OP Bancorp - Quarter Report: 2020 March (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 001-38437

OP BANCORP

(Exact Name of Registrant as Specified in its Charter)

California	81-3114676
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1000 Wilshire Blvd., Suite 500, Los Angeles, CA	90017
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (213) 892-9999

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Common Stock, no par value

Trading

Symbol(s)

OPBK

Name of each exchange on which registered

NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 8, 2020, there were 15,052,746 outstanding shares of the Registrant’s common stock.

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		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	5
	Consolidated Balance Sheets	5
	Consolidated Statements of Income and Comprehensive Income	6
	Consolidated Statements of Changes in Shareholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Unaudited Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	49

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Mine Safety Disclosures	51
Item 5.	Other Information	51
Item 6.	Exhibits	52

Signatures		53

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Cautionary Note Regarding Forward-Looking Statements

Certain matters set forth herein (including any exhibits hereto) constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to the Company’s current business plans and expectations regarding future operating results. Forward-looking statements may include, but are not limited to, the use of forward-looking language, such as “likely result in,” “expects,” “anticipates,” “estimates,” “forecasts,” “projects,” “intends to,” or may include other similar words or phrases, such as “believes,” “plans,” “trend,” “objective,” “continues,” “remains,” or similar expressions, or future or conditional verbs, such as “will,” “would,” “should,” “could,” “may,” “might,” “can,” or similar verbs.

These forward-looking statements are subject to risks and uncertainties that could cause actual results, performance or achievements to differ materially from those projected. These risks and uncertainties, some of which are beyond our control, include, but are not limited to:

•

business and economic conditions, particularly those affecting the financial services industry and our primary market areas;

•

our ability to successfully manage our credit risk and the sufficiency of our allowance for loan loss;

•

factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers, the success of construction projects that we finance, including any loans acquired in acquisition transactions;

•

our ability to effectively execute our strategic plan and manage our growth;

•

interest rate fluctuations, which could have an adverse effect on our profitability;

•

liquidity issues, including fluctuations in the fair value and liquidity of the securities we hold for sale and our ability to raise additional capital, if necessary;

•

external economic and/or market factors, such as changes in monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve, inflation or deflation, changes in the demand for loans, and fluctuations in consumer spending, borrowing and savings habits, which may have an adverse impact on our financial condition;

•

continued or increasing competition from other financial institutions, credit unions, and non-bank financial services companies, many of which are subject to different regulations than we are;

•

challenges arising from unsuccessful attempts to expand into new geographic markets, products, or services;

•

restraints on the ability of Open Bank to pay dividends to the holding company, which could limit our liquidity;

•

increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all;

•

a failure in the internal controls we have implemented to address the risks inherent to the business of banking;

•

inaccuracies in our assumptions about future events, which could result in material differences between our financial projections and actual financial performance;

•

changes in our management personnel or our inability to retain, motivate and hire qualified management personnel;

•

disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems;

•

disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions;

•

an inability to keep pace with the rate of technological advances due to a lack of resources to invest in new technologies;

•

risks related to potential acquisitions;

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•

political developments, uncertainties or instability, catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, pandemic diseases (such as the coronavirus) or extreme weather events, any of which may affect services we use or affect our customers, employees or third parties with which we conduct business;

•

incremental costs and obligations associated with operating as a public company;

•

the impact of any claims or legal actions to which we may be subject, including any effect on our reputation;

•

compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities and tax matters, and our ability to maintain licenses required in connection with commercial mortgage origination, sale and servicing operations;

•

changes in federal tax law or policy;

•

the rapidly changing uncertainties related to the Coronavirus pandemic including, but not limited to, the potential adverse effect of the pandemic on the economy, our employees and customers, and our financial performance; and

•

our ability to the manage the foregoing.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this report. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this report. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

OP BANCORP

CONSOLIDATED BALANCE SHEETS (unaudited)

As of March 31, 2020 and December 31, 2019

	March 31, 2020		December 31, 2019
	(Dollars in thousands, except share data)
ASSETS
Cash and cash equivalents	$	110,999	$	86,036
Securities available for sale, at fair value		52,179		56,549
Other investments		9,253		9,176
Loans held for sale		4,382		2,100
Loans receivable, net of allowance of $10,748 at March 31, 2020 and $10,050 at December 31, 2019		985,811		980,088
Premises and equipment, net		5,141		5,226
Accrued interest receivable		3,056		3,166
Servicing assets		6,963		7,024
Company owned life insurance (COLI)		10,683		10,618
Deferred tax assets		2,709		3,189
Operating right-of-use assets		7,885		8,254
Other assets		10,532		8,094
Total assets	$	1,209,593	$	1,179,520

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits:
Noninterest bearing	$	304,845	$	294,281
Interest bearing:
Savings		5,220		4,753
Money market and others		291,137		291,865
Time deposits greater than $250,000		210,507		213,345
Other time deposits		240,489		216,467
Total deposits		1,052,198		1,020,711
Accrued interest payable		2,592		2,686
Operating lease liabilities		9,701		10,126
Other liabilities		7,003		5,421
Total liabilities		1,071,494		1,038,944

Shareholders’ equity
Preferred stock – no par value; 10,000,000 shares authorized; no shares issued or outstanding at March 31, 2020 and December 31, 2019		—		—
Common stock – no par value; 50,000,000 shares authorized; 15,115,868 and 15,703,276 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively		80,422		86,381
Additional paid-in capital		7,882		7,524
Retained earnings		48,695		46,483
Accumulated other comprehensive loss		1,100		188
Total shareholders’ equity		138,099		140,576
Total liabilities and shareholders' equity	$	1,209,593	$	1,179,520

See accompanying notes to consolidated financial statements

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OP BANCORP

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)

For the Three Months ended March 31, 2020 and 2019

	Three Months Ended
	March 31,
	2020			2019
	(Dollars in thousands, except share data)
Interest income
Interest and fees on loans	$	13,694		$	13,354
Interest on investment securities		319			360
Other interest income		332			372
Total interest income		14,345			14,086
Interest expense
Interest on deposits		3,229			3,288
Total interest expense		3,229			3,288
Net interest income		11,116			10,798
Provision for loan losses		743			—
Net interest income after provision for loan losses		10,373			10,798

Noninterest income
Service charges on deposits		430			527
Loan servicing fees, net of amortization		392			383
Gain on sale of loans		1,155			1,077
Other income		319			1,546
Total noninterest income		2,296			3,533
Noninterest expense
Salaries and employee benefits		5,071			5,168
Occupancy and equipment		1,230			1,077
Data processing and communication		409			358
Professional fees		273			203
FDIC insurance and regulatory assessments		106			104
Promotion and advertising		162			178
Directors’ fees		233			228
Foundation donation and other contributions		330			388
Other expenses		393			369
Total noninterest expense		8,207			8,073
Income before income taxes		4,462			6,258
Income tax expense		1,163			1,518
Net income	$	3,299		$	4,740
Earnings per share - Basic	$	0.21		$	0.29
Earnings per share - Diluted	$	0.21		$	0.29
Other comprehensive income:
Change in unrealized income on securities available for sale		1,294			503
Tax effect		(382	)		(149	)
Total other comprehensive income		912			354
Comprehensive income	$	4,211		$	5,094

See accompanying notes to consolidated financial statements

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OP BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

For the Three Months ended March 31, 2020 and 2019

	Common Stock						Additional					Accumulated Other			Total
	Shares Outstanding			Amount			Paid-in Capital		Retained Earnings			Comprehensive Income (Loss)			Shareholders’ Equity
Balance at January 1, 2019		15,860,306		$	91,209		$	6,249	$	32,877		$	(548	)	$	129,787
Net income		—			—			—		4,740			—			4,740
Stock issued under stock-based compensation plans		118,162			292			—		—			—			292
Stock-based compensation		—			—			377		—			—			377
Repurchase of common stock		(258,885	)		(2,381	)		—		—			—			(2,381	)
Cash dividends declared		—			—			—		(793	)		—			(793	)
Change in unrealized loss on securities available for sale net of reclassifications and tax effects		—			—			—		—			354			354
Balance at March 31, 2019		15,719,583		$	89,120		$	6,626	$	36,824		$	(194	)	$	132,376

Balance at January 1, 2020		15,703,276		$	86,381		$	7,524	$	46,483		$	188		$	140,576
Net income		—			—			—		3,299			—			3,299
Stock issued under stock-based compensation plans		130,046			305			—		—			—			305
Stock-based compensation		—			—			358		—			—			358
Repurchase of common stock		(717,454	)		(6,264	)		—		—			—			(6,264	)
Cash dividends declared		—			—			—		(1,087	)		—			(1,087	)
Change in unrealized loss on securities available for sale net of reclassifications and tax effects		—			—			—		—			912			912
Balance at March 31, 2020		15,115,868		$	80,422		$	7,882	$	48,695		$	1,100		$	138,099

See accompanying notes to consolidated financial statements

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OP BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

For the Three Months ended March 31, 2020 and 2019

	Three Months Ended March 31,
	2020			2019
Cash flows from operating activities
Net income	$	3,299		$	4,740
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Provision for loan losses		743			—
Depreciation and amortization of premises and equipment		329			268
Amortization of net premiums on securities		58			53
Stock-based compensation		358			377
Gain on sales of loans		(1,155	)		(1,077	)
Earnings on company owned life insurance (COLI)		(65	)		(1,308	)
Origination of loans held for sale		(20,566	)		(18,044	)
Proceeds from sales of loans held for sale		19,012			19,165
Amortization of servicing assets		467			403
Net change in fair value of equity investment with readily determinable fair value		(77	)		(46	)
Net change in:
Accrued interest receivable		110			(300	)
Deferred tax assets		98			7
Other assets		1,041			(80	)
Accrued interest payable		(94	)		463
Other liabilities		(1,192	)		(1,967	)
Net cash from operating activities		2,366			2,654
Cash flows from investing activities
Net change in loans receivable		(6,445	)		(39,168	)
Proceeds from matured, called, or paid-down securities available for sale		5,605			1,670
Proceeds from COLI		—			2,288
Purchase of premises and equipment, net		(245	)		(718	)
Investment in low income housing partnership		(759	)		—
Net cash from investing activities		(1,844	)		(35,928	)
Cash flows from financing activities
Net change in deposits		31,487			24,226
Cash received from stock option exercises		305			292
Repurchase of common stock		(6,264	)		(2,381	)
Cash dividend paid on common stock		(1,087	)		(793	)
Net cash from financing activities		24,441			21,344
Net change in cash and cash equivalents		24,963			(11,930	)
Cash and cash equivalents at beginning of period		86,036			77,726
Cash and cash equivalents at end of period	$	110,999		$	65,796
Supplemental cash flow information
Cash paid during the period for:
Income taxes	$	1,335		$	465
Interest		3,323			2,825
Supplemental noncash disclosure:
Transfer from loan receivable to OREO	$	—		$	1,146
The adoption of ASU 2016-02, leases (Topic 842) recognition right-of-use assets		—			8,057
New commitments to low income housing partnership investments		3,477			—

See accompanying notes to consolidated financial statements

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OP BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Note 1. Business Description

OP Bancorp (the “Company”) is a California corporation whose common stock is quoted on the Nasdaq Global Market under the ticker symbol, “OPBK.” The Company was formed to acquire 100% of the voting equity of Open Bank (the “Bank”) and commenced operation as a bank holding company on June 1, 2016. This transaction was treated as an internal reorganization as all shareholders of the Bank became shareholders of the Company. The Company has no operations other than ownership of the Bank. The Bank is a California state-chartered and FDIC-insured financial institution, which began its operations on June 10, 2005. Headquartered in downtown Los Angeles, California, the Company operates primarily in the traditional banking business arena that includes accepting deposits and making loans and investments. The Company’s primary deposit products are demand and time deposits, and the primary lending products are commercial business loans to small to medium sized businesses. The Company is operating with nine full service branches, eight of which are located in California, in Downtown Los Angeles, Los Angeles Fashion District, Los Angeles Koreatown, Gardena, Buena Park and Santa Clara. The Company opened a ninth full service branch in Carrollton, Texas in April, 2019. The Company also has four loan production offices in Atlanta, Georgia, Aurora, Colorado, and Lynwood and Seattle, Washington.

On March 27, 2018, the Company completed its initial public offering of common stock, pursuant to which an aggregate of 2,300,000 shares of its common stock were sold at a public offering price of $11.00 per share, for aggregate net proceeds of approximately $22.6 million, after deducting underwriter discounts and commissions paid by it of approximately $1.7 million and other offering expenses of approximately $925,000.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation: The accompanying unaudited consolidated financial statements and notes thereto of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented, including eliminating intercompany transactions and balances. The results of operations for the interim periods are not necessarily indicative of the results for the full year. These interim unaudited financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto as of and for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The Company could experience a material adverse effect on its business as a result of the impact of the novel coronavirus pandemic (“COVID-19”) and the resulting governmental actions to curtail its spread. It is at least reasonably possible that the estimates based on information which was available at the date of the financial statements will change in the near term due to the COVID-19 pandemic and that the effect of the change would be material to the financial statements, including the allowance for loan losses. The extent to which the COVID-19 pandemic will impact our estimates and assumptions is highly uncertain and we are unable to make an estimate, at this time.

Concentration of Risk: Most of the Company’s customers are located within Los Angeles County and the surrounding area. The concentration of loans originated in this area may subject the Company to the risk of adverse impacts of economic, regulatory or other developments that could occur in Southern California. The Company has significant concentration in commercial real estate loans. The Company obtains what it believes to be sufficient collateral to secure potential losses. The extent and value of the collateral obtained varies based upon the details underlying each loan agreement.

