Executive Summary / Key Takeaways

• Robust Financial Momentum: OP Bancorp demonstrated strong financial performance in Q3 and the first nine months of 2025, with net income increasing by 23% and 16% year-over-year, respectively, driven by significant net interest income growth and expanding net interest margins.
• Strategic Loan and Deposit Expansion: The company achieved notable asset growth, with gross loans expanding 10% to $2.15 billion and total deposits rising 12% to $2.27 billion as of September 30, 2025, reflecting successful organic growth initiatives, particularly in Commercial Real Estate (CRE) and home mortgage loans.
• Technological Efficiency Gains: A key operational differentiator is the successful conversion to a new core banking system in Q4 2024, which has led to substantial reductions in data processing and communication expenses, enhancing overall operating efficiency.
• Strengthened Capital Position: OP Bancorp proactively bolstered its capital structure with a $25 million subordinated note offering in November 2025, designed to qualify as Tier 2 capital, providing a solid foundation for future growth and regulatory compliance.
• Niche Market Expertise with Inherent Risks: The company's deep focus on the Korean-American communities provides a competitive advantage, fostering strong customer loyalty, yet this geographic and demographic concentration also presents inherent risks related to local economic conditions and specific market dynamics.

A Niche Powerhouse in Community Banking

OP Bancorp, established in 2005, has carved out a distinct identity as a California-chartered commercial bank, Open Bank, primarily serving small and medium-sized businesses, their owners, and retail customers within the vibrant Korean-American communities. Headquartered in Los Angeles, California, the company's strategic footprint extends across twelve full-service branches in key California counties, the Dallas metropolitan area in Texas, and Clark County in Nevada, complemented by five loan production offices in other strategic locations. This community-centric model forms the bedrock of its operations, fostering deep relationships and localized expertise that differentiate it in a competitive financial landscape.

The banking industry is characterized by intense competition from a diverse array of players, ranging from large national and regional banks like East West Bank (EWBC) and Cathay General Bancorp (CATY) to smaller community banks, and increasingly, agile online banks and fintech platforms. OP Bancorp operates as a specialized player, leveraging its intimate understanding of its target demographic to compete effectively. While larger institutions often boast greater financial and marketing resources, OP Bancorp's strength lies in its strong community focus, which translates into enhanced customer loyalty and potentially more stable deposit bases. This localized expertise allows OP Bancorp to offer tailored services and build relationships that larger, more generalized banks may struggle to replicate, contributing to its operational efficiency and customer retention.

However, this focused approach also presents competitive vulnerabilities. OP Bancorp's modest size and the limitations imposed by a Coexistence Agreement regarding its "Open Bank" name restrict its geographic expansion beyond specified "Permitted Markets" (California, New York, Dallas, Atlanta, Chicago, Seattle, and Fort Lee, New Jersey). This constraint could hinder broader growth compared to rivals with expansive national or international footprints. Furthermore, the rise of online businesses and digital payment platforms poses a disintermediation risk, potentially eroding fee income and customer deposits across the industry. OP Bancorp's strategic response involves continuous investment in technology and maintaining its relationship-based banking model to counter these evolving competitive pressures.

Technological Advancement Driving Operational Efficiency

OP Bancorp recognizes the critical role of technology in modern banking and has made strategic investments to enhance its operational capabilities and competitive standing. A significant technological differentiator is the company's successful conversion to a new core banking system in the fourth quarter of 2024. This upgrade was not merely an incremental improvement but a foundational shift aimed at achieving more cost-effective processing capabilities.

The tangible benefits of this technological initiative are already evident in the company's financial performance. Data processing and communication expenses saw a substantial year-over-year decrease of 59% for the third quarter of 2025 and 48% for the first nine months of 2025. This reduction was primarily due to contractual credits received following the system conversion. Management anticipates that these savings will continue, leading to a "lower run rate" for these expenses and contributing to improved operating efficiency. This technological upgrade directly enhances OP Bancorp's competitive moat by optimizing its cost structure, allowing for potentially better pricing or increased investment in other areas. While specific future R&D initiatives were not detailed, the successful implementation of this core system demonstrates a commitment to leveraging technology for operational excellence.

Financial Performance Reflecting Strategic Execution

OP Bancorp's financial results for the third quarter and first nine months of 2025 underscore the effectiveness of its focused growth strategy and operational improvements. The company reported net income of $6.7 million for the third quarter of 2025, a 23% increase from $5.4 million in the same period last year. For the first nine months of 2025, net income reached $18.6 million, up 16% from $16.1 million year-over-year. These gains were primarily fueled by a robust increase in net interest income, despite higher noninterest expenses, income tax expense, and provision for credit losses.

Net interest income for the third quarter of 2025 surged to $20.3 million, a 23% increase from the prior year, with the net interest margin expanding by 31 basis points to 3.26%. Over the first nine months of 2025, net interest income grew 18% to $57.5 million, and the net interest margin expanded by 18 basis points to 3.17%. This expansion was largely driven by growth in average loan balances, although partially offset by a decline in loan yields due to the repricing of existing loans at lower interest rates following federal funds rate decreases. Concurrently, interest expense on interest-bearing deposits decreased, reflecting the repricing of deposit products in response to these rate cuts, further contributing to margin expansion. The efficiency ratio, a key measure of operational effectiveness, improved to 55.68% in Q3 2025 and 58.92% for the first nine months of 2025, primarily reflecting the increase in net interest income.

