OP Bancorp - Quarter Report: 2021 June (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 June 30, 2021

☐	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 August 3, 2021, there were 15,133,407 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	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55
Item 4.	Controls and Procedures	56

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	57
Item 1A.	Risk Factors	57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Mine Safety Disclosures	57
Item 5.	Other Information	57
Item 6.	Exhibits	58

Signatures		59

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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:

•

the 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;

•

the impact of the federal CARES Act and the significant additional lending activities undertaken by the Company in connection with the Small Business Administration’s Paycheck Protection Program enacted thereunder, including risks to the Company with respect to the uncertain application by the Small Business Administration of new borrower and loan eligibility, forgiveness and audit criteria;

•

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 losses;

•

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 us, 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;

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•

risks related to potential acquisitions;

•

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; 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)

($ in thousands, except shares)	June 30, 2021		December 31, 2020
ASSETS
Cash and cash equivalents	$	128,687	$	106,310
Securities available-for-sale, at fair value		111,832		91,791
Other investments		11,028		10,101
Loans held for sale		68,396		26,659
Loans receivable, net of allowance of $14,687 at June 30, 2021 and $15,352 at December 31, 2020		1,231,179		1,084,384
Premises and equipment, net		4,271		4,544
Accrued interest receivable, net of allowance of $792 at June 30, 2021 and $643 at December 31, 2020		3,469		3,985
Servicing assets		12,903		7,360
Company owned life insurance		11,005		10,879
Deferred tax assets		4,861		5,242
Operating right-of-use assets		6,065		6,786
Other assets		7,764		8,785
Total assets	$	1,601,460	$	1,366,826
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits:
Noninterest bearing	$	668,244	$	522,754
Interest bearing:
Money market and others		386,612		328,323
Time deposits greater than $250,000		193,704		200,210
Other time deposits		185,543		148,803
Total deposits		1,434,103		1,200,090
Federal Home Loan Bank advances		—		5,000
Accrued interest payable		608		1,021
Operating lease liabilities		7,567		8,429
Other liabilities		7,220		8,920
Total liabilities		1,449,498		1,223,460
Shareholders’ equity
Preferred stock – no par value; 10,000,000 shares authorized; no shares issued or outstanding at June 30, 2021 and December 31, 2020		—		—
Common stock – no par value; 50,000,000 shares authorized; 15,133,407 and 15,016,700 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively		78,718		78,657
Additional paid-in capital		8,324		8,521
Retained earnings		64,700		55,348
Accumulated other comprehensive income		220		840
Total shareholders’ equity		151,962		143,366
Total liabilities and shareholders' equity	$	1,601,460	$	1,366,826

See accompanying notes to consolidated financial statements

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OP BANCORP

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
($ in thousands, except per share data)	2021			2020			2021			2020
Interest income
Interest and fees on loans	$	14,971		$	12,549		$	28,255		$	26,243
Interest on securities available for sale		218			281			454			600
Other interest income		160			90			272			422
Total interest income		15,349			12,920			28,981			27,265
Interest expense
Interest on deposits		763			2,272			1,640			5,501
Total interest expense		763			2,272			1,640			5,501
Net interest income		14,586			10,648			27,341			21,764
(Reversal of) provision for loan losses		(1,112	)		1,988			(492	)		2,731
Net interest income after (reversal of) provision for loan losses		15,698			8,660			27,833			19,033

Noninterest income
Service charges on deposits		393			298			748			729
Loan servicing fees, net of amortization		302			514			833			906
Gain on sale of loans		1,210			936			3,092			2,091
Other income		315			314			513			632
Total noninterest income		2,220			2,062			5,186			4,358
Noninterest expense
Salaries and employee benefits		5,307			4,347			9,969			9,418
Occupancy and equipment		1,234			1,241			2,469			2,471
Data processing and communication		467			414			915			823
Professional fees		303			276			617			549
FDIC insurance and regulatory assessments		123			117			255			222
Promotion and advertising		176			163			353			324
Directors’ fees		128			223			244			456
Foundation donation and other contributions		640			245			1,147			575
Other expenses		411			308			786			703
Total noninterest expense		8,789			7,334			16,755			15,541
Income before income tax expense		9,129			3,388			16,264			7,850
Income tax expense		2,750			972			4,808			2,135
Net income	$	6,379		$	2,416		$	11,456		$	5,715
Earnings per share - Basic	$	0.42		$	0.16		$	0.75		$	0.37
Earnings per share - Diluted	$	0.42		$	0.16		$	0.75		$	0.37
Other comprehensive (loss)/income:
Change in unrealized (losses)/gains on securities available-for-sale		(133	)		(231	)		(879	)		1,063
Tax effect		39			68			259			(314	)
Total other comprehensive (loss)/income		(94	)		(163	)		(620	)		749
Comprehensive income	$	6,285		$	2,253		$	10,836		$	6,464

See accompanying notes to consolidated financial statements

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OP BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

	Common Stock						Additional						Accumulated Other			Total
($ in thousands, except shares)	Shares Outstanding			Amount			Paid-in Capital			Retained Earnings			Comprehensive Income (Loss)			Shareholders’ Equity
Balance at April 1, 2020		15,115,868		$	80,422		$	7,882		$	48,695		$	1,100		$	138,099
Net income		—			—			—			2,416			—			2,416
Other comprehensive income(loss)		—			—			—			—			(163	)		(163	)
Stock issued under stock-based compensation plans		22,189			—			—			—			—			—
Stock-based compensation, net		—			—			336			—			—			336
Repurchase of common stock		(70,027	)		(497	)		—			—			—			(497	)
Cash dividends declared		—			—			—			(1,055	)		—			(1,055	)
Balance at June 30, 2020		15,068,030		$	79,925		$	8,218		$	50,056		$	937		$	139,136

Balance at April 1, 2021		15,037,635		$	78,654		$	8,652		$	59,373		$	314		$	146,993
Net income		—			—			—			6,379			—			6,379
Other comprehensive income(loss)		—			—			—			—			(94	)		(94	)
Stock issued under stock-based compensation plans		95,772			64			—			—			—			64
Stock-based compensation, net		—			—			(328	)		—			—			(328	)
Repurchase of common stock		—			—			—			—			—			—
Cash dividends declared		—			—			—			(1,052	)		—			(1,052	)
Balance at June 30, 2021		15,133,407		$	78,718		$	8,324		$	64,700		$	220		$	151,962

Balance at January 1, 2020		15,703,276		$	86,381		$	7,524		$	46,483		$	188		$	140,576
Net income		—			—			—			5,715			—			5,715
Other comprehensive income(loss)		—			—			—			—			749			749
Stock issued under stock-based compensation plans		152,235			305			—			—			—			305
Stock-based compensation, net		—			—			694			—			—			694
Repurchase of common stock		(787,481	)		(6,761	)		—			—			—			(6,761	)
Cash dividends declared		—			—			—			(2,142	)		—			(2,142	)
Balance at June 30, 2020		15,068,030		$	79,925		$	8,218		$	50,056		$	937		$	139,136

Balance at January 1, 2021		15,016,700		$	78,657		$	8,521		$	55,348		$	840		$	143,366
Net income		—			—			—			11,456			—			11,456
Other comprehensive income(loss)		—			—			—			—			(620	)		(620	)
Stock issued under stock-based compensation plans		120,537			89			—			—			—			89
Stock-based compensation, net		—			—			(197	)		—			—			(197	)
Repurchase of common stock		(3,830	)		(28	)		—			—			—			(28	)
Cash dividends declared		—			—			—			(2,104	)		—			(2,104	)
Balance at June 30, 2021		15,133,407		$	78,718		$	8,324		$	64,700		$	220		$	151,962

See accompanying notes to consolidated financial statements

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OP BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Six Months Ended June 30,
($ in thousands)	2021			2020
Cash flows from operating activities
Net income	$	11,456		$	5,715
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
(Reversal of) provision for loan losses		(492	)		2,731
Depreciation and amortization of premises and equipment		657			655
Amortization of net premiums on securities		503			164
Amortization of servicing assets		1,401			821
Amortization of low-income housing partnerships		254			161
Stock-based compensation		236			716
Gain on sales of loans		(3,092	)		(2,091	)
Earnings on company owned life insurance		(126	)		(130	)
Net change in fair value of equity investment with readily determinable fair value		59			(89	)
Origination of loans held for sale		(76,270	)		(40,538	)
Proceeds from sales of loans held for sale		36,587			35,134
Net change in:
Accrued interest receivable		766			(1,657	)
Deferred tax assets		(122	)		(660	)
Other assets		1,826			(179	)
Accrued interest payable		(412	)		(722	)
Other liabilities		(2,373	)		(2,128	)
Net cash used in by operating activities		(29,142	)		(2,097	)
Cash flows from investing activities
Net change in loans receivable		(54,826	)		(53,354	)
Proceeds from matured, called, or paid-down securities available-for-sale		18,368			12,573
Purchase of loans and servicing assets		(97,631	)		—
Purchase of securities available-for-sale		(39,791	)		(30,528	)
Purchase of FHLB stock		(963	)		(685	)
Purchase of premises and equipment, net		(385	)		(309	)
Net change in investments in low-income housing partnerships		(189	)		(810	)
Net cash used in investing activities		(175,417	)		(73,113	)
Cash flows from financing activities
Net change in deposits		234,012			100,009
Cash received from stock option exercises		89			305
Proceeds from (payment of) Federal Home Loan Bank advances		(5,000	)		10,000
Repurchase of common stock		(28	)		(6,761	)
Cash dividend paid on common stock		(2,104	)		(2,142	)
Payments related to tax-withholding for vested restricted stock awards		(33	)		(22	)
Net cash provided by financing activities		226,936			101,389
Net change in cash and cash equivalents		22,377			26,179
Cash and cash equivalents at beginning of period		106,310			85,943
Cash and cash equivalents at end of period	$	128,687		$	112,122
Supplemental cash flow information
Cash paid during the period for:
Income taxes	$	6,253		$	3,505
Interest		2,052			6,223
Supplemental noncash disclosure:
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 Bank operates primarily in the traditional banking business arena that includes accepting deposits and making loans and investments. The Bank’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 Bank 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, and one-full service branch is located in Carrollton, Texas. The Bank also has four loan production offices in Atlanta, Georgia, Aurora, Colorado, and Lynwood and Seattle, Washington.

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 the financial results for the interim periods presented, including eliminating intercompany transactions and balances. Certain items on the Consolidated Financial Statements and notes for the prior years have been reclassified to conform to the 2021 presentation. 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 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Annual Report on Form 10-K”).

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 associated with 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.

The Company has added the following significant accounting policies as a result of an asset purchase of loan portfolio from Hana Small Business Lending, Inc. (“Hana”).

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Asset Purchase:

On May 24, 2021, the Company completed the purchase of Hana’s loan portfolio and paid approximately $97.6 million that included loans of $100.0 million at a fair value discount of $8.9 million, servicing assets of $6.1 million and accrued interest receivable of $398 thousand. The following table summarizes the consideration paid for the loan portfolio and the amounts of assets purchased:

($ in thousands)
Consideration
Cash	$	97,631

Recognized amounts of identifiable assets purchased:
Loans ⁽¹⁾	$	100,003
Loan discounts		(8,867	)
Accrued interest receivable		398
Servicing assets		6,097
Total recognized identifiable assets	$	97,631

(1)	Consists of $92.2 million of SBA loans, $6.9 million of PPP loans and $919 thousand of real estate loans.

Asset Acquisitions: The Company follows the guidance in Accounting Standards Codification (“ASC”) 805, Business Combination, for determining the appropriate accounting treatment for acquisition. Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business, provides an initial fair value screen to determine if substantially all of the fair value of the assets acquired is concentrated in a single asset or group of similar assets. If the initial test is met, the assets acquired would not represent a business combination, but rather an asset acquisition. If the transaction is deemed to be an asset acquisition, the cost accumulation and allocation model is used in which the cost of the acquisition is allocated on a relative fair value basis to the assets acquired. The Company concluded that this transaction did not qualify as a business combination and was accounted for as an asset acquisition in accordance with the “Acquisition of Assets Rather Than a Business” subsections of ASC 805-50 using a cost accumulation model.

Purchased Performing Loans: The Company records purchased performing loans at fair value including a discount and recognizes discount accretion using the contractual cash flow method. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. The Company evaluated $100.0 million of the loans purchased in accordance with the provisions of ASC 310-20, Nonrefundable Fees and Other Costs and recorded an $8.9 million discount. There was no allowance for loan losses established as of June 30, 2021 for the purchased performing loans. A provision for loan losses is recorded for any further deterioration in these loans subsequent to the acquisition.

Recent Accounting Pronouncements:

In June 2016, Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. 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 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 recognized in other comprehensive income (loss). 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, the 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 in October 2019, the FASB voted to approve the proposed delay. The Company expects the adoption date of ASU 2016-13 will be January 2023. ASU 2016-13 will be applied using a modified retrospective approach through a cumulative effect adjustment to retained earnings, except for debt securities that an other-than-temporary impairment had been previously recognized will be applied using the prospective transition approach. 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.

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In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU is a new accounting standard related to contracts or hedging relationships that reference London Interbank Offered Rate (“LIBOR”) or other reference rates that are expected to be discontinued. The new standard provides temporary optional expedients and exceptions regarding existing accounting requirements related to contractual modifications of contracts, hedging relationships, and other transactions that are affected by reference rate reform. In January 2021, the FASB issued ASU 2021-01, as subsequent amendments, which permits entities to apply optional expedients in Topic 848 to derivative instruments modified because of discounting transition resulting from referent rate reform. ASU 2020-04 became effective upon issuance and may be applied prospectively to contract modifications made on or before December 31, 2022. ASU 2021-01 became effective upon issuance and may be applied on a full restrospective basis as of any date from the begining of an interim period that includes or subsequent to March 12, 2020 or prospectively for contract modifications made on or before December 31, 2022. The Company adopted this guidance on a prospective basis in January 2021 and the guidance did not have a material impact on the Company’s Consolidated Financial Statements. The Company will assess the impact in conjuction with the reference rate transition as it occurs over the next two years.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This amendment simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The effective date will be January 2023. The Company does not expect the adoption of this guidance will be material to its Consolidated Statement of Income.

