OP Bancorp(OPBK) - 2024 Q4 - Annual Report

Part I Item 1. Business OP Bancorp, operating through its subsidiary Open Bank, is a commercial bank headquartered in Los Angeles, California, primarily serving the Korean-American community. As of December 31, 2024, the bank had $2.37 billion in total assets, $1.93 billion in net loans, and $2.03 billion in total deposits. Its business strategy focuses on organic growth, leveraging its community relationships, and maintaining strong asset quality through disciplined lending in commercial real estate, SBA, and commercial loans. The bank operates through eleven branches and five loan production offices across California, Texas, Nevada, and other states Consolidated Financial Highlights as of December 31, 2024 | Metric | Amount (in billions) | | :--- | :--- | | Total Assets | $2.37 | | Total Deposits | $2.03 | | Total Loans, Net | $1.93 | | Total Shareholders' Equity | $0.205 | - The bank operates through eleven full-service branches and five loan production offices, with a focus on serving the Korean-American community in major metropolitan areas[16] - A key community initiative is the Open Stewardship Foundation, to which the company commits 10% of its consolidated net income after taxes annually. Since its inception in 2011, over $17.5 million has been donated[20][25] Lending Activities Loan Portfolio Composition (December 31, 2024 vs 2023) | Loan Category | 2024 Amount (in thousands) | 2023 Amount (in thousands) | | :--- | :--- | :--- | | Commercial real estate | $980,247 | $885,585 | | SBA | $253,710 | $239,692 | | Commercial and industrial | $213,097 | $120,970 | | Home mortgage | $509,524 | $518,024 | | Consumer | $274 | $1,574 | | Gross loans receivable | $1,956,852 | $1,765,845 | - The loan portfolio is geographically concentrated in Southern California, with commercial real estate loans constituting the largest portion at 50.1% of total loans as of December 31, 2024[32] - The bank has been designated as an SBA Preferred Lender nationwide, which facilitates a more efficient marketing and approval process for its SBA 7(a) and 504 loan programs[52] Deposit Products Deposit Metrics (as of or for the year ended December 31, 2024) | Metric | Value | | :--- | :--- | | Total Deposits | $2.03 billion | | Core Deposits as % of Total Deposits | 72.1% | | Wholesale Deposits as % of Total Deposits | 21.4% | | Cost of Deposits (Annualized) | 3.48% | - Core deposits, defined as all deposits excluding time deposits over $250,000, are considered the primary low-cost funding source for the bank's lending activities[28] Supervision and Regulation - The company and its subsidiary, Open Bank, are extensively regulated by federal and state agencies, including the Federal Reserve, the FDIC, and the California Department of Financial Protection and Innovation (DFPI)[95][97][112] - The Bank is subject to Basel III capital rules, requiring minimum ratios for common equity Tier 1, Tier 1, and total capital, plus a 2.5% capital conservation buffer to avoid restrictions on dividends and bonuses[101][103] - Regulators have increased focus on commercial real estate (CRE) concentrations. As of December 31, 2024, the Bank's CRE loans represented 311% of its total risk-based capital, slightly exceeding the 300% supervisory threshold, which may warrant greater scrutiny[123] Item 1A. Risk Factors The company faces a wide range of risks, including those related to its business operations, loan portfolio, and regulatory environment. Key risks include cybersecurity threats, fluctuations in interest rates, and adverse economic conditions, particularly in the real estate market. The loan portfolio has significant concentration in commercial real estate and loans to small- and medium-sized businesses, which carry higher risk. The company is also dependent on its SBA lending program, subject to changes in government policy. Other material risks involve competition, reliance on key management, potential insufficiency of the allowance for credit losses, and extensive government regulation Risks Related to Our Business - The business is vulnerable to interruptions from cyber-attacks, fraudulent activity, and other security breaches, which are increasing in sophistication, potentially leading to financial loss and reputational damage[140][141] - Fluctuations in interest rates, driven by Federal Reserve monetary policy, can negatively impact net interest income, loan origination volumes, and the value of the securities portfolio[147][148][152] - The business is sensitive to general economic conditions, particularly in California. Recent wildfires in Los Angeles in January 2025 could impair borrowers' ability to repay loans and reduce collateral values[158] Risks Related to Our Loans - A significant portion of the loan portfolio (88.0% as of Dec 31, 2024) is secured by real estate, making the company vulnerable to negative changes in real estate values and liquidity[160] - Commercial loans, which comprised 73.9% of the total portfolio, carry a higher degree of risk as repayment often depends on the successful operation of the underlying business or property[161] - The bank's single-family residential loan product consists primarily of non-qualified mortgages, which are considered less liquid and more risky than traditional qualified mortgages[163][165] Risks