Classified in: Business
Subject: EARNINGS

OP Bancorp Reports Fourth Quarter and Year End Financial Result of 2019

OP Bancorp (the "Company") (NASDAQ: OPBK), the holding company of Open Bank (the "Bank"), today reported unaudited financial results for the fourth quarter of 2019. Net income for the fourth quarter of 2019 was $4.2 million, or $0.26 per diluted common share, compared with net income of $4.0 million, or $0.24 per diluted common share, for the third quarter of 2019, and net income of $3.8 million, or $0.23 per diluted common share, for the fourth quarter of 2018.

"We are pleased to complete the year achieving a record annual net income of $16.8 million or $1.03 per diluted common share, along with another solid quarterly net income of $4.2 million, or $0.26 per diluted common share. Despite a challenging and competitive rate environment, we have continued to grow our loans and deposits this year by 13.2% and 12.8%, respectively, while maintaining strong asset quality and retaining our noninterest bearing deposits at 28.8% of total deposits," commented Min Kim, President and Chief Executive Officer of OP Bancorp and Open Bank. Ms. Kim continued, "We are also pleased to announce an increase to our quarterly cash dividend to $0.07 per share from $0.05 per share starting from the first quarter of 2020. Additionally, as of January 23, 2020, we have repurchased an aggregate of 278,924 shares of our common stock at an average price of $9.58 per share under our second stock repurchase program."

Results of Operations

The reported interest income and yield on our loan portfolio are impacted by a number of components, including changes in the average contractual interest rate earned on loans and the amount of discount accretion on SBA loans. The following table reconciles the contractual interest income and yield on our loan portfolio to the reported interest income and yield for the periods indicated.

Net interest margin for the fourth quarter of 2019 decreased 14 basis points to 3.99% from 4.13% for the third quarter of 2019 primarily due to a greater decrease in the reported yield on interest-earning assets compared to a decrease in the cost of interest-bearing liabilities as a result of the cumulative market rate decreases by the Federal Reserve in August, September, and October 2019.

Net interest income before the provision for loan losses for the fourth quarter of 2019 was $11.1 million, a decrease of $141,000, or 1.3%, compared to the third quarter of 2019, primarily due to a $409,000 decrease in interest income, partially offset by a $268,000 decrease in interest expense.

Interest income on securities available for sale and other interest income decreased $126,000, or 15.1%, during the fourth quarter of 2019 compared to the third quarter of 2019. The decrease was primarily due to the aforementioned decrease in Fed funds rate and a $128,000 decrease in other interest income as a result of a $6.8 million, or 8.7%, decrease in the average balance of Fed funds sold and other investments, compared to the third quarter of 2019.

Interest income from the contractual interest rates on loans decreased $155,000, or 1.1%, during the fourth quarter of 2019 compared to the third quarter of 2019, reflecting a 22 basis point decrease in the average contractual interest rate, primarily resulting from the cumulative rate cuts by the Federal Reserve in late 2019. The amount of discount accretion on SBA loans decreased $128,000 during the fourth quarter of 2019 due to a decrease in SBA loan payoffs. The reported interest income on loans, net of SBA discount accretions and other components, decreased $283,000 during the fourth quarter of 2019.

Interest expense for the fourth quarter of 2019 decreased $268,000, or 6.9%, compared to the third quarter of 2019, due to a decrease of 17 basis points in the average cost of interest-bearing liabilities, primarily due to the decrease in the Fed funds rate.

Net interest margin for the fourth quarter of 2019 decreased 51 basis points to 3.99% from 4.50% for the fourth quarter of 2018, primarily due to a decrease in the reported yield on interest-earning assets as a result of cumulative market rate decreases of 75 basis points through three rate cuts by the Federal Reserve in late 2019.

Net interest income before provision for loan losses for the fourth quarter of 2019 increased $152,000, or 1.4%, to $11.1 million, compared to $10.9 million for the fourth quarter of 2018, primarily due to a $929,000 increase in interest income, partially offset by a $731,000 increase in interest expense.

