OP Bancorp — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. OP Bancorp is the holding company for Open Bank, a California-chartered community bank focused on commercial lending and deposits. Results are unaudited; dollar amounts below are in millions unless noted.
Financial performance
- Q2 earnings: Net income was $2.4 million, down 37.0% from $3.8 million a year earlier; diluted EPS was $0.16 versus $0.23. For the first half, net income was $5.7 million versus $8.6 million, and diluted EPS was $0.37 versus $0.52.
- Interest income and margins: Q2 net interest income declined 4.7% to $10.6 million. Net interest margin was 3.55%, down from 4.26%. First-half net interest income was $21.8 million versus $22.0 million, with margin of 3.74% versus 4.32%. Lower market rates reduced asset yields despite loan and deposit growth.
- Credit costs: Q2 provision for loan losses was $2.0 million versus $0.4 million; first-half provision was $2.7 million versus $0.4 million. Management attributed most of the first-half provision to increased COVID-19-related qualitative factors. The allowance was $12.8 million, 1.22% of gross loans, at June 30.
- Other income and costs: Q2 noninterest income fell 22.1% to $2.1 million, chiefly from lower loan-sale gains and deposit service charges; noninterest expense fell 12.3% to $7.3 million. First-half noninterest income declined 29.5% to $4.4 million, including the absence of a prior-year one-time COLI gain; expenses fell 5.4% to $15.5 million.
- Returns: Annualized Q2 return on assets was 1.15% versus 1.39%; return on equity was 10.45% versus 11.50%. First-half figures were 0.94% and 8.21%, respectively, compared with 1.60% and 12.97%.
Financial position, cash flow, and capital
- Total assets rose 9.2% from year-end 2019 to $1.288 billion. Gross loans were $1.044 billion, up 5.4%; deposits were $1.121 billion, up 9.8%. Cash and cash equivalents were $112.2 million, versus $86.0 million at year-end.
- Shareholders’ equity was $139.1 million, down from $140.6 million. The company repurchased $6.8 million of stock and paid $2.1 million in dividends during the first half.
- First-half operating cash flow was negative $2.1 million; investing cash flow was negative $73.1 million, including loan growth and securities purchases; financing cash flow was positive $101.4 million, primarily from deposit growth and $10.0 million of FHLB advances.
- FHLB advances outstanding were $10.0 million at a 0% rate under a pandemic relief program. The filing reports $407.0 million of available borrowing capacity across listed facilities, subject to collateral and facility terms. The gross loan-to-deposit ratio was 93.1%, down from 97.0% at year-end.
- The Bank was categorized as well-capitalized. At June 30, its total risk-based capital ratio was 15.04%, CET1 ratio 13.79%, and leverage ratio 10.87%. Management stated it met applicable capital requirements.
Material changes and operating developments
- The loan portfolio grew, notably with SBA PPP lending. By June 30, the company reported 924 PPP originations totaling $64.9 million; the reported PPP loan balance included in the portfolio was $63.4 million.
- COVID-19 payment deferrals covered 155 accounts with an aggregate balance of $190.9 million, or 18% of total loans. By August 3, 74 loans totaling $84.0 million had resumed regular payments.
- Commercial real estate represented about 61% of gross loans; 84.3% of gross loans were secured by real property. The filing describes geographic concentration in Southern California and exposure to sectors including real estate, hotels, retail, restaurants, and gas stations.
- Nonperforming loans declined to $1.0 million from $1.5 million at year-end; there were no other real estate owned assets. No net loan charge-offs were reported for the first half.
Outlook, risks, and contingencies
- The filing gives no earnings or revenue guidance. Management said the pandemic’s effects on estimates, credit quality, and financial results were highly uncertain and could not then be quantified.
- Key risks include COVID-19-related borrower stress, recession and real-estate deterioration, loan concentrations, interest-rate changes, liquidity and funding conditions, and the adequacy of the allowance. PPP risks include uncertain SBA eligibility, forgiveness, audit, and guarantee requirements, as well as potential litigation.
- Management said the allowance was adequate based on available information, while cautioning that weaker economic or real-estate conditions could increase nonperforming loans and losses. The company reported no adverse pending legal actions and said disclosure controls were effective.
- Undisbursed loan commitments and letters of credit totaled $87.4 million. Management did not anticipate material losses from these commitments. The company also had $2.7 million of unfunded low-income housing investment commitments.
Investor verification priorities
- Track performance and repayment outcomes for the $190.9 million of deferred loans, including which deferrals expire and whether borrowers resume payments.
- Reconcile PPP originations of $64.9 million with the $63.4 million reported portfolio balance, and monitor SBA forgiveness, audits, and guarantee exposure.
- Assess whether the $12.8 million allowance adequately reflects COVID-19 risks, particularly in commercial real estate and exposed industries.
- Monitor net interest margin and earnings under sustained low rates, alongside the large near-term maturities of time deposits.
- Review available borrowing capacity, collateral requirements, and the effect of repurchases and dividends on capital and liquidity.