OP Bancorp — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018 unless noted. OP Bancorp is a bank holding company whose sole operating subsidiary, Open Bank, provides commercial banking services, principally in California. The bank opened a ninth full-service branch in Carrollton, Texas, in April 2019. Amounts below are in millions except per-share data and ratios.
Key financial results
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Interest income | $14.09 | $11.18 |
| Net interest income | $10.80 | $9.56; up 13.0% |
| Net interest margin | 4.38% | 4.56% |
| Noninterest income | $3.58 | $2.21; up 62.0% |
| Noninterest expense | $8.12 | $6.81; up 19.3% |
| Provision for loan losses | $0 | $0.58 |
| Net income | $4.74 | $3.22; up 47.4% |
| Diluted earnings per share | $0.29 | $0.22 |
| Operating cash flow | $2.65 | $(1.39) |
- Annualized return on average assets was 1.83% (1.43% in Q1 2018); return on average equity was 14.46% (13.64%). The efficiency ratio improved to 56.48% from 57.86%.
- Net interest income increased with loan and securities growth and higher asset yields. However, deposit costs rose: average cost of interest-bearing liabilities increased to 2.10% from 1.23%, while net interest margin and spread declined.
- Noninterest income growth included a one-time $1.2 million gain related to company-owned life insurance. Higher salaries and benefits, other expenses, and charitable contributions contributed to expense growth. Average full-time equivalent employees rose to 158.5 from 136.5.
Financial position, liquidity and capital
- Total assets were $1.077 billion, up 3.2% from year-end; gross loans were $913.1 million, up 4.3%, and deposits were $929.4 million, up 2.7%. Commercial real estate represented 60% of gross loans; 87.0% of gross loans were secured by real property.
- Cash and cash equivalents were $65.8 million, down from $77.7 million at year-end. Investing activities used $35.9 million, mainly reflecting loan growth; financing activities provided $21.3 million, principally from deposit growth. No FHLB borrowings were outstanding.
- Available borrowing capacity was reported as $339.6 million across FHLB, Federal Reserve, PCBB and Zions facilities, supported by pledged loans. The filing also describes separate Federal Reserve and unsecured federal-funds facilities. See investor checks below for a commitment disclosure inconsistency.
- Shareholders’ equity was $132.4 million. The Bank’s capital ratios were 15.60% total risk-based, 14.52% Tier 1 and CET1, and 12.60% leverage; regulators classified the Bank as well capitalized.
- The allowance for loan losses was $9.6 million, or 1.05% of gross loans, versus 1.22% a year earlier. Nonperforming loans were $1.58 million at quarter-end and OREO was $1.15 million, bringing nonperforming assets to $2.73 million.
Material changes and notable items
- Compared with Q1 2018, average loans rose 12.8% and average earning assets rose 17.5%. Interest expense more than doubled as interest-bearing deposits grew and deposit rates increased.
- The allowance provision was zero versus $575,000 in Q1 2018. Management attributed the change partly to a $362,000 reduction in a specific SBA loan reserve after confirmation of an SBA government guarantee, alongside lower estimated loss factors.
- The company repurchased 258,885 shares for $2.38 million at an average $9.17 per share under a 400,000-share authorization; 141,115 shares remained available at March 31. It declared $793,000 in cash dividends during the quarter.
- Adoption of the new lease standard in Q1 2019 recognized $7.7 million of right-of-use assets and $9.6 million of lease liabilities. The filing reports no cumulative adjustment to retained earnings.
- One OREO property was recorded at $1.15 million; management expected its sale to be completed by the end of May 2019. The filing reports no new troubled debt restructurings or payment defaults on recently modified loans in the quarter.
Outlook, risks and contingencies
- The filing provides no quantitative earnings or growth guidance. Management says liquidity needs are expected to be met through operating cash flow, loan and securities repayments and maturities, deposit gathering, and borrowing facilities.
- Management identifies credit risk, commercial real estate concentration, economic conditions in Southern California, real estate values, interest-rate movements, deposit pricing, competition, growth execution, technology and vendor disruptions, regulatory requirements, and capital availability as risks. It considers the allowance adequate based on information currently available, while noting economic deterioration could increase nonperforming assets and credit losses.
- Interest-rate simulations indicate net interest income would increase 5.22% under an immediate +100-basis-point scenario and decline 4.81% under a −100-basis-point scenario, over the modeled horizon. Management says the bank was within policy limits and slightly more asset-sensitive; simulations are not forecasts.
- The company was evaluating the upcoming expected-credit-loss accounting standard and had engaged an adviser to develop a model; it expected added complexity and costs but could not quantify the financial effect. Management reported no material pending adverse legal actions, no material change in previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Reconcile off-balance-sheet commitment disclosures: the notes report $68.9 million of total undisbursed commitments, including $67.0 million to extend credit, while MD&A later reports $97.9 million total and $97.0 million to extend credit. The filing text does not explain the difference.
- Assess whether earnings growth is sustainable without the one-time $1.2 million life-insurance gain, and monitor the rising cost of deposits and declining net interest margin.
- Review commercial real estate concentration, classified-loan changes, OREO disposition, and the adequacy of the allowance as loan balances grow.
- Monitor maturities and repricing of time deposits, including $188.2 million of time deposits above the FDIC insurance limit, and the company’s dependence on continued deposit growth and collateral-backed borrowing capacity.
- Track execution of the Texas branch expansion, share repurchases and dividends, and the effects of adopting the expected-credit-loss standard.