OP Bancorp 10-Q Summary
Business context and reporting period
OP Bancorp filed its unaudited Form 10-Q for the quarter ended September 30, 2018. It is a bank holding company whose sole operating subsidiary, Open Bank, conducts commercial banking, primarily in Southern California, with additional loan production offices in Seattle, Dallas, and Atlanta. The bank focuses on small- and medium-sized business lending and deposits. Comparisons below are with the third quarter or first nine months of 2017, or with December 31, 2017 for balance-sheet measures.
Key financial metrics
| Metric | Period or date | Comparison |
|---|---|---|
| Net income | Q3 2018: $3.48 million; nine months: $10.49 million | Up 27.6% and 43.0%, respectively, year over year |
| Diluted EPS | Q3: $0.21; nine months: $0.66 | Versus $0.19 and $0.52 |
| Net interest income | Q3: $10.49 million; nine months: $30.03 million | Up 13.9% and 15.5% |
| Net interest margin | Q3: 4.44%; nine months: 4.49% | Versus 4.68% and 4.58% |
| Noninterest income / expense | Q3: $2.28 million / $7.70 million; nine months: $7.28 million / $21.99 million | Q3 expense rose 14.2%; nine-month expense rose 11.7% |
| Total assets | September 30: $1.035 billion | Up 14.9% from year-end 2017 |
| Gross loans / net loans | $850.0 million / $840.5 million | Gross loans up 13.6% from year-end |
| Deposits | $896.9 million | Up 16.0% from year-end |
| Allowance for loan losses | $9.55 million; 1.12% of gross loans | Versus $9.14 million and 1.21% at year-end |
| Cash and cash equivalents | $95.8 million | Versus $63.2 million at year-end |
| Debt and borrowing capacity | No FHLB advances outstanding; $317.0 million available borrowing capacity reported | Repaid $25 million of FHLB advances during the first nine months |
| Shareholders’ equity / regulatory capital | Equity: $125.0 million; consolidated CET1: 15.01%; total risk-based capital: 16.16% | Equity was $91.5 million at year-end; capital ratios increased from 12.26% and 13.49% |
For the first nine months, operating cash flow was $23.4 million, compared with a $3.3 million outflow in 2017. Investing activities used $112.5 million, mainly reflecting loan growth; financing provided $121.7 million, including deposit growth and IPO proceeds. Cash increased $32.5 million during the period.
Material changes and management commentary
- Growth in average loans and higher asset yields drove higher interest income; higher deposit balances and rates also raised interest expense. The net interest margin narrowed year over year in both reported comparisons.
- The March 2018 IPO issued 2.3 million shares at $11 per share and generated approximately $22.6 million net proceeds. Common shares outstanding increased to 15.77 million from 13.19 million at year-end 2017. The filing reports no material change in planned use of proceeds.
- Loan growth was concentrated in real estate: commercial real estate loans were $489.8 million, and 86.1% of gross loans were secured by real property. Management said all loan types were within established concentration limits and considered the allowance adequate, while noting that deterioration in local economic or real estate conditions could increase losses.
- Nonperforming loans were $1.23 million, or 0.15% of gross loans, compared with $1.04 million, or 0.14%, at year-end. Classified loans rose to $3.0 million. The allowance was 775% of nonperforming loans. Nine-month net charge-offs were 0.15% of average gross loans.
- The effective tax rate declined to 24.7% for Q3 and 26.5% for the first nine months, from 38.6% and 39.1%, respectively, primarily due to the Tax Cuts and Jobs Act.
- Available-for-sale securities had $1.47 million of gross unrealized losses. Management considered the losses temporary, did not intend to sell the securities, and said it was not more likely than not that a sale would be required before recovery.
- Management reported the bank as well-capitalized and said liquidity needs are expected to be met through operating cash flow, loan and securities repayments, deposit gathering, and available borrowing facilities. No formal earnings or revenue guidance is provided.
Outlook, risks, contingencies, and unusual items
- Key risks identified include credit quality and allowance estimates; commercial real estate and Southern California economic exposure; interest-rate and deposit-cost changes; liquidity and funding access; competition; and operational, technology, vendor, regulatory, and acquisition risks.
- The interest-rate model projected that a 100-basis-point increase would raise net interest income by 6.02% over 12 months, while a 100-basis-point decline would reduce it by 4.20%. Management said results were within policy limits; model estimates depend on assumptions and are not forecasts.
- Undisbursed credit commitments totaled $66.8 million, including $64.9 million of commitments to extend credit and $1.95 million of standby letters of credit. Management did not anticipate material losses from these arrangements.
- The company expects the new lease accounting standard to add approximately $13 million to assets and liabilities when adopted. It is evaluating the expected-credit-loss standard; the impact was not yet quantifiable, and management anticipated additional complexity and costs.
- Management reported no adverse pending legal actions and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether loan and deposit growth can continue without further compression in net interest margin as funding costs rise.
- Trends in classified and nonperforming loans, charge-offs, and allowance coverage, particularly within real estate-related exposures.
- The stability and cost of deposits, including $157.7 million of time deposits exceeding the $250,000 FDIC insurance limit and scheduled time-deposit maturities.
- The assumptions behind interest-rate sensitivity, liquidity capacity, and the reported borrowing availability, including collateral requirements.
- The eventual financial and operational effects of the expected-credit-loss and lease accounting standards.
- The effects of IPO share issuance and outstanding stock awards on per-share earnings and dilution.