There has been no significant or material changes to the Company’s accounting policies during the three months ended March 31, 2020, as compared to the Summary of Significant Accounting Policies as described in “Note 1 of the Notes to Consolidated Financial Statements” in the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2019.

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Recent Accounting Pronouncements:

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The objective of ASU 2016-13 is to provide financial statement users with decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit. ASU 2016-13 includes provisions that require financial assets measured at amortized cost (such as loans and held to maturity (HTM) debt securities) to be presented at the net amount expected to be collected. This will be accomplished through recognition of an estimate of all current expected credit losses. The estimate will include forecasted information for the timeframe that an entity is able to develop reasonable and supportable forecasts. This is a change from the current practice of recognizing incurred losses based on the probable initial recognition threshold under current GAAP. In addition, credit losses on available for sale (AFS) debt securities will be recorded through an allowance for credit losses rather than as a write-down. Under ASU 2016-13, an entity will be able to record reversals of credit losses in current period income when the estimate of credit losses declines, whereas current GAAP prohibits reflecting those improvements in current period earnings.

In July 2019, FASB proposed the effective date delay to January 2020 for SEC filers, excluding smaller reporting companies (“SRCs”) and emerging growth companies (“EGCs”), and January 2023 for all other entities including SRCs and EGCs, and on October 2019, FASB voted to approve the proposed delay. The Compny expects the adoption date would be January 2023. ASU 2016-13 will be applied through a cumulative effect adjustment to retained earnings (modified-retrospective approach), except for debt securities for which an other-than-temporary impairment had been recognized before the effective date. A prospective transition approach is required for these debt securities. The Company is currently evaluating the effects of ASU 2016-13 on its financial statements and disclosures, including software solutions, data requirements and loss estimation methodologies. The company has engaged a third party advisor to develop a new expected loss model. While the effects cannot yet be quantified, the Company expects ASU 2016-13 to add complexity and costs to its current credit loss evaluation process.

In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the provisions of this ASU and its effects on our consolidated financial statements.

In April 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued a revised interagency statement encouraging financial institutions to work with customers affected by the COVID-19 and providing additional information regarding loan modifications. The revised interagency statement clarifies the interaction between the interagency statement issued on March 22, 2020 and the temporary relief provided by Section 4013 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. Section 4013 allows financial institutions to suspend the requirements to classify certain loan modifications as troubled debt restructurings (“TDRs”). The revised statement also provides supervisory interpretations on past due and nonaccrual regulatory reporting of loan modification programs and regulatory capital. This interagency guidance is expected to reduce the number of TDRs that will be reported in future periods; however, the amount is indeterminable and will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

Note 3. Securities

The following table summarizes the amortized cost, fair value, and the corresponding amounts of gross unrealized gains and losses for available for sale securities as of March 31, 2020 and December 31, 2019:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
As of March 31, 2020:	(Dollars in thousands)
Available for sale:
U.S. Government sponsored agency securities	$	3,000	$	25	$	—	$	3,025
Mortgage-backed securities: residential		14,900		403		—		15,303
Collateralized mortgage obligations: residential		32,718		1,133		—		33,851
Total available for sale	$	50,618	$	1,561	$	—	$	52,179

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	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
As of December 31, 2019:	(Dollars in thousands)
Available for sale:
U.S. Government sponsored agency securities	$	5,000	$	2	$	(1	)	$	5,001
Mortgage-backed securities: residential		15,559		94		(12	)		15,641
Collateralized mortgage obligations: residential		35,723		243		(59	)		35,907
Total available for sale	$	56,282	$	339	$	(72	)	$	56,549

There were no sales of securities available for sale in the three months ended March 31, 2020 or 2019. The amortized cost and estimated fair value of securities available for sale at March 31, 2020, by contractual maturity, are shown below. Securities without a contractual maturity are shown separately.

	Amortized Cost		Fair Value
As of March 31, 2020:	(Dollars in thousands)
Available for sale:
Within one year	$	2,000	$	2,010
One to five years		1,000		1,015
Mortgage-backed securities: residential		14,900		15,303
Collateralized mortgage obligations		32,718		33,851
Total available for sale	$	50,618	$	52,179

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At March 31, 2020 and December 31, 2019, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

There were no securities with unrealized losses as of March 31, 2020. The following table summarizes securities with unrealized losses as of December 31, 2019, aggregated by length of time in a continuous unrealized loss position:

	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
As of December 31, 2019:	(Dollars in thousands)
Available for sale:
U.S. Government sponsored agency securities	$	—	$	—		$	1,999	$	(1	)	$	1,999	$	(1	)
Mortgage-backed securities: residential		—		—			3,254		(12	)		3,254		(12	)
Collateralized mortgage obligations		8,878		(29	)		3,658		(30	)		12,536		(59	)
Total available for sale	$	8,878	$	(29	)	$	8,911	$	(43	)	$	17,789	$	(72	)

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement, and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. As of March 31, 2020, management believes no securities with unrealized losses were OTTI.

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There were no securities pledged as collateral as of March 31, 2020 or December 31, 2019.

Other investments as of March 31, 2020 and December 31, 2019, consisted of the following:

	March 31, 2020		December 31, 2019
	(Dollars in thousands)
FHLB stock	$	5,358	$	5,358
PCBB stock		190		190
Mutual fund - CRA qualified		3,705		3,628
Total other investments	$	9,253	$	9,176

Note 4. Loans

The composition of the loan portfolio was as follows at March 31, 2020 and December 31, 2019:

	March 31, 2020			December 31, 2019
	(Dollars in thousands)
Real estate:
Commercial real estate	$	639,411		$	630,668
SBA loans—real estate		123,795			122,373
Total real estate		763,206			753,041
SBA loans—non-real estate		10,114			9,895
Commercial and industrial		99,860			103,852
Home mortgage		119,984			120,686
Consumer		3,395			2,664
Gross loans receivable		996,559			990,138
Allowance for loan losses		(10,748	)		(10,050	)
Loans receivable, net	$	985,811		$	980,088

No loans were outstanding to related parties as of March 31, 2020 or December 31, 2019.

The activity in the allowance for loan losses for the three months ended March 31, 2020 and 2019 was as follows:

						SBA
	Commercial		SBA Loans			Loans Non-			Commercial			Home
	Real Estate		Real Estate			Real Estate			and Industrial			Mortgage		Consumer			Total
	(Dollars in thousands)
Three months ended March 31, 2020:
Beginning balance	$	6,000	$	939		$	121		$	1,289		$	1,667	$	34		$	10,050
Provision for loan losses		210		143			116			3			254		17			743
Charge-offs		—		—			(45	)		—			—		—			(45	)
Recoveries		—		—			—			—			—		—			—
Ending balance	$	6,210	$	1,082		$	192		$	1,292		$	1,921	$	51		$	10,748
Three months ended March 31, 2019:
Beginning balance	$	4,805	$	894		$	505		$	1,746		$	1,653	$	33		$	9,636
Provision for loan losses		391		53			(376	)		(73	)		7		(2	)		—
Charge-offs		—		(17	)		—			—			—		—			(17	)
Recoveries		—		—			—			—			—		—			—
Ending balance	$	5,196	$	930		$	129		$	1,673		$	1,660	$	31		$	9,619

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The following table presents the balance in the allowance for loan losses and the recorded investment in loans (including accrued interest receivable of $2.8 million and $2.9 million as of March 31, 2020 and December 31, 2019, respectively) by portfolio segment as of March 31, 2020 and December 31, 2019:

	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total
As of March 31, 2020:	(Dollars in thousands)
Allowance for loan losses:
Commercial real estate	$	—	$	6,210	$	6,210
SBA loans—real estate		—		1,082		1,082
SBA loans—non-real estate		60		132		192
Commercial and industrial		330		962		1,292
Home mortgage		—		1,921		1,921
Consumer		—		51		51
Total	$	390	$	10,358	$	10,748
Loans:
Commercial real estate	$	—	$	640,889	$	640,889
SBA loans—real estate		476		123,914		124,390
SBA loans—non-real estate		159		10,011		10,170
Commercial and industrial		330		99,728		100,058
Home mortgage		—		120,468		120,468
Consumer		—		3,403		3,403
Total	$	965	$	998,413	$	999,378
As of December 31, 2019:
Allowance for loan losses:
Commercial real estate	$	—	$	6,000	$	6,000
SBA loans—real estate		—		939		939
SBA loans—non-real estate		—		121		121
Commercial and industrial		333		956		1,289
Home mortgage		—		1,667		1,667
Consumer		—		34		34
Total	$	333	$	9,717	$	10,050
Loans:
Commercial real estate	$	—	$	632,205	$	632,205
SBA loans—real estate		484		122,438		122,922
SBA loans—non-real estate		33		9,921		9,954
Commercial and industrial		333		103,774		104,107
Home mortgage		—		121,161		121,161
Consumer		—		2,671		2,671
Total	$	850	$	992,170	$	993,020

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The following table presents information related to impaired loans by class of loans as of and for the three months ended March 31, 2020 and 2019. The difference between the unpaid principal balance (net of partial charge-offs) and the recorded investment in the loans is not considered to be material. The difference between interest income recognized and cash basis interest recognized was immaterial.

					Average		Interest
	Recorded		Allowance		Recorded		Income
	Investment		Allocated		Investment		Recognized
As of and for the three months ended March 31, 2020:	(Dollars in thousands)
With no related allowance recorded:
SBA loans—real estate	$	476	$	—	$	480	$	—
SBA loans—non-real estate		33		—		33		—
With an allowance recorded:
SBA loans—non-real estate		126		60		126		9
Commercial and industrial		330		330		331		4
Total	$	965	$	390	$	970	$	13
As of and for the three months ended March 31, 2019:
With no related allowance recorded:
SBA loans—real estate	$	510	$	—	$	516	$	—
SBA loans—non-real estate		49		—		53		—
Commercial and industrial		680		—		680		—
With an allowance recorded:
Commercial and industrial		834		834		835		13
Total	$	2,073	$	834	$	2,084	$	13

The following table presents the recorded investment in nonaccrual loans and loans past due greater than 90 days still accruing interest, by class of loans, as of March 31, 2020 and December 31, 2019:

	Nonaccrual		Loans >90 Days Past Due & Still Accruing		Total
As of March 31, 2020:	(Dollars in thousands)
SBA loans—real estate	$	476	$	—	$	476
SBA loans—non-real estate		33		—		33
Home mortgage		694		—		694
Total	$	1,203	$	—	$	1,203
As of December 31, 2019:
SBA loans—real estate	$	484	$	—	$	484
SBA loans—non-real estate		33		—		33
Home mortgage		698		—		698
Total	$	1,215	$	—	$	1,215

Nonaccrual loans and loans past due greater than 90 days still accruing interest include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

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The following table represents the aging of the recorded investment in past due loans as of March 31, 2020 and December 31, 2019:

	30-59 Days Past Due		60-89 Days Past Due		> 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
As of March 31, 2020:	(Dollars in thousands)
Commercial real estate	$	—	$	—	$	—	$	—	$	640,889	$	640,889
SBA—real estate		—		1,545		476		2,021		122,369		124,390
SBA—non-real estate		—		2		33		35		10,135		10,170
Commercial and industrial		—		356		—		356		99,702		100,058
Home mortgage		1,789		373		454		2,616		117,852		120,468
Consumer		—		—		—		—		3,403		3,403
	$	1,789	$	2,276	$	963	$	5,028	$	994,350	$	999,378
As of December 31, 2019:
Commercial real estate	$	—	$	—	$	—	$	—	$	632,205	$	632,205
SBA—real estate		1,552		—		484		2,036		120,886		122,922
SBA—non-real estate		3		126		33		162		9,792		9,954
Commercial and industrial		364		—		—		364		103,743		104,107
Home mortgage		1,980		—		454		2,434		118,727		121,161
Consumer		—		—		—		—		2,671		2,671
	$	3,899	$	126	$	971	$	4,996	$	988,024	$	993,020

Troubled Debt Restructurings: As of March 31, 2020 and December 31, 2019, the Company had a recorded investment in troubled debt restructurings of $330,000 and $333,000, respectively. As of March 31, 2020 and December 31, 2019, the Company has allocated $330,000 and $333,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings, respectively. The Company has not committed to lend any additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

Modifications made were primarily extensions of existing payment modifications on loans previously identified as troubled debt restructurings. There were no new loans identified as trouble debt restructurings during the three months ended March 31, 2020 or 2019. There were no payment defaults during the three months ended March 31, 2020 or 2019 of loans that had been modified as troubled debt restructurings within the previous twelve months.

Loan payment deferrals: As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic. The Company has offered loan payment deferrals of up to 6 months for commercial and consumer borrowers impacted by the pandemic who have not been delinquent over 30 days on payments at the time of borrowers’ deferral requests. There was no borrower request during the first quarter of 2020, but as of April 30, 2020, the Company accepted payment deferral requests for 175 loan accounts from borrowers across multiple industries for an aggregate of $219.2 million. Recent interagency guidance from Federal Reserve and the Federal Deposit Insurance Corporation confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. We believe our loan modification program satisfies the applicable requirements.

PPP loans: A provision in the CARES Act created the Paycheck Protection Program (“PPP”), which is administered by the Small Business Administration (“SBA”). The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest and utilities. The loans may be forgiven conditioned upon the client providing payroll documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. The Bank is an approved SBA lender and began accepting applications for the program on April 3, 2020. As of April 24, 2020, we processed 323 applications for an aggregate of $36.7 million funded through the PPP loans.

