OP Bancorp Reports First Quarter Result of 2019

OP Bancorp (the “Company”) (NASDAQ: OPBK), the holding company of Open Bank (the “Bank”), today reported unaudited financial results for the first quarter of 2019. Net income for the first quarter of 2019 was $4.7 million, or $0.29 per diluted common share, compared with net income of $3.8 million, or $0.23 per diluted common share for the fourth quarter of 2018, and net income of $3.2 million, or $0.22 per diluted share for the first quarter of 2018.

Since the announcement of a share repurchase program to buy back up to 400,000 shares of its common stock on January 25, 2019, the Company repurchased 324,074 shares of its common stock at an average repurchase price of $9.11 through April 26, 2019.

“We are pleased to report another strong quarterly result to start off 2019. Excluding one-time gain on company owned life insurance, our net income for the 2019 first quarter was $3.8 million, or $0.23 earnings per share on a fully diluted basis, a 17% increase compared to $3.2 million, or $0.22 for the first quarter of 2018. Our loans and deposits continued to grow 15% and 14%, respectively, from the prior year, while we maintained strong asset quality and retained noninterest bearing deposits at 29.3% of total deposits,” commented Min Kim, President and Chief Executive Officer of OP Bancorp and Open Bank. Ms. Kim continued, “we opened two new loan production offices in Aurora, Colorado and Lynnwood, Washington during the quarter and are expected to open our ninth full service branch and a commercial lending center in Carrollton, Texas in late April of 2019. With these expansions outside of California, we look forward to continued growth in the coming years.”

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 income before provision for loan losses for the first quarter of 2019 was $10.8 million, a decrease of $128,000, or 1.2%, compared to $10.9 million for the fourth quarter of 2018, primarily due to a greater increase in interest expense compared to the increase in interest income.

Interest income on securities available for sale and other investment decreased $22,000, or 2.8% during the first quarter of 2019 compared to the prior quarter. The decrease was primarily due to Federal Home Loan Bank’s special dividend received during the fourth quarter of 2018, partially offset by an increase in interest income on securities available for sale from purchases of higher yielding securities.

Interest income from the contractual interest rates on loans increased $353,000, or 2.9%, during the first quarter of 2019 compared to the fourth quarter of 2018, reflecting an 11 basis point increase in the average contractual interest rate from an increase of 25 basis points in Fed funds rate in December 2018. The amount of discount accretion on SBA loans decreased $458,000 during the first quarter due to a decrease in SBA loan payoffs. The reported interest income on loans, net of SBA discount accretions and other components, increased $288,000 during the quarter.

Interest expense for the first quarter of 2019 increased $394,000, or 13.6%, compared to the fourth quarter of 2018, due to an increase of $33.4 million, or 5.5%, in average balance of interest-bearing liabilities and an increase of 20 basis points in average cost of interest-bearing liabilities, primarily due to a continued repricing of interest-bearing deposits following cumulative market rate increases of 100 basis points in 2018.

Net interest margin for the first quarter of 2019 decreased 12 basis points to 4.38% from 4.50% for the fourth quarter of 2018, primarily due to a greater increase in the cost of interest-bearing liabilities compared to the increase in the reported yield on earning assets.

Net interest income before provision for loan losses for the first quarter of 2019 increased $1.2 million, or 13.0%, to $10.8 million, compared to $9.6 million for the first quarter of 2018, primarily due to a $2.9 million increase in interest income, partially offset by an increase of $1.7 million in interest expense.

Interest income on securities available for sale and other investment increased $400,000, or 120.3% compared to the same period of 2018. The increase was primarily due to an increase in interest income on securities available for sale from purchases of higher yielding securities and an increase in other investment income from a $33.5 million increase in average Federal funds and the increase in Fed funds rate.

The increase in interest income on loans was primarily due to a 12.8% increase in average loans, including loans held for sale, and a 51 basis point increase in the yield on average loans to 6.09% for the first quarter of 2019 from 5.58% for the same period of 2018.

