OP Bancorp
For the period ended Jun 30, 2025. Filed Aug 11, 2025.
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Jun 30, 2025 · Filed Aug 11, 2025
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11 — Derivative Financial Instruments
Note 11— Derivative Financial Instruments
Risk Management Objective of Using Derivatives
The Company is exposed to various risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Beginning in 2024, the Company began utilizing derivatives to hedge the variability of cash flows associated with its existing variable-rate debt.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income ("AOCI") and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. As of June 30, 2025, the Company expects to reclassify an estimated $284 thousand of pre-tax of deferred net losses related to cash flow hedges from AOCI into earnings during the next 12 months.
The following table presents the notional amounts, fair values and classification on consolidated balance sheets of the Company's derivatives as of June 30, 2025 and December 31, 2024:
| Derivative Assets · Derivative Liabilities | |||||||
|---|---|---|---|---|---|---|---|
| ($ in thousands) · Notional Amount · Balance Sheet Location · Fair Value · Notional Amount · Balance Sheet Location · Fair Value | |||||||
| Derivatives designated as hedging instruments: | |||||||
| Interest rate products | $25,000 | Other assets | $6 | $50,000 | Other liabilities | $945 | |
| Total derivatives designated as hedging instruments | $6 | $945 | |||||
| Derivatives designated as hedging instruments: | |||||||
| Interest rate products | $25,000 | Other assets | $368 | $50,000 | Other liabilities | $579 | |
| Total derivatives designated as hedging instruments | $368 | $579 | |||||
The following table presents the pre-tax changes in AOCI from cash flow hedges for the three and six months ended June 30, 2025 and 2024:
| Derivatives in Subtopic 815-20 Hedging Relationships ($ in thousands) | Amount of Gain (Loss) Recognized in AOCI on Derivative | Amount of Gain (Loss) Recognized in AOCI Included Component | Amount of Gain (Loss) Recognized in AOCI Excluded Component | Location of Gain (Loss) Recognized from AOCI into Income | Amount of Gain (Loss) Reclassified from AOCI into Income | Amount of Gain (Loss) Reclassified from AOCI into Income Included Component | Amount of Gain (Loss) Reclassified from AOCI into Income Excluded Component |
|---|---|---|---|---|---|---|---|
| Derivatives in cash flow hedging relationships: | |||||||
| Interest rate products | $(150) | $(150) | $— | Interest expense | $29 | $29 | $— |
| Total | $(150) | $(150) | $— | $29 | $29 | $— | |
| Derivatives in cash flow hedging relationships: | |||||||
| Interest rate products | $(254) | $(254) | $— | Interest expense | $81 | $81 | $— |
| Total | $(254) | $(254) | $— | $81 | $81 | $— | |
| Derivatives in cash flow hedging relationships: | |||||||
| Interest rate products | $(632) | $(632) | $— | Interest expense | $60 | $60 | $— |
| Total | $(632) | $(632) | $— | $60 | $60 | $— | |
| Derivatives in cash flow hedging relationships: | |||||||
| Interest rate products | $(254) | $(254) | $— | Interest expense | $81 | $81 | $— |
| Total | $(254) | $(254) | $— | $81 | $81 | $— | |
The following table presents the pre-tax changes of the Company’s derivative financial instruments on the consolidated statement of income for the three and six months ended June 30, 2025 and 2024:
| Three Months Ended June 30, | Six Months Ended June 30, | |||
|---|---|---|---|---|
| 2025 | 2024 | 2025 | 2024 | |
| ($ in thousands) | Interest Expense | Interest Expense | Interest Expense | Interest Expense |
| Total amounts presented in the consolidated statement of income | $29 | $81 | $60 | $81 |
| The effects of cash flow hedging: | ||||
| Gain (loss) on cash flow hedging relationships | ||||
| Interest contracts | ||||
| Amount of loss reclassified from AOCI into income | $29 | $81 | $60 | $81 |
| Amount of gain (loss) reclassified from AOCI into income as a result that a forecasted transaction was no longer probable of occurring | — | — | — | — |
| Amount of loss reclassified from AOCI into income - included component | 29 | 81 | 60 | 81 |
| Amount of gain (loss) reclassified from AOCI into income - excluded component | — | — | — | — |
The tables below present a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of June 30, 2025 and December 31, 2024. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheet:
| Gross Amounts of Recognized Assets · Gross Amounts Offset in the Balance Sheet · Net Amounts of Assets presented in the Balance Sheet · Gross Amounts Not Offset in the Balance Sheet | ||||||
|---|---|---|---|---|---|---|
| ($ in thousands) · Financial Instruments · Cash Collateral Received · Net Amount | ||||||
| Derivatives assets | $6 | $— | $6 | $— | $6 | $— |
| Total | $6 | $— | $6 | $— | $6 | $— |
| Derivatives assets | $368 | $— | $368 | $— | $368 | $— |
| Total | $368 | $— | $368 | $— | $368 | $— |
| Gross Amounts of Recognized Liabilities · Gross Amounts Offset in the Balance Sheet · Net Amounts of Liabilities presented in the Balance Sheet · Gross Amounts Not Offset in the Balance Sheet | ||||||
|---|---|---|---|---|---|---|
| ($ in thousands) · Financial Instruments · Cash Collateral Posted · Net Amount | ||||||
| Derivatives liabilities | $945 | $— | $945 | $— | $945 | $— |
| Total | $945 | $— | $945 | $— | $945 | $— |
| Derivatives liabilities | $579 | $— | $579 | $— | $579 | $— |
| Total | $579 | $— | $579 | $— | $579 | $— |
The text of this filing, as the company filed it with the SEC, without its images or exhibits. This is not investment advice.