OP Bancorp - Quarter Report: 2022 September (Form 10-Q)

1531

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 September 30, 2022


☐			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

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, no par value

OPBK

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.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☒

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 ☒

The number of shares outstanding of the Registrant’s Common Stock as of November 7, 2022 was 15,199,840.

Table of Contents


		Page
	PART I - FINANCIAL INFORMATION	3
Item 1.	Financial Statements (unaudited).	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Changes in Shareholders’ Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	53
Item 4.	Controls and Procedures.	54
	PART II - OTHER INFORMATION	55
Item 1.	Legal Proceedings.	55
Item 1A.	Risk Factors.	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	55
Item 3.	Defaults Upon Senior Securities.	55
Item 4.	Mine Safety Disclosures.	55
Item 5.	Other Information.	55
Item 6.	Exhibits.	56
	SIGNATURES	57

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:

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

•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;

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

•geopolitical developments, uncertainties or instability, catastrophic events, acts of war or terrorism;

•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;

•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;

•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 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 loan eligibility, forgiveness and audit criteria;

•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;

•risks related to potential acquisitions;

•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;

•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.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

OP BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS



($ in thousands, except share data)	September 30, 2022 (unaudited)		December 31, 2021
ASSETS


Cash and cash equivalents	$	107,281	$	115,459
Available-for-sale debt securities, at fair value	186,438		150,444
Other investments	12,074		10,999
Loans held for sale	36,642		89,428
Loans receivable, net of allowance of $18,369 in 2022 and $16,123 in 2021	1,599,649		1,297,896
Premises and equipment, net	4,383		4,355
Accrued interest receivable, net of allowance of $0 in 2022 and $205 in 2021	5,856		4,579
Servicing assets	12,889		12,720
Company owned life insurance	21,464		11,134
Deferred tax assets, net	17,296		8,409
Operating right-of-use assets	8,265		8,905
Other assets	17,338		12,363
Total assets	$	2,029,575	$	1,726,691
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits:
Noninterest bearing	$	794,631	$	774,754
Interest bearing:
Money market and others	524,911		380,226
Time deposits greater than $250,000	277,785		207,288
Other time deposits	219,484		171,798
Total deposits	1,816,811		1,534,066
Federal Home Loan Bank advances	10,000		—
Accrued interest payable	1,099		558
Operating lease liabilities	9,485		10,307
Other liabilities	22,085		16,538
Total liabilities	1,859,480		1,561,469
Shareholders’ equity
Preferred stock no par value; 10,000,000 shares authorized; no shares issued or outstanding in 2022 and 2021	—		—
Common stock – no par value; 50,000,000 shares authorized; 15,199,840 and 15,137,808 shares issued and outstanding in 2022 and 2021, respectively	78,782		78,718
Additional paid-in capital	9,424		8,645
Retained earnings	99,487		79,056
Accumulated other comprehensive loss	(17,598)		(1,197)
Total shareholders’ equity	170,095		165,222
Total liabilities and shareholders' equity	$	2,029,575	$	1,726,691

See accompanying notes to consolidated financial statements

OP BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (unaudited)



	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousand, except per share data)	2022		2021		2022		2021
INTEREST INCOME
Interest and fees on loans	$	21,780	$	16,922	$	58,145	$	45,177
Interest on available-for-sale debt securities	881		269		2,114		723
Other interest income	573		164		1,067		436
Total interest income	23,234		17,355		61,326		46,336
Interest expense
Interest on deposits	2,890		766		4,613		2,406
Total interest expense	2,890		766		4,613		2,406
Net interest income	20,344		16,589		56,713		43,930
Provision for (reversal of) loan losses	662		(884)		1,999		(1,376)
Net interest income after provision for loan losses	19,682		17,473		54,714		45,306
NONINTEREST INCOME
Service charges on deposits	454		409		1,269		1,157
Loan servicing fees, net of amortization	610		599		1,711		1,432
Gain on sale of loans	3,490		2,188		10,601		5,280
Other income	267		346		815		859
Total noninterest income	4,821		3,542		14,396		8,728
NONINTEREST EXPENSE
Salaries and employee benefits	7,343		5,724		20,109		15,693
Occupancy and equipment	1,537		1,326		4,404		3,795
Data processing and communication	586		448		1,571		1,363
Professional fees	602		308		1,290		925
FDIC insurance and regulatory assessments	238		146		637		401
Promotion and advertising	177		175		531		528
Directors’ fees	170		183		537		427
Foundation donation and other contributions	875		842		2,542		1,989
Other expenses	810		367		1,882		1,153
Total noninterest expense	12,338		9,519		33,503		26,274
INCOME BEFORE INCOME TAX EXPENSE	12,165		11,496		35,607		27,760
Income tax expense	3,515		3,246		10,325		8,054
NET INCOME	$	8,650	$	8,250	$	25,282	$	19,706
EARNINGS PER SHARE - BASIC	$	0.56	$	0.54	$	1.63	$	1.29
EARNINGS PER SHARE - DILUTED	$	0.55	$	0.54	$	1.62	$	1.29

See accompanying notes to consolidated financial statements

OP BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)



	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2022		2021		2022		2021
NET INCOME	$	8,650	$	8,250	$	25,282	$	19,706
Other comprehensive loss:
Change in unrealized loss on securities available for sale	(9,404)		(343)		(23,285)		(1,222)
Tax effect	2,780		102		6,884		361
Total other comprehensive loss	(6,624)		(241)		(16,401)		(861)
COMPREHENSIVE INCOME	$	2,026	$	8,009	$	8,881	$	18,845

OP BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)



($ in thousands, except shares)	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
	Shares Outstanding	Amount
Balance at July 1, 2021	15,133,407	$	78,718	$	8,324	$	64,700	$	220	$	151,962
Net income	—	—		—		8,250		—		8,250
Other comprehensive loss	—	—		—		—		(241)		(241)
Stock issued under stock-based compensation plans	—	—		—		—		—		—
Stock-based compensation, net	—	—		167		—		—		167
Repurchase of common stock	—	—		—		—		—		—
Cash dividends declared ($0.10 per share)	—	—		—		(1,514)		—		(1,514)
Balance at September 30, 2021	15,133,407	78,718		8,491		71,436		(21)		$	158,624

