OP Bancorp Reports Fourth Quarter and Year End Results For 2020

OP Bancorp (the “Company”) (NASDAQ: OPBK), the holding company of Open Bank (the “Bank”), today reported unaudited financial results for the fourth quarter of 2020. Net income for the fourth quarter of 2020 was $3.9 million, or $0.25 per diluted common share, compared to net income of $3.6 million, or $0.23 per diluted common share, for the third quarter of 2020, and net income of $4.2 million, or $0.26 per diluted common share, for the fourth quarter of 2019.

“I am pleased to report another strong quarter with solid financial results in this challenging environment. We have exceeded our expectations in all key financial areas through proactive management of the risks, margin, and expenses during this historically difficult period. As we start a new year, we will continue to put our best efforts in supporting our customers who are still experiencing many challenges through new PPP, loan deferments, and any other means of assistance. In addition, we continue to put our priority in the well-being of employees and will promote safer working environment through expanding remote capabilities and more automated platforms. The contribution to our communities will remain a focus as we seek more ways to work with various organizations to help those who are in need. Lastly and most importantly, managing risks and maintaining safe and sound banking operations will continue to be our key focus this year,” 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 fourth quarter of 2020 increased 7 basis points to 3.73% from 3.66% for the third quarter of 2020, primarily due to a 24 basis point decrease in the cost of interest-bearing liabilities, partially offset by an 8 basis point decrease in the reported yield on interest-earning assets.

Net interest income before provision for loan losses for the fourth quarter of 2020 was $12.2 million, an increase of $762,000, or 6.7%, compared to $11.4 million for the third quarter of 2020, primarily due to a $403,000 decrease in interest expense and a $359,000 increase in interest income.

Interest income on securities available for sale and other investments for the fourth quarter of 2020 decreased $66,000, or 15.2%, to $369,000, compared to $435,000 for the third quarter of 2020. The decrease was primarily due to a $62,000 decrease in interest income on securities available for sale primarily due to lower yields on securities purchased during the third and fourth quarters of 2020 and increased premium amortizations from prepayments on investment portfolio.

Interest income from contractual interest rates on loans for the fourth quarter of 2020 increased $441,000, or 3.8%, compared to the third quarter of 2020, reflecting an increase of $50.7 million, or 4.8% in average balance of loans, partially offset by a 4 basis point decrease in average contractual interest rate on loans. The amount of discount accretion on SBA loans for the fourth quarter of 2020 increased $230,000 compared to the third quarter of 2020 due to an increase in SBA loan payoffs. The reported interest income on loans, net of SBA discount accretions and other components, for the fourth quarter of 2020 increased $425,000, or 3.4%, compared to the third quarter of 2020.

Interest expense for the fourth quarter of 2020 was $1.2 million, a decrease of $403,000, or 25.2%, compared to $1.6 million for the third quarter of 2020, primarily due to continued downward adjustments of the Bank’s deposit rates, partially offset by an increase of $6.3 million, or 0.9%, in the average balance of interest-bearing liabilities.

Net interest margin for the fourth quarter of 2020 decreased 26 basis points to 3.73% from 3.99% for the fourth quarter of 2019, primarily due to a 120 basis point decrease in the reported yield on interest-earning assets, partially offset by a 133 basis point decrease in the cost of interest-bearing liabilities as a result of cumulative market rate cuts of 150 basis points by the Federal Reserve in first quarter of 2020.

Net interest income before provision for loan losses for the fourth quarter of 2020 increased $1.1 million, or 10.0%, to $12.2 million, compared to $11.1 million for the fourth quarter of 2019, primarily due to a $2.4 million decrease in interest expense, partially offset by a $1.3 million decrease in interest income.

Interest income on securities available for sale and other investments for the fourth quarter of 2020 decreased $339,000, or 47.8%, to $369,000, compared to $708,000, for the fourth quarter of 2019. The decrease was primarily due to a decrease in interest income on Fed funds as a result of the aforementioned cumulative rate cuts, a decrease in interest income on other investments from lower FHLB dividend income, and a decrease in interest income on securities available for sale as a result of lower yields from investment purchases and higher premium amortizations from accelerated prepayments in 2020.

