulk sale transaction most of which were acquired
loans with remaining discounts.
Other income and fees for the first quarter of 2020 increased by $1.5 million
compared to the first quarter of 2019 due mostly to an increase in swap fee
income. Swap fee transactions have increased since March 31, 2019 which has led
to an overall increase in income earned from swap transactions.
65
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Noninterest Expense
Noninterest expense for the first quarter of 2020 was $72.1 million , an increase
of $1.3 million , or 1.8%, from $70.8 million for the same period of 2019.
The breakdown of changes in noninterest expense by category is shown in the
following table:
Three Months Ended March 31, Increase (Decrease)
2020 2019 Amount Percent (%)
(Dollars in thousands)
Salaries and employee benefits
2,073 5.1 % Occupancy 7,410 7,677 (267 ) (3.5 )% Furniture and equipment 4,259 3,446 813 23.6 % Advertising and marketing 1,673 2,062 (389 ) (18.9 )% Data processing and communications 2,631 2,956 (325 ) (11.0 )% Professional fees 3,300 5,380 (2,080 ) (38.7 )% Investments in affordable housing partnership expenses 2,551 2,881 (330 ) (11.5 )% FDIC assessments 1,559 1,551 8 0.5 % Credit related expenses 1,662 678 984 145.1 % OREO (income) expense, net 843 (152 ) 995 N/A Other 3,750 3,925 (175 ) (4.5 )% Total noninterest expense$ 72,140 $ 70,833 $ 1,307 1.8 % The increase in noninterest expense for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 was due primarily to an increase in salaries and employee benefits, furniture and equipment expense, credit related expenses, and OREO expenses, net offset by a decline in professional fees. Salaries and employee benefits expense increased$2.1 million for the first quarter of 2020 compared to the same period in 2019. The increase in salaries and benefits for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 was due to an increase in employees' salaries and stock compensation expenses offset by a decline in commissions paid and temporary staff expenses. The number of full-time equivalent employees decreased from 1,468 atMarch 31, 2019 to 1,458 atMarch 31, 2020 . Furniture and equipment expense increased$813 thousand for the first quarter of 2020 compared to the same period in 2019. The increase in furniture and equipment expense reflect additional expenditures made for software subscriptions, licenses, and IT related equipment. Professional fees experienced a decrease of$2.1 million for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . The decrease in professional fees for 2020 compared to 2019 was due to decreases in professional fees related to the implementation of CECL, IT related professional fees, and internal audit service fees. Credit related expenses increased$984 thousand for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 due to an increase provision for off balance sheet commitments and loan collection expenses for 2020 compared to 2019. OREO (income) expense, net experienced an increase for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 due an increase in OREO valuation allowance expenses. Other noninterest expense for the three months endedMarch 31, 2020 remained largely unchanged compared to expenses for the same period of the prior year. 66 -------------------------------------------------------------------------------- Provision for Income Taxes Income tax provision expense was$6.5 million and$14.4 million for the three months endedMarch 31, 2020 and 2019, respectively. The effective income tax rates were 19.94% and 25.24% for the three months endedMarch 31, 2020 and 2019, respectively. The reduction in effective tax rate for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 was due to the significant reduction in the projected pre-tax book income for 2020 as a result of the impact of the COVID-19 pandemic on the economy. The reduction in projected pre-tax book income for 2020 increased the tax effect of the Company's affordable housing partnership investment tax credits, reducing the overall tax rate for the three months endedMarch 31, 2020 . 