OP BANCORP
ANNUAL
REPORT
2017
OP BANCORP
2
ANNUAL REPORT 2017
OP BANCORP
OP Bancorp is the holding company of Open Bank with $901 million in total assets as of December
31, 2017. Open Bank is headquartered in Los Angeles and has been 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 three loan production offices in Seattle, Washington,
Dallas, Texas, and Atlanta, Georgia.
The Bank commenced its operations on June 10, 2005 as First Standard Bank and changed its name
to Open Bank in October 2010. OP Bancorp common stock is quoted on the Nasdaq Global Market
under the ticker symbol, “OPBK.”
OP BANCORP
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ANNUAL REPORT 2017
DEAR SHAREHOLDER, CLIENTS, AND COMMUNITIES
Open Bank continues to be your steward to serve our clients, shareholders, employees, and
communities… to grow our relationships together.
We continued to demonstrate strong performance in 2017. We are very pleased to report
record earnings of $9.2 million and finished the year with total assets of over $900 million
on a consolidated basis. We had strong growth in both loans and deposits and continue
to strive to maintain a net interest margin higher than our peers. We continue to find new
opportunities for growth and opened a loan production office in Duluth, Georgia in 2017
and a new branch in Santa Clara, Northern California in the first quarter 2018.
We believe that our strong growth is the result of our strategic goals, excellent service,
experienced management team, and enduring efforts in building relationships with new
and existing clients in our communities we serve.
We have a commitment to contribute 10% of our net income after taxes to the Open
Stewardship Foundation and other community events. In 2017 we made a total contribution
to Open Stewardship of around $920,000. The funds were used to support 62 civic
organizations, schools, and other eligible charitable non-profit organizations, as well as
community events that provide public benefit services in the communities we serve.
In the first quarter of 2018 we completed our initial public offering raising net proceeds of
$22.6 million. This was a wonderful step for our Company and we are very excited to have
our common stock listed on the Nasdaq Global Market.
Looking ahead, we benefit from our financial strength, our commitment to our communities,
and staying true to our vision… as we continue to grow, our contribution to our communities
will grow…hand-in-hand.
BRIAN CHOI
Chairman of the Board
OP Bancorp
MIN KIM
President & Chief Executive Officer
OP Bancorp
Open Bank
OP BANCORP
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ANNUAL REPORT 2017
FINANCIAL HIGHLIGHT
(dollars in thousands, except per share data)
2017
2016
2015
As of or for the year ended December 31,
Income Statement Data
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before taxes
Provision for income taxes
Net income
Per Share Data
Basic income per share
Diluted income per share
$ 40,283
$ 31,701
$ 25,192
4,573
35,710
1,311
8,986
26,257
17,128
7,892
9,236
3,371
28,330
1,682
9,007
23,334
12,320
4,894
7,425
2,689
22,503
553
7,978
19,795
10,133
4,170
5,963
$ 0.68
$ 0.55
$ 0.44
$ 0.66
$ 0.53
$ 0.43
Book value per share (at period end)
$ 6.94 $ 6.30
$ 5.71
Shares of common stock outstanding
13,190,527
12,896,548
12,682,510
Weighted average diluted shares
13,485,791
13,158,155
12,944,867
Balance Sheet Data
Loans held for investment
Loans held for sale
Allowance for loan losses
Total assets
Deposits
Shareholders’ equity
$ 748,024
$ 674,227
$ 507,286
15,739
9,139
900,999
773,306
91,480
1,646
7,910
761,250
661,784
81,284
5,579
6,390
617,350
519,721
72,479
OP BANCORP
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ANNUAL REPORT 2017
(dollars in thousands, except per share data)
2017
2016
2015
As of or for the year ended December 31,
Performance Ratio
Return on average assets
Return on average equity
Yield on total loans
Yield on average earning assets
Cost of average interest bearing liabilities
Cost of deposits
Net interest margin
Efficiency ratio (1)
Asset Quality Data (at Period End)
Net charge-offs to average loans held for investment
Nonperforming assets to loans held for investment plus OREO
ALL to nonperforming loans
ALL to loans held for investment
Balance Sheet and Capital Ratios
1.13%
10.63
5.48
5.20
0.97
0.62
4.61
58.74
0.01%
0.14
881.29
1.22
1.08%
1.05%
9.69
5.20
4.85
0.83
0.56
4.34
8.63
5.18
4.70
0.79
0.55
4.20
62.50
64.94
0.03%
0.09
1,373.26
1.17
(0.02)%
0.20
615.01
1.26
Loans held for investment to deposits
96.73%
101.88%
97.61%
Noninterest bearing deposits to deposits
Average equity to average total assets
Leverage ratio
Common equity tier 1 ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
37.43
10.59
10.46
12.26
12.26
13.49
37.38
11.18
10.89
12.20
12.20
13.40
29.85
12.20
11.70
14.28
14.28
15.53
Non-owner occupied CRE to total risk-based capital
296.69
293.56
233.83
(1) Represents non-interest expense divided by the sum of net interest income plus non-interest income.
OP BANCORP
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ANNUAL REPORT 2017
FINANCIAL HIGHLIGHT
TOTAL ASSET
dollars in thousands
$617,350
$761,250
$900,999
2015
2016
2017
TOTAL DEPOSIT
dollars in thousands
LOAN HELD FOR INVESTMENT
dollars in thousands
$661,784
$674,227
$519,721
$773,306
$507,286
$748,024
2015
2016
2017
2015
2016
2017
OP BANCORP
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ANNUAL REPORT 2017
NET INCOME
dollars in thousands
$7,425
$9,236
$5,963
2015
2016
2017
RETURN ON AVERAGE ASSETS
RETURN ON AVERAGE EQUITY
1.05 %
1.08 %
8.63%
9.69 %
1.13 %
10.63 %
2015
2016
2017
2015
2016
2017
OP BANCORP
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ANNUAL REPORT 2017
CORPORATE INFORMATION
Board of
Directors
Executive
Officers
BRIAN CHOI
Chairman of the Board
Chairman and CEO
Universal Financing Corporation
Ehese Investments, LLC
MIN J. KIM
President & Chief Executive Officer
OP Bancorp and Open Bank
SOO HUN JUNG
Medical Doctor
JASON HWANG
Certified Public Accountant
Jason Hwang, CPA
ERNEST E. DOW
Principal
Dow & Sohn CPAs
OCK HEE KIM
Former President
Lily’s Dress Company
MYUNG JA PARK
President
LP Royal Import LLC
Park and Park Inc.
YONG SIN SHIN
President
CJS Groups Inc
MIN J. KIM
President &
Chief Executive Officer
OP Bancorp and Open Bank
CHRISTINE OH
Executive Vice President &
Chief Financial Officer
OP Bancorp and Open Bank
STEVE PARK
Executive Vice President &
Chief Credit Officer
Open Bank
KI WON YOON
Executive Vice President &
Chief Lending Officer
Open Bank
KATHRINE DUNCAN
Executive Vice President &
Chief Risk Officer
Open Bank
INDEPENDENT AUDITOR
Crowe LLP
Sherman Oaks, CA
CORPORATE COUNSEL
Buchalter, A Professional Corporation
Los Angeles, CA
TRANSFER AGENT
Computershare Trust Company
OP BANCORP
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ANNUAL REPORT 2017
Corporate
Office
Branches
Headquarters
1000 Wilshire Blvd., Suite 500
Los Angeles, CA 90017
213.892.9999
Commercial Loan I
1000 Wilshire Blvd., Suite 100
Los Angeles, CA 90017
213.593.4820
Commercial Loan II
1000 Wilshire Blvd., Suite 100
Los Angeles, CA 90017
213.593.4823
Commercial Loan III
1000 Wilshire Blvd., Suite 100
Los Angeles, CA 90017
213.593.4830
Commercial Loan IV
1000 Wilshire Blvd., Suite 100
Los Angeles, CA 90017
213.593.4828
SBA Department
1000 Wilshire Blvd., Suite 500
Los Angeles, CA 90017
213.892.1164
Home Loan Center
550 S. Western Ave.
Los Angeles, CA 90020
877.296.6736
Aroma Office
3680 Wilshire Blvd., Suite 101
Los Angeles, CA 90010
213.401.3500
Olympic Office
3030 W. Olympic Blvd., Suite 110
Los Angeles, CA 90006
323.200.2100
Buena Park Office
5141 Beach Blvd., Suite E
Buena Park, CA 90621
714.735.5900
Fashion District Office
747 E. 10th St., Suite 310
Los Angeles, CA 90021
213.443.9333
Santa Clara Office
2998 E. El Camino Real
Santa Clara, CA 95051
669.212.8800
Western Office
550 S. Western Ave.
Los Angeles, CA 90020
213.401.1200
Gardena Office
15435 S. Western Ave., Suite 100-D
Gardena, CA 90249
310.354.6000
Wilshire Office
1000 Wilshire Blvd., Suite 100
Los Angeles, CA 90017
213.266.4100
Loan
Production
Office
Washington LPO, Seattle
11900 NE 1st St., Suite 300
Bellevue, WA 98005
425.454.3700
Texas LPO,Dallas
11498 Luna Rd., Suite 100
Farmers Branch, TX 75234
469.420.9400
Georgia LPO, Atlanta
3700 Crestwood Pkwy., Suite 205
Duluth, GA 30096
470.375.2435
OP BANCORP
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ANNUAL REPORT 2017
THE COMPLETE ANNUAL REPORT IS
SAVED IN THE ATTACHED USB
www.myopenbank.com
OP BANCORP
11
ANNUAL REPORT 2017
CONTENTS
Management Discussion and Analysis
12 - 39
Independent Auditors’ Report
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income and Comprehensive income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flow
40
41
42
43
44
Notes to Consolidated Financial Statements
45 - 70
OP BANCORP
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ANNUAL REPORT 2017
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in
conjunction with the “Selected Historical Consolidated Financial Data” and our consolidated financial statements and
related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not
limited to those set forth under “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors” and
elsewhere in our registration statement or Form S-1, may cause actual results to differ materially from those
projected in the forward looking statements. We assume no obligation to update any of these forward-looking
statements.
Overview
We are a bank holding company headquartered in Los Angeles, California. Our commercial community banking
activities are operated through Open Bank, our banking subsidiary. We offer commercial banking services to small
and medium-sized businesses, their owners and retail customers primarily in the Korean-American community.
Our lending activities are diversified and include commercial real estate, Small Business Administration (“SBA”)
guaranteed, commercial and industrial, home mortgage, and consumer loans. We generally lend in markets where
we have a physical presence through our branch and loan production offices, and attract deposits throughout our
market area through a wide range of deposit products for business banking and retail markets. We offer a multitude
of other products and services to our customers to complement our lending and deposit business.
We derive our income primarily from interest received on our loan portfolio, and fee income we receive in
connection with our deposits and the sale and service of SBA loans. Our major operating expenses are the interest
we pay on deposits, the salaries and related benefits we pay our management and staff and the rent we pay on our
leased properties. We rely primarily on locally-generated deposits, mostly from the Korean-American market within
California, to fund our loan activities. We currently operate seven branches in Los Angeles County and Orange
County. We have three loan production offices in Dallas, Texas, Seattle, Washington and Atlanta, Georgia.
As of December 31, 2017, we had total assets of $901.0 million, gross loans of $748.0 million, total deposits of
$773.3 million, and total consolidated shareholders’ equity of $91.5 million. For the years ended December 31, 2017,
2016 and 2015, we recorded net income of $9.2 million, $7.4 million, and $6.0 million, respectively.
Critical Accounting Policies and Estimates
Our accounting and reporting policies conform to accounting principles generally accepted in the United States
of America (“GAAP”) and conform to general practices within the industry in which we operate. To prepare financial
statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available
information. These estimates, assumptions and judgments affect the amounts reported in the financial statements
and accompanying notes. These estimates, assumptions and judgments are based on information available as of the
date of the financial statements and, as this information changes, actual results could differ from the estimates,
assumptions and judgments reflected in the financial statement. In particular, management has identified several
accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in
understanding our financial statements.
The following is a discussion of the critical accounting policies and significant estimates that require us to make
complex and subjective judgments. Additional information about these policies can be found in Note 2 of our
consolidated financial statements as of December 31, 2017, included elsewhere in this prospectus.
OP BANCORP
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ANNUAL REPORT 2017
Allowance for Loan Losses
The allowance for loan losses (“ALL”) is a valuation allowance for probable incurred credit losses. Loan losses are
charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required
using past loan loss experience, the nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may
be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should
be charged off.
The ALL is maintained at a level that management believes is appropriate to provide for known and inherent
incurred loan losses as of the date of the consolidated balance sheet and we have established methodologies for the
determination of its adequacy. The methodologies are set forth in a formal policy and take into consideration the
need for an overall general valuation allowance as well as specific allowances that are determined on an individual
loan basis.
The evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more
information becomes available. While management uses available information to recognize losses on loans, changes
in economic or other conditions may necessitate revision of the estimate in future periods.
Servicing Assets
Servicing assets are recognized separately when loans are sold and the rights to service loans are retained. When
loans are sold, servicing assets are recorded at fair value in accordance with ASC Topic 860, Transfers and Servicing
(“ASC 860”). Fair value is based on market prices for comparable servicing contracts, when available, or alternatively,
is based on a valuation model that calculates the present value of estimated future net servicing income. The fair
value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in the prepayment speed
and discount rate assumptions have the most significant impact on the fair value of servicing assets.
Servicing fee income, which is reported on the income statement as other income, is recorded for fees earned
for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as
income when earned. The amortization of servicing assets is netted against loan servicing fee income. Late fees and
ancillary fees related to loan servicing are not material.
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurement (“ASC 820”), defines fair value as the price that would be received to sell
a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the
measurement date. The degree of management judgment involved in determining the fair value of assets and
liabilities is dependent upon the availability of quoted market prices or observable market parameters. For financial
instruments that trade actively and have quoted market prices or observable market parameters, there is minimal
subjectivity involved in measuring fair value. When observable market prices and parameters are not available,
management judgment is necessary to estimate fair value. In addition, changes in market conditions may reduce the
availability of quoted prices or observable date. See Note 13 of our consolidated financial statements as of
December 31, 2017, included elsewhere in this prospectus, for a complete discussion of fair value of financial assets
and liabilities and their related measurement practices.
Stock-Based Compensation
We grant stock options to purchase our common stock and restricted stock to our employees and directors under
the 2010 Equity Incentive Plan. Additionally, we have outstanding options that were granted under option
OP BANCORP
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ANNUAL REPORT 2017
plans from which we no longer make grants. The benefits provided under all of these plans are subject to the
provisions of accounting guidance related to share based payments. Our results of operations for the calendar years
ended December 31, 2017, 2016 and 2015 were impacted by the recognition of non-cash expense related to the fair
value of our share based compensation awards.
The determination of fair value of stock-based payment awards on the date of grant using the Black Scholes
model is affected by our stock price, as well as the input of other subjective assumptions. These assumptions include,
but are not limited to, the expected term of stock options and our stock price volatility. Our stock options have
characteristics significantly different from those of traded options, and changes in the assumptions can materially
affect the fair value estimates.
Current accounting guidance requires forfeitures to be estimated at the time of grant and revised, if necessary,
in subsequent periods if actual forfeitures differ from those estimates. If actual forfeitures vary from our estimates,
we will recognize the difference in compensation expense in the period the actual forfeitures occur.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. If current available information raises doubt as to the realization
of the deferred tax assets, a valuation allowance may be established. We consider the determination of this valuation
allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the
amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable
income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.
See Note 9 of our consolidated financial statements as of December 31, 2017, included elsewhere in this prospectus,
for additional information. A valuation allowance for deferred tax assets may be required in the future if the amounts
of taxes recoverable through loss carry backs decline, if we project lower levels of future taxable income, or we
project lower levels of tax planning strategies. Such valuation allowance would be established through a charge to
income tax expense that would adversely affect our operating results.
Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2017 and 2016
The following discussion of our results of operations compares the year ended December 31, 2017 to the year
ended December 31, 2016.
We reported net income for the year ended December 31, 2017 of $9.2 million compared to net income of
$7.4 million for the year ended December 31, 2016. The increase was due to a $7.4 million increase in net interest
income and a $371,000 decrease in provision for loan losses, offset by a $2.9 million increase in noninterest expense
and a $3.0 million increase in provision for income taxes, which included a revaluation of deferred tax assets of
$1.3 million.
Net Interest Income
The management of interest income and expense is fundamental to our financial performance. Net interest
income, the difference between interest income and interest expense, is the largest component of the Company’s
total revenue. Management closely monitors both total net interest income and the net interest margin (net interest
income divided by average earning assets). We seek to maximize net interest income without exposing the Company
to an excessive level of interest rate risk through our asset and liability policies. Interest rate risk is
OP BANCORP
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ANNUAL REPORT 2017
managed by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and
liabilities. Our net interest margin is also adversely impacted by the reversal of interest on nonaccrual loans and the
reinvestment of loan payoffs into lower yielding investment securities and other short-term investments.
The following table presents, for the periods indicated, information about: (i) weighted average balances, the
total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average
balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates;
(iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin.
(Dollars in thousands)
Earning assets:
Year Ended December 31,
2017
2016
Average
Balance
Interest
and Fees
Yield /
Rate
Average
Balance
Interest
and Fees
Yield /
Rate
Federal funds sold and other investments (1).................................... $ 22,926 $
Securities available for sale ................................................................ 37,620
495
676
2.16% $ 26,213 $
40,159
1.80
507
664
1.93%
1.65
Total investments........................................................................... 60,546 1,171
Real estate .......................................................................................... 384,462 18,721
SBA ...................................................................................................... 123,822 9,430
C & I ..................................................................................................... 98,455 5,346
Home Mortgage .................................................................................. 103,191 5,344
271
Consumer ............................................................................................ 4,385
1.93
4.87
7.62
5.43
5.18
6.18
66,372 1,171
315,244 14,046
103,313 7,414
73,803 3,845
88,282 4,694
531
5,986
1.76
4.46
7.18
5.21
5.32
8.87
Loans (2) ......................................................................................... 714,315 39,112
5.48
586,628 30,530
5.20
Total earning assets .................................................................. 774,861 40,283
Noninterest-earning assets ....................................................... 45,499
Total assets ........................................................................... 820,360
5.20
653,000 31,701
32,617
685,617
4.85
Interest-bearing liabilities:
NOW and savings deposits ................................................................. 6,137
15
Money market deposits ...................................................................... 258,019 2,344
Time deposits ...................................................................................... 196,831 2,111
0.24%
0.91
1.07
4,058
10
202,737 1,736
181,191 1,540
0.25%
0.86
0.85
Total interest-bearing deposits ...................................................... 460,987 4,470
103
Borrowings ..................................................................................... 9,302
0.97
1.11
387,986 3,286
85
16,986
0.85
0.50
Total interest-bearing liabilities ................................................ 470,289 4,573
0.97
404,972 3,371
0.83
Noninterest-bearing liabilities:
Noninterest-bearing deposits ............................................................. 256,267
Other noninterest-bearing liabilities .................................................. 6,895
Total noninterest-bearing liabilities ............................................... 263,162
Shareholders’ equity ...................................................................... 86,909
Total liabilities and shareholders’ equity .................................. $ 820,360
198,413
5,585
203,998
76,647
$ 685,617
Net interest income / interest rate spreads ............................................