The Paycheck Protection Program and Health Care Enhancement Act (“PPP / HCEA Act”), which was signed into law on April 24, 2020, authorized additional funding under the CARES Act of $310 billion for PPP loans to be issued by financial institutions through the SBA. As of April 30, 2020, the Company approved 530 applications for an aggregate of $27.8 million under the PPP / HCEA Act.

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Credit Quality Indicators: The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. 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 according to their 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.

As of March 31, 2020 and December 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

	Pass		Special Mention		Substandard			Doubtful		Total
As of March 31, 2020:	(Dollars in thousands)
Commercial real estate	$	640,889	$	—	$	—		$	—	$	640,889
SBA loans—real estate		121,603		766		2,021			—		124,390
SBA loans—non-real estate		9,998		13		159			—		10,170
Commercial and industrial		94,611		4,761		686			—		100,058
Home mortgage		119,774		—		694			—		120,468
Consumer		3,403		—		—			—		3,403
	$	990,278	$	5,540	$	3,560	(1)	$	—	$	999,378
As of December 31, 2019:
Commercial real estate	$	632,205	$	—	$	—		$	—	$	632,205
SBA loans—real estate		120,116		770		2,036			—		122,922
SBA loans—non-real estate		9,781		140		33			—		9,954
Commercial and industrial		98,509		4,901		697			—		104,107
Home mortgage		120,463		—		698			—		121,161
Consumer		2,671		—		—			—		2,671
	$	983,745	$	5,811	$	3,464	(1)	$	—	$	993,020

Note 5. Leases

The Company’s operating leases are real estate leases which are comprised of its headquarters and office facilities from nonaffiliated parties with remaining lease terms ranging from 1 to 10 years as of March 31, 2020. Certain lease arrangements contain extension option which are typically around 5 years. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term.

At March 31, 2020, operating right-of-use (“ROU”) assets and related liabilities were $7.9 million and $9.7 million, respectively. Short-term operating leases, which are defined as leases with term of twelve months or less, were not recognized as ROU assets with related lease liabilities as permitted under ASU No. 2016-02. The lease payments on short-term operating leases are immaterial. The Company did not have any finance leases at March 31, 2020.

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Operating lease ROU assets represent the Company’s right to use the underlying asset during the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at the lease commencement based on the present value of the remaining lease payments using the Company’s incremental borrowing rate at the lease commencement date. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term and is recorded in occupancy expense in the consolidated statements of income. The Company’s occupancy expense also includes variable lease costs which is comprised of the Company's share of actual costs for utilities, common area maintenance, property taxes, and insurance that are not included in lease liabilities and are expensed as incurred. Variable lease costs can also include rent escalations based on changes to indices, such as the Consumer Price Index, where the Company estimates future rent increases and records the actual difference to variable costs.

The table below summarized the Company’s total lease cost:

	Three Months Ended March 31,
(Dollars in thousands)	2020		2019
Operating lease cost	$	444	$	403
Variable lease cost		184		161
Total lease cost	$	628	$	564

The table below summarizes other information related to the Company’s operating leases:

	Three Months Ended March 31,
(Dollars in thousands)	2020			2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	500		$	436
Weighted average remaining lease term - operating leases		5.5			6.1
Weighted average discount rate - operating leases		2.98	%		2.99	%

Rent expense was $628,000 and $564,000 for the three months ended March 31, 2020 and 2019, respectively.

The table below summarizes the remaining contractually obligated lease payments and a reconciliation to the lease liability reported on the consolidated balance sheet as of March 31, 2020 and December 31, 2019:

(Dollars in thousands)	March 31, 2020
2020 remaining	$	1,502
2021		2,032
2022		2,028
2023		1,816
2024		1,702
Thereafter		1,641
Total lease payments		10,721
Discount to present value		(1,020	)
Total lease liability	$	9,701

(Dollars in thousands)	December 31, 2019
2020	$	2,001
2021		2,032
2022		2,028
2023		1,816
2024		1,702
Thereafter		1,641
Total lease payments		11,220
Discount to present value		(1,094	)
Total lease liability	$	10,126

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Note 6. Premises and equipment

The Company’s premises and equipment consisted of the following as of March 31, 2020 and December 31, 2019:

	March 31, 2020			December 31, 2019
	(Dollars in thousands)
Leasehold improvements	$	6,734		$	6,571
Furniture and fixtures		3,201			3,174
Equipment and others		2,463			2,414
Total cost		12,398			12,159
Accumulated depreciation		(7,257	)		(6,933	)
Net book value	$	5,141		$	5,226

Total depreciation expense included in occupancy and equipment expenses was $329,000 and $268,000 for the three months ended March 31, 2020 and 2019, respectively.

Note 7. Servicing Assets

Activity for loan servicing assets during the three months ended March 31, 2020 and 2019 is as follows:

	Three Months Ended March 31,
		2020			2019
	(Dollars in thousands)
Beginning balance	$	7,024		$	6,987
Additions		406			462
Amortized to expense		(467	)		(403	)
Ending balance	$	6,963		$	7,046

There was no valuation allowance recorded against the carrying value of the servicing assets as of March 31, 2020 or 2019.

The fair value of the servicing assets was $8.0 million at March 31, 2020, which was determined using discount rates ranging from 5.7% to 11.9% and prepayment speeds ranging from 15.0% to 15.1%, depending on the stratification of the specific assets.

The fair value of the servicing assets was $8.5 million at March 31, 2019, which was determined using discount rates ranging from 5.7% to 11.4% and prepayment speeds ranging from 12.1% to 12.8%, depending on the stratification of the specific assets.

Note 8. Deposits

The scheduled maturities of time deposits were as follows as of March 31, 2020:

	March 31, 2020
	(Dollars in thousands)
2020 remaining	$	356,851
2021		91,198
2022		1,701
2023		855
2024		359
Thereafter		32
Total	$	450,996

Deposits from principal officers, directors, and their affiliates as of March 31, 2020 and December 31, 2019 were $1.1 million and $1.6 million, respectively.

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Note 9. Borrowing arrangements

As of March 31, 2020, the Company had no borrowings from the Federal Home Loan Bank of San Francisco. The Company has a letter of credit with the FHLB in the amount of $49,000,000 to secure a public deposit.

The Company had available borrowings from the following institutions as of March 31, 2020:

	March 31, 2020
	(Dollars in thousands)
Federal Home Loan Bank—San Francisco	$	245,845
Federal Reserve Bank		128,204
Pacific Coast Bankers Bank		8,000
Zions Bank		25,000
Total	$	407,049

The Company has pledged approximately $851.4 million of loans as collateral for these lines of credit as of March 31, 2020.

Note 10. Income Taxes

The Company’s income tax expense was $1.2 million and $1.5 million for the three months ended March 31, 2020 and 2019, respectively. The effective income tax rate was 26.1% and 24.3% for the three months ended March 31, 2020 and 2019, respectively.

The Company is subject to U.S. Federal income tax as well as various state taxing jurisdictions. The Company is no longer subject to examination by Federal taxing authorities for tax years prior to 2016 and for state taxing authorities for tax years prior to 2015.

There were no significant unrealized tax benefits recorded as of March 31, 2020 and 2019, and the Company does not expect any significant increase in unrealized tax benefits in the next twelve months.

Note 11. Commitments and Contingencies

Off-Balance-Sheet Credit Risk: The commitments and contingent liabilities include various commitments to extend credit and standby letters of credit, which arise in the normal course of business. Commitments to extend credit are legally binding loan commitments with set expiration dates. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. They are intended to be disbursed, subject to certain conditions, upon request of the borrower.

The Company evaluates the creditworthiness of each customer. Collateral, if deemed necessary by the Company upon the extension of credit, is obtained based on management’s evaluation of the borrower. Collateral for commercial and industrial loans may vary, but may include securities, accounts receivable, inventory, property, plant and equipment, and income producing commercial or other properties. The following table shows the distribution of undisbursed loan commitments as of the dates indicated:

	March 31, 2020		December 31, 2019
	(Dollars in thousands)
Commitments to extend credit	$	68,917	$	66,153
Standby letter of credit		7,327		7,377
Commercial letter of credit		685		1,111
Total undisbursed loan commitments	$	76,929	$	74,641

The majority of these off-balance sheet commitments have a variable interest rate. Management does not anticipate any material losses as a result of these transactions.

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Investments in low income housing partnership: The Company invests in qualified affordable housing partnerships. The following table shows the balance of the investments in low income housing partnership and the total unfunded commitments related to the investments in low income housing partnerships as of the dates indicated:

	March 31, 2020		December 31, 2019
	(Dollars in thousands)
Investments in low income housing partnerships	$	5,142	$	1,719
Unfunded commitments to fund investments for low income housing partnerships		2,788		70

These balances are reflected in the other assets and other liabilities line on the consolidated balance sheets. The Company expects to fulfill these commitments during the year ending 2034.

During the three months ended March 31, 2020 and 2019, the Company recognized amortization expense of $54,000 each for those periods, which was included within income tax expense on the consolidated statements of income. Additionally, during the three months ended March 31, 2020 and 2019, the Company recognized tax credits and other benefits from the investments in low income housing partnerships of $50,000 and $51,000, respectively.

Note 12. Stock-based Compensation

The Company has two stock-based compensation plans currently in effect as of March 31, 2020, as described further below. Total compensation cost that has been charged against earnings for these plans was $358,000 and $377,000 in the three months ended March 31, 2020 and 2019, respectively.

2005 Plan: In 2005, the Board of Directors and shareholders of the Bank approved a stock option plan for the benefit of directors and employees of the Bank (the “2005 Plan”). The 2005 Plan was assumed by the Company in 2016 at the time of the bank holding company reorganization. Under the 2005 Plan, the Bank was authorized to grant options to purchase up to 770,000 shares of the Company’s common stock.

The exercise prices of the options may not be less than 100 percent of the fair value of the Company’s common stock at the date of grant. The options, when granted, vest either immediately or ratably over five years from the date of the grant and expire after ten years if not exercised. The 2005 plan was expired in 2015 and no shares are available for grant.

A summary of the transactions under the 2005 Plan for the three months ended March 31, 2020 is as follows:

				Weighted
	Number of			Average		Aggregate
	Options			Exercise		Intrinsic
	Outstanding			Price		Value
	(Dollars in thousands, except per share data)
Outstanding, as of January 1, 2020		155,000		$	4.70
Options granted		—			—
Options exercised		(55,000	)		1.15
Options forfeited		—			—
Options expired		—			—
Outstanding, as of March 31, 2020		100,000			5.77	$	171
Fully vested and expected to vest		100,000			5.77	$	171
Vested		100,000		$	5.77	$	171

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Information related to the 2005 Plan for the periods indicated follows:

	Three Months Ended March 31,
		2020		2019
	(Dollars in thousands)
Intrinsic value of options exercised	$	370	$	387
Cash received from option exercises		63		107
Tax benefit realized from option exercised		15		—

The weighted average remaining contractual term of stock options outstanding under the 2005 Plan at March 31, 2020 was 3.40 years. The weighted average remaining contractual term of stock options that were exercisable at March 31, 2020 was 3.40 years. All of the stock options that are outstanding under the 2005 Plan were fully vested as of March 31, 2020.

2010 Plan: In 2010, the Board of Directors of the Bank approved a new equity incentive plan for granting stock options and restricted stock awards to key employees, officers, and non-employee directors of the Bank (the “2010 Plan”). In 2013, the 2010 Plan was amended and approved by the shareholders to increase the number of shares authorized to be issued under from 1,350,000 shares of common stock to 2,500,000 shares of common stock. The 2010 Plan was assumed by the Company in 2016 at the time of the bank holding company reorganization.

The exercise prices of stock options granted under the plan may not be less than 100% of the fair value of the Company’s stock at the date of grant. The options, when granted, vest ratably over five years from the date of the grant and expire after ten years if not exercised. There were no stock options granted under the 2010 Plan during the three months ended March 31, 2020 or 2019.

Restricted stock awards issued under the 2010 Plan may or may not be subject to vesting provisions. No awards were granted in the three months ended March 31, 2020. Awards which were granted in the three months ended March 31, 2019 vest at the end of three years from the date of the grant. Owners of the restricted stock awards shall have all of the rights of a shareholder including the right to vote the shares and to all dividends (cash or stock). Compensation expense related to restricted stock awards will be recognized over the vesting period of the awards based on the fair value of the Company’s common stock at the issue date.

A summary of stock options outstanding under the 2010 Plan for the three months ended March 31, 2020 is as follows:

				Weighted
	Number of			Average		Aggregate
	Options			Exercise		Intrinsic
	Outstanding			Price		Value
	(Dollars in thousands, except per share data)
Outstanding, as of January 1, 2020		365,000		$	5.78
Options granted		—			—
Options exercised		(85,000	)		2.85
Options forfeited		—			—
Options expired		—			—
Outstanding, as of March 31, 2020		280,000			6.66	$	336
Fully vested and expected to vest		265,000			6.59	$	336
Vested		220,000		$	6.30	$	336

Information related to stock options exercised under the 2010 Plan for the periods indicated follows:

	Three Months Ended March 31,
		2020		2019
	(Dollars in thousands)
Intrinsic value of options exercised	$	519	$	396
Cash received from option exercises		242		185
Tax benefit realized from option exercised		134		102

The weighted average remaining contractual term of stock options outstanding under the 2010 Plan at March 31, 2020 was 3.15 years. The weighted average remaining contractual term of stock options that were exercisable at March 31, 2020 was 2.92 years.

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A summary of the changes in the Company’s non-vested restricted stock awards under the 2010 Plan for the three months ended March 31, 2020 is as follows:

	Shares Issued		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
	(Dollars in thousands, except share data)
Non-vested, as of January 1, 2020		294,500	$	9.20
Awards granted		—		—
Awards vested		—		—
Awards forfeited		—		—
Non-vested, as of March 31, 2020		294,500	$	9.20	$	2,197

There were no vested restricted stock awards for the three months ended March 31, 2020, or 2019.

