OP Bancorp Reports Second 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 second quarter of 2019. Net income for the second quarter of 2019 was $3.8 million, or $0.23 per diluted common share, compared with net income of $4.7 million, or $0.29 per diluted common share for the first quarter of 2019, and net income of $3.8 million, or $0.23 per diluted share for the second quarter of 2018. Excluding one-time gain on company owned life insurance, net income for the first quarter of 2019 was $3.8 million or $0.23 per diluted common share.

“We are pleased to report another strong quarter, with a net income of $3.8 million, or $0.23 per diluted common share for the three months ended June 30, 2019. Our loans and deposits grew 15% and 18%, respectively, from the prior year, while maintaining strong asset quality. We maintained our noninterest bearing deposits at 28.2% of total deposits during this challenging environment,” commented Min Kim, President and Chief Executive Officer of OP Bancorp and Open Bank. Ms. Kim continued, “In April, we have successfully converted our Dallas loan production office to a full service branch with a commercial lending center in Carrollton, Texas. With this expansion, we look forward to continued growth of our franchise not only in California but also in Texas.”

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 second quarter of 2019 was $11.2 million, an increase of $379,000, or 3.5%, compared to $10.8 million for the first quarter of 2019, primarily due to a $792,000 increase in interest income, partially offset by a $413,000 increase in interest expense.

Interest income on securities available for sale and other investments increased $53,000, or 7.3%, during the second quarter of 2019 compared to the prior quarter. The increase was primarily due to a $83,000 increase in other investment income from a $12.7 million, or 27.7%, increase in average balance of Fed Funds.

Interest income from the contractual interest rates on loans increased $818,000, or 6.6%, during the second quarter of 2019 compared to the first quarter of 2019, reflecting a 5.0% increase in average balance of loans, including loans held for sale, and a three basis point increase in contractual yield. The amount of discount accretion on SBA loans increased $194,000 during the second quarter due to an increase in SBA loan payoffs. The reported interest income on loans, net of SBA discount accretions and other components, increased $739,000 during the quarter.

Interest expense for the second quarter of 2019 increased $413,000, or 12.6%, compared to the first quarter of 2019, due to an increase of $39.1 million, or 6.1%, in average balance of interest-bearing liabilities and an increase of 10 basis points in average cost of interest-bearing liabilities, primarily due to a continued repricing of interest-bearing deposits following cumulative market rate increases in 2018.

Net interest margin for the second quarter of 2019 decreased 12 basis points to 4.26% from 4.38% for the first quarter of 2019 because of the increase in the cost of interest-bearing liabilities and the decrease in the reported yield on earning assets.

Net interest income before provision for loan losses for the second quarter of 2019 increased $1.2 million, or 11.9%, to $11.2 million, compared to $10.0 million for the second quarter of 2018, primarily due to a $2.8 million increase in interest income, partially offset by a $1.6 million increase in interest expense.

Interest income on securities available for sale and other investments increased $393,000, or 100.2% compared to the same period of 2018. The increase was primarily due to a $119,000 increase in interest income on securities available for sale from purchases of higher yielding securities during the second and third quarters of 2018 and a $274,000 increase in other investment income from a $39.4 million increase in average Fed funds and a 40 basis point increase in Fed funds rate.

The increase in interest income on loans was primarily due to a 12.3% increase in average loans, including loans held for sale, and a 42 basis point increase in the yield on average loans to 6.06% for the second quarter of 2019 from 5.64% for the same period of 2018.

The increase in interest expense in the second quarter of 2019 compared to the second quarter of 2018 was due to a 20.3% increase in average interest-bearing liabilities and a 72 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 during the second half of 2018.

Net interest margin for the second quarter of 2019 decreased 20 basis points to 4.26% from 4.46% for the second quarter of 2018.

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

The provision for loan losses for the second quarter of 2019 was $401,000 compared to $33,000 for the second quarter of 2018. A provision for loan losses was not required for the first quarter of 2019. The second quarter provision for loan losses was primarily due to a $33.9 million increase in loan balances during the quarter.

Noninterest income for the second quarter of 2019 was $2.6 million, a decrease of $886,000, or 25.1%, from $3.5 million for the first quarter of 2019, primarily due to the gain on company owned life insurance of $1.2 million received in the first quarter and a decrease of $156,000 in loan servicing fees, partially offset by an increase of $511,000 in gain on sale of SBA loans.

Loan servicing fees decreased $156,000 to $227,000 for the second quarter of 2019 from $383,000 for the prior quarter. The decrease in loan servicing fees was primarily due to an increase in the amortization of SBA servicing assets from the increase in SBA loan payoffs.

Gain on sale of SBA loans increased $511,000 to $1.6 million for the second quarter of 2019 from $1.1 million for the first quarter of 2019. We sold $21.2 million in SBA loans with an average premium of 8.99% in the second quarter of 2019, compared to the sale of $17.7 million in SBA loans with an average premium of 8.19% in the first quarter of 2019.

