OP Bancorp — FY 2021 Form 10-K
Business context and reporting period. OP Bancorp is a California bank holding company operating Open Bank, a community commercial bank focused on small and midsize businesses and the Korean-American community. This filing covers the fiscal year ended December 31, 2021, with comparisons to 2020 and 2019. The company operated nine full-service branches and four loan production offices; a tenth branch in Cerritos was planned for the first quarter of 2022.
Financial performance and condition
| Metric | FY 2021 / Dec. 31, 2021 | FY 2020 / Dec. 31, 2020 |
|---|---|---|
| Net income | $28.8 million; diluted EPS $1.88 | $13.1 million; diluted EPS $0.85 |
| Net interest income | $61.0 million | $45.4 million |
| Net interest margin | 4.02% | 3.72% |
| Noninterest income | $16.0 million | $10.8 million |
| Noninterest expense | $35.9 million | $31.9 million |
| Provision for loan losses | $0.5 million | $6.0 million |
| Total assets | $1.73 billion | $1.37 billion |
| Gross loans | $1.31 billion | $1.10 billion |
| Deposits | $1.53 billion | $1.20 billion |
| Shareholders’ equity | $165.2 million | $143.4 million |
- Earnings and margins: Net income more than doubled year over year. Net interest income increased 34.5%, mainly from loan growth and a $5.2 million reduction in interest expense. Deposit cost fell to 0.22% from 0.75%; return on average assets was 1.83% versus 1.03%, and return on average equity was 18.90% versus 9.35%.
- Revenue mix and expenses: Gain on loan sales reached $11.3 million, up 85.7%, including $11.0 million from SBA loan sales. Total noninterest income increased 48.7%. Noninterest expenses rose 12.3%, including higher staffing, data-processing and charitable contribution costs. The efficiency ratio improved to 46.55% from 56.90%.
- Cash flow: Operating activities used $28.3 million, compared with $4.9 million used in 2020. Investing activities used $286.0 million, largely reflecting loan growth, the Hana portfolio purchase and securities purchases; financing activities provided $323.5 million, mainly from $334.0 million of deposit growth. Cash and cash equivalents ended the year at $115.5 million.
- Liquidity and funding: Deposits were 98.2% of liabilities; noninterest-bearing deposits were 50.5% of total deposits. Core deposits were 86.5% of deposits, and wholesale deposits were $95.8 million, or 6.2%. The loans-to-deposits ratio was 84.6%. Liquid assets totaled $265.9 million. There were no FHLB advances outstanding at year-end and no other borrowings reported; available borrowing capacity across disclosed facilities totaled $592.2 million.
- Asset quality and capital: Nonperforming loans rose to $3.2 million, or 0.24% of gross loans, from $1.0 million, or 0.09%; nonperforming assets were 0.19% of total assets. The allowance was $16.1 million, or 1.23% of gross loans, and net charge-offs were 0.02% of average gross loans. The Bank was reported well-capitalized; its CET1 ratio was 12.23%, total risk-based capital ratio 13.47%, and leverage ratio 9.44%.
- Debt and securities: No FHLB borrowings were outstanding at year-end. Available-for-sale securities were $150.4 million, with $2.1 million of gross unrealized losses, which management attributed primarily to interest-rate movements and considered temporary.
Material changes versus prior periods
- Assets grew 26.3%, gross loans 19.5%, deposits 27.8%, and shareholders’ equity 15.2% year over year.
- Net interest income increased as average SBA loans expanded and deposit funding costs declined. Average SBA loan balances rose by $155.0 million.
- The loan-loss provision fell sharply from 2020’s $6.0 million, while nonperforming loans increased from $1.0 million to $3.2 million.
- Noninterest income growth was led by SBA loan-sale gains and increased servicing activity. Securities-related accumulated other comprehensive income moved from a $0.8 million gain to a $1.2 million loss, reflecting market-value changes.
- In May 2021, the Bank purchased Hana Small Business Lending’s loan portfolio for approximately $97.6 million, including $100.0 million of loans at a fair-value discount and $6.1 million of servicing assets.
- Fourth-quarter 2021 net income was $9.1 million, compared with $3.8 million in fourth-quarter 2020. Fourth-quarter provision was $1.9 million, following provision reversals in the second and third quarters of 2021.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no formal earnings or financial guidance. Management described continued organic growth and planned the Cerritos branch opening in early 2022. Management estimated capital was sufficient to fund operations and growth initiatives for at least the next 24 months, subject to assumptions and conditions.
- Management commentary: Management cited improved economic resilience in its markets but emphasized continuing uncertainty from COVID-19 and variants. The company had processed 226 pandemic-related loan deferrals totaling $250.8 million; only three loans totaling $5.0 million remained in deferment at year-end.
- PPP and SBA exposure: The Bank had funded $154.5 million of PPP loans since the program began, with $118.7 million of principal forgiven by year-end; $40.6 million of PPP loans remained outstanding. SBA lending also entails dependence on program rules, sale premiums, servicing valuations and the SBA’s guarantee and forgiveness processes.
- Credit and concentration risks: CRE loans were 53.3% of gross loans; 83.3% of gross loans had real estate as a primary or secondary component of collateral. CRE exposure was 295% of risk-based capital at year-end. Management highlighted borrower, property-value, geographic and portfolio-seasoning risks.
- Interest-rate and liquidity risks: Management’s year-end simulation estimated net interest income would rise 8.07% under an immediate +100-basis-point rate shock, but fall 1.86% under a -100-basis-point shock. The economic value of equity was estimated to decline 23.05% under -100 basis points and 8.18% under +400 basis points. These are model scenarios, not forecasts. Rising rates may also reduce the value of fixed-rate securities.
- Other notable items: The company committed to contribute 10% of consolidated after-tax income to the Open Stewardship Foundation; 2021 contributions were $2.9 million. The company expected to adopt CECL in January 2023; the quantitative effect was not yet determined. It had begun transitioning LIBOR-linked instruments to alternative rates. No material legal proceedings or subsequent events requiring disclosure were reported. The independent auditor issued an unqualified opinion on the financial statements; management reported effective disclosure controls.
Investor verification priorities
- Verify the sustainability of 2021 earnings growth, particularly the contribution from SBA loan-sale gains, PPP activity, purchased Hana loans and lower funding costs.
- Review loan quality trends, including the increase in nonperforming loans, remaining deferrals, SBA non-guaranteed exposures, CRE concentrations and the adequacy of the allowance.
- Assess deposit stability and concentration, the growth in noninterest-bearing deposits, time-deposit maturities and access to contingent funding.
- Examine sensitivity to changing interest rates, unrealized securities losses, deposit repricing and the assumptions underlying management’s interest-rate scenarios.
- Track the effects of CECL adoption, the LIBOR transition, branch expansion and the 10% Foundation contribution commitment on future earnings and capital.