67 -------------------------------------------------------------------------------- Financial Condition AtMarch 31, 2020 , our total assets were$16.02 billion , an increase of$354.0 million , or 2.3%, from$15.67 billion atDecember 31, 2019 . The increase in total assets was due to the increase in loans receivable and cash and cash equivalents during the three months endedMarch 31, 2020 . Equity Investments Total equity investments include equity investments with readily determinable fair values and equity investment without readily determinable fair values. Equity investments atMarch 31, 2020 totaled$49.6 million , an increase of$479 thousand , or 1.0%, from$49.1 million atDecember 31, 2019 . AtMarch 31, 2020 , total equity investments with readily determinable fair values totaled$22.5 million consisting of mutual funds. Equity investments with readily determinable fair values atDecember 31, 2019 totaled$22.1 million also consisting of mutual funds. Changes to the fair value of equity investments with readily determinable fair values is recorded in other noninterest income. We also had$27.1 million and$27.0 million in equity investments without readily determinable fair values as ofMarch 31, 2020 andDecember 31, 2019 , respectively. AtMarch 31, 2020 , equity investments without readily determinable fair values included$25.7 million in Community Reinvestment Act investments,$1.0 million in Community Development Financial Institutions investments, and$370 thousand in correspondent bank stock. Equity investments without readily determinable fair values are carried at cost, less impairment, and adjustments are made to the carrying balance based on observable price changes. There were no impairments or observable price changes for equity investments without readily determinable fair values during the three months endedMarch 31, 2020 and 2019. Investment Securities Portfolio AtMarch 31, 2020 , we had$1.72 billion in available for sale securities compared to$1.72 billion atDecember 31, 2019 . The net unrealized gain on the available for sale securities atMarch 31, 2020 was$51.0 million compared to a net unrealized gain on securities of$12.1 million atDecember 31, 2019 . The change in unrealized gain on investment securities fromDecember 31, 2019 toMarch 31, 2020 was due to a decline in treasury rates as a result of the recent decline in interest rates. During the three months endedMarch 31, 2020 ,$56.4 million in investment securities were purchased and$90.6 million in investment securities were paid down. We adopted ASU 2016-13 onJanuary 1, 2020 and implemented the CECL methodology for our investment securities available for sale. At the time of adoption, we did not record a day 1 CECL adjustment on our investment securities available for sale as we determined that a credit impairment did not exist. Subsequently, we performed an analysis on our investment portfolio as ofMarch 31, 2020 and found an allowance for credit losses was not required. The majority of our investment portfolio consists of securities issued byU.S. Government agencies orU.S. Government sponsored enterprises which we determined have zero loss expectation. AtMarch 31, 2020 , we had corporate and municipal securities not issued byU.S. Government agencies orU.S. Government sponsored enterprises that were in unrealized loss positions. Based on our analysis of these investments, we concluded a credit loss did not exist due to the strength of the issuer, high bond ratings, and/or because we still expect full payment of principal and interest. Investments in Affordable Housing Partnerships AtMarch 31, 2020 , we had$80.0 million in investments in affordable housing partnerships compared to$82.6 million atDecember 31, 2019 . The decrease in investments in affordable housing partnerships was due to recorded losses and premium amortizations recorded during the three months endedMarch 31, 2020 . Commitments to fund investments in affordable housing partnerships totaled$20.7 million atMarch 31, 2020 compared to$28.5 million atDecember 31, 2019 . The decline in commitments to fund investments in affordable housing partnerships during the three months endedMarch 31, 2020 was due to cash contributions which reduced the remaining commitment balances. 68 -------------------------------------------------------------------------------- Loan Portfolio AtMarch 31, 2020 , loans receivable totaled$12.58 billion , an increase of$307.4 million from$12.28 billion atDecember 31, 2019 . The following table summarizes our loan portfolio by amount and percentage of total loans outstanding in each major loan category as of the dates indicated: March 31, 2020 December 31, 2019 Amount Percent (%) Amount Percent (%) Loan portfolio composition (Dollars in thousands) Real estate loans: Residential$ 56,727 - %$ 52,558 - % Commercial 8,342,643 67 % 8,316,470 68 % Construction 281,852 2 % 295,523 3 % Total real estate loans 8,681,222 69 % 8,664,551 71 % Commercial business 3,067,132 25 % 2,721,183 22 % Residential mortgage 786,833 6 % 835,188 7 % Consumer and other 48,229 - % 55,085 - % Total loans receivable, net of deferred costs and fees 12,583,416 100 % 12,276,007 100 % Allowance for credit losses (144,923 ) (94,144 ) Loans receivable, net of allowance for credit losses$ 12,438,493 $