Interest income on securities available for sale and other interest income decreased $46,000, or 6.1%, for the fourth quarter of 2019 compared to the fourth quarter of 2018. The decrease was primarily due to a $40,000 decrease in other interest income as a result of a 126 basis point decrease in the yield on the average balance of Fed funds sold and other investments and a $6,000 decrease in interest income on securities available for sale from purchases of lower yielding securities during the fourth quarter of 2019.

The increase of $929,000 in interest income on loans in the fourth quarter of 2019 was primarily due to a $110.6 million, or 12.8%, increase in the balance of average loans, including loans held for sale, compared to the fourth quarter of 2018, partially offset by a 30 basis point decrease in the yield on average loans to 5.71% for the fourth quarter of 2019 from 6.01% for the same period of 2018.

The increase of $731,000 in interest expense in the fourth quarter of 2019, compared to the fourth quarter of 2018 was due to a $104.2 million, or 17.3%, increase in the average balance of the total interest-bearing liabilities and a 13 basis point increase in the cost of interest-bearing liabilities.

The following tables show the asset yields, liability costs, spreads and margins for the periods indicated.

The Company recorded the provision for loan losses of $411,000 for the fourth quarter of 2019 compared to $290,000 for the third quarter of 2019 and $220,000 for the fourth quarter of 2018. The increases in the provision for loan losses from the third quarter of 2019, and the fourth quarter of 2018 were primarily due to a greater loan growth during the fourth quarter.

Noninterest income for the fourth quarter of 2019 was $2.5 million, a decrease of $219,000, or 8.0%, from $2.7 million for the third quarter of 2019, primarily due to a decrease of $187,000 in gain on sale of loans and a decrease of $172,000 in other income as result of a loss on sale of other real estate owned ("OREO"), partially offset by an increase of $90,000 in loan servicing fees and an increase of $50,000 in service charges on deposits.

Gain on sale of loans decreased $187,000 to $1.5 million for the fourth quarter of 2019 from $1.7 million for the third quarter of 2019. The Company sold $23.9 million in SBA loans with an average premium of 7.73% in the fourth quarter of 2019, compared to the sale of $22.2 million in SBA loans with an average premium of 8.85% in the third quarter of 2019.

Noninterest income for the fourth quarter of 2019 increased $463,000 to $2.5 million compared to $2.1 million for the fourth quarter of 2018, primarily due to an increase of $499,000 in gain on sale of SBA loans and an increase of $261,000 in loan servicing fees, partially offset by a decrease of $319,000 in other income.

Gain on sale of loans for the fourth quarter of 2018 was $1.0 million from the sale of $24.7 million in SBA loans with an average premium of 5.65%. Loan servicing fees, net of amortization, increased $261,000 to $333,000 for the fourth quarter of 2019 from $72,000 for the fourth quarter of 2018, primarily due to a decrease in the amortization of SBA servicing assets from the decrease in SBA loan payoffs.

Noninterest expense for the fourth quarter of 2019 was $7.7 million, a decrease of $759,000, or 9.0%, compared to the third quarter of 2019. The decrease was primarily due to a decrease of $944,000 in salary and employee benefits, partially offset by an increase of $92,000 in FDIC insurance and regulatory assessments, and an increase of $81,000 in corporate promotion and advertising expenses. The decrease in salary and employee benefits expense was primarily due to adjustments in management incentive accruals that are tied to the Company's actual financial performance.

Noninterest expense for the fourth quarter of 2019 increased $97,000, or 1.3%, to $7.7 million, compared to $7.6 million for the fourth quarter of 2018. The increase was primarily due to an increase of $161,000 in occupancy and equipment expense and an increase of $137,000 in data processing and communication expense, partially offset by a decrease of $162,000 in salary and employee benefits. The increases in occupancy and equipment expense and data processing and communication expense were primarily attributable to new loan production offices and a new branch opening in 2019.

Income tax provision was $1.3 million for the fourth quarter of 2019, $1.2 million for the third quarter of 2019, and $1.4 million for the fourth quarter of 2018. The effective tax rate for the fourth quarter of 2019 was 24.2%, compared to 23.6% for the third quarter of 2019 and 27.4% for the fourth quarter of 2018. The lower effective tax rates for the third and fourth quarters of 2019 compared to the fourth of 2018 were primarily due to additional tax benefits from an increase in non-qualified stock option exercises in 2019.

