OP Bancorp — Q1 2018 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2018, compared with Q1 2017; balance-sheet figures are compared with December 31, 2017. OP Bancorp is a bank holding company whose operating subsidiary, Open Bank, provides commercial banking services, primarily in Southern California. Its lending portfolio is concentrated in commercial real estate (CRE).
Key financial metrics
| Metric | Q1 2018 / March 31, 2018 | Comparable / prior period |
|---|---|---|
| Interest income | $11.18 million | $9.19 million, Q1 2017 |
| Net interest income | $9.56 million | $8.21 million, Q1 2017 |
| Net interest margin | 4.56% | 4.47%, Q1 2017 |
| Net income / diluted EPS | $3.22 million / $0.22 | $2.15 million / $0.15, Q1 2017 |
| Return on average assets / equity | 1.43% / 13.64%, annualized | 1.10% / 10.39%, Q1 2017 |
| Efficiency ratio | 57.86% | 61.13%, Q1 2017 |
| Loans, net of allowance | $784.0 million | $738.9 million, December 31, 2017 |
| Deposits | $818.3 million | $773.3 million, December 31, 2017 |
| Total assets / shareholders’ equity | $956.8 million / $117.3 million | $901.0 million / $91.5 million, December 31, 2017 |
| Cash and cash equivalents | $69.9 million | $63.2 million, December 31, 2017 |
| FHLB advances | $10.0 million | $25.0 million, December 31, 2017 |
| Operating / investing / financing cash flow | $(1.4) million / $(44.7) million / $52.7 million | Q1 2017: $2.2 million / $(6.2) million / $39.5 million |
Q1 2018 provision for loan losses was $575,000. The allowance was $9.7 million, or 1.22% of gross loans. Nonperforming loans were $592,000 (0.07% of gross loans); classified loans totaled $3.4 million. Regulatory capital ratios included 16.17% total risk-based capital, 14.93% CET1, and a 13.09% leverage ratio.
Material changes versus comparable periods
- Net income rose about 50%, primarily as net interest income increased 16.5% on loan growth and higher loan yields. Interest expense rose 65.7%, reflecting higher funding costs and increased interest-bearing deposits and borrowings.
- Gross loans grew 6.1% from year-end to $793.8 million; deposits increased 5.8% to $818.3 million. CRE was 57% of gross loans, and 83.8% of gross loans were secured by real property.
- Noninterest income declined 1.4% year over year to $2.21 million, as lower SBA loan-sale gains partly offset higher deposit service charges. Noninterest expense increased 6.6% to $6.81 million, including higher staffing, occupancy, and charitable contributions.
- On March 27, the company completed its IPO, selling 2.3 million shares at $11 per share for net proceeds of approximately $22.6 million. Common shares outstanding increased to 15.53 million from 13.19 million at year-end.
- Accumulated other comprehensive loss increased to $783,000 from $350,000, principally reflecting unrealized losses on available-for-sale securities. Fair value of that portfolio was $36.9 million, with gross unrealized losses of $1.11 million.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings or growth guidance. Management said it believed the allowance was adequate and liquidity sufficient to meet obligations; these are management assessments, not assurances.
- Management cited growth in average loans and loan yields as key drivers of net interest income. Deposit costs also rose, and the filing identifies interest-rate movements as a major risk. Modeling showed estimated net interest income sensitivity of +5.23% for a 100-basis-point rise and -3.25% for a 100-basis-point decline; management stated scenarios were within policy limits.
- Credit risks include geographic concentration in Southern California, significant CRE exposure, real-estate values, and borrower and construction-project performance. A $1.4 million lending relationship was downgraded to substandard; management warned weaker local conditions could increase nonperforming loans and losses.
- Available borrowing capacity was reported at $272.3 million across FHLB, Federal Reserve, PCBB, and Zions facilities, subject to collateral and facility terms. The $10 million FHLB advance outstanding at quarter-end matured and was repaid on April 2, 2018. Time deposits above the $250,000 FDIC insurance limit totaled $124.6 million.
- The company recognized no material Q1 effect from adopting the new revenue standard. The Tax Act reduced the federal corporate rate; the related $1.3 million deferred-tax remeasurement charge was recorded in Q4 2017, while the Q1 2018 effective tax rate was 26.7%, down from 39.1% in Q1 2017.
- Undisbursed loan commitments and letters of credit totaled $56.5 million. Management did not anticipate material losses from them. No adverse pending legal actions were reported; disclosure controls were deemed effective, with no material internal-control changes reported.
Important facts for investors to verify
- Track CRE and broader real-estate concentration, criticized/classified loans, delinquencies, and the allowance as the loan book expands.
- Monitor deposit pricing, time-deposit maturities, uninsured deposits, and the effect of further rate changes on net interest margin and earnings.
- Reconcile the IPO proceeds and share count, and assess capital deployment, dilution, and subsequent capital ratios.
- Review liquidity and the availability and collateral requirements of borrowing facilities, as well as operating cash flow, which was negative in Q1.
- Assess the durability of loan growth and SBA sale gains, and the impact of higher operating costs and the company’s stated annual charitable contribution policy.