Note 3. Securities

The following table summarizes the amortized cost, the corresponding amounts of gross unrealized gains and losses, and estimated fair value of securities AFS as of June 30, 2021 and December 31, 2020:

($ in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
As of June 30, 2021:
Available for sale
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	28,965	$	322	$	(81	)	$	29,206
Residential collateralized mortgage obligations		82,554		569		(497	)		82,626
Total available for sale	$	111,519	$	891	$	(578	)	$	111,832

($ in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
As of December 31, 2020:
Available for sale
U.S. Government-sponsored agency securities	$	1,000	$	5	$	—		$	1,005
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	19,281	$	430	$	(7	)	$	19,704
Residential collateralized mortgage obligations		70,318		814		(50	)		71,082
Total available for sale	$	90,599	$	1,249	$	(57	)	$	91,791

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There were no sales of securities AFS in the three and six months ended June 30, 2021 and 2020. The amortized cost and estimated fair value of securities AFS at June 30, 2021, by contractual maturity, are shown below.

($ in thousands)	Amortized Cost		Fair Value
As of June 30, 2021:
Available for sale
U.S. Government agencies or sponsored agency securities:
After one year through five years	$	827	$	866
After five years through ten years		4,446		4,607
After ten years		106,246		106,359
Total available for sale	$	111,519	$	111,832

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 June 30, 2021 and December 31, 2020, 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.

The following table presents the fair value and the associated gross unrealized losses on AFS securities by length of time those individual securities in each category have been in a continuous loss at June 30, 2021 and December 31, 2020:

($ in thousands)	Less Than 12 Months					12 Months or Longer					Total
As of June 30, 2021:	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Available for sale
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	12,229	$	(81	)	$	—	$	—		$	12,229	$	(81	)
Residential collateralized mortgage obligations		46,738		(491	)		1,844		(6	)		48,582		(497	)
Total available for sale	$	58,967	$	(572	)	$	1,844	$	(6	)	$	60,811	$	(578	)

($ in thousands)	Less Than 12 Months					12 Months or Longer				Total
As of December 31, 2020:	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Available for sale
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	3,089	$	(7	)	$	—	$	—	$	3,089	$	(7	)
Residential collateralized mortgage obligations		13,593		(50	)		—		—		13,593		(50	)
Total available for sale	$	16,682	$	(57	)	$	—	$	—	$	16,682	$	(57	)

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Management evaluates securities for other-than-temporary impairment (“OTTI”) on 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, along with the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or whether 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: (i) OTTI related to credit loss, which must be recognized in the income statement, and (ii) 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 both June 30, 2021 and December 31, 2020, management believes no securities with unrealized losses were OTTI.

As of June 30, 2021 and December 31, 2020, there were no pledged securities to secure public deposits, borrowing and letters of credit from the Federal Home Loan Bank (“FHLB”) and the Board of Governors of the Federal Reserve System (“FRB”), and for other purposes required or permitted by law. The following table presents the other investment securities, which are included in Other investments on the Consolidated Balance Sheet as of June 30, 2021 and December 31, 2020:

($ in thousands)	June 30, 2021		December 31, 2020
Federal Home Loan Bank stock	$	7,005	$	6,043
Pacific Coast Bankers Bank stock		190		190
Mutual fund - CRA qualified		3,738		3,773
Total other investment securities	$	10,933	$	10,006

The Company has equity investment in a mutual fund with readily determinable fair value of $3.7 million and $3.8 million, as of June 30, 2021 and December 31, 2020, respectively, which is measured at fair value with changes in fair value recorded in net income. The Company invested in the mutual fund for CRA purposes. For the mutual fund, the Company recorded a $7 thousand and a $31 thousand unrealized gain for the three months ended June 30, 2021 and 2020, respectively, and a $59 thousand unrealized loss for the six months ended June 30, 2021 compared to a $89 thousand unrealized gain for the six months ended June 30, 2020. The unrealized gains (losses) of the mutual fund are included in Other income in the Statements of Income and Comprehensive Income.

Note 4. Loans and Allowance for Loan Losses

The following table presents the composition of the loan portfolio as of June 30, 2021 and December 31, 2020:

($ in thousands)	June 30, 2021			December 31, 2020
Commercial real estate	$	684,082		$	651,684
SBA loans—real estate		217,356			136,224
SBA loans—non-real estate ⁽¹⁾		121,395			75,151
Commercial and industrial		102,562			107,307
Home mortgage		119,319			128,212
Consumer		1,152			1,158
Gross loans receivable		1,245,866			1,099,736
Allowance for loan losses		(14,687	)		(15,352	)
Loans receivable, net ⁽²⁾	$	1,231,179		$	1,084,384

(1)	At June 30, 2021 and December 31, 2020, SBA loans - non-real estate balances include SBA Paycheck Protection Program ("PPP") loans of $103.9 million and $64.9 million, respectively.

(2)	Includes net deferred loan fees or costs, unamortized premiums and unaccreted discounts of $(12.5) million and $(5.9) million as of June 30, 2021 and December 31, 2020, respectively.

No loans were outstanding to related parties as of June 30, 2021 or December 31, 2020.

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The following table summarizes the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2021 and 2020:

							SBA
	Commercial			SBA Loans			Loans Non-			Commercial			Home
($ in thousands)	Real Estate			Real Estate			Real Estate			and Industrial			Mortgage			Consumer			Total
Three months ended June 30, 2021:
Beginning balance	$	8,594		$	2,030		$	292		$	2,331		$	2,075		$	17		$	15,339
(Reversal of) provision for loan losses ⁽¹⁾		(138	)		(33	)		(37	)		(45	)		(371	)		(1	)		(625	)
Charge-offs		—			—			(27	)		—			—			—			(27	)
Recoveries		—			—			—			—			—			—			—
Ending balance	$	8,456		$	1,997		$	228		$	2,286		$	1,704		$	16		$	14,687
Three months ended June 30, 2020:
Beginning balance	$	6,210		$	1,082		$	192		$	1,292		$	1,921		$	51		$	10,748
(Reversal of) provision for loan losses		935			264			33			628			153			(25	)		1,988
Charge-offs		—			—			—			—			—			—			—
Recoveries		—			—			28			—			—			—			28
Ending balance	$	7,145		$	1,346		$	253		$	1,920		$	2,074		$	26		$	12,764

(1)	Excludes (reversal of) provision for uncollectible accrued interest receivable of ($487) thousand for the three months ended June 30, 2021. There was no provision for uncollectible accrued interest receivable for the three months ended June 30, 2020.

						SBA
	Commercial			SBA Loans		Loans Non-			Commercial			Home
($ in thousands)	Real Estate			Real Estate		Real Estate			and Industrial			Mortgage			Consumer			Total
Six months ended June 30, 2021:
Beginning balance	$	8,505		$	1,802	$	278		$	2,563		$	2,185		$	19		$	15,352
(Reversal of) provision for loan losses ⁽¹⁾		(49	)		195		(23	)		(277	)		(481	)		(6	)		(641	)
Charge-offs		—			—		(27	)		—			—			—			(27	)
Recoveries		—			—		—			—			—			3			3
Ending balance	$	8,456		$	1,997	$	228		$	2,286		$	1,704		$	16		$	14,687
Six months ended June 30, 2020:
Beginning balance	$	6,000		$	939	$	121		$	1,289		$	1,667		$	34		$	10,050
(Reversal of) provision for loan losses		1,145			407		149			631			407			(8	)		2,731
Charge-offs		—			—		(45	)		—			—			—			(45	)
Recoveries		—			—		28			—			—			—			28
Ending balance	$	7,145		$	1,346	$	253		$	1,920		$	2,074		$	26		$	12,764

(1)	Excludes (reversal of) provision for uncollectible accrued interest receivable of ($149) thousand for the six months ended June 30, 2021. There was no provision for uncollectible accrued interest receivable for the six months ended June 30, 2020.

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The following table presents the allowance for loan losses and recorded investment by portfolio segment and impairment methodology as of June 30, 2021 and December 31, 2020:

($ in thousands)	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total
As of June 30, 2021:
Allowance for loan losses ⁽¹⁾:
Commercial real estate	$	—	$	8,456	$	8,456
SBA loans—real estate		—		1,997		1,997
SBA loans—non-real estate		—		228		228
Commercial and industrial		323		1,963		2,286
Home mortgage		—		1,704		1,704
Consumer		—		16		16
Total	$	323	$	14,364	$	14,687
Loans ⁽²⁾:
Commercial real estate	$	—	$	686,042	$	686,042
SBA loans—real estate		396		217,752		218,148
SBA loans—non-real estate		—		121,951		121,951
Commercial and industrial		323		102,440		102,763
Home mortgage		—		119,778		119,778
Consumer		—		1,155		1,155
Total	$	719	$	1,249,118	$	1,249,837
As of December 31, 2020:
Allowance for loan losses ⁽¹⁾:
Commercial real estate	$	—	$	8,505	$	8,505
SBA loans—real estate		—		1,802		1,802
SBA loans—non-real estate		87		191		278
Commercial and industrial		330		2,233		2,563
Home mortgage		—		2,185		2,185
Consumer		—		19		19
Total	$	417	$	14,935	$	15,352
Loans ⁽²⁾:
Commercial real estate	$	—	$	654,235	$	654,235
SBA loans—real estate		—		136,873		136,873
SBA loans—non-real estate		174		75,477		75,651
Commercial and industrial		330		107,175		107,505
Home mortgage		—		128,683		128,683
Consumer		—		1,161		1,161
Total	$	504	$	1,103,604	$	1,104,108

(1)	Excludes allowance for uncollectible accrued interest receivable of $792 thousand and $643 thousand as of June 30, 2021 and December 31, 2020, respectively.

(2)	Includes accrued interest receivable of $4.0 million and $4.4 million as of June 30, 2021 and December 31, 2020, respectively.

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The following table presents the recorded investment of individually impaired loans and the specific allowance for loan losses as of June 30, 2021 and December 31, 2020. 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.

	As of June 30, 2021						As of December 31, 2020
	Recorded		Recorded				Recorded		Recorded
	Investment		Investment				Investment		Investment
	With No		With		Related		With No		With		Related
($ in thousands)	Allowance		Allowance		Allowance		Allowance		Allowance		Allowance
SBA loans—real estate	$	396	$	—	$	—	$	—	$	—	$	—
SBA loans—non-real estate		—		—		—		—		174		87
Commercial and industrial		—		323		323		—		330		330
Total	$	396	$	323	$	323	$	—	$	504	$	417

The following table presents the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans by portfolio segment for the three and six months ended June 30, 2021 and 2020. The difference between interest income recognized and cash basis interest recognized was immaterial.

	Three Months Ended June 30,								Six Months Ended June 30,
	2021				2020				2021				2020
	Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
($ in thousands)	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
SBA loans—real estate	$	165	$	—	$	—	$	—	$	83	$	—	$	—	$	—
SBA loans—non-real estate		—		—		125		2		—		—		125		4
Commercial and industrial		325		3		330		3		327		6		331		7
Total	$	490	$	3	$	455	$	5	$	410	$	6	$	456	$	11

The following table presents the recorded investment in nonaccrual loans and loans past due 90 or more days and still accruing interest, by portfolio segment, as of June 30, 2021 and December 31, 2020:

($ in thousands)	Nonaccrual		Loans 90 or More Days Past Due & Still Accruing		Total
As of June 30, 2021:
SBA loans—real estate	$	396	$	—	$	396
SBA loans—non-real estate		38		—		38
Commercial and industrial		323		—		323
Total	$	757	$	—	$	757
As of December 31, 2020:
SBA loans—non-real estate	$	56	$	—	$	56
Commercial and industrial		330		—		330
Home mortgage		599		—		599
Total	$	985	$	—	$	985

Nonaccrual loans and loans past due 90 or more days and still accruing interest include both homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

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The following table represents the aging analysis of the recorded investment in past due loans as of June 30, 2021 and December 31, 2020:

($ in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 or More Days Past Due		Total Past Due		Total Current or Less Than 30 Days Past Due		Total
As of June 30, 2021:
Commercial real estate	$	—	$	—	$	—	$	—	$	686,042	$	686,042
SBA—real estate		—		—		396		396		217,752		218,148
SBA—non-real estate		41		—		13		54		121,897		121,951
Commercial and industrial		—		—		—		—		102,763		102,763
Home mortgage		—		—		—		—		119,778		119,778
Consumer		—		—		—		—		1,155		1,155
	$	41	$	—	$	409	$	450	$	1,249,387	$	1,249,837
As of December 31, 2020:
Commercial real estate	$	—	$	—	$	—	$	—	$	654,235	$	654,235
SBA—real estate		—		—		—		—		136,873		136,873
SBA—non-real estate		—		—		—		—		75,651		75,651
Commercial and industrial		—		—		—		—		107,505		107,505
Home mortgage		—		—		599		599		128,084		128,683
Consumer		—		—		—		—		1,161		1,161
	$	—	$	—	$	599	$	599	$	1,103,509	$	1,104,108

Troubled Debt Restructurings: When, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession for other than an insignificant period of time to a borrower that the Company would not otherwise consider, the related loan is classified as a troubled debt restructuring (“TDR”), the balance of which totaled $323 thousand and $330 thousand as of June 30, 2021 and December 31, 2020, respectively. As of June 30, 2021 and December 31, 2020, the Company has allocated $323 thousand and $330 thousand of specific reserves to the loans classified as TDRs, respectively. The Company has not committed to lend any additional amounts to customers with outstanding loans that are classified as TDRs.

Modifications made were primarily extensions of existing payment modifications on loans when the loan was previously identified as TDRs. There were no new loans identified as TDRs during the three and six months ended June 30, 2021 or 2020. There were no payment defaults during the three and six months ended June 30, 2021, or 2020, of loans that had been modified as TDRs within the previous twelve months.

Loan payment deferrals: Through June 30, 2021, the Company has processed loan deferments for borrowers across multiple industries representing 225 loan accounts, with an aggregate loan balance of $250.7 million under the interagency guidance and Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). COVID-19 related modifications are generally not classified as TDRs due to the relief under the CARES Act and the interagency guidance, both of which the Company elected to apply. Additionally, the Company’s election to apply the TDR relief provided by the CARES Act and the interagency guidance impacts our regulatory capital ratios as these loan modifications related to COVID-19 are not adjusted to a higher risk-weighting normally required with TDR classification.

As of June 30, 2021, 216 loans with an aggregate balance of $235.0 million, including 66 home mortgage loans with an aggregate balance of $28.5 million, have resumed regular payments.