The increase in interest expense in the first quarter of 2019 compared to the first quarter of 2018 was due to a 19.0% increase in average interest-bearing liabilities and an 87 basis point increase in the cost of interest-bearing liabilities.

The increases in the average yield on loans and average cost of deposits were primarily due to cumulative market rate increases by the Federal Reserve of 100 basis points through four rate hikes of 25 basis points in 2018.

Net interest margin for the first quarter of 2019 decreased 18 basis points to 4.38% from 4.56% for the first quarter of 2018.

The following table shows the asset yields, liability costs, spreads and margins.

The Bank had no provision for loan losses for the first quarter of 2019 compared to $220,000 for the fourth quarter of 2018 and $575,000 for the first quarter of 2018. A provision for loan losses was not required for the first quarter of 2019, as an additional required reserve from an increase in loan balances during the quarter was offset by a $362,000 decrease in specific reserve for an SBA commercial loan upon the confirmation of SBA government guarantee.

The decrease compared to the first quarter of 2018 was primarily due to a decrease in the required reserve for loan losses as a percentage of gross loans for March 31, 2019 as overall loss factors used in the first quarter of 2019 were lower than those for the first quarter of 2018.

Noninterest income for the first quarter of 2019 was $3.6 million, an increase of $1.5 million, or 74.8%, from $2.1 million for the fourth quarter of 2018, primarily due to gain on company owned life insurance of $1.2 million and an increase of $311,000 in loan servicing fees due to lower SBA loan payoffs in the first quarter of 2019.

Loan servicing fees increased $311,000 to $383,000 for the first quarter of 2019 from $72,000 for the prior quarter. The increase in loan servicing fees was primarily due to a decrease in the amortization of SBA servicing assets from the decrease in SBA loan payoffs.

Gain on sale of SBA loans increased $49,000 to $1.1 million for the first quarter of 2019 from $1.0 million for the fourth quarter of 2018. We sold $17.7 million in SBA loans with an average premium of 8.19% in the first quarter of 2019, compared to the sale of $24.7 million in SBA loans with an average premium of 5.65% in the fourth quarter of 2018.

Noninterest income for the first quarter of 2019 increased $1.4 million compared to $2.2 million for the first quarter of 2018, primarily due to gain on company owned life insurance of $1.2 million, an increase of $91,000 in credit related fees, an increase of $88,000 in gain on sale of SBA loans, partially offset by a decrease of $89,000 in service charges on deposits. Gain on sale of SBA loans for the first quarter of 2018 was $968,000 from the sale of $13.4 million in SBA loans with an average premium of 8.66% in the first quarter of 2018.

Noninterest expense for the first quarter of 2019 was $8.1 million, an increase of $555,000, or 7.3%, compared to $7.6 million for the fourth quarter of 2018. The increase was primarily due to an increase of $601,000 in salary and employee benefits, partially offset by a decrease of $105,000 in professional fees. The increase in salary and employee benefits was primarily attributable to an increase in employer taxes from employee bonuses paid in the first quarter of 2019 and a lower employee bonus accrual in the fourth quarter of 2018. The decrease in professional fees was due to a higher legal fee accrual in the fourth quarter of 2018.

Noninterest expense for the first quarter of 2019 increased $1.3 million, or 19.3%, to $8.1 million, compared to $6.8 million for the first quarter of 2018. The increase was primarily due to an increase of $957,000 in salary and employee benefits from an increase of 24 in employee headcount to 163 at March 31, 2019 from 139 at March 31, 2018. Foundation donation and other contributions increased $32,000, which were tied to the Company’s increased net income. Other expense increased $152,000 to $464,000 compared to $312,000, primarily due to OREO expense of $38,000 and an increase of $65,000 in credit related expenses.

Income tax provision for the first quarter of 2019 was $1.5 million, compared to $1.4 million for the fourth quarter of 2018 and $1.2 million for the first quarter of 2018. The effective tax rate for the first quarter of 2019 was 24.3%, compared to 27.4% for the fourth quarter of 2018 and 26.7% for the first quarter of 2018.

