OP Bancorp — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. OP Bancorp is a Los Angeles-based bank holding company operating Open Bank, a community bank focused on small and medium-sized businesses and retail customers. Figures below are in U.S. dollars; financial amounts are in millions unless otherwise stated.
Financial performance and position
- Q2 earnings: Net income was $8.48 million, up 32.9% from $6.38 million in Q2 2021. Diluted EPS was $0.54 versus $0.42.
- First-half earnings: Net income was $16.63 million, up 45.2% from $11.46 million; diluted EPS was $1.07 versus $0.75.
- Revenue and margins: Q2 net interest income was $19.08 million, up 30.8%; net interest margin was 4.21%, versus 3.98%. For the first half, net interest income was $36.37 million, up 33.0%, and margin was 4.16%, versus 3.90%. Noninterest income was $5.36 million in Q2 and $9.58 million for the first half.
- Expenses and profitability: Q2 noninterest expense rose 30.9% to $11.50 million; the efficiency ratio improved to 47.07% from 52.30%. First-half noninterest expense rose 26.3% to $21.17 million; the efficiency ratio improved to 46.07% from 51.51%. Q2 return on average assets was 1.79% and return on average equity was 20.29%.
- Balance sheet at June 30: Total assets were $1.93 billion, deposits $1.74 billion, gross loans $1.48 billion and shareholders’ equity $169.5 million. Versus June 30, 2021, assets increased 20.7%, deposits 21.4%, gross loans 19.2% and equity 11.5%. Versus year-end 2021, net loans grew to $1.47 billion from $1.30 billion, while deposits rose to $1.74 billion from $1.53 billion.
- Credit quality: The allowance for loan losses was $17.7 million, or 1.19% of gross loans, compared with $16.1 million and 1.23% at year-end. Nonperforming loans were $2.18 million, or 0.15% of gross loans, down from $3.20 million and 0.24%. First-half provision expense was $1.34 million, compared with a $0.49 million reversal in first-half 2021.
- Cash flow and liquidity: First-half operating cash flow was $34.6 million versus cash used of $28.7 million in 2021; investing activities used $221.8 million and financing provided $204.4 million. Cash and cash equivalents increased $17.2 million to $132.7 million. Cash plus available-for-sale securities totaled $307.5 million. The loan-to-deposit ratio was 84.2%.
- Debt and capital: No FHLB borrowings were outstanding at June 30. The Bank had $663.6 million of borrowing capacity across listed facilities. The Bank’s total risk-based capital ratio was 13.36%, CET1 ratio 12.14% and leverage ratio 9.36%; management reported the Bank was well-capitalized.
Material changes versus comparable periods
- Growth in loan balances and higher loan yields drove much of the increase in interest income. Q2 average loan yield rose to 4.91% from 4.83%; the first-half yield rose to 4.88% from 4.73%.
- Loan-sale gains increased materially: $3.87 million in Q2 versus $1.21 million, and $7.11 million for the first half versus $3.09 million. Higher SBA loan sale volumes contributed, although average sale premiums were lower.
- Loan growth was led by home mortgage and commercial real estate. Home mortgage loans increased to $331.4 million from $173.3 million at year-end, including $138.0 million of purchases. Commercial real estate loans rose to $776.8 million from $701.5 million.
- Deposit growth included a shift toward interest-bearing balances: noninterest-bearing deposits were 47.1% of deposits at June 30, versus 50.5% at year-end. Q2 average cost of interest-bearing deposits increased to 0.50% from 0.42% a year earlier.
- Q2 provision expense replaced the prior-year reversal, reflecting loan growth and reserve adjustments. Noninterest expense also increased, principally due to staffing, a new branch opened in Q1 2022, and higher foundation contributions.
- Rising market rates produced a $9.78 million first-half after-tax other comprehensive loss, primarily from unrealized losses on available-for-sale securities. Those securities had $15.58 million of gross unrealized losses at June 30, compared with $2.13 million at year-end.
Outlook, commentary, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management said it expected available liquidity sources to meet the cash needs of lending activities and considered the allowance adequate, while cautioning that economic or real-estate weakness could increase nonperforming loans and credit losses.
- Interest-rate sensitivity is material. The company’s model projected that an immediate 400-basis-point increase would raise 12-month net interest income by 7.77% but reduce economic value of equity by 37.38%; a 100-basis-point decline projected a 5.14% reduction in net interest income. These are model scenarios, not forecasts.
- Credit concentration is a key risk: commercial real estate represented 52.2% of gross loans, and 89.9% of gross loans were secured by real property. Management reported no material industry concentration and said loans were within established limits.
- Available-for-sale securities’ unrealized losses were attributed primarily to interest-rate movements, not credit deterioration. Management did not intend to sell the securities and said it expected full collection; it concluded no credit impairment existed at June 30.
- Undisbursed credit commitments totaled $200.7 million, including $193.9 million of loan commitments. Management did not anticipate material losses; many commitments may expire without funding. One C&I loan of $454,000 remained under a COVID-19 payment modification.
- Management reported no material subsequent events, no material expected losses from legal claims, and effective disclosure controls. The filing highlights broader risks including economic conditions, rate movements, credit quality, liquidity, competition, regulation, cybersecurity and third-party service disruptions.
Important facts for investors to verify
- Whether loan growth and SBA loan-sale gains can continue, especially as sale premiums have declined and loan-market conditions change.
- How fast deposit costs reprice relative to loan yields as interest rates change, and the resulting effects on net interest margin and modeled economic value.
- Whether commercial real estate and home mortgage credit quality remains stable; review collateral values, criticized loans, delinquencies and allowance assumptions.
- The potential effects of securities mark-to-market losses on equity and liquidity if securities must be sold before recovery.
- Funding and capital capacity under stress, including deposit concentration and the availability of borrowing facilities against pledged collateral.