OP Bancorp Reports First Quarter Result of 2020

OP Bancorp (the “Company”) (NASDAQ: OPBK), the holding company of Open Bank (the “Bank”), today reported unaudited financial results for the first quarter of 2020. Net income for the first quarter of 2020 was $3.3 million, or $0.21 per diluted common share, compared to net income of $4.2 million, or $0.26 per diluted common share for fourth quarter of 2019, and net income of $4.7 million, or $0.29 per diluted common share for the first quarter of 2019. Excluding one-time gain of $1.2 million on company owned life insurance, net income for the first quarter of 2019 was $3.8 million or $0.23 per diluted common share.

“As the impact of COVID-19 has been collectively felt by all of us, my heartfelt appreciation goes out to all those working in the front line serving our community as we work together in recovery. In order to do our part, we have taken various steps to help our customers, employees and communities in this challenging and unprecedented time while maintaining our safe and sound banking operations. We have been assisting our customers with loan deferrals and the SBA Payroll Protection Program (PPP) in recent weeks. I am very proud of the efforts our employees are making to support our customers, especially those on the front lines,” commented Min Kim, President and Chief Executive Officer of OP Bancorp and Open Bank. Ms. Kim continued, “As part of our continued effort to support our communities, we have donated $1 million through Open Stewardship Foundation to help small restaurants in our communities. In addition, our directors and employees together have donated $100,000 to two local non-profit organizations to support families who are most severely impacted by the pandemic.”

COVID-19 Actions for our customers, employees and communities

• Offering loan payment deferrals: we have received 164 loan deferment requests for an aggregate of $218 million loan balances, which is approximately 22% of loan portfolio as of March 31, 2020
• Processing the SBA Paycheck Protection Program (PPP) loans: we have approved 326 loans for an aggregate of $37.4 million as of April 20, 2020
• Enabled remote working environment for employees while maintaining fully functioning operations in all areas
• Donated $1 million through Open Stewardship Foundation to support small restaurants in the communities we serve
• Donated $100,000 from our directors and employees’ contribution to two non-profit organizations to support families who are most severely impacted by the pandemic

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 first quarter of 2020 decreased 4 basis points to 3.95% from 3.99% for the fourth quarter of 2019 primarily due to a decrease in the reported yield on interest-earning assets, partially offset by a decrease in the cost of interest-bearing liabilities as a result of the cumulative market rate decreases by the Federal Reserve since October 2019.

Net interest income before the provision for loan losses for the first quarter of 2020 was $11.1 million, an increase of $38,000, or 0.3%, compared to the fourth quarter of 2019, primarily due to a $396,000 decrease in interest expense, partially offset by a $358,000 decrease in interest income.

Interest income on securities available for sale and other interest income decreased $57,000, or 8.0%, during the first quarter of 2020 compared to the fourth quarter of 2019. The decrease was primarily due to a $42,000 decrease in other interest income as a result of a 38 basis point decrease in the yield on the average balance of Fed funds sold and other investments and a $15,000 decrease in interest income on securities available for sale as a result of a $2.7 million decrease in the average balance from $2.0 million of maturities in agency securities and a $3.6 million of paydowns in MBS and CMO securities during the first quarter of 2020.

Interest income from contractual interest rates on loans decreased $257,000, or 1.9%, during the first quarter of 2020 compared to the fourth quarter of 2019, reflecting a 17 basis point decrease in the average contractual interest rate, primarily resulting from the cumulative rate cuts by the Federal Reserve in October 2019 and March 2020. The amount of discount accretion on SBA loans decreased $31,000 during the first quarter of 2020 due to a decrease in SBA loan payoffs. The reported interest income on loans, net of SBA discount accretions and other components, decreased $301,000, or 2.2% during the first quarter of 2020.

Interest expense for the first quarter of 2020 decreased $396,000, or 10.9%, compared to the fourth quarter of 2019, due to a decrease of 25 basis points in the average cost of interest-bearing liabilities, primarily due to the rate cuts by the Federal Reserve.

Net interest margin for the first quarter of 2020 decreased 43 basis points to 3.95% from 4.38% for the first quarter of 2019, primarily due to a decrease in the reported yield on interest-earning assets as a result of cumulative market rate cuts by the Federal Reserve in 2019.

Net interest income before provision for loan losses for the first quarter of 2020 increased $318,000, or 2.9%, to $11.1 million, compared to $10.8 million for the first quarter of 2019, primarily due to a $259,000 increase in interest income and a $59,000 decrease in interest expense.

