Opus Bank Announces First Quarter 2019 Results

Opus Bank ("Opus") (NASDAQ: "OPB") announced today net income of $10.9 million, or $0.28 per diluted share, for the first quarter of 2019 compared to a net loss of $6.9 million, or $(0.20) per diluted share, for the fourth quarter of 2018 and net income of $12.9 million, or $0.34 per diluted share, for the first quarter of 2018. Net income during the first quarter of 2019 included a $1.4 million expense related to the settlement of a longstanding legal matter that originated in January 2013 and a $489,000 charge related to the exiting of a line of business included in Other Income. Together, these items impacted earnings by $0.04 per diluted share.

Additionally, Opus announced today that its Board of Directors has approved the payment of a quarterly cash dividend of $0.11 per common share payable on May 23, 2019 to common stockholders, and a common-equivalent payment to its Series A Preferred stockholders of record as of May 9, 2019.

First Quarter 2019 Highlights

• Loans held for investment increased 6%, or $296.3 million, compared to the prior quarter, driven by strong growth in multifamily loans.
• Deposits increased 2%, or $124.9 million, compared to the prior quarter.
• Net interest income increased 1% compared to the prior quarter, as higher interest income on loans and investment securities was partially offset by higher interest expense on deposits and borrowings.
• Net interest margin expanded eight basis points to 3.15% compared to the prior quarter due to the benefit of loan repricing during the first quarter of 2019 and the repositioning of our securities portfolio in the fourth quarter of 2018. Our cost of deposits increased 13 basis points to 0.92% for the first quarter of 2019.
• Noninterest expense increased 2% compared to the prior quarter, excluding a $1.4 million expense related to a legal settlement during the quarter and $10.5 million of expenses related to a restructuring charge taken in the fourth quarter of 2018. The increase was driven by seasonally higher employer taxes in the first quarter of 2019.
• Nonperforming assets decreased 17% compared to the prior quarter to $23.3 million, or 0.30% of total assets compared to 0.39% of total assets in the prior quarter.
• Enterprise Value loans decreased 14% compared to the prior quarter to $105.0 million.
• Provision for loan losses was $2.2 million, largely driven by quarterly loan growth, as Opus recorded net recoveries of $1.6 million in the first quarter of 2019, compared to net charge-offs of $12.0 million in the prior quarter.
• Tangible book value per common share increased $0.19 to $17.96, while our tangible common equity to tangible assets decreased 53 basis points to 8.88% due to growth in total assets during the first quarter of 2019.

Paul G. Greig, Chairman of the Board, Interim Chief Executive Officer and President of Opus Bank, stated, "Our solid core earnings performance during the first quarter of 2019 included higher net interest income, expanding net interest margin, and further improvements in credit quality. Strong quarterly loan growth was driven by high origination volume of multifamily loans, as well as unusually low prepayments during the first quarter. While we were successful in increasing our real estate lending during the quarter, our focus on disciplined underwriting has not changed. All of Opus' team members are to be commended for the contributions to our first quarter performance."

Loans

Total loans held-for-investment increased $296.3 million, or 6%, to $5.5 billion as of March 31, 2019, from $5.2 billion as of December 31, 2018, and increased $232.5 million, or 4%, from $5.2 billion as of March 31, 2018. The increase in total loans during the first quarter of 2019 was driven by new loan fundings of $538.0 million, partially offset by loan payoffs of $196.2 million, which included planned exits of $22.5 million.

New loan fundings in the first quarter of 2019 totaled $538.0 million, an increase of $125.7 million, or 30%, from the fourth quarter of 2018 and an increase of $85.7 million, or 19%, from the first quarter of 2018. Commercial Business loans comprised $56.9 million, or 11%, of total new loan fundings; and real estate related loans comprised $480.3 million, or 89%, of total new loan fundings in the first quarter of 2019. Quarterly loan payoffs were $173.7 million, excluding planned loan exits, compared to $265.3 million in the fourth quarter of 2018 and $219.2 million in the first quarter of 2018.

Loan commitments originated during the first quarter of 2019 totaled $550.3 million, compared to $399.8 million during the fourth quarter of 2018 and $439.2 million during the first quarter of 2018. Our unfunded commitments on loans totaled $418.4 million as of March 31, 2019.

