Executive Summary / Key Takeaways

• OP Bancorp, operating primarily through Open Bank, is a community-focused financial institution specializing in commercial banking services for small to medium-sized businesses and retail customers, particularly within the Korean-American communities across its expanding geographic footprint.
• The company demonstrated resilience in the first quarter of 2025, reporting a 6.4% increase in net income year-over-year, driven by solid loan and deposit growth and a significant increase in noninterest income, despite a slight compression in net interest margin and higher operating expenses.
• Strategic geographic expansion through branches and loan production offices in markets with Korean-American concentrations, coupled with a focus on niche lending products like SBA and trade finance, remains a key growth driver, although constrained by a Coexistence Agreement on name usage in certain areas.
• The company maintains a strong balance sheet with ample liquidity and capital levels well above regulatory requirements, providing a buffer against potential economic downturns and supporting future growth initiatives.
• Investors should monitor the execution of the ongoing leadership transition, the impact of sustained elevated interest rates on credit quality and loan demand, and the company's ability to leverage technology to enhance efficiency and compete with larger, more digitally advanced institutions.

A Community Bank's Expanding Horizon

OP Bancorp stands as the holding company for Open Bank, a California state-chartered commercial bank that commenced operations in 2005. From its roots in downtown Los Angeles, Open Bank built its foundation serving the banking needs of small to medium-sized businesses and retail customers, with a particular emphasis on the vibrant Korean-American communities. This focus has shaped its business model, which centers on traditional banking activities: gathering deposits and deploying capital through loans and investments.

Over nearly two decades, the bank has strategically expanded its reach beyond its initial Southern California base. This growth trajectory has seen the establishment of full-service branches in Northern California, Washington, Nevada, and Texas, complemented by loan production offices in key markets like Georgia, Colorado, and Virginia. This deliberate geographic diversification targets areas with significant Korean-American populations, aiming to replicate the success of its relationship-based community banking model in new territories. This expansion, however, operates under the framework of a Coexistence Agreement regarding the "Open Bank" name, which limits its marketing and advertising primarily to the Korean-American community within specified markets, potentially constraining broader brand recognition and growth outside these niches.

The bank's operations are supported by a core banking system, which underwent a significant change completed in the fourth quarter of 2024. While specific proprietary or differentiated technologies beyond this system are not detailed, the completion of this upgrade contributed to a reduction in data processing expenses in the first quarter of 2025, indicating a focus on improving operational efficiency through foundational technology infrastructure. The strategic intent behind such investments is typically to streamline processes, enhance customer service, and potentially enable future digital product offerings, although specific quantifiable benefits in terms of processing speed, cost reduction beyond the noted expense decrease, or competitive advantage over alternatives are not detailed.

In the competitive landscape, OP Bancorp operates alongside a diverse group of financial institutions. Direct competitors include larger regional banks like Banc of California (BANC), Cathay General Bancorp (CATY), and Pacific Premier Bancorp (PPBI), which often possess greater financial resources, broader product suites, and more extensive branch networks. For instance, while OPBK leverages its community ties and expertise in areas like SBA lending and trade finance (including SWIFT services), larger rivals like CATY demonstrate superior efficiency and profitability metrics, with significantly higher net margins (CATY's TTM Net Profit Margin is 39% vs. OPBK's 18.02%) and stronger return on equity (CATY's 2024 ROE was 10% vs. OPBK's 2024 ROE of 10%). PPBI also shows stronger operating margins (PPBI's TTM Operating Profit Margin is 99% vs. OPBK's 27.26%). These larger competitors can often achieve greater economies of scale and invest more heavily in technology and marketing.

Indirect competition stems from fintech companies and online banks, which offer increasingly attractive digital alternatives for deposits and lending, often with lower fee structures or faster processing times. This competitive pressure necessitates continuous investment in technology and efficient operations to retain and attract customers. OPBK's smaller size, while fostering close community relationships, can also be a disadvantage, making it more challenging to compete on price or technology offerings and disproportionately increasing the burden of regulatory compliance costs compared to larger institutions.

Performance Amidst Macro Currents

The first quarter of 2025 saw OP Bancorp deliver a solid financial performance, reflecting its ability to generate growth despite the prevailing macro-economic conditions, including elevated interest rates. Net income for the three months ended March 31, 2025, rose to $5.6 million, a 6.4% increase from $5.2 million in the same period of 2024. This translated to diluted earnings per share of $0.37, up from $0.34 year-over-year.

The primary driver of this improved profitability was a 9.0% increase in net interest income, which grew by $1.4 million to $17.4 million. This expansion was largely attributable to growth in average earning assets, particularly loans and interest-earning deposits held in other banks. Average loan balances increased by a robust 10.8%, contributing significantly to interest income. However, the benefit of higher asset volumes was partially offset by a 30 basis point decrease in the average yield on loans, a consequence of the Federal Reserve's rate cuts impacting variable-rate assets. Interest expense on deposits also increased by 6.0%, driven by a substantial 18.2% increase in average interest-bearing deposit balances, although the average cost of these deposits saw a slight decrease of 46 basis points. The net effect on the net interest margin was a modest 5 basis point decrease, settling at 3.01% for Q1 2025, as the yield pressure on assets slightly outpaced the cost reduction on liabilities.

