OP Bancorp — Q1 2020 Form 10-Q
Business context and reporting period
OP Bancorp is the holding company for Open Bank, a California-chartered community bank focused on deposits and lending to small and midsize businesses. The unaudited quarter ended March 31, 2020; comparisons below are with Q1 2019 unless otherwise noted. The filing was signed May 11, 2020.
Financial performance and condition
- Income: Net interest income was $11.1 million, up 2.9%. Net interest income plus noninterest income was $13.4 million, down from $14.3 million. Net income fell 30.4% to $3.3 million; diluted EPS was $0.21 versus $0.29.
- Drivers and margins: Interest income rose modestly with loan growth, while lower market rates reduced asset yields. Net interest margin contracted to 3.95% from 4.38%; net interest spread was 3.32% versus 3.62%. Annualized return on average assets was 1.12% versus 1.83%, and return on average equity was 9.44% versus 14.46%. Efficiency ratio increased to 61.19% from 56.48%.
- Credit costs: The provision for loan losses was $743,000, versus none in Q1 2019. The allowance was $10.7 million, or 1.08% of gross loans, at quarter-end. Nonperforming loans were $1.5 million, approximately 0.15% of gross loans; net charge-offs were $45,000.
- Balance sheet and liquidity: Assets increased 2.6% from year-end to $1.21 billion. Gross loans were $996.6 million, up 0.6%, and deposits were $1.05 billion, up 3.1%. Cash and cash equivalents rose to $111.0 million from $86.0 million. Operating cash flow was $2.4 million; cash increased $25.0 million during the quarter.
- Funding and capital: The company reported no FHLB borrowings at March 31 and had $407.0 million of available borrowing capacity across listed facilities. The Bank’s total risk-based capital ratio was 14.59%, above the 10.00% well-capitalized threshold; management reported the Bank was well capitalized.
Material changes versus the prior comparable period
- Net income declined mainly because Q1 2019 included a one-time $1.2 million gain related to company-owned life insurance and Q1 2020 included the $743,000 loan-loss provision. Net interest income growth partly offset these factors.
- Average loans grew 12.4% year over year, but average loan yield fell to 5.51% from 6.09%. Average funding cost declined to 1.27% from 1.48% of deposits.
- Noninterest income decreased $1.2 million to $2.3 million, primarily reflecting the prior-year one-time life-insurance gain. Noninterest expense rose 1.7% to $8.2 million.
- Shareholders’ equity declined to $138.1 million from $140.6 million at year-end, including $6.3 million of Q1 share repurchases and $1.1 million of declared dividends.
Outlook, commentary, risks and unusual items
- COVID-19: Management said the pandemic’s effects on customers, the economy, credit losses and estimates were highly uncertain and could be material; it could not quantify the future impact. The filing provides no earnings or other numerical guidance.
- Borrower relief and PPP: By April 30, 2020, the Bank had accepted 175 payment-deferral requests totaling approximately $219.2 million, about 22% of March 31 gross loans, and offered deferrals of up to six months to qualifying borrowers. By April 24, it had processed 323 PPP applications totaling $36.7 million; by April 30, it had approved an additional 530 applications totaling $27.8 million under the later funding legislation. These are post-quarter disclosures.
- Portfolio risks: Approximately 76% of gross loans were real-estate loans, and 88.6% were secured by real property. Management increased qualitative allowance factors in response to pandemic uncertainty. It highlighted geographic concentration in Southern California and material commercial real-estate exposure.
- Other notable items: The company repurchased 717,454 shares for $6.3 million during Q1. Management also disclosed pandemic-related charitable donations of $1.0 million through the Open Stewardship Foundation and $100,000 from directors and employees; the filing text does not clearly specify their accounting period. Unfunded low-income-housing partnership commitments increased to $2.8 million.
- Contingencies and controls: The company reported no adverse pending legal actions, no material change in internal control over financial reporting, and effective disclosure controls. It cautioned that outcomes of claims and litigation remain uncertain.
Important facts for investors to verify
- How much of the $219.2 million in deferrals remains outstanding, and how borrowers’ repayment performance and risk ratings evolve.
- Subsequent credit quality, provision and allowance adequacy as pandemic-related economic effects become clearer.
- PPP loan funding, forgiveness, fee recognition and related credit or operational exposure; distinguish applications processed from approvals and funded loans.
- Whether earnings trends persist after excluding the prior-year one-time life-insurance gain, and how lower rates affect margins.
- Timing and accounting treatment of the disclosed $1.1 million in pandemic-related donations, and the effect of continued buybacks and dividends on capital and liquidity.