Noninterest income for the second quarter of 2019 decreased $136,000 compared to $2.8 million for the second quarter of 2018, primarily due to a decrease of $145,000 in loan servicing fees, a decrease of $140,000 in gain on sale of SBA loans, partially offset by an increase of $101,000 in service charges on deposits. Gain on sale of SBA loans for the second quarter of 2018 was $1.7 million from the sale of $24.8 million in SBA loans with an average premium of 8.60%. An $85,000 of other operation fee income was reclassified to service charges on deposits for the second quarter of 2019.

Noninterest expense for the second quarter of 2019 was $8.4 million, an increase of $285,000, or 3.5%, compared to $8.1 million for the first quarter of 2019. The increase was primarily due to an increase of $176,000 in salary and employee benefits and an increase of $55,000 in occupancy and equipment. The increases in salary and employee benefits were primarily driven by supporting continued growth of the company, and the increase in occupancy and equipment was primarily attributable to a branch opening in Carrollton, Texas in the second quarter of 2019.

Noninterest expense for the second quarter of 2019 increased $880,000, or 11.8%, to $8.4 million, compared to $7.5 million for the second quarter of 2018. The increase was primarily due to an increase of $729,000 in salary and employee benefits from an increase in employee headcount to 168 at June 30, 2019 from 138 at June 30, 2018. Occupancy and equipment expense increased $68,000 primarily attributable to the new loan production offices and a new branch opening in 2019. Professional fees increased $81,000 primarily due to an increase in financial reporting and auditing costs as additional regulatory reporting requirements became applicable in 2019.

Income tax provision for the second quarter of 2019 was $1.2 million, compared to $1.5 million for the first quarter of 2019 and the second quarter of 2018. The effective tax rates for the second quarter of 2019 and the first quarter of 2019 were 24.3%, compared to 27.9% for the second quarter of 2018. The decrease in the effective tax rate in the second quarter of 2019 compared to the second quarter of 2018 was primarily due to additional tax benefits from an increase in non-qualified stock option exercises during the second quarter of 2019.

Balance Sheet

Total assets at June 30, 2019 were $1.13 billion, an increase of $50.3 million, or 4.7%, compared to $1.08 billion at March 31, 2019, and an increase of $148.1 million, or 15.1%, compared to $979.4 million at June 30, 2018. Gross loans, net of unearned income, were $947.0 million at June 30, 2019, an increase of $33.9 million, or 3.7%, from $913.1 million at March 31, 2019, and an increase of $121.0 million, or 14.6%, from $826.0 million at June 30, 2018.

New loan originations for the second quarter of 2019 totaled $93.8 million, including SBA loan originations of $27.9 million, compared to $92.8 million, including SBA loan originations of $24.3 million, for the first quarter of 2019. New loan originations for the second quarter of 2018 were $92.0 million, including SBA loan originations of $29.3 million. Loan payoffs for the second quarter of 2019 were $33.5 million, compared to $22.5 million for the first quarter of 2019, and $30.1 million for the second quarter of 2018.

Total deposits were $974.7 million at June 30, 2019, an increase of $45.3 million, or 4.9%, from $929.4 million at March 31, 2019, and an increase of $151.3 million, or 18.4%, from $823.4 million at June 30, 2018. Noninterest bearing deposits were $275.0 million at June 30, 2019, compared to $272.5 million at March 31, 2019, and $270.1 million at June 30, 2018.

Noninterest bearing deposits accounted for 28.2% of total deposits at June 30, 2019, compared to 29.3% at March 31, 2019 and 32.8% at June 30, 2018.

The Company had no borrowings from the Federal Home Loan Bank (“FHLB”) at June 30, 2019 and March 31, 2019, compared to the advances from the FHLB of $25 million at June 30, 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. With the new branch opening, the Company had right-of-use assets and lease liabilities of $9.0 million and $10.7 million, respectively, at 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, 2019, as summarized in the following table.

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 has repurchased 333,270 shares of its common stock at an average repurchase price of $9.11 through July 25, 2019.

Asset Quality

Nonperforming loans were $1.56 million at June 30, 2019, a decrease of $24,000 from $1.58 million at March 31, 2019 and an increase of $566,000 from $990,000 at June 30, 2018.

The company had no other real estate owned (“OREO”) at June 30, 2019 and 2018 but had $1.1 million in OREO at March 31, 2019. The Company sold OREO of $1.1 million during the second quarter and no loss was recorded on the sale.

Nonperforming assets were $1.6 million, or 0.14% of total assets, at June 30, 2019, $2.7 million, or 0.25% of total assets, at March 31, 2019 and $990,000, or 0.10% of total assets, at June 30, 2018.

Nonperforming loans to gross loans were 0.16% at June 30, 2019, compared to 0.17% at March 31, 2019 and 0.12% at June 30, 2018. Total classified loans were $4.2 million, or 0.44% of gross loans, at June 30, 2019, compared to $4.2 million, or 0.46% of gross loans, at March 31, 2019, and $3.7 million, or 0.45% of gross loans, at June 30, 2018.

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

The allowance for loan losses was $9.5 million at June 30, 2019, compared to $9.6 at March 31, 2019, and $9.7 million at June 30, 2018. The allowance for loan losses was 1.01% of gross loans at June 30, 2019, 1.05% at March 31, 2019 and 1.18% at June 30, 2018. The allowance for loan losses was 612% of nonperforming assets at June 30, 2019, 353% at March 31, 2019 and 982% at June 30, 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.