OP Bancorp Reports Third 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 third quarter of 2020. Net income for the third quarter of 2020 was $3.6 million, or $0.23 per diluted common share, compared to net income of $2.4 million, or $0.16 per diluted common share, for the second quarter of 2020, and net income of $4.0 million, or $0.24 per diluted common share, for the third quarter of 2019.

“We are pleased to report a solid quarter with strong loan and deposit growth and an improved net interest margin during this challenging environment. We provided an additional loan loss provision of $1.4 million for the quarter resulting from further adjustments to our qualitative factors to reflect potential negative impact caused by COVID-19 pandemic. We will continue to be proactive in assisting our customers in navigating their businesses during this difficult and unprecedented period. Furthermore, we continue to put our priority in managing various risks to maintain 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 third quarter of 2020 increased 11 basis points to 3.66% from 3.55% for the second quarter of 2020 primarily due to a 30 basis point decrease in the cost of interest-bearing liabilities, partially offset by a 13 basis point decrease in the reported yield on interest-earning assets.

Net interest income before provision for loan losses for the third quarter of 2020 was $11.4 million, an increase of $771,000, or 7.2%, compared to the second quarter of 2020, primarily due to a $675,000 decrease in interest expense and a $96,000 increase in interest income.

Interest income on securities available for sale and other investments for the third quarter of 2020 increased $64,000, or 17.3%, compared to the second quarter of 2020. The increase was primarily due to a $38,000 increase in interest income on securities available for sale from investment purchases during the second and third quarters of 2020 and a $26,000 increase in dividend accrual on Federal Home Loan Bank stock.

Interest income from contractual interest rates on loans for the third quarter of 2020 increased $48,000, or 0.4% compared to the second quarter of 2020, reflecting an increase of $17.2 million, or 1.6% in the average balance of loans, partially offset by a 10 basis point decrease in the average contractual interest rate on loans. The amount of discount accretion on SBA loans for the third quarter of 2020 decreased $24,000 compared to 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 third quarter of 2020 increased $32,000, or 0.3%, compared to the second quarter of 2020.

Interest expense for the third quarter of 2020 decreased $675,000, or 29.7%, compared to the second quarter of 2020, primarily due to continued downward adjustments of the Bank’s deposit rates after the rate cuts by the Federal Reserve in March of 2020 and a decrease of $61.7 million, or 8.4%, in the average balance of interest-bearing liabilities.

Net interest margin for the third quarter of 2020 decreased 47 basis points to 3.66% from 4.13% for the third quarter of 2019, primarily due to a 138 basis point decrease in the reported yield on interest-earning assets, partially offset by a 126 basis point decrease in the cost of interest-bearing liabilities as a result of cumulative market rate cuts of 175 basis points by the Federal Reserve in the last quarter of 2019 and first quarter of 2020.

Net interest income before provision for loan losses for the third quarter of 2020 increased $200,000, or 1.8%, to $11.4 million, compared to $11.2 million for the third quarter of 2019, primarily due to a $2.3 million decrease in interest expense, partially offset by a $2.1 million decrease in interest income.

Interest income on securities available for sale and other investments for the third quarter of 2020 decreased $399,000, or 47.8%, compared to the third quarter of 2019. The decrease was primarily due to a $362,000 decrease in interest income on Fed funds as a result of the aforementioned cumulative rate cuts.

Interest income from contractual interest rates on loans for the third quarter of 2020 decreased $1.8 million, or 13.2%, compared to the third quarter of 2019, reflecting a 127 basis point decrease in the average contractual interest rate on loans, primarily due to the aforementioned cumulative rate cuts, partially offset by an increase of $115.7 million, or 12.2% in the average balance of loans. The amount of discount accretion on SBA loans for the third quarter of 2020 decreased $328,000 compared to the third 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, for the third quarter of 2020 decreased $1.7 million, or 11.9%, compared to the third quarter of 2019.

Interest expense for the third quarter of 2020 decreased $2.3 million, or 59.0%, compared to the third quarter of 2019, primarily due to the Bank’s downward adjustments in deposit rates after the rate cuts by the Federal Reserve in March of 2020 and a decrease of $27.8 million, or 4.0%, in the average balance of interest-bearing liabilities.