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The following table represents the loan deferment status change by loan type as of June 30, 2021:

Loan Deferment Status Change by Loan Type
	Total deferments				Payment resumed
	under the CARES Act				or paid off				Remaining deferments
($ in thousands)	as of June 30, 2021				through June 30, 2021				as of June 30, 2021
Loan Type	Number of accounts		Balance		Number of accounts		Balance		Number of accounts		Balance
Loans, excluding home mortgage and consumer loans		156	$	220,522		150	$	206,551		6	$	13,971
Home mortgage loans		69		30,205		66		28,497		3		1,708
Total		225	$	250,727		216	$	235,048		9	$	15,679

Paycheck Protection Program loans: A provision in the CARES Act created the PPP, which is administered by the Small Business Administration (“SBA”). The PPP is intended to provide loans to small businesses to pay expenses related to their employees, rent, mortgage interest and utilities. The loans may be forgiven conditioned upon the client providing applicable documentation evidencing their compliant with the terms of the program, including compliance regarding the use of funds. The Bank is an approved SBA lender and began accepting applications for the program on April 3, 2020.

As of June 30, 2021, the Company had loans outstanding with a carrying value of $103.9 million, which were recorded in the SBA – non-real estate. Since the PPP’s inception through June 30, 2021, we have funded $154.5 million, and $52.7 million of principal forgiveness has been provided on qualifying PPP loans.

Credit Quality Indicators: The Company monitor credit quality by evaluating various attributes and utilize such information in the evaluation of the appropriateness of the allowance for loan losses. 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.

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The following table presents the credit risk ratings by portfolio segment as of June 30, 2021 and December 31, 2020:

($ in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
As of June 30, 2021:
Commercial real estate	$	686,042	$	—	$	—	$	—	$	686,042
SBA loans—real estate		214,827		1,433		1,888		—		218,148
SBA loans—non-real estate		120,859		488		604		—		121,951
Commercial and industrial		98,105		—		4,658		—		102,763
Home mortgage		119,778		—		—		—		119,778
Consumer		1,155		—		—		—		1,155
	$	1,240,766	$	1,921	$	7,150	$	—	$	1,249,837
As of December 31, 2020:
Commercial real estate	$	654,235	$	—	$	—	$	—	$	654,235
SBA loans—real estate		134,815		535		1,523		—		136,873
SBA loans—non-real estate		75,453		—		198		—		75,651
Commercial and industrial		102,500		—		5,005		—		107,505
Home mortgage		128,084		—		599		—		128,683
Consumer		1,161		—		—		—		1,161
	$	1,096,248	$	535	$	7,325	$	—	$	1,104,108

Note 5. Premises and equipment

The Company’s premises and equipment consisted of the following as of June 30, 2021 and December 31, 2020:

($ in thousands)	June 30, 2021			December 31, 2020
Leasehold improvements	$	6,935		$	6,878
Furniture and fixtures		3,334			3,307
Equipment and others		2,875			2,593
Total cost		13,144			12,778
Accumulated depreciation		(8,873	)		(8,234	)
Net book value	$	4,271		$	4,544

Total depreciation expense included in occupancy and equipment expenses was $329 thousand and $325 thousand for the three months ended June 30, 2021 and 2020, respectively, and $657 thousand and $655 thousand for the six months ended June 30, 2021 and 2020, respectively.

Note 6. Servicing Assets

The Company recognizes the right to service SBA loans for others as servicing assets when the servicing income the Company receives is more than adequate compensation. Servicing assets are accounted for using the amortization method. Under this method, the Company amortizes the servicing assets over the period of the economic life of the assets arising from estimated net servicing revenue. The Company periodically stratifies its servicing assets into groupings based on risk characteristics and assesses each group for impairment based on fair value. The Servicing assets totaled $12.9 million at June 30, 2021 and $7.4 million at December 31, 2020.

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Based on the results of the impairment test, there were no valuation allowance for impairment as of June 30, 2021 and December 31, 2020. The following table presents an analysis of the changes in activity for loan servicing assets during the three and six months ended June 30, 2021 and 2020 is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)		2021			2020			2021			2020
Beginning balance	$	7,492		$	6,963		$	7,360		$	7,024
Additions from loans sold with servicing retained		277			363			847			769
Additions from purchase of servicing rights		6,097			—			6,097			—
Amortized to expense		(963	)		(354	)		(1,401	)		(821	)
Ending balance	$	12,903		$	6,972		$	12,903		$	6,972

The fair value of the servicing assets was $15.5 million at June 30, 2021, which was determined using discount rates ranging from 4.8% to 11.9% and prepayment speeds ranging from 14.2% to 14.4%, depending on the stratification of the specific assets.

The fair value of the servicing assets was $8.2 million at June 30, 2020, which was determined using discount rates ranging from 5.4% to 11.9% and prepayment speeds ranging from 14.9% to 15.1%, depending on the stratification of the specific assets.

Note 7. Deposits

Time deposits that exceed the FDIC insurance limit of $250,000 at June 30, 2021 and December 31, 2020 were $193.7 million and $200.2 million, respectively.

The scheduled maturities of time deposits as of June 30, 2021 were as follows:

($ in thousands)	June 30, 2021
Remainder of 2021	$	224,417
2022		150,950
2023		2,060
2024		1,039
2025		674
Thereafter		107
Total	$	379,247

Deposits from principal officers, directors, and their affiliates as of June 30, 2021 and December 31, 2020 were $1.9 million and $1.5 million, respectively.

Note 8. Borrowing Arrangements

As of June 30, 2021, the Company did not have any borrowings from the FHLB of San Francisco, compared with $5.0 million as of December 31, 2020, which had a zero interest rate under the Recovery Advance Program to support pandemic relief. The Company had a letter of credit with the FHLB in the amount of $67.0 million to secure public deposits as of both June 30, 2021 and December 31, 2020.

The Company had available borrowings from the following institutions as of June 30, 2021:

($ in thousands)	June 30, 2021
Federal Home Loan Bank—San Francisco	$	296,815
Federal Reserve Bank—San Francisco		130,765
Pacific Coast Bankers Bank		50,000
Zions Bank		25,000
First Horizon Bank		25,000
Total	$	527,580

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The Company has pledged approximately $930.9 million and $909.2 million of loans as collateral for these lines of credit as of June 30, 2021 and December 31, 2020, respectively.

Note 9. Income Taxes

The Company’s income tax expense was $2.8 million and $972 thousand for the three months ended June 30, 2021 and 2020, and $4.8 million and $2.1 million for the six months ended June 30, 2021 and 2020, respectively. The effective income tax rate was 30.1% and 28.7% for the three months ended June 30, 2021 and 2020, and 29.6% and 27.2% for the six months ended June 30, 2021 and 2020, 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 2017 and for state taxing authorities for tax years prior to 2016.

There were no significant unrealized tax benefits recorded as of June 30, 2021 and 2020, and the Company does not expect any significant increase in unrealized tax benefits in the next twelve months.

Note 10. Commitments and Contingencies

Off-Balance-Sheet Credit Risk: In the normal course of business, the Company enters into commitments to extend credit such as loan commitments and standby letters of credits (“SBLC”s). These commitments expose the Company to varying degrees of credit and market risk and are subject to the same credit and market risk limitation reviews as those instruments recorded on the Consolidated Balance Sheet. Loan commitments represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These commitments generally have fixed expiration dates or contain termination clauses in the event the customer’s credit quality deteriorates. Since many of the commitments are expected to expire without being drawn upon, the commitment amounts do not necessarily represent future funding requirements.

The Company applies the same credit underwriting criteria to extend loans and commitments to customers. Each customer’s credit worthiness is evaluated on a case-by-case basis. Collateral may be obtained based on management’s assessment of a customer’s credit. Collateral 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 credit-related commitments as of June 30, 2021 and December 31, 2020:

($ in thousands)	June 30, 2021		December 31, 2020
Loan commitments	$	122,150	$	75,740
Standby letters of credits		5,374		9,212
Commercial letters of credit		2,547		1,552
Total undisbursed credit related commitments	$	130,071	$	86,504

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.

Investments in low-income housing partnership: The Company invests in qualified affordable housing partnerships. The following table shows the Company’s investments in low-income housing partnerships, net, and related unfunded commitments as of June 30, 2021 and December 31, 2020:

($ in thousands)

June 30,

2021

December 31,

2020

Investments in low-income housing partnerships

4,679

4,932

Unfunded commitments to fund investments for low-income housing partnerships

1,967

2,154

These balances are reflected in other assets and other liabilities on the Consolidated Balance Sheets. The Company expects to finish fulfilling these commitments during the year ending 2034.

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Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credit and other benefits received and recognizes the amortization in income tax expense on the Consolidated Statements of Income and Comprehensive Income. The Company recognized amortization expense of $127 thousand and $107 thousand for the three months ended June 30, 2021 and 2020, and $254 thousand and $161 thousand for the six months ended June 30, 2021 and 2020, respectively. Additionally, the Company recognized tax credits and other benefits received from the investments in low-income housing partnerships of $114 thousand and $99 thousand for the three months ended June 30, 2021 and 2020, and $228 thousand and $149 thousand for the six months ended June 30, 2021 and 2020, respectively.

Note 11. Stock-based Compensation

The Company has three stock-based compensation plans currently in effect as of June 30, 2021, as described further below. Total compensation cost charged against income for these plans was $106 thousand and $236 thousand for the three and six months ended June 30, 2021, and total compensation cost charged against income for these plans was $358 thousand and $716 thousand for the three and six months ended June 30, 2020, 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% 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 expired in 2015 and no future grants can be made under the 2005 Plan.

A summary of the transactions under the 2005 Plan for the six months ended June 30, 2021 is as follows:

				Weighted
	Number of			Average		Aggregate
	Options			Exercise		Intrinsic
($ in thousands, except per share data)	Outstanding			Price		Value
Outstanding, as of January 1, 2021		100,000		$	5.77
Options granted		—			—
Options exercised		(40,000	)		1.60
Options forfeited		—			—
Options expired		—			—
Outstanding, as of June 30, 2021		60,000			6.28	$	227
Fully vested and expected to vest		60,000			6.28		227
Vested		60,000		$	6.28	$	227

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

	Three Months Ended June 30,				Six Months Ended June 30,
($ in thousands)		2021		2020		2021		2020
Intrinsic value of options exercised	$	42	$	—	$	174	$	370
Cash received from option exercises		64		—		64		63
Tax benefit realized from option exercised		—		—		20		17

The weighted average remaining contractual term of stock options outstanding under the 2005 Plan as of June 30, 2021 was 2.24 years. All stock options that are outstanding under the 2005 Plan were fully vested and exercisable as of June 30, 2021.

2010 Plan: In 2010, the Board of Directors of the Bank approved an 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 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.

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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. The 2010 Plan expired in August 2020 and no future grants can be made under the 2010 Plan.

Restricted stock awards issued under the 2010 Plan may or may not be subject to vesting provisions. Owners of the restricted stock awards shall have all 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 six months ended June 30, 2021 is as follows:

				Weighted
	Number of			Average		Aggregate
	Options			Exercise		Intrinsic
($ in thousands, except per share data)	Outstanding			Price		Value
Outstanding, as of January 1, 2021		220,000		$	7.75
Options granted		—			—
Options exercised		(10,000	)		2.53
Options forfeited		—			—
Options expired		—			—
Outstanding, as of June 30, 2021		210,000			8.00	$	433
Fully vested and expected to vest		210,000			8.00		433
Vested		210,000		$	8.00	$	433

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

	Three Months Ended June 30,				Six Months Ended June 30,
($ in thousands)		2021		2020		2021		2020
Intrinsic value of options exercised	$	—	$	89	$	86	$	608
Cash received from option exercises		—		—		25		242
Tax benefit realized from option exercised		—		23		—		157

The weighted average remaining contractual term of stock options outstanding under the 2010 Plan as of June 30, 2021 was 2.76 years. All stock options that are outstanding under the 2010 Plan were fully vested and exercisable as of June 30, 2021.

A summary of the changes in the Company’s non-vested restricted stock awards under the 2010 Plan for the six months ended June 30, 2021 is as follows:

($ in thousands, except share data)	Shares Issued			Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
Non-vested, as of January 1, 2021		154,500		$	11.66
Awards granted		—			—
Awards vested		(128,500	)		12.34
Awards forfeited		—			—
Non-vested, as of June 30, 2021		26,000		$	8.29	$	262

Information related to non-vested restricted stock awards under the 2010 Plan for the periods indicated follows:

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)		2021			2020			2021			2020
Tax benefit (provision) realized from awards vested	$	(85	)	$	(3	)	$	(85	)	$	(3	)

The Company had approximately $129 thousand of unrecognized compensation cost related to unvested restricted stock awards under the 2010 Plan as of June 30, 2021. The Company expects to recognize these costs over a weighted average period of 2.42 years.

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2021 Plan: In 2021, the Board of Directors of the Company approved a new equity incentive plan for granting stock options and restricted stock awards to key employees, officers, and non-employee directors of the Company and the Bank (the “2021 Plan”). The 2021 Plan was approved by the Company’s shareholders at the 2021 Annual Meeting. The number of shares authorized to be issued under the 2021 Plan was 1,500,000 shares of the Company’s common stock.

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. There were no stock options granted under the 2021 Plan during the six months ended June 30, 2021.

Restricted stock awards issued under the 2021 Plan may or may not be subject to vesting provisions. Owners of the restricted stock awards shall have all 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 the changes in the Company’s non-vested restricted stock awards under the 2021 Plan for the six months ended June 30, 2021 is as follows:

($ in thousands, except share data)	Shares Issued			Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
Non-vested, as of January 1, 2021		—		$	—
Awards granted		176,793			9.90
Awards vested		(152	)		9.90
Awards forfeited		—			—
Non-vested, as of June 30, 2021		176,641		$	9.90	$	1,777

No tax benefits or expenses were realized from restricted stock awards under the 2021 Plan for the six months ended June 30, 2021.

Note 12. Employee Benefit Plan

The Company sponsors a defined contribution plan, 401(k) profit sharing plan (the “401(k) Plan”), designed to provide retirement benefits financed by participant contributions, as well as contributions from the Company. Employees are eligible to participate in the 401(k) Plan as of the first day of the first calendar month after the date they have completed three months of service with the Company and have attained the age of 18. 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 $195 thousand and $176 thousand for the three months ended June 30, 2021 and 2020, respectively, $369 thousand and $356 thousand for the six months ended June 30, 2021 and 2020, respectively.

Note 13. Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability on the measurement date and is determined using an exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Assets and liabilities recorded at fair value on a recurring basis, such as AFS securities and equity investments. Additionally, from time to time, the Company records fair value adjustments on a nonrecurring basis. These nonrecurring adjustments typically involve application of lower of cost or fair value accounting and write-downs of individual assets.

The Company classify its assets and liabilities recorded at fair value as one of the following three categories and a financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement:

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.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Securities AFS: The fair values of investment securities AFS 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.