Balance at July 1, 2022	15,189,203	$	78,718	$	9,089	$	92,659	$	(10,974)	$	169,492
Net income	—	—		—		8,650		—		8,650
Other comprehensive loss	—	—		—		—		(6,624)		(6,624)
Stock issued under stock-based compensation plans	10,637	64		—		—		—		64
Stock-based compensation, net	—	—		335		—		—		335
Repurchase of common stock	—	—		—		—		—		—
Cash dividends declared ($0.12 per share)	—	—		—		(1,822)		—		(1,822)
Balance at September 30, 2022	15,199,840	78,782		9,424		99,487		(17,598)		$	170,095

Balance at January 1, 2021	15,016,700	$	78,657	$	8,521	$	55,348	$	840	$	143,366
Net income	—	—		—		19,706		—		19,706
Other comprehensive loss	—	—		—		—		(861)		(861)
Stock issued under stock-based compensation plans	120,537	89		—		—		—		89
Stock-based compensation, net	—	—		(30)		—		—		(30)
Repurchase of common stock	(3,830)	(28)		—		—		—		(28)
Cash dividends declared ($0.24 per share)	—	—		—		(3,618)		—		(3,618)
Balance at September 30, 2021	15,133,407	$	78,718	$	8,491	$	71,436	$	(21)	$	158,624

Balance at January 1, 2022	15,137,808	$	78,718	$	8,645	$	79,056	$	(1,197)	$	165,222
Net income	—	—		—		25,282		—		25,282
Other comprehensive loss	—	—		—		—		(16,401)		(16,401)
Stock issued under stock-based compensation plans	62,032	64		(79)		—		—		(15)
Stock-based compensation, net	—	—		858		—		—		858
Repurchase of common stock	—	—		—		—		—		—
Cash dividends declared ($0.32 per share)	—	—		—		(4,851)		—		(4,851)
Balance at September 30, 2022	15,199,840	$	78,782	$	9,424	$	99,487	$	(17,598)	$	170,095

See accompanying notes to consolidated financial statements

OP BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)



	Nine Months Ended September 30,
($ in thousands)	2022		2021
Cash flows from operating activities
Net income	$	25,282	$	19,706
Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities:
Provision for (reversal of) loan losses	1,999		(1,376)
Depreciation and amortization of premises and equipment	1,020		989
Amortization of net premiums on securities	546		707
Amortization of servicing assets	3,512		2,448
Accretion of loan discounts	(3,972)		(3,267)
Amortization of low income housing partnerships	584		405
Stock-based compensation	858		403
Deferred income taxes	(2,003)		356
Gain on sale of loans	(10,601)		(5,280)

Earnings on company owned life insurance	(330)		(191)
Net change in fair value of equity investment with readily determinable fair value	438		73
Origination of loans held for sale	(86,033)		(123,661)
Proceeds from sales of loans held for sale	161,287		59,545
Net change in:
Accrued interest receivable	(1,072)		631
Other assets	(11,068)		(3,668)
Accrued interest payable	541		(446)
Other liabilities	(229)		443
Net cash provided by operating activities	80,759		(52,183)
Cash flows from investing activities
Net change in loans receivable	(127,999)		(40,761)
Proceeds from matured, called, or paid-down securities available for sale	26,194		27,118
Purchase of company owned life insurance	(10,000)		—
Purchase of loans	(175,753)		(97,631)
Purchase of securities available for sale	(86,019)		(39,791)

Purchase of Federal Home Loan Bank stock	(1,477)		(963)
Purchase of premises and equipment, net	(1,048)		(644)
Investment in low income housing partnerships	(714)		(636)
Net cash used in investing activities	(376,816)		(153,308)
Cash flows from financing activities
Net change in deposits	282,745		296,316
Cash received from stock option exercises	64		89
Proceeds from Federal Home Loan Bank advances	10,000		—
Repayment of Federal Home Loan Bank advances	—		(5,000)

Repurchase of common stock	—		(28)
Cash dividend paid on common stock	(4,851)		(3,618)
Payments related to tax-withholding for vested restricted stock awards	(79)		(433)
Net cash provided by financing activities	287,879		287,326
Net change in cash and cash equivalents	(8,178)		81,835
Cash and cash equivalents at beginning of period	115,459		106,310
Cash and cash equivalents at end of period	$	107,281	$	188,145
Supplemental cash flow information
Cash paid during the period for:
Income taxes	$	10,557	$	7,253
Interest	$	5,890	$	2,852

See accompanying notes to consolidated financial statements

OP BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Note 1. Business and Basis of Presentation

OP Bancorp is a California corporation that 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 OP Bancorp. OP Bancorp 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, OP Bancorp operates primarily in the traditional banking business arena that includes accepting deposits and making loans and investments. OP Bancorp’s primary deposit products are demand and time deposits, and the primary lending products are commercial business loans to small to medium sized businesses. OP Bancorp is operating with ten full-service branches.

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 prior years have been reclassified to conform to the 2022 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, 2021 (“2021 Annual Report on Form 10-K”). Descriptions of our significant accounting policies are included in Note 1. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in the 2021 Annual Report on Form 10-K.

Recent Accounting Pronouncements Not Yet Effective

In March 2022, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ("ASU 2022-02"). ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings in Accounting Standards Codification (“ASC”) Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, ASU 2022-02 requires entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. ASU 2022-02 will be effective on January 1, 2023 though early adoption is permitted. The adoption of ASU 2022-02 is not expected to have a significant impact on our consolidated financial statements.

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 has established a committee to oversee the implementation of ASU 2016-13 and has engaged a third-party software vendor to assist the Company to develop a new expected credit loss model. The Company has completed development of its methodologies, data gathering and validation, and initial testing of its models. The Company has commenced its parallel run in the third quarter of 2022 and is currently engaged in implementation activities, including model development documentation and model validation by a third-party adviser. The Company will continue to analyze model results and address any gaps arising from internal reviews, model validation, and subsequent parallel run during the fourth quarter of 2022.

