OP Bancorp — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone Q4 filing. OP Bancorp is a Los Angeles-based bank holding company operating Open Bank, a community bank focused on small and medium-sized businesses and Korean-American communities. It operated nine branches, including a new Carrollton, Texas branch opened in Q2 2019, and four loan production offices.
Financial performance and condition
| Metric | FY2019 / Dec. 31, 2019 | FY2018 / Dec. 31, 2018 |
|---|---|---|
| Net interest income | $44.3 million | $41.0 million |
| Net income | $16.8 million | $14.3 million |
| Diluted EPS | $1.03 | $0.89 |
| Total assets | $1.180 billion | $1.044 billion |
| Gross loans | $990.1 million | $875.1 million |
| Deposits | $1.021 billion | $905.2 million |
| Shareholders’ equity | $140.6 million | $129.8 million |
| Net interest margin | 4.19% | 4.49% |
| Cost of deposits | 1.52% | 1.09% |
| Return on average assets / equity | 1.51% / 12.42% | 1.49% / 12.27% |
- Interest income rose 17.4% to $58.8 million, while interest expense increased 59.2% to $14.5 million. Loan growth and higher average loan yields lifted net interest income, but higher deposit costs compressed the margin.
- Noninterest income was $11.4 million, up 22.5%; gain on loan sales was $5.9 million, including $5.8 million from SBA loan sales. Noninterest expense rose 10.0% to $32.5 million, principally from staffing, occupancy and technology costs. The efficiency ratio was 58.39% versus 58.79%.
- Net cash provided by operating activities was $18.2 million (2018: $30.6 million); investing activities used $117.4 million, mainly reflecting loan growth; financing activities provided $107.6 million, primarily from deposit growth. Cash and cash equivalents ended at $86.0 million.
- The company reported no FHLB borrowings at year-end. Available borrowing capacity was approximately $376.4 million across FHLB, Federal Reserve, and other lines; these facilities are subject to collateral and terms.
- Asset quality remained strong by reported measures: nonperforming loans were $1.5 million, or 0.16% of gross loans; allowance for loan losses was $10.1 million, or 1.02% of loans. Net charge-offs were 0.07% of average loans.
- Bank capital ratios were 13.93% CET1, 13.93% Tier 1 risk-based, 14.96% total risk-based, and 11.95% Tier 1 leverage. The Bank was reported well-capitalized; ratios were lower than in 2018.
Material changes versus the prior comparable period
- Net income increased 17.6%; diluted EPS increased from $0.89 to $1.03.
- Assets, gross loans, and deposits grew 13.0%, 13.2%, and 12.8%, respectively. CRE loans rose to $630.7 million and represented approximately 64% of gross loans.
- Deposit funding costs increased materially, and net interest margin declined 30 basis points to 4.19%. Noninterest-bearing deposits fell to 28.8% of deposits from 31.5%.
- Provision for loan losses decreased to $1.1 million from $1.3 million. Nonperforming loans declined from $1.9 million to $1.5 million; there was no OREO at either year-end.
- Operating cash flow fell from $30.6 million to $18.2 million, while loan growth continued to absorb substantial investing cash.
- OP Bancorp repurchased 582,519 shares during 2019 for $5.4 million and paid $3.2 million in cash dividends. In January 2020, it raised its quarterly dividend from $0.05 to $0.07 per share.
Outlook, commentary, risks, and unusual items
- Management’s stated strategy is continued organic growth, deposit gathering, branch development, and diversified commercial lending; it may consider opportunistic acquisitions. The filing provides no quantified earnings, margin, loan-growth, or deposit-growth guidance.
- Management noted the December 2019 coronavirus outbreak and said its effects on customers, employees, vendors, and financial results were uncertain and could not then be predicted.
- Key risks include CRE and geographic concentration, borrower and collateral deterioration, rising funding costs and interest-rate sensitivity, liquidity and deposit competition, and dependence on SBA lending and secondary-market premiums. The filing also identifies cybersecurity, third-party service-provider, regulatory, and LIBOR-transition risks.
- Non-owner-occupied CRE loans were 308.3% of risk-based capital. The filing states the Bank did not exceed applicable CRE concentration guidance, but the concentration merits monitoring alongside the guidance’s other criteria.
- A $1.2 million one-time gain on company-owned life insurance contributed to higher other income and affected the effective tax rate. The company committed 10% of consolidated after-tax net income to its Open Stewardship Foundation.
- CECL adoption was expected in January 2023 under the company’s expected smaller-reporting-company status. Management said the eventual quantitative impact could not yet be determined and expected the standard likely to increase reserves.
- The company adopted lease accounting in 2019, recording $8.3 million of right-of-use assets and $10.1 million of lease liabilities. The auditor gave an unqualified opinion on the consolidated financial statements. Management reported effective disclosure controls; the filing states it was not then required to provide an auditor attestation on internal controls.
Important facts for investors to verify
- Whether deposit costs and net interest margin stabilized after the Federal Reserve’s 2019 rate cuts, and how loan and deposit repricing affected subsequent results.
- Loan credit performance, especially CRE, SBA, and nonqualified home mortgage exposures; monitor delinquency migration, charge-offs, collateral values, and allowance adequacy.
- The full CRE concentration calculation and applicable supervisory thresholds, given the disclosed 308.3% non-owner-occupied CRE-to-capital measure.
- Deposit mix, uninsured time deposits ($213.3 million at year-end), wholesale funding use, and availability of collateralized borrowing capacity.
- How much of earnings depends on SBA loan-sale gains and servicing income, and whether premiums and origination volumes are sustainable.
- The effect of the coronavirus outbreak, CECL implementation, dividend and repurchase decisions, and capital needs; the filing gives no quantified forward guidance.