OP Bancorp (OPBK) — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. OP Bancorp is a bank holding company whose subsidiary, Open Bank, serves small and medium-sized businesses and individuals, with a focus on the Korean-American community. It operates nine branches and four loan production offices.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $16.6 million | $11.4 million | $43.9 million | $33.2 million |
| Net interest margin | 4.21% | 3.66% | 4.01% | 3.71% |
| Net income | $8.3 million | $3.6 million | $19.7 million | $9.3 million |
| Diluted EPS | $0.54 | $0.23 | $1.29 | $0.60 |
| Noninterest income | $3.5 million | $3.0 million | $8.7 million | $7.4 million |
| Noninterest expense | $9.5 million | $8.0 million | $26.3 million | $23.5 million |
Q3 diluted EPS increased 129% year over year. Management attributed stronger earnings chiefly to loan growth, lower deposit costs and a reversal of loan-loss provision. Q3 pre-provision net revenue, a non-GAAP measure, was $10.6 million, up 64%. The efficiency ratio improved to 47.28% from 55.31%.
Balance sheet, liquidity and capital
- At September 30, 2021, total assets were $1.680 billion, up $313.1 million from December 31, 2020. Net loans were $1.218 billion; gross loans, including loans held for sale, were $1.326 billion.
- Deposits were $1.496 billion, up $296.3 million since year-end. Noninterest-bearing deposits were $713.1 million, or 47.6% of deposits, versus 43.6% at year-end.
- Cash and cash equivalents were $188.1 million, compared with $106.3 million at year-end. The bank had no FHLB advances outstanding; reported available borrowing capacity totaled $572.0 million across FHLB, Federal Reserve and correspondent lines. Gross loans to deposits were 82.3%, down from 91.6%.
- For the first nine months, operating cash flow was negative $52.2 million and investing cash flow negative $153.3 million; financing cash flow was positive $287.3 million, primarily reflecting deposit growth. Cash increased $81.8 million.
- Shareholders’ equity was $158.6 million. Bank total risk-based capital was 13.60%, common equity Tier 1 was 12.42%, and leverage was 9.58%. The bank was reported well-capitalized. The company paid $3.6 million in dividends during the first nine months; the quarterly dividend was raised to $0.10 per share.
Credit quality and material changes
- The allowance for loan losses was $14.1 million, or 1.15% of gross loans, versus $15.4 million, or 1.40%, at year-end. The company recorded a Q3 provision reversal of $884,000 and a nine-month reversal of $1.376 million; management cited improving economic conditions.
- Nonperforming loans were $1.052 million, 0.09% of gross loans, versus $985,000 and 0.09% at year-end. Nine-month net charge-offs were $20,000. Management reported criticized loans of $2.2 million, down from $7.9 million at year-end.
- On May 24, 2021, the company purchased Hana Small Business Lending’s loan portfolio for approximately $97.6 million. The acquisition included $100.0 million of loans recorded with an $8.9 million discount and $6.1 million of servicing assets. Management said discount accretion contributed to Q3 interest income; excluding the purchase’s impact, adjusted Q3 net interest margin was 3.91%, versus the reported 4.21%.
- Loans under the PPP totaled $69.3 million at quarter-end. Since the program began, the bank had funded $154.5 million and received $88.8 million of principal forgiveness. Of 225 COVID-related deferred loans totaling $250.7 million, 221 had resumed payments or been paid off; $6.7 million remained in deferment.
Management commentary, outlook and risks
Management reported continued improvement in the economic environment and low nonperforming loans, while emphasizing uncertainty around COVID-19 and its effects on borrowers, the economy and credit estimates. The filing does not provide numerical earnings guidance or a specific forward outlook. Management said it believes the allowance is adequate but cautioned that weaker California economic or real-estate conditions could increase problem loans and losses.
Key exposures include commercial real estate concentration, borrower and collateral performance, SBA and PPP eligibility or forgiveness reviews, interest-rate movements, deposit and liquidity conditions, and competition. Commercial real estate was $688.4 million, approximately 56% of gross loans; 83.0% of gross loans were secured by real property. Q3 noninterest expense rose 19%, led by salaries and employee benefits and higher foundation contributions. The filing reported no adverse pending legal actions requiring disclosure, and no material changes in internal control over financial reporting.
Investor verification priorities
- Assess the sustainability of earnings and margins, including Hana-loan discount accretion, PPP forgiveness-related fees, and the unusually favorable provision reversal.
- Review credit trends and allowance adequacy, especially commercial real estate exposure, remaining COVID deferrals, and the effect of economic changes on collateral values and borrowers.
- Monitor deposit growth, deposit mix and costs, liquidity use, and the bank’s capacity to fund loan commitments, which increased to $147.9 million from $75.7 million at year-end.
- Track capital ratios as assets grow and confirm the effect of dividends and future loan growth on regulatory buffers.
- Check subsequent filings for developments in SBA audits or PPP forgiveness, interest-rate sensitivity, and any realization of the disclosed off-balance-sheet commitments.