Balance Sheet

Total assets at March 31, 2019 were $1.08 billion, an increase of $33.0 million, or 3.2%, compared to $1.04 billion at December 31, 2018, and an increase of $120.4 million, or 12.6%, at March 31, 2018. Gross loans, net of unearned income, were $913.1 million at March 31, 2019, an increase of $38.0 million, or 4.3%, from $875.1 million at December 31, 2018, and an increase of $119.3 million, or 15.0%, from $793.8 million at March 31, 2018.

New loan originations for the first quarter of 2019 totaled $92.8 million, including SBA loan originations of $23.7 million, compared to $62.4 million, including SBA loan originations of $23.5 million, for the fourth quarter of 2018. New loan originations for the first quarter of 2018 were $101.0 million, including SBA loan originations of $16.4 million. Loan payoffs for the first quarter of 2019 were $22.5 million, compared to $13.2 million for the fourth quarter of 2018, and $32.2 million for the first quarter of 2018.

Total deposits were $929.4 million at March 31, 2019, an increase of $24.2 million, or 2.7%, from $905.2 million at December 31, 2018, and an increase of $111.1 million, or 13.6%, from $818.3 million at March 31, 2018. Noninterest bearing deposits were $272.5 million at March 31, 2019, compared to $285.1 million at December 31, 2018, and $289.0 million at March 31, 2018.

Noninterest bearing deposits accounted for 29.3% of total deposits at March 31, 2019, compared to 31.5% at December 31, 2018 and 35.3% at March 31, 2018.

The Company had no borrowings from the Federal Home Loan Bank (“FHLB”) at March 31, 2019 and December 31, 2018, compared to the advances from the FHLB of $10 million at March 31, 2018. The payoff of advances from the FHLB were funded by the increase in total deposits.

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 balance sheet.

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, 2019, as summarized in the following table.

Asset Quality

Nonperforming loans were $1.6 million at March 31, 2019, a decrease of $334,000 from $1.9 million at December 31, 2018 and an increase of $988,000 from $592,000 at March 31, 2018. There were two loans removed from nonaccrual status during the first quarter of 2019 and the allocation of the allowance for loan losses for these loans was removed. One of these loans was transferred to other real estate owned (“OREO”) of $1.1 million as of March 31, 2019. The sale of OREO is expected to complete by the end of April 2019. The Company had no OREO at December 31, 2019, or March 31, 2018.

Nonperforming assets were $2.7 million, or 0.25% of total assets, at March 31, 2019, $1.9 million, or 0.18% of total assets, at December 31, 2018 and $592,000, or 0.06% of total assets, at March 31, 2018.

Nonperforming loans to gross loans were 0.17% at March 31, 2019, compared to 0.22% at December 31, 2018 and 0.07% at March 31, 2018. Total classified loans were $4.2 million, or 0.46% of gross loans, at March 31, 2019, compared to $3.6 million, or 0.41% of gross loans, at December 31, 2018. The increase of $663,000 was primary due to an addition of $1.1 million for two loans, an SBA real estate loan and a commercial loan, which are from a single borrower relationship and fully secured by real estate collaterals, partially offset by a removal of $615,000 for two SBA real estate loans during the first quarter of 2019. The total classified loans were $4.0 million, or 0.51% of gross loans, at March 31, 2018.

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

The allowance for loan losses was $9.6 million at March 31, 2019 and December 31, 2018, compared to $9.7 million at March 31, 2018. The allowance for loan losses was 1.05% of gross loans at March 31, 2019, 1.10% at December 31, 2018 and 1.22% at March 31, 2018. The allowance for loan losses was 353% of nonperforming assets at March 31, 2019, 503% at December 31, 2018 and 1641% at March 31, 2018. Additional allowance for loan losses was not required for the first quarter, primarily due to aforementioned reversal in specific reserve on an SBA commercial loan during the quarter.

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 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 eight full branch offices in Downtown Los Angeles, Los Angeles Fashion District, Los Angeles Koreatown, Gardena, Buena Park, and Santa Clara. The Bank also has five loan production offices in Atlanta, Georgia, Aurora, Colorado, Dallas, Texas, 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 us; 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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