$ 35,710
4.23%
$ 28,330
4.02%
Net interest margin .................................................................................
4.61%
4.34%
(1)
Includes income and average balances for FHLB and Pacific Coast Bankers Bank (“PCBB”) stock, term federal
funds, interest-earning time deposits and other miscellaneous interest-earning assets.
(2) Average loan balances include non-accrual loans and loans held for sale.
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ANNUAL REPORT 2017
Increases and decreases in interest income and interest expense result from changes in average balances
(volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates.
The following tables set forth the effects of changing rates and volumes on our net interest income during the
period shown. Information is provided with respect to (i) effects on interest income attributable to changes in
volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate
(changes in rate multiplied by prior volume). Change applicable to both volume and rate have been allocated to
volume.
(Dollars in thousands)
Earning assets:
Year Ended December 31,
2017 over 2016
Change due to:
Volume
Rate
Interest
Variance
Federal funds sold and other investments ................................................................................................. $
Securities available for sale ........................................................................................................................
(68) $
(47)
56 $
59
(12)
12
Total investments...................................................................................................................................
Real estate .................................................................................................................................................. 3,295
SBA .............................................................................................................................................................. 1,540
C & I ............................................................................................................................................................. 1,333
Home Mortgage .......................................................................................................................................... 776
Consumer ....................................................................................................................................................
(115) 115
1,380
476
168
(126)
(138)
(122)
—
4,675
2,016
1,501
650
(260)
Loans ...................................................................................................................................................... 6,822
1,760
8,582
Total earning assets .......................................................................................................................... 6,707
NOW and savings deposits .........................................................................................................................
5
Money market deposits .............................................................................................................................. 501
Time deposits .............................................................................................................................................. 143
1,875
—
107
428
Total interest-bearing deposits .............................................................................................................. 649
Borrowings .............................................................................................................................................
(51)
535
69
8,582
5
608
571
1,184
18
Total interest-bearing liabilities ........................................................................................................ 598
604
1,202
Net interest income ......................................................................................................................................... $ 6,109 $ 1,271 $ 7,380
Net interest income for the year ended December 31, 2017 was $35.7 million compared to $28.3 million for the
year ended December 31, 2016, an increase of $7.4 million, or 26.1%. This increase was primarily due to an 18.7%
increase in the average balance of interest-earning assets, coupled with a 35 basis point improvement in the average
yield on interest-earning assets, offset by a 14 basis point increase in the average rate paid on interest-bearing
liabilities. The increase in the average balance of interest-earning assets was primarily due to an increase in average
loans outstanding. The increase in the average yield on interest-earning assets was primarily due to cumulative
market rate increases by the Federal Reserve of 100 basis points through four rate increases in each of December
2016, March 2017, June 2017 and December 2017.
Total interest income was $40.3 million in 2017 compared to $31.7 million in 2016, an increase of $8.6 million, or
27.1%. This increase was primarily due to an increase in interest earned on our loan portfolio. Interest and fees on
loans was $39.1 million in 2017 compared to $30.5 million in 2016, an increase of $8.6 million, or 28.1%. This increase
in interest income on loans was primarily due to a 21.8% increase in the average balance of loans outstanding and a
28 basis point improvement in the average yield on loans.
Interest income on total investments was $1.2 million in 2017 and 2016. Interest income on the securities
portfolio increased $12,000, or 1.8%, to $676,000 in 2017 compared to $664,000 in 2016. The increase in interest
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ANNUAL REPORT 2017
income on the securities portfolio was primarily due to a 15 basis point increase in the average yield on the securities
portfolio. Interest income on federal funds sold and other investments decreased $12,000, or 2.4%, to $495,000 in
2017 from $507,000 in 2016, due to a 12.5% decrease in the average balance of federal funds sold, offset by a 23
basis point increase in the average yield on federal fund sold and other investments.
Total interest expense was $4.6 million in 2017 compared to $3.4 million in 2016, an increase of $1.2 million, or
35.7%. The increase was primarily due to increases in interest expense on deposits. Interest expense on deposits
was $4.5 million in 2017 compared to $3.3 million in 2016, an increase of $1.2 million, or 36.0%. This increase was
primarily due to an 18.8% increase in the average balance of interest-bearing deposits, coupled with a 12 basis point
increase in the average interest rate paid.
Net interest margins for the years ended December 31, 2017 and 2016 were 4.61% and 4.34%, respectively.
Provision for Loan Losses
Credit risk is inherent in the business of making loans. We establish an allowance for loan losses through charges
to earnings, which are shown in the statements of operations as the provision for loan losses. Specifically identifiable
and quantifiable known losses are promptly charged off against the allowance. The provision for loan losses is
determined by conducting a quarterly evaluation of the adequacy of our allowance for loan losses and charging the
shortfall or excess, if any, to the current quarter’s expense. This has the effect of creating variability in the amount
and frequency of charges to earnings. The provision for loan losses and level of allowance for each period are
dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan
portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem
loans and the general economic conditions in our market area.
The provision for loan losses for the year ended December 31, 2017 was $1.3 million compared to $1.7 million
for the year ended December 31, 2016, a decrease of $371,000, or 22.1%. The decrease was primarily due to slower
growth in our loan portfolio in 2017 compared to in 2016. Our gross loans increased 11% in 2017 compared to 33%
in 2016.
The allowance for loan losses as a percentage of loans held for investment was 1.22% at December 31, 2017 and
1.17% at December 31, 2016.
Noninterest Income
While interest income remains the largest single component of total revenues, noninterest income is also an
important component. A portion of our noninterest income is associated with SBA lending activity, consisting of
gains on the sale of loans sold in the secondary market and servicing income from loans sold with servicing retained.
Other sources of noninterest income include loan servicing fees, service charges and fees, and gains on the sale of
securities.
Noninterest income for the year ended December 31, 2017 was $9.0 million, a decrease of $21,000, or 0.2%,
compared to $9.0 million for the year ended December 31, 2016.
The following table sets forth the various components of our noninterest income for the years ended
December 31, 2017 and 2016:
(Dollars in thousands)
Noninterest income:
Year Ended December 31,
2017
2016
Increase
(decrease)
Service charges on deposit accounts ......................................................................................................... $ 1,656 $ 1,275 $ 381
(186)
Loan servicing fees, net of amortization ................................................................................................... 1,127 1,313
OP BANCORP
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ANNUAL REPORT 2017
(Dollars in thousands)
Year Ended December 31,
2017
2016
Increase
(decrease)
Gain on sale of loans .................................................................................................................................. 4,939 5,507
Other income and fees .............................................................................................................................. 1,264 912
(568)
352
Total noninterest income...................................................................................................................... $ 8,986 $ 9,007 $ (21)
Total gain on sale of loans was $4.9 million in the year ended December 31, 2017 compared to $5.5 million for
the same period of 2016, a decrease of $568,000 or 10.3%.
Gain on sale of SBA loans totaled $4.8 million in the year ended December 31, 2017 compared to $5.4 million for
the same period of 2016. We sold $66.2 million in SBA loans with an average premium of 9.30% in the year ended
December 31, 2017 compared to the sale of $83.4 million in SBA loans with an average premium of 8.93% in the
same period of 2016, primarily due to a lower production in SBA loans in 2017 compared to 2016. We originated
$99.7 million of SBA loans in 2017 compared to $111.5 million in 2016. Other loans sold by us during both periods
were immaterial.
Loan servicing income, net of amortization decreased by $186,000 to $1.1 million in 2017 compared to
$1.3 million in 2016. The decrease in loan servicing income was due, in part, to a $521,000 increase in servicing asset
amortization expense, offset by a $335,000 increase in servicing fees. Our total SBA loan servicing portfolio was
$309.3 million as of December 31, 2017 compared to $303.8 million as of December 31, 2016. The increase in the
servicing portfolio reflects the sales of SBA loans in 2017.
The servicing assets that result from the sales of SBA loans with servicing retained are amortized over the
expected term of the loans using a method approximating the interest method. Servicing income generally declines
as the respective loans are repaid.
Noninterest Expense
Noninterest expense for the year ended December 31, 2017 was $26.3 million compared to $23.3 million for the
year ended December 31, 2016, an increase of $2.9 million, or 12.5%. The following table sets forth the major
components of our noninterest expense for the years ended December 31, 2017 and 2016:
(Dollars in thousands)
Noninterest expense:
Year Ended December 31,
2017
2016
Increase
(decrease)
Salaries and employee benefits ............................................................................................................. $ 16,474 $ 14,556 $ 1,918
302
Occupancy and equipment .................................................................................................................... 3,918 3,616
236
Data processing and communication .................................................................................................... 1,323 1,087
589
(95)
684
Professional fees ....................................................................................................................................
377
8
369
FDIC insurance and regulatory assessments .........................................................................................
631
74
557
Promotion and advertising ....................................................................................................................
Directors’ fees and stock-based compensation ....................................................................................
758
796
38
209
745
Foundation donation and other contributions......................................................................................
954
233
962
Other expenses ...................................................................................................................................... 1,195
Total noninterest expense ................................................................................................................ 26,257 23,334
2,923
Salaries and employee benefits expense for the year ended December 31, 2017 was $16.5 million compared to
$14.6 million for the year ended December 31, 2016, an increase of $1.9 million, or 13.2%. This increase was
attributable to an increase in the number of employees to support continued growth, annual salary adjustments,
OP BANCORP
19
ANNUAL REPORT 2017
increased bonus and incentives and increased benefit costs. The average number of full-time equivalent employees
was 130.4 in 2017 compared to 125.0 in 2016.
Occupancy and equipment expense for 2017 was $3.9 million compared to $3.6 million for 2016, an increase of
$302,000, or 8.4%. This increase was primarily due to the commencement of the lease for the Santa Clara office in
mid-2017 which will open in the first quarter of 2018, and the increased rental expense from the lease renewals of
the Fashion District and Gardena Offices in 2017.
Data processing and communication expense for 2017 was $1.3 million compared to $1.1 million for 2016, an
increase of $236,000, or 21.7%. This increase was primarily due a continued growth in our loans and deposits.
Professional fees for 2017 were $589,000 compared to $684,000 for 2016, a decrease of $95,000, or 13.9%. This
decrease was primarily due to the costs incurred in 2016 associated with the formation of OP Bancorp as a bank
holding company and the completion of the transactions under which Open Bank became a wholly-owned subsidiary
of OP Bancorp, offset by the professional fees incurred in the fourth quarter of 2017 attributable to this offering.
FDIC insurance and regulatory assessment expense for 2017 was $377,000 compared to $369,000 for 2016, an
increase of $8,000 or 2.2%. This increase was primarily due to an increase in our FDIC insurance and DBO regulatory
assessment as the size of our assets continued to grow.
Promotion and advertising expense for 2017 was $631,000 compared to $557,000 for 2016, an increase of
$74,000 or 13.3%. The increase was consistent with a continued growth of our loans and deposits.
Directors’ fees and expenses for 2017 were $796,000 compared to $758,000 for 2016, an increase of $38,000 or
5.0%. Directors’ fees and expenses include a monthly retainer fee, reimbursement for travel and other expenses,
and stock-based expenses relating to equity awards granted in prior years under our equity plans to our directors.
Directors’ fees and expenses (not including stock-based expenses) for 2017 was $365,000 compared to $327,000 in
2016, an increase of $38,000, or 11.5%. The increase was due to the increase in directors’ monthly retainer fees in
2017. Directors’ stock-based expenses for 2017 and 2016 were $431,000.
Our aggregate donations to the Foundation and other charitable and community contributions for 2017 were
$954,000 compared to $745,000 for 2016, an increase of $209,000, or 28.1%. The increase was due to increased
donation accruals for Open Stewardship Foundation, which is directly proportionate to the growth in our after tax
income. On an annual basis, we donate 10% of our consolidated net income after taxes to the Foundation.
Other expenses for 2017 were $1.2 million compared to $964,000 in 2016, an increase of $232,000, or 24.1%.
The increase was primarily due to increased operating expenses and customer service expenses.
Income Tax Expense
Income tax expense was $7.9 million in 2017 compared to $4.9 million in 2016. The increase in income tax
expense was related to growth in pre-tax income and a revaluation of deferred tax assets of $1.3 million, as discussed
below. Effective tax rates were 46.1% and 39.7% in 2017 and 2016, respectively.
On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act (the “Tax Act”), was signed into
law, which among other items reduces the federal corporate tax rate to 21% from 34%, effective January 1, 2018.
U.S. generally accepted accounting principles require companies to revalue certain tax-related assets as of the date
of enactment of the new legislation with resulting tax effects accounted for in the reporting period of enactment.
As a result, we performed an analysis to determine the impact of the revaluation of the net deferred tax asset. The
value of the deferred tax asset was reduced by $1.3 million, and recorded as tax expense for the year ended
December 31, 2017.
OP BANCORP
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ANNUAL REPORT 2017
Some items of income and expense are recognized in different years for tax purposes than when applying
generally accepted accounting principles leading to timing differences between our actual tax liability, and the
amount accrued for this liability based on book income. These temporary differences comprise the “deferred”
portion of our tax expense or benefit, which accumulates on our books as a deferred tax asset or deferred tax liability
until such time as they reverse.
Realization of deferred tax assets is primarily dependent upon us generating sufficient future taxable income to
obtain benefit from the reversal of net deductible temporary differences and the utilization of tax credit carry
forwards and the net operating loss carry forwards for Federal and California state income tax purposes. The amount
of deferred tax assets considered realizable is subject to adjustment in future periods based on estimates of future
taxable income. Under generally accepted accounting principles a valuation allowance is required to be recognized
if it is “more likely than not” that the deferred tax assets will not be realized. The determination of the realizability
of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation
of both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax
planning strategies, and assessments of current and future economic and business conditions.
We had net deferred tax assets of $3.4 million and $3.3 million at December 31, 2017, and December 31, 2016,
respectively.
After consideration of the matters in the preceding paragraph, we have determined that it is more likely than not
that net deferred tax assets at December 31, 2017 and December 31, 2016 will be fully realized in future years.
Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2016 and 2015
The following discussion of our results of operations compares the year ended December 31, 2016 to the year
ended December 31, 2015.
We reported net income for the year ended December 31, 2016 of $7.4 million compared to net income of
$6.0 million for the year ended December 31, 2015. The increase was due to a $5.8 million increase in net interest
income and a $1.0 million increase in noninterest income offset by a $3.5 million increase in noninterest expense
and a $1.1 million increase in provision for loan losses and a $700,000 increase in provision for income taxes.
Net Interest Income
The following table presents, for the periods indicated, information about our: (i) weighted average balances, the
total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average
balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates;
(iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin.
(Dollars in thousands)
Earning assets:
Year Ended December 31,
2016
2015
Average
Balance
Interest
and Fees
Yield /
Rate
Average
Balance
Interest
and Fees
Yield /
Rate
Federal funds sold and other investments (1)............................ $ 26,213 $
Securities available for sale ........................................................ 40,159
507
664
1.93%
1.65
$ 36,963 $
28,577
383
480
1.04%
1.68
Total investments................................................................... 66,372 1,171
Real estate .................................................................................. 315,244 14,046
SBA .............................................................................................. 103,313 7,414
Commercial & Industrial ............................................................. 73,803 3,845
Home Mortgage .......................................................................... 88,282 4,694
531
Consumer .................................................................................... 5,986
1.76
4.46
7.18
5.21
5.32
8.87
65,540
863
243,621 10,963
84,751 6,088
64,702 3,066
68,979 3,698
514
7,774
1.32
4.50
7.18
4.74
5.36
6.61
OP BANCORP
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ANNUAL REPORT 2017
(Dollars in thousands)
Year Ended December 31,
2016
2015
Average
Balance
Interest
and Fees
Yield /
Rate
Average
Balance
Interest
and Fees
Yield /
Rate
Loans (2) ................................................................................. 586,628 30,530
Total earning assets .......................................................... 653,000 31,701
Noninterest-earning assets ............................................... 32,617
Total assets ................................................................... 685,617
5.20
4.85
469,827 24,329
5.18
4.70
535,367 25,192
30,800
566,167
Interest-bearing liabilities:
NOW and savings deposits ......................................................... 4,058
10
Money market deposits .............................................................. 202,737 1,736
Time deposits .............................................................................. 181,191 1,540
Total interest-bearing deposits .............................................. 387,986 3,286
85
Borrowings ............................................................................. 16,986
Total interest-bearing liabilities ........................................ 404,972 3,371
0.25%
0.86
0.85
0.85
0.50
0.83
3,276
8
163,887 1,505
151,715 1,092
0.24%
0.92
0.72
318,878 2,605
84
20,001
0.82
0.42
338,879 2,689
0.79
Noninterest-bearing liabilities:
Noninterest-bearing deposits ..................................................... 198,413
Other noninterest-bearing liabilities .......................................... 5,585
Total noninterest-bearing liabilities ....................................... 203,998
Shareholders’ equity .............................................................. 76,647
Total liabilities and shareholders’ equity .......................... $ 685,617
153,435
4,784
158,219
69,069
$566,167
Net interest income / interest rate spreads ....................................
$ 28,330
4.02%
$ 22,503
3.91%
Net interest margin .........................................................................
4.34%
4.20%
(1)
Includes income and average balances for FHLB and PCBB stock, term federal funds, interest-earning time
deposits and other miscellaneous interest-earning assets.
(2) Average loan balances include non-accrual loans and loans held for sale.
OP BANCORP
22
ANNUAL REPORT 2017
Increases and decreases in interest income and interest expense result from changes in average balances
(volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The
following tables set forth the effects of changing rates and volumes on our net interest income during the period
shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume
(change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes
in rate multiplied by prior volume). Change applicable to both volume and rate have been allocated to volume.
Year Ended December 31,
2016 over 2015
(Dollars in thousands)
Earning assets:
Increase (Decrease)
Due to Change due in:
Average
Volume
Average
Rate
Federal funds sold and other investments ......................................................................................... $ (135)
Securities available for sale ................................................................................................................
194
Total investments...........................................................................................................................
Real estate ..........................................................................................................................................
SBA ......................................................................................................................................................
Commercial & Industrial .....................................................................................................................
Home Mortgage ..................................................................................................................................
Consumer ............................................................................................................................................
59
3,182
1,326
457
1,024
(134)
$ 259
(10)
249
(99)
—
322
(28)
151
Net
Interest
Variance
$ 124
184
308
3,083
1,326
779
996
17
Total loans ......................................................................................................................................
5,855
346
6,201
Total earning assets ..................................................................................................................
5,914
595
6,509
Expense from interest-bearing liabilities
NOW and savings deposits ................................................................................................................. $
Money market deposits ......................................................................................................................
Time deposits ......................................................................................................................................
2
335
232
Total interest-bearing deposits ......................................................................................................
Borrowings .....................................................................................................................................
569
(14)
$ —
(104)
216
112
15
$
2
231
448
681
1
Total interest-bearing liabilities ................................................................................................
555
127
682
Net interest income ................................................................................................................................. $5,359
$ 468
$ 5,827
Net interest income for the year ended December 31, 2016 was $28.3 million compared to $22.5 million for the
year ended December 31, 2015, an increase of $5.8 million, or 25.9%. This increase was primarily due to a 22.0%
increase in the average balance of interest-earning assets, coupled with a 15 basis point improvement in the average
yield on interest-earning assets. The increase in the average balance of interest-earning assets was primarily due to
an increase in average loans outstanding. The increase in the average yield on interest-earning assets was primarily
due to an increase in the federal funds rate of 25 basis points in December 2015.
