OP Bancorp — Q2 2018 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018; balance-sheet comparisons are primarily with December 31, 2017. OP Bancorp is a bank holding company whose principal operation is Open Bank, a California-chartered bank focused on commercial banking, including small and midsize business lending. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $10.0 million | $8.6 million | $19.5 million | $16.8 million |
| Provision for loan losses | $33,000 | $170,000 | $609,000 | $711,000 |
| Noninterest income | $2.8 million | $2.2 million | $5.0 million | $4.5 million |
| Noninterest expense | $7.5 million | $6.6 million | $14.3 million | $12.9 million |
| Net income | $3.8 million | $2.5 million | $7.0 million | $4.6 million |
| Diluted EPS | $0.23 | $0.18 | $0.45 | $0.33 |
| Net interest margin | 4.46% | 4.58% | 4.51% | 4.53% |
- Q2 net income increased 53.9%; management attributed the increase mainly to higher net interest income and loan-sale gains, partly offset by higher operating expenses. Six-month net income increased 52.0%.
- Q2 return on average assets was 1.61% and return on average equity was 12.70%; the efficiency ratio was 58.56%.
- At June 30, assets were $979.4 million, up 8.7% from year-end; gross loans were $826.0 million, up 10.4%; deposits were $823.4 million, up 6.5%. Loans were predominantly real-estate related: 70% of gross loans were real estate loans, and 84.1% were secured by real property.
- Cash and cash equivalents were $61.3 million. First-half operating cash flow was $11.0 million, investing cash flow was negative $86.1 million, and financing cash flow was $73.0 million. Financing included $22.6 million of net IPO proceeds and $50.1 million of deposit growth.
- Shareholders’ equity was $121.4 million. The Bank was reported well-capitalized; its total risk-based capital ratio was 16.08%, common equity Tier 1 ratio 14.89%, and Tier 1 leverage ratio 12.90%.
- FHLB advances were $25.0 million at quarter-end; the advance matured and was repaid on July 2, 2018. The company reported $271.3 million of available borrowing capacity, subject to collateral and facility terms.
Material changes and management commentary
- Net interest income rose 16.2% in Q2 and 16.3% for the first half. Loan growth and higher loan yields drove interest income, while deposit costs increased: the average cost of interest-bearing liabilities rose to 1.48% in Q2 from 0.91% a year earlier. The margin declined year over year.
- Q2 noninterest income grew 26.0%, primarily from a $576,000 increase in gains on SBA loan sales; SBA loan-sale volume rose to $24.8 million from $16.2 million. First-half SBA loan-sale volume was $38.2 million versus $32.6 million.
- Q2 noninterest expense increased 14.1%, reflecting staffing, occupancy, charitable contributions, and IPO-related advertising costs. The company says it donates 10% of consolidated after-tax income annually to the Open Stewardship Foundation.
- The effective tax rate fell to 27.9% in Q2 and 27.3% for the first half, versus 39.6% and 39.4%, respectively, in 2017; management attributed the reduction primarily to the Tax Cuts and Jobs Act.
- The March 2018 IPO sold 2.3 million shares at $11 per share and generated approximately $22.6 million in net proceeds. The filing reports no material change in the planned use of proceeds.
Outlook, risks and unusual items
- The filing provides no specific earnings, growth, or margin guidance. Management says it expects to meet contractual obligations through cash, operating profitability, loan and securities repayments and maturities, deposit gathering, and available borrowing sources.
- Credit quality indicators were mixed: nonperforming loans were approximately $990,000, or 0.12% of gross loans, down from $1.037 million at year-end. Classified loans rose to $3.1 million from $2.1 million, primarily after one $1.3 million lending relationship was downgraded to substandard. The allowance for loan losses was $9.7 million, or 1.18% of gross loans.
- Management considers the allowance adequate but cautions that deterioration in Southern California economic or real-estate conditions could increase nonperforming assets and credit losses. Commercial real estate is a significant concentration; the company also identifies interest-rate, liquidity, competition, regulatory, technology, and execution risks.
- Interest-rate simulations showed estimated net interest income sensitivity of +5.37% for a 100-basis-point rate increase and -3.74% for a 100-basis-point decrease. Economic value of equity sensitivity was +2.05% and -2.73%, respectively. Management reported the company remained within board policy limits; these model scenarios are not forecasts.
- Unrealized losses on available-for-sale securities increased to $1.21 million from $606,000 at year-end. Management considered the losses temporary and said it did not intend, and was not more likely than not required, to sell the securities before recovery.
- Undisbursed loan commitments and letters of credit totaled $59.2 million. Management did not anticipate material losses from these commitments. The company reported no adverse pending legal actions and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth can continue to produce earnings growth as deposit funding costs rise and net interest margin remains under pressure.
- Credit trends within the real-estate-heavy loan portfolio, including the $1.3 million downgraded relationship, nonaccrual loans, and allowance adequacy as the portfolio expands.
- The sustainability of SBA loan-sale gains and servicing income, and the effect of changing sale volumes and prepayment assumptions on results.
- Deposit mix, renewal pricing and uninsured time-deposit exposure; time deposits above the $250,000 FDIC insurance limit totaled $141.8 million.
- The use of IPO proceeds, post-IPO share count and dilution, and the company’s capital position relative to fully phased-in regulatory buffers.
- The July 2 repayment of the $25 million FHLB advance and continued access to borrowing capacity supported by pledged collateral.