12,181,863
Our total loans increased fromDecember 31, 2019 toMarch 31, 2020 largely due to an increase in commercial business loans during the three months endedMarch 31, 2020 . Commercial business loans increased$346.0 million fromDecember 31, 2019 toMarch 31, 2020 due to a combination of new loan originations and line of credit commitment drawdowns. During the first quarter of 2020 we saw slightly elevated line utilization rates as a result of economic uncertainty brought about by the COVID-19 pandemic. The increase in commercial business loans was somewhat offset by a decline in residential mortgage loans of$48.4 million due to pay-downs and payoffs. We normally do not extend lines of credit or make loan commitments to business customers for periods in excess of one year. We use the same credit policies in making commitments and conditional obligations as we do for providing loan facilities to our customers. We perform annual reviews of such commitments prior to renewal. The following table shows our loan commitments and letters of credit outstanding at the dates indicated:March 31, 2020 December 31, 2019 (Dollars in thousands)
Commitments to extend credit
126,448 113,720
Other commercial letters of credit 28,924 37,627
Total $ 1,800,815 $ 2,016,294
69-------------------------------------------------------------------------------- Nonperforming Assets Nonperforming assets, which consist of nonaccrual loans, loans 90 days or more past due and on accrual status, accruing restructured loans, and OREO totaled$139.9 million atMarch 31, 2020 compared to$122.1 million atDecember 31, 2019 . The ratio of nonperforming assets to loans receivable and OREO was 1.11% atMarch 31, 2020 and 0.99% atDecember 31, 2019 . The following table summarizes the composition of our nonperforming assets as of the dates indicated. March 31, 2020 December 31, 2019 (Dollars in thousands) Nonaccrual loans (1)$ 72,639 $ 54,785 Loans 90 days or more days past due, still accruing 387 7,547 Accruing restructured loans 43,789 35,709 Total nonperforming loans 116,815 98,041 OREO 23,039 24,091 Total nonperforming assets$ 139,854 $ 122,132 Nonperforming loans to loans receivable 0.93 % 0.80 % Nonperforming assets to loans receivable and OREO 1.11 % 0.99 % Nonperforming assets to total assets 0.87 % 0.78 % Allowance for credit losses to nonperforming loans 124.06 % 96.03 % Allowance for credit losses to nonperforming assets 103.62 %
77.08 %
__________________________________
(1) Nonaccrual loans exclude guaranteed portion of delinquent SBA loans that are
in liquidation totaling
as of December 31, 2019 . Nonaccrual loans for December 31, 2019 also
excludes PCI loans.
Allowance for Credit Losses
On January 1, 2020 the Company adopted ASU 2016-13, "Measurement of Credit
Losses on Financial Instruments", or CECL which significantly changed the credit
losses estimation model for loan and investments. On March 27, 2020 , President
Donald Trump signed into law the CARES Act in response to the global pandemic.
The CARES Act includes a provision that temporarily delays the required
implementation date of ASU 2016-13. However, we chose not to elect to delay the
adoption of ASU 2016-13 and implements the CECL methodology as of January 1,
2020 . On January 1, 2020 , we recorded a $26.2 million day 1 CECL adjustment as a
result of adopting the new standard.
The allowance for credit losses ("ACL") was $144.9 million at March 31, 2020
compared to allowance for loan losses of $94.1 million at December 31, 2019 . The
ACL was 1.15% of loans receivable at March 31, 2020 and 0.77% of loans
receivable at December 31, 2019 . The ACL to loans receivable ratio does not
include non-credit related discount on acquired loans. Total discount on
acquired loans at March 31, 2020 and December 31, 2019 totaled $36.5 million and
$45.9 million , respectively. ACL on individually evaluated loans increased to
$5.5 million at March 31, 2020 from $3.4 million at December 31, 2019 .
Subsequent to the completion of the ACL calculation as of March 31, 2020 , we
received updated macroeconomic forecast scenarios in April 2020 , which reflects
more projected deterioration in GDP and unemployment compared to the scenario
incorporated into our ACL calculation as of March 31, 2020 . The updated April
2020 forecast scenario information was not reflected in our ACL as of March 31,
2020 . If those forecasts remain unchanged or decline further, we would expect
additional increases in ACL and additional provision for credit losses expense.