Total interest income was $31.7 million in 2016 compared to $25.2 million in 2015, an increase of $6.5 million, or
25.8%. This increase was primarily due to an increase in interest earned on our loan portfolio. Interest and fees on
loans was $30.5 million in 2016 compared to $24.3 million in 2015, an increase of $6.2 million, or 25.5%. This
increase in interest income on loans was primarily due to a 24.9% increase in the average balance of loans
outstanding. The increase in the average balance of loans outstanding was primarily due to continued organic growth
in most of our loan categories.
Interest income on total investments increased $308,000, or 35.7%, to $1.2 million in 2016 compared to $864,000
in 2015. Interest income on the securities portfolio increased $184,000, or 38.3%, to $664,000 in 2016
OP BANCORP
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ANNUAL REPORT 2017
compared to $480,000 in 2015. The increase in interest income on the securities portfolio was primarily due to a
$11.6 million, or 40.5%, increase in the average balance of our securities portfolio. We purchased $30.1 million of
home mortgage-backed securities and collateralized mortgage obligations in 2015. Interest income on federal funds
sold, cash equivalents and other investments increased $124,000, or 32.0%, to $507,000 in 2016 from $383,000 in
2015 primarily due to an increase of $95,000 in FHLB stock dividend in 2016.
Total interest expense was $3.4 million in 2016 compared to $2.7 million in 2015, an increase of $700,000, or
25.4%. The increase was primarily due to increases in interest expense on deposits. Interest expense on deposits
was $3.3 million in 2016 compared to $2.6 million in 2015, an increase of $700,000, or 26.1%. This increase was
primarily due to a 21.7% increase in the average balance of interest-bearing deposits, coupled with a three basis
point increase in the average interest rate paid.
Net interest margins for the years ended December 31, 2016 and 2015 were 4.34% and 4.20%, respectively.
Provision for Loan Losses
The provision for loan losses for the year ended December 31, 2016 was $1.7 million compared to $553,000 for
the year ended December 31, 2015, an increase of $1.1 million, or 204%, which was primarily due to the growth of
our loan portfolio. The allowance for loan losses as a percentage of loans was 1.17% at December 31, 2016 and
1.26% at December 31, 2015.
Noninterest Income
Noninterest income for the year ended December 31, 2016 was $9.0 million compared to $8.0 million for the
year ended December 31, 2015, an increase of $1.0 million, or 12.9%. The following table sets forth the various
components of our noninterest income for the years ended December 31, 2016 and 2015:
(Dollars in thousands)
Noninterest Income:
Year Ended December 31,
2016
2015
Increase
(decrease)
Service charges on deposit accounts ......................................................................................................... $ 1,275 $ 1,278 $
Loan servicing fees, net of amortization ................................................................................................... 1,313 1,131
Gain on sale of loans .................................................................................................................................. 5,507 4,669
Other income and fees .............................................................................................................................. 912 900
(3)
182
838
12
Total noninterest income...................................................................................................................... $ 9,007 $ 7,978 $ 1,029
Total gain on sale of loans during 2016 was $5.5 million in the year ended December 31, 2016 compared to
$4.7 million for the same period of 2015, an increase of $800,000 or 17.9%.
Gain on sale of SBA loans totaled $5.4 million in the year ended December 31, 2016 compared to $4.6 million for
the same period of 2015. We sold $83.4 million in SBA loans with an average premium of 8.93% in the year ended
December 31, 2016 compared to the sale of $64.8 million with an average premium of 9.46% in the same period of
2015. Other loans sold by us during the period were immaterial.
Loan servicing income, net of amortization increased by $200,000 to $1.3 million in 2016 compared to $1.1 million
in 2015. The increase in loan servicing income was due to an increase in SBA loans being serviced. Our total SBA loan
servicing portfolio was $303.8 million as of December 31, 2016 compared to $260.5 million as of December 31, 2015.
The increase in the servicing portfolio reflects the growth in our originations and sales of SBA loans in 2016.
OP BANCORP
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ANNUAL REPORT 2017
Noninterest Expense
Noninterest expense for the year ended December 31, 2016 was $23.3 million compared to $19.8 million for the
year ended December 31, 2015, an increase of $3.5 million, or 17.9%. The following table sets forth the various
components of our noninterest expense for the years ended December 31, 2016 and 2015:
(Dollars in thousands)
Noninterest expense:
Year Ended December 31,
2016
2015
Increase
(decrease)
Salaries and employee benefits ............................................................................................................. $ 14,556 $ 12,253 $ 2,303
454
Occupancy and equipment .................................................................................................................... 3,616 3,162
303
784
Data processing and communication .................................................................................................... 1,087
271
413
684
Professional fees ....................................................................................................................................
62
307
369
FDIC insurance and regulatory assessments .........................................................................................
Promotion and advertising ....................................................................................................................
25
532
557
784
758
Directors’ fees and stock-based compensation ....................................................................................
(26)
143
602
745
Foundation donation and other contributions......................................................................................
4
958
962
Other expenses ......................................................................................................................................
Total noninterest expense ................................................................................................................ 23,334 19,795
3,539
Salaries and employee benefits expense for the year ended December 31, 2016 was $14.6 million compared to
$12.3 million for the year ended December 31, 2015, an increase of $2.3 million, or 18.8%. This increase was
attributable to an increase in the number of employees to support continued growth, annual salary adjustments,
increased bonus and incentives and increased benefit costs. The number of full-time equivalent employees was
129.5 at December 31, 2016 compared to 115.5 at December 31, 2015.
Occupancy and equipment expense for 2016 was $3.6 million compared to $3.2 million for 2015, an increase of
$454,000, or 14.4%. This increase was mainly due to the opening of the Western office in mid-2015 and the three
loan production offices in 2016.
Data processing and communication expense for 2016 was $1.1 million compared to $784,000 for 2015, an
increase of $303,000, or 38.6%. This increase was primarily due a continued growth in operations.
Professional fees for 2016 was $684,000 compared to $413,000 for 2015, and increase of $271,000, or 65.6%.
This increase was primarily due to higher costs associated with the PCAOB standards audit conducted during 2016
for years 2016 and 2015 and the costs incurred in 2016 associated with the formation of OP Bancorp as a bank
holding company and completion of the transactions under which Open Bank became a wholly-owned subsidiary of
OP Bancorp.
FDIC insurance and regulatory assessment expense for 2016 was $369,000 compared to $307,000 for 2015, an
increase of $62,000 or 20.2%. This increase was primarily due to an increase in our FDIC insurance and DBO
regulatory assessment as we continued to grow in assets.
Promotion and advertising expense for 2016 was $557,000 compared to $532,000 for 2015, an increase of
$25,000 or 4.7%. The increase was consistent with a continued growth of our loans and deposits.
Directors’ fees and expenses for 2016 were $758,000 compared to $784,000 for 2015, a decrease of $26,000 or
3.3%. Directors’ fees and expenses include a monthly retainer fee, reimbursement for traveling and other expenses,
and stock-based expenses relating to equity awards granted in prior years under our equity plans to our directors.
Directors’ fees and expenses (not including stock-based expenses) for 2016 was $327,000 compared to
OP BANCORP
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ANNUAL REPORT 2017
$282,000 for 2015, an increase of $45,000, or 16.0%. The increase was due to the increase in directors’ monthly
retainer fees in 2016. Director’s stock-based expenses for 2016 was $431,000 compared to $502,000 for 2015, a
decrease of $71,000, or 14.1%. The decrease was the result of more stock options vesting in 2015 compared to 2016.
Our aggregate donations to the Foundation and other charitable and community contributions for 2016 were
$745,000 compared to $602,000 for 2015, an increase of $143,000, or 23.8%.
Income Tax Expense
Income tax expense was $4.9 million in 2016 compared to $4.2 million in 2015. The increase in income tax
expense was consistent with the related growth in our pre-tax income. Our effective tax rates were 39.7% and 41.2%
in 2016 and 2015, respectively. The lower effective tax rate in 2016 was primarily due to benefits recognized from
the change in tax accounting associated with the treatment of our stock options.
Financial Condition
Total assets increased $139.7 million, or 18.4%, to $901.0 million at December 31, 2017 as compared to
$761.3 million at December 31, 2016. This increase primarily resulted from an increase of $73.8 million, or 10.9%, in
gross loans and an increase of $43.1 million in cash and cash equivalents. We funded our asset growth primarily with
an increase of $111.5 million in deposits and additional advances from FHLB of $15.0 million.
Investment portfolio
The securities portfolio is the second largest component of our interest earning assets, and the structure and
composition of this portfolio is important to an analysis of our financial condition. The portfolio serves the following
purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be
required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows
from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk management tool,
because it provides a large base of assets, the maturity and interest rate characteristics of which can be changed
more readily than the loan portfolio to better match changes in the deposit base and our other funding sources; and
(iv) it is an alternative interest-earning use of funds when loan demand is weak or when deposits grow more rapidly
than loans.
We classify our securities as either available-for-sale or held-to-maturity at the time of purchase. Accounting
guidance requires available-for-sale securities to be marked to fair value with an offset to accumulated other
comprehensive income (loss), a component of shareholders’ equity. Monthly adjustments are made to reflect
changes in the fair value of our available-for-sale securities.
All of the securities in our investment portfolio were classified as available-for-sale at December 31, 2017. There
were no held-to-maturity or trading securities in our investment portfolio at December 31, 2017. All available-for-
sale securities are carried at fair value. Securities available-for-sale consist primarily of US government-sponsored
agency securities, home mortgage-backed securities and collateralized mortgage obligations.
Securities available-for-sale increased $6.0 million, or 16.9%, to $41.5 million at December 31, 2017 from
$35.5 million at December 31, 2016. Securities available-for-sale decreased $8.4 million to $35.5 million at
December 31, 2016 from $43.9 million at December 31, 2015. No issuer of the available-for-sale securities, other
than FNMA and FHLMC, comprised more than ten percent of our shareholders’ equity as of December 31, 2017,
2016, or 2015.
OP BANCORP
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ANNUAL REPORT 2017
The following table summarizes the fair value of the available-for-sale securities portfolio as of the dates
presented.
(Dollars in thousands)
Available for sale:
U.S. Government
December 31, 2017
December 31, 2016
December 31, 2015
Amortized
Cost
Fair
Value
Unrealized
Gain/(Loss)
Amortized
Cost
Fair
Value
Unrealized
Gain/(Loss)
Amortized
Cost
Fair
Value
Unrealized
Gain/(Loss)
agencies ......................... $ 6,989 $ 6,932
$ (57)
$ 6,984 $ 6,977
$
(7)
$ 7,978 $ 7,949
$ (29)
Mortgage-backed
securities—residential ...
Collateralized mortgage
14,109
13,941
(168)
17,721
17,556
(165)
22,615
22,444
(171)
obligations ......................
Other securities ..................
18,459
2,518
18,113
2,486
(346)
(32)
11,124
—
10,930
—
(194)
—
13,690
—
13,496
—
(194)
—
Total available for sale ... $42,075 $ 41,472
$ (603)
$35,829 $ 35,463
$ (366)
$44,283 $ 43,889
$ (394)
Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. At December
31, 2017, we evaluated the securities which had an unrealized loss for other than temporary impairment (OTTI) and
determined all decline in value to be temporary. We anticipate full recovery of amortized cost with respect to these
securities by maturity, or sooner in the event of a more favorable market interest rate environment. We do not
intend to sell these securities and it is not more likely than not that we will be required to sell them before recovery
of the amortized cost basis, which may be at maturity.
The following table sets forth certain information regarding contractual maturities and the weighted average
yields of our investment securities as of the dates presented. Expected maturities may differ from contractual
maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. We
have no securities with contractual maturities due in one year or less as of December 31, 2017.
(Dollars in thousands)
Available for sale:
As of December 31, 2017
Due after One Year
Through Five Years
Due after Five Years
Through Ten Years
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Due after Ten Years
Amortized
Cost
Weighted
Average
Yield
U.S. Government agencies.............................................. $ 6,989
—
Mortgage-backed securities—residential ......................
—
Collateralized mortgage obligations ...............................
—
Other securities ..............................................................
Total available for sale ...............................................
6,989
1.68%
—
—
—
1.68%
$ —
5,545
—
—
$ 5,545
—
1.98%
—
—
1.98%
$ —
8,564
18,459
2,518
—
1.89%
2.03%
—
$29,541
1.82%
We have not used interest rate swaps or other derivative instruments to hedge fixed rate loans or securities to
otherwise mitigate interest rate risk.
Loans
Our loans represent the largest portion of our earning assets, substantially greater than the securities portfolio
or any other asset category, and the quality and diversification of the loan portfolio is an important consideration
when reviewing our financial condition.
OP BANCORP
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ANNUAL REPORT 2017
At December 31, 2017, gross loans including deferred costs totaled $748.0 million compared to $674.2 million at
December 31, 2016 and $507.3 million at December 31, 2015.
The loan distribution table that follows sets forth our gross loans outstanding, and the percentage distribution in
each category as of the dates indicated:
(Dollars in thousands)
Real estate:
As of December 31,
2017
2016
2015
Amount
% of Total
Amount
% of Total
Amount
% of Total
Commercial real estate .............................................. $ 420,760
SBA loans—real estate ............................................... 106,924
Total real estate .................................................... 527,684
SBA loan—non-real estate ............................................. 8,635
Commercial and industrial ............................................. 103,681
Home mortgage .............................................................. 104,068
Consumer........................................................................ 3,955
Gross loans ................................................................. 748,023
(9,139)
Allowance for loan losses......................................
Net loans .................................................................... $ 738,884
56%
14%
70%
1%
14%
13.9%
1%
100%
$ 362,585
97,411
459,996
6,875
97,660
104,809
4,887
674,227
(7,910)
$ 666,317
54%
14%
68%
1%
14%
16%
1%
100%
54%
15%
69%
1%
14%
15%
1%
100%
$ 272,394
75,641
348,035
6,814
70,629
76,866
4,942
507,286
(6,390)
$ 500,896
Gross loans increased $73.8 million, or 10.9%, to $748.0 million as of December 31, 2017 compared to
$674.2 million as of December 31, 2016. The increase in our gross loans resulted from organic growth in most of our
loan categories.
The following tables presents the maturity distribution of our loans as of December 31, 2017 and 2016. The table
shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with
variable (floating) interest rates.
(Dollars in thousands)
Real estate:
As of December 31, 2017
Due in One Year or Less
Due after One Year
Through Five Years
Due after Five Years
Fixed Rate
Adjustable
Rate
Fixed Rate
Adjustable
Rate
Fixed Rate
Adjustable
Rate
Total
Commercial real estate ...................................... $ 24,364
—
SBA loans—real estate .......................................
$ 38,629 $171,457 $ 88,328 $ 39,120 $ 58,862 $ 420,760
106,924 106,924
—
—
—
—
Total real estate ............................................
SBA loan—non-real estate .....................................
Commercial and industrial .....................................
Home mortgage ......................................................
Consumer................................................................
24,364
—
—
—
—
38,629
—
58,900
—
1,821
171,457
—
2,188
—
11
88,328
764
25,876
—
1,202
39,120
—
—
104,068
—
165,786 527,684
7,871 8,635
16,717 103,681
— 104,068
921 3,955
Gross loans ......................................................... $ 24,364
$ 99,350 $173,656 $116,170 $143,188 $191,295 $ 748,023
OP BANCORP
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ANNUAL REPORT 2017
(Dollars in thousands)
Real estate:
As of December 31, 2016
Due in One Year or Less
Due after One Year
Through Five Years
Due after Five Years
Fixed Rate
Adjustable
Rate
Fixed Rate
Adjustable
Rate
Fixed Rate
Adjustable
Rate
Total
Commercial real estate ...................................... $ 4,541
—
SBA loans—real estate .......................................
$ 26,034 $183,869 $ 41,074 $ 62,842 $ 44,225 $ 362,585
97,411 97,411
—
—
—
—
Total real estate ............................................
SBA loan—non-real estate .....................................
Commercial and industrial .....................................
Home mortgage ......................................................
Consumer................................................................
4,541
—
75
—
—
26,034
15
46,933
—
2,548
183,869
—
2,908
—
—
41,074
701
25,248
—
1,419
62,842
—
—
104,809
—
141,636 459,996
6,159 6,875
22,496 97,660
— 104,809
920 4,887
Gross loans ......................................................... $ 4,616
$ 75,530 $186,777 $ 68,442 $167,651 $171,211 $ 674,227
Our loan portfolio is concentrated in commercial real estate, commercial (primarily manufacturing, wholesale,
and services oriented entities), SBA loans (unguaranteed portion) with the remaining balance in home mortgage,
and consumer loans. We do not have any material concentrations by industry or group of industries in the loan
portfolio. However, 84.5% of our gross loans was secured by real property as of December 31, 2017, compared to
83.8% as of December 31, 2016.
We have established concentration limits in the loan portfolio for commercial real estate loans, commercial and
industrial loans, and unsecured lending, among others. All loan types are within established limits. We use
underwriting guidelines to assess the borrowers’ historical cash flow to determine debt service, and we further stress
test the debt service under higher interest rate scenarios. Financial and performance covenants are used in
commercial lending agreements to allow us to react to a borrower’s deteriorating financial condition, should that
occur.
Commercial real estate loans include owner-occupied and non-occupied commercial real estate. We originate
both fixed and adjustable rate loans. Adjustable rate loans are based on the Wall Street Journal prime rate. At
December 31, 2017, approximately 56% of the commercial real estate portfolio consisted of fixed-rate loans. Our
policy maximum loan-to-value, or LTV, is 70% for commercial real estate loans. At December 31, 2017, our average
loan to value for commercial real estate loans was 72.1%. Our commercial real estate loan portfolio totaled
$420.8 million at December 31, 2017 compared to $362.6 million at December 31, 2016.
We are designated an SBA Preferred Lender under the SBA Preferred Lender Program. We offer mostly SBA 7(a)
variable-rate loans. We generally sell the 75% guaranteed portion of the SBA loans that we originate. Our SBA loans
are typically made to small-sized manufacturing, wholesale, retail, hotel/motel and service businesses for working
capital needs or business expansions. SBA loans have maturities up to 25 years. Typically, non-real estate secured
loans mature in less than 10 years. Collateral may also include inventory, accounts receivable and equipment, and
may include personal guarantees. Our unguaranteed SBA loans collateralized by real estate are monitored by
collateral type and included in our CRE Concentration Guidance.
As of December 31, 2017 our SBA portfolio totaled $115.6 million compared to $104.3 million as of December 31,
2016. These increases were primarily due to continued growth of our SBA loan portfolio partially offset by the sales
of those loans. We originated $99.7 million and $111.5 million during the years ended December 31, 2017 and 2016,
respectively. We sold $66.2 million and $83.4 million of SBA loans during the years ended December 31, 2017 and
2016, respectively.
OP BANCORP
29
ANNUAL REPORT 2017
From our total SBA loan portfolio, $106.9 million is secured by real estate and $8.6 million is unsecured or secured
by business assets at December 31, 2017.