Assets and liabilities measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020 are summarized below:

			Fair Value Measure Using
			Quoted		Significant Other		Significant
			Prices in		Observable		Unobservable
	Total		Active Markets		Inputs		Inputs
($ in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
As of June 30, 2021:
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	29,206	$	—	$	29,206	$	—
Residential collateralized mortgage obligations		82,626		—		82,626		—
Other investment securities:
Mutual fund - CRA qualified	$	3,738	$	3,738	$	—	$	—

As of December 31, 2020:
U.S. Government sponsored agency securities	$	1,005	$	—	$	1,005	$	—
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	19,704	$	—	$	19,704	$	—
Residential collateralized mortgage obligations		71,082		—		71,082		—
Other investment securities:
Mutual fund - CRA qualified	$	3,773	$	3,773	$	—	$	—

There were no transfers between Level 1 and Level 2 for the three and six months ended June 30, 2021 or 2020.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or fair value and write-downs of individual assets.

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.

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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.

The following table presents the fair value hierarchy and fair value of assets that were still held and had fair value adjustments measured on a nonrecurring basis as of June 30, 2021 and December 31, 2020:

			Fair Value Measure Using
			Quoted		Significant Other		Significant
			Prices in		Observable		Unobservable
	Total		Active Markets		Inputs		Inputs
($ in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
As of June 30, 2021:
Impaired loans	$	396	$	—	$	—	$	396

As of December 31, 2020:
Impaired loans	$	87	$	—	$	—	$	87

The following table presents the increase (decrease) in value of certain assets held at the end of the respective reporting periods presented for which a nonrecurring fair value adjustment was recognized during the period presented:

	Three Months Ended June 30,				Six Months Ended June 30,
($ in thousands)	2021		2020		2021		2020
As of June 30, 2021:
Impaired loans	$	3	$	1	$	7	$	(56	)

The following table presents information about significant unobservable inputs utilized in the Company’s nonrecurring Level 3 fair value measurements as of June 30, 2021 and December 31, 2020:

Fair Value

Weighted-

Measurements

Valuation

Unobservable

Range of

Average of

($ in thousands)

(Level 3)

Techniques

Inputs

Inputs ⁽¹⁾

As of June 30, 2021:

Impaired loans

Commercial and industrial ⁽²⁾

—

Income approach -

discounted cash flows

Discount rate

3.8%

SBA loans—real estate

Market approach

Market data

comparison

(30.0)%

to (10.0)%

(20.6)%

SBA loans—real estate

372

Income approach -

income capitalization

Capitalization rate

12.0%

As of December 31, 2020:

Impaired loans

Commercial and industrial ⁽²⁾

—

Income approach -

discounted cash flows

Discount rate

3.8%

SBA loans—non-real estate

Income approach -

discounted cash flows

Discount rate

5.3%

SBA loans—non-real estate

Market approach

Market data

comparison

(3.5)%

to 7.1%

2.9%

(1)	Weighted-average of inputs is based on the relative fair value of the respective assets as of June 30, 2021 and December 31, 2020.

(2)

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Applying fair value adjustments on the impaired loan through the full specific reserve allowance of the loan carrying value resulted in a zero fair value balance as of June 30, 2021 and December 31, 2020.

Financial Instruments: The carrying amounts and estimated fair values of financial instruments that are not carried at fair value on a recurring basis as of June 30, 2021 and December 31, 2020 are as follows. These financial assets and liabilities are measured at amortized cost basis on the Company’s Consolidated Balance Sheet:

($ in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Estimated Fair Value
As of June 30, 2021:
Financial Assets:
Cash and cash equivalents	$	128,687	$	128,687	$	—	$	—	$	128,687
Loans held for sale		68,396		—		75,119		—		75,119
Loans receivable, net		1,231,179		—		—		1,235,981		1,235,981
Accrued interest receivable, net		3,469		11		279		3,179		3,469
Other investments:
FHLB and PCBB stock		7,195	N/A		N/A		N/A		N/A
Time deposits placed		95		—		95		—		95
Servicing assets		12,903		—		—		15,457		15,457
Financial Liabilities:
Deposit	$	1,434,103	$	—	$	1,434,482	$	—	$	1,434,482
Accrued interest payable		608		—		608		—		608

($ in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Estimated Fair Value
As of December 31, 2020:
Financial Assets:
Cash and cash equivalents	$	106,310	$	106,310	$	—	$	—	$	106,310
Loans held for sale		26,659		—		26,659		—		26,659
Loans receivable, net		1,084,384		—		—		1,109,217		1,109,217
Accrued interest receivable, net		3,985		7		249		3,729		3,985
Other investments:
FHLB and PCBB stock		6,233	N/A		N/A		N/A		N/A
Time deposits placed		95		—		95		—		95
Servicing assets		7,360		—		—		9,106		9,106
Financial Liabilities:
Deposit	$	1,200,090	$	—	$	1,200,789	$	—	$	1,200,789
FHLB Advances		5,000	$	—	$	5,000	$	—		5,000
Accrued interest payable		1,021		—		1,021		—		1,021

Note 14. Regulatory Capital Matters

Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. As of June 30, 2021, the capital conservation buffers for the Company is 2.50%. Management believes that as of June 30, 2021 and December 31, 2020, 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. Unrealized gain or loss on securities available-for-sale is not included in computing regulatory capital.

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The following table presents the regulatory capital amounts and ratios for the Company and the Bank as of dates indicated:

						Required for					Minimum
						Capital Adequacy					To be Considered
	Actual					Purposes					"Well Capitalized"
($ in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2021:
Total capital (to risk-weighted assets)
Consolidated	$	166,116		13.87	%	N/A		N/A			N/A		N/A
Bank		163,293		13.63	%		95,833		8.00	%		119,791		10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated		151,133		12.62	%	N/A		N/A			N/A		N/A
Bank		148,312		12.38	%		71,875		6.00	%		95,833		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)
Consolidated		151,133		12.62	%	N/A		N/A			N/A		N/A
Bank		148,312		12.38	%		53,906		4.50	%		77,864		6.50	%
Tier 1 leverage (to average assets)
Consolidated		151,133		9.96	%	N/A		N/A			N/A		N/A
Bank		148,312		9.77	%		60,705		4.00	%		75,882		5.00	%

Note: The capital requirements are only applicable to the Bank, and the Company's ratios are included for comparison purpose.

						Required for					Minimum
						Capital Adequacy					To be Considered
	Actual					Purposes					"Well Capitalized"
($ in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2020:
Total capital (to risk-weighted assets)
Consolidated	$	155,287		14.81	%	N/A		N/A			N/A		N/A
Bank		152,232		14.52	%		83,859		8.00	%		104,824		10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated		142,147		13.56	%	N/A		N/A			N/A		N/A
Bank		139,092		13.27	%		62,894		6.00	%		83,859		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)
Consolidated		142,147		13.56	%	N/A		N/A			N/A		N/A
Bank		139,092		13.27	%		47,171		4.50	%		68,136		6.50	%
Tier 1 leverage (to average assets)
Consolidated		142,147		10.55	%	N/A		N/A			N/A		N/A
Bank		139,092		10.32	%		53,915		4.00	%		67,393		5.00	%

Note: The capital requirements are only applicable to the Bank, and the Company's ratios are included for comparison purpose.

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Note 15. 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 are as follows:

	Three Months Ended
	June 30,
($ in thousands, except share data)	2021			2020
Basic
Net income	$	6,379		$	2,416
Undistributed earnings allocated to participating securities		(60	)		(45	)
Net income allocated to common shares		6,319			2,371
Weighted average common shares outstanding		15,056,484			15,072,423
Basic earnings per common share	$	0.42		$	0.16
Diluted
Net income allocated to common shares	$	6,319		$	2,371
Weighted average common shares outstanding for basic earnings per common share		15,056,484			15,072,423
Add: Dilutive effects of assumed exercises of stock options		72,967			40,195
Average shares and dilutive potential common shares		15,129,451			15,112,618
Diluted earnings per common share	$	0.42		$	0.16

No stock options for shares of common stock were antidilutive for the three months ended June 30, 2021. Stock options for 212,000 shares of common stock were antidilutive for the three months ended June 30, 2020.

	Six Months Ended
	June 30,
($ in thousands, except share data)	2021			2020
Basic
Net income	$	11,456		$	5,715
Undistributed earnings allocated to participating securities		(112	)		(106	)
Net income allocated to common shares		11,344			5,609
Weighted average common shares outstanding		15,039,773			15,279,486
Basic earnings per common share	$	0.75		$	0.37
Diluted
Net income allocated to common shares	$	11,344		$	5,609
Weighted average common shares outstanding for basic earnings per common share		15,039,773			15,279,486
Add: Dilutive effects of assumed exercises of stock options		59,630			54,801
Average shares and dilutive potential common shares		15,099,403			15,334,287
Diluted earnings per common share	$	0.75		$	0.37

No stock options for shares of common stock were antidilutive for the six months ended June 30, 2021. Stock options for 212,000 shares of common stock were antidilutive for the six months ended June 30, 2020.

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

INTRODUCTION

The following discussion provides information about the results of operations, financial condition, liquidity, and capital recourses of OP Bancorp and its subsidiary bank, Open Bank. This information is intended to facilitate the understanding and assessment of significant changes and trends related to the Company’s results of operations and financial condition. This discussion and analysis should be read in conjunction with the Consolidated Financial Statement and the accompanying notes presented elsewhere in this report, and the Company’s annual report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 15, 2021. When we refer to “we”, “our”, and “us”, and “the Company” in this report, we mean OP Bancorp and our subsidiary bank, Open Bank on a consolidated basis. When we refer to the “Bank” in this report, we mean our only bank subsidiary, Open Bank. References to the “holding company” refer to OP Bancorp, the parent company on a stand-alone basis.

OVERVIEW

OP Bancorp, a California corporation, is a bank holding company registered under Bank Holding Company Act of 1956, as amended, with our corporate headquarters located in Los Angeles, California. We offer commercial banking services to small and medium-sized businesses with a strong focus on the financial service needs of the Korean-American community. Through nine full service branches and four loan production offices, we provide a full range of commercial and retail banking loan and deposit products. The Company’s principal activity is lending to and accepting deposits from businesses and individuals. The primarily source of revenue is net interest income, which is principally derived from the difference between interest earned on loans and securities, and interest paid on deposits and other funding sources.

Financial Performance Summary

Noteworthy items about the Company for the second quarter of 2021 compared with the same period in 2020:

•

Completion of Loan Purchase: On May 24, 2021, the Company completed the purchase of Hana’s loan portfolio and paid approximately $97.6 million that included loans of $100.0 million at a fair value discount of $8.9 million, servicing assets of $6.1 million and accrued interest receivable of $398 thousand.

•

Net Income: Net income was $6.4 million, or $0.42 per diluted common share, up $4.0 million, or 164%. The increase was primarily due to higher net interest income and a reversal of provision for loan losses, partially offset by increases in income tax expense and noninterest expense.

•

Pre-provision Net Revenue: Non-GAAP pre-provision net revenue was $8.0 million, up $2.6 million, or 49%. The increase was mainly due to higher net interest income. For details, refer to Item 2. MD&A – Reconciliation of GAAP to Non-GAAP Financial Measures in this report.

•

Net Interest Income and Net Interest Margin: Net interest income was $14.6 million, up $3.9 million, or 37%. Net interest margin was 3.98%, up 43 basis points. The increases in net interest income and net interest margin reflected average loan growth and lower average costs of deposits.

•

Provision for Loan Losses: Provision for loan losses decreased $3.1 million, primarily due to continued improvements in the economic environment in 2021.

•

Noninterest Income: Noninterest income was $2.2 million, up $158 thousand, or 8%. The increase was primarily due to higher gains on sale of loans and service charges on deposits, partially offset by lower loan servicing fees, net of amortization.

•

Noninterest Expense and Efficiency Ratio: Noninterest expense was $8.8 million, up $1.5 million, or 20%, primarily due to higher salaries and employee benefits, and foundation donation and other contributions. Efficiency ratio was 52.30%, an improvement from 57.70%.

•

Profitability: Return on average equity of 17.10% and return on average assets of 1.68%, up from 6.97% and 0.77%, respectively.

•

Total Assets: Total assets were $1.60 billion, up $313.4 million, or 24%. The increase was primarily due to loan portfolio growth.

•

Loans: Total loans were $1.31 billion, up $262.0 million, or 25%. The increase was primarily due to the Hana loan purchase during the second quarter of 2021. Participation in the PPP and an increase in commercial real estate loans have also contributed to the growth.

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•

Deposits: Deposits were $1.43 billion, up $313.4, or 28%. The increase was primarily due to growth in noninterest bearing and money market.

•

Allowance for Loan Losses: Allowance for loan losses was $14.7 million, up $1.9 million, or 15%. The increase was primarily due to loan portfolio growth and the deteriorating economic conditions during the second half of 2020 as a result of the COVID-19 pandemic, partially offset by improvements in the economic conditions in the first half of 2021.

Balance Sheet and Liquidity

Our balance sheet remained strong during second quarter 2021 with solid levels of liquidity and capital. Our total assets increased $234.6 million, or 17% from December 31, 2020 to $1.60 billion as of June 30, 2021 primarily driven by higher loans as a result of the Hana loan purchase, the origination of PPP and growth in commercial real estate in the first half of 2021.

Asset Quality

We maintained solid asset quality with low levels of nonperforming loans and net charge-offs. Nonperforming loans to gross loans of 0.06% remained low compared with 0.09% as of December 31, 2020. Net charge-offs were $27 thousand or 0.01% of average loans for the second quarter of 2021, compared with net recoveries of $28 thousand or 0.01% of average loans for the second quarter of 2020. The allowance for loan losses of $14.7 million as of June 30, 2021, decreased $665 thousand from December 31, 2020. The economic conditions, including employment and consumer spending, improved during the quarter. However, the economic outlook continues to be uncertain with the unprecedented impacts of COVID-19 pandemic. Therefore, we maintained our allowance at 1.18% of gross loans, and 19 times our nonperforming loans.

Capital

We maintained a solid capital position in the first half of 2021, with total equity of $152.0 million as of June 30, 2021, compared with $143.4 million as of December 31, 2020. Capital ratios remained strong during the quarter. Our common equity tier 1 and total risk-based ratios were 12.62% and 13.87% as of June 30, 2021, respectively, down from December 31, 2020 due to asset growth in the first half of 2021. We returned $2.1 million of capital in cash dividends to stockholders during the first half of 2021. The Company’s Board of Directors approved a 43% increase to the quarterly cash dividend to $0.10 per share, up from $0.07 per share.

CRITIAL 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 the audited Consolidated Financial Statements included in the Company’s Form 10-K for the period ended December 31, 2020.

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 ALL when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the ALL. Management estimates the ALL 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 ALL may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

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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.

