Hope Bancorp: A Quality Small-Cap Bank
Hope Bancorp Inc. (NASDAQ:HOPE) is an interesting small-cap bank opportunity that recently caught my eye. It operates Bank of Hope, which is the first and only super regional bank that caters to the Korean-American population. The company is headquartered in Los Angeles and serves a multi-ethnic population across the nation with branches in California, Washington, Texas, Illinois, New York, New Jersey, Virginia and Alabama.
The bank also operates SBA loan production offices in Seattle, Denver, Dallas, Atlanta, Portland, Oregon, New York City, Northern California and Houston; commercial loan production offices in Northern California and Seattle; residential mortgage loan production offices in California; and a representative office in Seoul, Korea.
Bank of Hope specializes in core business banking products for small and medium-sized businesses, with an emphasis in commercial real estate and commercial lending, SBA lending and international trade financing.
Althoigh some of the company's predecessor banks date back over 40 years, the current structure was formed in June 2000. As of March 31, the company had total assets of $17.8 billion and total stockholders' equity of $2.0 billion.
Loan portfolio characteristics
As of the end of 2021, approximately 52% of the outstanding loan portfolio was based in Southern California. The Eastern regions of the U.S. comprise about 17% of the portfolio with Northern California coming in next at 7%.
The bank is primarily a commercial lender with 65% of the loan portfolio being commercial restate (43% non-owner occupied and 22% owner-occupied). The remaining portfolio is comprised of commercial and industrial projects (30%) and consumer (5%). Within those sectors, there is also a wide range of diverse projects and industry applications.
The Bank of Hope represents about half of the parent companys total business. Other bank brands include Open Bank, Hanmi Bank, New Millennium Bank, Metro City Bank and Pacific City Bank.
Korean-American community
The U.S. is home to the largest Korean diaspora community in the world. There are estimated to be approximately 1.9 million Korean-Americans living in the country today. The largest population of this group lives in California, where they represent a population that is almost three times larger than the next biggest state, which is New York. This community has average earnings and income statistics substantially above U.S. averages. There have been five Korean-Americans elected to the U.S. Congress.
Financial review
The company reported its first-quarter 2022 earnings on April 18, and the results were very encouraging for investors. Net income increased 18% while loan originations increased 21% to $1.03 billion. The quality of the loan portfolio improved substantially with total nonperforming assets decreasing 8.4% and criticized loans decreasing 21.2%. CEO Kevin Kim said:
The momentum in our business development efforts continued to build with record first quarter production volume of $1.03 billion, which resulted in 6.7% growth in loans receivable on an annualized basis, excluding PPP loans. Given the increased productivity of our larger banking teams and our more diversified areas of lending expertise, we believe we are well positioned to deliver a very strong year of new loan production that will ultimately lead to enhanced growth in earnings and shareholder returns.
The bank's return ratios all showed improvement with return on assets increasing to 1.37%, return on equity increasing to 11.62% and return on tangible common equity increasing to 15.01%. However, the companys efficiency ratio increased to 51.50%. An efficiency ratio is a measure of a bank's ability to control expenses and operate efficiently, and a number below 50% is usually optimal.
Valuation
The companys tangible book value per share at the end of the quarter was $13.04 and the book value per share was $16.96. The stock is trading at 1.23 times tangible book value, which is below the small-mid cap regional bank average of 1.83.
The stock is trading at only 9 times analysts' consensus earnings per share estimates of $1.77 for 2022, which is below the industry average of approximately 13. The company pays an above-market dividend yield of 3.60% compared to the industry average of about 2.2%.
Guru trades
Gurus who have purchased the stock recently include Jim Simons (Trades, Portfolio) and John Hussman (Trades, Portfolio), while those who have sold the stock recently include Jeremy Grantham (Trades, Portfolio) and Hotchkis & Wiley.
Conclusion
Hope Bancorp appears to be undervalued based on industry competitors as well as potential growth opportunities the company is seeking. The quality of the bank's loan portfolio is improving and their capital ratios look satisfactory enough to withstand a minor downturn in the commercial real estate sector. In addition, the company may make a good acquisition target for a mid-size or large-cap bank looking to expand.
This article first appeared on GuruFocus.