Related to our SBA Loan Program - The SBA lending program is dependent on the U.S. federal government. Loss of the bank's SBA Preferred Lender status or changes to the SBA program could materially harm financial results[171] - The company incurs credit risk on the non-guaranteed portion of SBA loans it retains. If the SBA determines a loss is due to technical deficiencies in origination or servicing, it may seek recovery from the bank[172] - Recognition of gains on the sale of SBA loans is based on assumptions regarding values of retained portions and servicing rights. Significant errors in these assumptions could result in material revenue misstatements[174] Risks Related to Cybersecurity - The company's business is highly dependent on electronic infrastructure for collecting, storing, and processing sensitive customer and employee information, making it a target for cybercriminals[217] - As a smaller bank, the company relies heavily on third-party vendors for cybersecurity expertise. Failures or vulnerabilities in these vendors' systems could be harmful to the business and reputation[225] - The development of AI-based technologies is expected to accelerate both the number and sophistication of cybersecurity threats, requiring continuous and increasingly expensive investment in protective measures[220] Item 1C. Cybersecurity The company has integrated cybersecurity into its overall risk management framework, overseen by the Information Security Officer (ISO) who reports regularly to the Board of Directors' Risk and Compliance Committee (BRCC). The strategy involves using up-to-date security controls, leveraging encryption, and conducting regular employee training. The company engages third-party experts for penetration testing and vulnerability scanning. The Board, through the BRCC, provides oversight, reviews risk assessments, and ensures management maintains appropriate expertise. To date, no cybersecurity threats have materially impaired the company's business or financial condition - The Board Risk and Compliance Committee (BRCC) is central to the Board's oversight of cybersecurity risks, receiving quarterly reports from the Information Security Officer (ISO) and Chief Risk Officer[279][280] - The company engages external cybersecurity consultants to perform annual penetration testing, vulnerability scanning, and monitoring of suspicious activity[273] - The company utilizes industry-leading systems for 24/7 threat detection and has an incident response team that proactively searches for potential threats. A clear escalation process is in place for incidents deemed potentially material[284] Item 2. Properties The company's corporate offices are located at 1000 Wilshire Blvd., Los Angeles, California, under a lease expiring in January 2030. The company leases all of its eleven branch offices, which are located in California (Los Angeles, Gardena, Buena Park, Santa Clara, Cerritos), Texas (Carrollton), and Nevada (Las Vegas). Additionally, it maintains leased loan production offices in California, Georgia, Colorado, Washington, and Virginia - The corporate headquarters are leased at 1000 Wilshire Blvd., Los Angeles, CA, with the lease expiring in January 2030[286] - All eleven branch offices and five loan production offices are operated out of leased properties[288][299] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on The Nasdaq Global Market under the symbol "OPBK". As of March 21, 2025, there were 159 record holders. The company maintains a quarterly cash dividend, which was increased to $0.12 per share in July 2022. The ability to pay dividends is dependent on the financial condition and regulatory limitations of its subsidiary, Open Bank - The company's common stock is traded on The Nasdaq Global Market under the symbol "OPBK"[303] - A quarterly cash dividend of $0.12 per share was established in July 2022, representing an annualized dividend of $0.48 per share[305] - The ability to pay dividends is subject to the company's financial condition, regulatory requirements, and the capacity of its subsidiary, Open Bank, to pay dividends to the holding company[306][307] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations For the year ended December 31, 2024, net income decreased by 11.9% to $21.1 million, primarily due to a $3.1 million decrease in net interest income as rising deposit costs outpaced increases in asset yields. Total assets grew 10.2% to $2.37 billion, driven by a 10.8% increase in gross loans to $1.96 billion and a 12.2% increase in total deposits to $2.03 billion. The net interest margin compressed by 38 basis points to 2.99%. The provision for credit losses increased to $2.8 million, reflecting the elevated interest rate environment. Noninterest income grew 15.8%, while noninterest expense rose 5.2%. The bank maintained a strong capital position, with all regulatory capital ratios exceeding "well-capitalized" minimums Results of Operations Year-Over-Year Performance Comparison (2024 vs. 2023) | Metric | 2024 | 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $65.6M | $68.7M | (4.5)% | | Provision for Credit Losses | $2.8M | $1.7M | 66.7% | | Noninterest Income | $16.4M | $14.2M | 15.8% | | Noninterest Expense | $50.2M | $47.7M | 5.2% | | Net Income | $21.1M | $23.9M | (11.9)% | | Diluted EPS | $1.39 | $1.55 | (10.3)% | - Net interest income decreased by $3.1 million in 2024 due to higher interest expense on deposits, which repriced faster than interest-earning assets in the rising rate environment. The net interest margin compressed to 2.99% from 3.37% in 2023[337][341] - Noninterest income increased by $2.2 million, driven by higher service charges on deposits and a larger gain on the sale of SBA loans, which benefited from higher average sales premiums[355][357] - Noninterest expense rose by $2.5 million, primarily due to a $2.1 million increase in salaries and employee benefits from a higher headcount and salary adjustments[363][364] Financial Condition Balance Sheet Highlights (December 31, 2024 vs. 2023) | Metric | 2024 | 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $2.37B | $2.15B | 10.2% | | Gross Loans | $1.96B | $1.77B | 10.8% | | Total Deposits | $2.03B | $1.81B | 12.2% | | Shareholders' Equity | $205.0M | $192.6M | 6.4% | - Gross loans increased by $191.0 million (10.8%), primarily from new loan production of $502.8 million, partially offset by payoffs and sales[387] - Nonperforming loans increased to $7.8 million (0.40% of gross loans) from $6.1 million (0.34% of gross loans) at year-end 2023[403][406] - The allowance for credit losses increased to $24.8 million (1.27% of gross loans) from $22.0 million (1.25% of gross loans) at the end of 2023[399][400] Liquidity and Capital Resources Bank Regulatory Capital Ratios (as of December 31, 2024) | Ratio | Actual | Minimum to be "Well-Capitalized" | | :--- | :--- | :--- | | Total Risk-Based Capital | 12.50% | 10.00% | | Tier 1 Risk-Based Capital | 11.25% | 8.00% | | Common Equity Tier 1 Capital | 11.25% | 6.50% | | Tier 1 Leverage | 9.20% | 5.00% | - The Bank exceeded all regulatory capital requirements and was considered "well-capitalized" as of December 31, 2024[417] - Total available liquidity, including liquid assets and available borrowings, was $1.04 billion, representing 51.2% of total deposits as of December 31, 2024[414][415] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, which it manages through its Asset/Liability Management Committee (ALM). The company uses Net Interest Income (NII) simulation and Economic Value of Equity (EVE) models to measure potential impacts of interest rate changes. As of December 31, 2024, the company's balance sheet was asset-sensitive. A hypothetical immediate 100 basis point increase in interest rates was projected to increase net interest income by 2.80% over 12 months, while a 100 basis point decrease was projected to reduce it by 2.04% Interest Rate Sensitivity Analysis (as of December 31, 2024) | Rate Shock | Net Interest Income Sensitivity (%) | Economic Value of Equity Sensitivity (%) | | :--- | :--- | :--- | | +300 bps | 7.10 | (21.91) | | +200 bps | 5.28 | (11.24) | | +100 bps | 2.80 | (3.95) | | -100 bps | (2.04) | 3.43 | - The company identifies interest rate risk as its primary source of market risk, arising from timing differences in repricing assets and liabilities, option risk, yield curve risk, and basis risk[420][421] - The balance sheet is modeled to be asset sensitive, meaning net interest income is expected to increase in a rising rate environment[424][429] Item 8. Financial Statements and Supplementary Data This section contains the company's consolidated financial statements for the fiscal years ended December 31, 2024, 2023, and 2022, as audited by the independent registered public accounting firm, Crowe LLP. The statements include the Consolidated Balance Sheets, Statements of Income, Statements of Comprehensive Income, Statements of Changes in Shareholders' Equity, and Statements of Cash Flows, along with accompanying notes. The auditor's report provides an unqualified opinion on both the financial statements and the effectiveness of internal control over financial reporting as of December 31, 2024 - The independent auditor, Crowe LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting as of December 31, 2024[573] - The company adopted the new accounting standard for credit losses (CECL) on January 1, 2023, which resulted in a $1.9 million increase to the allowance for credit losses and a $1.5 million decrease to retained earnings[398][574] Item 9A. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of December 31, 2024. Management also assessed the internal control over financial reporting based on the COSO framework and concluded it was effective. The independent registered public accounting firm, Crowe LLP, has also issued an audit report attesting to the effectiveness of the company's internal control over financial reporting. No material changes to internal controls were reported during the period - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2024[433][434] - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2024[435][437] Part III Item 10. Directors, Executive Officers and Corporate Governance The Board of Directors consists of seven members, six of whom are independent. The roles of Chairman and CEO are separate. The Board oversees risk management through various committees, including the Audit, Human Resources & Compensation, and Nomination & Governance committees. The report provides biographical information for all directors and executive officers, detailing their experience and qualifications. The