OP Bancorp faces rising classified loans and declining profit amid financial market challenges

OP Bancorp, the Los Angeles-based holding company for Open Bank, reported a decrease in its fourth-quarter 2024 profits, attributing the decline to a rise in classified loans and market volatility. The bank’s net income dropped to $5.0 million, or $0.33 per diluted share, from $5.2 million, or $0.34 per share, in the same period of the previous year. The announcement resulted in a 12% drop in OP Bancorp’s stock, closing at $13.82 on Friday and extending the stock’s overall 2% decline over the past three months.

The rise in classified loans, which are loans deemed at risk of default, stood at $13.3 million for the fourth quarter of 2024, an increase from $11.9 million in the previous year. Nonperforming loans, a subset of classified loans, grew by approximately 29%, now representing 0.40% of the bank’s total gross loans, up from 0.34% in the same quarter of 2023.

What Are the Implications of Rising Classified Loans for OP Bancorp?

The escalation in classified and nonperforming loans indicates growing financial stress among the bank’s borrowers, particularly small- and medium-sized businesses. Min Kim, President and CEO of OP Bancorp, stated that the ongoing uncertainty in the financial markets has made it challenging to increase customer deposits and reduce deposit costs. The bank’s provision for credit losses surged to $1.5 million, more than double the $630,000 recorded in the previous year.

Kim emphasized that OP Bancorp remains committed to managing its credit exposure prudently. The increase in nonperforming loans was driven largely by commercial real estate and small business sectors, highlighting the impact of broader economic pressures on loan performance.

How Is OP Bancorp Navigating Market Volatility and Deposit Trends?

OP Bancorp’s total deposits experienced a 1.8% decrease to $2.03 billion in the fourth quarter, reflecting customers’ preference for higher-yielding deposit products. The decline in noninterest-bearing deposits, which fell to 24.9% of total deposits from 28.9% the prior year, underscores the challenge of attracting cost-effective funding in a competitive market environment. Despite these pressures, the bank reported a modest increase in net interest income to $16.9 million, supported by a slight improvement in the net interest margin to 2.96%.

The shift in deposit composition was primarily driven by the Federal Reserve’s rate changes, which incentivized customers to seek higher returns through time deposits. This trend, coupled with elevated deposit costs, has contributed to the bank’s constrained profit margins.

What Is OP Bancorp’s Response to the Los Angeles Wildfires?

OP Bancorp also addressed the impact of the Los Angeles wildfires on its operations and customers. The bank estimates its exposure to wildfire-affected areas at $23.5 million, approximately 1.3% of its net loans. Two borrowers with a combined outstanding balance of $2.2 million may require temporary loan modifications due to direct wildfire damage. The bank is actively monitoring these accounts to mitigate potential losses and provide support to affected customers and employees.

Min Kim expressed the bank’s commitment to supporting the community through these challenges, stating, “We are dedicated to assisting our customers and employees impacted by the wildfires, ensuring that necessary resources and assistance are provided during this difficult time.”

What Does the Future Hold for OP Bancorp?

Looking ahead, OP Bancorp remains focused on maintaining its strong capital position. The bank reported a Common Equity Tier 1 (CET1) ratio of 11.35%, signaling a robust capital buffer to navigate ongoing market uncertainties. The company declared a quarterly dividend of $0.12 per share, payable on February 20, 2025, reflecting its confidence in long-term financial stability.

However, the increased credit loss provisions and rising classified loans underscore the challenges that lie ahead. As economic conditions remain uncertain, particularly for small businesses in the bank’s target markets, OP Bancorp’s ability to balance growth with risk management will be critical.

The bank’s strategic focus on serving Korean and other ethnic minority communities, along with its expansion across Los Angeles, Orange, and Santa Clara Counties, as well as Texas and Nevada, positions it to leverage niche market opportunities. Nevertheless, addressing the growing financial pressures on its loan portfolio and managing deposit costs effectively will be crucial for sustaining profitability.

Key Insights and Strategic Outlook

OP Bancorp’s fourth-quarter results reflect a broader trend of financial institutions grappling with rising loan delinquencies and shrinking margins amid economic uncertainty. As the bank continues to manage its exposure to classified and nonperforming loans, maintaining a cautious yet proactive approach will be essential. The institution’s strong capital ratios and commitment to community support provide a foundation for resilience, but vigilant risk management and strategic capital deployment will be pivotal for future growth and stability.