There were 95,427 shares available for grant under the 2010 Plan as of March 31, 2020 (in either stock options or restricted stock awards). As of March 31, 2020, the Company had approximately $1.4 million of unrecognized compensation cost related to unvested stock options and restricted stock awards under the 2010 Plan. The Company expects to recognize these costs over a weighted average period of 1.07 years.

Note 13. Employee Benefit Plan

The Company established a 401(k) profit sharing plan (the “401(k) Plan”) which is open to all eligible employees who are at least 21 years old and have completed 90 days of service. Each employee is allowed to contribute to the 401(k) Plan up to the maximum percentage allowable, not to exceed the limits of applicable IRS Code Sections. Each year, the Company may, in its discretion, make matching contributions to the 401(k) Plan. Total employer contributions to the 401(k) Plan amounted to $180,000 and $137,000 for the three months ended March 31, 2020 and 2019, respectively.

Note 14. Revenue Recognition

Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans, letters of credit, and investment securities, as well as revenue related to mortgage servicing activities and revenue on bank owned life insurance, as these activities are subject to other GAAP discussed elsewhere within the disclosures. Descriptions of the Company’s revenue-generating activities that are within the scope of ASC 606, which are presented in the Company’s income statements as components of noninterest income are as follows:

Service charges on deposits: Income from service charges on deposits is within the scope of ASC 606. These include general service fees for monthly account maintenance and activity or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue on these types of fees are recognized when the Company’s performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payment for such performance obligations are generally received at the time the performance obligations are satisfied. Total revenues from services charges on deposits in the three months ended March 31, 2020 and 2019, on a dollar and percentage of total revenue basis was $152,000 or 1.1%, and $172,000 or 1.2%, respectively, of service charges on deposits is related to these revenue streams. Service charges on deposits also include overdraft and NSF fees. Overdraft fees are charged when a depositor has a draw on their account that has inadequate funds. In certain instances, the Company, at its sole discretion, may pay to the party requesting the draw on the deposit account, the balance of the draw for which there are inadequate funds rather than denying payment of the item. The Company then charges a fee for this short term extension of credit to the depositor for not complying with the balance requirements stipulated in the deposit agreement with the Bank, and as well as to cover the cost of advancing those funds. NSF fees are charged to customers when in the event of a draw on the customer's account that has insufficient funds to meet the payment of the draw (such as through written checks or ACH transactions), the Company returns the item rather than paying the balance of the draw for which the customer has inadequate funds. This typically happens when the customer has fairly sizable draws or multiple draws on an account that has inadequate funds to meet the demands for payment. Total revenues from service charges on deposits from overdraft and NSF fees for the three months ended March 31, 2020 and 2019, on a dollar and percentage of total revenue basis was $215,000, or 1.6%, and $276,000, or 1.9%, respectively.

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Wire transfer fee income: This revenue stream is generated through the processing of customers’ incoming and outgoing wire transfers. Income generated from wire transfer fees is within the scope of ASC 606 and approximately $63,000, or 0.5%, and $79,000, or 0.5% of total revenues for the three months ended March 31, 2020 and 2019, respectively, is included in other income in noninterest income.

Other revenue streams that are recorded in other income in noninterest income include revenue generated from letters of credit and income on bank owned life insurance. These revenue streams are either not material or out of scope of ASC 606.

Note 15. Fair Value of Financial Instruments

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1—Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2—Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3—Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate fair value:

Securities Available for Sale: The fair values of investment securities are determined by matrix pricing, which is a mathematical technique used to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Management obtains the fair values of investment securities on a monthly basis from a third-party pricing service.

Other Investment: The Company has equity investment with readily determinable fair value. The fair value for the equity investment with readily determinable fair value is obtained from unadjusted quoted prices in active markets on the date of measurement and classified as Level 1.

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s judgment, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the credit department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

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Assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 are summarized below:

			Fair Value Measuring Using
			Quoted		Significant Other		Significant
			Prices in		Observable		Unobservable
	Total		Active Markets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
As of March 31, 2020:
U.S. Government sponsored agency securities	$	3,025	$	—	$	3,025	$	—
Mortgage-backed securities - residential		15,303		—		15,303		—
Collateralized mortgage obligations		33,851		—		33,851		—
Other investments:
Mutual fund - CRA qualified		3,705		3,705		—		—

As of December 31, 2019:
U.S. Government sponsored agency securities	$	5,001	$	—	$	5,001	$	—
Mortgage-backed securities - residential		15,641		—		15,641		—
Collateralized mortgage obligations		35,907		—		35,907		—
Other investments:
Mutual fund - CRA qualified		3,628		3,628		—		—

There were no transfers between Level 1 and Level 2 in the three months ended March 31, 2020 or 2019. There were no assets or liabilities measured at fair value on a non-recurring basis as of March 31, 2020 or December 31, 2019.

Financial Instruments: The carrying amounts and estimated fair values of financial instruments not carried at fair value as of March 31, 2020 are as follows:

	Carrying Amount		Level 1		Level 2		Level 3		Value
As of March 31, 2020:	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	110,999	$	110,999	$	—	$	—	$	110,999
Loans held for sale		4,382		—		4,754		—		4,754
Loans receivable, net		985,811		—		—		980,882		980,882
Accrued interest receivable		3,056		9		228		2,819		3,056
Other investments:
FHLB and PCBB stock		5,548	N/A		N/A		N/A		N/A
Financial Liabilities:
Deposit	$	1,052,198	$	—	$	1,054,002	$	—	$	1,054,002
Accrued interest payable		2,592		—		2,592		—		2,592

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The carrying amounts and estimated fair values of financial instruments not carried at fair value at December 31, 2019 are as follows:

	Carrying Amount		Level 1		Level 2		Level 3		Value
As of December 31, 2019:	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	86,036	$	86,036	$	—	$	—	$	86,036
Loans held for sale		2,100		—		2,100		—		2,100
Loans receivable, net		980,088		—		—		1,009,490		1,009,490
Accrued interest receivable		3,166		41		243		2,882		3,166
Other investments:
FHLB and PCBB stock		5,548	N/A		N/A		N/A		N/A
Financial Liabilities:
Deposit	$	1,020,711	$	—	$	1,021,571	$	—	$	1,021,571
Accrued interest payable		2,686		—		2,686		—		2,686

Note 16. Regulatory Capital Matters

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was 0.625% in 2016 and increased 0.625% annually until 2019. As of March 31, 2020, the capital conservation buffer for the Company is 2.50%. Management believes as of March 31, 2020 and December 31, 2019, the Bank met all capital adequacy requirements to which they are subject to. Based on recent changes to the Federal Reserve’s definition of a “Small Bank Holding Company” that increased the threshold to $3 billion in assets, the Company is not currently subject to separate minimum capital measurements. At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank. For comparison purposes, the Company’s ratios are included in following discussion as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of March 31, 2020 and December 31, 2019, the Company and Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2020 and December 31, 2019, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

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Actual and required capital amounts (in thousands) and ratios, exclusive of the capital conservation buffer, are presented below as of March 31, 2020 and December 31, 2019:

						Required for					Minimum
						Capital Adequacy					To be Considered
	Actual					Purposes					"Well Capitalized"
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2020:
Total capital (to risk-weighted assets)
Consolidated	$	147,410		14.78	%	N/A		N/A			N/A		N/A
Bank		145,465		14.59	%		79,782		8.00	%		99,727		10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated		136,594		13.69	%	N/A		N/A			N/A		N/A
Bank		134,649		13.50	%		59,836		6.00	%		79,782		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)
Consolidated		136,594		13.69	%	N/A		N/A			N/A		N/A
Bank		134,649		13.50	%		44,877		4.50	%		64,823		6.50	%
Tier 1 capital (to average assets)
Consolidated		136,594		11.59	%	N/A		N/A			N/A		N/A
Bank		134,649		11.42	%		47,143		4.00	%		58,929		5.00	%

						Required for					Minimum
						Capital Adequacy					To be Considered
	Actual					Purposes					"Well Capitalized"
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2019:
Total capital (to risk-weighted assets)
Consolidated	$	150,092		15.18	%	N/A		N/A			N/A		N/A
Bank		147,820		14.96	%		79,069		8.00	%		98,836		10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated		139,975		14.16	%	N/A		N/A			N/A		N/A
Bank		137,703		13.93	%		59,301		6.00	%		79,069		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)
Consolidated		139,975		14.16	%	N/A		N/A			N/A		N/A
Bank		137,703		13.93	%		44,476		4.50	%		64,243		6.50	%
Tier 1 capital (to average assets)
Consolidated		139,975		12.14	%	N/A		N/A			N/A		N/A
Bank		137,703		11.95	%		46,103		4.00	%		57,629		5.00	%

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Note 17. Earnings per Share

The two-class method is used in the calculation of basic and diluted earnings per share. Under the two-class method, earnings available to common shares are allocated between common shares and participating securities. The Company’s restricted stock awards are considered participating securities as the unvested awards have non-forfeitable rights to dividends, paid or unpaid, on unvested awards. The factors used in the earnings per share computation follow:

	Three Months Ended
	March 31,
(Dollars in thousands, except share data)	2020			2019
Basic
Net income	$	3,299		$	4,740
Undistributed earnings allocated to participating securities		(62	)		(127	)
Net income allocated to common shares		3,237			4,613
Weighted average common shares outstanding		15,486,549			15,817,060
Basic earnings per common share	$	0.21		$	0.29
Diluted
Net income allocated to common shares	$	3,237		$	4,613
Weighted average common shares outstanding for basic earnings per common share		15,486,549			15,817,060
Add: Dilutive effects of assumed exercises of stock options		99,706			295,665
Average shares and dilutive potential common shares		15,586,255			16,112,725
Diluted earnings per common share	$	0.21		$	0.29

No shares of common stock were antidilutive for the three months ended March 31, 2020. Stock options and restricted stock awards for 145,000 shares of common stock were not considered in computing diluted earnings per common share for the three months ended March 31, 2019 because they were antidilutive.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q.

Completion of Initial Public Offering

On March 27, 2018, we completed our initial public offering of common stock, pursuant to which we sold an aggregate of 2,300,000 shares of our common stock at a public offering price of $11.00 per share, for aggregate net proceeds of approximately $22.6 million, after deducting underwriter discounts and commissions paid by us of approximately $1.7 million and other offering expenses of approximately $925,000.

Critical Accounting Policies and Estimates

Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) and conform to general practices within the industry in which we operate. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statement. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements.

The following is a discussion of the critical accounting policies and significant estimates that require us to make complex and subjective judgments. Additional information about these policies can be found in the “Notes to Consolidated Financial Statements, Note 1. Summary of Significant Accounting Policies” of our audited consolidated financial statements included in the Annual Report on Form 10-K for the period ended December 31, 2019.

Allowance for Loan Losses

The allowance for loan losses (“ALL”) is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The ALL is maintained at a level that management believes is appropriate to provide for known and inherent incurred loan losses as of the date of the consolidated balance sheet and we have established methodologies for the determination of its adequacy. The methodologies are set forth in a formal policy and take into consideration the need for an overall general valuation allowance as well as specific allowances that are determined on an individual loan basis.

The evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. While management uses available information to recognize losses on loans, changes in economic or other conditions may necessitate revision of the estimate in future periods.

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Selected Financial Data

Financial Highlights (unaudited)
(Dollars in thousands, except per share data)	Three Months Ended
	March 31,			March 31,
	2020			2019
Income Statement Data:
Interest income	$	14,345		$	14,086
Interest expense		3,229			3,288
Net interest income		11,116			10,798
Provision for loan losses		743			—
Noninterest income		2,296			3,533
Noninterest expense		8,207			8,073
Income before taxes		4,462			6,258
Provision for income taxes		1,163			1,518
Net Income	$	3,299		$	4,740
Diluted earnings per share	$	0.21		$	0.29
Performance Ratios:
Return on average assets (annualized)		1.12	%		1.83	%
Return on average equity (annualized)		9.44	%		14.46	%
Net interest margin (annualized)		3.95	%		4.38	%
Efficiency ratio ⁽¹⁾		61.19	%		56.48	%

(1)	Represents noninterest expense divided by the sum of net interest income and noninterest income.

Financial Highlights (unaudited)
(Dollars in thousands, except per share data)	As of
	March 31,			December 31,
	202			2019
Balance Sheet Data:
Loans held for sale	$	4,382		$	2,100
Gross loans, net of unearned income		996,559			990,138
Allowance for loan losses		10,748			10,050
Total assets		1,209,593			1,179,520
Deposits		1,052,198			1,020,711
Shareholders’ equity		138,099			140,576
Credit Quality:
Nonperforming loans	$	1,533		$	1,548
Nonperforming assets		1,533			1,548
Net charge-offs to average gross loans (annualized)		0.02	%		0.00	%
Nonperforming assets to gross loans plus OREO		0.15	%		0.16	%
ALL to nonperforming loans		701	%		649	%
ALL to gross loans		1.08	%		1.02	%
Capital Ratios:
Total risk-based capital ratio		14.78	%		15.18	%
Tier 1 risk-based capital ratio		13.69	%		14.16	%
Common equity tier 1 ratio		13.69	%		14.16	%
Leverage ratio		11.59	%		12.14	%

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COVID-19

The COVID-19 pandemic has caused significant, unprecedented disruption around the world that has affected daily living and negatively impacted the global economy. The pandemic has resulted in temporary closures of many businesses and the institution of social distancing and shelter in place requirements in many states and communities, which has increased unemployment levels and caused extreme volatility in the financial markets. While COVID-19 has negatively impacted the economy, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides for financial stimulus and government lending programs at unprecedented levels. The benefits of these programs, as well as any potential additional stimulus, to effectively support businesses and consumers within the economy are uncertain.