The following tables show the asset yields, liability costs, net interest spread, and net interest margin for the periods indicated, along with the percentage changes in the periods indicated.

The Bank recorded $1.4 million in provision for loan losses for the third quarter of 2020. Management has made further adjustments to the qualitative factors on all loan types during the third quarter of 2020 to reflect persistent adverse impacts on national, state, and local economies caused by the COVID-19 pandemic. The increases in qualitative factors accounted for $1.2 million, or 80%, of provision for loan losses for the quarter. The Bank recorded provision for loan losses of $2.0 million for the second quarter of 2020 and $290,000 for the third quarter of 2019.

Noninterest income for the third quarter of 2020 was $3.0 million, an increase of $959,000, or 46.5%, from $2.1 million for the second quarter of 2020, primarily due to an increase of $877,000 in gain on sale of loans and an increase of $69,000 in loan servicing fees from slower SBA loan payoffs.

Gain on sale of loans for the third quarter of 2020 was $1.8 million, an increase of $877,000, compared to $936,000 for the second quarter of 2020. The Bank sold $24.0 million in SBA loans with an average premium of 9.66% in the third quarter of 2020, compared to the sale of $14.9 million in SBA loans with an average premium of 7.94% in the second quarter of 2020.

Noninterest income for the third quarter of 2020 was $3.0 million, an increase of $289,000, compared to $2.7 million for the third quarter of 2019, primarily due to an increase of $340,000 in loan servicing fees from slower SBA loan payoffs and an increase of $99,000 in gain on sale of loans, partially offset by a decrease of $140,000 in service charges on deposits. Gain on sale of loans for the third quarter of 2019 was $1.7 million from the sale of $22.2 million in SBA loans with an average premium of 8.85%.

Noninterest expense for the third quarter of 2020 was $8.0 million, an increase of $653,000, or 8.9%, compared to $7.3 million for the second quarter of 2020. The increase was primarily due to an increase of $739,000 in salary and employee benefits and an increase of $115,000 in foundation donation and other contributions. The increase in salary and employee benefits was primarily due to a decrease in deferred loan origination costs. The deferred loan origination costs for the third quarter of 2020 was $612,000, a decrease of $801,000, compared to $1.4 million for the second quarter of 2020 with the origination of 924 SBA Paycheck Protection Program (PPP) loans.

Noninterest expense for the third quarter of 2020 was $8.0 million, a decrease of $437,000, or 5.2%, compared to $8.4 million for the third quarter of 2019. The decrease was primarily due to a decrease of $263,000 in salary and employee benefits, a decrease of $101,000 in promotion and advertising expenses, and a decrease of $182,000 in other expenses, partially offset by an increase of $133,000 in FDIC insurance and regulatory assessments expenses. The decrease in salary and employee benefits was primarily due to an increase in deferred loan origination costs. The deferred loan origination costs of $612,000 for the third quarter of 2020 was $339,000 higher than $273,000 for the third quarter of 2019, primarily due to more loan originations in the third quarter of 2020. The FDIC insurance and regulatory assessments expenses was lower during the second half of 2019 due to the small bank assessment credits that were applied. Management continues to monitor and manage overhead expenses as earnings have been adversely impacted by a lower rate environment and higher loan loss provisions in 2020.

Income tax provision was $1.5 million for the third quarter of 2020, $972,000 for the second quarter of 2020 and $1.2 million for the third quarter of 2019. The effective tax rate for the third quarter of 2020 was 28.9%, compared to 28.7% for the second quarter of 2020 and 23.6% for the third quarter of 2019. The higher effective tax rate for the third quarter of 2020 compared to the third quarter of 2019 was primarily due to realizing a lower amount of tax benefits resulting from the exercise of non-qualified stock options during the third quarter of 2020.

Balance Sheet

Total assets were $1.34 billion at September 30, 2020, an increase of $51.8 million, or 4.0%, compared to $1.29 billion at June 30, 2020, and an increase of $187.9 million, or 16.3%, compared to $1.15 billion at September 30, 2019.

