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Today we continue our earnings season coverage and we have to reiterate that we really like buying regional bank stocks in this environment. We have been pushing our members into these names on pullbacks because we think they are setting up for several years of strength on the back of their increasing ability to make more money. We think they are best suited to benefit from the interest rate hikes the Federal Reserve is pushing as their balance sheets are bet easier to understand relative to a complicated multinational investment type bank. They stand to benefit from widening net interest margins more than big global banks in our opinion. While we would expect regional banks to see some near-term slowing demand in loans for homes, autos, and new businesses, etc., performance has largely been better than expected in Q3.
One interesting bank that is focused on small businesses in California and Texas is OP Bancorp (NASDAQ:OPBK), and we believe the bank is poised to benefit from the resurgence of small businesses in America since COVID-19, as well as widening rates. The bank just reported Q3 earnings, and we believe the key metrics of the bank, along with a dividend yield over 4% make this a potentially attractive buying opportunity. Let us discuss.
OP Bancorp Q3 performance strong
In the just reported quarter the bank saw deposits decline, similar to many regional banks we have covered. Some of this is due to competition for deposits due to better rates now being offered. That said, the company grew its loan portfolio. Still, the earnings power of the bank is impressive. Revenues jumped in Q3, with OP Bancorp bringing in $25.2 million. These revenues of $25.2 million were a 25.0% increase year-over-year. Many regional banks have increased loan loss provisions ahead of possible economic turmoil in coming quarters, so this offsets some of the This year, loan loss provisions were $662,000, increasing from credits earlier in the year, and swinging $1.5 million. Provisions are being increased in case we have a mild or even moderate recession in 2023. This provisions weighed on earnings power, and combine with expenses, OP Bancorp saw net interest income widen. Margins expanded to 4.31%, but we expect further improvement moving forward as new loans are made at higher rates. Overall, OP Bancorp’s net income widened to $8.7 million or $0.55 per share compared to $8.2 million or $0.54 per share in the same quarter of 2021. This slightly missed consensus expectations by $0.02. Overall, it was a relatively mixed quarter, but we suspect operational efficiency improved over the next 8 quarters with higher rate loans.
Growth in loans for OP Bancorp
We always like to look for widening deposits and loans when we look at regional banks. As we know, having more deposits helps fund more loans. The thesis behind buying bank stocks at these severely depressed levels is that as rates increase, these banks can make better-termed loans and make more money on those deposits. That said, deposits were up nicely to $1.82 billion up $320.4 million from last year.
Over on the loan front, much like deposits, loans grew organically. Total loans were $1.65 billion at the end of the quarter rising $328.4 million or 25% from last year. This growth is certainly welcomed, and new loans are coming with better rates. As we move into Q4 rates are so much higher, and will have even better terms. Growth of loans now suggests we should see widening net interest margins, so long as the cost of funds (e.g., interest paid on deposits) does not rise dramatically. What we do know is asset quality has seen some mixed movement.
OP Bancorp asset quality mixed
We love to see growing loans but need to make sure that there is not a lot of bad debt on the books. In short, we need to review asset quality. We need to ensure that the assets held are performing and not delinquent. That said, the ratio of the non-performing loans was 0.14%, and this ticked up from 0.09% a year ago. This is a trend to watch going forward.
The allowance for loan losses improved one basis point to 1.14% of gross loans, from 1.15% a year ago. Making some adjustments, the adjusted allowance for loan losses as a percentage of loans improved significantly to 1.18% versus 1.34% a year ago.
OP Bancorp is a highly efficient bank
OP Bancorp has an excellent efficiency ratio. This ratio has largely improved over the last few years. The best banks approach 50% on this metric; the lower the better. In Q3, OP Bancorp saw an efficiency ratio of 4903%. This is a very strong result. We have to also point out that the return on average assets and equity slipped. The return on average assets fell to 1.77% vs. 2.03% a year ago. The return on average equity came in at 19.91% vs 21.30% versus last year. While there was some decline here, the bank is still efficient. We think that these metrics will improve when loan demand picks back up in a few quarters while loans are made at better rates.
Solid dividend yield pays you to wait for a turnaround in OP Bancorp stock
We do think that the dividend is attractive here as you wait for a turnaround in performance. The bank also pays a dividend and is currently yielding 4.1%. The dividend paid is $0.16 quarterly and is in little danger of being cut based on the payout ratio being 18%. What is more, the dividend is likely to continue to be raised when we look at the recent history of dividends.
OP Bancorp valuation
When considering an investment in a bank stock we want to have a sense of the valuation. It is relatively attractive compared to a lot of other regional banks we have covered on most metrics. One thing we noted is that book value here rose 7% from last year to $11.19. With shares at $11.72, this is an attractive price-to-book proposition. This is particularly attractive given the outlook for banks over the next few years.
Final thoughts
The dividend is offering investors a compelling yield. Loans are growing as are deposits. Asset quality is strong, but keep an eye on non-performing loans as they increased. Efficiency is strong but did decline some, but we see improvement in 2023. We think this is another bank stock option to consider for growth in 2023.
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