OPBK - OP Bancorp: Cheap But Q3 Lags Higher-Quality Names

2023-10-27 15:30:41 ET

Summary

• OP Bancorp's Q3 performance was weak, with declining deposits, minimal loan growth, and a 21% decrease in revenues.
• The bank's asset quality has deteriorated, with an increase in non-performing loans and a higher allowance for loan losses.
• Operational metrics, such as efficiency ratio and return on average assets, have significantly worsened, making OP Bancorp an unattractive investment.

We continue our earnings season coverage for regional banks, which have been crushed this year. There are many headwinds, such as a weakening consumer, pressure on businesses, high rates on loans making them more difficult to pay, and banks needing to fight for deposit dollars and having to pay big bucks for them in interest.

Folks, we have looked at a number of banks, and some are in fine shape in this mess. The sector has held up, but margins have been buried.

One name we used to like is in California and Texas. It is OP Bancorp ( OPBK ). While there is a strong yield paying you to wait, this is a bank that lagged the pack on many key metrics. We rate it a "don't buy." We would not short it, but are rather neutral to mildly bearish on the performance. Let us discuss.

OP Bancorp's Q3 headline performance weak

In the just- reported quarter the bank saw deposits decline, and minimal growth in the loan portfolio. Revenues fell in Q3, with OP Bancorp bringing in $19.9 million. These revenues of $19.9 million were a 21% decrease year-over-year. Loan loss provisions doubled from last years $662,000, increasing to $1.3 million. These provisions weighed on earnings power, and combined with expenses, and lower margins, earnings got hit. Margins fell from to 4.31%, to 3.38%, and fell from 3.40% in the sequential Q2.

Overall, OP Bancorp's net income fell to just $5.1 million or $0.33 per share compared to $8.7 million or $0.55 per share in the same quarter of 2022. This missed consensus expectations by a whopping $0.05 per share. This was not a good quarter, even though the company is dedicating funds to a share repurchase program, which we question the timing on that, though we do note the stock is well below book value. But we cannot buy a bank with severe deterioration in the key metrics we follow.

Growth in loans for OP Bancorp

We always like to look for widening deposits and loans when we look at regional banks. That said, deposits were down to $1.83 billion flat from a year ago and down from $1.86 billion last year.

Loans edged up, one positive here. Total loans were $1.76 billion at the end of the quarter rising from $1.65 billion from last year, and up $40 million from Q2. This growth is certainly welcomed, and new loans are coming with better rates. But the asset quality has deteriorated.

OP Bancorp's asset quality deteriorates

Growing loans is positive but a review asset quality suggests some pain ahead. Other competitors that we have rated buys have seen improvements on quality metrics. We need to ensure that the assets held are performing and not delinquent. That said, the ratio of the non-performing loans was 0.24%, and this ticked up significantly from 0.14% a year ago. This is a trend to watch going forward. This ratio also worsened from 0.20% in the sequential Q2.

The allowance for loan losses also increased from 1.14% of gross loans, a year ago to 1.23%. Further, it also worsened from 1.21% in the sequential Q2. In Q2 there were hardly any net-charge offs, but net charge-offs to average gross loans spiked to of 0.11%, compared to <0.01% last quarter. OP Bancorp has historically had an excellent efficiency ratio. This ratio has largely improved over the last few years. In Q3, OP Bancorp saw an efficiency ratio of 57.9%, significant erosion from 49.0% a year ago.

Perhaps unsurprisingly, the return on average assets and equity slipped. The return on average assets fell to just 0.96% from 1.77% a year ago, and further fell from 1.15% in Q2. Ouch. The return on average equity came in at just 11.07% versus 19.91% last year, and from 13.27% in Q2. Just not the kind of movement we want to see in a regional. The company does pay a nice dividend, one saving grace, and even with the declines in performance, it is well covered.

Final thoughts

While the OP Bancorp yield is partially enticing, and the bank is well below book value, the operational metrics are too weak for our standards. We think you avoid this one.

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