OP Bancorp — Q2 2023 Form 10-Q
Business context and reporting period. OP Bancorp is a California bank holding company whose principal operations are conducted through Open Bank, a community bank focused on commercial banking, including lending to small and midsized businesses. This unaudited filing covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are to December 31, 2022. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $17.3 million | $19.1 million | $35.1 million | $36.4 million |
| Net income | $6.1 million | $8.5 million | $13.6 million | $16.6 million |
| Diluted EPS | $0.39 | $0.54 | $0.88 | $1.07 |
| Net interest margin | 3.40% | 4.21% | 3.48% | 4.16% |
| Efficiency ratio | 58.97% | 47.07% | 56.24% | 46.07% |
- Revenue and margins: Q2 interest income rose 49% to $30.1 million, but interest expense increased to $12.9 million from $1.1 million, reducing net interest income 9.6%. The bank’s average deposit cost increased to 2.63% from 0.25% in Q2. For the first half, noninterest income was $7.9 million, down 17.5%, mainly reflecting lower loan-sale gains.
- Expenses and profit: Q2 noninterest expense increased 6.9% to $12.3 million; first-half expense rose 14.4% to $24.2 million, including higher staff and FDIC assessment costs. First-half net income declined 18.1%.
- Loans and credit: Gross loans were $1.716 billion, up 2.3% from year-end. Commercial real estate was 49.4% of gross loans and home mortgages 30.1%; 92.6% of gross loans were secured by real property. The allowance for credit losses was $20.8 million, or 1.21% of gross loans. Nonperforming loans increased to $8.8 million (0.51% of gross loans) from $3.1 million (0.18%); the filing says these amounts include $5.4 million of guaranteed SBA loans. No Q2 credit-loss provision was recorded; the six-month provision was a $338,000 reversal.
- Deposits, liquidity, and debt: Deposits totaled $1.860 billion, down 1.4% from year-end; noninterest-bearing deposits were 34.1% of deposits. Estimated uninsured deposits were $1.09 billion, or 58.7% of total deposits. Cash and cash equivalents were $143.8 million; cash plus available-for-sale securities totaled $346.0 million. Unused borrowing capacity was $672.9 million, and the bank had $75.0 million of FHLB advances outstanding at a 4.22% weighted-average rate. The loans-to-deposits ratio was 91.2%.
- Cash flow and capital: For the six months, operating activities provided $53.8 million, investing activities used $36.2 million, and financing activities provided $43.3 million; cash increased $60.8 million. Bank regulatory ratios were above well-capitalized thresholds: total risk-based capital 12.98%, CET1 11.80%, and leverage 9.41%.
- Other balance-sheet items: Available-for-sale securities had a $25.8 million net unrealized loss at June 30, primarily attributed by management to interest-rate movements rather than credit quality. Shareholders’ equity was $183.8 million. The company repurchased $2.6 million of stock and declared $0.24 per share in dividends during the first half.
Material changes versus comparable periods
- Despite higher asset yields, rapidly rising funding costs compressed Q2 net interest margin by 81 basis points year over year; the six-month margin was down 68 basis points.
- Net income fell year over year in both Q2 and the first half. In Q2, lower net interest income and loan-sale gains were partly offset by no credit-loss provision and lower taxes. For the first half, higher operating expense and lower noninterest income also contributed to the decline.
- Loan growth was accompanied by a rise in nonperforming loans. The allowance-to-nonperforming-loans ratio declined to 236% from 625% at year-end.
- Deposits declined modestly overall, with a shift in mix: noninterest-bearing deposits decreased while time deposits increased. The company began using FHLB advances, which were zero at December 31, 2022.
- On January 1, 2023, adoption of CECL increased the loan allowance by $1.9 million and off-balance-sheet commitment allowance by $184,000; after a deferred tax asset, opening retained earnings decreased by $1.5 million.
Outlook, commentary, and risks
The filing provides no formal numerical earnings or revenue guidance. Management expects deposit pricing and liquidity demands to remain elevated for an indefinite period and expects near-term contraction in net interest margin and net interest income. Management states that liquidity sources are sufficient to meet expected needs, but notes that maintaining higher liquidity can limit investment in higher-yielding assets.
- Key risks include deposit outflows and confidence concerns affecting smaller banks, the high uninsured-deposit share, interest-rate movements and repricing costs, and potential regulatory demands for greater liquidity or reserves.
- Credit exposure includes the sizable real-estate-secured portfolio, borrower and collateral performance, and the increase in nonperforming loans. Loan commitments and letters of credit totaled $294.4 million, though management did not anticipate material losses from these arrangements.
- Interest-rate modeling showed a 0.65% decline in projected net interest income under an immediate +300-basis-point scenario and a 39.84% decline in economic value of equity under that scenario. These are model sensitivities, not forecasts.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It said ordinary-course legal claims were not expected to be material.
Important facts for investors to verify
- Whether deposit levels, uninsured-deposit concentration, and deposit pricing stabilize, and how much reliance on wholesale funding is needed.
- Whether net interest margin and net interest income continue to weaken as deposits reprice and rates change.
- The causes and subsequent performance of nonperforming loans, including the guaranteed SBA portions, and whether the allowance remains adequate under CECL assumptions.
- The realizability and liquidity implications of the unrealized losses on available-for-sale securities, particularly if deposit withdrawals require asset sales.
- Whether loan growth, real-estate concentration, and elevated noninterest expense produce sustainable returns without eroding capital or asset quality.