70
--------------------------------------------------------------------------------The following table reflects our allocation of the ACL by loan type and the ratio of each loan segment to total loans as of the dates indicated:
Allocation of Allowance for Credit Losses
March 31, 2020 December 31, 2019
Percent of Percent of
Allowance for Loans Allowance to Allowance for Loans Allowance to
Credit Losses Receivable* Loans Receivable Loan Losses Receivable* Loans Receivable
(Dollars in thousands)
Loan Type
Real estate -
residential $ 399 $ 56,727 0.70 % $ 204 $ 52,558 0.39 %
Real estate -
commercial 92,560 8,342,643 1.11 % 51,712 8,316,470 0.62 %
Real estate -
construction 1,686 281,852 0.60 % 1,677 295,523 0.57 %
Commercial business 42,883 3,067,132 1.40 % 33,032 2,721,183 1.21 %
Residential
mortgage 5,779 786,833 0.73 % 5,942 835,188 0.71 %
Consumer and other 1,616 48,229 3.35 % 1,577 55,085 2.86 %
Total $ 144,923 $ 12,583,416 1.15 % $ 94,144 $ 12,276,007 0.77 %
__________________________________
* Held-for-sale loans of$8.3 million and$54.3 million atMarch 31, 2020 andDecember 31, 2019 , respectively, were excluded. 71
--------------------------------------------------------------------------------
The following table shows the provisions for credit losses, the amount of loans
charged off, and the recoveries on loans previously charged off, together with
the balance of the ACL at the beginning and end of each period, the balance of
average loans and loans receivable outstanding, and certain other ratios as of
the dates and for the periods indicated:
At or for the Three Months Ended
March 31,
2020 2019
(Dollars in thousands)
LOANS:
Average loans, including loans held for sale $ 12,259,848 $ 12,088,169
Loans receivable $ 12,583,416 $ 12,054,004
ALLOWANCE:
Balance, beginning of period $ 94,144 $ 92,557
Less loan charge offs:
Real estate - commercial (2,397 ) (60 )
Commercial business (3,035 ) (1,408 )
Consumer and other (525 ) (286 )
Total loan charge offs (5,957 ) (1,754 )
Plus loan recoveries:
Real estate - commercial 167 1,127
Commercial business 2,359 158
Consumer and other 10 7
Total loans recoveries 2,536 1,292
Net loan charge offs (3,421 ) (462 )
CECL day 1 adoption impact 26,200 -
Provision for credit losses 28,000 3,000
PCI allowance adjustment - (878 )
Balance, end of period $ 144,923 $ 94,217 Net loan charge offs to average loans, including loans held for sale*
0.11 % 0.02 %
Allowance for credit losses to loans receivable at end of period
1.15 % 0.78 %
Net loan charge offs to allowance for credit losses* 9.44 % 1.96 %
Net loan charge offs to provision for credit losses 12.22 % 15.40 %
__________________________________
* Annualized
We believe the ACL as ofMarch 31, 2020 was adequate to absorb lifetime losses in the loan portfolio. However, no assurance can be given that actual losses will not exceed the estimated amounts. If the effect of the COVID-19 pandemic are worse than we currently expect, or if the effects are prolonged, actual losses could exceed the estimated amounts which could have a material and adverse effect on our financial condition and results of operations. During the first quarter of 2020, we received a large number of modification requests from borrowers affected by the COVID-19 pandemic. As a result, we recorded additional qualitative reserves to account for potential credit risk from the expected increase in loan modifications under the CARES Act. OREO AtMarch 31, 2020 , OREO, net totaled$23.0 million , decrease of$1.1 million compared to$24.1 million atDecember 31, 2019 . During the three months endedMarch 31, 2020 , one loan was transferred to OREO totaling$980 thousand and we sold three OREO that had a carrying balance of$1.0 million . OREO valuation allowance for the three months endedMarch 31, 2020 totaled$1.0 million . 72 -------------------------------------------------------------------------------- Deposits, Other Borrowings, and Convertible Notes Deposits Deposits are our primary source of funds used in lending and investment activities. AtMarch 31, 2020 , deposits increased$309.2 million , or 2.5%, to$12.84 billion from$12.53 billion atDecember 31, 2019 . The increase in deposits was primarily due to an increase in money market and NOW account balances offset by a decline in time deposit balances, demand deposits, and savings. AtMarch 31, 2020 , 23.5% of total deposits were noninterest bearing demand deposits, 36.6% were time deposits, and 39.9% were interest bearing demand and savings deposits. AtDecember 31, 2019 , 24.8% of total deposits were noninterest bearing demand deposits, 41.2% were time deposits, and 34.0% were interest bearing demand