Cash and Investment Securities

Cash and investment securities totaled $1.5 billion as of March 31, 2019, an increase of $179.3 million, or 13%, compared to December 31, 2018, and an increase of $125.5 million, or 9%, compared to March 31, 2018. Cash and cash equivalents as of March 31, 2019 increased $166.9 million, or 66%, to $421.5 million compared to December 31, 2018, and increased $129.3 million, or 44%, compared to March 31, 2018. The balance of investment securities was relatively unchanged from the prior period and the first quarter of 2018, increasing by $12.4 million compared to December 31, 2018, and decreasing by $3.8 million compared to March 31, 2018.

Deposits and Borrowings

Deposits increased $124.9 million, or 2%, to $6.1 billion as of March 31, 2019, from $6.0 billion as of December 31, 2018 and increased $33.2 million, or 1%, from $6.0 billion as of March 31, 2018. Deposit growth in the first quarter of 2019 was driven by our Retail Banking, Municipal Banking, and Commercial and Specialty Banking divisions. Noninterest bearing demand deposits and money market and savings increased 1% and 5%, respectively, in the first quarter of 2019, while interest checking account balances decreased 4% from the prior quarter. Time deposits increased $121.5 million compared to December 31, 2018. The average balance of deposits in the first quarter of 2019 decreased $84.3 million compared to the prior quarter, as deposit inflows occurred later in the period.

Our loan to deposit ratio was 90% as of March 31, 2019, compared to 87% as of December 31, 2018 and 87% as of March 31, 2018.

Federal Home Loan Bank (FHLB) advances increased to $330.0 million as of March 31, 2019, compared to a zero balance as of December 31, 2018 and $10.0 million as of March 31, 2018. The average balance of FHLB advances during the first quarter of 2019 was $122.0 million, compared to $33,000 in the fourth quarter of 2018 and $16.4 million in the first quarter of 2018.

Net Interest Income

Net interest income increased 1% to $50.8 million for the first quarter of 2019, compared to $50.4 million for the fourth quarter of 2018, and decreased 2% from $51.7 million for the first quarter of 2018.

Interest income from loans increased 2% to $57.0 million for the first quarter of 2019, driven by a 2% increase in the average balance of loans, the benefit of repricing of loans, and interest recaptured on nonaccrual loans, partially offset by fewer days in the first quarter.

Interest income from cash and investment securities increased 14% from the fourth quarter of 2018 to $9.9 million for the first quarter of 2019, driven primarily by a higher yield on investment securities as a result of the securities portfolio repositioning we executed near the end of the fourth quarter of 2018. The average balance of cash and cash equivalents decreased $84.9 million, or 27%, compared to the prior quarter, as excess cash was redeployed into higher yielding loans and investment securities.

Interest expense increased 15% to $16.1 million for the first quarter of 2019, compared to $14.0 million for the fourth quarter of 2018, and increased 79% compared to $9.0 million for the first quarter of 2018. The increase in interest expense during the first quarter of 2019 was driven by a higher rate on interest-bearing deposits, a change in the mix of deposits, and the addition of FHLB borrowings during the quarter.

Net Interest Margin

Net interest margin on a taxable equivalent basis increased eight basis points to 3.15% in the first quarter of 2019 from 3.07% in the fourth quarter of 2018, and decreased five basis points from 3.20% in the first quarter of 2018. The linked-quarter change was primarily driven by an 11 basis point increase in the average yield on loans due to the benefit of loan repricing, fewer days in the first quarter of 2019, and interest recaptured on nonaccrual loans, as well as a 61 basis point increase in the average yield on securities due to the repositioning of our securities portfolio in the fourth quarter of 2018 and lower premium amortization compared to the prior quarter. These were partially offset by a 15 basis point increase in our cost of funds, driven primarily by the increase in FHLB advances and lower balances of interest-bearing demand and money market deposits.