Balance Sheet

Total assets at December 31, 2019, were $1.18 billion, an increase of $27.6 million, or 2.4%, compared to $1.15 billion at September 30, 2019, and an increase of $135.3 million, or 13.0%, compared to $1.04 billion at December 31, 2018.

Gross loans, net of unearned income, were $990.1 million at December 31, 2019, an increase of $25.8 million, or 2.7%, from $964.4 million at September 30, 2019, and an increase of $115.1 million, or 13.2%, from $875.1 million at December 31, 2018.

New loan originations for the fourth quarter of 2019 totaled $98.4 million, including SBA loan originations of $26.3 million, compared to $100.9 million, including SBA loan originations of $30.9 million, for the third quarter of 2019, and $62.4 million, including SBA loan originations of $23.5 million, for the fourth quarter of 2018. Loan payoffs for the fourth quarter of 2019 were $35.9 million, compared to $38.7 million for the third quarter of 2019, and $13.2 million for the fourth quarter of 2018.

Total deposits were $1.02 billion at December 31, 2019, an increase of $24.7 million, or 2.5%, from $996.0 million at September 30, 2019, and an increase of $115.5 million, or 12.8%, from $905.2 million at December 31, 2018. Noninterest bearing deposits were $294.3 million at December 31, 2019, compared to $296.8 million at September 30, 2019, and $285.1 million at December 31, 2018.

Noninterest bearing deposits accounted for 28.8% of total deposits at December 31, 2019, compared to 29.8% at September 30, 2019, and 31.5% at December 31, 2018. The following table shows the Company's deposits by type as a percentage of total deposits as of the periods indicated.

The Company had no borrowings from the Federal Home Loan Bank ("FHLB") at December 31, 2019, September 30, 2019, and December 31, 2018.

The adoption of the new lease accounting standard ASU 2016-02, Leases (Topic 842) effective January 1, 2019, resulted in the recognition of $7.7 million and $9.6 million in right-of-use assets and lease liabilities, respectively, on the balance sheet. With the new branch opening, the Company had right-of-use assets and lease liabilities of $8.3 million and $10.1 million, respectively, at December 31, 2019.

The Company's consolidated regulatory capital ratios exceeded regulatory guidelines and the Bank's capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at December 31, 2019, as summarized in the following table.

The Company announced a second stock repurchase program on August 28, 2019, which authorizes the Company to repurchase up to 475,000 shares of its common stock following the completion of the Company's first stock repurchase program in August 2019. Since the announcement of the second stock repurchase program, the Company has repurchased an aggregate of 278,924 shares of its common stock at an average repurchase price of $9.58 per share through January 23, 2020.

Asset Quality

Nonperforming loans were $1.55 million at December 31, 2019, a decrease of $22,000 from $1.57 million at September 30, 2019, and a decrease of $366,000 from $1.9 million at December 31, 2018.

The company had no OREO at December 31, 2019 and 2018 but had $1.8 million in OREO at September 30, 2019. The Company sold OREO of $1.8 million during the fourth quarter of 2019 with a loss of $145,000.

Nonperforming assets were $1.5 million, or 0.13% of total assets, at December 31, 2019, $3.4 million, or 0.29% of total assets, at September 30, 2019, and $1.9 million, or 0.18% of total assets, at December 31, 2018.

Nonperforming loans to gross loans were 0.16% at December 31, 2019, and September 30, 2019, compared to 0.22% at December 31, 2018. Total classified loans were $3.5 million, or 0.35% of gross loans, at December 31, 2019, compared to $3.2 million, or 0.34% of gross loans, at September 30, 2019, and $3.6 million, or 0.41% of gross loans, at December 31, 2018.

The following tables shows the trend of classified loans by loan type as of the date stated.

The allowance for loan losses was $10.1 million at December 31, 2019, compared to $9.6 million at September 30, 2019, and at December 31, 2018. The allowance for loan losses was 1.02% of gross loans at December 31, 2019, 1.00% at September 30, 2019 and 1.10% at December 31, 2018. The allowance for loan losses was 649% of nonperforming assets at December 31, 2019, 285% at September 30, 2019, and 503% at December 31, 2018.