Gross loans, net of unearned income, were $1.07 billion at September 30, 2020, an increase of $29.3 million, or 2.8.%, from $1.04 billion at June 30, 2020, and an increase of $108.4 million, or 11.2%, from $964.4 million at September 30, 2019.

New loan originations totaled $140.2 million for the third quarter of 2020, including $1.3 million in SBA PPP loans and $76.3 million in other SBA loans, compared to $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, and $100.3 million for the third quarter of 2019, including $30.9 million in SBA loans. Loan payoffs were $47.1 million for the third quarter of 2020, compared to $21.7 million for the second quarter of 2020, and $38.7 million for the third quarter of 2019.

Total deposits were $1.17 billion at September 30, 2020, an increase of $49.4 million, or 4.4%, from $1.12 billion at June 30, 2020, and an increase of $174.2 million, or 17.5%, from $996.0 million at September 30, 2019. Noninterest-bearing deposits were $488.8 million at September 30, 2020, compared to $428.8 million at June 30, 2020, and $296.8 million at September 30, 2019. The increase in noninterest-bearing deposits during the third quarter of 2020 was primarily due to new accounts being opened during the quarter as well as increased balances from our existing accounts.

Noninterest-bearing deposits accounted for 41.8% of total deposits at September 30, 2020, compared to 38.2% at June 30, 2020, and 29.8% at September 30, 2019. The following table shows the Bank’s deposits, by type as a percentage of total deposits as of the periods indicated.

The Bank had $10.0 million in borrowings from the Federal Home Loan Bank (FHLB) at September 30, 2020 and June 30, 2020, which has a 0% rate under the Zero-Rate Recovery Advance Program, FHLB’s pandemic relief initiatives. The Bank had no borrowings from the FHLB at September 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 September 30, 2020, as summarized in the following table.

The Company announced a fourth stock repurchase program on September 9, 2020, which authorizes the Company to repurchase up to 500,000 shares of its common stock. As of October 19, 2020, as part of its fourth stock repurchase program, the Company repurchased 82,000 shares of its common stock at an average price of $6.10. Since the announcement of the initial stock repurchase program in January 2019, the Company has repurchased a total of 1.45 million shares of its common stock at an average repurchase price of $8.69 per share through October 19, 2020.

Asset Quality

Nonperforming loans were $330,000 at September 30, 2020, a decrease of $689,000 from $1.0 million at June 30, 2020 and a decrease of $1.2 million from $1.6 million at September 30, 2019.

The Bank had no other real estate owned (OREO) at September 30, 2020 and June 30, 2020. The Bank had OREO of $1.8 million at September 30, 2019.

Nonperforming assets were $330,000, or 0.02% of total assets, at September 30, 2020, compared to $1.0 million, or 0.08% of total assets, at June 30, 2020, and $3.4 million, or 0.29% of total assets, at September 30, 2019.

Nonperforming loans to gross loans were 0.3% at September 30, 2020, compared to 0.10% at June 30, 2020, and 0.16% at September 30, 2019. Total classified loans were $2.1 million, or 0.20% of gross loans, at September 30, 2020, compared to $2.8 million, or 0.27% of gross loans, at June 30, 2020, and $3.2 million, or 0.34% of gross loans, at September 30, 2019.

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

Loans in deferred status were 42 loans for an aggregate balance of $56.9 million, or 5% of total loans at September 30, 2020, compared to 155 loans for an aggregate balance of $190.9 million, or 18% of total loans at June 30, 2020. Since we started loan deferments under the CARES Act in the second quarter of 2020, 130 loans for an aggregate balance of $173.0 million have resumed regular payments or paid off through September 30, 2020.

The allowance for loan losses (ALL) was $14.2 million at September 30, 2020, compared to $12.8 million at June 30, 2020, and $9.6 million at September 30, 2019. The ALL was 1.32% of gross loans at September 30, 2020, 1.22% of gross loans at June 30, 2020 and 1.00% at September 30, 2019. Excluding fully guaranteed SBA PPP loans, the ALL was 1.40% of gross loans at September 30, 2020, 1.30% of gross loans at June 30, 2020, and 1.00% of gross loans at September 30, 2019. The ALL was 4,295% of nonperforming assets at September 30, 2020, 1,252% at June 30, 2020, and 285% at September 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.