Noninterest Income

Noninterest income increased 228% to $11.1 million in the first quarter of 2019 from $3.4 million in the fourth quarter of 2018, and decreased 17% from $13.3 million in the first quarter of 2018. Noninterest income during the first quarter of 2019 included $6.7 million of trust administrative fees, $1.4 million from our Escrow & Exchange divisions, and $1.4 million of treasury management and deposit account fees. Noninterest income during the fourth quarter of 2018 included a $9.9 million loss on the sale of investment securities related to the repositioning of our securities portfolio, as well as approximately $1.5 million of revenues generated by our Merchant Banking division that were not repeated in the first quarter of 2019. Included in Other Income during the first quarter of 2019 was a $49,000 net increase in equity warrant valuations, compared to a net decrease of $354,000 in the prior quarter, and an FHLB dividend of $304,000, compared to a dividend of $584,000 in the prior quarter. Additionally, Other Income included an expense of $489,000 primarily related to the exiting of Opus Financial Partners, the company's broker-dealer, as a line of business, which triggered an impairment charge on a sublet property. Opus Bank is discontinuing Opus Financial Partners as this line of business did not achieve adequate performance results and was not considered an effective use of capital.

Noninterest Expense

Noninterest expense decreased 15% to $45.4 million in the first quarter of 2019, compared to $53.7 million in the fourth quarter of 2018, and increased 3% from $44.1 million in the first quarter of 2018. Noninterest expense during the first quarter of 2019 included a $1.4 million expense related to a legal settlement during the quarter, while noninterest expense during the fourth quarter of 2018 included $10.5 million of expenses related to the restructuring charge taken in the fourth quarter. Excluding these items, noninterest expense increased 2% in the first quarter of 2019, primarily due to seasonally higher employer taxes during the first quarter.

Our efficiency ratio for the first quarter of 2019 was 70.6%, compared to 81.5% for the fourth quarter of 2018 and 65.5% for the first quarter of 2018.

Income Tax Expense

We recorded an income tax expense of $3.4 million in the first quarter of 2019, compared to an income tax benefit of $654,000 in the fourth quarter of 2018 as a result of the pre-tax loss we incurred for the quarter, and an income tax expense of $4.1 million in the first quarter of 2018. Our effective tax rate for the first quarter of 2019 was 24.0%.

Asset Quality

Total nonperforming assets decreased 17% to $23.3 million, or 0.30% of total assets, as of March 31, 2019, compared to $28.0 million, or 0.39% of total assets, as of December 31, 2018, and $63.8 million, or 0.87% of total assets, as of March 31, 2018. Total Enterprise Value loans were reduced by $17.0 million, or 14%, during the first quarter of 2019 and totaled $105.0 million as of March 31, 2019.

Total criticized loans increased $2.2 million, or 1%, to $152.5 million as of March 31, 2019, compared to $150.3 million as of December 31, 2018, and decreased $94.9 million, or 38%, from $247.4 million as of March 31, 2018. Special mention loans decreased $13.2 million in the first quarter of 2019, and classified loans increased $15.4 million. The decrease in special mention loans was driven by $11.3 million of loans downgraded to classified loans and payoffs, upgrades, and normal amortization of $1.9 million. The increase in classified loans was driven by downgrades of $26.2 million, partially offset by payoffs, charge-offs, upgrades, and normal amortization of $10.8 million.

Our allowance for loan losses was $58.5 million, or 1.07% of our total loan portfolio, as of March 31, 2019, compared to $54.7 million, or 1.06%, as of December 31, 2018 and $67.8 million, or 1.30%, as of March 31, 2018. The increase in the allowance for loan losses during the first quarter of 2019 compared to the prior quarter was driven by a provision for loan losses of $2.2 million and recoveries of $2.0 million which were partially offset by charge-offs of $383,000. The ratio of the allowance for loan losses to total nonaccrual loans was 251% as of March 31, 2019, compared to 195% as of December 31, 2018 and 106% as of March 31, 2018.

We recorded a provision expense for loan losses of $2.2 million in the first quarter of 2019, compared to a provision expense of $7.7 million in the fourth quarter of 2018 and a provision expense of $3.9 million in the first quarter of 2018. The provision expense during the first quarter of 2019 was primarily driven by net loan growth and risk rating migration, partially offset by net recoveries and planned loan exits.

Capital

As of March 31, 2019, Opus exceeded all regulatory capital requirements under Basel III and was considered to be a "well-capitalized" financial institution, as summarized in the table below:

Stockholders' equity totaled over $1.0 billion as of March 31, 2019 and increased $7.3 million from December 31, 2018 and $25.7 million from March 31, 2018. Our tangible book value per common share increased $0.19 to $17.96 as of March 31, 2019 compared to $17.77 as of December 31, 2018, and increased $0.79 compared to $17.17 as of March 31, 2018.

