OP Bancorp (OPBK) Q3 2026 earnings review
OP Bancorp lending income rises, but problem property loans double
OP Bancorp, the California parent of Open Bank, grew its lending income while problem commercial property loans more than doubled. Revenue rose 12% from a year ago to $28 million as loan growth lifted net interest margin. Chief executive Sang K. Oh highlighted the lending rebound, but quarterly net profit slipped 3% from last quarter to $7.8 million because the bank set aside $1.6 million for bad loans.
| Net interest income | $22.2M +9% from a year ago |
|---|---|
| Diluted profit per share | $0.52 +16% from a year ago |
| Criticized (problem) loans | $77.6M up from $33.4M last quarter |
| Quarterly cash dividend | $0.14 Unchanged from last quarter |
⚖️ Verdict: 🔴 Bearish
The story got worse because credit cracks appeared in the commercial property book and deposit costs are set to rise. Four borrower relationships totaling $42 million fell into the bank's warning grade, while management warned that $1.1 billion of time deposits will renew at higher interest rates over the next six months. The good news: core lending income still grew 7% from last quarter by our math after stripping out a prior accounting charge.
The question now is whether the four downgraded borrowers will pay off their loans or default. Management says the largest borrower is selling its downtown Los Angeles building to pay the debt, whereas a failed sale or lower property values would force larger loan loss charges. Loan loss provisions over the next two quarters will tell.
🐂 Bull Case
Lending Income and Margin Rebounded on Loan Growth
OP Bancorp earns most of its money from net interest income, the gap between interest earned on loans and interest paid on deposits. "Continued loan growth supported higher net interest income and further expansion in net interest margin," chief executive Sang K. Oh said. Net interest income rose 11% from last quarter to $22.2 million, and net interest margin (profit on lending as a percentage of earning assets) rose 0.19 percentage points to 3.27%.
The lender said the jump was "primarily driven by continued loan growth and the normalization of Federal Reserve Bank account income following a prior-quarter accrual adjustment". In the second quarter, a one-time accounting charge cut interest income by $739 thousand. Even without that prior charge, lending income grew 6.7% from last quarter by our math, because average loans grew 4% and average loan yields rose 0.05 percentage points to 6.41%.
What to watch: average loan yields in the fourth quarter. A drop would show that new home mortgages are pulling down the bank's overall lending rate.
SBA Loan Sales Kept Fee Income High
Open Bank originates government-backed loans for small businesses through the Small Business Administration (SBA) and sells the guaranteed portions to other investors for a fee. Gains on these loan sales reached $3.3 million this quarter, up 61% from a year ago. The bank sold $51.1 million of SBA loans at an average premium of 8.06%, compared with $36.8 million at 6.71% a year earlier.
This business matters because it brings in fee revenue without keeping the credit risk on the balance sheet. Noninterest income made up 19% of total revenue this quarter, up from 17% a year ago, even though rising market interest rates caused paper losses on mutual funds. However, new SBA loan originations slowed 9% from last quarter to $29.6 million.
What to watch: SBA loan sale premiums and volume in the fourth quarter. A drop in the premium below 8% would cut fee income and make the bank rely more on property lending.
🐻 Bear Case
Problem Commercial Property Loans More Than Doubled
Oh said the bank remains committed to "disciplined risk management", and the release stated that overall credit quality remained sound. Yet criticized loans, which are loans showing early signs of financial stress, more than doubled from last quarter to $77.6 million. That pushed problem loans to 3.39% of the total loan book, up from 1.48% three months ago.
- Special mention loans (the first warning grade): $51.7 million, up from $8.8 million last quarter
- Four downgraded relationships: $41.5 million in total, including a $21.3 million downtown Los Angeles property loan
- Provision for credit losses: $1.6 million expense, compared with a $149 thousand reversal last quarter
- Allowance coverage of criticized loans: 37%, down from 84% last quarter
The company said "there is a viable path toward a positive resolution through repayment or credit upgrades over the next few quarters" because most of these borrowers still make payments on time. But one $6.2 million property loan is already late on payments, and lower collateral values forced the bank to set aside $1.6 million for bad loans, which caused quarterly net profit to fall 3%.
What to watch: whether the $21.3 million downtown Los Angeles property sells in the fourth quarter. A failed sale or a downgrade to classified status would force the bank to book larger loan loss reserves.
