OP Bancorp — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; unaudited. OP Bancorp is a bank holding company whose subsidiary, Open Bank, provides commercial and retail banking, with a focus on small and medium-sized businesses and the Korean-American community.
Financial results and position
| Metric | Q2 2021 / June 30, 2021 | Comparable period / prior date |
|---|---|---|
| Net income | $6.4 million; diluted EPS $0.42 | Q2 2020: $2.4 million; $0.16 per diluted share |
| Net interest income | $14.6 million | Q2 2020: $10.6 million |
| Net interest margin | 3.98% | Q2 2020: 3.55% |
| Six-month net income / diluted EPS | $11.5 million / $0.75 | Six months 2020: $5.7 million / $0.37 |
| Six-month net interest margin | 3.90% | Six months 2020: 3.74% |
| Total assets | $1.60 billion | December 31, 2020: $1.37 billion |
| Total loans, including loans held for sale | $1.314 billion | December 31, 2020: $1.126 billion |
| Total deposits | $1.434 billion | December 31, 2020: $1.200 billion |
| Shareholders’ equity | $152.0 million | December 31, 2020: $143.4 million |
| Cash and cash equivalents | $128.7 million | December 31, 2020: $106.3 million |
Q2 net income rose 164% year over year; first-half net income rose 100.5%. Q2 pre-provision net revenue, a non-GAAP measure, was $8.0 million, up 49%. The Q2 efficiency ratio was 52.30%, compared with 57.70%; return on average assets was 1.68% and return on average equity was 17.10%.
For the first half, operating cash flow was negative $29.1 million, investing cash flow was negative $175.4 million, and financing cash flow was positive $226.9 million. Cash increased $22.4 million. The operating outflow included $76.3 million of loan originations held for sale. The Bank had no FHLB advances outstanding at quarter-end, versus $5.0 million at December 31, 2020. Reported available borrowing capacity across listed facilities was $527.6 million.
Material changes and drivers
- On May 24, 2021, the Company completed an asset purchase of Hana Small Business Lending’s loan portfolio: $97.6 million cash consideration for approximately $100.0 million of loans before an $8.9 million discount, $6.1 million in servicing assets and accrued interest. The acquired loans included SBA and PPP loans. The Company reported $86.0 million of interest income on the acquired loans in Q2 and first-half 2021 combined; adjusted net interest margin excluding the purchase was 3.85% for Q2 and 3.83% for the first half.
- Q2 net interest income increased $3.9 million, primarily from higher average loan balances and lower deposit costs. Interest expense fell 66% year over year. First-half net interest income increased $5.6 million, despite lower average asset yields.
- The Company recorded a $1.1 million Q2 reversal of loan-loss provision, compared with a $2.0 million provision in Q2 2020. For the first half, it recorded a $492,000 reversal versus a $2.7 million provision in 2020. Management attributed the improvement to better economic conditions.
- Q2 noninterest income increased 8% to $2.2 million, mainly from gains on loan sales and deposit service charges. Noninterest expense rose 20% to $8.8 million, principally from salaries and benefits and higher foundation donations and contributions.
- Deposits increased $234.0 million from year-end, including growth in noninterest-bearing deposits. Loans grew with the Hana purchase, PPP activity and commercial real estate lending.
Credit, liquidity, capital, outlook and risks
- The allowance for loan losses was $14.7 million, or 1.18% of gross loans, down from $15.4 million and 1.40% at year-end. Nonperforming loans were $757,000, or 0.06% of gross loans; net charge-offs were $27,000 in Q2. Management considered the allowance adequate but noted uncertainty around COVID-19 and the economic outlook.
- At June 30, 225 loans totaling $250.7 million had received COVID-related deferrals; 216 loans totaling $235.0 million had resumed payments or been paid off. Nine loans totaling $15.7 million remained deferred.
- PPP loans outstanding had a carrying value of $103.9 million. Since the program began, the Bank had funded $154.5 million and received $52.7 million in principal forgiveness. SBA eligibility, forgiveness and audit requirements remain risks.
- Commercial real estate was $684.1 million, and 81.9% of gross loans were secured by real property. Hotels/motels represented $195.8 million, or 16.4%, of the disclosed commercial and other business loan portfolio. Management cited possible adverse effects from weaker regional economic conditions and real estate values.
- The Bank’s total risk-based capital ratio was 13.63%, CET1 ratio 12.38%, and leverage ratio 9.77%. The Bank was reported well capitalized; ratios declined from year-end as assets grew. The Company’s reported total risk-based capital ratio was 13.87%.
- Management described liquidity and capital as solid. The gross loan-to-deposit ratio was 86.9%. However, $193.7 million of time deposits exceeded the $250,000 FDIC insurance limit, and $130.1 million of undisbursed credit commitments were outstanding.
- Management provided no specific earnings or financial guidance. It cited ongoing uncertainty from COVID-19, interest-rate changes, credit quality, CRE concentration, PPP administration, competition, technology and cybersecurity, and regulatory requirements. Interest-rate simulations showed projected net interest income sensitivity of +5.35% for a 100-basis-point rise and -0.86% for a 100-basis-point decline.
- The Board approved a 43% increase in the quarterly cash dividend, to $0.10 per share from $0.07. The filing reported no adverse pending legal actions requiring disclosure, and management stated disclosure controls were effective.
Important facts for investors to verify
- Performance and credit quality of the Hana-purchased loans, including discount accretion, servicing-asset valuation and any subsequent credit deterioration.
- Remaining COVID-related deferrals, PPP forgiveness and audit exposure, and the adequacy of the allowance as conditions change.
- Exposure to commercial real estate and hotel/motel borrowers, collateral values, and regional economic conditions.
- Deposit stability and concentration, including uninsured time deposits, and the availability of borrowing facilities under stress.
- Sustainability of margin and earnings growth after separating the Hana purchase, loan-sale gains, provision reversals and other period-specific factors.