Conference Call and Webcast Details

Date: Monday, April 29, 2019
Time: 8:00 a.m. PT (11:00 a.m. ET)

Phone Number: (855) 265-3237
Conference ID: 5876447
Webcast URL: http://investor.opusbank.com/event

Analysts, investors, and the general public may listen to our discussion of Opus' first quarter performance and participate in the question/answer session by using the phone number listed above or through a live webcast of the conference available through a link on the investor relations page of Opus' website at: http://investor.opusbank.com/event. The webcast will include a slide presentation, enabling conference participants to experience the discussion with greater impact. It is recommended that participants dial into the conference call or log into the webcast approximately 10 minutes prior to the call.

Replay Information: For those who are not able to listen to the call, an archived recording will be available beginning approximately two hours following the completion of the call. To listen to the call replay, dial (855) 859-2056, or for international callers dial (404) 537-3406. The access code for either replay number is 5876447. The call replay will be available through May 30, 2019.

About Opus Bank

Opus Bank is an FDIC insured California-chartered commercial bank with $7.7 billion of total assets, $5.5 billion of total loans, and $6.1 billion in total deposits as of March 31, 2019. Opus Bank provides commercial and retail banking products and solutions to its clients in western markets from its headquarters in Irvine, California and through 47 banking offices, including 28 in California, 16 in the Seattle/Puget Sound region in Washington, two in the Phoenix metropolitan area of Arizona and one in Portland, Oregon. Opus Bank offers a suite of treasury and cash management and depository solutions, and a wide range of loan products, including commercial, healthcare, media and entertainment, corporate finance, multifamily residential, commercial real estate and structured finance, and is an SBA preferred lender. Opus Bank offers commercial escrow services and facilitates 1031 Exchange transactions through its Escrow and Exchange divisions. Additionally, Opus Bank's wholly-owned subsidiary, PENSCO Trust Company, has approximately $14 billion of custodial IRA assets and approximately 47,000 client accounts, which are comprised of self-directed investors, financial institutions, capital raisers and financial advisors. Opus Bank is an Equal Housing Lender. For additional information about Opus Bank, please visit our website: www.opusbank.com.

Forward Looking Statements

This release and the aforementioned conference call and webcast includes forward-looking statements related to Opus' plans, beliefs and goals. Forward-looking statements are neither historical facts nor assurances of future performance. Opus generally identifies forward-looking statements by terminology such as "outlook," "believes," "expects," "potential," "continues," "may," "will," "could," "should," "seeks," "approximately," "predicts," "intends," "plans," "estimates," "anticipates" or the negative version of those words or other comparable words. Any forward-looking statements contained in this release and the aforementioned conference call and webcast are based on the historical performance of Opus and its subsidiaries or on its current plans, beliefs, estimates, expectations and goals. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity that could cause actual results to differ materially from those indicated by the forward-looking statements, including, without limitation: market and economic conditions, changes in interest rates, our liquidity position, the management of our growth, the risks associated with our loan portfolio, local economic conditions affecting retail and commercial real estate, our geographic concentration in the western region of the United States, competition within the industry, dependence on key personnel, government legislation and regulation, the risks associated with any future acquisitions, the effect of natural disasters, and risks related to our technology and information systems. For a discussion of these and other risks and uncertainties, see Opus' filings with the Federal Deposit Insurance Corporation, including, but not limited to, the risk factors in Opus' Annual Report on Form 10-K filed with the Federal Deposit Insurance Corporation on February 28, 2019. If one or more of these or other risks or uncertainties materialize, or if Opus' underlying assumptions prove to be incorrect, Opus' actual results may vary materially from those indicated in these statements. These filings are available on the Investor Relations page of Opus' website at: investor.opusbank.com.

Opus undertakes no obligation to revise or publicly release any revision to these forward-looking statements, whether as a result of new information, future developments or otherwise.

Non-GAAP Financial Measures

Our accounting and reporting policies conform to generally accepted accounting principles in the United States ("GAAP"). We believe that the presentation of certain non-GAAP financial measures assists investors in evaluating our financial results. These non-GAAP measures include our return on average tangible equity, tangible book value per common share, and tangible common equity ratio. These non-GAAP measures should be taken together with the corresponding GAAP measures and should not be considered a substitute of the GAAP measures.

The following tables present a reconciliation of the most comparable GAAP financial measures and ratios to the non-GAAP financial measures and ratios:

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