The Company expects to adopt ASU 2016-13 on January 1, 2023 without electing the fair value option on eligible financial instruments. 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. While the Company continues to evaluate the effects of ASU 2016-13 on its Consolidated Financial Statements, the Company expects that this ASU may result in an increase in the allowance for loan losses. The ultimate effect of this ASU will depend on the size, composition and credit quality of the loan portfolio, and economic conditions at the time of adoption.

Note 2. Securities

The following table summarizes the amortized cost, the corresponding amounts of gross unrealized gains and losses, and estimated fair value of available-for-sale ("AFS") debt securities as of September 30, 2022 and December 31, 2021:



	September 30, 2022
($ in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	49,249	$	—	$	(5,942)	$	43,307
Residential collateralized mortgage obligations	162,173		1		(19,043)		143,131
Total AFS debt securities	$	211,422	$	1	$	(24,985)	$	186,438



	December 31, 2021
($ in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	37,555	$	178	$	(321)	$	37,412
Residential collateralized mortgage obligations	114,588		253		(1,809)		113,032
Total AFS debt securities	$	152,143	$	431	$	(2,130)	$	150,444

There were no sales of AFS debt securities during the three and nine months ended September 30, 2022 and 2021. The amortized cost and estimated fair value of AFS debt securities as of September 30, 2022, by contractual maturity, are shown below:



($ in thousands)	Amortized Cost		Fair Value
After one year through five years	$	921	$	862
After five years through ten years	2,940		2,735
After ten years	207,561		182,841
Total AFS debt securities	$	211,422	$	186,438

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. As of September 30, 2022 and 2021, 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 debt securities by length of time those individual securities in each category have been in a continuous loss as of September 30, 2022 and December 31, 2021:



	September 30, 2022
	Less Than 12 Months				12 Months or Longer				Total
($ in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	28,829	$	(3,470)	$	14,479	$	(2,472)	$	43,308	$	(5,942)
Residential collateralized mortgage obligations	98,297		(10,031)		38,359		(9,012)		136,656		(19,043)
Total AFS debt securities	$	127,126	$	(13,501)	$	52,838	$	(11,484)	$	179,964	$	(24,985)



	December 31, 2021
	Less Than 12 Months				12 Months or Longer				Total
($ in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	31,120	$	(321)	$	—	$	—	$	31,120	$	(321)
Residential collateralized mortgage obligations	93,607		(1,578)		7,212		(231)		100,819		(1,809)
Total AFS debt securities	$	124,727	$	(1,899)	$	7,212	$	(231)	$	131,939	$	(2,130)

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.

The unrealized losses were primarily attributable to interest rate movement, not credit quality. These securities (Fannie Mae, Ginnie Mae, and Freddie Mac) are guaranteed or sponsored by agencies of the U.S. government, and the issuers of the securities are of high credit quality. The Company believes that the gross unrealized losses presented in the previous tables are temporary and no credit losses are expected. As a result, the Company expects full collection of the carrying amount of these securities, does not intend to sell the securities in an unrealized loss position, and it was more-

likely-than-not the Company will not have to sell these securities prior to recovery of amortized cost. Accordingly, the Company does not consider these securities to be OTTI as of September 30, 2022.

As of September 30, 2022 or December 31, 2021, there were no pledged securities to secure public deposits, borrowing and letters of credit from Federal Home Loan Bank ("FHLB") and the Board of Governors of the Federal Reserve System, 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 Sheets as of September 30, 2022 and December 31, 2021:



($ in thousands)	September 30, 2022		December 31, 2021
FHLB stock	$	8,483	$	7,006
PCBB stock	190		190
Mutual fund - CRA qualified	3,306		3,708
Time deposits placed in other banks	95		95
Total other investments	$	12,074	$	10,999

The Company has equity investment in a mutual fund with readily determinable fair value of $3.3 million and $3.7 million, as of September 30, 2022 and December 31, 2021, 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 $145 thousand and a $14 thousand unrealized loss for the three months ended September 30, 2022 and 2021, respectively, and a $438 thousand and a $73 thousand unrealized loss for the nine months ended September 30, 2022 and 2021, respectively. The unrealized gains (losses) of the mutual fund are included in Other income in the Consolidated Statements of Income.

Note 3. Loans and Allowance for Loan Losses

The following table presents the composition of the loan portfolio as of September 30, 2022 and December 31, 2021:



($ in thousands)	September 30, 2022		December 31, 2021
Commercial real estate	$	830,125	$	701,450
SBA loans—real estate	217,793		220,099
SBA loans—non-real estate (1)	14,776		55,759
Commercial and industrial ("C&I")	133,855		162,543
Home mortgage	419,469		173,303
Consumer	2,000		865
Gross loans receivable	1,618,018		1,314,019
Allowance for loan losses	(18,369)		(16,123)
Loans receivable, net (2)	$	1,599,649	$	1,297,896

(1)Includes SBA Paycheck Protection Program ("PPP") loans of $1.1 million and $40.6 million as of September 30, 2022 and December 31, 2021, respectively.

(2)Includes net deferred loan fees or costs, unamortized premiums and unaccreted discounts of $2.9 million and $7.0 million as of September 30, 2022 and December 31, 2021, respectively.

No loans were outstanding to related parties as of September 30, 2022 and December 31, 2021.

The following table summarizes the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2022 and 2021:



($ in thousands)	Commercial Real Estate		SBA Loans— Real Estate		SBA Loans—Non- Real Estate		C&I		Home Mortgage		Consumer		Total
Three Months Ended September 30, 2022
Beginning balance	$	7,743	$	1,800	$	135	$	2,102	$	5,913	$	9	$	17,702
(Reversal of) provision for loan losses (1)	(895)		(261)		7		291		1,521		(1)		662
Charge-offs	—		—		—		—		—		—		—
Recoveries	—		—		5		—		—		—		5
Ending balance	$	6,848	$	1,539	$	147	$	2,393	$	7,434	$	8	$	18,369

Three Months Ended September 30, 2021
Beginning balance	$	8,456	$	1,997	$	228	$	2,286	$	1,704	$	16	$	14,687
(Reversal of) provision for loan losses (1)	(241)		99		(35)		(332)		(46)		(2)		(557)
Charge-offs	—		—		—		—		—		—		—
Recoveries	—		—		3		—		—		1		4
Ending balance	$	8,215	$	2,096	$	196	$	1,954	$	1,658	$	15	$	14,134

(1)There was no provision for uncollectible accrued interest receivable for the three months ended September 30, 2022. Excludes reversal of uncollectible accrued interest receivable of $327 thousand for the three months ended September 30, 2021.