Asset growth was a significant contributor to performance, with total assets reaching $2.61 billion as of September 30, 2025, a 10% increase from December 31, 2024. This expansion was predominantly driven by a 10% increase in gross loans to $2.15 billion. Commercial Real Estate (CRE) loans led this growth, increasing by 11% to $1.09 billion, followed by home mortgage loans, which rose 15% to $587.6 million. SBA and Commercial & Industrial (CI) loans also saw modest increases. On the funding side, total deposits grew 12% to $2.27 billion, with notable increases in time deposits and money market accounts. While noninterest-bearing deposits also grew, their proportion of total deposits slightly decreased.

Noninterest income for the first nine months of 2025 increased, primarily due to higher loan servicing fees, net of amortization (up 29% to $2.63 million), and service charges on deposits (up 20% to $2.74 million). The increase in loan servicing fees was attributed to lower amortization expense resulting from reduced loan payoff activity. However, gains on the sale of loans decreased by 10% to $5.50 million, primarily due to lower average premium rates on SBA loan sales. Noninterest expenses saw an increase in salaries and employee benefits (up 14% for the first nine months to $26.74 million) due to staffing growth and merit adjustments, but this was partially mitigated by the significant reduction in data processing and communication expenses, directly linked to the new core banking system.

Capital Strength and Liquidity Management

OP Bancorp maintains a robust capital position, essential for supporting its growth initiatives and navigating economic uncertainties. As of September 30, 2025, the Bank exceeded all regulatory capital requirements under the Basel III Capital Rules and was categorized as "well-capitalized" by the FDIC. This strong capital base provides a buffer against potential credit losses and supports strategic expansion.

Further demonstrating its proactive capital management, the company completed a private offering of $25 million principal amount of a Fixed-to-Floating Subordinated Note on November 7, 2025. This note, maturing in 2035, bears a fixed interest rate of 7.50% for the first five years and then converts to a floating rate based on the 3-month term Secured Overnight Financing Rate (SOFR) plus 411 basis points. Designed to qualify as Tier 2 capital, the proceeds are intended for general corporate purposes, including strengthening the Bank's regulatory capital and supporting its growth. This strategic capital injection enhances the company's financial flexibility and long-term stability.

Liquidity remains ample, with cash and cash equivalents totaling $166.7 million and available-for-sale (AFS) debt securities at $200.8 million as of September 30, 2025. The company also has significant unused borrowing capacity from the Federal Home Loan Bank (FHLB), Federal Reserve, and correspondent banks, totaling $741.5 million. While uninsured deposits represented 50% of total deposits as of September 30, 2025, up from 47% at year-end 2024, the diversified funding sources and strong liquidity position mitigate this risk. The investment portfolio, primarily composed of U.S. government-sponsored agency securities, is considered high quality, with unrealized losses attributed to interest rate movements rather than credit deterioration, and management expects full collection of carrying amounts.

Outlook and Risk Considerations

The outlook for OP Bancorp appears positive, with management anticipating continued operational efficiencies from its new core banking system. Analyst sentiment, as reflected by a recent Zacks Rank #1 (Strong Buy) upgrade, points to an improving earnings outlook. The Zacks Consensus Estimate for 2025 earnings per share is $1.71, with a 17.1% increase in the consensus estimate over the past three months, signaling positive revisions. Seeking Alpha also noted OP Bancorp as a "small, unjustly overlooked, bank" with "solid balance sheet growth, attractive valuation, and focus on Korean-American communities".

However, investors must consider several key risks. The current interest rate environment, despite recent Federal Reserve rate reductions, remains uncertain. If rates resume increasing or stay elevated, borrowers could face repayment difficulties, impacting loan quality. The significant concentration of the loan portfolio in real estate (89% secured by real property) exposes the company to adverse changes in real estate values, particularly in the Los Angeles Metropolitan Area, which is prone to natural disasters. The increase in nonperforming loans by 57% to $12.3 million as of September 30, 2025, highlights this vulnerability. The adequacy of the allowance for credit losses, while managed through analytical models, relies on assumptions that may prove inaccurate in times of market stress.

Furthermore, the company's dependence on third-party service providers for core banking functions introduces operational risks. Adverse economic conditions in Asia, particularly South Korea, could indirectly affect customers with strong ties to the region, potentially leading to deposit outflows or increased credit risk. U.S. federal government shutdowns also pose a risk, as they can delay the processing of government-backed loans, such as SBA loans, impacting funding timelines. Finally, the Coexistence Agreement limits the company's geographic expansion, potentially capping long-term growth opportunities.

Conclusion

OP Bancorp stands as a compelling investment proposition for discerning investors, distinguished by its deeply embedded community banking model and a strategic focus on the Korean-American demographic. The company's recent financial performance, marked by robust net income growth, expanding net interest margins, and significant loan and deposit expansion in 2025, demonstrates effective execution of its core strategy. The successful implementation of a new core banking system has yielded tangible operational efficiencies, positioning OP Bancorp to sustain its profitability and competitive edge through reduced costs.

While the inherent risks associated with geographic and loan portfolio concentration, coupled with the uncertainties of interest rate fluctuations and broader economic conditions, warrant careful consideration, OP Bancorp's proactive capital management, evidenced by its recent subordinated note offering, and strong liquidity profile provide a solid foundation. The company's commitment to its niche market, combined with its operational improvements and a positive analyst outlook, suggests a pathway for continued value creation. For investors seeking exposure to a well-managed regional bank with a clear strategic focus and a demonstrated ability to generate consistent financial results, OP Bancorp presents an attractive opportunity.