Interest income from contractual interest rates on loans for the fourth quarter of 2020 decreased $1.2 million, or 8.9%, compared to the fourth quarter of 2019, reflecting a 109 basis point decrease in average contractual interest rate on loans, primarily due to the aforementioned cumulative rate cuts, partially offset by an increase of $139.5 million, or 14.3% in average balance of loans. The amount of discount accretion on SBA loans for the fourth quarter of 2020 increased $30,000 compared to the fourth quarter of 2019, primarily due to an increase in monthly discount accretions in line with an increase in SBA loan balance in 2020. The reported interest income on loans, net of SBA discount accretions and other components, for the fourth quarter of 2020 decreased $989,000, or 7.1%, compared to the fourth quarter of 2019.

Interest expense for the fourth quarter of 2020 decreased $2.4 million, or 67.1%, to $1.2 million, compared to $3.6 million for the fourth 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 $26.8 million, or 3.8%, 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 $1.8 million in provision for loan losses for the fourth quarter of 2020. Management evaluates the qualitative and quantitative factors on all loan types to reflect continued adverse impacts on national, state, and local economies caused by the COVID-19 pandemic. The changes in quantitative factors accounted for $1.3 million, or 70%, of provision for loan losses for the quarter, which includes $633,000 for accrued interest receivables on deferred loans, $440,000 for an increase in loan balance, and $226,000 for loan balance migration to classified loans. The Bank recorded a provision for loan losses of $1.4 million for the third quarter of 2020 and $411,000 for the fourth quarter of 2019.

Noninterest income for the fourth quarter of 2020 was $3.4 million, an increase of $371,000, or 12.3%, from $3.0 million for the third quarter of 2020, primarily due to an increase of $375,000 in gain on sale of loans and an increase of $180,000 in other income, partially offset by a decrease of $216,000 in loan servicing fees from an increase in SBA loan payoffs. Gain on sale of loans for the fourth quarter of 2020 was $2.2 million, an increase of $375,000, compared to $1.8 million for the third quarter of 2020. The Bank sold $28.5 million in SBA loans with an average premium of 8.83% in the fourth quarter of 2020, compared to the sale of $24.0 million in SBA loans with an average premium of 9.66% in the third quarter of 2020.

Noninterest income for the fourth quarter of 2020 was $3.4 million, an increase of $879,000, compared to $2.5 million for the fourth quarter of 2019, primarily due to an increase of $661,000 in gain on sale of loans and an increase of $343,000 in other income, partially offset by a decrease of $159,000 in service charges on deposits. Gain on sale of loans for the fourth quarter of 2019 was $1.5 million from the sale of $23.9 million in SBA loans with an average premium of 7.73%. The Bank sold a property that had been used for the Bank’s internal use with a gain of $213,000 during the fourth quarter of 2020, while the Bank sold OREO with a loss of $145,000 during the fourth quarter of 2019.

Noninterest expense for the fourth quarter of 2020 was $8.4 million, an increase of $415,000, or 5.2%, compared to $8.0 million for the third quarter of 2020. The increase was primarily due to an increase of $440,000 in salary and employee benefits as a result of year-end adjustments in employee bonus and incentive accruals.

Noninterest expense for the fourth quarter of 2020 was $8.4 million, an increase of $737,000, or 9.6%, compared to $7.7 million for the fourth quarter of 2019. The increase was primarily due to an increase of $1.1 million in salary and employee benefits, partially offset by a decrease of $201,000 in promotion and advertising expenses, and a decrease of $131,000 in director’s fees expenses. The increase in salary and employee benefits was primarily due to additional accruals made to employee bonus and incentives during the fourth quarter of 2020 compared to accrual reversals made to employee bonus during the fourth quarter of 2019. The decrease in promotion and advertising expenses was primarily due to Management’s proactive management of overhead expenses amid the COVID-19 pandemic. The decrease in director’s expense was due to a decrease of $108,000 in restricted stock unit expense resulting from the full vesting of the restricted stock units in July 2020.

Income tax provision was $1.5 million for the fourth quarter and for the third quarter of 2020, and $1.3 million for the fourth quarter of 2019. The effective tax rate for the fourth quarter of 2020 was 28.1%, compared to 28.9% for the third quarter of 2020 and 24.2% for the fourth quarter of 2019. The higher effective tax rate for the fourth quarter of 2020 compared to the fourth quarter of 2019 was primarily due to realizing a lower amount of tax benefits resulting from the exercise of non-qualified stock options. There was no non-qualified stock option exercised during the fourth quarter of 2020.