and savings deposits. AtMarch 31, 2020 , we had$1.75 billion in brokered deposits and$300.0 million in California State Treasurer deposits compared to$1.48 billion in brokered deposits and$300.0 million in California State Treasurer deposits atDecember 31, 2019 . The California State Treasurer time deposits atMarch 31, 2020 , had original maturities ranging from three to six months, had a weighted average interest rate of 1.37%, and were collateralized with securities with a fair value of$339.8 million . Time deposits of more than$250 thousand atMarch 31, 2020 totaled$1.85 billion compared to$1.86 billion atDecember 31, 2019 . We increased our brokered deposit balances during the three months endedMarch 31, 2020 to enhance our overall liquidity in consideration of the recent COVID-19 pandemic. However, since the declaration of the pandemic, we have not experienced any meaningful deposit run-off. The following is a schedule of certificates of deposit maturities as ofMarch 31, 2020 : Balance Percent (%) (Dollars in thousands) Three months or less $ 1,459,587 31 % Over three months through six months 1,265,321 27 % Over six months through nine months 892,536 19 % Over nine months through twelve months 1,000,726 21 % Over twelve months 84,677 2 % Total time deposits $ 4,702,847 100 % FHLB Advances and Other Borrowings We utilize FHLB advances as a secondary source of funds in addition to deposits which we consider our primary source of funding. FHLB advances are typically secured by pledged loans and/or securities with a market value at least equal to the outstanding advances plus our investment in FHLB stock. AtMarch 31, 2020 , FHLB advances totaled$675.0 million and had an average weighted remaining maturity of 1.0 year compared to$625.0 million with an average weighted remaining maturity of 1.2 years atDecember 31, 2019 . Total FHLB advances atMarch 31, 2020 andDecember 31, 2019 did not include any FHLB advance premiums. We did not have federal funds purchased atMarch 31, 2020 andDecember 31, 2019 . Trust Preferred Securities accrue and pay distributions periodically at specified annual rates as provided in the related indentures for the securities. The trusts used the net proceeds from their respective offerings to purchase a like amount of subordinated debentures (the "Debentures") issued by us. The Debentures are the sole assets of the trusts. Our obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by us of the obligations of the trusts. Subordinated debentures totaled$103.3 million atMarch 31, 2020 and$103.0 million atDecember 31, 2019 . The Trust Preferred Securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. We have the right to redeem the Debentures in whole (but not in part) on or after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date. 73 -------------------------------------------------------------------------------- Convertible Notes During the second quarter of 2018, we issued$217.5 million aggregate principal amount of 2.00% convertible senior notes maturing onMay 15, 2038 in a private offering to qualified institutional buyers under Rule 144A of the Securities Act of 1933. The convertible notes were issued as part of our plan to repurchase common stock. The convertible notes pay interest on a semi-annual basis to holders of the notes. The convertible notes can be called by us, in whole or in part, at any time after five years for the original issued amount in cash. Holders of the notes can put the notes for cash on the fifth, tenth, and fifteenth year of the notes. The net carrying balance of convertible notes atMarch 31, 2020 was$200.7 million , net of$16.8 million in discounts, which represents the conversion option discount and capitalized issuance costs. AtDecember 31, 2019 , the net carrying balance of convertible notes was$199.5 million , net of$18.0 million in discounts and issuance costs. (See footnote 10 "Subordinated Debentures and Convertible Notes" for additional information regarding convertible notes issued) Off-Balance-Sheet Activities and Contractual Obligations We routinely engage in activities that involve, to varying degrees, elements of risk that are not reflected, in whole or in part, in the consolidated financial statements. These activities are part of our normal course of business and include traditional off-balance-sheet credit-related financial instruments, interest rate swap contracts, and long-term debt. Traditional off-balance-sheet credit-related financial instruments are primarily commitments to extend credit and standby letters of credit. These activities could require us to make cash payments to third parties if certain