($ in thousands)	Commercial Real Estate		SBA Loans— Real Estate		SBA Loans—Non- Real Estate		C&I		Home Mortgage		Consumer		Total
Nine Months Ended September 30, 2022
Beginning balance	$	8,150	$	2,022	$	199	$	2,848	$	2,891	$	13	$	16,123
(Reversal of) provision for loan losses (1)	(1,302)		(476)		(100)		(455)		4,543		(6)		2,204
Charge-offs	—		(14)		(18)		—		—		—		(32)
Recoveries	—		7		66		—		—		1		74
Ending balance	$	6,848	$	1,539	$	147	$	2,393	$	7,434	$	8	$	18,369

Nine Months Ended September 30, 2021
Beginning balance	$	8,505	$	1,802	$	278	$	2,563	$	2,185	$	19	$	15,352
(Reversal of) provision for loan losses (1)	(290)		294		(58)		(609)		(527)		(8)		(1,198)
Charge-offs	—		—		(27)		—		—		—		(27)
Recoveries	—		—		3		—		—		4		7
Ending balance	$	8,215	$	2,096	$	196	$	1,954	$	1,658	$	15	$	14,134

(1)Excludes reversal of uncollectible accrued interest receivable of $205 thousand and $178 thousand for the nine months ended September 30, 2022 and 2021, respectively.

The following table presents the allowance for loan losses and recorded investment (not including accrued interest receivable) by portfolio segment and impairment methodology as of September 30, 2022 and December 31, 2021:



($ in thousands)	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
As of September 30, 2022
Allowance for loan losses (1):
Commercial real estate	$	—	$	6,848	$	6,848
SBA loans—real estate	—		1,539		1,539
SBA loans—non-real estate	—		147		147
C&I	288		2,105		2,393
Home mortgage	—		7,434		7,434
Consumer	—		8		8
Total	$	288	$	18,081	$	18,369
Loans (2):
Commercial real estate	$	—	$	830,125	$	830,125
SBA loans—real estate	411		217,382		217,793
SBA loans—non-real estate	—		14,776		14,776
C&I	288		133,567		133,855
Home mortgage	—		419,469		419,469
Consumer	—		2,000		2,000
Total	$	699	$	1,617,319	$	1,618,018
As of December 31, 2021
Allowance for loan losses (1):
Commercial real estate	$	—	$	8,150	$	8,150
SBA loans—real estate	—		2,022		2,022
SBA loans—non-real estate	—		199		199
C&I	312		2,536		2,848
Home mortgage	—		2,891		2,891
Consumer	—		13		13
Total	$	312	$	15,811	$	16,123
Loans (2):
Commercial real estate	$	—	$	701,450	$	701,450
SBA loans—real estate	812		219,287		220,099
SBA loans—non-real estate	—		55,759		55,759
C&I	312		162,231		162,543
Home mortgage	—		173,303		173,303
Consumer	—		865		865
Total	$	1,124	$	1,312,895	$	1,314,019

(1)There was no uncollectible accrued interest receivable as of September 30, 2022. Excludes allowance for uncollectible accrued interest receivable of $205 thousand as of December 31, 2021.

(2)Excludes accrued interest receivables of $5.2 million and $4.4 million as of September 30, 2022, and December 31, 2021, respectively.

The following table presents the recorded investment of individually impaired loans and the specific allowance for loan losses as of September 30, 2022 and December 31, 2021:



	September 30, 2022 (1)								December 31, 2021 (1)
($ in thousands)	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance		Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance
SBA loans—real estate	$	411	$	411	$	—	$	—	$	812	$	812	$	—	$	—
C&I	288		—		288		288		312		—		312		312
Total	$	699	$	411	$	288	$	288	$	1,124	$	812	$	312	$	312

(1) The difference between the unpaid principal balance (net of partial charge-offs) and the recorded investment in the loans was not considered to be material.

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 nine months ended September 30, 2022 and September 30, 2021. The difference between interest income recognized and cash basis interest recognized was immaterial.



	Three Months Ended September 30,								Nine Months Ended September 30,
	2022				2021				2022				2021
($ in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
SBA loans—real estate	$	411	$	—	$	540	$	—	$	405	$	—	$	450	$	—
C&I	293		9		322		—		301		24		326		—
Total	$	704	$	9	$	862	$	—	$	706	$	24	$	776	$	—

The following table presents the recorded investment in nonaccrual loans and loans past due 90 or more days and still accruing interest, by portfolio as of September 30, 2022 and December 31, 2021:



($ in thousands)	Nonaccrual		90 or More Days Past Due & Still Accruing		Total
As of September 30, 2022
SBA loans—real estate	$	411	$	—	$	411
SBA loans—non-real estate	568		—		568
C&I	288		—		288
Home mortgage	984		—		984
Total	$	2,251	$	—	$	2,251
As of December 31, 2021
SBA loans—real estate	$	812	$	—	$	812
SBA loans—non-real estate	837		200		1,037
C&I	313		—		313
Home mortgage	1,038		—		1,038
Total	$	3,000	$	200	$	3,200

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.