The Company was able to react quickly to these changes because of the commitment and flexibility of its workforce coupled with a well-prepared business continuity plan. The Company has taken various steps to help our customers, employees, and communities, while maintaining safe and sound banking operations. The Company has been assisting customers with loans deferrals and the PPP loans and has provided employees remote working environment while maintaining fully functioning operations in all areas. The Company donated $1.0 million through Open Stewardship Foundation to support small restaurants in the communities we serve. The Company also donated $100,000 from its board of directors and employees’ contribution to two local non-profit organizations to support families who are most severely impacted by the pandemic.

The CARES Act was passed by Congress and signed into law on March 27, 2020. The CARES Act includes an allocation of $349 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”). This program is known as the Paycheck Protection Program (“PPP”). PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. Payments are deferred for the first six months of the loan. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. The Paycheck Protection Program and Health Care Enhancement Act (“PPP / HCEA Act”) was passed by Congress on April 23, 2020 and signed into law on April 24, 2020. The PPP / HCEA Act authorizes additional funding under the CARES Act of $310 billion for PPP loans to be issued by financial institutions through the SBA. In addition, the FRB has implemented a liquidity facility available to financial institutions participating in the PPP (“PPPLF”). In conjunction with the PPP, the PPPLF will allow the Federal Reserve Banks to lend to member banks on a non-recourse basis with PPP loans as collateral. Additionally, the CARES Act provides for relief on existing and new SBA loans through Small Business Debt Relief. As part of the SBA Small Business Debt Relief, the SBA will automatically pay principal, interest and fees of certain SBA loans for a period of six months for both existing loans and new loans issued prior to September 27, 2020. The CARES Act also provides for Mortgage Payment Relief and a foreclosure moratorium. As of April 24, 2020, the Company processed 323 applications for an aggregate of $36.7 million funded through the PPP loans under the CARES Act. Additionally, the Company approved 530 applications for an aggregate of $27.8 million under the PPP / HCEA Act as of April 30, 2020.

Recent interagency guidance from Federal Reserve and the Federal Deposit Insurance Corporation confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. The Company implemented a loan modification program to assist our clients experiencing financial stress resulting from the economic impacts caused by the pandemic. The Company has offered loan payment deferrals of up to 6 months for commercial and consumer borrowers impacted by the pandemic who have not been delinquent over 30 days on payments at the time of borrowers’ deferral requests. The Company believes our loan modification program satisfies the applicable requirements under the interagency guidance. As of April 30, 2020, the Company accepted payment deferral requests for 175 loan accounts from borrowers across multiple industries for an aggregate of $219.2 million. The Company believes our loan modification program satisfies the applicable requirements.

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The following tables summarize loan portfolio breakdown by industry, loans deferral requests and PPP loans as of the dates presented.

Loan Portfolio Breakdown by Industry
Excluding Home mortgage and consumer loans
(Dollars in thousands)	As of March 31, 2020
Industry	Number of accounts		% of total			Balance		% of total
Real estate lessors		209		20.0	%	$	356,175		40.2	%
- Retail		87		8.3			161,741		18.3
- Industrial		46		4.4			87,625		9.9
- Mixed use		15		1.4			29,414		3.3
- Office		13		1.2			24,809		2.8
- Other		48		4.6			52,586		5.9
Hotel / motel		125		12.0			145,364		16.4
Gas station		146		14.0			125,708		14.2
Wholesale		103		9.8			50,663		5.7
Carwash		33		3.2			33,230		3.8
Food services / restaurant		107		10.2			24,486		2.8
Laundry services		49		4.7			22,288		2.5
Church		12		1.1			14,272		1.6
Other		262		25.0			113,308		12.8
Total		1,046		100.0	%	$	885,494		100.0	%

Loan Deferment Request Summary by Industry
For requests received through April 30, 2020
Excluding Home mortgage and consumer loans
(Dollars in thousands)	Number of requests								Balance of requests
Industry	Number of accounts		% of request			% of total loans			Balance		% of request			% of total loans
Real estate lessors		49		47.6	%		23.4	%	$	100,939		54.2	%		28.3	%
- Retail		29		28.2			33.3			64,035		34.4			39.6
- Industrial		6		5.8			13.0			7,664		4.1			8.7
- Mixed use		3		2.9			20.0			17,481		9.4			59.4
- Office		5		4.9			38.5			6,817		3.7			27.5
- Other		6		5.8			12.5			4,942		2.7			9.4
Hotel / motel		15		14.6			12.0			41,495		22.3			28.5
Gas station		8		7.8			5.5			12,443		6.7			9.9
Wholesale		7		6.8			6.8			9,070		4.9			17.9
Carwash		2		1.9			6.1			2,487		1.3			7.5
Food services / restaurant		10		9.7			9.3			9,642		5.2			39.4
Laundry services		3		2.9			6.1			2,302		1.2			10.3
Church		5		4.9			41.7			5,388		2.9			37.8
Other		4		3.9			1.5			2,371		1.3			2.1
Total		103		100.0	%		9.8	%	$	186,136		100.0	%		21.0	%

* Number of accounts and Balance information were as of March 31, 2020.

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Loan Deferment Request Summary by Loan Type
For requests received through April 30, 2020
(Dollars in thousands)	Number of requests								Balance of requests
Loan Type	Number of accounts		% of request			% of total loans			Balance		% of request			% of total loans
Real estate loans		81		46.3	%		22.9	%	$	170,741		77.9	%		26.7	%
Home Mortgage loans		71		40.6			22.9			32,814		15.0			27.3
C & I loans		22		12.6			11.0			15,395		7.0			15.4
Consumer		1		0.6			11.1			282		0.1			8.3
Total		175		100.0	%		12.8	%	$	219,232		100.0	%		22.0	%

* Number of accounts and Balance information were as of March 31, 2020.

SBA PPP Loan Approval Summary by Customer Type
For loans approved through April 24, 2020
(Dollars in thousands)	Number of loans					Approved Balance
Customer Type	Number of accounts		% of total			Balance		% of total
Commercial Lending		152		47.1	%	$	22,250		60.5	%
SBA Lending		97		30.0			9,349		25.4
Deposit		72		22.3			5,093		13.9
New		2		0.6			55		0.1
Total		323		100.0	%	$	36,747		100.0	%

Results of Operations—Comparison for the Three Months Ended March 31, 2020 and 2019

The following discussion of our results of operations compares the three months ended March 31, 2020 to the three months ended March 31, 2019.

We reported net income for the three months ended March 31, 2020 of $3.3 million, or $0.21 per diluted common share, compared to net income of $4.7 million, or $0.29 per diluted common share, for the three months ended March 31, 2019, a decrease of $1.4 million, or 30.4%. The decrease was primarily due to one-time gain of $1.2 million on company owned life insurance (COLI) in the first quarter of 2019 and a $743,000 increase in provision for loan losses, partially offset by a $318,000 increase in net interest income and a $355,000 decrease in income tax expense.

Net Interest Income

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 the Company’s 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 the Company to an excessive level of interest rate risk through our asset and liability policies. Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities. Our net interest margin is also adversely impacted by the reversal of interest on nonaccrual loans and the reinvestment of loan payoffs into lower yielding investment securities and other short-term investments.

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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.

	Three Months Ended March 31,
	2020							2019
(Dollars in thousands)	Average Balance		Interest and Fees		Yield / Rate			Average Balance		Interest and Fees		Yield / Rate
Interest earning assets:
Federal Funds sold and other investments (1)	$	78,256	$	332		1.68	%	$	52,963	$	372		2.82	%
Securities available for sale		54,647		319		2.33			54,771		360		2.63
Total investments		132,903		651		1.95			107,734		732		2.72
Real estate loans		633,963		8,198		5.20			519,037		7,149		5.59
SBA loans		138,900		2,667		7.72			131,272		2,933		9.06
C & I loans		100,686		1,277		5.10			106,680		1,594		6.06
Home Mortgage loans		121,768		1,514		4.97			128,507		1,636		5.09
Consumer loans		2,774		38		5.51			2,532		42		6.68
Total loans (2)		998,091		13,694		5.51			888,028		13,354		6.09
Total earning assets		1,130,994		14,345		5.10			995,762		14,086		5.72
Noninterest-earning assets		48,189							42,476
Total assets	$	1,179,183						$	1,038,238

Interest-bearing liabilities:
NOW and Savings	$	7,988	$	5		0.25	%	$	5,176	$	3		0.25	%
Money market deposits		289,214		952		1.32			251,583		1,121		1.81
Time deposits		431,772		2,272		2.12			379,430		2,164		2.31
Total interest-bearing deposits		728,974		3,229		1.78			636,189		3,288		2.10
Borrowings		45		—		0.00			—		—		0.00
Total interest-bearing liabilities		729,019		3,229		1.78			636,189		3,288		2.10
Noninterest-bearing liabilities:
Noninterest-bearing deposits		292,453							262,524
Other noninterest-bearing liabilities		17,921							8,445
Total noninterest-bearing liabilities		310,374							270,969
Shareholders’ equity		139,790							131,081
Total liabilities and shareholders’ equity	$	1,179,183						$	1,038,239
Net interest income / interest rate spreads			$	11,116		3.32	%			$	10,798		3.62	%
Net interest margin						3.95	%						4.38	%
Cost of deposits & cost of funds:
Total deposits / cost of deposits	$	1,021,427	$	3,229		1.27	%	$	898,713	$	3,288		1.48	%
Total funding liabilities / cost of funds	$	1,021,472	$	3,229		1.27	%	$	898,713	$	3,288		1.48	%

(1)	Includes income and average balances for Federal Home Loan Bank (“FHLB”) and Pacific Coast Bankers Bank (“PCBB”) stock, CRA qualified mutual fund, term federal funds, interest-earning time deposits and other miscellaneous interest-earning assets.

(2)	Average loan balances include non-accrual loans and loans held for sale.

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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.

	Three Months Ended March 31,
	2020 over 2019
	Change due to:
(Dollars in thousands)	Volume			Rate			Interest Variance
Interest earning assets:
Federal Funds sold and other investments	$	141		$	(181	)	$	(40	)
Securities available for sale		(1	)		(40	)		(41	)
Total investments		140			(221	)		(81	)
Real estate loans		1,567			(518	)		1,049
SBA loans		173			(439	)		(266	)
C & I loans		(83	)		(234	)		(317	)
Home Mortgage loans		(84	)		(38	)		(122	)
Consumer loans		4			(8	)		(4	)
Total loans		1,577			(1,237	)		340
Total earning assets		1,717			(1,458	)		259

NOW and Savings		2			—			2
Money market deposits		159			(328	)		(169	)
Time deposits		294			(186	)		108
Total interest-bearing deposits		455			(514	)		(59	)
Borrowings		-			—			-
Total interest-bearing liabilities		455			(514	)		(59	)

Net interest income	$	1,262		$	(944	)	$	318

Interest income increased $259,000, or 1.8%, to $14.3 million for the three months ended March 31, 2020 from $14.1 million for the same period in 2019, primarily due to the growth in average loans and securities, partially offset by a decrease in the average yields on loans and securities.

Average loans increased $110.1 million, or 12.4%, to $998.1 million for the three months ended March 31, 2020 from $888.0 million for the same period in 2019. Average total investments including Federal Funds and securities available for sale increased $25.2 million, or 23.4%, to $132.9 million for the three months ended March 31, 2020 from $107.7 million for the same period in 2019. Average interest-earning assets increased $135.2 million, or 13.6%, to $1.13 billion for the three months ended March 31, 2020 from $995.8 million for the same period in 2019. The increase in average loans was primarily due to new loan production, and the increase in average total investments was primarily due to a $25.3 million increase in Federal Funds.

The average yield on loans decreased 58 basis points to 5.51% for the three months ended March 31, 2020 from 6.09% for the same period in 2019, primarily due to the cumulative market interest rate decrease by the Federal Reserve since October 2019. The average yield on securities decreased 30 basis points to 2.33% for the three months ended March 31, 2020 from 2.63% for the same period in 2019, primarily due to a decrease of $41,000 in interest income on securities.

The average yield on Federal Funds and other investments for the three months ended March 31, 2020 and March 31, 2019 were 1.68% and 2.82% respectively. The average Federal Funds balance for the three months ended March 31, 2020 was $69.0 million with an average yield of 1.24% compared to the average Federal Funds balance of $45.7 million for the same period in 2019 with an average yield of 2.41%. The decrease in the average yield was primarily due to aforementioned market rate decreases by the Federal Reserve.

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The average yield on interest-earning assets decreased 62 basis points to 5.10% for the three months ended March 31, 2020 from 5.72% for the same period in 2019.

Interest expense decreased $59,000, or 1.8%, to $3.2 million for the three months ended March 31, 2020 from $3.3 million for the same period in 2019, primarily due to a decrease in the average cost of interest-bearing liabilities, partially offset by the growth in average interest-bearing liabilities.

Average interest-bearing liabilities increased $92.8 million, or 14.6%, to $729.0 million for the three months ended March 31, 2020, compared with $636.2 million for the same period in 2019. The increase in average interest-bearing liabilities resulted primarily from a $92.8 million increase in average interest-bearing deposits, including a $52.3 million increase in average time deposits and a $37.6 million increase in average money market deposits. Average noninterest-bearing demand deposits increased $29.9 million, or 11.4%, to $292.5 million for the three months ended March 31, 2020 compared to $262.5 million for the same period in 2019.