specified future events occur. The contractual amounts represent the extent of our exposure in these off-balance-sheet activities. These activities are necessary to meet the financing needs of our customers. We enter into interest rate swap contracts under which we are required to either receive cash from or pay cash to counterparties depending on changes in interest rates. We utilize interest rate swap contracts, interest rate floors, and interest rate caps to help manage the risk of changing interest rates. We also sell interest rate swaps to certain adjustable rate commercial loan customers to fix the interest rate on their floating rate loans. When the fixed rate swap is originated with the customer, an identical offsetting swap is also entered into by us with a correspondent bank. We enter into various stand-alone mortgage-banking derivatives in order to hedge the risk associated with the fluctuation of interest rates. The first type of derivative, an interest rate lock commitment, is a commitment to originate loans whereby the interest rate on the loan is determined prior to funding. To mitigate interest rate risk on these rate lock commitments we also enter into forward commitments, or commitments to deliver residential mortgage loans on a future date, also considered derivatives. Net change in the fair value of derivatives represents income recorded from changes in fair value for these mortgage derivatives instruments. We do not anticipate that our current off-balance-sheet activities will have a material impact on our future results of operations or our financial condition. Further information regarding our financial instruments with off-balance-sheet risk can be found in Item 3 "Quantitative and Qualitative Disclosures about Market Risk."Stockholders' Equity and Regulatory Capital Historically, our primary source of capital has been the retention of earnings, net of interest payments on Debentures and convertible notes and dividend payments to stockholders. We seek to maintain capital at a level sufficient to assure our stockholders, customers, and regulators that we and the Bank are financially sound. For this purpose, we perform ongoing assessments of capital related risks, components of capital, as well as projected sources and uses of capital in conjunction with projected increases in assets and levels of risks. Total stockholders' equity was$2.02 billion atMarch 31, 2020 compared to$2.04 billion atDecember 31, 2019 . The federal banking agencies require a minimum ratio of qualifying total capital to risk-weighted assets of 8.0%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, and a minimum ratio of Tier 1 common equity capital to risk-weighted assets of 4.5%, to generally be considered "adequately capitalized" under the Prompt Corrective Action regulations. In addition to the risk-based guidelines, federal banking agencies require banking organizations to maintain a minimum amount of Tier 1 capital to average total assets, referred to as the leverage ratio, of 4.0% to generally be considered "adequately capitalized" under the Prompt Corrective Action regulations. Federal banking agencies also require a capital conservation buffer of 2.50% in addition to the ratios required to generally be considered "adequately capitalized" under the Prompt Corrective Action regulations. Failure to maintain this capital conservation buffer results in limits or prohibitions on capital distributions and discretionary compensation payments. Capital requirements apply to us and the Bank separately. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. 74 -------------------------------------------------------------------------------- AtMarch 31, 2020 , our common equity Tier 1 capital was$1.53 billion compared to$1.55 billion atDecember 31, 2019 . Our Tier 1 capital, defined as stockholders' equity less intangible assets and includes our trust preferred securities, was$1.63 billion atMarch 31, 2020 and$1.65 billion atDecember 31, 2019 . AtMarch 31, 2020 , the common equity Tier 1 capital ratio was 11.44%. The total capital to risk-weighted assets ratio was 13.08% and the Tier 1 capital to risk-weighted assets ratio was 12.19%. The Tier 1 leverage capital ratio atMarch 31, 2020 was 10.88%. AtMarch 31, 2020 andDecember 31, 2019 , the most recent regulatory notification generally categorized the Bank as "well capitalized" under the general regulatory framework for Prompt Corrective Action. To be generally categorized as "well-capitalized" the Bank must maintain minimum common equity Tier 1 capital, total risk-based, Tier 1 risk-based, and Tier 1 leverage capital ratios as set forth in