SELECTED FINANCIAL DATA

Financial Highlights (unaudited)
($ in thousands, except per share data)	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2021			2020			2021			2020
Income Statement Data:
Net interest income	$	14,586		$	10,648		$	27,341		$	21,764
(Reversal of) provision for loan losses		(1,112	)		1,988			(492	)		2,731
Noninterest income		2,220			2,062			5,186			4,358
Noninterest expense		8,789			7,334			16,755			15,541
Income tax expense		2,750			972			4,808			2,135
Net Income	$	6,379		$	2,416		$	11,456		$	5,715
Diluted earnings per share	$	0.42		$	0.16		$	0.75		$	0.37
Performance Ratios:
Return on average assets (annualized)		1.68	%		0.77	%		1.56	%		0.94	%
Return on average equity (annualized)		17.10	%		6.97	%		15.58	%		8.21	%
Net interest margin (annualized)		3.98	%		3.55	%		3.90	%		3.74	%
Efficiency ratio ⁽¹⁾		52.30	%		57.70	%		51.51	%		59.49	%

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

Financial Highlights (unaudited)
($ in thousands, except per share data)	As of
	June 30,			December 31,
	2021			2020
Balance Sheet Data:
Total loans ⁽¹⁾	$	1,314,262		$	1,126,395
Total deposits	$	1,434,103			1,200,090
Total assets	$	1,601,460			1,366,826
Shareholders’ equity	$	151,962			143,366
Credit Quality:
Nonperforming loans	$	757		$	985
Nonperforming assets	$	757		$	985
Quarterly net charge-offs to average gross loans (annualized)		0.01	%		0.00	%
Nonperforming assets to gross loans plus OREO		0.06	%		0.09	%
Allowance for loan losses to nonperforming loans		1,940	%		1,558	%
Allowance for loan losses to gross loans		1.18	%		1.40	%
Financial Ratios:
Total risk-based capital ratio		13.87	%		14.81	%
Tier 1 risk-based capital ratio		12.62	%		13.56	%
Common equity tier 1 ratio		12.62	%		13.56	%
Leverage ratio		9.96	%		10.55	%
Book value per common share	$	10.04		$	9.55

(1)	Includes loans held for sale.

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COVID-19 AND GOVERNMENT RESPONSE

The COVID-19 pandemic has caused significant, unprecedented disruption around the world that has affected daily living and negatively impacted the local, state, national and global economies. It has caused significant economic and financial disruption that have adversely affected or otherwise impacted our businesses. The COVID-19 has not yet been globally contained and the number of cases continues to increase in many locations, including in the United States in which we operate. During the course of the continuing pandemic, there have been varying governmental and other responses to slow or control the spread of the COVID-19 and to mitigate the adverse impact of the COVID-19, such as stay at home orders, restrictions on business activities, health and safety guidelines, economic relief for individuals and businesses, and monetary policy measures, such responses have met varying degrees of success, and it remains uncertain whether these actions will be successful in a sustained manner. We cannot predict at this time the scope and duration of the pandemic.

Despite the continuing challenges in recent months, there has been some improvement in the economic environment and resilience in the markets in which we operate. With the seemingly wider availability and distribution of vaccinations and the easing of some restrictions in the United States, we have seen steps towards broader containment. However, there still remains much uncertainty around containment of the pandemic, which will depend on various factors, including but not limited to, the extent and spread of variants of the virus; efficacy of vaccines; and government and other actions to mitigate the spread of COVID-19.

Through the COVID-19 pandemic, 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 loan deferrals and the PPP loans and has provided employees remote working environment while maintaining fully functioning operations in all areas.

Loan Payment Deferrals

In early 2020, we began providing payment deferrals of up to 12 months for our commercial and consumer borrowers who had been adversely impacted by the COVID-19 pandemic and had not been delinquent over 30 days on payments at the time of the borrowers’ deferral requests. For the loans modified under this program, in accordance with the provisions of Section 4013 of the CARES Act and the interagency statement issued by bank regulatory agencies, we elected to not apply troubled debt structuring classification who were current as of December 31, 2019. Through June 30, 2021, the Company has processed loan deferments for borrowers across multiple industries representing 225 loan accounts, with an aggregate loan balance of $250.7 million under the interagency guidance and Section 4013 of the CARES Act. As of June 30, 2021, total outstanding balance of remaining in deferment status balance was $15.7 million and represented 1.2% of the total portfolio, down from 2.7% as of December 31, 2020.

The following tables summarizes loan portfolio breakdown by industry and loan deferment as of June 30, 2021:

Loan Portfolio Breakdown by Industry
Excluding Home mortgage and consumer loans
($ in thousands)	As of June 30, 2021
Industry	Number of accounts		% of total			Balance		% of total
Hotel / motel		304		7.7	%	$	195,816		16.4	%
Personal and laundry services		253		6.4			27,148		2.3
Wholesale		366		9.3			75,391		6.3
Food services / restaurant		524		13.4			60,242		5.0
Real estate lessor		247		6.3			395,194		33.1
Gas station		268		6.8			184,140		15.4
Other		1,962		50.0			255,860		21.4
Total ⁽¹⁾		3,924		100.0	%	$	1,193,791		100.0	%

(1)	Includes loans held for sale.

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Loan Deferment Summary by Industry
Excluding Home mortgage and consumer loans
($ in thousands)	As of June 30, 2021
Industry	Number of accounts		% of deferment			% of total loans			Balance		% of deferment			% of total loans
Hotel / motel		3		50.0	%		1.0	%	$	11,903		85.2	%		6.1	%
Personal and laundry services		1		16.7			0.4			959		6.9			3.5
Wholesale		1		16.7			0.3			480		3.4			0.6
Other		1		16.7			0.1			629		4.5			0.2
Total		6		100.0	%		0.2	%	$	13,971		100.0	%		1.2	%

Loan Deferment Summary by Loan Type
($ in thousands)	As of June 30, 2021
Loan Type	Number of accounts		% of deferment			% of total loans			Balance		% of deferment			% of total loans
Real estate loans		5		55.6	%		1.3	%	$	13,491		86.0	%		2.0	%
C & I loans		1		11.1			0.4			480		3.1			0.5
Loans, excluding home mortgage and consumer loans		6		66.7			0.2			13,971		89.1			1.2
Home mortgage loans		3		33.3			1.0			1,708		10.9			1.4
Total		9		100.0	%		0.2	%	$	15,679		100.0	%		1.2	%

Loan Deferment Status Change by Loan Type
	Total deferments				Payment resumed
	under the CARES Act				or paid off				Remaining deferments
($ in thousands)	as of June 30, 2021				through June 30, 2021				as of June 30, 2021
Loan Type	Number of accounts		Balance		Number of accounts		Balance		Number of accounts		Balance
Loans, excluding home mortgage and consumer loans		156	$	220,522		150	$	206,551		6	$	13,971
Home mortgage loans		69		30,205		66		28,497		3		1,708
Total		225	$	250,727		216	$	235,048		9	$	15,679

Paycheck Protection Program

Beginning in April 2020, we accepted applications under the PPP administered by the SBA under the CARES Act, as amended by the Economic Aid Act enacted on December 27, 2020 and have originated loans to qualified small businesses. Under the terms of the program, loans funded through the PPP are eligible to be forgiven if certain requirements are met, including using the funds for certain costs relating to payroll, healthcare and qualifying mortgage interest, rent and utility payments. To the extent not forgiven, loans are subject to terms of the program. Since the PPP’s inception through June 30, 2021, we have funded $154.5 million, and $52.7 million of principal forgiveness has been provided on qualifying PPP loans. As of June 30, 2021, there were unamortized net deferred fees and unaccreted discounts of $3.9 million to be recognized over the estimated life of the loan as a yield adjustment on the loans. If a loan is paid off or forgiven by the SBA prior to its projected estimated life, the remaining unamortized deferred fees will be recognized as interest income in that period.

RESULFS OF OPERATIONS

Comparison for the Second Quarter of 2021 and 2020

The following discussion of our results of operations compares the second quarter of 2021 to the same quarter in 2020.

Second quarter 2021 net income was $6.4 million, or $0.42 per diluted common share, compared with second quarter 2020 net income of $2.4 million, or $0.16 per diluted common share, an increase of $4.0 million, or 164.0% in net income. The increase was primarily due to a $3.9 million increase in net interest income and a $3.1 million decrease in provision for loan losses, partially offset by a $1.8 million increase in income tax expense and a $1.5 million increase in noninterest expense.

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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.

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 June 30,
	2021							2020
($ 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⁾	$	117,605	$	160		0.54	%	$	100,083	$	90		0.36	%
Securities available for sale		108,960		218		0.80			60,544		281		1.86
Total investments		226,565		378		0.67			160,627		371		0.92
Real estate loans		670,224		7,725		4.62			638,359		7,500		4.73
SBA loans		346,702		4,816		5.57			190,042		2,615		5.53
C & I loans		101,362		983		3.89			93,633		920		3.95
Home mortgage loans		122,588		1,431		4.67			119,998		1,476		4.92
Consumer & other loans		1,182		16		5.30			2,912		38		5.28
Total loans ⁽²⁾		1,242,058		14,971		4.83			1,044,944		12,549		4.83
Total earning assets		1,468,623		15,349		4.19			1,205,571		12,920		4.31
Noninterest-earning assets		49,687							49,837
Total assets	$	1,518,310						$	1,255,408

Interest-bearing liabilities:
Money market deposits and others	$	366,922	$	281		0.31	%	$	304,941	$	483		0.64	%
Time deposits		366,603		482		0.53			426,645		1,789		1.69
Total interest-bearing deposits		733,525		763		0.42			731,586		2,272		1.25
Borrowings		3,025		—		0.00			3,959		—		0.00
Total interest-bearing liabilities		736,550		763		0.42			735,545		2,272		1.24
Noninterest-bearing liabilities:
Noninterest-bearing deposits		615,385							362,779
Other noninterest-bearing liabilities		17,115							18,362
Total noninterest-bearing liabilities		632,500							381,141
Shareholders’ equity		149,260							138,722
Total liabilities and shareholders’ equity	$	1,518,310						$	1,255,408
Net interest income / interest rate spreads			$	14,586		3.77	%			$	10,648		3.07	%
Net interest margin						3.98	%						3.55	%
Cost of deposits & cost of funds:
Total deposits / cost of deposits	$	1,348,910	$	763		0.23	%	$	1,094,365	$	2,272		0.83	%
Total funding liabilities / cost of funds	$	1,351,935	$	763		0.23	%	$	1,098,324	$	2,272		0.83	%

(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 June 30,
	2021 over 2020
	Change due to:
($ in thousands)	Volume			Rate			Interest Variance
Interest earning assets:
Federal Funds sold and other investments	$	19		$	51		$	70
Securities available for sale		151			(214	)		(63	)
Total investments		170			(163	)		7
Real estate loans		393			(168	)		225
SBA loans		2,182			19			2,201
C & I loans		77			(14	)		63
Home mortgage loans		31			(76	)		(45	)
Consumer & other loans		(22	)		-			(22	)
Total loans		2,661			(239	)		2,422
Total earning assets		2,831			(402	)		2,429

Money market deposits and others		84			(286	)		(202	)
Time deposits		(223	)		(1,084	)		(1,307	)
Total interest-bearing deposits		(139	)		(1,370	)		(1,509	)
Borrowings		—			—			—
Total interest-bearing liabilities		(139	)		(1,370	)		(1,509	)
Net interest income	$	2,970		$	968		$	3,938

Net interest income increased $3.9 million, or 37.0%, to $14.6 million for the second quarter of 2021 from $10.6 million for the same period in 2020, primarily due to higher average loan balance and lower average cost of deposits.

Interest and fees on loans was $15.0 million for the second quarter of 2021, compared with $12.5 million for the same period in 2020, an increase of $2.4 million, or 19.3%. The increase was primarily due to average loan growth. For the second quarter of 2021, average loans increased $197.1 million, or 18.9%, to $1.24 billion from $1.04 billion for the same period in 2020, primarily due to the Hana loan purchase and organic growth in PPP and real estate loans. The average yield on loans remained flat at 4.83%.

Average interest-earning assets increased $263.1 million, or 21.8%, to $1.47 billion for the second quarter of 2021 from $1.21 billion for the same period in 2020. For the second quarter of 2021, average yield on interest-earning assets decreased 12 basis points to 4.19% from 4.31% for the same period in 2020.

Interest expense was $763 thousand for the second quarter of 2021, compared with $2.3 million for the same period in 2020, a decrease of $1.5 million, or 66.4%, primarily due to continued downward adjustments in deposit rates and changes in deposit mix.

Average cost of interest-bearing liabilities decreased 82 basis points to 0.42% for the second quarter of 2021 from 1.24% for the same period in 2020. The decrease in the average cost of interest-bearing liabilities primarily reflected the impact of lower interest rates and changes in deposit mix. Deposits are an importance source of funds and impact both net interest income and net interest margin. Average noninterest-bearing deposits increased $252.6 million, or 69.6%, to $615.4 million for the second quarter of 2021, compared with $362.8 million for the same period in 2020. The increase in average noninterest-bearing deposits was primarily driven by customers’ preferences for liquidity given the economic uncertainty associated with the COVID-19 pandemic, as well as PPP funds held in deposit accounts. Average interest-bearing liabilities increased $1.0 million, or 0.1%, to $736.6 million for the second quarter of 2021 compared with $735.5 million for the same period in 2020.

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The net interest spread and net interest margin for the second quarter of 2021, were 3.77% and 3.98%, respectively, compared with 3.07% and 3.55%, respectively, for the same period in 2020. Excluding the impact of the Hana loan purchase, adjusted net interest margin was 3.85% for the second quarter of 2021. For details, refer to Item 2. MD&A – Reconciliation of GAAP to Non-GAAP Financial Measures in this report on Form 10-Q.

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 statements of operations 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 or excess, 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 Company recorded a reversal of its provision for loan losses of $1.1 million for the second quarter of 2021, compared with a provision for loan losses of $2.0 million for the same period in 2020, a decrease of $3.1 million, or 155.9%. The decrease was driven by continued improvements in the economic environment during the second quarter of 2021. The reversal of the provision for loan losses of $1.1 million included a $487 thousand reversal of provision for uncollectible accrued interest receivable for the second quarter of 2021. There was no provision for uncollectible accrued interest receivable for the second quarter of 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. Other sources of noninterest income include loan servicing fees, service charges and fees, and gains on the sale of securities.

Noninterest income for the second quarter of 2021 increased $158 thousand, or 7.7%, to $2.2 million compared with $2.1 million for the same period in 2020, primarily due to higher gains on sale of loans and service charges on deposits, partially offset by lower loan servicing fees, net of amortization.