The average cost of interest-bearing liabilities decreased 32 basis points to 1.78% for the three months ended March 31, 2020 from 2.10% for the same period in 2019.

Net interest income increased $318,000, or 2.9%, for the three months ended March 31, 2020, to $11.1 million compared to $10.8 million for the same period in 2019. The net interest spread and net interest margin for the three months ended March 31, 2020, were 3.32% and 3.95%, respectively, compared with 3.62% and 4.38%, respectively, for the same period in 2019.

Provision for Loan Losses

Credit risk is inherent in the business of making loans. We establish an allowance for loan losses through charges to earnings, which are shown in the Consolidated Statements of Income and Comprehensive Income as the provision for loan losses. Specifically, identifiable and quantifiable known losses are promptly charged off against the allowance. The provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of our allowance for loan losses and charging the shortfall, if any, to the current quarter’s expense. This has the effect of creating variability in the amount and frequency of charges to earnings. The provision for loan losses and level of allowance for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market area.

The provision for loan losses for the three months ended March 31, 2020 was $743,000. The Company had no provision for loan losses for the same period in 2019. The increase in the provision for loan losses for the three months ended March 31, 2020 compared to the same period in 2019 was primarily due to the national pandemic’s unforeseeable impact to economy and loan balance growth during the period. Considering the pandemic’s negative impacts to national and local economic and business conditions, management increased qualitative factors, especially in commercial and home mortgage loans. The increases in qualitative factors accounted for $593,000, or 80%, of the provision for loan losses for the three months ended March 31, 2020.

Noninterest Income

While interest income remains the largest single component of total revenues, noninterest income is also an important component. A portion of our noninterest income is associated with SBA lending activity, consisting of gains on the sale of loans sold in the secondary market and servicing income from loans sold with servicing retained. The servicing assets that result from the sales of SBA loans with servicing retained are amortized over the expected term of the loans using a method approximating the interest method. Servicing income generally declines as the respective loans are repaid. Other sources of noninterest income include loan servicing fees, service charges and fees, and gains on the sale of securities.

Noninterest income for the three months ended March 31, 2020 decreased $1.2 million, or 35.0%, to $2.3 million compared to the same period in 2019. The decrease was primarily attributable to a decrease of $1.2 million in other income and a decrease of $97,000 in service charges on deposits, partially offset by an increase of $78,000 in gain on sale of loans. The Company received one-time gain on COLI in the first quarter of 2019. We sold $17.5 million in SBA loans with a gain on sale of $1.1 million for the three months ended March 31, 2020, compared to selling $17.7 million in SBA loans with a gain on sale of $1.1 million for the same period in 2019.

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The following table sets forth the various components of our noninterest income for the three months ended March 31, 2020 and 2019:

	Three Months Ended March 31,
(Dollars in thousands)	2020		2019		Increase (decrease)
Noninterest income:
Service charges on deposit accounts	$	430	$	527	$	(97	)
Loan servicing fees, net of amortization		392		383		9
Gain on sale of loans		1,155		1,077		78
Other income and fees		319		1,546		(1,227	)
Total noninterest income	$	2,296	$	3,533	$	(1,237	)

Noninterest Expense

Noninterest expense for the three months ended March 31, 2020 was $8.2 million compared to $8.1 million for the same period in 2019, an increase of $134,000 or 1.7%. The increase was primarily attributable to increased occupancy and equipment expense, professional fees, and data processing and communication expenses, partially offset by decreased salaries and employee benefits.

The following table sets forth the major components of our noninterest expense for the three months ended March 31, 2020 and 2019:

	Three Months Ended March 31,
(Dollars in thousands)	2020		2019		Increase (decrease)
Noninterest expense:
Salaries and employee benefits	$	5,071	$	5,168	$	(97	)
Occupancy and equipment		1,230		1,077		153
Data processing and communication		409		358		51
Professional fees		273		203		70
FDIC insurance and regulatory assessments		106		104		2
Promotion and advertising		162		178		(16	)
Directors' fees and stock-based compensation		233		228		5
Foundation donation and other contributions		330		388		(58	)
Other expenses		393		369		24
Total noninterest expense		8,207		8,073		134

Salaries and employee benefits expense for the three months ended March 31, 2020 decreased $97,000, or 1.9%, to $5.1 million from $5.2 million for the same period in 2019. This decrease was attributable to a decrease in employees incentives. The average number of full-time equivalent employees was 173.0 and 158.5 in the three months ended March 31, 2020 and 2019, respectively.

Occupancy and equipment expenses for the three months ended March 31, 2020 were $1.2 million, a $153,000, or 14.2% increase compared to the same period in 2019. Data processing and communication expenses increased $51,000, or 14.2%, to $409,000 for the three months ended March 31, 2020 compared to $358,000 for the same period in 2019. Those increases in expenses were primarily attributable to support both the new loan production offices and a new branch that opened in 2019.

Professional fees for the three months ended March 31, 2020 were $273,000 a $70,000, or 34.5% increase compared to the same period in 2019. The increase was due to an increase in financial reporting and auditing costs.

Foundation donation and other contributions for the three months ended March 31, 2020 decreased $58,000, or 14.9% from $388,000 for the same period in 2019. The decrease was due to the decreased donation accruals for Open Stewardship Foundation, which is directly proportionate to the growth in our after-tax net income. On an annual basis, we donate 10% of our consolidated net income after taxes to the Foundation.

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Income Tax Expense

Income tax expense was $1.2 million and $1.5 million for the three months ended March 31, 2020 and 2019, respectively. The effective income tax rate was 26.1% and 24.3% for the three months ended March 31, 2020 and 2019, respectively. The increase in the effective tax rate for the three months ended March 31, 2020 compared to the same period in 2019 was primarily due to an adjustment in 2019 from the difference between the tax provision and tax return for the year of 2018.

Financial Condition

Total assets increased $30.1 million, or 2.3%, to $1.21 billion at March 31, 2020 compared to $1.18 billion at December 31, 2019. This increase primarily resulted from an increase of $25.0 million, or 29.0%, in cash and cash equivalents and an increase of $6.4 million, or 0.6%, in gross loans. We funded our asset growth primarily with an increase of $31.5 million in deposits during the three months ended March 31, 2020.

Investment portfolio

The securities portfolio is the second largest component of our interest earning assets, and the structure and composition of this portfolio is important to an analysis of our financial condition. The portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk management tool, because it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and our other funding sources; and (iv) it is an alternative interest-earning use of funds when loan demand is weak or when deposits grow more rapidly than loans.

We classify our securities as either available-for-sale or held-to-maturity at the time of purchase. Accounting guidance requires available-for-sale securities to be marked to fair value with an offset to accumulated other comprehensive income (loss), a component of shareholders’ equity. Monthly adjustments are made to reflect changes in the fair value of our available-for-sale securities.

All of the securities in our investment portfolio were classified as available-for-sale at March 31, 2020. There were no held-to-maturity securities in our investment portfolio at March 31, 2020. All available-for-sale securities are carried at fair value. Securities available-for-sale consist primarily of US government-sponsored agency securities, home mortgage-backed securities and collateralized mortgage obligations.

Securities available-for-sale decreased $4.4 million, or 7.7%, to $52.2 million at March 31, 2020 from $56.5 million at December 31, 2019, primarily due to the paydowns on collateralized mortgage obligations and home mortgage-backed securities. No issuer of the available-for-sale securities, other than FNMA and FHLMC, comprised more than 10% of our shareholders’ equity as of March 31, 2020 or December 31, 2019.

The following table summarizes the fair value of the available-for-sale securities portfolio as of the dates presented.

	March 31, 2020						December 31, 2019
	Amortized		Fair		Unrealized		Amortized		Fair		Unrealized
(Dollars in thousands)	Cost		Value		Gain/(Loss)		Cost		Value		Gain/(Loss)
Available for sale
U.S. Government agencies	$	3,000	$	3,025	$	25	$	5,000	$	5,001	$	1
Mortgage-backed securities: residential		14,900		15,303		403		15,559		15,641		82
Collateralized mortgage obligations		32,718		33,851		1,133		35,723		35,907		184
Total available for sale	$	50,618	$	52,179	$	1,561	$	56,282	$	56,549	$	267

Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. At March 31, 2020, we evaluated the securities which had an unrealized loss for other than temporary impairment (OTTI) and determined all decline in value to be temporary. We anticipate full recovery of amortized cost with respect to these securities by maturity, or sooner in the event of a more favorable market interest rate environment. We do not intend to sell these securities and it is not more likely than not that we will be required to sell them before recovery of the amortized cost basis, which may be at maturity.

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The following table sets forth certain information regarding contractual maturities and the weighted average yields of our investment securities as of the dates presented. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

	As of March 31, 2020
	Due in One Year					Due after One Year					Due after Five Years
	or Less					Through Five Years					Through Ten Years					Due after Ten Years
			Weighted					Weighted					Weighted					Weighted
	Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Average
(Dollars in thousands)	Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield
Available for sale
U.S. Government agencies	$	2,000		1.54	%	$	1,000		1.75	%	$	—		—	%	$	—		—	%
Mortgage-backed securities - residential		—		—	%		—		—	%		7,328		2.01	%		7,572		2.97	%
Collateralized mortgage obligations		—		—	%		—		—	%		989		1.78	%		31,729		2.49	%
Total available for sale	$	2,000		1.73	%	$	1,000		1.75	%	$	8,317		1.98	%	$	39,301		2.59	%

We have not used interest rate swaps or other derivative instruments to hedge fixed rate loans or securities to otherwise mitigate interest rate risk.

Loans

Our loans represent the largest portion of our earning assets, substantially greater than the securities portfolio or any other asset category, and the quality and diversification of the loan portfolio is an important consideration when reviewing our financial condition.

At March 31, 2020, gross loans including deferred costs totaled $996.6 million compared to $990.1 million at December 31, 2019, an increase of $6.4 million, or 0.6%. The increase in our gross loans resulted from organic growth in commercial real estate and SBA loans.

The loan distribution table that follows sets forth our gross loans outstanding, and the percentage distribution in each category as of the dates indicated:

	March 31, 2020						December 31, 2019
(Dollars in thousands)	Amount			% of Total			Amount			% of Total
Real estate:
Commercial real estate	$	639,411			64	%	$	630,668			64	%
SBA loan - real estate		123,795			12	%		122,373			12	%
Total real estate		763,206			76	%		753,041			76	%
SBA loan - non-real estate		10,114			1	%		9,895			1	%
Commercial and industrial		99,860			10	%		103,852			10	%
Home mortgage		119,984			12	%		120,686			12	%
Consumer		3,395		<1%				2,664		<1%
Gross loans		996,559			100	%		990,138			100	%
Allowance for loan losses		(10,748	)					(10,050	)
Net loans	$	985,811					$	980,088

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The following tables presents the maturity distribution of our loans as of March 31, 2020 and December 31, 2019. The table shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates.

	As of March 31, 2020
					Due after One Year
	Due in One Year or Less				Through Five Years				Due after Five Years
			Adjustable				Adjustable				Adjustable
(Dollars in thousands)	Fixed Rate		Rate		Fixed Rate		Rate		Fixed Rate		Rate		Total
Real estate:
Commercial real estate	$	46,918	$	36,915	$	279,381	$	171,352	$	71,363	$	33,482	$	639,411
SBA loans - real estate		—		—		—		—		—		123,795		123,795
Total real estate		46,918		36,915		279,381		171,352		71,363		157,277		763,206
SBA loan - non-real estate		—		33		—		1,004		—		9,077		10,114
Commercial and industrial		—		44,511		385		38,785		—		16,179		99,860
Home mortgage		—		—		—		—		109,957		10,027		119,984
Consumer		—		1,996		—		1,399		—		—		3,395
Gross loans	$	46,918	$	83,455	$	279,766	$	212,540	$	181,320	$	192,560	$	996,559

	As of December 31, 2019
					Due after One Year
	Due in One Year or Less				Through Five Years				Due after Five Years
			Adjustable				Adjustable				Adjustable
(Dollars in thousands)	Fixed Rate		Rate		Fixed Rate		Rate		Fixed Rate		Rate		Total
Real estate:
Commercial real estate	$	40,641	$	30,792	$	267,292	$	173,730	$	77,338	$	40,875	$	630,668
SBA loans - real estate		—		—		—		—		—		122,373		122,373
Total real estate		40,641		30,792		267,292		173,730		77,338		163,248		753,041
SBA loan - non-real estate		—		41		—		772		—		9,082		9,895
Commercial and industrial		—		52,220		398		35,016		—		16,218		103,852
Home mortgage		—		—		—		—		112,662		8,024		120,686
Consumer		—		895		—		1,769		—		—		2,664
Gross loans	$	40,641	$	83,948	$	267,690	$	211,287	$	190,000	$	196,572	$	990,138

Our loan portfolio is concentrated in commercial real estate, commercial (primarily manufacturing, wholesale, and services-oriented entities), SBA loans (unguaranteed portion) with the remaining balance in home mortgage, and consumer loans. We do not have any material concentrations by industry or group of industries in the loan portfolio. However, 88.6% of our gross loans are secured by real property as of March 31, 2020, compared to 88.2% as of December 31, 2019.

We have established concentration limits in the loan portfolio for commercial real estate loans, commercial and industrial loans, and unsecured lending, among others. All loan types are within established limits. We use underwriting guidelines to assess the borrowers’ historical cash flow to determine debt service, and we further stress test the debt service under higher interest rate scenarios. Financial and performance covenants are used in commercial lending agreements to allow us to react to a borrower’s deteriorating financial condition, should that occur.