the table below: As of March 31, 2020 Actual To Be Well-Capitalized Excess Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Hope Bancorp, Inc. Common equity Tier 1 capital ratio (to risk-weighted assets)$ 1,527,666 11.44 % N/A N/A N/A N/A Total risk-based capital ratio (to risk-weighted assets)$ 1,746,523 13.08 % N/A N/A N/A N/A Tier 1 risk-based capital ratio (to risk-weighted assets)$ 1,627,083 12.19 % N/A N/A N/A N/A Tier 1 capital to total assets (to average assets)$ 1,627,083 10.88 % N/A N/A N/A N/A Bank of Hope Common equity Tier 1 capital ratio (to risk-weighted assets)$ 1,804,000 13.52 %$ 867,533 6.50 %$ 936,467 7.02 % Total risk-based capital ratio (to risk-weighted assets)$ 1,950,169 14.61 %$ 1,334,667 10.00 %$ 615,502 4.61 % Tier 1 risk-based capital ratio (to risk-weighted assets)$ 1,804,000 13.52 %$ 1,067,733 8.00 %$ 736,267 5.52 % Tier 1 capital to total assets (to average assets)$ 1,804,000 12.05 %$ 748,353 5.00 %$ 1,055,647 7.05 % As of December 31, 2019 Actual To Be Well-Capitalized Excess Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Hope Bancorp, Inc. Common equity Tier 1 capital ratio (to risk-weighted assets)$ 1,553,697 11.76 % N/A N/A N/A N/A Total risk-based capital ratio (to risk-weighted assets)$ 1,747,611 13.23 % N/A N/A N/A N/A Tier 1 risk-based capital ratio (to risk-weighted assets)$ 1,652,831 12.51 % N/A N/A N/A N/A Tier 1 capital to total assets (to average assets)$ 1,652,831 11.22 % N/A N/A N/A N/A Bank of Hope Common equity Tier 1 capital ratio (to risk-weighted assets)$ 1,811,862 13.72 %$ 858,462 6.50 %$ 953,400 7.22 % Total risk-based capital ratio (to risk-weighted assets)$ 1,906,642 14.44 %$ 1,320,711 10.00 %$ 585,931 4.44 % Tier 1 risk-based capital ratio (to risk-weighted assets)$ 1,811,862 13.72 %$ 1,056,569 8.00 %$ 755,293 5.72 % Tier 1 capital to total assets (to average assets)$ 1,811,862 12.29 %$ 737,005 5.00 %$ 1,074,857 7.29 % 75
-------------------------------------------------------------------------------- Liquidity Management Liquidity risk is the risk of reduction in our earnings or capital that would result if we were not able to meet our obligations when they come due without incurring unacceptable losses. Liquidity risk includes the risk of unplanned decreases or changes in funding sources and changes in market conditions that affect our ability to liquidate assets quickly and with minimum loss of value. Factors considered in liquidity risk management are the stability of the deposit base; the marketability, maturity, and pledging of our investments; the availability of alternative sources of funds; and our demand for credit. The objective of our liquidity management is to have funds available to meet cash flow requirements arising from fluctuations in deposit levels and the demands of daily operations, which include funding of securities purchases, providing for customers' credit needs, and ongoing repayment of borrowings. Our primary sources of liquidity are derived from financing activities, which include customer and broker deposits, federal funds facilities, and borrowings from the FHLB and the FRB Discount Window. These funding sources are augmented by payments of principal and interest on loans and securities, proceeds from sale of loans, and the liquidation or sale of securities from our available for sale portfolio. Primary uses of funds include withdrawal of and interest payments on deposits, originations of loans, purchases of investment securities, and payment of operating expenses. AtMarch 31, 2020 , our total borrowing capacity from the FHLB was$3.92 billion of which$3.20 billion was unused and available to borrow. AtMarch 31, 2020 , our total borrowing capacity from the FRB Discount Window was$762.1 million , all of which was unused and available to borrow. In addition to these lines, our liquid assets, consisting of cash and cash equivalents, interest bearing cash deposits and time deposits with other banks, liquid investment securities available for sale, and equity investments were$2.08 billion atMarch 31, 2020 compared to$1.95 billion atDecember 31, 2019 . Cash and cash equivalents were$802.0 million atMarch 31, 2020 compared to$698.6 million atDecember 31, 2019 . We believe our liquidity sources are sufficient to meet all reasonably foreseeable short-term and intermediate-term needs. As a result of the recent COVID-19 pandemic we review our liquidity position on a daily basis. The pandemic has not yet materially impacted our liquidity position. We have not experienced any meaningful deposit run off and our sources of funds remain available for use. 76
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