The following table sets forth the various components of our noninterest income for the second quarter of 2021 and 2020:

	Three Months Ended June 30,
($ in thousands)	2021		2020		Increase (Decrease)
Noninterest income:
Service charges on deposits	$	393	$	298	$	95
Loan servicing fees, net of amortization		302		514		(212	)
Gain on sale of loans		1,210		936		274
Other income		315		314		1
Total noninterest income	$	2,220	$	2,062	$	158

Gain on sale of loans was $1.2 million, an increase of $274 thousand from the same period in 2020. The increase was mainly driven by higher sales premiums. The Company sold $10.6 million in SBA loans at an average premium of 11.48%, compared with the sale of $14.9 million at an average premium of 7.94% for the same period in 2020.

Service charges on deposits were $393 thousand, an increase of $95 thousand from the same period in 2020. The increase was primarily due to increases in account analysis fees and wire fees.

Loan servicing fees, net of amortization, were $302 thousand, a decrease of $212 thousand from the same period in 2020. The decrease was primarily due to higher amortization of servicing assets associated with loan payoffs, partially offset by higher servicing fee income resulting from purchased loans. Servicing fee income, net of amortization, from the Hana loan purchase was $27 thousand.

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Noninterest Expense

Noninterest expense for the second quarter of 2021 was $8.8 million compared with $7.3 million for the same period in 2020, an increase of $1.5 million, or 19.9%. The increase was primarily attributable to higher salaries and employee benefits, and foundation and other contributions.

The following table sets forth the major components of our noninterest expense for the second quarter of 2021 and 2020:

	Three Months Ended June 30,
($ in thousands)	2021		2020		Increase (Decrease)
Noninterest expense:
Salaries and employee benefits	$	5,307	$	4,347	$	960
Occupancy and equipment		1,234		1,241		(7	)
Data processing and communication		467		414		53
Professional fees		303		276		27
FDIC insurance and regulatory assessments		123		117		6
Promotion and advertising		176		163		13
Directors' fees and stock-based compensation		128		223		(95	)
Foundation donation and other contributions		640		245		395
Other expenses		411		308		103
Total noninterest expense	$	8,789	$	7,334	$	1,455

Salaries and employee benefits were $5.3 million, an increase of $960 thousand from the same period in 2020. The increase was primarily attributable to higher SBA incentive expense and an increase in the number of employees to support continued growth of the Company. The average number of full-time equivalent employees was 179.3 for the second quarter of 2021, compared to 171.3 for the same period in 2020.

Foundation donation and other contributions were $640 thousand, an increase of $395 thousand from the same period in 2020. The increase was primarily due to higher donation accruals for Open Stewardship Foundation as a result of higher net income compared with the same period in 2020.

Income Tax Expense

Income tax expense was $2.8 million and $972 thousand for the second quarter of 2021 and 2020, respectively. The effective income tax rate increased to 30.1% for the second quarter of 2021 compared with 28.7% for the same period in 2020, primarily due a tax provision related to restricted stock awards vested in the second quarter of 2021.

Comparison for the first half of 2021 and 2020

The following discussion of our results of operations compares the first half of 2021 to the same period in 2020.

For the first half of 2021, net income was $11.5 million, or $0.75 per diluted common share, compared with $5.7 million, or $0.37 per diluted common share for the same period in 2020, an increase of $5.7 million, or 100.5%. The increase was primarily due to a $5.6 million increase in net interest income and a $3.2 million decrease in provision for loan losses, partially offset by a $2.7 million increase in income tax expense and a $1.2 million increase in noninterest expense.

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Net Interest Income

	Six Months Ended June 30,
	2021							2020
($ 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⁾	$	108,528	$	272		0.50	%	$	89,169	$	422		0.94	%
Securities available for sale		101,000		454		0.90			57,595		600		2.08
Total investments		209,528		726		0.69			146,764		1,022		1.39
Real estate loans		661,907		15,191		4.63			636,161		15,698		4.96
SBA loans		307,787		8,096		5.30			164,471		5,282		6.46
C & I loans		108,803		2,055		3.81			97,160		2,197		4.55
Home mortgage loans		124,135		2,882		4.64			120,883		2,990		4.95
Consumer & other loans		1,184		31		5.24			2,843		76		5.40
Total loans ⁽²⁾		1,203,816		28,255		4.73			1,021,518		26,243		5.16
Total earning assets		1,413,344		28,981		4.13			1,168,282		27,265		4.69
Noninterest-earning assets		51,024							49,012
Total assets	$	1,464,368						$	1,217,294

Interest-bearing liabilities:
Money market deposits and others	$	351,943	$	551		0.32	%	$	301,071	$	1,440		0.96	%
Time deposits		364,216		1,089		0.60			429,208		4,061		1.90
Total interest-bearing deposits		716,159		1,640		0.46			730,279		5,501		1.51
Borrowings		4,007		—		0.00			2,002		—		0.00
Total interest-bearing liabilities		720,166		1,640		0.46			732,281		5,501		1.51
Noninterest-bearing liabilities:
Noninterest-bearing deposits		580,134							327,616
Other noninterest-bearing liabilities		16,991							18,142
Total noninterest-bearing liabilities		597,125							345,758
Shareholders’ equity		147,077							139,255
Total liabilities and shareholders’ equity	$	1,464,368						$	1,217,294
Net interest income / interest rate spreads			$	27,341		3.67	%			$	21,764		3.18	%
Net interest margin						3.90	%						3.74	%
Cost of deposits & cost of funds:
Total deposits / cost of deposits	$	1,296,293	$	1,640		0.26	%	$	1,057,895	$	5,501		1.05	%
Total funding liabilities / cost of funds	$	1,300,300	$	1,640		0.25	%	$	1,059,897	$	5,501		1.04	%

(1)	Includes income and average balances for FHLB and 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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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.

	Six Months Ended June 30,
	2021 over 2020
	Change due to:
($ in thousands)	Volume			Rate			Interest Variance
Interest earning assets:
Federal Funds sold and other investments	$	77		$	(227	)	$	(150	)
Securities available for sale		304			(450	)		(146	)
Total investments		381			(677	)		(296	)
Real estate loans		602			(1,109	)		(507	)
SBA loans		3,915			(1,101	)		2,814
C & I loans		245			(387	)		(142	)
Home mortgage loans		79			(187	)		(108	)
Consumer & other loans		(44	)		(1	)		(45	)
Loans		4,797			(2,785	)		2,012
Total earning assets		5,178			(3,462	)		1,716

Money market deposits and others		208			(1,097	)		(889	)
Time deposits		(539	)		(2,433	)		(2,972	)
Total interest-bearing deposits		(331	)		(3,530	)		(3,861	)
Borrowings		—			—			—
Total interest-bearing liabilities		(331	)		(3,530	)		(3,861	)

Net interest income	$	5,509		$	68		$	5,577

Net interest income increased $5.6 million, or 25.6%, to $27.3 million for the first half of 2021 from $21.8 million for the same period in 2020, primarily due to higher average loan balance and lower average cost of deposits, partially offset by lower average yield on loans.

Interest and fees on loans was $28.3 million for the first half of 2021, compared with $26.2 million for the same period in 2020, an increase of $2.0 million, or 7.7%. The increase was primarily due to average loan growth, partially offset by lower average yield on loans. For the first half of 2021, average loans increased $182.3 million, or 17.8%, to $1.20 billion from $1.02 billion for the same period in 2020, primarily due to SBA loans originations, increases in loans held for sale, and the Hana loan purchase. The average yield on loans was 4.73%, a 43 basis point decrease from 5.16% for the same period in 2020.

Average interest-earning assets increased $245.1 million, or 21.0%, to $1.41 billion for the first half of 2021 from $1.17 billion for the same period in 2020. For the first half of 2021, average yield on interest-earning assets decreased 56 basis points to 4.13% from 4.69% for the same period in 2020.

Interest expense was $1.6 million for the first half of 2021, compared with $5.5 million for the same period in 2020, a decrease of $3.9 million, or 70.2%, primarily due to continued downward adjustments in deposit rates and changes in deposit mix.

Average cost of interest-bearing liabilities decreased 105 basis points to 0.46% for the first half of 2021 from 1.51% for the same period in 2020. The decrease in the average cost of interest-bearing liabilities primarily reflected the impact of lower interest rates and changes in deposit mix. Average noninterest-bearing deposits increased $252.5 million, or 77.1%, to $580.1 million for the first half of 2021, compared with $327.6 million for the same period in 2020. The increase in average noninterest-bearing deposits was primarily driven by customers’ preferences for liquidity given the economic uncertainty associated with the COVID-19 pandemic, as well as PPP funds held in deposit accounts. Average interest-bearing liabilities decreased $12.1 million, or 1.7%, to $720.2 million for the first half of 2021 compared with $732.3 million for the same period in 2020.

The net interest spread and net interest margin for the first half of 2021, were 3.67% and 3.90%, respectively, compared with 3.18% and 3.74%, respectively, for the same period in 2020. Excluding the impact of the Hana loan purchase, adjusted net interest margin was 3.83% for the first half of 2021. For details, refer to Item 2. MD&A – Reconciliation of GAAP to Non-GAAP Financial Measures in this report on Form 10-Q.

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Provision for Loan Losses

The Company recorded a reversal of its provision for loan losses of $492 thousand for the first half of 2021, compared with a provision for loan losses of $2.7 million for the same period in 2020, a decrease of $3.2 million, or 118.0%. The decrease was driven by continued improvements in the economic environment in the first half of 2021. The reversal of the provision for loan losses of $492 thousand included a $149 thousand provision for uncollectible accrued interest receivable for the first half of 2021. There was no provision for uncollectible accrued interest receivable for the same period in 2020.

Noninterest Income

Noninterest income for the first half of 2021 increased $828 thousand, or 19.0%, to $5.2 million compared with $4.4 million for the same period in 2020, primarily due to higher gains on sale of loans.

The following table sets forth the various components of our noninterest income for the first half of 2021 and 2020:

	Six Months Ended June 30,
($ in thousands)	2021		2020		Increase (Decrease)
Noninterest income:
Service charges on deposits	$	748	$	729	$	19
Loan servicing fees, net of amortization		833		906		(73	)
Gain on sale of loans		3,092		2,091		1,001
Other income		513		632		(119	)
Total noninterest income	$	5,186	$	4,358	$	828

Gain on sale of loans was $3.1 million, an increase of $1.0 million from the same period in 2020. The increase was primarily due to higher sales premiums. The Company sold $33.0 million in SBA loans at an average premium of 10.82%, compared with the sale of $32.5 million at an average premium of 8.19% for the same period in 2020.

Noninterest Expense

Noninterest expense for the first half of 2021 was $16.8 million compared with $15.5 million for the same period in 2020, an increase of $1.2 million, or 7.8%. The increase was primarily attributable to higher foundation donation and other contributions, and salaries and employee benefits.

The following table sets forth the major components of our noninterest expense for the first half of 2021 and 2020:

	Six Months Ended June 30,
($ in thousands)	2021		2020		Increase (Decrease)
Noninterest expense:
Salaries and employee benefits	$	9,969	$	9,418	$	551
Occupancy and equipment		2,469		2,471		(2	)
Data processing and communication		915		823		92
Professional fees		617		549		68
FDIC insurance and regulatory assessments		255		222		33
Promotion and advertising		353		324		29
Directors' fees and stock-based compensation		244		456		(212	)
Foundation donation and other contributions		1,147		575		572
Other expenses		786		703		83
Total noninterest expense	$	16,755	$	15,541	$	1,214

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Salaries and employee benefits were $10.0 million, an increase of $551 thousand from the same period in 2020. The increase was primarily attributable to higher provision for employee compensation expense in line with higher net income, partially offset by higher deferred loan origination cost. The average number of full-time equivalent employees was 175.3 for the first half of 2021, compared with 172.2 for the same period in 2020.

Foundation donation and other contributions were $1.1 million, an increase of $572 thousand from the same period in 2020, primarily due to higher donation accruals for Open Stewardship Foundation as a result of higher net income compared with the same period in 2020.

Income Tax Expense

Income tax expense was $4.8 million and $2.1 million for the first half of 2021 and 2020, respectively. The effective income tax rate increased to 29.6% for the first half of 2021 compared with 27.2% for the same period in 2020, primarily due to lower tax benefits resulting from reduced number of exercises of non-qualified stock options during the first half of 2021 compared to the same period in 2020.

FINANCIAL CONDITION

Total assets increased $234.6 million, or 17.2%, to $1.60 billion at June 30, 2021 compared with $1.37 billion at December 31, 2020, primarily due to increases of $187.9 million, or 16.7%, in total loans, $22.4 million, or 21.0% in cash and cash equivalents, and $20.0 million, or 21.8%, in securities AFS. We funded our asset growth primarily with an increase of $234.0 million, or 19.5% in total deposits during the first half of 2021.

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 AFS or held-to-maturity at the time of purchase. Accounting guidance requires AFS 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 AFS securities.

All securities in our investment portfolio were classified as AFS as of both June 30, 2021 and December 31, 2020. There were no held-to-maturity securities in our investment portfolio as of both June 30, 2021 and December 31, 2020. All AFS securities are carried at fair value and consist primarily of US government agencies or sponsored agency securities as of both June 30, 2021 and December 31, 2020.

Securities AFS increased $20.0 million, or 21.8%, to $111.8 million at June 30, 2021 from $91.8 million at December 31, 2020, primarily due to purchases of $39.8 million, partially offset by principal paydowns and maturity of $18.4 million for the first half of 2021. No issuer of securities AFS, other than the U.S. Government and its agencies, comprised more than 10% of our shareholders’ equity as of June 30, 2021 or December 31, 2020.

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The following table summarizes the fair value of the AFS securities portfolio as of June 30, 2021 and December 31, 2020:

	June 30, 2021						December 31, 2020
	Amortized		Fair		Unrealized		Amortized		Fair		Unrealized
($ in thousands)	Cost		Value		Gain/(Loss)		Cost		Value		Gain/(Loss)
Available for sale
U.S. Government-sponsored agency securities	$	-	$	-	$	-	$	1,000	$	1,005	$	5
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	28,965	$	29,206	$	241	$	19,281	$	19,704	$	423
Residential collateralized mortgage obligations		82,554		82,626		72		70,318		71,082		764
Total available for sale	$	111,519	$	111,832	$	313	$	90,599	$	91,791	$	1,192

The Company’s AFS securities are carried at fair value with changes in fair values reflected in Other comprehensive income (loss) unless a security is deemed to be other than temporary impairment (“OTTI”). Net unrealized gains on AFS securities were $313 thousand as of June 30, 2021, which declined from net unrealized gains of $1.2 million. Gross unrealized losses on AFS securities totaled $578 thousand as of June 30, 2021, compared with $57 thousand as of December 31, 2020. Of the securities with gross unrealized losses, all were U.S. government agencies or sponsored agency securities as of both June 30, 2021 and December 31, 2020. As of June 30, 2021, the Company had no intention to sell securities with unrealized losses and believed it was more-likely-than-not that it would not be required to sell such securities before recovery of their amortized cost.

