OP Bancorp — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. OP Bancorp is a bank holding company whose subsidiary, Open Bank, primarily serves small and midsized businesses through deposits, commercial lending, SBA lending, and investments, with most customers in Southern California.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $11.4 million | $11.2 million | $33.2 million | $33.2 million |
| Provision for loan losses | $1.4 million | $0.3 million | $4.1 million | $0.7 million |
| Noninterest income | $3.0 million | $2.7 million | $7.4 million | $8.9 million |
| Noninterest expense | $8.0 million | $8.4 million | $23.5 million | $24.9 million |
| Net income | $3.6 million | $4.0 million | $9.3 million | $12.6 million |
| Diluted EPS | $0.23 | $0.24 | $0.60 | $0.77 |
- Q3 net interest margin was 3.66%, versus 4.13%; the nine-month margin was 3.71%, versus 4.25%. The nine-month efficiency ratio was 58.00%, versus 59.03%.
- At September 30, total assets were $1.34 billion, up 13.6% from year-end 2019. Gross loans were $1.07 billion, deposits $1.17 billion, and shareholders’ equity $141.5 million.
- Cash and cash equivalents were $88.0 million and available-for-sale securities were $93.5 million. The company had $10 million of FHLB advances at a 0% rate. It reported approximately $456 million in additional borrowing availability across identified facilities, subject to collateral and facility terms.
- For the first nine months, operating cash flow was negative $26.3 million, investing cash flow negative $121.2 million, and financing cash flow positive $149.5 million; cash increased $1.9 million to $88.0 million. Loan-held-for-sale originations contributed to the operating cash outflow.
- Allowance for loan losses was $14.2 million, or 1.32% of gross loans (1.40% excluding fully guaranteed PPP loans). Regulatory capital ratios remained well above minimum requirements; the Bank’s total risk-based capital ratio was 14.51% and leverage ratio 10.52%.
Material changes versus comparable periods
- Net income fell 10.1% year over year in Q3 and 26.0% for the first nine months. Higher loan-loss provisions were the main driver, reflecting pandemic-related economic uncertainty and loan growth.
- Interest expense declined as deposit pricing reset lower, partly offsetting reduced asset yields. For the first nine months, interest income fell $3.8 million while interest expense fell $3.8 million; net interest income was essentially unchanged.
- Loans grew $82.7 million from year-end 2019, including $64.6 million of PPP loans outstanding at September 30. Deposits rose $149.5 million; noninterest-bearing deposits increased to 41.8% of total deposits from 28.8% at year-end.
- Noninterest income declined year to date, largely because 2019 included a $1.2 million one-time gain on company-owned life insurance. Lower deposit service charges and gains on loan sales also contributed; higher loan servicing income partly offset the decline.
- Nonperforming loans fell to $330,000 from $1.5 million at year-end 2019. No loans were past due more than 90 days and still accruing, and there were no nonaccrual loans at quarter-end; the reported nonperforming balance was an accruing troubled debt restructuring.
Outlook, commentary, and risks
- The filing provides no formal earnings or financial guidance. Management describes the effects of COVID-19 as highly uncertain and says potential changes to estimates, including the allowance for loan losses, could be material.
- Of 172 COVID-related deferrals totaling $229.9 million, 130 loans totaling $173.0 million had resumed payments or been paid off; 42 deferrals totaling $56.9 million remained at September 30. Management said qualifying pandemic-related modifications were not treated as troubled debt restructurings.
- PPP exposure includes 978 loans originated for $66.3 million. The filing highlights uncertainty around SBA eligibility, forgiveness and audit rules, potential SBA guaranty denials, and possible PPP-related litigation.
- Credit risk includes commercial real estate concentration and exposure to local economic conditions. Among commercial/business loans excluding home mortgages and consumer loans, hotels and motels represented $159.9 million, and $32.2 million of those loans remained deferred at quarter-end. Management increased qualitative credit-loss factors in response to the pandemic.
- Interest-rate sensitivity modeling showed projected net interest income up 6.87% under an immediate +100-basis-point scenario and up 0.53% under a -100-basis-point scenario. Economic value of equity was projected down 19.12% under -100 basis points; these are model scenarios, not forecasts.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The company disclosed no adverse pending legal actions requiring disclosure.
Key facts for investors to verify
- Whether remaining loan deferrals, particularly hotel/motel and other pandemic-affected exposures, resume regular payments and how credit quality develops after relief programs expire.
- Whether the $14.2 million allowance adequately reflects future losses, given pandemic uncertainty and the portfolio’s commercial real estate and geographic concentrations.
- How quickly the $41.4 million loans-held-for-sale balance is sold: the filing said no such loans had been sold to the secondary market as of November 4, 2020.
- The actual forgiveness, fee income, servicing, and SBA-guaranty outcomes for PPP loans, including any audit, compliance, or litigation developments.
- Whether deposit growth and available borrowing capacity continue to support liquidity, and how lower asset yields affect net interest margin and earnings.