OP Bancorp

Note 3. Loans and Allowance for Credit Losses on Loans

Loans

The following table presents the composition of the loan portfolio as of September 30, 2026 and December 31, 2025:

(1)Includes net deferred loan costs (fees) and net unamortized premiums (discounts) of $(1.8) million as of September 30, 2026 and $(331) thousand as of December 31, 2025.

Allowance for Credit Losses on Loans

For loans that share risk characteristics, the Company employs a modeled approach that takes into account current and future economic conditions to estimate lifetime expected losses on a collective basis. With the adoption of Current Expected Credit Losses ("CECL"), the Company elected not to consider accrued interest receivable in its estimated credit losses as the Company writes off the uncollectible accrued interest receivable in a timely manner. Generally, loans are placed on nonaccrual status when they become 90 days or more past due, and any previously accrued but unpaid interest is reversed against interest income. Accrued interest receivable on loans totaled $9.2 million and $8.8 million as of September 30, 2026 and December 31, 2025, respectively.

For collectively evaluated loans, the Company estimates expected credit losses using a non-discounted cash flow methodology that incorporates Probability of Default ("PD") and Loss Given Default ("LGD") assumptions derived from the external historical credit loss data. The model incorporates forward-looking economic conditions through a weighted multiple-scenario approach consisting of baseline and severely adverse scenarios. Forecasted PDs are determined using a regression model based on the national unemployment rate, while LGD assumptions are based on the external historical loss data and are not subject to regression-based forecasting. The Company applies a reasonable and supportable period ofone year for the baseline scenario andtwo years for the adverse scenario, after which loss assumptions revert to historical loss information through aone-year reversion period for the baseline scenario and atwo-year reversion period for the adverse scenario. The Company segments the loan portfolio by major loan type using the Call Report codes and internal loan risk ratings to determine the Bank's allowance for credit losses.

The Company also applies qualitative adjustments for current economic, portfolio-specific, and other relevant risk factors that are not fully captured by the quantitative model. Key qualitative and macroeconomic variables include GDP, unemployment rates, interest rates, asset quality ratios, loan portfolio concentration, California house price index, and CRE price index. The parameters for making adjustments are established under a Credit Risk Matrix that provides different possible scenarios for each of the factors listed below. The Credit Risk Matrix and the possible scenarios enable the Bank to qualitatively adjust the loss rates. This matrix considers the following nine factors, which are patterned after the guidelines provided under the Federal Financial Institutions Examination Council Interagency Policy Statement on the Allowance for Credit Losses, updated to reflect the adoption of CECL:

• Changes in lending policies and procedures, including changes in underwriting standards and practices for collection, charge-offs, and recoveries;

• Actual and expected changes in national and local economic and business conditions and developments in which the institution operates that affect the collectability of loans;

• Changes in the nature and volume of the loan portfolio;

• Changes in the experience, ability, and depth of lending management and staff;

• Changes in the volume and severity of past-due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans;

• Changes in the quality of the credit review function;

• Changes in the value of the underlying collateral for loans that are not collateral-dependent;

• The existence, growth, and effect of any concentrations of credit, and

• The effect of other external factors, such as the regulatory, legal and technological environments; competition; and events such as natural disasters.

The Company evaluates loans individually when they do not share similar risk characteristics with other loans in the portfolio and are not eligible for the practical expediency threshold. As a practical expedient, the Company generally does not individually evaluate loans with an outstanding net exposure of less than $500 thousand, net of government guarantees, where applicable. Instead, expected credit losses for these loans are estimated on a collective basis within the applicable loan segment. Loans with an outstanding net exposure of $500 thousand or greater that do not share similar risk characteristics with the collectively evaluated population are assessed individually, as appropriate.

When a loan is individually evaluated for the allowance for credit losses, the Company uses one of two valuation methods: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; or (2) for collateral-dependent loans, the fair value of the underlying collateral. For collateral-dependent loans, the Company obtains an updated "as-is" appraisal or other appropriate valuation to estimate the collateral's fair value. To help ensure valuations remain current, appraisals are generally updated every twelve months by a qualified independent appraiser. If the fair value of the collateral is less than the loan's amortized cost basis, the Company records an allowance for credit losses with a corresponding provision for credit losses.

The Company maintains a separate allowance for credit losses for its off-balance sheet commitments. The Company uses an estimated funding rate to allocate an allowance to undrawn exposures. This funding rate serves as a credit conversion factor, reflecting the likelihood that undrawn lines of credit may be drawn at any time. The funding rate is determined based on a look-back period of eight quarters. Credit loss is not estimated for off-balance sheet commitments that are unconditionally cancellable by the Company.

The following table summarizes the activity in the allowance for credit losses on loans by portfolio segment and unfunded commitments for the three and nine months ended September 30, 2026 and 2025:

Collateral-dependent loans are loans where repayment is expected to be provided solely by the sale of the underlying collateral, and there are no other available and reliable sources of repayment. The estimated credit losses for these loans are based on the collateral’s fair value less selling costs. Generally, the Company records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less selling costs at the time of foreclosure.