The Company assesses individual securities for OTTI for each reporting period. There were no OTTI credit losses recognized in earnings for the second quarter and first half of 2021 and 2020.

The following table sets forth certain information regarding contractual maturities and the weighted average yields of our investment securities as of June 30, 2021. 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 June 30, 2021
	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
($ in thousands)	Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield
Available for sale
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	—		—	%	$	827		1.96	%	$	3,798		1.87	%	$	24,340		1.09	%
Residential collateralized mortgage obligations		—		—	%		—		—	%		648		1.75	%		81,906		0.69	%
Total available for sale	$	—		—	%	$	827		1.96	%	$	4,446		1.85	%	$	106,246		0.78	%

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.

Gross loans including net deferred costs increased $146.1 million, or 13.3%, to $1.25 billion at June 30, 2021, compared to $1.10 billion at December 31, 2020, primarily due to Hana loan purchase, originations of SBA PPP loans and organic growth in commercial real estate for the six months ended June 30, 2021. In response to the COVID-19 pandemic, the Company provided assistance to customers faced with financial difficulties by offering SBA PPP loans and also provided customers with payment relief through our loan deferment program. For more information, see MD&A — Overview – COVID-19 and Government Response in this report on Form 10-Q.

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Loans — Loan purchase: On May 24, 2021, the Company completed the purchase of the Hana’s loan portfolio and paid approximately $97.6 million that included loans of $100.0 million at a fair value discount of $8.9 million, servicing assets of $6.1 million and accrued interest receivable of $398 thousand. The following table summarizes the consideration paid for the loan portfolio and the amounts of assets purchased:

($ in thousands)
Consideration
Cash	$	97,631

Recognized amounts of identifiable assets purchased:
Loans ⁽¹⁾	$	100,003
Loan discounts		(8,867	)
Accrued interest receivable		398
Servicing assets		6,097
Total recognized identifiable assets	$	97,631

(1)	Consists of $92.2 million of SBA loans, $6.9 million of PPP loans and $919 thousand of real estate loans.

The loan distribution table that follows sets forth our gross loans outstanding, and the percentage distribution in each category as of June 30, 2021 and December 31, 2020:

	June 30, 2021						December 31, 2020
($ in thousands)	Amount			% of Total			Amount			% of Total
Commercial real estate	$	684,082			55	%	$	651,684			59	%
SBA loan - real estate		217,356			17	%		136,224			12	%
SBA loan - non-real estate		121,395			10	%		75,151			7	%
Commercial and industrial		102,562			8	%		107,307			10	%
Home mortgage		119,319			10	%		128,212			12	%
Consumer		1,152		<1%				1,158		<1%
Gross loans		1,245,866			100	%		1,099,736			100	%
Allowance for loan losses		(14,687	)					(15,352	)
Net loans ⁽¹⁾	$	1,231,179					$	1,084,384

(1)	Includes net deferred loan fees or costs, unamortized premiums and unaccreted discounts of $(12.5) million and $(5.9) million as of June 30, 2021 and December 31, 2020, respectively.

The following tables presents the maturity distribution of our loans as of June 30, 2021 and December 31, 2020. 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 June 30, 2021
					Due after One Year
	Due in One Year or Less				Through Five Years				Due after Five Years
			Adjustable				Adjustable				Adjustable
($ in thousands)	Fixed Rate		Rate		Fixed Rate		Rate		Fixed Rate		Rate		Total
Commercial real estate	$	51,644	$	57,352	$	299,838	$	144,584	$	99,822	$	30,842	$	684,082
SBA loans - real estate		—		—		—		47		396		216,913		217,356
SBA loan - non-real estate		14,377		86		89,522		5,124		—		12,286		121,395
Commercial and industrial		131		27,489		207		40,674		23,164		10,897		102,562
Home mortgage		—		—		—		—		105,615		13,704		119,319
Consumer		—		379		—		773		—		—		1,152
Gross loans	$	66,152	$	85,306	$	389,567	$	191,202	$	228,997	$	284,642	$	1,245,866

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	As of December 31, 2020
					Due after One Year
	Due in One Year or Less				Through Five Years				Due after Five Years
			Adjustable				Adjustable				Adjustable
($ in thousands)	Fixed Rate		Rate		Fixed Rate		Rate		Fixed Rate		Rate		Total
Commercial real estate	$	58,101	$	44,439	$	293,045	$	155,303	$	74,302	$	26,494	$	651,684
SBA loans - real estate		—		—		—		—		—		136,224		136,224
SBA loan - non-real estate		—		11		64,906		952		—		9,282		75,151
Commercial and industrial		8,933		43,618		221		36,853		4,887		12,795		107,307
Home mortgage		—		—		—		—		114,141		14,071		128,212
Consumer		—		271		—		887		—		—		1,158
Gross loans	$	67,034	$	88,339	$	358,172	$	193,995	$	193,330	$	198,866	$	1,099,736

Loans — Commercial Real Estate: Our loan portfolio is concentrated in commercial real estate, commercial (primarily manufacturing, wholesale, and services-oriented entities), SBA loans (primarily 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, 81.9% of our gross loans are secured by real property as of June 30, 2021, compared to 83.3% as of December 31, 2020.

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. As of June 30, 2021, approximately 66% 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. As of June 30, 2021, our average loan-to-value for commercial real estate loans was approximately 53%. Our commercial real estate loan portfolio totaled $684.1 million as of June 30, 2021 compared with $651.7 million as of December 31, 2020.

Loans — SBA Loans: We are designated as 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 June 30, 2021, our SBA portfolio totaled $338.8 million, including $103.9 million of SBA PPP loans, compared with $211.4 million, including $64.9 million of SBA PPP loans as of December 31, 2020, an increase of $127.4 million, or 60.3%. The increase was primarily due to the Hana loan purchase. During the first half of 2021, we originated $181.9 million of SBA loans, including $88.1 million of SBA PPP loans, compared with $110.0 million, including $65.0 million of SBA PPP loans during the same period in 2020. We sold $33.0 million and $32.5 million in SBA loans during the first half of 2021 and 2020, respectively.

As of June 30, 2021 and December 31, 2020, loans held for sale totaled $68.4 million and $26.7 million, respectively, and consisted of SBA loans. At the time of commitment to originate or purchase a loan, a loan is determined to be held for investment if it is the Company’s intent to hold the loan to maturity or for the “foreseeable future,” subject to periodic reviews under the Company’s evaluation processes, including liquidity and credit risk management. If the Company subsequently changes its intent to hold certain loans, those loans are transferred from held for investment to held for sale at the lower of cost or fair value.

Loans — Commercial and Industrial: Commercial and industrial loans totaled $102.6 million at June 30, 2021, compared with $107.3 million at December 31, 2020.

Loans — Home Mortgage: We originate mainly non-qualified single-family home mortgage loans (“home mortgage”) primarily through broker relationships, but also through our branch network. We offer a five-year or seven-year hybrid adjustable-rate mortgage loans, which reprice annually after the initial fixed rate period. These loans are held for investment.

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Home mortgage loans totaled $119.3 million at June 30, 2021, compared with $128.2 million at December 31, 2020, a decrease of $8.9 million, or 6.9%. During the first half of 2021, home mortgage loan origination of $24.8 million were more than offset by payoffs, paydowns and sales of $33.7 million. In comparison, home mortgage loan origination of $18.4 million were slightly more than offset by payoffs, paydowns and sales of $19.1 million.

Loan Servicing

As of June 30, 2021, and December 31, 2020, we serviced $658.9 million and $388.8 million, respectively, of SBA loans for others. Activities for loan servicing rights for the second quarter and first half of 2021 and 2020 were as follows:

	Three Months Ended June 30,									Six Months Ended June 30,
($ in thousands)	2021			2020			Increase (decrease)			2021			2020			Increase (decrease)
Beginning balance	$	7,492		$	6,963		$	529		$	7,360		$	7,024		$	336
Additions from loans sold with servicing retained		277			363			(86	)		847			769			78
Additions from purchase of servicing rights		6,097			—			6,097			6,097			—			6,097
Amortized to expense		(963	)		(354	)		(609	)		(1,401	)		(821	)		(580	)
Ending balance	$	12,903		$	6,972		$	5,931		$	12,903		$	6,972		$	5,931

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 element of judgment and high levels of subjectivity.

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 difficulty 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.

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As of June 30, 2021, the allowances for loan losses amounted to $14.7 million, or 1.18% of gross loans, compared with $15.4 million, or 1.40% of gross loans and $12.8 million, or 1.22% of gross loans as of December 31, 2020 and June 30, 2020, respectively. The decrease in the first half of 2021 was largely due to continued improvements in the economic environment in the first half of 2021. The increase from June 30, 2020 was primarily due to loan portfolio growth and the deteriorating economic conditions during the second half of 2020 as a result of the COVID-19 pandemic, partially offset by improved economic conditions during the first half of 2021. Excluding the impacts of the purchased Hana loans, PPP loans and the allowance for uncollectible accrued interest receivable, adjusted allowance to gross loans ratios were 1.46%, 1.54%, and 1.30% as of June 30, 2021, December 31, 2020 and June 30, 2020, respectively. For details, refer to Item 2. MD&A – Reconciliation of GAAP to Non-GAAP Financial Measures in this report on Form 10-Q.

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. 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’s 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.

Analysis of the Allowance for Loan Losses.

The following tables present a summary of activities in the allowance for loan losses by portfolio segment, as of and for the second quarter and first half of 2021 and 2020:

	As of and For the Three Months Ended June 30,
	2021											2020
						Net											Net
			(Reversal			(Charge-								(Reversal			(Charge-
	Beginning		of)			Offs)			Ending			Beginning		of)			Offs)		Ending
($ in thousands)	Balance		Provision ⁽¹⁾			Recoveries			Balance			Balance		Provision ⁽¹⁾			Recoveries		Balance
Commercial real estate	$	8,594	$	(138	)	$	—		$	8,456		$	6,210	$	935		$	—	$	7,145
SBA loans - real estate		2,030		(33	)		—			1,997			1,082		264			—		1,346
SBA loan - non-real estate		292		(37	)		(27	)		228			192		33			28		253
Commercial and industrial		2,331		(45	)		—			2,286			1,292		628			—		1,920
Home mortgage		2,075		(371	)		—			1,704			1,921		153			—		2,074
Consumer		17		(1	)		—			16			51		(25	)		—		26
Total	$	15,339	$	(625	)	$	(27	)	$	14,687		$	10,748	$	1,988		$	28	$	12,764
Gross loans ⁽²⁾									$	1,245,866									$	1,043,506
Average gross loans ⁽²⁾										1,198,890										1,035,751
Net charge-offs (recoveries) to average gross loans										0.01	%									(0.01	)%
Allowance for loans losses to gross loans										1.18	%									1.22	%

(1)	Excludes (reversal of) provision for uncollectible accrued interest receivable of $(487) thousand for the second quarter of 2021. There was no provision for uncollectible accrued interest receivable for the second quarter of 2020.

(2)	Excludes loans held for sale.

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	As of and For the Six Months Ended June 30,
	2021											2020
						Net											Net
			(Reversal			(Charge-								(Reversal			(Charge-
	Beginning		of)			Offs)			Ending			Beginning		of)			Offs)			Ending
($ in thousands)	Balance		Provision ⁽¹⁾			Recoveries			Balance			Balance		Provision ⁽¹⁾			Recoveries			Balance
Commercial real estate	$	8,505	$	(49	)	$	—		$	8,456		$	6,000	$	1,145		$	—		$	7,145
SBA loans - real estate		1,802		195			—			1,997			939		407			—			1,346
SBA loan - non-real estate		278		(23	)		(27	)		228			121		149			(17	)		253
Commercial and industrial		2,563		(277	)		—			2,286			1,289		631			—			1,920
Home mortgage		2,185		(481	)		—			1,704			1,667		407			—			2,074
Consumer		19		(6	)		3			16			34		(8	)		—			26
Total	$	15,352	$	(641	)	$	(24	)	$	14,687		$	10,050	$	2,731		$	(17	)	$	12,764
Gross loans ⁽²⁾									$	1,245,866										$	1,043,506
Average gross loans ⁽²⁾										1,169,338											1,014,244
Net charge-offs (recoveries) to average gross loans										0.00	%										0.00	%
Allowance for loans losses to gross loans										1.18	%										1.22	%

(1)	Excludes (reversal of) provision for uncollectible accrued interest receivable of $149 thousand for the first half of 2021. There was no provision for uncollectible accrued interest receivable for the first half of 2020.

(2)	Excludes loans held for sale.

The following table presents an allocation of the allowance for loan losses by portfolio as of June 30, 2021 and December 31, 2020:

	June 30, 2021					December 31, 2020
($ in thousands)	Amount		% of Total			Amount		% of Total
Commercial real estate	$	8,456		58	%	$	8,505		55	%
SBA loan - real estate		1,997		14	%		1,802		12	%
SBA loan - non-real estate		228		1	%		278		2	%
Commercial and industrial		2,286		15	%		2,563		17	%
Home mortgage		1,704		12	%		2,185		14	%
Consumer		16	<1%				19	<1%
Gross loans	$	14,687		100	%	$	15,352		100	%

Nonperforming Assets

Nonperforming assets are comprised of nonaccrual loans, past due loans 90 days or more but still accruing, performing TDR loans, and OREO. Generally, loans are placed on nonaccrual status when they become 90 days past due or more. Loans are considered past due when contractually required principal or interest payments have not been made on the due dates. Loans are also placed on nonaccrual status when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that full collection of principal or interest becomes uncertain regardless of the length of past due status. Once a loan is placed on nonaccrual status, interest accrual is discontinued, and all unpaid accrued interest is received is reversed against interest income. Interest payments received on nonaccrual loans are reflected as a reduction of principal and not as interest income. A loan is returned to accrual status when the borrower has demonstrated a satisfactory payment trend subject to management’s assessment of the borrower’s ability to repay the loan.

Foreclosed assets, consisting of other real estate owned (“OREO”), are included in Other assets on the Consolidated Balance Sheet. The Company did not have any OREO property as of both June 30, 2021 and December 30, 2020.