The following table represents the aging analysis of the recorded investment in past due loans as of September 30, 2022 and December 31, 2021:



($ in thousands)	30-59 Days Past Due		60-89 Days Past Due		> 90 Days Past Due		Total Past Due		Loans Not Past Due		Total (1)
As of September 30, 2022
Commercial real estate	$	—	$	—	$	—	$	—	$	830,125	$	830,125
SBA—real estate	70		—		—		70		217,723		217,793
SBA—non-real estate	290		503		250		1,043		13,733		14,776
C&I	—		—		—		—		133,855		133,855
Home mortgage	1		342		844		1,187		418,282		419,469
Consumer	—		—		—		—		2,000		2,000
Total	$	361	$	845	$	1,094	$	2,300	$	1,615,718	$	1,618,018
As of December 31, 2021
Commercial real estate	$	—	$	—	$	—	$	—	$	701,450	$	701,450
SBA—real estate	—		—		419		419		219,680		220,099
SBA—non-real estate	76		336		881		1,293		54,466		55,759
C&I	—		—		—		—		162,543		162,543
Home mortgage	—		—		893		893		172,410		173,303
Consumer	—		—		—		—		865		865
Total	$	76	$	336	$	2,193	$	2,605	$	1,311,414	$	1,314,019

(1)Excludes accrued interest receivables of $5.2 million and $4.4 million as of September 30, 2022, and December 31, 2021, respectively.

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 $288 thousand and $313 thousand as of September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022 and December 31, 2021, the Company has allocated $288 thousand and $313 thousand of specific reserves to the loan 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 previously identified as TDRs. There were no new loans identified as TDRs during the three and nine months ended September 30, 2022 and 2021. There were no payment defaults during the nine months ended September 30, 2022 and 2021 of loans that had been modified as TDRs within the previous twelve months.

Loan Payment Deferrals: As of September 30, 2022, there was no loan under COVID-19 loan payment modification.

Paycheck Protection Program loans: A provision in the CARES Act created the PPP, which is administered by the SBA. The PPP was 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 September 30, 2022, the Company had loans outstanding with a carrying value of $1.1 million, which were recorded in the SBA – non-real estate. Since the PPP’s inception through September 30, 2022, the Company has funded $154.5 million, and $153.4 million of principal forgiveness has been provided on qualifying PPP loans.

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

established at inception, and generally only adjusted based on performance. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention—Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard—Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful—Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

As of September 30, 2022 and December 31, 2021, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:



($ in thousands)	Pass		Special Mention		Substandard		Doubtful		Total (1)
As of September 30, 2022
Commercial real estate	$	830,125	$	—	$	—	$	—	$	830,125
SBA loans—real estate	216,618		—		1,175		—		217,793
SBA loans—non-real estate	14,134		—		471		171		14,776
C&I	133,113		—		742		—		133,855
Home mortgage	418,486		—		983		—		419,469
Consumer	2,000		—		—		—		2,000
Total	$	1,614,476	$	—	$	3,371	$	171	$	1,618,018
As of December 31, 2021
Commercial real estate	$	701,450	$	—	$	—	$	—	$	701,450
SBA loans—real estate	218,408		—		1,691		—		220,099
SBA loans—non-real estate	54,762		—		966		31		55,759
C&I	162,230		—		313		—		162,543
Home mortgage	172,265		—		1,038		—		173,303
Consumer	865		—		—		—		865
Total	$	1,309,980	$	—	$	4,008	$	31	$	1,314,019

(1)Excludes accrued interest receivables of $5.2 million and $4.4 million as of September 30, 2022, and December 31, 2021, respectively.

Note 4. Premises and Equipment

The following table presents information regarding the premises and equipment as of September 30, 2022 and December 31, 2021:



($ in thousands)	September 30, 2022		December 31, 2021
Leasehold improvements	$	7,824	$	7,375
Furniture and fixtures	3,880		3,530
Equipment and others	3,204		2,955
Total premises and equipment	14,908		13,860
Accumulated depreciation	(10,525)		(9,505)
Total premises and equipment, net	$	4,383	$	4,355

Total depreciation expense included in occupancy and equipment expenses was $349 thousand and $332 thousand for the three months ended September 30, 2022 and 2021, respectively, and $1,020 thousand and $989 thousand for the nine months ended September 30, 2022 and 2021, respectively.

Note 5. 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. Based on the results of the impairment test, there was no valuation allowance for impairment as of September 30, 2022 and December 31, 2021.

The following table presents an analysis of the changes in activity for loan servicing assets during the three and nine months ended September 30, 2022 and 2021:



	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2022		2021		2022		2021
Beginning balance	$	12,341	$	12,903	$	12,720	$	7,360
Additions from loans sold with servicing retained	1,532		533		3,681		1,380
Additions from purchase of servicing rights					—		6,097
Amortized to expense	(984)		(1,047)		(3,512)		(2,448)
Ending balance	$	12,889	$	12,389	$	12,889	$	12,389

The fair value of the servicing assets was $17.3 million as of September 30, 2022, which was determined using discount rates ranging from 4.83% to 10.3% and prepayment speeds ranging from 13.0% to 13.3%, depending on the stratification of the specific assets.

The fair value of the servicing assets was $15.1 million as of September 30, 2021, which was determined using discount rates ranging from 3.8% to 10.0% and prepayment speeds ranging from 14.3% to 14.7% depending on the stratification of the specific assets.

Note 6. Deposits

Time deposits that exceed the FDIC insurance limit of $250 thousand as of September 30, 2022 and December 31, 2021 were $277.8 million and $207.3 million, respectively.

The following table presents the scheduled contractual maturities of time deposits as of September 30, 2022:



($ in thousands)
Remainder of 2022	$	127,992
2023	361,488
2024	6,110
2025	1,153
2026 and thereafter	526
Total	$	497,269

Deposits from principal officers, directors, and their affiliates as of September 30, 2022 and December 31, 2021 were $1.4 million and $1.2 million, respectively.

Note 7. Borrowing Arrangements

As of September 30, 2022, the Company had $10.0 million borrowings from the FHLB of San Francisco compared to no borrowings as of December 31, 2021. The Company has a letter of credit with the FHLB in the amount of $67.0 million to secure a public deposit as of both September 30, 2022 and December 31, 2021.

The Company had available borrowings from the following institutions as of September 30, 2022:



($ in thousands)
FHLB—San Francisco	$	406,523
Federal Reserve Bank	179,942
Pacific Coast Bankers Bank	50,000
Zions Bank	25,000
First Horizon Bank	25,000
Total	$	686,465

The Company has pledged approximately $1.14 billion and $958.3 million of loans as collateral for these lines of credit as of September 30, 2022 and December 31, 2021, respectively.