The following table represents the amortized cost basis of collateral-dependent loans by property type as of September 30, 2026 and December 31, 2025, for which repayment is expected to be obtained through the sale of the underlying collateral:

(1)Excludes guaranteed portion of SBA loans totaling $31.2 million and $12.7 million as of September 30, 2026 and December 31, 2025, respectively.

(2)The allowance for credit losses allocated to these loans as of September 30, 2026 and December 31, 2025 was $2.1 million and $1.3 million, respectively.

Nonaccrual loans and accruing loans past due 90 days or more include both (i) loans with similar risk characteristics that are collectively evaluated for allowance, and (ii) loans that do not share similar risk characteristics that are individually evaluated for allowance. Under the Company's policy, nonaccrual loans with outstanding balances greater than or equal to $500 thousand that lack shared risk characteristics are subject to individual evaluation for expected credit losses.

The following table presents the amortized cost in nonaccrual loans and loans past due 90 or more days and still accruing interest as of September 30, 2026 and December 31, 2025:

(1) Excludes guaranteed portion of loans totaling $38.3 million and $20.9 million as of September 30, 2026 and December 31, 2025, respectively.

(2) Interest income recognized on nonaccrual loans during the periods presented was not significant.

The following table represents the aging analysis of gross loans as of September 30, 2026 and December 31, 2025:

(1)Excludes guaranteed portion of loans totaling $3.2 million as of December 31, 2025, with the excluded portion classified within "Current Accruing" loans. As of September 30, 2026, there wasno guaranteed portion.

(2)Excludes guaranteed portion of loans totaling $38.3 million as of September 30, 2026, including $36.1 million in SBA—real estate and $2.2 million in SBA—non-real estate and $20.9 million as of December 31, 2025, including $18.9 million in SBA—real estate, $1.7 million in SBA—non-real estate, and $319 thousand in a CRE loan

Loan Modifications to Borrowers Experiencing Financial Difficulty

To help borrowers facing financial difficulty, the Company may agree to modify the contractual terms of a loan as a way to mitigate loss. These modifications are handled individually, aiming to create terms that support both repayment and the borrower's financial needs. A borrower is considered as experiencing financial difficulty when there is significant uncertainty regarding the borrower's ability to meet required debt payments or secure comparable financing from another creditor at a market rate for similar debt. Modifications may include, but not limited to, payment delays, interest rate reductions, term extensions, principal forgiveness, or a combination of such modifications.

The following tables present the amortized cost of loans as of September 30, 2026 that were modified for borrowers experiencing financial difficulty during the three months ended September 30, 2026 and nine months ended September 30, 2026 and 2025 by loan segment and modification type. There were no modifications during the three months ended September 30, 2025:

(1) Interest-only payment arrangements are included within payment delays as other-than-significant payment delays under ASC 310-10-50-39.

(2) Excludes guaranteed portion of SBA loans totaling $5.2 million and $5.1 million as of September 30, 2026 and September 30, 2025, respectively.

The following tables describe the financial effect of the loan modifications made to borrowers experiencing financial difficulty for the periods presented:

(1)Interest-only payment arrangements are included within payment delays as other-than-significant payment delays under ASC 310-10-50-39.

A modified loan may become delinquent and may result in a payment default (generally 90 days past due) subsequent to modification. During the three and nine months ended September 30, 2026, an SBA-real estate loan with an amortized cost basis of $785 thousand, net of the SBA guarantee, as of September 30, 2026 that had received a payment delay modification within the preceding 12 months subsequently defaulted. In comparison, there wereno loans that received modifications within the previous 12 months preceding as of September 30, 2025 and subsequently defaulted in three and nine months ended September 30, 2025.

As of September 30, 2026, and 2025, there wereno commitments to lend additional funds to borrowers experiencing financial difficulty whose loans were modified during the nine months ended September 30, 2026 and 2025, respectively.

The Company closely monitors the performance of modified loans to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presents the performance of such loans that were modified in the twelve months ended September 30, 2026 and 2025:

(1)Excludes guaranteed portion of SBA loans totaling $7.8 million and $5.1 million as of September 30, 2026 and 2025, respectively.

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about borrowers' ability to service their debt including: current financial information, historical payment experience, credit documentation, public information, and current economic trends. For consumer loans, a credit grade is established at inception, and generally only adjusted based on performance. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention — Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard — Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful — Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

The following table presents the loan portfolio's amortized cost and current year-to-date gross write-offs by loan type, risk rating and year of origination or, when applicable, the year of the most recent renewal, or major modification as of September 30, 2026 and December 31, 2025:

(1)As of September 30, 2026 and December 31, 2025, criticized loans with payments guaranteed by government agencies that were classified as "Pass" rated totaled $43.5 million and $27.3 million, respectively. The September 30, 2026 balance consisted of $41.3 million of SBA—real estate and $2.2 million of SBA—non-real estate, while the December 31, 2025 balance consisted of $25.3 million of SBA—real estate, $1.7 million of SBA—non-real estate, and $319 thousand of CRE.