Commercial and industrial loans totaled $103.7 million at December 31, 2017 compared to $97.7 million at
December 31, 2016 and $70.6 million at December 31, 2015. The increase resulted primarily from organic loan
growth.
We originate mainly non-qualified, alternative documentation single-family home mortgage loans (“home
mortgage”) primarily through broker relationships, but also through our branch network. The loan product is a five-
year or seven-year hybrid adjustable rate mortgage which reprices after five years to the one-year LIBOR plus certain
spreads. We originate the non-qualified single-family home mortgage loans held by us for investment.
Home mortgage loans totaled $104.1 million at December 31, 2017 compared to $104.8 million at December 31,
2016, a decrease of $700,000, or 0.7%. The decrease was primarily due to lower loan origination and higher loan
payoffs in 2017 compared to 2016. During the year ended December 31, 2017, we originated $42.1 million and sold
$9.5 million in home mortgage loans. Payoffs and paydowns for the same period were $31.2 million and $2.8 million,
respectively. During the same period in 2016, we originated $53.3 million and sold $5.8 million in home mortgage
loans. Payoffs and paydowns for the same period were $17.3 million and $2.3 million, respectively.
Loan Servicing
As of December 31, 2017, 2016, and 2015, we serviced $309.3 million, $303.8 million, and $260.5 million
respectively, of SBA loans for others. Activity for loan servicing rights was as follows:
Year Ended December 31,
(Dollars in thousands)
Beginning balance............................................................................................................................................ $ 6,783 $ 5,551 $ 4,670
Additions .......................................................................................................................................................... 1,923 2,645 2,148
Amortized to expense ..................................................................................................................................... (1,935) (1,413) (1,267)
2017
2016
2015
Ending balance ....................................................................................................................................... $ 6,771 $ 6,783 $ 5,551
Loan servicing rights are included in accrued interest receivable and other assets on our consolidated balance
sheets and reported net of amortization.
Allowance for loan losses
The allowance for loan losses is an estimate of probable incurred losses in the loan portfolio. Loans are charged-
off against the allowance when management believes a loan balance is uncollectible. Subsequent recoveries, if any,
are credited to the allowance for loan losses. Management’s methodology for estimating the allowance balance
consists of several key elements, which include specific allowances on individual impaired loans and the formula
driven allowances on pools of loans with similar risk characteristics. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-
off.
The allowance for loan losses is determined on a quarterly basis and reflects management’s estimate of probable
incurred credit losses inherent in the loan portfolio. We also rely on internal and external loan review procedures to
further assess individual loans and loan pools, and economic data for overall industry and geographic trends. The
computation includes element of judgment and high levels of subjectivity.
A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Impaired loans include loans on non-accrual status and performing
restructured loans. Income from loans on non-accrual status is recognized to the extent cash is
OP BANCORP
30
ANNUAL REPORT 2017
received and when the loan’s principal balance is deemed collectible. Depending on a particular loan’s
circumstances, we measure impairment of a loan based upon either the present value of expected future cash flows
discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral
less estimated costs to sell if the loan is collateral dependent. A loan is considered collateral dependent when
repayment of the loan is based solely on the liquidation of the collateral. Fair value, where possible, is determined
by independent appraisals, typically on an annual basis. Between appraisal periods, the fair value may be adjusted
based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our
problem loan monitoring process, or if discussions with the borrower lead us to believe the last appraised value no
longer reflects the actual market value for the collateral. The impairment amount on a collateral-dependent loan is
charged-off to the allowance if deemed not collectible and the impairment amount on a loan that is not collateral-
dependent is set up as a specific reserve.
In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to
contractual terms, the loan is classified as a troubled debt restructuring. These concessions may include a reduction
of the interest rate, principal or accrued interest, extension of the maturity date or other actions intended to
minimize potential losses. Loans restructured at a rate equal to or greater than that of a new loan with comparable
risk at the time the loan is modified may be excluded from restructured loan disclosures in years subsequent to the
restructuring if the loans are in compliance with their modified terms. A restructured loan is considered impaired
despite its accrual status and a specific reserve is calculated based on the present value of expected cash flows
discounted at the loan’s effective interest rate or the fair value of the collateral less estimated costs to sell if the loan
is collateral dependent. Interest income on impaired loans is accrued as earned, unless the loan is placed on non-
accrual status.
The allowance for loan losses was $9.1 million at December 31, 2017 compared to $7.9 million at December 31,
2016, an increase of $1.2 million, or 15.5%. The increase was primarily due to the overall growth in the size of our
gross loan portfolio, which grew $73.8 million, or 10.9%, to $748.0 million at December 31, 2017 from $674.2 million
at December 31, 2016.
In determining the allowance and the related provision for loan losses, we consider three principal elements:
(i) valuation allowances based upon probable losses identified during the review of impaired commercial and
industrial, commercial real estate, construction and land development loans, (ii) allocations, by loan classes, on loan
portfolios based on historical loan loss experience and qualitative factors and (iii) review of the credit discounts in
relationship to the valuation allowance calculated for purchased loans. Provisions for loan losses are charged to
operations to record changes to the total allowance to a level deemed appropriate by us.
It is the policy of management to maintain the allowance for loan losses at a level adequate for risks inherent in
the loan portfolio. The Federal Reserve Board and the California Department of Business Oversight also review the
allowance for loan losses as an integral part of their examination process. Based on information currently available,
management believes that our allowance for loan losses is adequate. However, the loan portfolio can be adversely
affected if California economic conditions and the real estate market in our market area were to weaken. The effect
of such events, although uncertain at this time, could result in an increase in the level of nonperforming loans and
increased loan losses, which could adversely affect our future growth and profitability. No assurance of the ultimate
level of credit losses can be given with any certainty.
OP BANCORP
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ANNUAL REPORT 2017
Analysis of the Allowance for Loan Losses.
The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge-
offs, by category, for the years ended December 31, 2017, 2016 and 2015.
As of and For the Year
Ended December 31, 2017
As of and For the Year
Ended December 31, 2016
As of and For the Year
Ended December 31, 2015
Provision
Net
Charge-offs
ALL
Balance
Provision
Net
Charge-offs
ALL
Balance
Provision
Net
Charge-offs
ALL
Balance
(Dollars in thousands)
Real estate:
Commercial real
estate .................... $ 584
$ —
$
4,801
$ 985
$ —
$ 4,217
$ 751
$ —
$ 3,232
SBA loans—real
estate ....................
189
—
1,082
189
—
893
(42)
Total real estate .........
SBA loan—non-real
773
—
5,883
1,174
—
5,110
709
1
1
704
3,936
estate ....................
633
155
538
(50)
20
59
(7)
(7)
129
Commercial and
industrial ...............
Home mortgage .........
Consumer...................
(57)
44
(83)
—
(73)
—
1,265
1,408
45
130
427
1
142
—
—
1,322
1,364
55
(336)
227
(40)
Total ........................... $ 1,310
$ 82
$
9,139
$ 1,682
$162
$ 7,910
$ 553
(70)
—
(4)
$ (80)
Gross loans ................
Average gross
loans ......................
Net charge-offs to
average loans(1) ...
Allowance for loans
losses to gross
loans ......................
$ 748,023
705,748
0.01%
1.22%
$ 674,227
578,262
0.03%
1.17%
(1) Net charge-offs are loan charge-offs net of loan recoveries.
Non-performing Loans
1,334
937
54
$ 6,390
$ 507,286
462,870
(0.02)%
1.26%
Loans are considered delinquent when principal or interest payments are past due 30 days or more. Delinquent
loans may remain on accrual status between 30 days and 90 days past due. Loans on which the accrual of interest
has been discontinued are designated as non-accrual loans. Typically, the accrual of interest on loans is discontinued
when principal or interest payments are past due 90 days or when, in the opinion of management, there is a
reasonable doubt as to collectability in the normal course of business. When loans are placed on non-accrual status,
all interest previously accrued but not collected is reversed against current period interest income. Income on non-
accrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is
deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes
full collectability of principal and interest is probable.
Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as OREO until sold,
and is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. We had no OREO
at December 31, 2017, 2016 and 2015.
Non-performing loans include loans 90 days past due and still accruing, loans accounted for on a non-accrual
basis and accruing restructured loans. Non-performing assets consist of non-performing loans plus OREO.
OP BANCORP
32
ANNUAL REPORT 2017
Non-performing loans were $1.0 million at December 31, 2017 compared to $576,000 at December 31, 2016 and
$1.0 million at December 31, 2015. The increase in the year ended December 31, 2017 was primarily due to two
non-accrual home mortgage loans which were non-performing. The decrease in the year ended December 31, 2016
was primarily due to one large principal paydown on one of the non-performing loans. We did not recognize any
interest income on non-accrual loans during the years ended December 31, 2017, 2016 and 2015 while the loans
were in non-accrual status. Additional interest income that we would have recognized on these loans had they been
current in accordance with their original terms was $10,000 in the year ended December 31, 2016 and $5,000 for
the same period of 2015. There was no such additional interest income in the year ended December 31, 2017.
We recognized interest income on loans modified under troubled debt restructurings of $9,000 in the year ended
December 31, 2017, $25,000 in the year ended December 31, 2016, and $34,000 in the year ended December 31,
2015.
The following table sets forth the allocation of our non-performing assets among our different asset categories
as of the dates indicated. Non-performing loans include non-accrual loans, loans past due 90 days or more and still
accruing interest, and loans modified under troubled debt restructurings.
As of December 31,
(Dollars in thousands)
Non-accrual loans .................................................................................................................................... $ 683
Past due loans 90 days or more and still accruing .................................................................................. —
Accruing troubled debt restructured loans ............................................................................................. 354
2017
Total non-performing loans ................................................................................................................ 1,037
Other real estate owned ..................................................................................................................... —
2016
2015
$ 209
—
367
576
—
$ 657
—
382
1,039
—
Total non-performing assets .......................................................................................................... $ 1,037
$ 576
$1,039
Non-performing loans to gross loans ...................................................................................................... 0.14%
Non-performing assets to total assets .................................................................................................... 0.12%
Allowance for loan losses to non-performing loans................................................................................ 881%
0.09%
0.08%
1373%
0.20%
0.17%
615%
In addition to the nonperforming assets described above we have a lending relationship with two companies that
are affiliated with each other comprised of two loans to a retail company and one loan to a related online company
totaling $1.9 million. These loans were current at December 31, 2017 and accordingly, they were not included in the
nonperforming asset categories above. In March 2018, even though the loans were current, the retail company with
a $1.4 million loan outstanding filed for reorganization under Chapter 11 of the federal bankruptcy laws. We will
reassess the risk ratings and potential loss exposure of these loans on a prospective basis as we continue to work
with the borrower and obtain further information. The $500,000 loan to the online company, representing the
balance of the borrowing relationship, is current and remains a performing loan.
Deposits
We gather deposits primarily through our branch locations. We offer a variety of deposit products including
demand deposits accounts, interest-bearing products, savings accounts and certificate of deposits. We put
continued effort into gathering noninterest demand deposits accounts through marketing to our existing and new
loan customers, customer referrals, our marketing staff and various involvement with community networks.
Total deposits at December 31, 2017 were $773.3 million, representing an increase of $111.5 million, or 16.9%,
compared to $661.8 million at December 31, 2016. As of December 31, 2017, 37.4% of total deposits were comprised
of noninterest-bearing demand accounts, 32.5% of interest-bearing transaction accounts and 30.1% of time
deposits.
OP BANCORP
33
ANNUAL REPORT 2017
Total deposits at December 31, 2016 were $661.8 million, representing an increase of $142.1 million, or 27.3%,
compared to $519.7 million at December 31, 2015. As of December 31, 2016, 37.4% of total deposits were
comprised of noninterest-bearing demand accounts, 35.2% of interest-bearing transaction accounts and 27.4% of
time deposits.
The following table summarizes our average deposit balances and weighted average rates for the years ended
December 31, 2017, 2016 and 2015:
As of December 31,
2017
2016
2015
(Dollars in thousands)
Noninterest-bearing demand ................................................ $ 256,267
Interest-bearing:
Average
Balance
Weighted
Average
Rate
Average
Balance
Weighted
Average
Rate
Average
Balance
Weighted
Average
Rate
—%
$198,413
—%
$ 153,435
—%
NOW and Savings deposits ............................................... 6,137
Money market .................................................................. 258,019
Time deposits ($250,000 or less) ...................................... 106,676
Time deposits (more than $250,000) ............................... 90,155
Total interest-bearing .................................................. 460,987
0.25
0.91
1.08
1.06
0.97
4,058
202,737
108,912
72,279
0.25
0.86
0.94
0.71
3,276
163,888
58,882
92,832
0.25
0.92
0.74
0.71
387,986
0.85
318,878
0.82
Total deposits .......................................................... $ 717,254
0.62
$586,399
0.56
$ 472,313
0.55
The following tables set forth the maturity of time deposits as of December 31, 2017 and 2016:
As of December 31, 2017
Maturity Within:
(Dollars in thousands)
Time deposits ($250,000 or less) ......................................................................... $ 49,491 $ 28,128 $ 37,414 $ 8,748 $ 123,781
108,952
Time deposits (more than $250,000) .................................................................. 52,245
36,832
13,673
6,202
Three
Months
Three to
Six Months
Six to 12
Months
After
12 Months
Total
Total time deposits ......................................................................................... $ 101,736 $ 41,801 $ 74,246 $14,950 $ 232,733
As of December 31, 2016
Maturity Within:
(Dollars in thousands)
Time deposits ($250,000 or less) ........................................................................... $ 14,302 $ 15,801 $ 31,060 $10,441 $ 71,604
110,031
Time deposits (more than $250,000) .................................................................... 35,699
15,497
53,235
5,600
Three
Months
Three to
Six Months
Six to 12
Months
After
12 Months
Total
Total time deposits ........................................................................................... $ 50,001 $ 69,036 $ 46,557 $16,041 $ 181,635
Borrowed Funds
Other than deposits, we also utilized FHLB advances as a supplementary funding source to finance our operations.
The advances from the FHLB are collateralized by residential and commercial real estate loans. At December 31,
2017, 2016 and 2015, we had maximum borrowing capacity from the FHLB of $308.5 million, $248.3 million and
$211.3 million, respectively. We had $25 million of advances from FHLB at December 31, 2017, compared to
$10 million at December 31, 2016 and $20 million at December 31, 2015.
OP BANCORP
Liquidity
34
ANNUAL REPORT 2017
Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers,
while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We
continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will
meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow
needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on
investment objectives of our shareholders.
Our liquidity position is supported by management of liquid assets and access to alternative sources of funds. Our
liquid assets include cash, interest-bearing deposits in correspondent banks, federal funds sold, and fair value of
unpledged investment securities. Other available sources of liquidity include wholesale deposits, and additional
borrowings from correspondent banks, FHLB advances, and the Federal Reserve discount window.
Our short-term and long-term liquidity requirements are primarily met through cash flow from operations,
redeployment of prepaying and maturing balances in our loan and investment portfolios, and increases in customer
deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet
additional liquidity requirements on either a short-term or long-term basis.
As of December 31, 2017, 2016 and 2015, we had $9.5 million of unsecured federal funds lines with no amounts
advanced. In addition, on such dates we had lines of credit from the Federal Reserve discount window of
$92.8 million, $84.0 million and $45.1 million, respectively. The Federal Reserve discount window lines were
collateralized by a pool of commercial real estate loans and commercial and industrial loans totaling $156.2 million,
$152.9 million and $92.3 million as of December 31, 2017, 2016 and 2015, respectively. We did not have any
borrowings outstanding with the Federal Reserve at December 31, 2017, 2016 or 2015, and our borrowing capacity
is limited only by eligible collateral.
At December 31, 2017 we had a $25 million advance from the FHLB which had an overnight borrowing interest
rate of 1.41%. We had a $10 million FHLB advance outstanding at December 31, 2016 which was an overnight
borrowing at an interest rate of 0.55%. At December 31, 2015, we had an aggregate of $20 million of outstanding
advances from FHLB of which $10 million was a one year advance maturing on June 2, 2016 at an interest rate of
0.49% and $10 million was a one year advance maturing on August 8, 2016 at an interest rate of 0.57%. Based on
the values of loans pledged as collateral, we had $145.8 million of additional borrowing availability with the FHLB as
of December 31, 2017. We also maintain relationships in the capital markets with brokers to issue certificates of
deposit and money market accounts.
Capital Requirements
We are subject to various regulatory capital requirements administered by the federal and state banking
regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial
statements. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action”
(described below), we must meet specific capital guidelines that involve quantitative measures of our assets,
liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. The capital amounts
and classifications are subject to qualitative judgments by the federal banking regulators about components, risk
weightings and other factors. Qualitative measures established by regulation to ensure capital adequacy required
us to maintain minimum amounts and ratio of CET1 capital, Tier 1 capital and total capital to risk-weighted assets
and of Tier 1 capital to average consolidated assets, referred to as the “leverage ratio.” For further information, see
“Supervision and Regulation—Regulatory Capital Requirements” and “Supervision and Regulation—Prompt
Corrective Action Framework.”
In the wake of the global financial crisis of 2008 and 2009, the role of capital has become fundamentally more
important, as banking regulators have concluded that the amount and quality of capital held by banking
OP BANCORP
35
ANNUAL REPORT 2017
organizations was insufficient to absorb losses during periods of severely distressed economic conditions. The Dodd-
Frank Act and new banking regulations promulgated by the U.S. federal banking regulators to implement the Basel III
Capital Rules have established strengthened capital standards for banks and bank holding companies and require
more capital to be held in the form of common stock. These provisions, which generally became applicable to us on
January 1, 2015, impose meaningfully more stringent regulatory capital requirements than those applicable to us
prior to that date. In addition, the Basel III Capital Rules will implement a concept known as the “capital conservation
buffer.” In general, banks and bank holding companies will be required to hold a buffer of common equity Tier 1
capital equal to 2.5% of risk-weighted assets over each minimum capital ratio to avoid being subject to limits on
capital distributions (e.g., dividends, stock buybacks, etc.) and certain discretionary bonus payments to executive
officers. For community banks, the capital conservation buffer requirement commenced on January 1, 2016, with a
gradual phase-in. Full compliance with the capital conservation buffer will be required by January 1, 2019.
The table below also summarizes the capital requirements applicable to us and the Bank in order to be considered
“well-capitalized” from a regulatory perspective, as well as our and the Bank’s capital ratios as of December 31, 2017
and 2016. We and the Bank exceeded all regulatory capital requirements under the Basel III Capital Rules and were
considered to be “well-capitalized” as of the dates reflected in the table below. As of December 31, 2017, the FDIC
categorized us as well-capitalized under the prompt corrective action framework. There have been no conditions or
events since December 31, 2017 that management believes would change this classification.