Balance Sheet

Total assets were $1.37 billion at December 31, 2020, an increase of $27.0 million, or 2.0%, compared to $1.34 billion at September 30, 2020, and an increase of $187.3 million, or 15.9%, compared to $1.18 billion at December 31, 2019.

Gross loans, net of unearned income, were $1.10 billion at December 31, 2020, an increase of $26.9 million, or 2.5%, from $1.07 billion at September 30, 2020, and an increase of $109.6 million, or 11.1%, from $990.1 million at December 31, 2019.

The Following tables shows new loan originations for the periods indicated.

Loan payoffs were $41.2 million for the fourth quarter of 2020, compared to $47.1 million for the third quarter of 2020, and $35.9 million for the fourth quarter of 2019.

Total deposits were $1.20 billion at December 31, 2020, an increase of $29.9 million, or 2.6%, from $1.17 billion at September 30, 2020, and an increase of $179.4 million, or 17.6%, from $1.02 billion at December 31, 2019. Noninterest-bearing deposits were $522.8 million at December 31, 2020, compared to $488.8 million at September 30, 2020, and $294.3 million at December 31, 2019. The increase in noninterest-bearing deposits during the fourth quarter of 2020 was primarily due to new accounts being opened during the quarter.

Noninterest-bearing deposits accounted for 43.6% of total deposits at December 31, 2020, compared to 41.8% at September 30, 2020, and 28.8% at December 31, 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 $5.0 million in borrowings from the Federal Home Loan Bank (FHLB) at December 31, 2020 and $10.0 million at September 30, 2020, which has a 0% interest rate under the Zero-Rate Recovery Advance Program, FHLB’s pandemic relief initiatives. The Bank had no borrowings from the FHLB at December 31, 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 December 31, 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 January 25, 2021, the Company has repurchased 201,000 shares of its common stock at an average price of $6.66 in the fourth stock repurchase program. Since the announcement of the initial stock repurchase program in January 2019, the Company has repurchased a total of 1.57 million shares of its common stock at an average repurchase price of $8.64 per share through January 25, 2021.

Asset Quality

Nonperforming loans were $985,000 at December 31, 2020, an increase of $655,000 from $330,000 at September 30, 2020 and a decrease of $563,000 from $1.5 million at December 31, 2019.

The Bank had no other real estate owned (OREO) at December 31, 2020, September 30, 2020 and December 31, 2019.

Nonperforming assets were $985,000, or 0.07% of total assets, at December 31, 2020, compared to $330,000, or 0.02% of total assets, at September 30, 2020, and $1.5 million, or 0.13% of total assets, at December 31, 2019. Nonperforming loans to gross loans were 0.09% at December 31, 2020, compared to 0.03% at September 30, 2020, and 0.16% at December 31, 2019.

Total classified loans were $7.3 million, or 0.67% of gross loans, at December 31, 2020, compared to $2.1 million, or 0.20% of gross loans, at September 30, 2020, and $3.5 million, or 0.35% of gross loans, at December 31, 2019. The increase of $5.2 million was primarily due to a commercial loan of $3.8 million, two SBA real estate loans of $751,000, which were reclassified from special mentioned loans, and a home mortgage loan of $600,000, which was newly classified and placed on a nonaccrual status. All of these loans are fully secured by real estate collaterals.

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

The Bank had 18 loans in deferred status with an aggregate balance of $31.2 million, or 2.7% of total loans at December 31, 2020, compared to 42 loans in deferred status with an aggregate balance of $56.9 million, or 5.1% of total loans at September 30, 2020. Since we started loan deferments under the CARES Act in the second quarter of 2020, 165 loans with an aggregate balance of $205.0 million have resumed regular payments or have been paid off through December 31, 2020.

The allowance for loan losses (ALL) was $15.3 million at December 31, 2020, compared to $14.2 million at September 30, 2020, and $10.1 million at December 31, 2019. The ALL was 1.39% of gross loans at December 31, 2020, 1.32% of gross loans at September 30, 2020, and 1.02% of gross loans at December 31, 2019. Excluding fully guaranteed SBA PPP loans, the ALL was 1.48% of gross loans at December 31, 2020, 1.40% of gross loans at September 30, 2020, and 1.02% of gross loans at December 31, 2019. The ALL was 1,555% of nonperforming assets at December 31, 2020, 4,295% at September 30, 2020, and 649% at December 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 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. 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, fires, 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.