Note 8. Income Tax

The Company’s income tax expense was $3.5 million and $3.2 million for the three months ended September 30, 2022 and 2021, respectively, and $10.3 million and $8.1 million for the nine months ended September 30, 2022 and 2021, respectively. The effective income tax rate was 28.9% and 28.2% for the three months ended September 30, 2022 and 2021, respectively and 29.0% and 29.0% for the nine months ended September 30, 2022 and 2021, 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 2018 and for state taxing authorities for tax years prior to 2017.

There were no significant unrealized tax benefits recorded as of September 30, 2022 and 2021, and the Company does not expect any significant increase in unrealized tax benefits in the next twelve months.

Note 9. 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 Sheets. 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 presents the distribution of undisbursed credit-related commitments as of September 30, 2022 and December 31, 2021:



($ in thousands)	September 30, 2022		December 31, 2021
Loan commitments	$	186,291	$	116,511
Standby letter of credit	6,467		4,477
Commercial letter of credit	980		1,028
Total undisbursed credit related commitments	$	193,738	$	122,016

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 balance of the investments in low-income housing partnerships and the total unfunded commitments related to the investments in low-income housing partnerships as of September 30, 2022 and December 31, 2021:



($ in thousands)	September 30, 2022		December 31, 2021
Investments in low-income housing partnerships	$	12,326	$	7,911
Unfunded commitments to fund investments for low-income housing partnerships	$	9,111	$	4,825

These balances are reflected in the other assets and other liabilities lines on the Consolidated Balance Sheets. The Company expects to finish fulfilling these commitments during the year ending 2039.

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. The Company recognized amortization expense of $210 thousand and $151 thousand for the three months ended September 30, 2022 and 2021, respectively, and $584 thousand and $405 thousand for the nine months ended September 30, 2022 and 2021, respectively. Additionally, the Company recognized tax credits and other benefits from the investments in low-income housing partnerships of $266 thousand and $190 thousand for the three months ended September 30, 2022 and 2021, respectively, and $738 thousand and $506 thousand for the nine months ended September 30, 2022 and 2021, respectively.

Note 10. Stock-Based Compensation

The Company has three stock-based compensation plans currently in effect as of September 30, 2022, as described further below. Total compensation cost that has been charged against earnings for these plans for the three months ended September 30, 2022 and 2021 was $335 thousand and $167 thousand, respectively, and $858 thousand and $403 thousand for the nine months ended September 30, 2022 and 2021, 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 nine months ended September 30, 2022 is as follows:



($ in thousands, except share data)	Number of Options Outstanding	Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding, as of January 1, 2022	52,000	$	6.37	$	333
Options granted	—	—
Options exercised	(12,000)	5.33
Options forfeited	—	—
Options expired	—	—
Outstanding, as of September 30, 2022	40,000	$	6.24	$	195
Fully vested and expected to vest	40,000	$	6.24	$	195
Vested	40,000	$	6.24	$	195

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



	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2022		2021		2022		2021
Intrinsic value of options exercised	$	60	$	—	$	60	$	174
Cash received from option exercises	$	64	$	—	$	64	$	64
Tax benefit realized from option exercised	$	2	$	—	$	2	$	20

The weighted average remaining contractual term of stock options outstanding under the 2005 Plan as of September 30, 2022 was 0.97 years. The weighted average remaining contractual term of stock options that were exercisable as of September 30, 2022 was 0.97 years. All of the stock options that are outstanding under the 2005 Plan were fully vested as of September 30, 2022.

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

The exercise prices of stock options granted under the plan may not be less than 100% of the fair value of the Company’s stock at the date of grant. The options, when granted, vest ratably over five years from the date of the grant and expire after ten years if not exercised. The 2010 Plan expired in August 2020, and no further 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 of the rights of a shareholder including the right to vote the shares and to all dividends (cash or stock). Compensation expense related to restricted stock awards will be recognized over the vesting period of the awards based on the fair value of the Company’s common stock at the issue date.

A summary of the stock options outstanding under the 2010 Plan for the nine months ended September 30, 2022 is as follows:



($ in thousands, except share data)	Number of Options Outstanding	Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding, as of January 1, 2022	210,000	$	8.00	$	1,000
Options granted	—	—
Options exercised	—	—
Options forfeited	—	—
Options expired	—	—
Outstanding, as of September 30, 2022	210,000	$	8.00	$	655
Fully vested and expected to vest	210,000	$	8.00	$	655
Vested	210,000	$	8.00	$	655

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



	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2022		2021		2022		2021
Intrinsic value of options exercised	$	—	$	—	$	—	$	86
Cash received from option exercises	$	—	$	—	$	—	$	25
Tax benefit realized from option exercised	$	—	$	—	$	—	$	—

The weighted average remaining contractual term of stock options outstanding as of September 30, 2022 was 1.50 years. The weighted average remaining contractual term of stock options that were exercisable as of September 30, 2022 was 1.50 years.

A summary of the changes in the Company's non-vested restricted stock awards under the 2010 Plan for the nine months ended September 30, 2022 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, 2022	21,000	$	7.95	$	268
Awards granted	—	—
Awards vested	—	—
Awards forfeited	(6,500)	6.37
Non-vested, as of September 30, 2022	14,500	$	8.66	$	161

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



	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2022		2021		2022		2021
Tax (provision) benefit realized from awards vested	$	—	$	—	$	—	$	(85)

As of September 30, 2022, the Company had approximately $27 thousand of unrecognized compensation cost related to unvested restricted stock awards under the 2010 Plan. The Company expects to recognize these costs over a weighted average period of 1.70 years.

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 100.00% of the fair value of the Company’s stock at the date of grant. There are no stock options granted under the 2021 Plan as of September 30, 2022.

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 nine months ended September 30, 2022 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, 2022	176,641	$	9.90	$	2,254
Awards granted	217,553	12.59
Awards vested	(58,798)	9.90
Awards forfeited	(15,030)	12.30
Non-vested, as of September 30, 2022	320,366	$	11.62	$	3,562

Information related to vested restricted stock awards under the 2021 Plan for the periods indicated follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2022		2021		2022		2021
Tax benefit realized from awards vested	$	—	$	—	$	12	$	—

There were 1,128,087 shares available for future grants of either stock options or restricted stock awards under the 2021 Plan as of September 30, 2022. The Company had approximately $3.1 million of unrecognized compensation cost related to unvested restricted stock awards under the 2021 Plan as of September 30, 2022. The Company expects to recognize these costs over a weighted average period of 2.78 years.

