OP Bancorp — Q3 2023 Form 10-Q Summary
Business context and reporting period
OP Bancorp is a California bank holding company whose principal operations are conducted through Open Bank, a community bank serving small and midsize businesses and retail customers. The unaudited filing covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are with December 31, 2022. Open Bank opened its eleventh full-service branch, in Las Vegas, during Q3.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $17.3 million | $20.3 million | $52.5 million | $56.7 million |
| Noninterest income | $2.6 million | $4.8 million | $10.5 million | $14.4 million |
| Provision for credit losses | $1.4 million | $0.7 million | $1.0 million | $2.0 million |
| Noninterest expense | $11.5 million | $12.3 million | $35.7 million | $33.5 million |
| Net income | $5.1 million | $8.7 million | $18.7 million | $25.3 million |
| Diluted EPS | $0.33 | $0.55 | $1.21 | $1.62 |
| Net interest margin | 3.38% | 4.31% | 3.45% | 4.22% |
Q3 return on average assets was 0.96% versus 1.77%; return on average equity was 11.07% versus 19.91%. The efficiency ratio rose to 57.92% from 49.03%. For the nine-month periods, those measures were 1.18% versus 1.80%, 13.69% versus 19.91%, and 56.77% versus 47.11%, respectively.
At September 30, assets were $2.14 billion, up 2.3% from year-end; gross loans were $1.76 billion, up 4.8%; deposits were $1.83 billion, down 3.2%; and shareholders’ equity was $184.3 million, up 4.2%. Net loans were $1.74 billion. Cash and cash equivalents were $105.7 million, and available-for-sale (AFS) securities were $191.3 million.
For the first nine months, operating cash flow was $69.2 million, investing cash flow was negative $73.5 million, and financing cash flow was positive $27.1 million. Cash increased $22.8 million to $105.7 million. The Bank had $95.0 million of FHLB advances outstanding, at a 4.54% weighted-average rate; it had no FHLB advances at December 31, 2022.
Material changes and key drivers
- Net income declined 40.8% in Q3 and 25.9% year to date. Management attributed the Q3 decline mainly to lower net interest income and noninterest income, plus higher credit-loss provision. Year-to-date results also reflected higher noninterest expense.
- Higher deposit costs more than offset increased loan yields. Q3 interest expense rose $11.0 million year over year, while interest income rose $8.0 million. The average cost of deposits increased to 2.83% from 0.65% in Q3; net interest margin contracted 93 basis points.
- Lower SBA loan-sale activity reduced gains on loan sales: Q3 gains were $1.2 million versus $3.5 million, and nine-month gains were $5.8 million versus $10.6 million. SBA sales were $23.4 million in Q3 and $104.8 million year to date.
- Nonperforming loans increased to $4.2 million, or 0.24% of gross loans, from $2.0 million, or 0.12%, at year-end. The allowance for credit losses was $21.6 million, or 1.23% of gross loans, compared with $19.2 million, or 1.15%, at year-end. Q3 net charge-offs were $488,000.
- Deposits shifted toward time deposits: noninterest-bearing deposits fell to 33.2% of deposits from 37.2% at year-end. Estimated uninsured deposits were $1.06 billion, or 58.2% of total deposits. The loans-to-deposits ratio rose to 95.2% from 88.0%.
- AFS securities had $30.4 million of gross unrealized losses at quarter-end, attributed by management to interest rates rather than credit quality. Accumulated other comprehensive loss was $21.4 million. Management reported no intent or expected need to sell the securities before recovery and recorded no securities credit-loss allowance.
Liquidity, capital, outlook and risks
Cash plus AFS securities totaled $297.1 million, or 16.3% of deposits. Available borrowing capacity was $662.3 million, bringing liquid assets plus available borrowings to 52.6% of deposits. Undisbursed credit commitments totaled $262.0 million. Management stated it expected liquidity sources to meet cash requirements, but identified deposit withdrawals and undrawn credit lines as important liquidity risks.
The Bank was reported well-capitalized. At September 30, its CET1 and Tier 1 risk-based capital ratios were 11.98%, total risk-based capital was 13.20%, and Tier 1 leverage was 9.55%. These exceeded the stated well-capitalized thresholds.
The filing provides no numerical earnings or operating guidance. Management highlighted sustained high interest rates, deposit competition and costs, potential deposit outflows, weaker loan demand, borrower repayment stress, and reduced SBA sale activity as pressures on earnings. Risks also include the possibility of forced securities sales at a loss, changing credit conditions, regulatory scrutiny or increased capital requirements, and further FDIC assessments. The bank’s loan book is concentrated in real-estate-secured lending: 92.1% of gross loans were secured by real property, and commercial real estate represented 50.0% of loans. Management reported ordinary-course legal claims but did not expect material losses. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether deposit retention, mix, and funding costs stabilize, particularly given the 58.2% estimated uninsured-deposit share and the rise in time-deposit funding.
- Whether net interest margin and earnings respond as expected to interest rates; the filing’s +300-basis-point scenario estimates a 4.60% decline in net interest income and a 41.93% decline in economic value of equity.
- Whether elevated delinquencies and nonperforming loans, including real-estate exposures, lead to further provisions or losses beyond the allowance.
- How the $30.4 million unrealized AFS securities loss and management’s ability to avoid selling securities affect liquidity and capital if deposit outflows accelerate.
- Whether SBA loan originations, sale volumes, and premiums recover, and whether higher operating costs and branch expansion affect profitability.