Actual
Regulatory
Capital Ratio
Requirements
Minimum To be
Considered
“Well Capitalized”
Regulatory
Capital Ratio
Requirements,
including fully
phased in Capital
Conservation Buffer
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
As of December 31, 2017:
Total capital (to risk-weighted assets)
Consolidated ................................................... $100,713
Bank ................................................................ 100,648
13.49% $59,729 8.00%
59,726 8.00%
13.48%
N/A
N/A
74,658 10.00%
$78,394
78,391
10.50%
10.50%
Tier 1 capital (to risk-weighted assets)
Consolidated ................................................... 91,510
Bank ................................................................ 91,445
12.26%
12.25%
44,797 6.00%
44,795 6.00%
N/A
59,726
N/A
8.00%
63,462
63,459
8.50%
8.50%
CET1 capital (to risk-weighted assets)
Consolidated ................................................... 91,510
Bank ................................................................ 91,445
12.26%
12.25%
33,597 4.50%
33,596 4.50%
N/A
48,528
N/A
6.50%
52,263
52,260
7.00%
7.00%
Tier 1 capital (to average assets)
Consolidated ................................................... 91,510
Bank ................................................................ 91,445
10.46%
10.45%
35,009 4.00%
35,007 4.00%
N/A
43,759
N/A
5.00%
35,009
35,007
4.00%
4.00%
Actual
Regulatory
Capital Ratio
Requirements
Minimum To be
Considered
“Well Capitalized”
Regulatory
Capital Ratio
Requirements,
including fully
phased in Capital
Conservation Buffer
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
As of December 31, 2016:
Total capital (to risk-weighted assets)
Consolidated ..................................................... $89,286
Bank .................................................................. 89,225
13.40% $53,311
53,306
13.39%
8.00%
8.00%
N/A
66,632
N/A
10.00%
$ 69,970
69,964
10.50%
10.50%
Tier 1 capital (to risk-weighted assets)
Consolidated ..................................................... 81,304
Bank .................................................................. 81,244
12.20%
12.19%
39,983
39,979
6.00%
6.00%
N/A
53,306
N/A
8.00%
56,643
56,637
8.50%
8.50%
OP BANCORP
36
ANNUAL REPORT 2017
Actual
Regulatory
Capital Ratio
Requirements
Minimum To be
Considered
“Well Capitalized”
Regulatory
Capital Ratio
Requirements,
including fully
phased in Capital
Conservation Buffer
(Dollars in thousands)
CET1 capital (to risk-weighted assets)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
Consolidated ..................................................... 81,304
Bank .................................................................. 81,244
12.20%
12.19%
29,987
29,985
4.50%
4.50%
N/A
43,311
N/A
6.50%
46,647
46,643
7.00%
7.00%
Tier 1 capital (to average assets)
Consolidated ..................................................... 81,304
Bank .................................................................. 81,244
10.89%
10.88%
29,859
29,857
4.00%
4.00%
N/A
37,321
N/A
5.00%
29,859
29,857
4.00%
4.00%
Contractual Obligations
The following tables contain supplemental information regarding our total contractual obligations at
December 31, 2017 and 2016:
Payments Due at December 31, 2017
(Dollars in thousands)
Deposits without a stated maturity................................................................. $ 540,573 $ —
14,768
Time deposits................................................................................................... 217,783
Operating lease commitments ........................................................................ 1,630
3,251
Advances from FHLB ........................................................................................ 25,000
Within
One Year
One to
Three Years
Three to
Five Years
After Five
Years
Total
$ —
182
3,378
$ — $ 540,573
232,733
—
12,022
3,763
25,000
Total contractual obligations ...................................................................... $ 784,986 $18,019
$ 3,560
$3,763 $ 810,328
One to
Three Years
(Dollars in thousands)
Deposits without a stated maturity................................................................. $ 480,149 $ —
16,041
Time deposits................................................................................................... 165,594
Operating lease commitments ........................................................................ 1,459
2,775
Advances from FHLB ........................................................................................ 10,000
Within
One Year
Three to
Five Years
After Five
Years
Total
$ —
—
2,806
$ — $ 480,149
181,635
—
11,612
4,572
10,000
Total contractual obligations ...................................................................... $ 657,202 $ 18,816
$ 2,806
$ 4,572 $ 683,396
Payments Due at December 31, 2016
We believe that we will be able to meet our contractual obligations as they come due through the maintenance
of adequate cash levels. We expect to maintain adequate cash levels through profitability, loan and securities
repayment and maturity activity and continued deposit gathering activities. We have in place various borrowing
mechanisms for both short-term and long-term liquidity needs.
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the
financing needs of our customers. These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of
the amount recognized in our consolidated balance sheet. The contractual or notional amounts of those instruments
reflect the extent of involvement we have in particular classes of financial instruments.
OP BANCORP
37
ANNUAL REPORT 2017
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amount does not necessarily represent future cash requirements. We evaluate
each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if we deem collateral
is necessary upon extension of credit, is based on management’s credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer
to a third party. They are intended to be disbursed, subject to certain condition, upon request of the borrower.
The following table summarized commitments as of the dates presented.
December 31,
(Dollars in thousands)
Commitments to extend credit ..................................................................................................................... $ 62,356 $ 55,689 $ 53,013
Standby letters of credit ................................................................................................................................ 1,627 1,499 3,166
2017
2016
2015
Total .......................................................................................................................................................... $ 63,983 $ 57,188 $ 56,179
Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market
risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads.
We have identified interest rate risk as our primary source of market risk.
Interest Rate Risk
Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk
arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing
liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options,
such as borrowers’ ability to prepay home mortgage loans at any time and depositors’ ability to redeem certificates
of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or
decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield
curves, such as U.S. Treasuries and LIBOR (basis risk).
Our board’s asset liability committee, or ALM, establishes broad policy limits with respect to interest rate risk.
Our management’s asset liability committee, or ALCO, establishes specific operating guidelines within the
parameters of the policies set by the ALM. In general, we seek to minimize the impact of changing interest rates on
net interest income and the economic values of assets and liabilities. Our ALCO monitors the level of interest rate
risk sensitivity on a quarterly basis to ensure compliance with the ALM-approved risk limits. The policy requires a
periodic review of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan
prepayment rates based on historical analysis, and noninterest-bearing and interest-bearing deposit durations based
on historical analysis.
Interest rate risk management is an active process that encompasses monitoring loan and deposit flows
complemented by investment and funding activities. Effective management of interest rate risk begins with
understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk
posture given business forecasts, management objectives, market expectations, and policy constraints.
An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is
expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice
upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin.
Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest
OP BANCORP
38
ANNUAL REPORT 2017
rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice
upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.
Interest rate risk measurement is calculated and reported to the ALCO and ALM at least quarterly. The
information reported includes period-end results and identifies any policy limits exceeded, along with an assessment
of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.
Evaluation of Interest Rate Risk
We use a net interest income simulation model to measure and evaluate potential changes in our net interest
income. We run various hypothetical interest rate scenarios at least quarterly and compare these results against a
scenario with no changes in interest rates. We use two approaches to model interest rate risk: Earnings at Risk, or
EAR, and Economic Value of Equity, or EVE. Under EAR, net interest income is modeled utilizing various assumptions
for assets and liabilities. EVE measures the period end market value of assets minus the market value of liabilities
and the change in this value as rates change. EVE is a period end measurement.
Our simulation model incorporates various assumptions, which we believe are reasonable but which may have a
significant impact on results such as: (i) the timing of changes in interest rates; (ii) shifts or rotations in the yield
curve; (iii) re-pricing characteristics for market-rate-sensitive instruments; (iv) varying loan prepayment speeds for
different interest rate scenarios; and (v) the overall growth and mix of assets and liabilities. Because of limitations
inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the
actual effect of a change in market interest rates on our results but rather as a means to better plan and execute
appropriate asset-liability management strategies and manage our interest rate risk.
Potential changes to our net interest income in hypothetical rising and declining rate scenarios calculated as of
December 31, 2017, 2016 and 2015 are presented in the following table. The projections assume (1) immediate,
parallel shifts downward of the yield curve of 100 basis points and (2) immediate, parallel shifts upward of the yield
curve of 100, 200, 300 and 400 basis points over 12 months. In the current interest rate environment, a downward
shift of the yield curve of 200, 300 and 400 basis points does not provide us with meaningful results. In a downward
parallel shift of the yield curve, interest rate at the short-end of the yield curve are not modeled to decline any
further than 0%.
Net Interest Income
Sensitivity
December 31,
Economic Value of Equity
Sensitivity
December 31,
2017
2016
2015
2017
2016
2015
+400 basis points ....................................................................
+300 basis points ....................................................................
+200 basis points ....................................................................
+100 basis points ....................................................................
-100 basis points .....................................................................
11.58%
9.14%
6.42%
3.43%
(2.24)%
9.95%
7.57%
5.58%
3.19%
(1.47)%
2.49%
3.23%
2.58%
1.66%
(2.70)%
6.28%
5.85%
4.90%
4.09%
(3.06)%
(4.63)%
(2.15)%
(0.02)%
1.65%
(6.42)%
(14.04)%
(9.36)%
(5.69)%
(2.02)%
(1.29)%
We are within board-established policy limits for the all rate scenarios. The EAR reported at December 31, 2017
projects that our earnings are expected to be sensitive to changes in interest rates over the next year. In recent
periods, the amount of fixed rate assets decreased resulting in a position shift to be slightly more asset sensitive.
OP BANCORP
39
ANNUAL REPORT 2017
MARKET PRICE OF COMMON STOCK
The common stock of the Company was quoted on the OTCQB Market until March 28, 2018, under the symbol
“OPBK.” The following table shows the high and low bid quotations of the common stock in each of the previous
eight quarters as quoted on the OTCQB. There may also have been transactions at prices other than those shown
during that time. The market for our common stock is sporadic and at times very limited.
The Historical Bid Quotations of the Common Stock
Quarters Ending
High
Low
December 31, 2017 ............................................................................................................................................................... $ 9.95 $ 9.11
September 30, 2017 .............................................................................................................................................................. $ 9.30 $ 7.75
June 30, 2017 ......................................................................................................................................................................... $ 7.90 $ 7.30
March 31, 2017 ...................................................................................................................................................................... $ 7.70 $ 6.95
December 31, 2016 ............................................................................................................................................................... $ 7.70 $ 6.10
September 30, 2016 .............................................................................................................................................................. $ 6.40 $ 5.95
June 30, 2016 ......................................................................................................................................................................... $ 6.10 $ 5.65
March 31, 2016 ...................................................................................................................................................................... $ 6.55 $ 5.64
On December 31, 2017, we had approximately 390 record holders of our common stock. There has been no
regular and liquid trading market for the common stock. Our common stock became listed for trading on the Nasdaq
Global Market in March 2018, and at that time the quoting of our shares on the OTCQB Market was discontinued.
The Company has not paid dividends on its common stock.
OP BANCORP
40
ANNUAL REPORT 2017
Independent Auditors’ Report
Crowe Horwath LLP
Independent Member Crowe Horwath International
Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors of OP Bancorp
Los Angeles, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of OP Bancorp (the "Company") as of
December 31, 2017 and 2016, the related consolidated statements of income and comprehensive income,
shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,
and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December
31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2017, in conformity with accounting principles generally accepted in the
United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on the Company's financial statements based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting in accordance with the
standards of the PCAOB. As part of our audits we are required to obtain an understanding of internal
control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of
the Company's internal control over financial reporting. Accordingly, we express no such opinion in
accordance with the standards of the PCAOB.
Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2010.
Los Angeles, California
March 5, 2018
Crowe Horwath LLP
OP BANCORP
41
ANNUAL REPORT 2017
Consolidated Balance Sheets
OP BANCORP
CONSOLIDATED BALANCE SHEETS
December31, 2017 and 2016
ASSETS
Cash and cash equivalents
Securities available for sale, at fair value
Loans held for sale
Loans receivable, net of allowance of $9,139,488 at December 31, 2017
and $7,909,682 at December 31, 2016
Premises and equipment, net
Accrued interest receivable
Federal Home Loan Bank and Pacific Coast
Bankers Bank stock, at cost
Servicing assets
Company owned life insurance
Deferred tax assets
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits:
Noninterest bearing
Interest bearing:
Savings
Money market and others
Time deposits greater than $250,000
Other time deposits
Total deposits
Federal Home Loan Bank advances
Accrued interest payable
Other liabilities
Total liabilities
Shareholders’ equity
Preferred stock – no par value; 10,000,000 shares
authorized; no shares issued or outstanding at
December 31, 2017 and 2016
Common stock – no par value; 50,000,000 shares authorized;
13,190,527 and 12,896,548 shares issued and outstanding
at December 31, 2017 and 2016, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
$
$
$
December 31,
2017
December 31,
2016
$
63,249,952
41,471,711
15,739,305
738,884,413
4,480,792
2,463,486
4,286,500
6,771,097
11,089,718
3,383,365
9,178,491
900,998,830
$
20,126,028
35,463,451
1,646,250
666,317,092
5,067,095
2,001,488
3,437,600
6,782,555
10,769,627
3,276,063
6,363,171
761,250,420
289,409,876
$
247,376,244
3,838,353
247,324,292
108,952,059
123,781,434
773,306,014
25,000,000
423,239
10,789,627
809,518,880
3,206,538
229,566,160
79,056,290
102,578,668
661,783,900
10,000,000
321,753
7,860,980
679,966,633
-
-
67,925,860
5,279,991
18,623,952
(349,853 )
91,479,950
67,499,310
4,611,973
9,387,470
(214,966)
81,283,787
Total liabilities and shareholders' equity
$
900,998,830
$
761,250,420
See accompanying notes to consolidated financial statements
2
OP BANCORP
42
ANNUAL REPORT 2017
Consolidated Statements of Income and
Comprehensive Income
OP BANCORP
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31, 2017, 2016 and 2015
Interest income
Interest and fees on loans
Interest on investment securities
Other interest income
Total interest income
Interest expense
Interest on deposits
Interest on borrowed funds
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Service charges on deposits
Loan servicing fees, net of amortization
Gain on sale of loans
Other income
Total noninterest income
Noninterest expense
Salaries and employee benefits
Occupancy and equipment
Data processing and communication
Professional fees
FDIC insurance and regulatory assessments
Promotion and advertising
Directors’ fees
Foundation donation and other contributions
Other expenses
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Earnings per share - Basic
Earnings per share - Diluted
Other comprehensive income/(loss):
Change in unrealized gain/(loss) on securities available
for sale, net of tax effects of ($103,553), $11,932, and ($100,453)
in 2017, 2016 and 2015, respectively
Total other comprehensive income/(loss)
Comprehensive income
2017
Years Ended
December 31,
2016
$
$
39,111,439
675,948
495,153
40,282,540
$
30,529,892
664,121
507,042
31,701,055
4,469,689
103,067
4,572,756
35,709,784
1,310,932
34,398,852
1,656,252
1,127,017
4,938,760
1,264,333
8,986,362
16,473,500
3,918,219
1,322,955
588,850
376,886
630,683
796,206
953,900
1,195,544
26,256,743
17,128,471
7,891,989
9,236,482
0.68
0.66
(134,887)
(134,887)
9,101,595
$
$
$
$
3,286,147
85,290
3,371,437
28,329,618
1,682,301
26,647,317
1,274,726
1,313,036
5,507,238
911,624
9,006,624
14,555,542
3,615,843
1,086,764
683,531
368,557
556,805
758,423
745,300
963,350
23,334,115
12,319,826
4,894,455
7,425,371
0.55
0.53
17,065
17,065
7,442,436
$
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements
2015
24,328,811
480,305
383,042
25,192,158
2,605,140
83,974
2,689,114
22,503,044
552,843
21,950,201
1,277,879
1,130,650
4,669,042
900,417
7,977,988
12,252,708
3,162,047
783,657
412,859
306,769
532,482
783,602
601,577
959,270
19,794,971
10,133,218
4,169,873
5,963,345
0.44
0.43
(143,663)
(143,663)
5,819,682
3
Consolidated Statements of Income and
Comprehensive Income
Consolidated Statements of Changes in
Shareholders’ Equity
OP BANCORP
43
ANNUAL REPORT 2017
Balance at January 1, 2015
Net income
Stock issued under stock-based compensation
plans
Stock-based compensation
Change in unrealized loss on securities
available for sale net of reclassifications
and tax effects
Common Stock
Shares
Outstanding
12,411,089 $66,993,270 $2,538,412 $ (4,001,246 ) $
(Accumulated Comprehensive
Income (Loss)
Amount
Deficit)
Additional
Paid-in
Capital
Retained
Earnings /
Accumulated
Other
Total
Shareholders’
Equity
-
-
-
5,963,345
271,421
-
349,090
-
-
868,444
-
-
-
-
-
-
(88,368) $65,442,068
-
-
-
5,963,345
349,090
868,444
(143,663)
(143,663)
Balance at December 31, 2015
12,682,510 $67,342,360 $3,406,856 $ 1,962,099 $
(232,031) $72,479,284
Net income
Stock issued under stock-based compensation
plans
Stock-based compensation
Change in unrealized gain on securities
available for sale net of reclassifications
and tax effects
-
-
-
7,425,371
214,038
-
156,950
-
-
1,205,117
-
-
-
-
-
-
-
-
-
7,425,371
156,950
1,205,117
17,065
17,065
Balance at December 31, 2016
12,896,548 $67,499,310 $4,611,973 $ 9,387,470 $
(214,966) $81,283,787
Net income
Stock issued under stock-based compensation
plans
Stock-based compensation
Change in unrealized loss on securities
available for sale net of reclassifications
and tax effects
-
-
-
9,236,482
293,979
-
426,550
-
-
668,018
-
-
-
-
-
-
-
-
-
9,236,482
426,550
668,018
(134,887)
(134,887)
Balance at December 31, 2017
13,190,527 $67,925,860 $5,279,991 $ 18,623,952 $
(349,853) $91,479,950
Consolidated Statements of Changes in
Shareholders’ Equity
OP BANCORP
44
ANNUAL REPORT 2017
Consolidated Statements of Cash Flows
OP BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2017, 2016 and 2015
Cash flows from operating activities
Net income
2017
2016
2015
$
9,236,482
$
7,425,371
$
5,963,345
Adjustments to reconcile net income to net cash
and cash equivalents provided by operating activities:
Provision for loan losses
Depreciation and amortization of premises and equipment
Amortization of net premiums on securities
Stock-based compensation
Gain on sales of loans
Gain on called securities
Earnings on company owned life insurance
Origination of loans held for sale
Proceeds from sales of loans held for sale
Amortization of servicing assets
Net change in:
Accrued interest receivable
Other assets
Accrued interest payable
Other liabilities
Net cash from operating activities
Cash flows from investing activities
Net change in loans receivable
Proceeds from calls of securities held to maturity
Proceeds from calls of securities available for sale
Purchase of securities available for sale
Purchase of premises and equipment, net
Purchase of Federal Home Loan Bank stock
Net cash from investing activities
Cash flows from financing activities
1,310,932
1,007,736
282,969
668,018
(4,938,760)
-
(320,091)
(83,423,426)
72,345,672
1,934,917
(461,998)
(2,819,069)
101,486
2,928,647
(2,146,485)
(73,878,253)
-
6,168,924
(12,698,593)
(421,433)
(848,900)
(81,678,255)
1,682,301
1,084,071
385,410
1,205,117
(5,507,238 )
-
(334,666 )
(84,065,452 )
90,860,166
1,413,698
(439,675 )
(6,159,670 )
(25,383 )
3,058,493
10,582,543
552,843
940,404
268,598
868,444
(4,669,042)
(1,383)
(353,082)
(68,291,494)
70,944,759
1,267,603
(386,967)
926,048
214,968
703,632
8,948,676
(167,103,293 )
-
8,069,010
-
(259,033 )
(782,300 )
(160,075,616 )
(93,676,619)
3,000,000
5,580,479
(30,117,837)
(1,879,464)
(755,200)
(117,848,641)
Net change in deposits
Cash received from stock option exercises
Borrowings/(Repayment) of Federal Home Loan Bank advances
Net cash from financing activities
111,522,114
426,550
15,000,000
126,948,664
142,062,833
156,950
(10,000,000 )
132,219,783
91,202,151
349,090
(10,000,000)
81,551,241
Net change in cash and cash equivalents
43,123,924
(17,273,290 )
(27,348,724)
Cash and cash equivalents at beginning of period
20,126,028
37,399,318
64,748,042
Cash and cash equivalents at end of period
$
63,249,952
$
20,126,028
$
37,399,318
Supplemental cash flow information
Cash paid during the year for:
Income taxes
Interest
$
7,741,894
4,471,270
$
5,432,000
3,396,820
$
2,695,000
2,474,146
See accompanying notes to consolidated financial statements
5
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
OP BANCORP
45
ANNUAL REPORT 2017
NOTE 1—BUSINESS DESCRIPTION
OP Bancorp is a California corporation whose common stock is quoted on the OTCQB under the ticker symbol, “OPBK.” OP
Bancorp was formed to acquire 100% of the voting equity of Open Bank (the “Bank”) and commenced operation as a bank holding
company on June 1, 2016. This transaction was treated as an internal reorganization as all shareholders of the Bank became
shareholders of OP Bancorp. OP Bancorp has no operations other than ownership of the Bank. The Bank is a California state-
chartered and FDIC-insured financial institution, which began its operations on June 10, 2005. Headquartered in downtown Los
Angeles, California, OP Bancorp operates primarily in the traditional banking business arena that includes accepting deposits and
making loans and investments. OP Bancorp’s primary deposit products are demand and time deposits, and the primary lending
products are commercial business loans to small to medium sized businesses. OP Bancorp is operating with seven full service
branches. There are no significant concentrations of loans to any one industry or customer. However, OP Bancorp’s customers’ ability
to repay their loans is dependent on the real estate and general economic conditions in OP Bancorp’s market area.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include OP Bancorp and its wholly owned subsidiary, the Bank,
together referred to as the “Company.” Intercompany transactions and balances are eliminated in consolidation. The consolidated
financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United
States of America (“GAAP”). Certain reclassifications have been made to the prior year’s financial statements to conform to the
current year’s presentation.
Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based
on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures
provided, and actual results could differ.
Concentration of Risk: Most of the Company’s customers are located within Los Angeles County and the surrounding area. The
concentration of loans originated in this area may subject the Company to the risk of adverse impacts of economic, regulatory or other
developments that could occur in Southern California.
The Company has significant concentration in commercial real estate loans. The Company obtains what it believes to be sufficient
collateral to secure potential losses. The extent and value of the collateral obtained varies based upon the details underlying each loan
agreement.
Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90
days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions.
Securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and
ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities
available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the
level-yield method without anticipating prepayments. Gains and losses on sales are recorded on the trade date and determined using
the specific identification method.
Management evaluates securities for other- than- temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently
when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers
the extent and duration of the unrealized loss, and the financial condition and near- term prospects of the issuer. Management also
assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position
before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference
between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the
aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must
be recognized in the income statement, and 2) OTTI related to other factors, which is recognized in other comprehensive income. The
credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost
basis.
Notes to Consolidated Financial Statements
OP BANCORP
46
ANNUAL REPORT 2017
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Federal Home Loan Bank (“FHLB”) Stock: The Bank is a member of the FHLB system. Members are required to own a certain
amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at
cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash
and stock dividends are reported as income.
Pacific Coast Bankers Bank (“PCBB”) Stock : The Bank is a member of PCBB. PCBB stock is carried at cost, classified as a
restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends
are reported as income.
Loans Held for Sale: Certain Small Business Administration (“SBA”) loans that may be sold prior to maturity are designated as
held for sale at origination and are recorded at the lower of their cost or fair value less costs to sell, determined on an aggregate basis.
A valuation allowance is established if the market value of such loans is lower than their cost, and operations are charged or credited
for valuation adjustments. Origination fees on loans held for sale, net of certain costs of processing and closing the loans, are deferred
until the time of sale and are included in the computation of the gain or loss from the sales of the related loans. A portion of the
premium on sale of SBA loans is recognized as gains on sales of loans at the time of the sale. These loans are generally sold with
servicing retained.
Loans Receivable: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff
are reported at the principal balance outstanding, net of deferred loan fees and costs and an allowance for loan losses. Interest income
is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in
interest income using the level-yield method without anticipating prepayments. The recorded investment in loans includes accrued
interest receivable, deferred loan fees and costs, and unearned income.
The accrual of interest income on commercial real estate and other commercial and industrial loans is discontinued at the time the
loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically charged off no
later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual
status or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due
90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and
individually classified impaired loans.
All interest accrued but not received for loans placed on nonaccrual status is reversed against interest income. Interest received on
such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to
accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably
assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses
are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience,
the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for
any loan that in management’s judgment should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified
as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan agreement.
Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial
difficulties, are considered troubled debt restructurings and classified as impaired. Troubled debt restructurings are separately
identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective
rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair
value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in
accordance with the accounting policy for the allowance for loan losses.
OP BANCORP
47
ANNUAL REPORT 2017
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Factors considered by management in determining impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal
and interest owed. Impairment is measured on a loan-by-loan basis for commercial real estate and construction loans. Large groups of
smaller balance homogeneous loans are collectively evaluated for impairment. Income recognition on impaired loans materially
conforms to the method the Company uses for income recognition on nonaccrual loans.
Allowance for impaired loans is determined based on the present value of the estimated cash flows or on the fair value of the
collateral if the loan is collateral dependent, less costs to sell. If the measured fair value is less than the recorded investment in the loan,
the deficiency will be charged off against the allowance for loan losses, or alternatively, a specific allocation will be established. For
consumer loans, management will generally charge off the balance if the loan is 90 days or more past due.
The general component of the allowance covers non- impaired loans and is based on historical loss experience adjusted for current
factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the
Company over the most recent two years. For those portfolio segments that the Company does not have sufficient historical data
available to track the loss migration, the loss factors are based on the actual loss history experienced by the Company over the most
recent five years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio
segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans;
levels of and trends in charge- offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and
underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending
management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in
credit concentrations. Related to the current national and local economic conditions, the Company has considered risk factors
including the broad deterioration of property values, reduced consumer and business spending as a result of high unemployment and
reduced credit availability, and the lack of confidence in a sustainable recovery.
The following portfolio segments have been identified in the Company’s loan portfolio, and are also representative of the classes
within the portfolio: commercial real estate, SBA loans—real estate, SBA loans—non-real estate, commercial and industrial, trade
finance, home mortgage, and consumer. The Company reviews the credit risk exposure of all its portfolio segments by internally
assigned grades. The Company categorizes loans into risk grades based on relevant information about the ability of borrowers to
service their debt such as: current financial information, historical payment experience, credit documentation, public information, and
current economic trends, among other factors. For the home mortgage and consumer portfolio segments, the Company’s primary
monitoring tool is reviewing past due listings to determine if the loans are performing.
The determination of the allowance for loan losses is based on estimates that are particularly susceptible to changes in the
economic environment and market conditions.
Management believes that as of December 31, 2017 and 2016 the allowance for loan losses is adequate based on information
currently available. If a deterioration in the economy of the Company’s principal market area occurs, the Company’s loan portfolios
could be adversely impacted and higher charge-offs and increases in non-performing assets could result. Such an adverse impact could
also require a larger allowance for loan losses.
Servicing Assets: When SBA loans are sold with servicing retained, servicing assets are initially recorded at fair value with the
income statement effect recorded in gains on sales of loans. Fair value is based on a valuation model that calculates the present value
of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in
estimating future net servicing income, such as the cost to service, the discount rate, prepayment speeds, and default rates and losses.
The Company compares the valuation model inputs and results to published industry data in order to validate the model results and
assumptions. Servicing assets are subsequently measured using the amortization method which requires servicing assets to be
amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the
underlying loans.
OP BANCORP
48
ANNUAL REPORT 2017
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Servicing assets are evaluated for impairment based upon the fair value of the assets as compared to their carrying amount.
Impairment is recognized through a valuation allowance to the extent that fair value is less than the carrying amount. If the Company
later determines that all or a portion of the impairment no longer exists, a reduction of the valuation allowance may be recorded as an
increase to income. Changes in the valuation allowances are reported with other income on the income statement. The fair values of
servicing rights are subject to fluctuations as a result of changes in estimated and actual prepayment speeds, default rates, and losses.
Servicing fee income, which is reported on the income statement as other income, is recorded for fees earned for servicing loans.
The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned. The amortization
of servicing assets is netted against loan servicing fee income. Late fees and ancillary fees related to loan servicing are not material.
Company Owned Life Insurance: The Company has purchased life insurance policies on certain key executives. Company owned
life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash
surrender value adjusted for other charges or other amounts due that are probable at settlement.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been
relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the
transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the
transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase
them before their maturity.
Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation. Equipment and furnishings are
depreciated over 3 to 10 years, and leasehold improvements are amortized over the lesser of the terms of the respective leases or the
estimated useful lives. The straight-line method of depreciation is used for financial reporting purposes. Repairs and maintenance are
charged to operating expenses as incurred.
Other Real Estate Owned, Net: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs
to sell when acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer
mortgage loan occurs when the legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the
property to satisfy the loan through the completion of a deed in lieu of foreclosure or through a similar legal agreement. These assets
are subsequently accounted for at the lower of their cost or fair value less estimated costs to sell. If their fair value declines subsequent
to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.
Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as
commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these
items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are
recorded when they are funded.
Stock-Based Compensation: Compensation cost is recognized for stock options and restricted stock awards issued to employees
based on the fair value of the awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options,
while the market price of the Company’s common stock at the date of the grant is used for restricted stock awards. Compensation cost
is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation
cost is recognized on a straight-line basis over the requisite service period for the entire award.
Earnings per Common Share: Basic and diluted earnings per share is based on the two-class method prescribed in ASC Topic 260,
Earnings Per Share (ASC 260). Stock options and restricted stock awards are considered outstanding for this calculation unless
unearned. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock-
based compensation plans. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of
issuance of the financial statements.
OP BANCORP
49
ANNUAL REPORT 2017
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax
assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between
carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is
greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit
is recorded. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the
next twelve months.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense. There were no interest or
penalties recognized in the years ended December 31, 2017 or 2016.
Comprehensive Income/(Loss): Comprehensive income/(loss) consists of net income and other comprehensive income. Other
comprehensive income includes unrealized gains and losses on securities available for sale, which are also recognized as separate
components of shareholders’ equity, net of tax.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded
as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not
believe there now are such matters that will have a material effect on the financial statements.
Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other
assumptions, as more fully disclosed in Note 13–Fair Value of Financial Instruments. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad
markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Operating Segments: While the chief decision-makers monitor the revenue streams of the various products and services, operations
are managed and financial performance is evaluated on a Company-wide basis. Discrete financial information is not available other
than on a Company-wide basis.
Recent Accounting Pronouncements:
In May 2014, the Financial Accounting Standard Board (FASB) issued Accounting Standard Update (ASU) 2014-9 (ASU 2014-
09), Revenue from Contracts with Customers. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. The guidance also specifies the accounting for some costs to obtain or fulfill a
contract with a customer, as well as enhanced disclosure requirements. In August 2015, the FASB issued ASU 2015-14 which
deferred the effective date of ASU 2014-09 to fiscal years, and interim reporting periods within those fiscal years, beginning after
December 15, 2017. In March 2016, the FASB issued ASU 2016-08 which clarified the revenue recognition implementation guidance
on principal versus agent considerations and is effective during the same period as ASU 2014-09. In April 2016, the FASB issued
ASU 2016-10 which clarified the revenue recognition guidance regarding the identification of performance obligations and the
licensing implementation and is effective during the same period as ASU 2014-09. In May 2016, the FASB issued ASU 2016 -12
which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax
and transition. ASU 2016-12 is effective during the same period as ASU 2014-09.
The majority of the Company’s revenue consists of net interest income on financial assets and financial liabilities, which is
explicitly excluded from the scope of ASU 2014-09. The Company adopted the new standard beginning January 1, 2018. The
Company completed its analysis for determining the extent ASU 2014-09 will affect its noninterest income, primarily in the area of
fees and service charges on deposit accounts and trade finance activities. Based on the analysis performed, the Company did n ot have
a material change in the timing or measurement of revenues related to noninterest income. The Company will continue to evaluate the
effect that this guidance will have on other revenue streams within its scope, as well as changes in disclosures required by the new
guidance. However, the Company does not expect this to have a material impact on its consolidated financial statements.
OP BANCORP
50
ANNUAL REPORT 2017
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 is intended to increase
transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key
information about lease arrangements. This ASU is effective for annual periods and interim periods within those annual periods
beginning after December 15, 2018. Based on leases outstanding at December 31, 2017, the Company does not expect this ASU to
have a material impact on the income statement, but does anticipate a $12 million increase in assets and liabilities once this ASU
becomes effective (based on the leases outstanding as of December 31, 2017).
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments (ASU 2016- 13). The objective of ASU 2016-13 is to provide financial statement users with decision-useful
information about the expected credit losses on financial instruments and other commitments to extend credit. ASU 2016-13 includes
provisions that require financial assets measured at amortized cost (such as loans and held to maturity (HTM) debt securities) to be
presented at the net amount expected to be collected. This will be accomplished through recognition of an estimate of all current
expected credit losses. The estimate will include forecasted information for the timeframe that an entity is able to develop reasonable
and supportable forecasts. This is a change from the current practice of recognizing incurred losses based on the probable initial
recognition threshold under current GAAP. In addition, credit losses on available for sale (AFS) debt securities will be recorded
through an allowance for credit losses rather than as a write-down. Under ASU 2016-13, an entity will be able to record reversals of
credit losses in current period income when the estimate of credit losses declines, whereas current GAAP prohibits reflecting those
improvements in current period earnings.
ASU 2016-13 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019,
and early adoption is permitted for fiscal years, including interim periods, beginning after December 15, 2018. ASU 2016-13 will be
applied through a cumulative effect adjustment to retained earnings (modified-retrospective approach), except for debt securities for
which an other-than-temporary impairment had been recognized before the effective date. A prospective transition approach is
required for these debt securities. The Company is currently evaluating the effects of ASU 2016-13 on its financial statements and
disclosures, including software solutions, data requirements and loss estimation methodologies. While the effects cannot yet be
quantified, the Company expects ASU 2016-13 to add complexity and costs to its current credit loss evaluation process.
In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20) (ASU
2017-08). ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at a premium. Prior to the
issuance of this guidance, premiums were amortized as an adjustment of yield over the contractual life of the instrument. ASU 2017-
08 requires premiums on purchased callable debt securities that have explicit, noncontingent call features that are callable at fixed
prices to be amortized to the earliest call date. There are no accounting changes for securities held at a discount. This ASU is effective
for annual periods and interim periods within those annual periods beginning after December 15, 2018, and early adoption is permitted.
ASU 2017-08 will be applied through a cumulative effect adjustment through equity (modified-retrospective approach). The Company
is currently evaluating the effects of ASU 2017-08 on its financial statements and disclosures.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718), Scope of Modification
Accounting (ASU 2017-09). ASU 2017-09 clarifies when changes to the terms and conditions of share-based payment awards must be
treated as modifications. Specifically, the new guidance permits companies to make certain changes to awards without accounting for
them as modifications. ASU 2017-09 is effective for annual periods beginning after December 31, 2017 and will be applied
prospectively to an award modified after the effective date. There have been no changes to the terms and conditions of share-based
payment awards, and as a result the adoption of this standard did not have a material effect on the Company’s operating results or
financial condition.
OP BANCORP
51
ANNUAL REPORT 2017
OP BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 3—SECURITIES
The following table summarizes the amortized cost, fair value, and the corresponding amounts of gross unrealized gains and losses
for available for sale securities at December 31, 2017 and 2016:
As of December 31, 2017
Available for sale
U.S. Government sponsored
agency securities
Mortgage-backed securities:
residential
Collateralized mortgage obligations
Other securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
6,988,681
$
2,001
$
(58,674 )
$
6,932,008
14,109,433
18,458,814
2,518,498
-
-
-
(168,908 )
(345,316 )
(32,818 )
13,940,525
18,113,498
2,485,680
Total available for sale
$
42,075,426
$
2,001
$
(605,716 )
$
41,471,711
As of December 31, 2016
Available for sale
U.S. Government sponsored
agency securities
Mortgage-backed securities:
residential
Collateralized mortgage obligations
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
6,983,402
$
27,162
$
(33,402 )
$
6,977,162
17,721,150
11,124,174
-
-
(165,113 )
(193,922 )
17,556,037
10,930,252
Total available for sale
$
35,828,726
$
27,162
$
(392,437 )
$
35,463,451
There were no sales of securities available for sale in 2017, 2016 or 2015. The amortized cost and estimated fair value of securities
available for sale at December 31, 2017, by contractual maturity, are shown below. Securities without a contractual maturity are
shown separately.
As of December 31, 2017
Available for sale
One to five years
Mortgage-backed securities: residential
Collateralized mortgage obligations
Other securities
Total available for sale
Amortized
Cost
Fair
Value
$
$
6,988,681
14,109,433
18,458,814
2,518,498
6,932,008
13,940,525
18,113,498
2,485,680
$
42,075,426
$
41,471,711
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties. At December 31, 2017 and 2016, there were no holdings of securities of any one issuer, other
than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.
(Continued)
12
OP BANCORP
52
ANNUAL REPORT 2017
OP BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 3—SECURITIES (Continued)
The following table summarizes securities with unrealized losses at December 31, 2017 and 2016, aggregated by length of time in a
continuous unrealized loss position:
As of December 31, 2017
Available for sale
U.S. Government sponsored
agency securities
Mortgage-backed securities:
residential
Collateralized mortgage obligations
Other securities
Less Than 12 Months
Fair
Value
Unrealized
Losses
12 Months or Longer
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
$
3,957,340
$
(33,620) $ 1,974,139
$ (25,054 ) $
5,931,479
$
(58,674)
7,954,428
9,642,028
2,485,680
(70,965)
(138,243)
(32,818)
5,986,097
8,471,469
-
(97,943 )
(207,073 )
-
13,940,525
18,113,497
2,485,680
(168,908)
(345,316)
(32,818)
Total available for sale
$ 24,039,476
$ (275,646) $ 16,431,705
$ (330,070 ) $ 40,471,181
$ (605,716)
As of December 31, 2016
Available for sale
U.S. Government sponsored
agency securities
Mortgage-backed securities:
residential
Collateralized mortgage obligations
Less Than 12 Months
Fair
Value
Unrealized
Losses
12 Months or Longer
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
$
3,965,444
$
(33,402) $
-
$
-
$
3,965,444
$
(33,402)
17,556,036
7,791,185
(165,113)
(133,356)
-
3,139,067
-
(60,566 )
17,556,036
10,930,252
(165,113)
(193,922)
Total available for sale
$ 29,312,665
$ (331,871) $ 3,139,067
$ (60,566 ) $ 32,451,732
$ (392,437)
The Company believes that the unrealized losses are temporary, arising mainly from fluctuations in interest rates and do not reflect
a deterioration of credit quality of the issuers. In analyzing an issuer’s financial condition, the Company may consider whether the
securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the
results of reviews of the issuer’s financial condition. The fair value is expected to recover as the securities approach maturity.