Note 11. 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 $216 thousand and $188 thousand for the three months ended September 30, 2022 and 2021, respectively and $642 thousand and $557 thousand for the nine months ended September 30, 2022 and 2021.

Note 12. 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 classifies 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.

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 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 September 30, 2022 and December 31, 2021 are summarized below:



	Fair Value Measure on a Recurring Basis
($ in thousands)	Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2022
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	43,307	$	—	$	43,307	$	—
Residential collateralized mortgage obligations	$	143,131	$	—	$	143,131	—
Other investments:
Mutual fund - CRA qualified	$	3,306	$	3,306	$	—	$	—

December 31, 2021
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	37,412	$	—	$	37,412	$	—
Residential collateralized mortgage obligations	$	113,032	$	—	$	113,032	$	—
Other investments:
Mutual fund - CRA qualified	$	3,708	$	3,708	$	—	$	—

There were no transfers of assets or liabilities between the Level 1 and Level 2 classifications for the three and nine months ended September 30, 2022 or 2021.

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.

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 September 30, 2022 and December 31, 2021:



	Fair Value Measure on a Nonrecurring Basis
($ in thousands)	Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2022
Impaired loans	$	410	$	—	$	—	$	410

December 31, 2021
Impaired loans	$	814	$	—	$	—	$	814

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 September 30,				Nine Months Ended September 30,
($ in thousands)	2022		2021		2022		2021
Impaired loans	$	5	$	(106)	$	15	$	(99)

The following table presents information about significant unobservable inputs utilized in the Company’s nonrecurring Level 3 fair value measurements as of September 30, 2022 and December 31, 2021:

($ in thousands)

Fair Value
Measurements
(Level 3)

Valuation
Techniques

Unobservable
Inputs

Range of
Inputs

Weighted-

Average of

Inputs (1)

September 30, 2022

Impaired loans:

SBA loans—real estate

410

Income approach -

income capitalization

Capitalization rate

12.0%

December 31, 2021

Impaired loans:

SBA loans—real estate

419

Market approach

Market data

comparison

2% to 17%

8.7%

SBA loans—real estate

395

Income approach -

income capitalization

Capitalization rate

12.0%

(1)Weighted-average of inputs is based on the relative fair value of the respective assets as of September 30, 2022 and December 31, 2021.

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 September 30, 2022 and December 31, 2021 are as follows. These financial assets and liabilities are measured at amortized cost basis on the Company’s Consolidated Balance Sheets:



	September 30, 2022
($ in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Value
Financial Assets:
Cash and cash equivalents	$	107,281	$	107,281	$	—	$	—	$	107,281
Loans held for sale	36,642		—		39,801		—		39,801
Loans receivable, net	1,599,649		—		—		1,533,583		1,533,583
Accrued interest receivable, net	5,856		75		578		5,203		5,856
Other investments:
FHLB and PCBB stock	8,673		N/A		N/A		N/A		N/A
Time deposits placed	95		—		95		—		95
Servicing assets	12,889		—		—		17,263		17,263
Financial Liabilities:
Deposit	1,816,811		—		1,806,368		—		1,806,368
FHLB Advances	10,000		—		10,000		—		10,000
Accrued interest payable	1,099		—		1,099		—		1,099



	December 31, 2021
($ in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Value
Financial Assets:
Cash and cash equivalents	$	115,459	$	115,459	$	—	$	—	$	115,459
Loans held for sale	89,428		—		99,301		—		99,301
Loans receivable, net	1,297,896		—		—		1,291,926		1,291,926
Accrued interest receivable, net	4,579		—		348		4,231		4,579
Other investments:
FHLB and PCBB stock	7,196		N/A		N/A		N/A		N/A
Time deposits placed	95		—		95		—		95
Servicing assets	12,720		—		—		15,505		15,505
Financial Liabilities:
Deposit	1,534,066		—		1,534,066		—		1,534,066

Accrued interest payable	558		—		558		—		558

Note 13. Regulatory Capital Matters

The Bank is subject to certain risk-based capital and leverage ratio requirements under the U.S. Basel III capital rules administered by the federal and state banking agencies. Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on the Company's operations or financial condition. The Basel III capital rules also require the Bank to maintain a capital conservation buffer of 2.5% above the minimum risk-based capital ratios in order to absorb losses during periods of economic stress, effective January 1, 2019. Banking institutions with a ratio of common equity tier 1 capital to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends. equity repurchases and compensation based on the amount of the shortfall. Management believes that as of September 30, 2022 and December 31, 2021, 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.

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



	September 30, 2022
	Actual (1)				Required for Capital Adequacy Purposes				Minimum To be Considered "Well Capitalized"
($ in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk-weighted assets)
Consolidated	$	205,902	13.10	%	N/A		N/A		N/A		N/A
Bank	203,851		12.97	%	$	125,716	8.00	%	$	157,145	10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated	187,343		11.92	%	N/A		N/A		N/A		N/A
Bank	185,293		11.79	%	94,287		6.00	%	125,716		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)
Consolidated	187,343		11.92	%	N/A		N/A		N/A		N/A
Bank	185,293		11.79	%	70,715		4.50	%	102,144		6.50	%
Tier 1 capital (to average assets)
Consolidated	187,343		9.52	%	N/A		N/A		N/A		N/A
Bank	185,293		9.41	%	78,726		4.00	%	98,408		5.00	%

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



	December 31, 2021
	Actual (1)				Required for Capital Adequacy Purposes				Minimum To be Considered "Well Capitalized"
($ in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk-weighted assets)
Consolidated	$	182,439	13.66	%	N/A		N/A		N/A		N/A
Bank	179,882		13.47	%	$	106,857	8.00	%	$	133,572	10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated	165,944		12.42	%	N/A		N/A		N/A		N/A
Bank	163,387		12.23	%	80,143		6.00	%	106,857		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)
Consolidated	165,944		12.42	%	N/A		N/A		N/A		N/A
Bank	163,387		12.23	%	60,107		4.50	%	86,822		6.50	%
Tier 1 capital (to average assets)
Consolidated	165,944		9.58	%	N/A		N/A		N/A		N/A
Bank	163,387		9.44	%	69,266		4.00	%	86,582		5.00	%

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

Note 14. Earnings Per Share

Basic EPS is calculated using the two-class method. Under the two-class method, all earnings (distributed and undistributed) are allocated to common stock and participating securities. The Company grants restricted stock awards, which entitle recipients to receive nonforfeitable dividends during the vesting period on a basis equivalent to dividends paid to holders of the Company's common stock. These restricted stock awards meet the definition of participating

securities based on their respective rights to receive nonforfeitable dividends, and they are treated as a separate class of securities in computing basic EPS. Participating securities are not included as incremental shares in computing diluted EPS.