Maturing Time Deposits Will Push Funding Costs Up
Banks earn more when they keep customers' money in checking accounts that pay no interest. At Open Bank, noninterest-bearing deposits fell 2% from last quarter to $539.3 million, or 22% of total deposits. To fund its loan growth, the California lender added $72.2 million in time deposits (certificates of deposit that lock in an interest rate), which now make up 60% of all deposits.
In its presentation, the company warned that "Most time deposits are expected to mature within six months and reprice at higher rates, contributing to near-term increases in deposit costs". By our math, 74% of its time deposits, or $1.08 billion, mature within six months at rates near 3.9%. Replacing them at higher rates will squeeze the lending margin.
What to watch: the average cost of interest-bearing deposits next quarter, which stood at 3.79% in the third quarter. A rise above 3.85% would show that deposit repricing is eating into lending spreads.
One-Time Legal Bills Pushed Overhead Costs Up
Operating expenses rose 14% from a year ago and 5% from last quarter to $15.5 million. The efficiency ratio, which measures noninterest expense as a share of revenue, worsened by 0.72 percentage points from a year ago to 56.40%. Outside of staff pay, the jump came from professional fees, which more than doubled to $1.1 million and took 2.4 percentage points more of revenue than a year ago by our math.
OP Bancorp said the increase was "primarily due to higher non-recurring legal and professional service expenses incurred during the quarter", without explaining what caused the legal work. Data processing and communication costs also nearly doubled from a year ago to $513 thousand.
What to watch: professional fees in the fourth quarter. If the line does not drop back toward $450 thousand, the legal costs are ongoing rather than one-off.
👓 Other Themes
Open Bank Elected a Simpler Capital Rule
On September 30, Open Bank adopted the Community Bank Leverage Ratio framework, a federal rule that exempts qualifying community banks from complex risk-weighted capital rules if they keep a Tier 1 leverage ratio (core capital divided by average assets) above 8%. The bank sits at 10.01%. Meanwhile, the parent company bought back no shares for a fifth straight quarter under its August 2025 repurchase plan.
💲 Other KPIs
Gross loans grew 1.3% from last quarter and 6.4% from a year ago. Commercial property loan originations fell 44% from last quarter to $51.7 million, while home mortgage originations rose 47% to $53.7 million. Because new mortgages carry lower interest rates (6.09%) than commercial property loans (6.30%), the shift capped the portfolio's contractual yield at 6.24%.
Book value per share (shareholders' equity divided by shares outstanding) rose 0.5% from last quarter and 8.0% from a year ago. Retained earnings added $5.7 million to equity this quarter, but higher market interest rates increased paper losses on the bond portfolio by $4.5 million after tax, slowing book value growth from last quarter's 2.4% pace.
Liquid assets — cash in vaults, deposits at other banks, and debt securities available for sale — rose from $378 million last quarter to 15.3% of total assets. Because deposit growth ($62.1 million) exceeded net loan growth ($28.8 million), the company parked an extra $67.7 million in interest-bearing accounts at other banks.
🔮 Guidance
Unchanged. The board declared a $0.14 per share cash dividend for the third straight quarter after raising it from $0.12 in April. That payout equals 27% of third-quarter net profit and is up 17% from the $0.12 per share paid a year ago. OP Bancorp does not issue revenue or profit forecasts.
❓ Key Questions
What caused the $675 thousand jump in legal fees?
Professional fees rose 149% from last quarter to $1.13 million on what the release called non-recurring legal and professional services. Investors need to know whether those legal bills relate to the newly downgraded property loans or a regulatory matter.
What is the appraisal value on the $21.3M LA loan?
A single $21.3 million commercial property developer relationship in downtown Los Angeles accounted for half of the jump in special mention loans and is now for sale. The expected sale price will determine if the bank faces a loss.
What rates is Open Bank offering on renewing CDs?
Management warned that most of its $1.46 billion in time deposits will mature within six months and reprice at higher rates. Knowing the current renewal rate relative to the 3.95% maturing rate will show how much the lending margin will compress.
Why did commercial credit line usage drop by $27 million?
Commercial and industrial loan balances fell 16% from last quarter to $186.4 million because business borrowers paid down their credit lines. Management did not say whether customers needed less working capital or moved their borrowing to rival banks.