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, 2025 and December 31, 2024:

(1)Includes net deferred loan costs (fees) and net unamortized premiums (discounts) of $(248) thousand as of September 30, 2025 and $(702) thousand as of December 31, 2024.

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 $8.7 million and $8.1 million as of September 30, 2025 and December 31, 2024, respectively.

For collectively evaluated loans, the Company uses transition matrices to develop the Probability of Default ("PD") and Loss Given Default ("LGD") approaches, incorporating quantitative factors and qualitative considerations in the calculation of the allowance. The model provides forecasts of PD and LGD based on national unemployment rates using regression analysis. The Company incorporates future economic conditions using a weighted multiple scenario approach: baseline and adverse. 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 methodologies described above generally rely on historical loss experience to determine the quantitative portion of the allowance for credit losses. The Company also considers other qualitative and macroeconomic variables related to current conditions and reasonable and supportable forecasts that may indicate current expected credit losses could differ from the historical information reflected in the quantitative models. 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 collectivity 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.

For loans that do not share similar risk characteristics such as nonaccrual loans above $500 thousand, the Company evaluates these loans on an individual loan basis. Such nonaccrual loans are considered to have different risk profiles than performing loans and are therefore evaluated individually. The Company elected to collectively assess nonaccrual loans with balances below $500 thousand along with the performing and accrual loans, in order to reduce the operational burden of individually assessing small nonaccrual loans with immaterial balances. When a loan is individually evaluated for the allowance for credit losses, the Company uses one of two different asset valuation measurement methods: 1) the present value of future cash flows discounted at the loan’s effective interest rate; or 2) the fair value of the collateral for a collateral-dependent loan. For the collateral-dependent loans, the Company obtains a new "as-is" valuation appraisal to determine an updated fair value of collateral. To ensure that appraised values remain current, the Company obtains updated appraisals every twelve months from a qualified independent appraiser. If the fair value of the collateral is less than the amortized balance of the loan, the Company recognizes an allowance for credit losses with a corresponding charge to the 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 8 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 for the three and nine months ended September 30, 2025 and 2024:

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, 2025 and December 31, 2024, for which repayment is expected to be obtained through the sale of the underlying collateral:

(1)Excludes guaranteed portion of SBA loans totaling $16.0 million and $15.2 million as of September 30, 2025 and December 31, 2024, respectively.

(2)The allowance for credit losses allocated to these loans as of September 30, 2025 and December 31, 2024 was $1.1 million and $1.2 million, respectively.

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, 2025 and December 31, 2024:

(1) Excludes guaranteed portion of loans totaling $17.6 million and $16.3 million as of September 30, 2025 and December 31, 2024, 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 above the $500 thousand threshold that lack shared risk characteristics are subject to individual evaluation for expected credit losses.

The following table represents the aging analysis of gross loans as of September 30, 2025 and December 31, 2024:

(1)Excludes guaranteed portion of loans totaling $17.6 million and $16.3 million as of September 30, 2025 and December 31, 2024, respectively.

(2)Revised to conform with the current presentation.

Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, other-than-insignificant payment delay, other-than-insignificant term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral.

The following table presents the amortized cost of loans as of September 30, 2025 that were modified for borrowers experiencing financial difficulty during the three months ended September 30, 2024 and the nine months ended September 30, 2025 and 2024 by loan class and modification type. There wereno modifications during the three months ended September 30, 2025:

(1)Excludes guaranteed portion of SBA loans totaling $5.1 million for the nine months ended September 30, 2025. In comparison, excludes guaranteed portion of SBA loans totaling $5.5 million for both the three and nine months ended September 30, 2024.

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

A modified loan may become delinquent and may result in a payment default (generally 90 days past due) subsequent to modification. There were no loans that received modifications within the past 12 months as of September 30, 2025 and 2024, and subsequently defaulted in three and nine months ended September 30, 2025, and 2024.

For both the nine months ended September 30, 2025 and 2024, the Company hadno additional commitments to lend to borrowers whose loans were modified during the periods.

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, 2025 and 2024:

(1)Excludes guaranteed portion of SBA loans totaling $5.1 million and $9.3 million as of September 30, 2025 and 2024, 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 as of September 30, 2025 and December 31, 2024:

(1)As of September 30, 2025 and December 31, 2024, $20.8 million and $16.3 million, respectively, of criticized loans with payments guaranteed by government agencies were classified as "Pass" rated.