Noninterest income provided a significant boost, increasing by 34.3%, or $1.2 million, to $4.8 million. This strong performance was broad-based:

• Service charges on deposits grew by 63.4% to $1.0 million, primarily due to an increase in the number of analysis accounts.
• Loan servicing fees, net of amortization, increased by 30.4% to $1.0 million, benefiting from lower amortization driven by fewer loan payoffs in the servicing portfolio.
• Gain on sale of loans rose by 18.6% to $2.0 million, reflecting a higher volume of SBA loans sold in the secondary market, despite a slightly lower average sales premium rate.
• Other income saw a substantial 58.3% increase to $790 thousand, attributed to higher credit-related fees and improved performance from a CRA-qualified mutual fund.

Operating expenses also increased, rising by 13.6%, or $1.7 million, to $13.8 million. The main contributors were a 11.9% increase in salaries and employee benefits, driven by a higher employee headcount (240 in Q1 2025 vs. 228 in Q1 2024), and a significant increase in other expenses, including credit-related and customer service costs. Notably, data processing and communication expenses decreased by 39.2%, a direct benefit realized from the core banking system change completed in the prior quarter. Despite the overall increase in expenses, the efficiency ratio remained relatively stable at 62.13%, indicating that revenue growth kept pace with cost increases.

From a balance sheet perspective, total assets grew by 6.2% since year-end 2024, reaching $2.51 billion. This growth was fueled by increases in both gross loans (up 4.4% to $2.04 billion) and cash and cash equivalents (up 47.4% to $198.9 million). The loan portfolio saw increases across key categories like Home Mortgage, Commercial Real Estate, and SBA loans, partially offset by a decrease in Commercial and Industrial loans. Total deposits expanded by a strong 8.0% to $2.19 billion, with growth in both noninterest-bearing and interest-bearing accounts, demonstrating the bank's ability to attract funding. The loans-to-deposits ratio improved slightly to 92.2%, indicating a healthy funding profile.

Asset quality metrics showed a slight increase in nonperforming loans, which rose to 0.51% of gross loans as of March 31, 2025, compared to 0.40% at year-end 2024. The allowance for credit losses increased to $25.4 million, representing 1.24% of gross loans. The provision for credit losses increased significantly year-over-year, reflecting the growth in loan balances and unfunded commitments. While the allowance coverage relative to nonperforming loans decreased, the overall allowance level is determined using a CECL model that incorporates economic forecasts and qualitative adjustments, which management believes is adequate.

The bank maintains a strong liquidity position, supported by on-balance sheet liquid assets and significant available borrowing capacity from the FHLB, Federal Reserve, and correspondent banks, totaling nearly $700 million as of March 31, 2025. Capital levels remain robust, with the bank exceeding all regulatory minimums under the Basel III framework and being categorized as "well-capitalized." This strong capital position provides a solid foundation for continued operations and strategic initiatives.

Strategic Transitions and Future Considerations

OP Bancorp is currently undergoing a significant leadership transition at the executive level, a planned succession aimed at ensuring continuity and guiding future growth. This involves the retirement of the current President and CEO, Min Kim, who will assume the role of Chair of the Board, and the appointment of Sang Oh as the new CEO, effective July 1, 2025. Additionally, Christine Oh transitioned from CFO to Chief Operating Officer in March 2025, with Jaehyun Park stepping into the CFO role. While these changes are part of a deliberate plan, the execution and effectiveness of this transition will be a key factor to watch, as leadership stability is crucial for navigating the complex banking environment and executing strategic goals.

The company's outlook is closely tied to its ability to continue executing its niche growth strategy while managing the persistent macro-economic headwinds, particularly interest rate volatility and potential impacts on credit quality. Management has indicated that recent conditions have required a focus on liquidity and capital management, which has somewhat limited growth and near-term profitability. While specific quantitative guidance was not provided, the strategic emphasis remains on expanding the geographic footprint in target markets and deepening relationships within the Korean-American community.

Key risks that could impact the investment thesis include the potential for further deterioration in credit quality, particularly if elevated interest rates continue to pressure borrowers in the real estate and commercial segments. The geographic concentration in California also exposes the bank to regional economic downturns and natural disasters. Cybersecurity threats, which are becoming increasingly sophisticated, pose an ongoing operational and reputational risk, requiring continuous investment in protective measures. Competition from larger, more technologically advanced institutions and agile fintechs remains a significant challenge, potentially pressuring margins and market share. The success of the leadership transition and the ability of the new management team to effectively steer the company through these challenges will be paramount.

Conclusion

OP Bancorp's first quarter 2025 results demonstrate a resilient performance, marked by solid balance sheet growth and strong noninterest income generation, contributing to increased profitability despite a challenging interest rate environment that pressured net interest margin. The company's strategic focus on serving the Korean-American community through targeted geographic expansion continues to yield positive results, leveraging its niche expertise in areas like SBA lending and trade finance.

While the bank maintains a strong capital and liquidity position, providing a buffer against potential risks, it faces ongoing challenges from macro-economic volatility, competitive pressures from larger and more technologically advanced institutions, and the inherent risks associated with its concentrated loan portfolio. The current leadership transition adds another layer of complexity that investors will need to monitor closely. The investment thesis for OPBK hinges on its ability to successfully execute its niche growth strategy, effectively manage credit risk in a dynamic environment, and leverage operational efficiencies gained from technology investments to maintain profitability and competitive positioning over the long term.