company has established corporate governance principles, including a Code of Business Conduct and procedures for shareholder communications - The Board is comprised of seven members, with six determined to be independent. The roles of Chairman of the Board (Brian Choi) and President & CEO (Min J. Kim) are separate[447][457] - The Board has three primary standing committees composed of independent directors: Audit, Human Resources & Compensation, and Nomination & Governance[460] - A leadership succession plan is underway, with Sang Oh succeeding Min Kim as CEO effective July 1, 2025, and Christine Oh transitioning from CFO to COO[181] Item 11. Executive Compensation Executive compensation consists of base salary, annual cash bonuses under a Management Incentive Plan, equity awards, and other benefits. For 2024, President and CEO Min J. Kim's total compensation was $915,300. The Management Incentive Plan for 2024 was based on achieving targets for ROA, ROE, and efficiency ratio, as well as individual performance goals. The company also maintains a 2021 Equity Incentive Plan for granting stock options and restricted stock units to key employees and directors 2024 Summary Compensation Table | Name and Principal Position | Salary ($) | Non-Equity Incentive ($) | Total Compensation ($) | | :--- | :--- | :--- | :--- | | Min J. Kim, President and CEO | 576,300 | 315,900 | 915,300 | | Christine Y. Oh, EVP and CFO | 337,461 | 65,700 | 425,809 | | Sang K. Oh, EVP and CCO | 287,390 | 55,900 | 362,376 | - The 2024 Management Incentive Plan was based on achieving financial targets for ROA (target 1.01%), ROE (target 11.30%), and efficiency ratio (target 57.35%), along with individual goals[516] - The company has an employment agreement with CEO Min J. Kim, which includes provisions for severance upon termination without cause or in connection with a change in control[510] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of March 21, 2025, all directors and executive officers as a group beneficially owned 19.97% of the company's common stock. The largest individual holder among them was Chairman Brian Choi, with 8.74%. Two institutional investors, Manulife Financial Corporation and AllianceBernstein L.P., were reported as beneficial owners of more than 5% of the common stock, holding 5.95% and 5.42% respectively. The company's equity compensation plans had 1,078,188 securities remaining available for future issuance as of December 31, 2024 Beneficial Ownership as of March 21, 2025 | Name of Beneficial Owner | Percent of Class | | :--- | :--- | | All directors and executive officers as a group (15 individuals) | 19.97% | | Brian Choi (Chairman) | 8.74% | | Manulife Financial Corporation | 5.95% | | AllianceBernstein L.P. | 5.42% | - As of December 31, 2024, there were 1,078,188 securities available for future issuance under the company's equity compensation plans[546] Item 13. Certain Relationships and Related Transactions, and Director Independence The company has a written policy for reviewing and approving related party transactions, overseen by the Audit Committee. Transactions with related parties, such as loans and deposits, are conducted in the ordinary course of business on terms comparable to those with unrelated parties. As of December 31, 2024, deposits from officers, directors, and their affiliates totaled $2.3 million. The company also has a significant relationship with the Open Stewardship Foundation, to which it commits 10% of its after-tax net income annually. Six of the seven board members are deemed independent - The Audit Committee is responsible for reviewing and approving or ratifying any related party transactions to ensure they are on arm's-length terms[547][550] - The company commits to donating 10% of its consolidated annual after-tax income to the Open Stewardship Foundation, a non-profit organization whose board includes several of the company's directors[552] - As of December 31, 2024, deposits from officers, directors, and their affiliates totaled $2.3 million. There were no loans outstanding to this group[551] Item 14. Principal Accountant Fees and Services The company's independent auditor billed a total of $742,271 for fiscal year 2024, compared to $654,803 for fiscal year 2023. The majority of these fees were for audit services, with a smaller portion for tax-related services. The Audit Committee determined that the provision of these services was compatible with maintaining the auditor's independence Accountant Fees (Fiscal Years 2024 vs. 2023) | Category of Services | Fiscal Year 2024 ($) | Fiscal Year 2023 ($) | | :--- | :--- | :--- | | Audit fees | 673,050 | 597,795 | | Tax fees | 69,221 | 57,008 | | Total accounting fees | 742,271 | 654,803 | Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the exhibits filed as part of the Form 10-K report. These include corporate governance documents like the Articles of Incorporation and Bylaws, material contracts such as employment agreements, and certifications required by the Sarbanes-Oxley Act. It also includes the consent of the independent registered public accounting firm and the Inline XBRL data files - This section provides a comprehensive list of all exhibits filed with the annual report, including governance documents, material contracts, and required certifications[560][562]