OP Bancorp: Strong loan growth to boost earnings this year (NASDAQ: OPBK)

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Profit from OP Bancorp (NASDAQ:OPBK) will likely increase this year on the back of remarkable loan growth. Regional economic factors will likely increase the size of the loan portfolio this year. In addition, the rate-sensitive loan portfolio will ensure that earnings benefit from an environment of rising interest rates. On the other hand, slightly above average provision charges are likely to dampen earnings growth. Overall, I expect OP Bancorp to report earnings of $2.28 per share for 2022, up 21% year-over-year. The year-end target price suggests a strong upside from the current market price. Therefore, I adopt a buy rating on OP Bancorp.

Loan growth will slow but remain satisfactory

OP Bancorp’s loan portfolio grew 8.8% in the first quarter of 2022, or 35% annualized. Such high loan growth is unsustainable; therefore, the growth rate will likely naturally slow 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 rich in commercial and small business loans. In addition, the portfolio is geographically concentrated in California. Therefore, the Federal Reserve Bank of Philadelphia’s California Coincident Index is a good indicator of economic activity, and therefore credit demand in the near future. As shown below, the upward trajectory of the index is somewhat steep.

Chart
Data by YCharts

However, high interest rates are expected to weigh on credit demand in the second half of the year. Federal Reserve projections suggest interest rates will peak in late 2022 or 2023 before falling. As a result, it would make sense for commercial borrowers to delay borrowing for capital expenditures for a few quarters. As a result, loan growth is likely to slow through to the end of 2022 before accelerating again next year.

Overall, I expect the loan portfolio to grow by 18.9% by the end of 2022 compared to the end of 2021. During this time, I expect other Balance sheet items increase more or less in line with loans for the last three quarters of the year. The following table shows my balance sheet estimates.

EX18 FY19 FY20 FY21 FY22E
Financial situation
Net loans 865 980 1,084 1,298 1,543
Net loan growth 17.1% 13.2% 10.6% 19.7% 18.9%
Other productive assets 63 68 129 251 282
Deposits 905 1,021 1,200 1,534 1,827
Loans and sub-debts ten 13 ten 11
Common Equity 130 141 143 165 188
Tangible BVPS ($) 8.3 8.8 9.4 10.9 12.3

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

Loan and deposit mixes well positioned for rate hikes

OP Bancorp’s loan portfolio is quite rate sensitive as variable rate loans represented 41.1% of total loans at the end of March 2022, as mentioned in the results presentation. In addition, $40 million in hybrid loans, representing 3% of total loans, will be reassessed within a year.

In addition, the large balance of non-interest bearing deposits will dampen the average cost of deposits as rates rise. Non-interest-bearing deposits represented 50.7% of total deposits at the end of March 2022. Money market and other deposits that will quickly revalue after each rate hike represented 27% of total deposits at the end of March 2022. Of March. March 2022.

Management’s interest rate sensitivity analysis presented in File 10-Q shows that a 200 basis point increase in interest rates can increase net interest income by 10.94% year-over-year month.

OP Bancorp Interest Rate Sensitivity

Filing 1Q 2022 10-Q

The above analysis assumes an immediate rise in interest rates. In reality, rate increases have been gradual this year. Therefore, the impact on net interest income will be less than 10.94%.

Given these factors, I expect the margin to increase by 14 basis points in the last three quarters of 2022, compared to 4.12% in the first quarter of the year.

Higher interest rates, recession threats to keep provisioning slightly above normal

OP Bancorp’s non-performing loans were well covered at the end of March 2022. Non-performing loans represented 0.20% of total loans, while provisions represented 1.17% of total loans at the end of the first quarter, as mentioned in the presentation. Because of the large cushion, I’m not too concerned that high interest rates and the threat of recession will drive up funding costs significantly. In my view, provisioning will likely only be slightly higher than normal for the remainder of this year. Large loan additions will likely further increase the provisioning for expected loan losses.

Overall, I expect OP Bancorp to report a net provision charge of 0.17% of total loans in 2022. In comparison, the net provision charge averaged 0.15% of total loans from 2017 to 2019.

Profits are expected to increase by 21%

Large loan additions in 2022 will likely be the main driver of earnings growth. In addition, the planned expansion of margins will increase the bottom line. On the other hand, slightly higher than normal provision charges will likely limit earnings growth. Overall, I expect OP Bancorp to report earnings of $2.28 per share for 2022, up 21% year-over-year. The following table shows my income statement estimates.

EX18 FY19 FY20 FY21 FY22E
income statement
Net interest income 41 44 45 61 75
Allowance for loan losses 1 1 6 1 3
Non-interest income 9 11 11 16 17
Non-interest charges 30 33 32 36 40
Net income – Common Sh. 14 16 13 29 35
BPA – Diluted ($) 0.89 1.03 0.85 1.88 2.28

Source: SEC filings, earnings releases, author’s estimates

(In millions of dollars, unless otherwise indicated)

Actual earnings may differ materially from estimates due to the risks and uncertainties associated with inflation and, therefore, the timing and magnitude of interest rate increases. Also, the threat of a recession may increase the provisioning of expected loan losses beyond my expectations. The new Omicron sub-variant should also be watched.

Adopt a shopping note

OP Bancorp offers a dividend yield of 3.8% at the current quarterly dividend rate of $0.10 per share. 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 do not expect an increase in the level of dividends.

I use historical price/accounting tangible (“P/TB”) and price/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.

FY19 FY20 FY21 Medium
T. Book value per share ($) 8.8 9.4 10.9
Average market price ($) 9.5 7.2 10.5
Historical P/TB 1.08x 0.77x 0.96x 0.94x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple by the expected tangible book value per share of $12.3 yields a target price of $11.6 for the end of 2022. This price target implies an upside of 9.7% compared to the closing price on July 15. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 0.74x 0.84x 0.94x 1.04x 1.14x
TBVPS – Dec 2022 ($) 12.3 12.3 12.3 12.3 12.3
Target price ($) 9.1 10.3 11.6 12.8 14.0
Market price ($) 10.6 10.6 10.6 10.6 10.6
Up/(down) (13.7)% (2.0)% 9.7% 21.4% 33.1%
Source: Author’s estimates

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

FY19 FY20 FY21 Medium
Earnings per share ($) 1.03 0.85 1.88
Average market price ($) 9.5 7.2 10.5
Historical PER 9.3x 8.5x 5.6x 7.8x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple with the expected earnings per share of $2.28 yields a price target of $17.8 for the end of 2022. This price target implies a 68.4% upside from at the closing price on July 15. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 5.8x 6.8x 7.8x 8.8x 9.8x
EPS 2022 ($) 2.28 2.28 2.28 2.28 2.28
Target price ($) 13.2 15.5 17.8 20.0 22.3
Market price ($) 10.6 10.6 10.6 10.6 10.6
Up/(down) 25.2% 46.8% 68.4% 90.0% 111.6%
Source: Author’s estimates

An equal weighting of the target prices from the two valuation methods gives a target price of $14.7, implying a 39.1% upside from the current market price. Adding the forward dividend yield gives an expected total return of 42.9%. Therefore, I adopt a buy rating on OP Bancorp.

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