Nonperforming loans include loans 90 days past due and still accruing, loans accounted for on a non-accrual basis and performing TDR loans. Nonperforming loans were $757 thousand at June 30, 2021, a decrease of $228 thousand, compared with $985 thousand at December 31, 2020.

Classified loans were $7.2 million at June 30, 2021, a decrease of $175 thousand, compared with $7.3 million at December 31, 2020 and majority of classified loans as of June 30, 2021 was secured by real estate collaterals.

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The following table presents information regarding nonperforming assets as of June 30, 2021 and December 31, 2020:

($ in thousands)	June 30, 2021			December 31, 2020
Non-accrual loans	$	757		$	985
Past due loans 90 days or more and still accruing		—			—
Accruing troubled debt restructured loans		—			—
Total non-performing loans		757			985
Other real estate owned		—			—
Total non-performing assets	$	757		$	985
Nonperforming loans to gross loans		0.06	%		0.09	%
Nonperforming assets to total assets		0.05	%		0.07	%
Allowance for loan losses to non-performing loans		1,940	%		1,558	%

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 reached $1.43 billion as of June 30, 2021, an increase of $234.0 million, or 19.5% from $1.20 billion as of December 31, 2020, primarily driven by core broad-based growth in noninterest-bearing, money market and time deposits. Noninterest-bearing deposits were $668.2 million or 46.6% of total deposits as of June 30, 2021, up from $522.8 million or 43.6% of total deposits as of December 31, 2020. The increase in noninterest-bearing deposits was primarily due to customers’ preferences for liquidity given the economic uncertainty associated with the COVID-19, as well as PPP funds held in deposit account.

The following tables presents the maturity distribution of time deposits as of June 30, 2021 and December 31, 2020:

	As of June 30, 2021
	Maturity Within:
	Three		Three to		Six to 12		After
($ in thousands)	Months		Six Months		Months		12 Months		Total
Time deposits (more than $250,000)	$	90,957	$	30,760	$	71,987	$	—	$	193,704
Time deposits ($250,000 or less)		59,503		43,197		76,513		6,330		185,543
Total time deposits	$	150,460	$	73,957	$	148,500	$	6,330	$	379,247

	As of December 31, 2020
	Maturity Within:
	Three		Three to		Six to 12		After
($ in thousands)	Months		Six Months		Months		12 Months		Total
Time deposits (more than $250,000)	$	107,198	$	25,498	$	63,818	$	3,696	$	200,210
Time deposits ($250,000 or less)		33,474		28,020		80,308		7,001		148,803
Total time deposits	$	140,672	$	53,518	$	144,126	$	10,697	$	349,013

Borrowed Funds

Other than deposits, we also utilize 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. As of June 30, 2021 and December 31, 2020, we had maximum borrowing capacity from the FHLB of $400.4 million and $394.0 million, respectively. The Company did not have any FHLB borrowings as of June 30, 2021, compared with $5.0 million as of December 31, 2020, which had a zero interest rate under the Recovery Advance Program to support pandemic relief.

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.

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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.

Our gross loan to deposit ratio was 86.9% as of June 30, 2021, compared with 91.6% as of December 31, 2020.

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.

As of June 30, 2021, we had available borrowing capacity of $296.8 million with the FHLB and $130.8 million with the FRB. Eligible loans defined in guidelines from the FHLB and FRB were pledged to the FHLB and FRB discount window as collateral. Our unsecured federal funds lines of credit with correspondent, subject to availability, totaled $100.0 million as of June 30, 2021. We also maintain relationships in the capital markets with brokers to issue certificates of deposits and money market accounts.

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,” 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 regarding components, risk weightings and other factors. Qualitative measures established by regulation to ensure capital adequacy required us to maintain minimum amounts and various ratios 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.” For further information, see “Supervision and Regulation” in our 2020 Annual Report on Form 10-K.

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 June 30, 2021 and December 31, 2020. The Bank exceeded all regulatory capital requirements under the Basel III Capital Rules and were considered to be “well-capitalized” as of June 30, 2021 and December 31, 2020 reflected in the table below. As of June 30, 2021, the FDIC categorized us as well-capitalized under the prompt corrective action framework. There have been no conditions or events since June 30, 2021 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
($ in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2021:
Total capital (to risk-weighted assets)
Consolidated	$	166,116		13.87	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		163,293		13.63	%		95,833		8.00	%		119,791		10.00	%		125,781		10.50	%
Tier 1 capital (to risk-weighted assets)
Consolidated		151,133		12.62	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		148,312		12.38	%		71,875		6.00	%		95,833		8.00	%		101,822		8.50	%
CET1 capital (to risk-weighted assets)
Consolidated		151,133		12.62	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		148,312		12.38	%		53,906		4.50	%		77,864		6.50	%		83,854		7.00	%
Tier 1 leverage (to average assets)
Consolidated		151,133		9.96	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		148,312		9.77	%		60,705		4.00	%		75,882		5.00	%		60,705		4.00	%

Note: The capital requirements are only applicable to the Bank, and the Company's ratios are included for comparison purpose.

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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
($ in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2020:
Total capital (to risk-weighted assets)
Consolidated	$	155,287		14.81	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		152,232		14.52	%		83,859		8.00	%		104,824		10.00	%		110,065		10.50	%
Tier 1 capital (to risk-weighted assets)
Consolidated		142,147		13.56	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		139,092		13.27	%		62,894		6.00	%		83,859		8.00	%		89,101		8.50	%
CET1 capital (to risk-weighted assets)
Consolidated		142,147		13.56	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		139,092		13.27	%		47,171		4.50	%		68,136		6.50	%		73,377		7.00	%
Tier 1 leverage (to average assets)
Consolidated		142,147		10.55	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		139,092		10.32	%		53,915		4.00	%		67,393		5.00	%		53,915		4.00	%

Note: The capital requirements are only applicable to the Bank, and the Company's ratios are included for comparison purpose.

CONTRACTUAL OBLIGATIONS

The following tables contain the Company’s significant fixed and determinable contractual obligations, along with categories of payment dates as of June 30, 2021 and December 31, 2020:

	Payments Due at June 30, 2021
	Within		One to		Three to		After Five
($ in thousands)	One Year		Three Years		Five Years		Years		Total
Deposits without a stated maturity	$	1,054,856	$	—	$	—	$	—	$	1,054,856
Time deposits		372,917		4,931		1,399		—		379,247
Operating lease commitments		2,079		3,659		1,698		777		8,213
Commitments to fund investments for low-income housing partnerships		1,334		566		22		45		1,967
Total contractual obligations	$	1,431,186	$	9,156	$	3,119	$	822	$	1,444,283

	Payments Due at December 31, 2020
	Within		One to		Three to		After Five
($ in thousands)	One Year		Three Years		Five Years		Years		Total
Deposits without a stated maturity	$	851,077	$	—	$	—	$	—	$	851,077
Time deposits		338,316		9,578		522		597		349,013
Operating lease commitments		2,047		3,844		2,376		956		9,223
Advanced from FHLB		5,000		—		—		—		5,000
Commitments to fund investments for low-income housing partnerships		1,042		1,036		29		47		2,154
Total contractual obligations	$	1,197,482	$	14,458	$	2,927	$	1,600	$	1,216,467

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 ARRANGEMENT

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.

($ in thousands)	As of June 30, 2021		As of December 31, 2020
Loan commitments	$	122,150	$	75,740
Standby letters of credits		5,374		9,212
Commercial letters of credit		2,547		1,552
Total undisbursed credit related commitments	$	130,071	$	86,504

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

In addition to GAAP measures, management uses certain non-GAAP financial measures to provide supplemental information regarding the Company’s performance.

Pre-provision net revenue removes provision for loan losses and income tax expense. Management believes that this non-GAAP measure, when taken together with the corresponding GAAP financial measures (as applicable), provides meaningful supplemental information regarding our performance. This non-GAAP financial measure also facilitates a comparison of our performance to prior periods.

During the second quarter of 2021, the Company purchased 638 loans from Hana for a total purchase price of $97.6 million. The Company evaluated $100.0 million of the loans purchased in accordance with the provisions of ASC 310-20, Nonrefundable Fees and Other Costs, which were recorded with a $8.9 million discount. As a result, the fair value discount on these loans is being accreted into interest income over the expected life of the loans using the effective yield method. Adjusted loan yield and net interest margin for the three months ended June 30, 2021 excluded the impacts of contractual interest and discount accretion of the purchased loans as management does not consider purchasing loan portfolios to be normal or recurring transactions. Management believes that presenting the adjusted average loan yield and net interest margin provide comparability to prior periods and these non-GAAP financial measures provide supplemental information regarding the Company’s performance.

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Adjusted allowance to gross loans ratio removes the impacts of purchased loans, PPP loans and allowance on accrued interest receivable. Management believes that this ratio provides greater consistency and comparability between the Company’s results and those of its peer banks.

		Three Months Ended					Six Months Ended
		June 30,			June 30,		June 30,			June 30,
($ in thousands)		2021			2020		2021			2020
Interest income		$	15,349		$	12,920	$	28,981		$	27,265
Interest expense			763			2,272		1,640			5,501
Net interest income			14,586			10,648		27,341			21,764
Noninterest income			2,220			2,062		5,186			4,358
Noninterest expense			8,789			7,334		16,755			15,541
Pre-provision net revenue	(a)	$	8,017		$	5,376	$	15,772		$	10,581
Reconciliation to Net Income:
(Reversal of) provision for loan losses	(b)		(1,112	)		1,988		(492	)		2,731
Income tax expense	(c)		2,750			972		4,808			2,135
Net Income	(a) + (b) + (c)	$	6,379		$	2,416	$	11,456		$	5,715

		Three Months Ended						Six Months Ended
		June 30,			June 30,			June 30,			June 30,
($ in thousands)		2021			2020			2021			2020
Yield on Average Loans
Interest income on loans		$	14,971		$	12,549		$	28,255		$	26,243
Less: interest income on purchased loans			(860	)		—			(860	)		—
Adjusted interest income on loans	(a)	$	14,111		$	12,549		$	27,395		$	26,243

Average loans		$	1,242,058		$	1,044,944		$	1,203,816		$	1,021,518
Less: Average purchased loans			(37,526	)		—			(18,867	)		—
Adjusted average loans	(b)	$	1,204,532		$	1,044,944		$	1,184,949		$	1,021,518

Average loan yield ⁽¹⁾			4.83	%		4.83	%		4.73	%		5.16	%
Effect on average loan yield ⁽¹⁾			-0.13	%		0.00	%		-0.07	%		0.00	%
Adjusted average loan yield ⁽¹⁾	(a)/(b)		4.70	%		4.83	%		4.66	%		5.16	%

Net Interest Margin
Net interest income		$	14,586		$	10,648		$	27,341		$	21,764
Less: interest income on purchased loans			(860	)		—			(860	)		—
Adjusted net interest income	(c)	$	13,726		$	10,648		$	26,481		$	21,764

Average interest-earning assets		$	1,468,623		$	1,205,571		$	1,413,344		$	1,168,282
Less: Average purchased loans			(37,526	)		—			(18,867	)		—
Adjusted average interest-earning assets	(d)	$	1,431,097		$	1,205,571		$	1,394,477		$	1,168,282

Net interest margin ⁽¹⁾			3.98	%		3.55	%		3.90	%		3.74	%
Effect on net interest margin ⁽¹⁾			-0.13	%		0.00	%		-0.07	%		0.00	%
Adjusted net interest margin ⁽¹⁾	(c)/(d)		3.85	%		3.55	%		3.83	%		3.74	%

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		As of
		June 30,			December 31,			June 30,
($ in thousands)		2021			2020			2020
Gross loans		$	1,245,866		$	1,099,736		$	1,043,506
Less: Purchased loans			(88,438	)		—			—
PPP loans ⁽¹⁾			(97,673	)		(64,906	)		(63,424	)
Adjusted gross loans	(a)	$	1,059,755		$	1,034,830		$	980,082

Accrued interest receivable on loans		$	3,179		$	3,729		$	4,578
Less: Accrued interest receivable on purchased loans			(290	)		—			—
Accrued interest receivable on PPP loans ⁽²⁾			(461	)		(445	)		(115	)
Add: Allowance on accrued interest receivable			792			643			—
Adjusted accrued interest receivable on loans	(b)	$	3,220		$	3,927		$	4,463

Adjusted gross loans and accrued interest receivable	(a) + (b) = (c)	$	1,062,975		$	1,038,757		$	984,545

Allowance for loan losses		$	14,687		$	15,352		$	12,764
Add: Allowance on accrued interest receivable			792			643			—
Adjusted Allowance	(d)	$	15,479		$	15,995		$	12,764

Adjusted allowance to gross loans ratio	(d)/(c)		1.46	%		1.54	%		1.30	%

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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.

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.

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Potential changes to our net interest income in hypothetical rising and declining rate scenarios calculated as of June 30, 2021 and December 31, 2020 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
	June 30, 2021			December 31, 2020			June 30, 2021			December 31, 2020
+400 basis points		15.65	%		30.27	%		(5.29	)%		10.14	%
+300 basis points		13.00	%		23.87	%		2.86	%		12.73	%
+200 basis points		9.57	%		16.85	%		8.11	%		13.55	%
+100 basis points		5.35	%		8.99	%		8.52	%		11.14	%
-100 basis points		(0.86	)%		—	%		(26.04	)%		(20.87	)%

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 and Bank presently do not have any adverse pending legal actions requiring disclosure.

Item 1A. Risk Factors

A discussion of the risk factors affecting us is set forth in Part I, Item 1A. Risk Factors in our 2020 Annual Report on Form 10-K. The discussion of risk factors 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 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.

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.

On February 28, 2020, the Company announced that the 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 completed the third stock repurchase program in May 2020 at an average price of $7.77 per share.

On September 9, 2020, the Company announced a fourth stock repurchase program that authorizes the Company to repurchase up to 500,000 shares of its common stock. During the first quarter of 2021, the Company repurchased an aggregate of 3,830 shares at an average price of $7.5 per share. The Company did not purchase any shares during the second quarter of 2021.

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.

3.3		First Amendment to the Amended and Restated Bylaws of OP Bancorp included as Exhibit 3.3 to the Annual Report on Form 10-K filed March 15, 2021 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 – the instant document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH		Inline XBRL Taxonomy Schema Document

101.CAL		Inline XBRL Taxonomy Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

⁺ 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.

	OP Bancorp

Date: August 6, 2021	By:	/s/ Min J. Kim
		Min J. Kim
		President and Chief Executive Officer

Date: August 6, 2021	By:	/s/ Christine Oh
		Christine Oh
		Chief Financial Officer