OPBK - OP Bancorp: Strong Loan Growth To Drive Earnings This Year

• After remarkable loan growth during the first quarter of the year, loan growth will likely decelerate but remain quite decent for the remainder of 2022.
• Thanks to the large balances of variable-rate loans and non-interest-bearing deposits, the net interest income is quite sensitive to interest rate changes.
• Provisioning will likely remain slightly above normal due to approaching economic headwinds.
• The December 2022 target price suggests a high upside from the current market price. Further, OPBK is offering a decent dividend yield.

Earnings of OP Bancorp ( OPBK ) will likely surge this year on the back of remarkable loan growth. Regional economic factors will likely boost loan portfolio size this year. Further, the rate-sensitive loan portfolio will ensure that earnings benefit from a rising interest-rate environment. On the other hand, slightly higher-than-average provision expenses will likely restrict earnings growth. Overall, I'm expecting OP Bancorp to report earnings of $2.28 per share for 2022, up 21% year-over-year. The year-end target price suggests a high upside from the current market price. Therefore, I'm adopting a buy rating on OP Bancorp.

Loan Growth to Decelerate but Remain Satisfactory

OP Bancorp’s loan portfolio grew by an astounding 8.8% during the first quarter of 2022, or 35% annualized. Such high loan growth is unsustainable; therefore, the growth rate will likely naturally decelerate for the second and third quarters of the year. Nevertheless, loan growth will remain at a decent level thanks to regional economic factors.

OP Bancorp’s loan portfolio is heavy on commercial and small business loans. Further, the portfolio is geographically concentrated in California. Therefore, the California Coincident Index of the Federal Reserve Bank of Philadelphia is a good indicator of economic activity, and consequently the credit demand for the near future. As shown below, the index’s upward trajectory is somewhat steep.

However, high interest rates are likely to take a toll on credit demand during the back half of the year. The Federal Reserve’s projections suggest that interest rates will peak in late 2022 or 2023 before trending downwards. As a result, it would make sense for commercial borrowers to delay their borrowing for capital expenditure by a few quarters. As a result, loan growth will likely slow down by the end of 2022 before picking up pace again next year.

Overall, I'm expecting the loan portfolio to increase by 18.9% by the end of 2022 from the end of 2021. Meanwhile, I'm expecting other balance sheet items to grow more or less in line with loans for the last three quarters of the year. The following table shows my balance sheet estimates.

Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, the threat of a recession can increase the provisioning for expected loan losses beyond my expectation. The new Omicron subvariant also bears monitoring.

Adopting a Buy Rating

OP Bancorp is offering a dividend yield of 3.8% at the current quarterly dividend rate of $0.10 per share. The earnings and dividend estimates suggest a payout ratio of 17.6% for 2022, which is close to the three-year average of 23.0%. Therefore, I’m not expecting an increase in the dividend level.

I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value OP Bancorp. The stock has traded at an average P/TB ratio of 0.94 in the past, as shown below.

The stock has traded at an average P/E ratio of around 7.8x in the past, as shown below.

Equally weighting the target prices from the two valuation methods gives a combined target price of $14.7 , which implies a 39.1% upside from the current market price. Adding the forward dividend yield gives a total expected return of 42.9%. Hence, I’m adopting a buy rating on OP Bancorp.

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