About OP Bancorp

OP Bancorp, the holding company for Open Bank (the "Bank"), is a California corporation whose common stock is quoted on the Nasdaq Global Market under the ticker symbol, "OPBK." The Bank is engaged in the general commercial banking business in Los Angeles, Orange, and Santa Clara Counties, California, and Carrollton, Texas and is focused on serving the banking needs of small- and medium-sized businesses, professionals, and residents with a particular emphasis on Korean and other ethnic minority communities. The Bank currently operates with nine full branch offices in Downtown Los Angeles, Los Angeles Fashion District, Los Angeles Koreatown, Gardena, Buena Park, and Santa Clara, California and Carrollton, Texas. The Bank also has four loan production offices in Atlanta, Georgia, Aurora, Colorado, and Lynnwood and Seattle, Washington. The Bank commenced its operations on June 10, 2005 as First Standard Bank and changed its name to Open Bank in October 2010. Its headquarters is located at 1000 Wilshire Blvd., Suite 500, Los Angeles, California 90017. Phone 213.892.9999; www.myopenbank.com Member FDIC, Equal Housing Lender.

Cautionary Note Regarding Forward-Looking Statements

Certain matters set forth herein (including any exhibits hereto) constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to the Company's current business plans and expectations regarding future operating results. Forward-looking statements may include, but are not limited to, the use of forward-looking language, such as "likely result in," "expects," "anticipates," "estimates," "forecasts," "projects," "intends to," or may include other similar words or phrases, such as "believes," "plans," "trend," "objective," "continues," "remains," or similar expressions, or future or conditional verbs, such as "will," "would," "should," "could," "may," "might," "can," or similar verbs. These forward-looking statements are subject to risks and uncertainties that could cause actual results, performance or achievements to differ materially from those projected. These risks and uncertainties, some of which are beyond our control, include, but are not limited to: business and economic conditions, particularly those affecting the financial services industry and our primary market areas; our ability to successfully manage our credit risk and the sufficiency of our allowance for loan loss; factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers and the success of construction projects that we finance; our ability to effectively execute our strategic plan and manage our growth; interest rate fluctuations, which could have an adverse effect on our profitability; liquidity issues, including fluctuations in the fair value and liquidity of the securities we hold for sale; external economic and/or market factors, such as changes in monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve, inflation or deflation, changes in the demand for loans, and fluctuations in consumer spending, borrowing and savings habits, which may have an adverse impact on our financial condition; continued or increasing competition from other financial institutions, credit unions, and non-bank financial services companies, many of which are subject to different regulations than we are; challenges arising from unsuccessful attempts to expand into new geographic markets, products, or services; restraints on the ability of the Bank to pay dividends to the holding company; increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; a failure in the internal controls we have implemented to address the risks inherent to the business of banking; inaccuracies in our assumptions about future events, which could result in material differences between our financial projections and actual financial performance; changes in our management personnel or our inability to retain motivate and hire qualified management personnel; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems; disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions; an inability to keep pace with the rate of technological advances due to a lack of resources to invest in new technologies; risks related to potential acquisitions; incremental costs and obligations associated with operating as a public company; the impact of any claims or legal actions to which we may be subject, including any effect on our reputation; compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities and tax matters, and our ability to maintain licenses required in connection with commercial mortgage origination, sale and servicing operations; changes in federal tax law or policy; the affect if any of the recent federal government shutdown on our SBA loan program; and our ability the manage the foregoing and other factors set forth in the Company's public reports. We describe these and other risks that could affect our results in Item 1A. "Risk Factors," of our latest Annual Report on Form 10-K for the year ended December 31, 2018 and in our other subsequent filings with the Securities and Exchange Commission. If any of these risks or uncertainties materializes or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by such forward-looking statements. We assume no obligation to update such forward-looking statements. Any forward-looking statements presented herein are made only as of the date of this press release, and we do not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise, except as required by law.

 

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