OP Bancorp (OPBK) — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter results. OP Bancorp is a California bank holding company; its subsidiary, Open Bank, focuses on commercial and community banking, particularly serving Korean-American communities and small and medium-sized businesses.
Financial performance and condition
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net interest income | $41.0 million | $35.7 million |
| Noninterest income | $9.3 million | $9.0 million |
| Net income | $14.3 million | $9.2 million |
| Diluted EPS | $0.89 | $0.66 |
| Net interest margin | 4.49% | 4.61% |
| Efficiency ratio | 58.79% | 58.74% |
- Fourth-quarter net income was $3.8 million, versus $1.9 million in Q4 2017. Q4 net interest income was $10.9 million; noninterest income was $2.1 million.
- Net interest income rose 14.7% for the year as average earning assets and loan yields increased. Interest expense nearly doubled, chiefly as deposit costs rose; cost of deposits increased to 1.09% from 0.62%.
- Total assets were $1.044 billion, up 15.9%; gross loans were $875.1 million, up 17.0%; deposits were $905.2 million, up 17.1%; and shareholders’ equity was $129.8 million at year-end.
- Loan portfolio concentration remained significant: commercial real estate was $503.8 million, or 57.6% of gross loans. About 85.6% of gross loans were secured by real property.
- Credit quality weakened from a low base: nonperforming loans were $1.9 million, or 0.22% of gross loans, versus $1.0 million and 0.14% a year earlier. Allowance for loan losses was $9.6 million, 1.10% of loans, compared with $9.1 million and 1.22% in 2017. Net charge-offs were 0.09% of average loans.
- Cash and cash equivalents were $77.7 million at year-end. Operating cash flow was $30.6 million; investing cash flow was negative $146.3 million and financing cash flow was positive $130.2 million. Cash increased $14.5 million during the year.
- The Bank had no FHLB advances outstanding at year-end, compared with $25 million in 2017. It reported $330.9 million of available borrowing capacity across listed facilities. Total liabilities were $914.4 million, primarily deposits.
- Regulatory capital remained strong: the Bank’s CET1 ratio was 15.12%, total risk-based capital ratio 16.25%, and leverage ratio 12.87%. It was classified as well-capitalized.
Material changes and unusual items
- OP Bancorp completed its IPO in March 2018, issuing 2.3 million shares at $11.00 per share and receiving approximately $22.6 million in net proceeds. The share issuance contributed to higher year-end equity and supported growth.
- Higher earnings reflected increased net interest income and lower income tax expense, partly offset by higher operating costs. The 2018 effective tax rate was 26.8%, versus 46.1% in 2017; 2017 included a $1.3 million deferred-tax-asset revaluation following federal tax reform.
- Noninterest expense increased 12.6% to $29.6 million, including higher salaries, professional fees related to the IPO, and Foundation contributions. The company’s annual Foundation commitment is 10% of consolidated after-tax income.
- SBA loan-sale gains were $4.9 million, nearly unchanged year over year, although the average sale premium declined to 7.19% from 9.30%. Management attributed this to accelerated borrower refinancing.
- The company opened a Santa Clara branch in 2018 and planned a Carrollton, Texas branch for Q2 2019. In 2019, it announced a $0.05 quarterly dividend and a repurchase authorization for up to 400,000 shares; 258,885 shares had been repurchased by March 15, 2019. No cash dividends were paid in 2018 or 2017.
Outlook, risks and contingencies
Management emphasized organic growth, branch expansion, commercial lending, and growing lower-cost deposits. The filing does not provide quantified earnings or revenue guidance. Management expected to continue expanding, while noting new-branch costs and the possibility that growth could pressure margins, liquidity, or credit quality.
- Key exposures include CRE and other real-estate collateral, geographic concentration in Southern California, commercial borrower performance, and an initially less-seasoned loan portfolio. Most single-family mortgage loans were non-qualified loans, which management describes as less liquid and higher risk.
- Rising rates may increase deposit funding costs and compress margins; modeled net interest income sensitivity was positive under rate increases and negative under a 100-basis-point decline. These are simulations, not forecasts.
- Other stated risks include deposit competition and wholesale funding reliance, SBA program and loan-sale risks, regulatory and capital requirements, cybersecurity and third-party service-provider dependence, and execution risks from expansion.
- The company reported no pending legal claims and no material loss contingencies identified by management. It was evaluating CECL, effective for the company for fiscal years beginning after December 15, 2019; management expected added complexity and implementation costs, but had not quantified the financial impact.
Important facts for investors to verify
- Reconcile the filing’s differing descriptions of SBA loan-sale amounts and servicing portfolio balances; the text reports some figures inconsistently.
- Track subsequent credit performance, especially nonperforming SBA and commercial loans, charge-offs, and adequacy of the allowance as the fast-growing portfolio seasons.
- Assess CRE concentration, real-estate collateral values, deposit mix and pricing, and the impact of further interest-rate changes on net interest margin.
- Verify execution and costs of the Carrollton branch expansion, and the effects of the announced dividend and share repurchases on capital and liquidity.
- Review the full audited financial statements and subsequent filings for cash-flow trends, CECL adoption effects, and any changes in capital, funding access, or regulatory status.