Management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated
recovery.
There were no securities pledged at December 31, 2017. Securities with fair values of approximately $11,946,357 were pledged to
secure public deposits, borrowings, and for other purposes as required or permitted by law at December 31, 2016.
(Continued)
13
OP BANCORP
53
ANNUAL REPORT 2017
OP BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 4—LOANS
The composition of the loan portfolio was as follows at December 31, 2017 and December 31, 2016:
Real estate:
Commercial real estate
SBA loans—real estate
Total real estate
SBA loans—non-real estate
Commercial and industrial
Home mortgage
Consumer
Gross loans receivable
Allowance for loan losses
Loans receivable, net
December 31, 2017
December 31, 2016
$
$
420,759,900
106,924,278
527,684,178
8,634,879
103,681,574
104,067,756
3,955,514
748,023,901
(9,139,488 )
738,884,413
$
$
362,585,001
97,411,302
459,996,303
6,875,189
97,660,178
104,808,620
4,886,484
674,226,774
(7,909,682)
666,317,092
The Company had $10,768 in loans to principal officers, directors, and their affiliates at December 31, 2017. No loans were
outstanding to related parties as of December 31, 2016.
The activity in the allowance for loan losses for the years ended December 31 2017, 2016 and 2015 was as follows:
Commercial
Real Estate
SBA Loans
Real Estate
SBA
Loans Non-
Real Estate
Commercial
and Industrial
Home
Mortgage
Consumer
Total
Balance at January 1, 2015
$ 2,480,934
$
745,363
$
128,772
$
1,599,594
$ 709,581
$
90,257
$5,754,501
Provision for loan losses
Charge-offs
Recoveries
750,676
-
-
(42,125)
-
851
(7,015)
(7,880)
14,900
(335,549)
-
70,530
226,700
-
-
(39,844)
-
4,000
552,843
(7,880)
90,281
Balance at December 31, 2015
$ 3,231,610
$
704,089
$
128,777
$
1,334,575
$ 936,281
$
54,413
$6,389,745
Provision for loan losses
Charge-offs
Recoveries
985,479
-
-
188,516
-
-
(49,824)
(32,180)
12,259
130,162
(142,443)
-
427,347
-
-
621
-
-
1,682,301
(174,623)
12,259
Balance at December 31, 2016
$ 4,217,089
$
892,605
$
59,032
$
1,322,294
$1,363,628
$
55,034
$7,909,682
Provision for loan losses
Charge-offs
Recoveries
584,208
-
-
189,460
-
-
633,345
(168,683)
14,273
(56,838)
-
-
44,114
-
-
(83,357)
-
73,284
1,310,932
(168,683)
87,557
Balance at December 31, 2017
$ 4,801,297
$ 1,082,065
$
537,967
$
1,265,456
$1,407,742
$
44,961
$9,139,488
(Continued)
14
OP BANCORP
54
ANNUAL REPORT 2017
OP BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 4—LOANS (Continued)
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment
as of December 31, 2017 and 2016:
2017
Allowance for loan losses:
Commercial real estate
SBA loans—real estate
SBA loans—non-real estate
Commercial and industrial
Home mortgage
Consumer
Total
Loans:
Commercial real estate
SBA loans—real estate
SBA loans—non-real estate
Commercial and industrial
Home mortgage
Consumer
Total
2016
Allowance for loan losses:
Commercial real estate
SBA loans—real estate
SBA loans—non-real estate
Commercial and industrial
Home mortgage
Consumer
Total
Loans:
Commercial real estate
SBA loans—real estate
SBA loans—non-real estate
Commercial and industrial
Home mortgage
Consumer
Total
Loans
Individually
Evaluated
for Impairment
Loans
Collectively
Evaluated
for Impairment
Total
$
$
$
$
$
$
$
$
-
-
-
353,985
-
-
353,985
-
-
-
353,985
241,164
20,763
615,912
-
-
3,817
367,320
-
-
371,137
-
-
3,817
367,320
-
-
371,137
$
$
4,801,297
1,082,065
537,967
911,471
1,407,742
44,961
8,785,503
$
$
4,801,297
1,082,065
537,967
1,265,456
1,407,742
44,961
9,139,488
$ 421,811,734
107,427,788
8,655,808
103,601,098
104,239,551
3,946,491
$ 749,682,470
$ 421,811,734
107,427,788
8,655,808
103,955,083
104,480,715
3,967,254
$ 750,298,382
$
$
4,217,089
892,605
55,215
954,974
1,363,628
55,034
7,538,545
$
$
4,217,089
892,605
59,032
1,322,294
1,363,628
55,034
7,909,682
$ 363,380,249
97,756,201
6,892,341
97,519,413
105,229,707
4,897,862
$ 675,675,773
$ 363,380,249
97,756,201
6,896,158
97,886,733
105,229,707
4,897,862
$ 676,046,910
(Continued)
15
OP BANCORP
55
ANNUAL REPORT 2017
OP BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 4—LOANS (Continued)
The following table presents information related to impaired loans by class of loans as of and for the years ended December 31,
2017, 2016 and 2015. The difference between the unpaid principal balance (net of partial charge-offs) and the recorded investment in
the loans is not considered to be material.
2017
With no related allowance recorded:
Home mortgage
Consumer
With an allowance recorded:
Commercial and industrial
2016
With an allowance recorded:
SBA loans – non-real estate
Commercial and industrial
2015
With an allowance recorded:
SBA loans – non-real estate
Commercial and industrial
Recorded
Investment
Allowance
Allocated
Average
Recorded
Investment
Interest
Income
Recognized
$
$
$
$
$
$
241,164
20,763
353,985
615,912
3,817
367,320
371,137
47,183
723,911
771,094
$
$
$
$
$
$
-
-
353,985
353,985
3,817
367,320
371,137
47,183
723,911
771,094
$
$
$
$
$
$
242,210
30,521
360,653
633,384
9,325
545,616
554,941
47,147
883,012
930,159
$
$
$
$
$
$
-
-
16,801
16,801
1,959
15,292
17,251
5,618
14,860
20,478
The difference between interest income recognized and cash basis interest recognized was immaterial.
The following table presents the recorded investment in nonaccrual loans and loans past due greater than 90 days still accruing
interest by class of loans as of December 31, 2017 and 2016:
2017
Home mortgage
Consumer
Total
2016
SBA loans—non-real estate
Total
Nonaccrual
$ 662,365
20,763
$ 683,128
$ 208,802
$ 208,802
Loans >90 Days
Past Due & Still
Accruing
$
$
$
$
-
-
-
-
Total
$ 662,365
20,763
$ 683,128
$ 208,802
$ 208,802
Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively
evaluated for impairment and individually classified impaired loans.
(Continued)
16
OP BANCORP
56
ANNUAL REPORT 2017
OP BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 4—LOANS (Continued)
The following table represents the aging of the recorded investment in past due loans as of December 31, 2017 and 2016:
30-59 Days
Past Due
60-89 Days
Past Due
> 90 Days
Past Due
Total
Past Due
Loans Not
Past Due
Total
2017
Commercial real estate
SBA—real estate
SBA—non-real estate
Commercial and industrial
Home mortgage
Consumer
2016
Commercial real estate
SBA—real estate
SBA—non-real estate
Commercial and industrial
Home mortgage
Consumer
$
- $
139,806
61,611
-
-
-
$201,417 $
- $
-
-
-
662,365
-
- $421,811,734 $421,811,734
- $
107,427,788
-
8,655,808
-
103,955,083
-
104,480,715
-
-
3,967,254
- $ 662,365 $ 863,782 $749,434,600 $750,298,382
107,287,982
8,594,197
103,955,083
103,818,350
3,967,254
139,806
61,611
-
662,365
-
$
- $
- $
- $363,380,249 $363,380,249
97,756,201
6,896,158
97,886,733
105,229,707
4,897,862
$241,576 $1,640,245 $ 208,802 $2,090,623 $673,956,287 $676,046,910
- $
-
208,802
-
-
-
96,688,931
6,687,356
97,886,733
104,415,156
4,897,862
1,067,270
208,802
-
814,551
-
241,576
-
-
-
-
825,694
-
-
814,551
-
Troubled Debt Restructurings: As of December 31, 2017 and 2016, the Company had a recorded investment in troubled debt
restructurings of $353,985 and $367,320, respectively. The Company has allocated $353,985 and $367,320 of specific reserves to
customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2017 and 2016, respectively. The
Company has not committed to lend any additional amounts to customers with outstanding loans that are classified as troubled debt
restructurings.
Modifications made were primarily extensions of existing payment modifications on loans previously identified as troubled debt
restructurings. There were no new loans identified as trouble debt restructurings during the years ended December 31, 2017, 2016 or
2015. There were no payment defaults during the years ended December 31, 2017, 2016 or 2015 of loans that had been modified as
troubled debt restructurings within the previous twelve months.
Credit Quality Indicators: The Company categorizes loans into risk categories based on relevant information about the ability of
borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public
information, and current economic trends, among other factors. For consumer loans, a credit grade is established at inception, and
generally only adjusted based on performance. The Company analyzes loans individually by classifying the loans as to credit risk.
This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
Special Mention—Loans classified as special mention have a potential weakness that deserves management’s close attention. If
left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s
credit position at some future date.
Substandard—Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies
are not corrected.
(Continued)
17
OP BANCORP
57
ANNUAL REPORT 2017
OP BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 4—LOANS (Continued)
Doubtful—Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and
values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-
rated loans.
As of December 31, 2017 and 2016, and based on the most recent analysis performed, the risk category of loans by class of loans is
as follows:
2017
Commercial real estate
SBA loans—real estate
SBA loans—non-real estate
Commercial and industrial
Home mortgage
Consumer
2016
Commercial real estate
SBA loans—real estate
SBA loans—non-real estate
Commercial and industrial
Home mortgage
Consumer
Pass
Special
Mention
Substandard
Doubtful
Total
$421,811,734
106,405,966
8,594,375
103,601,098
103,818,350
3,946,491
$748,178,014
$
$
-
-
32,702
-
-
-
32,702
$
-
1,021,822
28,731
353,985
662,365
20,763
$ 2,087,666
$363,380,249
96,847,750
6,852,884
97,212,559
104,415,156
4,897,862
$673,606,460
$
-
-
39,457
306,854
-
-
$ 346,311
$
-
908,451
3,817
367,320
814,551
-
$ 2,094,139
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$421,811,734
107,427,788
8,655,808
103,955,083
104,480,715
3,967,254
$750,298,382
$363,380,249
97,756,201
6,896,158
97,886,733
105,229,707
4,897,862
$676,046,910
NOTE 5—PREMISES AND EQUIPMENT
The Company’s premises and equipment consisted of the following at December 31, 2017 and 2016:
Leasehold improvements
Furniture and fixtures
Equipment and others
Total cost
Accumulated depreciation
Net book value
December 31,
2017
$ 5,061,520
2,492,623
1,677,175
9,231,318
December 31,
2016
$ 4,834,045
2,441,082
1,564,168
8,839,295
(4,750,526)
$ 4,480,792
(3,772,200)
$ 5,067,095
Total depreciation expense included in occupancy and equipment expenses was $1,007,736, $1,084,071, and $940,404 for the
years ended December 31, 2017, 2016 and 2015, respectively.
(Continued)
18
OP BANCORP
58
ANNUAL REPORT 2017
NOTE 6—SERVICING ASSETS
Activity for loan servicing assets during the years ended December 31, 2017, 2016 and 2015 is as follows:
Beginning balance
Additions
Amortized to expense
Ending balance
Year Ended
December 31, 2017
6,782,555
1,923,459
(1,934,917)
6,771,097
Year Ended
December 31, 2016
5,550,975
2,645,278
(1,413,698 )
6,782,555
Year Ended
December 31, 2015
4,670,462
2,148,116
(1,267,603)
5,550,975
There was no valuation allowance recorded against the carrying value of the servicing assets as of December 31, 2017 or 2016.
The fair value of the servicing assets was $8,739,146 at December 31, 2017. Fair value of the servicing assets at December 31,
2017 was determined using discount rates ranging from 4.15% to 10.40% and prepayment speeds ranging from 10.2% to 10.9%,
depending on the stratification of the specific assets.
The fair value of the servicing assets was $8,703,142 at December 31, 2016. Fair value of the servicing assets at year-end 2016 was
determined using discount rates ranging from 4.50% to 10.86% and prepayment speeds ranging from 9.8% to 10.1%, depending on
the stratification of the specific assets.
NOTE 7—DEPOSITS
Time deposits that exceed the FDIC insurance limit of $250,000 at December 31, 2017 and 2016 were $108,952,059 and
$96,641,799, respectively.
The scheduled maturities of time deposits were as follows at December 31, 2017:
2018
2019
2020
2022
Total
$
$
217,783,392
14,325,669
441,883
182,549
232,733,493
Deposits from principal officers, directors, and their affiliates at December 31, 2017 and 2016 were $1,068,580 and $597,226,
respectively.
NOTE 8—BORROWING ARRANGEMENTS
As of December 31, 2017, the Company had a $25 million advance outstanding from the Federal Home Loan Bank of San
Francisco. The maturity date of this advance was January 2, 2018 and the interest rate on the advances was 1.41%. The advance was
paid off on January 2, 2018 as scheduled. In addition, the Company has a letter of credit with the FHLB in the amount of $49,000,000
to secure a public deposit.
The Company had available borrowings from the following institutions as of December 31, 2017:
Federal Home Loan Bank—San Francisco
Federal Reserve Bank
Pacific Coast Bankers Bank
Zions Bank
Total
$
$
145,761,000
92,830,000
4,000,000
5,500,000
248,091,000
The Company has pledged approximately $643,724,000 of loans as collateral for these lines of credit as of December 31, 2017.
OP BANCORP
59
ANNUAL REPORT 2017
OP BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 9—INCOME TAXES
Income tax expense/(benefit) was as follows:
Current federal expense
Current state expense
Deferred federal expense
Deferred state expense
Deferred tax asset revaluation
Year Ended
December 31, 2017
5,893,432
$
2,002,308
7,895,740
Year Ended
December 31, 2016
5,116,854
$
1,430,189
6,547,043
Year Ended
December 31, 2015
2,534,570
$
267,629
2,802,199
(1,061,464)
(278,586)
1,336,299
(3,751)
(1,375,939 )
(276,649 )
-
(1,652,588 )
538,824
828,850
-
1,367,674
Total tax expense
$
7,891,989
$
4,894,455
$
4,169,873
Effective tax rates differ from the federal statutory rates of 35% for 2017 and 34% for 2016 and 2015 applied to income before
taxes due to the following:
Federal statutory rate times financial statement income
Effect of:
Meals and entertainment
State income taxes, net of federal tax benefit
Stock option expense and related excess tax benefits
Company owned life insurance
Other, net
Deferred tax asset revaluation
Year Ended
December 31, 2017
5,994,965
$
Year Ended
December 31, 2016
4,188,741
$
Year Ended
December 31, 2015
3,445,294
$
45,246
1,096,258
(300,879)
(112,032)
(167,868)
1,336,299
1,897,024
36,981
831,920
34,956
(113,786 )
(84,357 )
-
705,714
29,622
656,476
43,664
(120,048)
114,865
-
724,579
Total tax expense
$
7,891,989
$
4,894,455
$
4,169,873
On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act (the “Tax Act”), was signed into law, which among
other items reduces the federal corporate tax rate to 21% from 35%, effective January 1, 2018. U.S. generally accepted accounting
principles requires companies to revalue certain tax-related assets as of the date of enactment of the new legislation with resulting tax
effects accounted for in the reporting period of enactment. As a result, the Company performed an analysis to determine the impact of
the revaluation of the net deferred tax asset. The value of the Company’s deferred tax asset was reduced by $1.3 million, and such
$1.3 million was recorded as tax expense for the year ended December 31, 2017.
ASU 2016-09, “Compensation-Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting”
requires the Company to recognize all excess tax benefits or tax deficiencies through the income statement as income tax
expense/benefit. Under previous GAAP, any excess tax benefits were recognized in additional paid-in capital to offset current-period
and subsequent-period tax deficiencies. Due to the adoption of ASU 2016-09 in 2017, the Company recorded the related excess tax
benefits of $318,771 through the income statement as income tax benefit.
(Continued)
20
OP BANCORP
60
ANNUAL REPORT 2017
OP BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 9—INCOME TAXES (Continued)
The net deferred tax asset included in the statement of financial position includes the following components at the dates indicated
below:
Deferred tax assets:
Pre-opening expense
Organizational costs
Allowance for loan losses
Loans held for sale
Stock-based compensation
Accrued compensation
Accrued contributions
Accrued rent
State taxes
Net unrealized loss on securities available for sale
Nonaccrual loan interest income
Other
Total deferred tax assets
Deferred tax liabilities:
Loan origination costs
Depreciation
Other
Total deferred tax liabilities
Net deferred tax asset
December 31,
2017
December 31,
2016
December 31,
2015
$
42,265
32,040
2,228,954
432,739
273,444
74,632
-
590,118
410,057
178,480
48,023
18,801
4,329,553
$
83,183
47,650
2,102,881
60,501
367,748
110,506
301,291
862,240
510,277
150,311
121,605
29,596
4,747,789
$
107,529
-
1,148,132
217,202
376,057
88,794
216,286
782,016
24,514
162,243
111,161
25,628
3,259,562
(476,756 )
(434,294 )
(35,138 )
(946,188 )
(490,010)
(939,524)
(42,192)
(1,471,726)
(401,818)
(1,137,845)
(84,492)
(1,624,155)
$ 3,383,365
$ 3,276,063
$ 1,635,407
A valuation allowance for deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income
and tax planning strategies which will create taxable income during the periods in which those temporary differences become
deductible. At December 31, 2017, management reevaluated all positive and negative evidence that existed and concluded all
deferred tax assets are realizable. Therefore, no valuation allowance is necessary.
The Company is subject to U.S. Federal income tax as well as various state taxing jurisdictions. The Company is no longer subject
to examination by Federal taxing authorities for tax years prior to 2014 and for state taxing authorities for tax years prior to 2013.
There were no significant unrealized tax benefits recorded as of December 31, 2017, 2016 and 2015, and the Company does not
expect any significant increase in unrealized tax benefits in the next twelve months.
(Continued)
21
OP BANCORP
61
ANNUAL REPORT 2017
OP BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 10—COMMITMENTS AND CONTINGENCIES
Lease Commitments: The Company leases its headquarters and office facilities from nonaffiliated parties under operating leases.
Rent expense for the years ended December 31, 2017, 2016 and 2015 was $2,007,705, $1,717,807 and $1,489,736, respectively. Rent
commitments related to the lease of the Company’s main office and branch facilities, before considering renewal options and
additional lessor charges, were as follows:
2018
2019
2020
2021
2022
Thereafter
Total
$
$
1,629,972
1,606,245
1,645,328
1,693,146
1,684,852
3,762,002
12,021,545
Off-Balance-Sheet Credit Risk: The commitments and contingent liabilities include various commitments to extend credit and
standby letters of credit, which arise in the normal course of business. Commitments to extend credit are legally binding loan
commitments with set expiration dates. Standby letters of credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. They are intended to be disbursed, subject to certain conditions, upon request of the
borrower.