Interest income on securities available for sale and other interest income for the first quarter of 2020 decreased $81,000, or 11.1%, compared to the first quarter of 2019. The decrease was primarily due to a $40,000 decrease in other interest income as a result of a 114 basis point decrease in the yield on the average balance of Fed funds sold and other investments and a $41,000 decrease in interest income on securities available for sale as a result of a 30 basis point decrease in the yield on the average balance of securities available for sale.

Interest income from contractual interest rates on loans for the first quarter of 2020 increased $585,000, or 4.7%, compared to the first quarter of 2019, primarily due to a $110.1 million, or 12.4%, increase in the balance of average loans, including loans held for sale, compared to the first quarter of 2019, partially offset by a 43 basis point decrease in the yield on average loans to 5.27% for the first quarter of 2020 from 5.70% for the same period of 2019. Prepayment penalties and other fees for the first quarter of 2020 decreased $217,000 compared to the first quarter of 2019. The reported interest income on loans, net of SBA discount accretions and other components, for the first quarter of 2020 increased $340,000, or 2.5%, compared to the same period of 2019.

Interest expense for the first quarter of 2020 decreased $59,000, or 1.8%, compared to the first quarter of 2019, primarily due to a 32 basis point decrease in the cost of interest-bearing liabilities, partially offset by a $92.8 million, or 14.6%, increase in the average balance of total 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 (LLP) of $743,000 for the first quarter of 2020. Considering the pandemic’s negative impacts to national and local economic and business conditions, the management increased qualitative factors, especially in commercial and home mortgage loans. The increases in qualitative factors accounted for $593,000, or 80%, of the LLP for the quarter. The Company recorded the LLP of $411,000 for the fourth quarter of 2019 and had no LLP for the first quarter of 2019.

Noninterest income for the first quarter of 2020 was $2.3 million, a decrease of $217,000, or 8.67%, from $2.5 million for the fourth quarter of 2019, primarily due to a decrease of $372,000 in gain on sale of loans and a decrease of $89,000 in service charges on deposits, partially offset by an increase of $59,000 in loan servicing fees and an increase of $185,000 in other income.

Gain on sale of loans for the first quarter of 2020 was $1.2 million, a decrease of $372,000, compared to $1.5 million for the fourth quarter of 2019. The Company sold $17.5 million in SBA loans with an average premium of 8.41% in the first quarter of 2020, compared to the sale of $23.9 million in SBA loans with an average premium of 7.73% in the fourth quarter of 2019. Due to the closure of SBA’s secondary market operation amid COVID-19, approximately $3.3 million in SBA loans were not sold in the first quarter of 2020 and placed in the loans held for sale as of March 31, 2020.

Noninterest income for the first quarter of 2020 decreased $1.2 million to $2.3 million compared to $3.5 million for the first quarter of 2019, primarily due to one-time gain of $1.2 million on company owned life insurance in the first quarter of 2019.

Gain on sale of loans for the first quarter of 2019 was $1.1 million from the sale of $17.7 million in SBA loans with an average premium of 8.19%.

Noninterest expense for the first quarter of 2020 was $8.2 million, an increase of $542,000, or 7.1%, compared to $7.7 million for the fourth quarter of 2019. The increase was primarily due to an increase of $666,000 in salary and employee benefits, partially offset by a decrease of $101,000 in promotion and advertising expenses. The increase in salary and employee benefits expense was primarily due to a lower employee bonus and profit sharing accrual in the fourth quarter of 2019 from adjustments in management incentive accruals that were tied to the Company’s actual financial performance in 2019.

Noninterest expense for the first quarter of 2020 was $8.2 million, an increased $134,000, or 1.7%, compared to $8.1 million for the first quarter of 2019. The increase was primarily due to an increase of $153,000 in occupancy and equipment expense, an increase of $70,000 in professional fees, and an increase of $51,000 in data processing and communication expense, partially offset by a decrease of $97,000 in salary and employee benefits. The increases in occupancy and equipment expense and data processing and communication expense were primarily attributable to a new branch opening in the second quarter of 2019.

Income tax provision was $1.2 million for the first quarter of 2020, $1.3 million for the fourth quarter of 2019, and $1.5 million for the first quarter of 2019. The effective tax rate for the first quarter of 2020 was 26.1%, compared to 24.2% for the fourth quarter of 2019 and 24.3% for the first quarter of 2019. The higher effective tax rates for the first quarter of 2020 compared to the fourth of 2019 was primarily due to less tax benefits from a decrease in non-qualified stock option exercises in 2020.

