OP Bancorp — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Dollar amounts are in millions unless stated otherwise. OP Bancorp is a bank holding company whose principal business is community banking through Open Bank, focused on deposits and commercial lending. It operated nine full-service branches, including a new Carrollton, Texas branch opened in April 2019.
Financial performance and position
- Q2 earnings: Net income was $3.84 million, up 1.2% from $3.79 million a year earlier; diluted EPS was $0.23 in both periods. Net interest income rose 11.9% to $11.18 million, while noninterest expense increased 11.8% to $8.36 million.
- First-half earnings: Net income was $8.58 million, up 22.4% from $7.01 million; diluted EPS rose to $0.52 from $0.45. Net interest income increased 12.4% to $21.98 million.
- Revenue and margins: Q2 interest income rose 23.3% to $14.88 million, but interest expense increased 78.4% to $3.70 million as deposit costs rose. Q2 net interest margin declined to 4.26% from 4.46%; first-half margin was 4.32% versus 4.51%. Q2 return on average assets was 1.39% and return on average equity was 11.50%.
- Noninterest items: Q2 noninterest income was $2.65 million, down 4.9%, reflecting lower loan-servicing fees and loan-sale gains. First-half noninterest income rose 23.7% to $6.18 million, principally because of a one-time $1.2 million gain on company-owned life insurance. First-half noninterest expense rose 15.0% to $16.43 million, led by personnel costs.
- Assets and lending: Total assets were $1.13 billion at June 30, up 8.0% from year-end 2018. Gross loans increased 8.2% to $947.0 million; commercial real estate loans were $583.6 million, or 62% of gross loans. Deposits grew 7.7% to $974.7 million. Shareholders’ equity was $135.5 million.
- Credit quality: The allowance for loan losses was $9.53 million, 1.01% of gross loans, versus 1.18% at June 30, 2018. Nonperforming loans were $1.56 million, or 0.16% of gross loans, compared with $1.91 million at December 31, 2018. Classified loans increased to $4.2 million from $3.6 million at year-end. The quarter included $496,000 of charge-offs, principally a $493,000 commercial and industrial charge-off.
- Cash flow and liquidity: Cash and cash equivalents were $83.1 million, up from $77.7 million at year-end. First-half operating cash flow was $8.0 million; investing cash use was $67.8 million, primarily reflecting loan growth; financing cash flow was $65.2 million, including a $69.5 million increase in deposits. The Bank had no FHLB borrowings. Reported additional borrowing availability totaled $351.9 million across FHLB, Federal Reserve, and other institutions, subject to collateral and facility terms.
- Debt, leases, and capital: The filing reports no FHLB borrowings at quarter-end. Adoption of lease accounting resulted in $9.0 million of right-of-use assets and $10.7 million of lease liabilities. The Bank was categorized as well capitalized; its total risk-based capital ratio was 15.37%, CET1 ratio 14.35%, and leverage ratio 12.18%.
Material changes versus comparable periods
- Q2 net income was nearly flat year over year despite higher net interest income, as expense growth, a higher loan-loss provision, and lower noninterest income offset much of the gain.
- First-half net income grew 22.4%, supported by loan growth, higher yields, and the one-time life-insurance gain. The contribution of that unusual gain should be distinguished from recurring operating performance.
- Average interest-bearing deposit costs rose materially, contributing to lower net interest margin despite increased asset yields. The average cost of interest-bearing liabilities was 2.20% in Q2 versus 1.48% a year earlier.
- Loan growth was concentrated in commercial real estate: CRE loans rose to $583.6 million from $503.8 million at year-end. Real-property-secured loans represented 87.5% of gross loans.
- First-half cash dividends paid were $1.6 million and common-stock repurchases were $3.0 million. The repurchase program authorized up to 400,000 shares; 74,385 shares had been repurchased in Q2, with 66,730 shares remaining under the program at June 30.
Outlook, commentary, and risks
- The filing provides no specific earnings or revenue guidance. Management said it expected to meet contractual obligations through cash, operating profitability, loan and securities repayments and maturities, deposit gathering, and available borrowing sources.
- Management described the allowance as adequate based on information available, while noting that weaker California economic or real-estate conditions could increase nonperforming loans, charge-offs, and required reserves.
- Interest-rate simulation showed estimated net interest income increasing 5.86% under an immediate 100-basis-point rise and declining 4.96% under a 100-basis-point fall, over the modeled period. Management said the Bank was within policy limits and had become slightly more asset-sensitive. These are model estimates, not forecasts.
- Key disclosed risks include commercial real-estate and geographic concentration, borrower and construction-project performance, interest-rate and deposit-cost changes, competition, liquidity and funding access, regulatory requirements, technology and vendor disruptions, and execution of growth plans.
- The company adopted the new lease standard in 2019. It was evaluating the expected-credit-loss standard (CECL), including data, systems, and modeling requirements; the financial impact had not yet been quantified. Management anticipated added complexity and costs.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no adverse pending legal actions and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether loan growth—particularly CRE growth—and the higher classified-loan balance are accompanied by any further deterioration in delinquency, collateral values, or credit grades.
- How deposit pricing and funding mix affect net interest margin as time deposits mature; $228.4 million of time deposits were scheduled to mature during the remainder of 2019.
- How much first-half earnings growth is repeatable without the $1.2 million life-insurance gain, and whether rising operating expenses can be contained.
- Availability and terms of borrowing facilities, including collateral requirements, and the Bank’s capacity to fund continued loan growth while maintaining liquidity and capital buffers.
- The execution and potential earnings impact of CECL implementation, as the filing did not quantify its expected effect.