OP Bancorp (NASDAQ: OPBK) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. OP Bancorp is a bank holding company whose subsidiary, Open Bank, focuses on commercial banking, including small- and medium-sized business lending. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Net interest income | $11.22 | $10.49 | $33.19 | $30.03 |
| Provision for loan losses | $0.29 | $0.44 | $0.69 | $1.05 |
| Noninterest income | $2.73 | $2.28 | $8.91 | $7.28 |
| Noninterest expense | $8.42 | $7.71 | $24.86 | $21.99 |
| Net income | $4.00 | $3.48 | $12.58 | $10.49 |
| Diluted EPS | $0.24 | $0.21 | $0.77 | $0.66 |
| Net interest margin | 4.13% | 4.44% | 4.25% | 4.49% |
| Efficiency ratio | 60.39% | 60.34% | 59.03% | 58.95% |
- Q3 net income rose 14.9%; nine-month net income rose 19.9%. Growth reflected higher net interest income and noninterest income, and lower loan-loss provisions, partly offset by higher operating costs.
- Interest income increased with loan and investment growth and higher asset yields. Deposit costs also rose: the average cost of interest-bearing liabilities was 2.20% in Q3 versus 1.69% a year earlier, and 2.17% for nine months versus 1.48%.
- Noninterest income benefited from loan-sale gains. For the first nine months, other income included a one-time $1.2 million gain on company-owned life insurance (COLI).
- Noninterest expense rose 9.3% in Q3 and 13.0% for nine months, principally from salaries, occupancy, and data processing. Management attributed higher staffing and facility-related costs partly to growth, new loan production offices, and a new Texas branch opened in April 2019.
Balance sheet, cash flow, credit and capital
- Growth: Total assets were $1.152 billion at September 30, up 10.3% from year-end 2018. Gross loans were $964.4 million, up 10.2%; deposits were $996.0 million, up 10.0%.
- Loan mix and concentration: Commercial real estate loans were $594.4 million, about 62% of gross loans. Real-estate-secured lending represented 87.4% of gross loans. Management identifies commercial real estate and Southern California economic conditions as important concentration risks.
- Credit quality: Nonperforming loans declined to $1.57 million from $1.91 million at year-end, while nonperforming assets rose to $3.39 million from $1.91 million, reflecting $1.82 million of OREO. The allowance was $9.64 million, or 1.00% of gross loans, compared with 1.10% at year-end. Nine-month net charge-offs were $0.69 million.
- Cash flow: For the first nine months, operating cash flow was $15.9 million, investing cash flow was negative $88.9 million, and financing cash flow was positive $84.3 million. Cash and cash equivalents increased $11.4 million to $89.1 million.
- Debt and liquidity: No FHLB borrowings were outstanding at quarter-end. The filing reports $366.7 million of available borrowing capacity across listed facilities, supported by pledged loans; cash and cash equivalents were $89.1 million. The gross loan-to-deposit ratio was 96.8%.
- Capital: The Bank was classified as well-capitalized. Its September 30 ratios included 15.03% total risk-based capital, 14.01% Tier 1 and common equity Tier 1, and 11.83% Tier 1 leverage. Ratios declined from year-end 2018 but remained above stated well-capitalized thresholds.
- Shareholder returns: The Company repurchased 395,000 shares under a program earlier in 2019 and 94,887 shares under a new program during Q3. The September program authorized repurchases of up to 475,000 shares; 371,276 remained available at quarter-end.
Outlook, risks and notable items
- The filing gives no specific earnings, growth, or margin guidance. Management says it monitors interest-rate exposure and reports that modeled results were within board limits. Its September 2019 model projected net interest income sensitivity of +6.21% under a 100-basis-point increase and -5.77% under a 100-basis-point decrease; these are scenario estimates, not forecasts.
- Management cites risks from credit quality and loan concentrations, real-estate values and regional economic conditions, interest-rate changes, deposit pricing and liquidity, competition, execution of growth plans, regulatory requirements, and technology or vendor disruptions.
- Undisbursed credit commitments totaled $81.1 million, up from $63.8 million at year-end. Management did not anticipate material losses from these commitments.
- The Company adopted lease accounting in 2019, recognizing $8.6 million in operating right-of-use assets and $10.3 million in lease liabilities at September 30. It was evaluating the expected-credit-loss standard and stated it expected adoption in January 2023 following a proposed effective-date delay then awaiting final issuance.
- The Company reported no adverse pending legal actions, no material changes to previously disclosed risk factors, and effective disclosure controls and procedures.
Important facts for investors to verify
- Whether loan growth and loan-sale gains can be sustained as deposit costs rise and net interest margin remains below the prior-year level.
- Performance and collateral coverage of the commercial real estate portfolio, the new OREO property, and loans rated special mention or substandard.
- Deposit mix, time-deposit maturities, funding costs, and the availability of borrowing capacity under stressed liquidity conditions.
- The durability of earnings excluding the one-time COLI gain, alongside continued growth in staffing and other operating expenses.
- Capital levels and planned share repurchases relative to continued balance-sheet growth and regulatory requirements.