OP Bancorp

The management of interest income and expense is fundamental to our financial performance. Net interest income, the difference between interest income and interest expense, is the largest component of our total revenue. Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets). We seek to maximize net interest income without exposing ourselves to excessive interest rate risk through our asset and liability policies. We manage interest rate risk by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities. Our net interest margin also may be affected adversely from time to time when we are required to reverse previously accrued interest on loans that are reclassified as non-accrual.

The following table presents, for the periods indicated, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields, (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates, (iii) net interest income, (iv) the interest rate spread, and (v) the net interest margin.

(1)Annualized.

(2)Includes FHLB and PCBB stocks, CRA qualified mutual fund and interest-earning time deposits with banks.

(3)Include loans held-for-sale.

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following tables set forth the effects of changing rates and volumes on our net interest income during the period shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Change applicable to both volume and rate have been allocated to volume and rate ratably.

Net interest income for the second quarter of 2025 increased year-over-year, primarily driven by higher interest income on loans.

Interest income on loans increased $3.7 million, or 12%, primarily due to growth in average loan balances, partially offset by a decline in loan yields, reflecting the impact of of downward repricing on adjustable-rate loans and lower rates on new originations following last year's decreases in the federal funds rate.

Interest expense on interest-bearing deposits remained relatively unchanged, as the impact of increase in average interest-bearing deposit balances was almost offset by a decline in interest-bearing deposit costs. The decline in deposit costs reflected the repricing of deposit products in response to the last year's decreases in the federal fund rate.

As a result, net interest margin increased 27 basis points, as a 22% increase in net interest income outpaced an 11% increase in average earning assets, primarily driven by a 52 basis point increase in net interest spread.

Net interest income for the first half of 2025 increased year-over-year, primarily driven by higher interest income on loans, partially offset by a modest increase in interest expense on interest-bearing liabilities.

Interest income on loans increased $5.2 million, or 9%, largely due to by growth in average loan balances. This increase was partially offset by a decline in loan yields, reflecting the impact of downward repricing on adjustable-rate loans and lower rates on new originations following last year's decreases in the federal funds rate. The decline in loan yields was further impacted by lower non-contractual components, such as reduced discount accretion income and lower interest recognized on nonaccrual loans.

Interest expense on interest-bearing liabilities increased slightly $288 thousand, or 1%, primarily due to higher average interest-bearing deposits. However, this was mostly offset by a decline in deposit costs, as interest-bearing deposits repriced downward in response to the prior year's federal fund rate cuts.

As a result, net interest margin increased 11 basis points, as a 15% increase in net interest income outpaced an 11% increase in average earning assets, primarily driven by a 35 basis point increase in net interest spread.