OP Bancorp — Q3 2022 Form 10-Q
Reporting period: Quarter ended September 30, 2022; comparisons are primarily with Q3 and the first nine months of 2021, and balance-sheet comparisons with December 31, 2021. OP Bancorp operates Open Bank, a California-chartered community bank serving small and medium-sized businesses and other customers, with a focus on the Korean-American community.
Financial results and condition
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Net interest income | $20.3 million | $16.6 million | +22.6% |
| Provision for loan losses | $0.7 million | $0.9 million reversal | $1.5 million increase in provision |
| Noninterest income | $4.8 million | $3.5 million | +36.1% |
| Noninterest expense | $12.3 million | $9.5 million | +29.6% |
| Net income | $8.7 million | $8.3 million | +4.8% |
| Diluted EPS | $0.55 | $0.54 | +$0.01 |
| Net interest margin | 4.31% | 4.21% | +10 bps |
For the first nine months of 2022, net income was $25.3 million, up 28.3%; diluted EPS was $1.62 versus $1.29; and net interest income rose 29.1% to $56.7 million. Noninterest income increased 64.9% to $14.4 million, while noninterest expense rose 27.5% to $33.5 million. Nine-month net interest margin was 4.22%, up from 4.01%.
- Balance sheet: Total assets were $2.03 billion at September 30, up 17.5% from $1.73 billion at year-end 2021. Gross loans increased 23.1% to $1.62 billion; deposits rose 18.4% to $1.82 billion. Shareholders’ equity was $170.1 million, versus $165.2 million.
- Loan mix and credit: Commercial real estate loans were $830.1 million (51.3% of gross loans); home mortgage loans grew to $419.5 million from $173.3 million at year-end. The allowance for loan losses was $18.4 million, or 1.14% of gross loans, compared with $16.1 million, or 1.23%. Nonperforming loans declined to $2.3 million, or 0.14% of gross loans, from $3.2 million, or 0.24%.
- Cash flow and liquidity: Nine-month operating cash flow was $80.8 million, investing cash outflow was $376.8 million, and financing cash inflow was $287.9 million. Cash and equivalents ended at $107.3 million, down from $115.5 million at year-end. Cash plus available-for-sale (AFS) securities totaled $293.7 million. The bank reported $686.5 million of available borrowing capacity across FHLB, Federal Reserve and correspondent-bank lines; FHLB borrowings outstanding were $10 million.
- Debt and capital: The filing reports no material long-term debt; FHLB advances were $10 million. The bank’s total risk-based capital ratio was 12.97%, CET1 ratio 11.79%, and leverage ratio 9.41%; management said the bank met applicable capital requirements and was well-capitalized.
- Profitability and operating costs: Q3 return on average assets was 1.77% and return on average equity 19.91%. The efficiency ratio was 49.03%, compared with 47.29% in Q3 2021. Higher staffing, a new branch, consulting and business-development costs contributed to expense growth.
Material changes and management commentary
- Management attributed higher net interest income mainly to loan growth and higher asset yields amid Federal Reserve rate increases. Q3 average loan yield rose to 5.36% from 5.13%, while the average cost of interest-bearing deposits rose to 1.21% from 0.40%.
- Loan growth reflected new production and home-mortgage purchases; gross loans increased $304.0 million from year-end. The portfolio became more concentrated in real estate-secured lending: 90.7% of gross loans were secured by real property, versus 83.3% at year-end.
- Gain on loan sales rose, reflecting greater SBA loan-sale volume, although average premiums were lower. The company sold $59.3 million of SBA loans in Q3 at a 6.67% average premium, versus $20.6 million at 11.59% a year earlier.
- AFS securities were $186.4 million at fair value against $211.4 million amortized cost, with $25.0 million of gross unrealized losses, chiefly attributed to rising interest rates. Those losses contributed to a $16.4 million nine-month after-tax decline in accumulated other comprehensive income. Management stated it did not intend, and was not more likely than not expected, to have to sell the securities before recovery, and did not identify credit impairment.
- Management recorded a $2.0 million loan-loss provision for the first nine months, versus a $1.4 million reversal in 2021, mainly reflecting quantitative reserves associated with loan growth. Management considered the allowance adequate but cautioned that economic or real-estate-market weakness could increase problem loans and losses.
Outlook, risks and contingencies
The filing provides no specific earnings or balance-sheet guidance. Management highlighted sensitivity to interest-rate movements, deposit pricing and funding, real-estate values, borrower financial health, liquidity and securities fair values, competition, regulatory requirements, and operational, technology and cybersecurity risks. Its interest-rate simulation showed that a parallel +100 basis-point shock was associated with a 1.28% increase in modeled net interest income over 12 months, while modeled economic value of equity declined 7.60%; results are simulations, not forecasts.
- The company expected to adopt the current expected credit loss standard (CECL) on January 1, 2023 and said adoption may increase the allowance; the ultimate effect remained under evaluation.
- Undisbursed credit commitments totaled $193.7 million, including $186.3 million of loan commitments. Management did not anticipate material losses from these commitments.
- Low-income housing partnership investments had $9.1 million of unfunded commitments, expected to be fulfilled through 2039. Management said it did not expect legal claims in the normal course of business to have a material financial-statement impact.
- No loans remained under COVID-19 payment deferral at September 30, 2022. The filing reported no material subsequent events and no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether loan and deposit growth can be sustained while deposit costs rise and noninterest-bearing deposits’ share falls to 43.7% from 50.5% at year-end.
- Credit quality and reserve adequacy as the portfolio expands, particularly in commercial real estate and home mortgages; review delinquency, nonaccrual and risk-rating trends.
- Potential CECL adoption impact on the allowance, retained earnings and reported earnings beginning in 2023.
- Whether the large unrealized AFS securities losses remain manageable under liquidity or deposit stress, given their effect on accumulated other comprehensive loss.
- The filing’s EPS presentation: the income statement reports Q3 basic EPS of $0.56 and diluted EPS of $0.55; MD&A also cites $0.55 per diluted share. Verify comparisons using the stated diluted measure.