OP Bancorp — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are against December 31, 2020 unless otherwise noted. OP Bancorp is the holding company for Open Bank, a California-chartered bank focused on deposits and commercial lending, principally in Southern California. The company operated nine branches and four loan production offices.
Financial performance and position
| Metric | Q1 2021 | Comparable / prior period |
|---|---|---|
| Net income | $5.1 million; diluted EPS $0.33 | $3.3 million; diluted EPS $0.21 in Q1 2020 |
| Net interest income | $12.8 million | $11.1 million in Q1 2020 |
| Net interest margin | 3.80% | 3.95% in Q1 2020 |
| Noninterest income / expense | $3.0 million / $8.0 million | $2.3 million / $8.2 million in Q1 2020 |
| Provision for loan losses | $620,000 | $743,000 in Q1 2020 |
| Total assets | $1.455 billion | $1.367 billion at December 31, 2020 |
| Gross loans / deposits | $1.156 billion / $1.285 billion | $1.100 billion / $1.200 billion at December 31, 2020 |
| Shareholders’ equity | $147.0 million | $143.4 million at December 31, 2020 |
- Net income increased 53.9% year over year. Management attributed the improvement mainly to higher net interest income and noninterest income, partly offset by higher income tax expense.
- Interest income declined 5.0% to $13.6 million, but interest expense fell 72.8% to $877,000 as deposit rates repriced lower. Net interest income rose 14.7%; net interest spread improved to 3.56% from 3.32%, while margin declined from 3.95% to 3.80%.
- Noninterest income increased 29.2%, primarily on higher SBA loan-sale gains and servicing fees. Noninterest expense declined 2.9%; the efficiency ratio improved to 50.67% from 61.19%.
- Annualized return on average assets was 1.44% versus 1.12%; return on average equity was 14.02% versus 9.44% in Q1 2020.
- Cash and cash equivalents were $127.5 million at quarter-end. Operating cash flow was $4.9 million, investing cash flow was negative $68.0 million, and financing cash flow was positive $84.2 million; cash increased $21.1 million during the quarter.
- Loans grew 5.1% from year-end, including increased SBA PPP lending; deposits rose 7.1%. Noninterest-bearing deposits were $572.0 million, or 44.5% of deposits.
- The allowance for loan losses was $15.3 million, or 1.33% of gross loans (1.47% excluding fully guaranteed PPP loans), versus 1.40% at year-end. Nonperforming loans were $1.15 million, up from $985,000; there were no net charge-offs in Q1 2021.
- Borrowings included $5.0 million of FHLB advances at a 0% rate. The company reported $501.8 million in available borrowing capacity across listed facilities, supported by pledged collateral. Bank regulatory capital ratios exceeded well-capitalized thresholds; the Bank’s total risk-based capital ratio was 14.77% and leverage ratio was 10.17%.
Material changes and notable items
- Loan growth included $113.6 million of SBA PPP loans at March 31, compared with $64.9 million at year-end. The company originated 1,336 second-draw PPP loans totaling $74.2 million during the quarter. First-draw PPP forgiveness totaled $22.9 million by quarter-end.
- Of 185 loans with $236.8 million of cumulative COVID-related deferrals, 171 loans totaling $217.8 million had resumed payments or been paid off. Fourteen loans totaling $19.0 million remained deferred. Remaining business-loan deferrals were concentrated in hotel/motel borrowers.
- Available-for-sale securities rose to $102.4 million from $91.8 million. Unrealized losses increased to $587,000 from $57,000; management said it did not consider the losses other-than-temporary and did not expect to be required to sell the securities before recovery.
- Commercial real estate represented approximately 57% of gross loans; 80.2% of gross loans were secured by real property. Real estate lessors represented 37.1% of the disclosed commercial loan portfolio by industry, while hotel/motel loans represented 14.1%.
- Q1 loan-loss provision included a $636,000 allocation to the allowance for accrued interest receivable associated with deferred loans and loans not fully caught up on accrued interest. The reported income-statement provision was $620,000; these amounts refer to distinct allowance components as described in the filing.
- Cash dividends declared were $1.1 million. The company repurchased 3,830 shares during the quarter; no shares remained available under the repurchase program as of January, and the filing reports 298,484 shares available at March 31.
Outlook, risks and contingencies
- No specific earnings or financial guidance was provided. Management said it anticipated many business customers would resume full operations as vaccinations accelerated and governments reopened businesses, while emphasizing the continuing uncertainty and potential adverse effects of COVID-19.
- Key risks include credit deterioration and allowance adequacy, commercial real estate and geographic concentration, PPP eligibility and forgiveness or audit requirements, interest-rate changes, deposit and liquidity conditions, competition, regulatory requirements, and technology or third-party service disruptions.
- At March 31, interest-rate simulations estimated net interest income would rise 5.37% under an immediate +100-basis-point scenario and 15.59% under +400 basis points; a -100-basis-point scenario showed a 0.66% decline. Economic value of equity sensitivity was negative 9.02% at +400 basis points and negative 19.07% at -100 basis points. These are model estimates, not forecasts.
- Undisbursed credit commitments totaled $118.5 million, including $108.9 million of commitments to extend credit. Management did not anticipate material losses from these arrangements. No adverse pending legal actions requiring disclosure were reported.
- The company expects to adopt the current expected credit losses standard (CECL) in January 2023 and was evaluating its effects; it expects added complexity and costs. It was transitioning from LIBOR to SOFR and did not expect the transition to be material to income.
Important facts for investors to verify
- Whether remaining COVID-related deferrals, particularly hotel/motel exposures, resume regular payments and whether accrued-interest allowances prove adequate.
- PPP loan forgiveness, SBA eligibility and audit outcomes, and the impact of PPP balances on reported loan growth, yields and fee income.
- Credit quality trends in commercial real estate and other concentrated markets, including the increase in nonperforming loans and the assumptions underlying the allowance.
- Deposit stability, uninsured time-deposit maturities, available collateral and borrowing capacity, and liquidity needs as loans grow.
- Interest-rate simulation assumptions and actual effects on net interest margin, earnings and economic value of equity.
- Movements in securities’ unrealized losses and the company’s ability and intention to hold affected securities until recovery.