OP Bancorp — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022 unless noted. OP Bancorp is a Los Angeles-based bank holding company whose Open Bank subsidiary serves small and medium-sized businesses and retail customers. Figures are unaudited and in U.S. dollars.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Interest income | $28.6 million | $17.9 million | +$10.7 million |
| Interest expense | $10.7 million | $0.7 million | +$10.0 million |
| Net interest income | $17.9 million | $17.3 million | +3.5% |
| Net interest margin | 3.56% | 4.12% | Down 56 basis points |
| Noninterest income | $4.3 million | $4.2 million | +1.9% |
| Noninterest expense | $11.9 million | $9.7 million | +23.2% |
| Net income / diluted EPS | $7.5 million / $0.48 | $8.2 million / $0.53 | Net income down 7.6% |
- Pre-tax income was $10.6 million, versus $11.5 million. Return on average assets was 1.43% (1.85%); return on average equity was 16.82% (19.54%). Efficiency ratio increased to 53.67% from 44.93%.
- Higher loan and securities yields lifted interest income, but sharply higher deposit costs compressed margin. Deposit cost rose to 2.25% from 0.17%; cost of average interest-bearing liabilities was 3.55% versus 0.34%.
- Management attributed lower earnings chiefly to a $2.2 million rise in noninterest expense, partly offset by higher net interest income and a $679,000 swing from provision expense to a credit-loss reversal.
Balance sheet, cash flow and capital
- Total assets were $2.17 billion, up 3.6%; gross loans were $1.69 billion, up 0.8%; deposits were $1.90 billion, up 1.0%; and shareholders’ equity was $183.8 million, up 3.9% from year-end.
- Cash and cash equivalents increased to $181.5 million from $83.0 million. Q1 operating cash flow was $44.6 million; investing activities used $13.5 million and financing activities provided $67.4 million. The company received $50 million in Federal Home Loan Bank (FHLB) advances.
- Liquid assets (cash and available-for-sale securities) totaled $394.3 million, or 18.2% of assets. Available borrowing capacity was $680.8 million; liquid assets plus available borrowings equaled 49.5% of assets. The loan-to-deposit ratio was 87.8%.
- Estimated uninsured deposits were $900.6 million, or 47.3% of deposits, compared with $938.3 million, or 49.8%, at year-end. Noninterest-bearing deposits declined to 33.8% of deposits from 37.2%.
- The $50 million FHLB borrowing had a 5.27% weighted-average rate and matured April 13, 2023. The filing reports borrowing capacity but does not state whether this advance was repaid after quarter-end.
- At March 31, the Bank’s total risk-based capital ratio was 13.01%, CET1 ratio 11.81%, and leverage ratio 9.23%; management reported the Bank was well-capitalized.
Material changes, outlook and risks
- Adoption of CECL on January 1 increased the loan-loss allowance by $1.9 million and the off-balance-sheet commitment allowance by $184,000, recorded a $624,000 deferred tax asset, and reduced opening retained earnings by $1.5 million. The ending loan allowance was $20.8 million, or 1.23% of gross loans.
- Nonperforming loans rose to $4.4 million (0.26% of gross loans) from $3.1 million (0.18%) at year-end. Allowance coverage of nonperforming loans was 478%, down from 625%. The quarter included $116,000 of charge-offs and $23,000 of recoveries.
- Noninterest expense growth reflected $1.6 million higher salary and benefit costs, which management linked partly to 23 additional full-time employees, and a $260,000 increase in FDIC insurance and regulatory assessments.
- Available-for-sale securities had $22.7 million of gross unrealized losses at March 31, primarily attributed to interest rates rather than credit quality. Management said it did not intend, and was more likely than not would not need, to sell these securities before recovery; no credit-loss allowance was recorded on them.
- The filing provides no specific earnings or margin guidance. Management stated liquidity sources were expected to be sufficient for lending and other cash requirements. It identified deposit withdrawals, customer confidence after recent bank failures, interest-rate movements, funding costs, loan performance, real-estate values and broader economic conditions as risks. These are forward-looking assessments, not guarantees.
- Q1 credit-related commitments totaled $267.8 million. Management did not anticipate material losses from these commitments. Legal proceedings were described as ordinary-course matters, with no expected material financial-statement impact.
Important facts for investors to verify
- Whether the April 13, 2023 FHLB advance was repaid, renewed or replaced, and how subsequent deposit flows affected liquidity and funding costs.
- Trends in uninsured and noninterest-bearing deposits, deposit pricing, and the concentration or stability of funding.
- Subsequent movement in nonperforming loans, delinquencies, charge-offs, and CECL allowance assumptions, particularly for home mortgages and real-estate-secured lending.
- Potential effects of interest-rate changes on net interest margin and the value or liquidity of the securities portfolio; the filing’s rate-sensitivity scenarios are model estimates, not forecasts.
- Whether higher staffing and regulatory costs persist and whether revenue growth can offset expense increases and margin compression.