OP Bancorp — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020; quarterly figures below include the three months ended December 31, 2020. The filing was signed March 15, 2021.
Business context
OP Bancorp is a Los Angeles-based bank holding company operating through Open Bank. It serves small and medium-sized businesses and consumers, with a focus on Korean-American communities. At year-end, the Bank had nine full-service branches and four loan production offices. Its lending is concentrated in commercial real estate (CRE), SBA, commercial and industrial, and home mortgage loans.
Financial performance and condition
- Scale: Assets were $1.367 billion, up 15.9% from 2019; deposits were $1.200 billion, up 17.6%; gross loans were $1.100 billion, up 11.1%. Shareholders’ equity was $143.4 million.
- Earnings: Net income was $13.1 million, or $0.85 per diluted share, versus $16.8 million, or $1.03, in 2019. Net interest income rose 2.5% to $45.4 million; total noninterest income was $10.8 million.
- Margins and returns: Net interest margin declined to 3.72% from 4.19%; return on average assets was 1.03% versus 1.51%, and return on average equity was 9.35% versus 12.42%. The efficiency ratio improved to 56.90% from 58.39%.
- Credit costs and asset quality: Provision for loan losses increased to $6.0 million from $1.1 million, largely reflecting COVID-19-related adjustments. The allowance was $15.4 million, or 1.40% of loans held for investment, versus 1.02%. Nonperforming loans were $985,000 (0.09% of gross loans); there was no other real estate owned. Net charge-offs were effectively 0% of average loans.
- Cash flow: Operating activities used $5.0 million; investing activities used $147.1 million; financing activities provided $172.4 million. Cash and cash equivalents increased $20.4 million to $106.4 million. Loan growth and loan-sale originations contributed to investing and operating cash uses, respectively.
- Funding and liquidity: Noninterest-bearing deposits were 43.6% of deposits, compared with 28.8% in 2019. The annual cost of deposits fell to 0.75% from 1.52%. The Bank had $5.0 million of FHLB advances outstanding and reported $488.7 million of available borrowing capacity across listed facilities; no Federal Reserve borrowings were outstanding. Deposits were the primary funding source.
- Capital: The Bank’s year-end CET1 ratio was 13.27%, total risk-based capital ratio 14.52%, and leverage ratio 10.32%; the filing states the Bank exceeded applicable minimums and was well-capitalized.
Changes versus prior periods
- Annual net income fell 21.7% from 2019, primarily because the provision for loan losses rose by $4.9 million. Lower interest expense partly offset lower interest income: interest expense declined 42.8%, while interest income declined 8.7%.
- The Federal Reserve’s 2020 rate cuts reduced yields on loans and investments. Net interest income nevertheless increased as lower funding costs and loan-volume growth more than offset lower asset yields; net interest margin compressed.
- Loan and deposit growth continued, while the share of noninterest-bearing deposits increased. The allowance ratio rose as management incorporated pandemic-related economic risks.
- Fourth-quarter 2020 net income was $3.8 million, or $0.25 per diluted share, compared with $4.2 million, or $0.26, in fourth-quarter 2019. Quarterly provision expense was $1.8 million versus $0.4 million.
- Noninterest income declined 5.7%, including lower deposit service charges and the absence of a $1.2 million one-time company-owned life insurance gain recorded in 2019. Loan servicing income increased, and a $213,000 gain on sale of property was recorded in 2020.
Outlook, risks and notable items
- Management provided no specific numerical earnings or growth guidance. It described continued organic growth, deposit gathering, commercial lending and disciplined underwriting as priorities, while emphasizing uncertainty from COVID-19 and its economic effects.
- At year-end, 18 deferred loans totaling $31.2 million remained under the pandemic-related modification program; 165 of 183 deferred loans, totaling $205.0 million, had resumed regular payments or been paid off. Hotel and motel loans represented a substantial share of the remaining commercial deferrals.
- CRE was 59.2% of gross loans. The Bank reported CRE concentration measures above supervisory screening thresholds and said it was enhancing monitoring. A downturn in commercial real estate, hospitality or small-business conditions could increase credit losses.
- PPP activity included 978 loans with an aggregate balance of $66.3 million originated under the program; $64.9 million remained outstanding at year-end. The filing identifies SBA eligibility, forgiveness, audit, guarantee and potential litigation risks.
- Other stated risks include interest-rate and funding sensitivity, the LIBOR transition, deposit concentration, cybersecurity and third-party vendor exposure, regulatory changes, and the possibility that the allowance may prove insufficient. The company expected to adopt CECL in 2023 and had not quantified its impact.
- Subsequent event: On January 28, 2021, the Bank agreed to purchase Hana Small Business Lending’s SBA loan portfolio. The loans outstanding were approximately $105 million, with a servicing portfolio of approximately $295 million; estimated purchase price was approximately $102 million, subject to closing adjustments.
- The company committed to contribute 10% of consolidated after-tax net income to the Open Stewardship Foundation. It paid $0.07 per share quarterly dividends during 2020 and repurchased approximately 985,000 shares during the year. Future distributions remain subject to capital, regulatory and other restrictions.
Most important facts for investors to verify
- How the remaining pandemic-related deferrals performed after year-end, particularly hotel and motel exposures, and whether allowance levels remained adequate.
- The composition and credit risk of CRE concentrations, including non-owner-occupied exposures and the Bank’s response to supervisory concentration measures.
- PPP loan forgiveness, SBA guarantee compliance and audit outcomes, as well as the timing, final price and integration risks of the Hana portfolio acquisition.
- Whether deposit growth and lower funding costs can sustain earnings as asset yields, rates and loan demand change; review the cash-flow statement and available borrowing capacity alongside reported liquidity.
- Reconcile the filing’s SBA loan-sale disclosures: one discussion reports $85.0 million sold in 2020, while another reports $113.9 million. The filing text does not clearly reconcile these figures.