OP Bancorp Reports Second 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 second quarter of 2020. Net income for the second quarter of 2020 was $2.4 million, or $0.16 per diluted common share, compared to net income of $3.3 million, or $0.21 per diluted common share for first quarter of 2020, and net income of $3.8 million, or $0.23 per diluted common share for the second quarter of 2019.

“As COVID-19 has continued to weigh down on national and local economies and is adversely impacting many businesses, we provided an additional loan loss reserve of $2.0 million during the second quarter, reflecting further adjustments to qualitative factors. We will continue to put efforts in taking necessary steps to help our customers, employees, and communities while focusing on maintaining our safe and sound banking operations,” commented Min Kim, President and Chief Executive Officer of OP Bancorp and Open Bank.

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 both 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 second quarter of 2020 decreased 40 basis points to 3.55% from 3.95% for the first quarter of 2020 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 of 150 basis points by the Federal Reserve in Mach 2020.

Net interest income before the provision for loan losses for the second quarter of 2020 was $10.6 million, a decrease of $468,000, or 4.2%, compared to the first quarter of 2020, primarily due to a $1.4 million decrease in interest income, partially offset by a $957,000 decrease in interest expense.

Interest income on securities available for sale and other interest income decreased $280,000, or 43.0%, during the second quarter of 2020 compared to the first quarter of 2020. The decrease was primarily due to a $242,000 decrease in other interest income as a result of a 132 basis point decrease in the yield on the average balance of Fed funds sold and other investments in the period and a $38,000 decrease in interest income on securities available for sale as a result of a 47 basis point decrease in the yield on the average balance of securities available for sale in the period.

Interest income from contractual interest rates on loans decreased $1.1 million, or 8.3%, during the second quarter of 2020 compared to the first quarter of 2020, reflecting a 64 basis point decrease in the average contractual interest rate on loans in the period, primarily resulting from the cumulative rate cuts by the Federal Reserve in March 2020. The amount of discount accretion on SBA loans decreased $147,000 during the second 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 $1.1 million, or 8.4%, during the second quarter of 2020 compared to the first quarter of 2020.

Interest expense for the second quarter of 2020 decreased $957,000, or 29.6%, compared to the first quarter of 2020, due to a decrease of 54 basis points in the average cost of interest-bearing liabilities, primarily due to the rate cuts by the Federal Reserve in March.

Net interest margin for the second quarter of 2020 decreased 71 basis points to 3.55% from 4.26% for the second 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 cumulative market rate cuts of 225 basis points by the Federal Reserve in the last half of 2019 and first quarter of 2020.

Net interest income before provision for loan losses for the second quarter of 2020 decreased $529,000, or 4.7%, to $10.6 million, compared to $11.2 million for the second quarter of 2019, primarily due to a $2.0 million decrease in interest income, partially offset by a $1.4 million decrease in interest expense.

Interest income on securities available for sale and other interest income for the second quarter of 2020 decreased $414,000, or 52.7%, compared to the second quarter of 2019. The decrease was primarily due to a $368,000 decrease in other interest income as a result of a 238 basis point decrease in the yield on the average balance of Fed funds sold and other investments and a $46,000 decrease in interest income on securities available for sale as a result of a 59 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 second quarter of 2020 decreased $1.4 million, or 10.4%, compared to the second quarter of 2019, reflecting a 113 basis point decrease in the average contractual interest rate on loans in the period, primarily due to the cumulative market rate cuts by the Federal Reserve in the last half of 2019 and first quarter of 2020. The amount of discount accretion on SBA loans decreased $291,000 during the second 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, for the second quarter of 2020 decreased $1.5 million, or 11.0%, compared to the same period of 2019.

Interest expense for the second quarter of 2020 decreased $1.4 million, or 38.6%, compared to the second quarter of 2019, primarily due to a 96 basis point decrease in the cost of interest-bearing liabilities in the period, partially offset by a $60.3 million, or 8.9%, 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, along with the percentage changes in the periods indicated.

The Company recorded provision for loan losses of $2.0 million for the second quarter of 2020. Major economic forecasts, including the California Economic Forecasts, show a significant decline in GDP and a substantial rise in unemployment for 2020. Management has made further adjustments to qualitative factors on all loan types during the second quarter of 2020 to reflect adverse impacts on national, state, and local economies caused by the COVID-19 pandemic. The increases in qualitative factors accounted for $2.0 million, or 100%, of the provision for loan losses for the quarter. The Company recorded provision for loan losses of $743,000 for the first quarter of 2020 and $401,000 for the second quarter of 2019.

Noninterest income for the second quarter of 2020 was $2.1 million, a decrease of $234,000, or 10.2%, from $2.3 million for the first quarter of 2020, primarily due to a decrease of $219,000 in gain on sale of loans and a decrease of $138,000 in service charges on deposits, partially offset by an increase of $122,000 in loan servicing fees.

Gain on sale of loans for the second quarter of 2020 was $936,000, a decrease of $219,000, compared to $1.2 million for the first quarter of 2020. The Company sold $14.9 million in SBA loans with an average premium of 7.94% in the second quarter of 2020, compared to the sale of $17.5 million in SBA loans with an average premium of 8.41% in the first quarter of 2020.

Noninterest income for the second quarter of 2020 decreased $585,000 to $2.1 million compared to $2.6 million for the second quarter of 2019, primarily due to a decrease of $652,000 in gain on sale of loans and a decrease of $269,000 in service charges on deposits, partially offset by an increase of $287,000 in loan servicing fees and $49,000 in other income. Gain on sale of loans for the second quarter of 2019 was $1.6 million from the sale of $21.2 million in SBA loans with an average premium of 8.99%.