Commercial real estate loans include owner-occupied and non-occupied commercial real estate. We originate both fixed and adjustable rate loans. Adjustable rate loans are based on the Wall Street Journal prime rate. At March 31, 2020, approximately 62% of the commercial real estate portfolio consisted of fixed-rate loans. Our policy maximum loan-to-value, or LTV, is 70% for commercial real estate loans. At March 31, 2020, our average loan to value for commercial real estate loans was approximately 54%. Our commercial real estate loan portfolio totaled $639.4 million at March 31, 2020 compared to $630.7 million at December 31, 2019.

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We are designated an SBA Preferred Lender under the SBA Preferred Lender Program. We offer mostly SBA 7(a) variable-rate loans. We generally sell the 75% guaranteed portion of the SBA loans that we originate. Our SBA loans are typically made to small-sized manufacturing, wholesale, retail, hotel/motel and service businesses for working capital needs or business expansions. SBA loans have maturities up to 25 years. Typically, non-real estate secured loans mature in less than 10 years. Collateral may also include inventory, accounts receivable and equipment, and may include personal guarantees. Our unguaranteed SBA loans collateralized by real estate are monitored by collateral type and included in our CRE Concentration Guidance.

As of March 31, 2020, our SBA portfolio totaled $133.9 million compared to $132.3 million as of December 31, 2019, an increase of $1.6 million, or 1.2%. We originated $25.7 million of SBA loans in the three months ended March 31, 2020 compared to $23.7 million in the three months ended March 31, 2019.

Commercial and industrial loans totaled $99.9 million at March 31, 2020 compared to $103.9 million at December 31, 2019.

We originate mainly non-qualified, alternative documentation single-family home mortgage loans (“home mortgage”) primarily through broker relationships, but also through our branch network. The loan product is a five-year or seven-year hybrid adjustable rate mortgage which reprices after five years to the one-year LIBOR plus certain spreads. We originate the non-qualified single-family home mortgage loans held by us for investment. Home mortgage loans totaled $120.0 million at March 31, 2020 compared to $120.7 million at December 31, 2019, a decrease of $702,000, or 0.6%.

Loan Servicing

As of March 31, 2020, and December 31, 2019, we serviced $352.0 million and $347.8 million respectively, of SBA loans for others. Activities for loan servicing rights for the three months ended March 31, 2020 and 2019 were as follows:

	Three Months Ended March 31,
(Dollars in thousands)	2020			2019			Increase (decrease)
Beginning balance	$	7,024		$	6,987		$	37
Additions		406			462			(56	)
Amortized to expense		(467	)		(403	)		(64	)
Ending balance	$	6,963		$	7,046		$	(83	)

Loan servicing rights are included in accrued interest receivable and other assets on our consolidated balance sheets and reported net of amortization.

Allowance for loan losses

The allowance for loan losses is an estimate of probable incurred losses in the loan portfolio. Loans are charged-off against the allowance when management believes a loan balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance for loan losses. Management’s methodology for estimating the allowance balance consists of several key elements, which include specific allowances on individual impaired loans and the formula driven allowances on pools of loans with similar risk characteristics. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

The allowance for loan losses is determined on a quarterly basis and reflects management’s estimate of probable incurred credit losses inherent in the loan portfolio. We also rely on internal and external loan review procedures to further assess individual loans and loan pools, and economic data for overall industry and geographic trends. The computation includes elements of judgment and high levels of subjectivity.

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A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include loans on non-accrual status and performing restructured loans. Income from loans on non-accrual status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectible. Depending on a particular loan’s circumstances, we measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. A loan is considered collateral dependent when repayment of the loan is based solely on the liquidation of the collateral. Fair value, where possible, is determined by independent appraisals, typically on an annual basis. Between appraisal periods, the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring process, or if discussions with the borrower lead us to believe the last appraised value no longer reflects the actual market value for the collateral. The impairment amount on a collateral-dependent loan is charged-off to the allowance if deemed not collectible and the impairment amount on a loan that is not collateral-dependent is set up as a specific reserve.

In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructuring. These concessions may include a reduction of the interest rate, principal or accrued interest, extension of the maturity date or other actions intended to minimize potential losses. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the loan is modified may be excluded from restructured loan disclosures in years subsequent to the restructuring if the loans are in compliance with their modified terms. A restructured loan is considered impaired despite its accrual status and a specific reserve is calculated based on the present value of expected cash flows discounted at the loan’s effective interest rate or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. Interest income on impaired loans is accrued as earned, unless the loan is placed on non-accrual status.

The allowance for loan losses was $10.7 million at March 31, 2020 and $10.1 million at December 31, 2019. The allowance for loan losses was 1.08% of gross loans at March 31, 2020 compared to 1.02% at December 31, 2019.

In determining the allowance and the related provision for loan losses, we consider two principal elements: (i) valuation allowances based upon probable losses identified during the review of impaired commercial and industrial, commercial real estate, construction and land development loans; and (ii) allocations, by loan classes, on loan portfolios based on historical loan loss experience and qualitative factors.

It is the policy of management to maintain the allowance for loan losses at a level adequate for risks inherent in the loan portfolio. The Federal Reserve Board and the California Department of Business Oversight also review the allowance for loan losses as an integral part of their examination process. Based on information currently available, management believes that our allowance for loan losses is adequate. However, the loan portfolio can be adversely affected if California economic conditions and the real estate market in our market area were to weaken. The effect of such events, although uncertain at this time, could result in an increase in the level of nonperforming loans and increased loan losses, which could adversely affect our future growth and profitability. No assurance of the ultimate level of credit losses can be given with any certainty.

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Analysis of the Allowance for Loan Losses.

The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge-offs, by category, for the three months ended March 31, 2020 and 2019.

	For the Three Months Ended March 31,
	2020									2019
					Net										Net
	Beginning				Charge-		Ending			Beginning					Charge-		Ending
(Dollars in thousands)	Balance		Provision		offs		Balance			Balance		Provision			offs		Balance
Real estate:
Commercial real estate	$	6,000	$	210	$	—	$	6,210		$	4,805	$	391		$	—	$	5,196
SBA loans - real estate		939		143		—		1,082			894		53			17		930
Total real estate		6,939		353		—		7,292			5,699		444			17		6,126
SBA loan - non-real estate		121		116		45		192			505		(376	)		—		129
Commercial and industrial		1,289		3		—		1,292			1,746		(73	)		—		1,673
Home mortgage		1,667		254		—		1,921			1,653		7			—		1,660
Consumer		34		17		—		51			33		(2	)		—		31
Total	$	10,050	$	743	$	45	$	10,748		$	9,636	$	—		$	17	$	9,619
Gross loans (1)							$	996,559									$	913,064
Average gross loans (1)								992,736										885,194
Net charge-offs to average gross loans (2)								0.02	%									0.01	%
Allowance for loans losses to gross loans								1.08	%									1.05	%

(1) Gross loans balance and average gross loans balance exclude loans held for sale
(1) Net charge-offs are loan charge-offs net of loan recoveries and average loan balances include non-accrual loans.

The provision for loan losses for the three months ended March 31, 2020 was $743,000, compared to no provision for loan losses for the same period in 2019. The increase in the provision for loan losses for the three months ended March 31, 2020 compared to the same period in 2019 was primarily due to the COVID-19 pandemic’s unforeseeable impact to economy and loan balance growth during the period. Considering the pandemic’s negative impacts to national and local economic and business conditions, management increased qualitative factors, especially in commercial and home mortgage loans. Management also considered risk mitigating factors such as the Small Business Debt Relief for SBA loans under the CARES Act and low loan to value ratios for loans with real estate collateral. The average loan to value ratios as of March 31, 2020 were approximately 60% for commercial real estate and home mortgage loans. The increases in qualitative factors accounted for $593,000, or 80%, of the provision for loan losses for the three months ended March 31, 2020.

The allowance for loan losses was $10.7 million at March 31, 2020 compared to $9.6 million at March 31, 2019. The allowance for loan losses was 1.08% of gross loans at March 31, 2020 compared to 1.05% at March 31, 2019. The allowance for loan losses increased to 701% of non-performing loans as of March 31, 2020 from 503% as of March 31, 2019.

Non-performing Loans

Loans are considered delinquent when principal or interest payments are past due 30 days or more. Delinquent loans may remain on accrual status between 30 days and 90 days past due. Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on non-accrual loans is subsequently recognized only to the extent that cash is received, and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable.

Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned (“OREO”) until sold, and is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. We had no OREO property at March 31, 2020 and at December 31, 2019.

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Non-performing loans include loans 90 days past due and still accruing, loans accounted for on a non-accrual basis and accruing restructured loans. Non-performing assets consist of non-performing loans plus OREO. Non-performing loans were $1.5 million at March 31, 2020 and at December 31, 2018.

Classified loans were $3.5 million at March 31, 2020, an increase of $42,000 compared to $3.5 million at December 31, 2019. Excluding the SBA guarantee balance retained, classified loans were $3.1 million at March 31, 2020 and December 31, 2019.

The following table sets forth the allocation of our non-performing assets among our different asset categories as of the dates indicated. Non-performing loans include non-accrual loans, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings.

(Dollars in thousands)	March 31, 2020			December 31, 2019
Non-accrual loans	$	1,203		$	1,215
Past due loans 90 days or more and still accruing		—			—
Accruing troubled debt restructured loans		330			333
Total non-performing loans		1,533			1,548
Other real estate owned		—			—
Total non-performing assets	$	1,533		$	1,548
Non-performing loans to gross loans		0.15	%		0.22	%
Non-performing assets to total assets		0.13	%		0.18	%
Allowance for loan losses to non-performing loans		701	%		503	%

Deposits

We gather deposits primarily through our branch locations. We offer a variety of deposit products including demand deposits accounts, interest-bearing products, savings accounts and certificate of deposits. We focus our efforts to originate noninterest demand deposits accounts through marketing to our existing and new loan customers, customer referrals, and the involvement of our marketing staff in various community networks.

Total deposits at March 31, 2020 were $1.05 billion, representing an increase of $31.5 million, or 3.1%, compared to $1.02 billion at December 31, 2019. As of March 31, 2020, 29.0% of total deposits were comprised of noninterest-bearing demand accounts, 28.1% of interest-bearing transaction accounts and 42.9% of time deposits.

The following tables summarize our average deposit balances and weighted average rates for the three months ended March 31, 2020 and 2019:

	Three Months Ended March 31,
	2020					2019
			Weighted					Weighted
	Average		Average			Average		Average
(Dollars in thousands)	Balance		Rate			Balance		Rate
Noninterest-bearing demand	$	292,453		―	%	$	262,524		―	%
Interest-bearing:
NOW and Savings deposits		7,988		0.25			5,176		0.25
Money market		289,214		1.32			251,583		1.81
Time deposits ($250,000 or less)		220,786		2.07			201,406		2.29
Time deposits (more than $250,000)		210,986		2.17			178,024		2.33
Total interest-bearing		728,974		1.78			636,189		2.10
Total deposits	$	1,021,427		1.27	%	$	898,713		1.48	%

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The following tables set forth the maturity of time deposits as of March 31, 2020 and December 31, 2019:

	As of March 31, 2020
	Maturity Within:
	Three		Three to		Six to 12		After
(Dollars in thousands)	Months		Six Months		Months		12 Months		Total
Time deposits ($250,000 or less)	$	86,071	$	77,974	$	68,436	$	8,008	$	240,489
Time deposits (greater than $250,000)		87,850		41,083		80,138		1,436		210,507
Total time deposits	$	173,921	$	119,057	$	148,574	$	9,444	$	450,996

	As of December 31, 2019
	Maturity Within:
	Three		Three to		Six to 12		After
(Dollars in thousands)	Months		Six Months		Months		12 Months		Total
Time deposits ($250,000 or less)	$	35,612	$	86,328	$	85,650	$	8,877	$	216,467
Time deposits (greater than $250,000)		60,904		76,166		72,656		3,619		213,345
Total time deposits	$	96,516	$	162,494	$	158,306	$	12,496	$	429,812

Borrowed Funds

Other than deposits, we also utilized FHLB advances as a supplementary funding source to finance our operations. The advances from the FHLB are collateralized by residential and commercial real estate loans. At March 31, 2020 and December 31, 2019, we had maximum borrowing capacity from the FHLB of $391.3 million and $412.4 million, respectively. We had no borrowings from FHLB at March 31, 2020 or at December 31, 2019.

Liquidity

Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.

Our liquidity position is supported by management of liquid assets and access to alternative sources of funds. Our liquid assets include cash, interest-bearing deposits in correspondent banks, Federal Funds sold, and fair value of unpledged investment securities. Other available sources of liquidity include wholesale deposits, and additional borrowings from correspondent banks, FHLB advances, and the Federal Reserve discount window.

At March 31, 2020 and December 31, 2018, our gross loan to deposit ratio was 94.7% and 97.0%, respectively.

Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, and increases in customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis.

We had $33.0 million and 13.5 million of unsecured Federal Funds lines with no amounts advanced as of March 31, 2020 and as of December 31, 2019, respectively. In addition, on such dates we had lines of credit from the Federal Reserve discount window of $128.2 million and $124.0 million, respectively. The Federal Reserve discount window lines were collateralized by a pool of commercial real estate loans and commercial and industrial loans totaling $213.1 million and $206.7 million as of March 31, 2020 and December 31, 2019, respectively. We did not have any borrowings outstanding with the Federal Reserve at March 31, 2020 or December 31, 2019, and our borrowing capacity is limited only by eligible collateral.

At March 31, 2020 and December 31, 2019, we had no borrowings from the FHLB. Based on the values of loans pledged as collateral, we had $245.8 million and $238.9 million of additional borrowing availability with the FHLB as of March 31, 2020 and December 31, 2019, respectively. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts.