Balance Sheet

Total assets at March 31, 2020, were $1.21 billion, an increase of $30.1 million, or 2.5%, compared to $1.18 billion at December 31, 2019, and an increase of $132.4 million, or 12.3%, compared to $1.08 billion at March 31, 2019.

Gross loans, net of unearned income, were $996.6 million at March 31, 2020, an increase of $6.4 million, or 0.6%, from $990.1 million at December 31, 2019, and an increase of $83.5 million, or 9.1%, from $913.1 million at March 31, 2019.

New loan originations for the first quarter of 2020 totaled $77.9 million, including SBA loan originations of $25.7 million, compared to $98.4 million, including SBA loan originations of $26.3 million, for the fourth quarter of 2019, and $92.8 million, including SBA loan originations of $23.7 million, for the first quarter of 2019. Loan payoffs for the first quarter of 2020 were $44.6 million, compared to $35.9 million for the fourth quarter of 2019, and $35.9 million for the first quarter of 2019.

Total deposits were $1.05 billion at March 31, 2020, an increase of $31.5 million, or 3.1%, from $1.02 billion at December 31, 2019, and an increase of $122.8 million, or 13.2%, from $905.2 million at March 31, 2019. Noninterest bearing deposits were $304.8 million at March 31, 2020, compared to $294.3 million at December 31, 2019, and $272.5 million at March 31, 2019.

Noninterest bearing deposits accounted for 29.0% of total deposits at March 31, 2020, compared to 28.8% at December 31, 2019, and 29.3% at March 31, 2019. 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 March 31, 2020, December 31, 2019, and March 31, 2019.

The Company had right-of-use assets and lease liabilities of $7.9 million and $9.7 million, respectively, at March 31, 2020.

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 March 31, 2020, as summarized in the following table.

The Company announced a third stock repurchase program on February 28, 2020, which authorizes the Company to repurchase up to 500,000 shares of its common stock following the completion of the Company’s second stock repurchase program in February 2020. Since the announcement of the third stock repurchase program, the Company has repurchased an aggregate of 476,761 shares of its common stock at an average repurchase price of $7.80 per share through April 22, 2020.

Asset Quality

Nonperforming loans were $1.53 million at March 31, 2020, a decrease of $15,000 from $1.55 million at December 31, 2019, and a decrease of $47,000 from $1.58 million at March 31, 2019.

The Company had no OREO at March 31, 2020 and December 31, 2019 but had $1.1 million in OREO at March 31, 2019. The Company sold the OREO of $1.1 million during the second quarter of 2019, and no loss was recorded on the sale.

Nonperforming assets were $1.53 million, or 0.13% of total assets, at March 31, 2020, compared to $1.55 million, or 0.13% of total assets, at December 31, 2019, and $2.7 million, or 0.25% of total assets, at March 31, 2019.

Nonperforming loans to gross loans were 0.15% at March 31, 2020, compared to 0.16% at December 31, 2019, and 0.17% at March 31, 2019. Total classified loans were $3.6 million, or 0.36% of gross loans, at March 31, 2020, compared to $3.5 million, or 0.35% of gross loans, at December 31, 2019, and $4.2 million, or 0.46% of gross loans, at March 31, 2019.

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

The allowance for loan losses was $10.7 million at March 31, 2020, compared to $10.1 million at December 31, 2019, and $9.6 million at March 31, 2019. The allowance for loan losses was 1.08% of gross loans at March 31, 2020, 1.02% at December 31, 2019 and 1.05% at March 31, 2019. The allowance for loan losses was 701% of nonperforming assets at December 31, 2019, 649% at December 31, 2019, and 353% at March 31, 2019.

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 losses; 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, the success of construction projects that we finance, including any loans acquired in acquisition transactions; 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 and our ability to raise additional capital, if necessary; 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 Open Bank to pay dividends to us, which could limit our liquidity; 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; political developments, uncertainties or instability, catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, pandemic diseases (such as the coronavirus) or extreme weather events, any of which may affect services we use or affect our customers, employees or third parties with which we conduct business; 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 rapidly changing uncertainties related to the Coronavirus pandemic including, but not limited to, the potential adverse effect of the pandemic on the economy, our employees and customers, and our financial performance; 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, 2019 and in our other subsequent filings with the Securities and Exchange Commission. The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this report. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this report. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.