Noninterest expense for the second quarter of 2020 was $7.3 million, a decrease of $873,000, or 10.6%, compared to $8.2 million for the first quarter of 2020. The decrease was primarily due to a decrease of $724,000 in salary and employee benefits and a decrease of $85,000 in foundation donation and other contributions. The decrease in salary and employee benefits was primarily due to an increase in deferred loan origination costs from originating 924 SBA’s Paycheck Protection Program (PPP) loans for an aggregate loan balance of $64.9 million during the quarter.

Noninterest expense for the second quarter of 2020 was $7.3 million, a decrease of $1.0 million, or 12.3%, compared to $8.4 million for the second quarter of 2019. The decrease was primarily due to a decrease of $997,000 in salary and employee benefits and a decrease of $134,000 in foundation donation and other contributions, partially offset by an increase of $109,000 in occupancy and equipment expense. The decrease in salary and employee benefits was primarily due to the aforementioned increase in deferred loan origination costs for SBA PPP loans and the decrease in foundation donation tied to the Company’s net income. The increase in occupancy and equipment expense was primarily due to a new branch opening in the second quarter of 2019.

Income tax provision was $972,000 for the second quarter of 2020, $1.2 million for the first quarter of 2020 and for the second quarter of 2019. The effective tax rate for the second quarter of 2020 was 28.7%, compared to 26.1% for the first quarter of 2020 and 24.3% for the second quarter of 2019. The higher effective tax rate for the second quarter of 2020 compared to the first quarter of 2020 and the second quarter of 2019 was primarily due to less tax benefits realized because of a decrease in non-qualified stock option exercises during the second quarter of 2020.

Balance Sheet

Total assets were $1.29 billion at June 30, 2020, an increase of $78.4 million, or 6.5%, compared to $1.21 billion at March 31, 2020, and an increase of $160.5 million, or 14.2%, compared to $1.13 billion at June 30, 2019.

Gross loans, net of unearned income, were $1.04 billion at June 30, 2020, an increase of $46.9 million, or 4.7%, from $996.6 million at March 31, 2020, and an increase of $96.5 million, or 10.2%, from $947.0 million at June 30, 2019.

New loan originations totaled $104.1 million for the second quarter of 2020, including $64.9 million in SBA PPP loans and $19.3 million in other SBA loans, compared to $77.9 million for the first quarter of 2020, including $25.7 million in SBA loans, and $93.8 million for the second quarter of 2019, including $27.9 million in SBA loans. Loan payoffs were $21.7 million for the second quarter of 2020, compared to $33.5 million for the first quarter of 2020, and $22.5 million for the second quarter of 2019.

Total deposits were $1.12 billion at June 30, 2020, an increase of $68.5 million, or 6.5%, from $1.05 billion at March 31, 2020, and an increase of $146.0 million, or 15.0%, from $974.7 million at June 30, 2019. Noninterest-bearing deposits were $428.4 million at June 30, 2020, compared to $304.8 million at March 31, 2020, and $275.0 million at June 30, 2019. The increase in noninterest-bearing deposits during the second quarter of 2020 was partially due to the SBA PPP loans funded to customers’ noninterest-bearing deposits.

Noninterest-bearing deposits accounted for 38.2% of total deposits at June 30, 2020, compared to 29.0% at March 31, 2020, and 28.2% at June 30, 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 $10.0 million in borrowings from the Federal Home Loan Bank (FHLB) at June 30, 2020, which had 0% rate under the Zero-Rate Recovery Advance Program, FHLB’s pandemic relief initiatives. The Company had no borrowings from the FHLB at March 31, 2020 and June 30, 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 June 30, 2020, as summarized in the following table.

The Company completed its third stock repurchase program in May 2020 with an aggregate purchase of 500,000 shares of common stock at an average price of $7.77. Since the announcement of the initial stock repurchase program in January 2019, the Company has repurchased an aggregate of 1.37 million shares of its common stock at an average repurchase price of $8.84 per share through May 2020.

Asset Quality

Nonperforming loans were $1.02 million at June 30, 2020, a decrease of $514,000 from $1.53 million at March 31, 2020 and a decrease of $537,000 from $1.56 million at June 30, 2019.

The Company had no other real estate owned (OREO) at June 30, 2020, March 31, 2020, and June 30, 2019.

Nonperforming assets were $1.02 million, or 0.08% of total assets, at June 30, 2020, compared to $1.53 million, or 0.13% of total assets, at March 31, 2020, and $1.56 million, or 0.14% of total assets, at June 30, 2019.

Nonperforming loans to gross loans were 0.10% at June 30, 2020, compared to 0.15% at March 31, 2020, and 0.16% at June 30, 2019. Total classified loans were $2.8 million, or 0.27% of gross loans, at June 30, 2020, compared to $3.6 million, or 0.36% of gross loans, at March 31, 2020, and $4.2 million, or 0.44% of gross loans, at June 30, 2019.

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

The allowance for loan losses (ALL) was $12.8 million at June 30, 2020, compared to $10.7 million at March 31, 2020, and $9.5 million at June 30, 2019. The ALL was 1.22% of gross loans at June 30, 2020, 1.08% of gross loans at March 31, 2020, and 1.01% at June 30, 2019. Excluding fully guaranteed SBA PPP loans, the ALL was 1.30% of gross loans at June 30, 2020. The allowance for loan losses was 1,252% of nonperforming assets at June 30, 2020, 701% at March 31, 2020, and 612% at June 30, 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; the impact of the federal CARES Act and the significant additional lending activities undertaken by the Company in connection with the Small Business Administration’s Paycheck Protection Program enacted thereunder, including risks to the Company with respect to the uncertain application by the Small Business Administration of new borrower and loan eligibility, forgiveness and audit criteria; 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.