The Company evaluates the creditworthiness of each customer. Collateral, if deemed necessary by the Company upon the
extension of credit, is obtained based on management’s evaluation of the borrower. Collateral for commercial and industrial loans may
vary, but may include securities, accounts receivable, inventory, property, plant and equipment, and income producing commercial or
other properties.
The Company had loan commitments granted and undisbursed of approximately $60,748,000 and $54,774,000; commitments
under outstanding commercial letters of credit of approximately $1,608,000 and $915,000; and standby letters of credit and guarantee
of approximately $1,627,000 and $1,499,000 at December 31, 2017 and 2016, respectively. The majority of these off-balance sheet
commitments have a variable interest rate. Management does not anticipate any material losses as a result of these transactions.
NOTE 11—STOCK-BASED COMPENSATION
The Company has two stock-based compensation plans currently in effect as of December 31, 2017, as described further below.
Total compensation cost that has been charged against earnings for these plans in 2017, 2016 and 2015 was $668,018, $1,205,117, and
$868.444, respectively.
2005 Plan: In 2005, the Board of Directors and shareholders of the Bank approved a stock option plan for the benefit of directors
and employees of the Bank (the “2005 Plan”). The 2005 Plan was assumed by the Company in 2016 at the time of the bank holding
company reorganization. Under the 2005 Plan, the Bank was authorized to grant options to purchase up to 770,000 shares of the
Company’s common stock. The exercise prices of the options may not be less than 100 percent of the fair value of the Company’s
common stock at the date of grant.
The options, when granted, vest either immediately or ratably over five years from the date of the grant and expire after ten years if
not exercised.
There were no stock options granted under the 2005 Plan during 2017 or 2016.
(Continued)
22
OP BANCORP
62
ANNUAL REPORT 2017
OP BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 11—STOCK-BASED COMPENSATION (Continued)
A summary of the transactions under the 2005 Plan for the year ended December 31, 2017 is as follows:
Outstanding, beginning of year
Options granted
Options exercised
Options forfeited
Options expired
Outstanding, as of December 31, 2017
Fully vested and expected to vest
Vested
Number of
Options
Outstanding
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
375,000
-
(40,000)
-
-
335,000
328,500
309,000
$
$
3.95
-
3.54
-
-
3.99
3.95
3.81
$
$
$
1,944,950
1,921,435
1,850,890
Information related to the 2005 Plan during each year follows:
Intrinsic value of options exercised
Cash received from option exercises
Tax benefit realized from option exercised
Year Ended
December 31, 2017
174,700
$
141,550
-
Year Ended
December 31, 2016
71,250
$
76,250
-
Year Ended
December 31, 2015
175,000
$
152,500
-
There were no shares available for grant under the 2005 Plan as of December 31, 2017. The weighted average remaining
contractual term of stock options outstanding under the 2005 Plan at December 31, 2017 was 3.55 years. The weighted average
remaining contractual term of stock options that were exercisable at December 31, 2017 was 3.37 years.
As of December 31, 2017, the Company had approximately $24,173 of unrecognized compensation costs related to unvested stock
options under the 2005 Plan. The Company expects to recognize these costs over a weighted average period of 0.75 year.
2010 Plan: In 2010, the Board of Directors of the Bank approved a new equity incentive plan for granting stock options and
restricted stock awards to key employees, officers, and non-employee directors of the Bank (the “2010 Plan”). In 2013, the 2010 Plan
was amended and approved by the shareholders to increase the number of shares authorized to be issued under from 1,350,000 shares
to 2,500,000 shares of common stock. The 2010 Plan was assumed by the Company in 2016 at the time of the bank holding company
reorganization.
The exercise prices of stock options granted under the plan may not be less than 100 percent of the fair value of the Company’s
stock at the date of grant. The options, when granted, vest ratably over five years from the date of the grant and expire after ten years
if not exercised. Option prices under the 2010 Plan are to be equal to the fair value of the Company’s common stock on the date of
grant. There were no stock options granted under the 2010 Plan during 2017 or 2016.
Restricted stock awards issued under the 2010 Plan may or may not be subject to vesting provisions. Awards which were granted in
2017 and 2016 are not subject to vesting provisions. Owners of the restricted stock awards shall have all of the rights of a shareholder
including the right to vote the shares and to all dividends (cash or stock). Compensation expense related to restricted stock awards will
be recognized over the vesting period of the awards based on the fair value of the Company’s common stock at the issue date.
(Continued)
23
OP BANCORP
63
ANNUAL REPORT 2017
OP BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 11—STOCK-BASED COMPENSATION (Continued)
A summary of stock options issued under the 2010 Plan for the year ended December 31, 2017 is as follows:
Outstanding, beginning of year
Options granted
Options exercised
Options forfeited
Options expired
Outstanding, as of December 31, 2017
Fully vested and expected to vest
Vested
Number of
Options
Outstanding
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
895,000
-
(100,000)
-
-
795,000
765,000
675,000
$
$
4.07
-
2.85
-
-
4.22
4.07
3.55
$
$
$
4,437,350
4,383,350
4,221,350
Information related to stock options issued under the 2010 Plan during each year follows:
Intrinsic value of options exercised
Cash received from option exercises
Tax benefit realized from option exercised
Year Ended
December 31, 2017
497,000
$
285,000
208,988
Year Ended
December 31, 2016
124,900
$
80,700
37,858
Year Ended
December 31, 2015
268,460
$
196,590
81,374
The weighted average remaining contractual term of stock options outstanding under the 2010 Plan at December 31, 2017 was 3.69
years. The weighted average remaining contractual term of stock options that were exercisable at December 31, 2017 was 3.24 years.
A summary of the changes in the Company’s non-vested restricted stock awards under the 2010 Plan for the year ended December
31, 2017 is as follows:
Non-vested, beginning of year
Awards granted
Awards vested
Awards forfeited
Non-vested, end of year
Shares
Issued
644,000
153
(188,653)
(2,000)
453,500
$
$
Weighted
Average
Grant Date
Fair Value
Aggregate
Intrinsic
Value
5.68
9.85
5.02
5.75
5.95
$
4,444,300
Information related to non-vested restricted stock awards under the 2010 Plan during each year follows:
Tax benefit realized from awards vested
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
$
614,711
$
483,286
$
488,459
(Continued)
24
OP BANCORP
64
ANNUAL REPORT 2017
NOTE 11—STOCK-BASED COMPENSATION (Continued)
There were 218,605 shares available for grant under the 2010 Plan as of December 31, 2017 (in either stock options or restricted
stock awards). As of December 31, 2017, the Company had approximately $2,505,538 of unrecognized compensation cost related to
unvested stock options and restricted stock awards under the 2010 Plan. The Company expects to recognize these costs over a
weighted average period of 2.35 years. The total fair value of shares vested during 2017was $1,039,362.
NOTE 12—EMPLOYEE BENEFIT PLAN
The Company established a 401(k) profit sharing plan (the “401(k) Plan”) which is open to all eligible employees who are at least
21 years old and have completed 90 days of service. Each employee is allowed to contribute to the 401(k) Plan up to the maximum
percentage allowable, not to exceed the limits of applicable IRS Code Sections. Each year, the Company may, in its discretion, make
matching contributions to the 401(k) Plan. Total employer contributions to the 401(k) Plan amounted to $419,733, $374,692, and
$298,154 for the years ended December 31, 2017, 2016 and 2015, respectively.
NOTE 13—FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There
are three levels of inputs that may be used to measure fair values:
Level 1—Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as
of the measurement date.
Level 2—Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities,
quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market
participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate fair value:
Securities Available for Sale: The fair values of investment securities are determined by matrix pricing, which is a mathematical
technique used to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on
the securities’ relationship to other benchmark quoted securities (Level 2). Management obtains the fair values of investment
securities on a monthly basis from a third-party pricing service.
Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent
real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable
sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for
differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a
Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book
value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s judgment, changes in
market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business,
resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted
accordingly.
Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or
certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the
Company. Once received, a member of the credit department reviews the assumptions and approaches utilized in the appraisal as well
as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.
Crowe Horwath LLP
Independent Member Crowe Horwath International
Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors of OP Bancorp
Los Angeles, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of OP Bancorp (the "Company") as of
December 31, 2017 and 2016, the related consolidated statements of income and comprehensive income,
shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,
and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December
31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2017, in conformity with accounting principles generally accepted in the
United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on the Company's financial statements based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting in accordance with the
standards of the PCAOB. As part of our audits we are required to obtain an understanding of internal
control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of
the Company's internal control over financial reporting. Accordingly, we express no such opinion in
accordance with the standards of the PCAOB.
Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2010.
Los Angeles, California
March 5, 2018
Crowe Horwath LLP
OP BANCORP
65
ANNUAL REPORT 2017
OP BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 13—FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Assets and liabilities measured at fair value on a recurring basis at December 31, 2017 and 2016 are summarized below:
As of December 31, 2017:(cid:3)
U.S. Government sponsored
agency securities
Mortgage-backed securities - residential
Collateralized mortgage obligations
Other securities
As of December 31, 2016:(cid:3)
U.S. Government sponsored
agency securities
Mortgage-backed securities - residential
Collateralized mortgage obligations
Total
Fair Value
$
6,932,008
13,940,525
18,113,498
2,485,680
$
6,977,162
17,556,037
10,930,252
Fair Value Measuring Using
Significant
Other
Observable
Inputs
(Level 2)
Quoted
Prices in
Active Markets
(Level 1)
Significant
Unobservable
Inputs
(Level 3)
$
$
-
-
-
-
-
-
-
$
6,932,008
13,940,525
18,113,498
2,485,680
$
6,977,162
17,556,037
10,930,252
$
$
-
-
-
-
-
-
-
There were no transfers between level 1 and level 2 during 2017 or 2016. There were no assets or liabilities measured at fair value
on a non-recurring basis at December 31, 2017 or 2016.
Financial Instruments: The carrying amounts and estimated fair values of financial instruments not carried at fair value, at
December 31, 2017 are as follows:
Financial Assets:
Cash and cash equivalents
Loans held for sale
Loans receivable, net
Accrued interest receivable
FHLB and PCBB stock
Financial Liabilities:
Deposit
FHLB Advances
Accrued interest payable
Carrying
Amount
Level 1
Level 2
Level 3
Value
$ 63,249,952 $63,249,952 $
- $
15,739,305
738,884,413
2,463,486
4,286,500
-
-
-
N/A
17,203,060
-
189,005
N/A
- $ 63,249,952
17,203,060
-
731,436,572
731,436,572
2,463,486
2,274,481
N/A
N/A
$773,306,014 $
25,000,000
423,239
- $773,071,521 $
25,000,000
-
423,239
-
- $773,071,521
25,000,000
-
423,239
-
(Continued)
26
OP BANCORP
66
ANNUAL REPORT 2017
OP BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 13—FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The carrying amounts and estimated fair values of financial instruments not carried at fair value at December 31, 2016 are as
follows:
Financial Assets:
Cash and cash equivalents
Loans held for sale
Loans receivable, net
Accrued interest receivable
FHLB and PCBB stock
Financial Liabilities:
Deposit
FHLB Advances
Accrued interest payable
Carrying
Amount
Level 1
Level 2
Level 3
Value
$ 20,126,028 $20,126,028 $
- $
1,646,250
666,317,092
2,001,488
3,437,600
-
-
-
N/A
1,793,260
-
181,352
N/A
- $ 20,126,028
1,793,260
-
661,997,633
661,997,633
2,001,488
1,820,136
N/A
N/A
$661,783,900 $
10,000,000
321,753
- $662,160,942 $
10,000,000
-
321,753
-
- $662,160,942
10,000,000
-
321,753
-
The methods and assumptions, not previously presented, used to estimate fair value are described as follows:
(a) Cash and Cash equivalents
The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
(b) Loans Held for Sale
The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in
a Level 2 classification.
(c) Loans Receivable, Net
Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values
for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or
fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit
price.
(d) FHLB and PCBB Stock
It is not practical to determine the fair value of FHLB and PCBB stock due to restrictions placed on their transferability.
(e) Deposits
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of
money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying
amount) resulting in a Level 2 classification. The carrying amounts of variable rate, fixed-term money market accounts and
certificates of deposit approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed
rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered
on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
(Continued)
27
OP BANCORP
67
ANNUAL REPORT 2017
NOTE 13—FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
(f) Federal Home Loan Bank Advances
The fair values of Federal Home Loan Bank Advances are estimated using discounted cash flow analyses based on the current
borrowing rates for similar types of borrowing arrangements, resulting in a Level 2 classification.
(g) Accrued Interest Receivable/Payable
The carrying amounts of accrued interest approximate fair value and are classified within the same fair value hierarchy level as
the related asset or liability.
(h) Off-balance Sheet Instruments
Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of
commitments is not material.
NOTE 14—REGULATORY CAPITAL MATTERS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies.
Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules
implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the
Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully
phased in by January 1, 2019. Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately
capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The
capital conservation buffers for 2016 and 2017 are 0.625% and 1.25%, respectively. The net unrealized gain or loss on available for
sale securities is not included in computing regulatory capital. Management believes as of December 31, 2017 and 2016, the Company
and Bank meet all capital adequacy requirements to which they are subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial
condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital
distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2017 and 2016,
the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective
action. There are no conditions or events since that notification that management believes have changed the institution’s category.
OP BANCORP
68
ANNUAL REPORT 2017
OP BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 14—REGULATORY CAPITAL MATTERS (Continued)
Actual and required capital amounts (in thousands) and ratios, exclusive of the capital conservation buffer, are presented below at
December 31, 2017 and 2016:
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Actual
Required for
Capital Adequacy
Purposes
Minimum
To be Considered
"Well Capitalized"
Ratio
Amount
As of December 31, 2017:
Total capital (to risk-weighted assets)
Consolidated
Bank
Tier 1 capital (to risk-weighted assets)
Consolidated
Bank
Common equity Tier 1 capital
(to risk-weighted assets)
Consolidated
Bank
Tier 1 capital (to average assets)
Consolidated
Bank
$ 100,713
100,648
13.49% $ 59,729
59,726
13.48%
91,510
91,445
12.26%
12.25%
44,797
44,795
91,510
91,445
91,510
91,445
12.26%
12.25%
10.46%
10.45%
33,597
33,596
35,009
35,007
8.00 %
8.00 %
6.00 %
6.00 %
4.50 %
4.50 %
4.00 %
4.00 %
N/A
74,658
N/A
59,726
N/A
48,528
N/A
43,759
N/A
10.00%
N/A
8.00%
N/A
6.50%
N/A
5.00%
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Actual
Required for
Capital Adequacy
Purposes
Minimum
To be Considered
"Well Capitalized"
Ratio
Amount
As of December 31, 2016:
Total capital (to risk-weighted assets)
Consolidated
Bank
Tier 1 capital (to risk-weighted assets)
Consolidated
Bank
Common equity Tier 1 capital
(to risk-weighted assets)
Consolidated
Bank
Tier 1 capital (to average assets)
Consolidated
Bank
$ 89,286
89,225
13.40% $ 53,311
53,306
13.39%
81,304
81,244
12.20%
12.19%
39,983
39,979
81,304
81,244
81,304
81,244
12.20%
12.19%
10.89%
10.88%
29,987
29,985
29,859
29,857
8.00 %
8.00 %
6.00 %
6.00 %
4.50 %
4.50 %
4.00 %
4.00 %
N/A
66,632
N/A
53,306
N/A
43,311
N/A
37,321
N/A
10.00%
N/A
8.00%
N/A
6.50%
N/A
5.00%
(Continued)
29
OP BANCORP
69
ANNUAL REPORT 2017
OP BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 15—EARNINGS PER SHARE
The two-class method is used in the calculation of basic and diluted earnings per share. Under the two-class method, earnings
available to common shares are allocated between common shares and participating securities. The Company’s restricted stock awards
are considered participating securities as the unvested awards have non-forfeitable rights to dividends, paid or unpaid, on unvested
awards. The factors used in the earnings per share computation follow:
Basic
Net income
Undistributed earnings allocated to participating securities
Net income allocated to common shares
Weighted average common shares outstanding
Basic earnings per common share
Diluted
Net income allocated to common shares
Weighted average common shares outstanding for
basic earnings per common share
Add: Dilutive effects of assumed exercises of stock options
Average shares and dilutive potential common shares
Diluted earnings per common share
Year Ended
December 31,
2016
2017
$ 9,236,482 $ 7,425,371
(402,328)
7,023,043
12,788,378
0.55
(366,031 )
8,870,451
13,063,344
0.68 $
$
2015
$ 5,963,345
(412,190)
5,551,155
12,549,915
0.44
$
$ 8,870,451 $ 7,023,043
$ 5,551,155
13,063,344
422,447
13,485,791
$
0.66 $
12,788,378
369,777
13,158,155
0.53
12,549,915
394,952
12,944,867
0.43
$
Stock options and restricted stock awards for 220,000, 305,000 and 305,000 shares of common stock were not considered in
computing diluted earnings per common share for the year ended December 31, 2017, 2016 and 2015 because they were antidilutive.
NOTE 16—PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
OP Bancorp (the “Company”) is a California corporation whose common stock is quoted on the OTCQB under the ticker symbol,
“OPBK.” The Company was formed to acquire 100% of the voting equity of Open Bank (the “Bank”) and commenced operation as a
bank holding company on June 1, 2016. This transaction was treated as an internal reorganization as all shareholders of the Bank
became shareholders of the Company. The Company has no operations other than ownership of the Bank. For the parent company
only condensed statements of income and comprehensive income, and cash flows, we have assumed that the Company existed as of
January 1, 2016.
Condensed financial information of OP Bancorp follows:
CONDENSED BALANCE SHEETS
December 31, 2017 and 2016
ASSETS
Investment in banking subsidiaries
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Shareholders’ equity
Total liabilities and shareholders' equity
December 31,
2017
December 31,
2016
$
$
$
91,414,795
65,155
91,479,950
91,479,950
91,479,950
$
$
$
81,223,077
60,710
81,283,787
81,283,787
81,283,787
(Continued)
30
OP BANCORP
70
ANNUAL REPORT 2017
OP BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 16—PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31, 2017 and 2016
Other expense
Income before income tax and undistributed subsidiary income
Income tax benefit
Equity in undistributed subsidiary income
Net income
2017
2016
$
37,824
$
144,464
(37,824)
(15,903)
9,258,403
(144,464)
(59,500)
7,510,335
$
9,236,482
$
7,425,371
CONDENSED STATEMENT OF CASH FLOWS
Years ended December 31, 2017 and 2016
Cash flows from operating activities
Net income
Adjustments:
Equity in undistributed subsidiary income
Change in other assets
Net cash from operating activities
Cash flows from investing activities
Investment in subsidiaries
Net cash from investing activities
Cash flows from financing activities
Proceeds from subsidiaries
Net cash from financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
2017
2016
$
9,236,482
$
7,425,371
(9,258,403 )
21,921
-
(7,510,335)
84,964
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
31