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Capital Requirements

We are subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action” (described below), we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. The capital amounts and classifications are subject to qualitative judgments by the federal banking regulators about components, risk weightings and other factors. Qualitative measures established by regulation to ensure capital adequacy required us to maintain minimum amounts and ratio of CET1 capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets, referred to as the “leverage ratio.”

The Dodd-Frank Act and new banking regulations promulgated by the U.S. federal banking regulators to implement the Basel III Capital Rules have established strengthened capital standards for banks and bank holding companies and require more capital to be held in the form of common stock. These provisions, which generally became applicable to us on January 1, 2015, impose meaningfully more stringent regulatory capital requirements than those applicable to us prior to that date. In addition, the Basel III Capital Rules implemented a concept known as the “capital conservation buffer.” In general, banks and bank holding companies are required to hold a buffer of common equity Tier 1 capital equal to 2.5% of risk-weighted assets over each minimum capital ratio to avoid being subject to limits on capital distributions (e.g., dividends, stock buybacks, etc.) and certain discretionary bonus payments to executive officers. For community banks, the capital conservation buffer requirement commenced on January 1, 2016, with a gradual phase-in with full compliance with the capital conservation buffer required by January 1, 2019.

The table below also summarizes the capital requirements applicable to us and the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as our and the Bank’s capital ratios as of March 31, 2020 and December 31, 2019. We and the Bank exceeded all regulatory capital requirements under the Basel III Capital Rules and were considered to be “well-capitalized” as of the dates reflected in the table below. As of March 31, 2020, the FDIC categorized us as well-capitalized under the prompt corrective action framework. There have been no conditions or events since March 31, 2020 that management believes would change this classification.

																Regulatory
																Capital Ratio
																Requirements,
						Regulatory					Minimum					including fully
						Capital Ratio					To be Considered					phased in Capital
	Actual					Requirements					"Well Capitalized"					Conservation Buffer
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2020:
Total capital (to risk-weighted assets)
Consolidated	$	147,410		14.78	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		145,465		14.59	%		79,782		8.00	%		99,727		10.00	%		104,714		10.50	%
Tier 1 capital (to risk-weighted assets)
Consolidated		136,594		13.69	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		134,649		13.50	%		59,836		6.00	%		79,782		8.00	%		84,768		8.50	%
CET1 capital (to risk-weighted assets)
Consolidated		136,594		13.69	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		134,649		13.50	%		44,877		4.50	%		64,823		6.50	%		69,809		7.00	%
Tier 1 capital (to average assets)
Consolidated		136,594		11.59	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		134,649		11.42	%		47,143		4.00	%		58,929		5.00	%		47,143		4.00	%

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																Regulatory
																Capital Ratio
																Requirements,
						Regulatory					Minimum					including fully
						Capital Ratio					To be Considered					phased in Capital
	Actual					Requirements					"Well Capitalized"					Conservation Buffer
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2019:
Total capital (to risk-weighted assets)
Consolidated	$	150,092		15.18	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		147,820		14.96	%		79,069		8.00	%		98,836		10.00	%		103,778		10.50	%
Tier 1 capital (to risk-weighted assets)
Consolidated		139,975		14.16	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		137,703		13.93	%		59,301		6.00	%		79,069		8.00	%		84,010		8.50	%
CET1 capital (to risk-weighted assets)
Consolidated		139,975		14.16	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		137,703		13.93	%		44,476		4.50	%		64,243		6.50	%		69,185		7.00	%
Tier 1 capital (to average assets)
Consolidated		139,975		12.14	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		137,703		11.95	%		46,103		4.00	%		57,629		5.00	%		46,103		4.00	%

Contractual Obligations

The following tables contain supplemental information regarding our total contractual obligations as of March 31, 2020 and December 31, 2019:

	Payments Due at March 31, 2020
	Within		One to		Three to		After Five
(Dollars in thousands)	One Year		Three Years		Five Years		Years		Total
Deposits without a stated maturity	$	601,202	$	—	$	—	$	—	$	601,202
Time deposits		441,552		8,448		567		429		450,996
Operating lease commitments		2,008		4,049		3,328		1,336		10,721
Commitments to fund investments for low income housing partnerships		1,245		1,465		30		48		2,788
Total contractual obligations	$	1,046,007	$	13,962	$	3,925	$	1,813	$	1,065,707

	Payments Due at December 31, 2019
	Within		One to		Three to		After Five
(Dollars in thousands)	One Year		Three Years		Five Years		Years		Total
Deposits without a stated maturity	$	590,899	$	—	$	—	$	—	$	590,899
Time deposits		417,316		12,006		490		—		429,812
Operating lease commitments		2,001		4,060		3,518		1,641		11,220
Commitments to fund investments for low income housing partnerships		29		12		23		6		70
Total contractual obligations	$	1,010,245	$	16,078	$	4,031	$	1,647	$	1,032,001

We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. We have in place various borrowing mechanisms for both short-term and long-term liquidity needs.

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Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our consolidated balance sheet. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if we deem collateral is necessary upon extension of credit, is based on management’s credit evaluation of the counterparty.

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. They are intended to be disbursed, subject to certain condition, upon request of the borrower.

The following table summarized commitments as of the dates presented.

(Dollars in thousands)	March 31, 2020		December 31, 2019
Commitments to extend credit	$	68,917	$	66,153
Standby letters of credit		7,327		7,377
Other commercial letters of credit		685		1,111
Total	$	76,929	$	74,641

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We have identified interest rate risk as our primary source of market risk.

Interest Rate Risk

Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay home mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR (basis risk).

Our board’s asset liability committee, or ALM, establishes broad policy limits with respect to interest rate risk. Our management’s asset liability committee, or ALCO, establishes specific operating guidelines within the parameters of the policies set by the ALM. In general, we seek to minimize the impact of changing interest rates on net interest income and the economic values of assets and liabilities. Our ALCO monitors the level of interest rate risk sensitivity on a quarterly basis to ensure compliance with the ALM-approved risk limits. The policy requires a periodic review of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan prepayment rates based on historical analysis, and noninterest-bearing and interest-bearing deposit durations based on historical analysis.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

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An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.

Interest rate risk measurement is calculated and reported to the ALCO and ALM at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

Evaluation of Interest Rate Risk

We use a net interest income simulation model to measure and evaluate potential changes in our net interest income. We run various hypothetical interest rate scenarios at least quarterly and compare these results against a scenario with no changes in interest rates. We use two approaches to model interest rate risk: Earnings at Risk, or EAR, and Economic Value of Equity, or EVE. Under EAR, net interest income is modeled utilizing various assumptions for assets and liabilities. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.

Our simulation model incorporates various assumptions, which we believe are reasonable but which may have a significant impact on results such as: (i) the timing of changes in interest rates; (ii) shifts or rotations in the yield curve; (iii) re-pricing characteristics for market-rate-sensitive instruments; (iv) varying loan prepayment speeds for different interest rate scenarios; and (v) the overall growth and mix of assets and liabilities. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results but rather as a means to better plan and execute appropriate asset-liability management strategies and manage our interest rate risk.

Potential changes to our net interest income in hypothetical rising and declining rate scenarios calculated as of March 31, 2020 and December 31, 2019 are presented in the following table. The projections assume (i) immediate, parallel shifts downward of the yield curve of 100 basis points and (ii) immediate, parallel shifts upward of the yield curve of 100, 200, 300 and 400 basis points over 12 months. In the current interest rate environment, a downward shift of the yield curve of 200, 300 and 400 basis points does not provide us with meaningful results. In a downward parallel shift of the yield curve, interest rate at the short-end of the yield curve are not modeled to decline any further than 0%.

	Net Interest Income Sensitivity						Economic Value of Equity Sensitivity
	March 31, 2020			December 31, 2019			March 31, 2020			December 31, 2019
+400 basis points		22.13	%		18.23	%		6.56	%		(2.94	)%
+300 basis points		17.82	%		14.64	%		8.53	%		(0.01	)%
+200 basis points		12.83	%		10.51	%		8.90	%		1.55	%
+100 basis points		6.92	%		5.79	%		6.48	%		2.62	%
-100 basis points		(5.45	) %		(5.26	)%		(7.48	) %		(4.38	)%

We are within board-established policy limits for the all rate scenarios. The EAR reported at March 31, 2020 projects that our earnings are expected to be sensitive to changes in interest rates over the next year. In recent periods, the amount of fixed rate assets decreased resulting in a position shift to be slightly more asset sensitive.

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Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

The Company’s management, including our President and Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered in this report. Based on such evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of business, we are or may be involved in various legal or regulatory proceedings, claims, including claims related to, employment, wage-hour and labor law claims, lender liability claims, and consumer and privacy claims, some which may be styled as “class action” or representative cases. We evaluate all claims and lawsuits with respect to their potential merits, our potential defenses and counterclaims, settlement or litigation potential and the expected effect on us. The outcome of any claims or litigation, regardless of the merits, is inherently uncertain. We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The outcomes of our legal proceedings and other contingencies are, however, inherently unpredictable and subject to significant uncertainties. The Company presently does not have any adverse pending legal actions.

Item 1A. Risk Factors

The following discussion supplements the discussion of risk factors affecting us as set forth in Part I, Item 1A. Risk Factors in our 2019 Annual Report on Form 10-K. The discussion of risk factors, as so supplemented, provides a description of some of the important risk factors that could affect our actual results and could cause our results to vary materially from those expressed in public statements or documents. However, other factors besides those included in the discussion of risk factors, as so supplemented, or discussed elsewhere in other of our reports filed with or furnished to the SEC could affect our business or results. The readers should not consider any description of such factors to be a complete set of all potential risks that we may face.

Effects of the COVID-19 Pandemic

The COVID-19 pandemic has negatively impacted the U.S. and global economy; disrupted U.S. and global supply chains; lowered equity market valuations; created significant volatility and disruption in financial markets; contributed to a decrease in the rates and yields on U.S. Treasury securities; resulted in ratings downgrades, credit deterioration, and defaults in many industries; increased demands on capital and liquidity; and increased unemployment levels and decreased consumer confidence. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities, including those in our footprint. The pandemic has caused us, and could continue to cause us, to recognize credit losses in our loan portfolios and increases in our allowance for credit losses. Sustained adverse effects may also increase our cost of capital, prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements, or result in downgrades in our credit ratings. The extent to which the COVID-19 pandemic impacts our business, financial condition, liquidity, and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the continued effectiveness of our business continuity plan, the direct and indirect impact of the pandemic on our customers, employees, counterparties and service providers, and actions taken by governmental authorities and other third parties in response to the pandemic. Governmental authorities have taken significant measures to provide economic assistance to individual households and businesses, stabilize the markets, and support economic growth. The success of these measures is unknown, and they may not be sufficient to fully mitigate the negative impact of the pandemic. Additionally, some measures, such as a suspension of consumer and commercial loan payments and the reduction in interest rates to near zero, may have a negative impact on our business, financial condition, liquidity, and results of operations.

Furthermore, the U.S. economy is likely to experience a recession as a result of the pandemic, and our business could be materially and adversely affected by a prolonged recession. To the extent the pandemic adversely affects our business, financial condition, liquidity, or results of operations, it may also have the effect of heightening many of the other risks described in the section entitled “Risk Factors” in our 2019 Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On January 25, 2019, the Company announced that the board of directors approved a stock repurchase program that authorized the Company to repurchase up to 400,000 shares of its common stock in open market. During the first, second, and third quarter of 2019, the Company repurchased an aggregate of 395,000 shares at an average price of $9.10 per share. The first stock repurchase program was terminated as of August 23, 2019.

On August 28, 2019, the Company’s Board of Directors approved another stock repurchase program that authorized the Company to repurchase up to 475,000 shares of its common stock. The Company completed the second stock repurchase program in February 2020 at an average price of $9.75 per share.

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On February 28, 2020, the Company announced that Board of Directors approved another stock repurchase program that authorized the Company to repurchase up to 500,000 shares of its common stock. The Company repurchased an aggregate of 429,973 shares at an average price of $7.89 per share as of March 31, 2020.

The Company may purchase share in open market transactions, through block trades, in privately negotiated transactions, or by other trading plans as determined by the Company’s management. The repurchase program may be suspended, terminated, or modified at any time. The time of purchases and amount of share repurchase may be affected by variety factors including market conditions, price, trading volume and regulatory requirements.

The following table summarizes share repurchase activities for the three months ended March 31, 2020.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Publicly Announced Program		Approximate Number of Shares that May Yet Be Purchased Under the Program
	(Dollars in thousands, except per share data)
January 1, 2020 to January 31, 2020		96,410	$	9.79	$	96,410		—
February 1, 2020 to February 29, 2020		191,071		10.00		191,071		—
March 1, 2020 to March 31, 2020		429,973		7.89		429,973		70,027
Total		717,454	$	8.94	$	717,454		70,027

Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

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Item 6. Exhibits

Exhibit Number		Description

3.1		Articles of Incorporation of OP Bancorp included as Exhibit 3.1 to the Registration Statement on Form S-1 filed March 5, 2018 and incorporated herein by reference.

3.2		Amended and Restated Bylaws of OP Bancorp included as Exhibit 3.2 to the Registration Statement on Form S-1 filed March 5, 2018 and incorporated herein by reference.

31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. ⁺

31.2		Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. ⁺

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.⁺

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.⁺

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

⁺ Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Company Name

Date: May 11, 2020	By:	/s/ Min J. Kim
		Min J. Kim
		President and Chief Executive Officer

Date: May 11, 2020	By:	/s/ Christine Oh
		Christine Oh
		Chief Financial Officer