Diluted EPS incorporates the potential impact of contingently issuable shares. Diluted EPS is calculated under both the two-class and treasury stock methods, and the more dilutive amount is reported. For each of the periods presented in the table below, diluted EPS calculated under two-class method was more dilutive.

The following table presents the calculation of net income applicable to common stockholders and basic and diluted EPS for the three and nine months ended September 30, 2022 and 2021:



	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands, except share and per share data)	2022		2021		2022		2021
Basic
Net income	$	8,650	$	8,250	$	25,282	$	19,706
Undistributed earnings allocated to participating securities	(188)		(109)		(532)		(216)
Net income allocated to common shares	8,462		8,141		24,750		19,490
Weighted average common shares outstanding	15,195,826		15,133,407		15,158,749		15,071,327
Basic earnings per common share	$	0.56	$	0.54	$	1.63	$	1.29
Diluted
Net income allocated to common shares	$	8,462	$	8,141	$	24,750	$	19,490
Weighted average common shares outstanding for basic earnings per common share	15,195,826		15,133,407		15,158,749		15,071,327
Add: Dilutive effects of assumed exercises of stock options	79,330		67,206		87,596		62,246
Average shares and dilutive potential common shares	15,275,156		15,200,613		15,246,345		15,133,573
Diluted earnings per common share	$	0.55	$	0.54	$	1.62	$	1.29

No share of common stock was antidilutive for the three and nine months ended September 30, 2022 and 2021.

Note 15. Subsequent Events

The Company has evaluated subsequent events through the issuance of these financial statements and is not aware of any material items that would require disclosure in the notes to the financial statements or would be required to be recognized as of September 30, 2022.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical financial statements and the related notes thereto contained in this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

OVERVIEW

We are a bank holding company headquartered in Los Angeles, California. Our commercial community banking activities are operated through Open Bank, our banking subsidiary. We offer commercial banking services to small and medium-sized businesses, their owners and retail customers primarily in the Korean-American community.

Our results of operations depend primarily on our net interest income. We drive our income from interest received on our loan portfolio and the fee income we receive in connection with our deposits, and the sale and service of SBA loans. Our major operating expenses are the interest we pay on deposits, the salaries and related benefits we pay our management

and staff, and the rent we pay on our leased properties. We rely primarily on locally-generated deposits, mostly from the Korean-American market within California, to fund our loan activities. We currently operate eight branches in Los Angeles County and Orange County, one branch in Santa Clara County, and one branch in Carrollton, Texas. We have four loan production offices in Atlanta, Georgia, Aurora, Colorado, and Lynnwood and Seattle, Washington.

The following significant items are of note as of or for the three and nine months ended September 30, 2022 compared to as of or the same periods ended September 30, 2021:

As of September 30, 2022 compared to as of September 30, 2021

•Total assets were $2.03 billion, an increase of $349.7 million, or 20.8%, from $1.68 billion.

•Gross loans were $1.62 billion, an increase of $386.2 million, or 31.4%, from $1.23 billion.

•Total deposits were $1.82 billion, an increase of $320.4 million, or 21.4%, from $1.50 billion.

•Shareholders’ equity was $170.1 million, an increase of $11.5 million, of 7.2%, from $158.6 million.

For the three months ended September 30, 2022 compared to the three months ended September 30, 2021

•Net income was $8.7 million or $0.55 per diluted common share, an increase of $0.4 million, or 4.8%, from $8.3 million or $0.54 per diluted common share.

•Net interest income increased to $20.3 million, an increase of $3.8 million, or 22.6%, from $16.6 million.

For the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021

•Net income was $25.3 million or $1.62 per diluted common share, an increase of $5.6 million, or 28.3%, from $19.7 million or $1.29 per diluted common share.

•Net interest income increased to $56.7 million, an increase of $12.8 million, or 29.1%, from $43.9 million.

SELECTED FINANCIAL DATA



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
($ in thousands, except share and per share data)	2022			2021			2022			2021
Income Statement Data:
Interest income	$	23,234		$	17,355		$	61,326		$	46,336
Interest expense	2,890			766			4,613			2,406
Net interest income	20,344			16,589			56,713			43,930
Provision for (reversal of) loan losses	662			(884)			1,999			(1,376)
Noninterest income	4,821			3,542			14,396			8,728
Noninterest expense	12,338			9,519			33,503			26,274
Income before income taxes	12,165			11,496			35,607			27,760
Income tax expense	3,515			3,246			10,325			8,054
Net income	8,650			8,250			25,282			19,706
Per Share Data:
Basic income per share	0.56			0.54			1.63			1.29
Diluted income per share	0.55			0.54			1.62			1.29
Book value per share	11.19			10.48			11.19			10.48
Shares of common stock outstanding	15,199,840			15,133,407			15,199,840			15,133,407

Performance Ratios:
Return on average assets (1)	1.77		%	2.03		%	1.80		%	1.73		%
Return on average equity (1)	19.91		%	21.30		%	19.91		%	17.55		%
Yield on total loans (1)	5.36		%	5.13		%	5.05		%	4.87		%
Yield on average earning assets (1)	4.92		%	4.40		%	4.56		%	4.23		%
Cost of average interest bearing liabilities (1)	1.21		%	0.40		%	0.71		%	0.44		%
Cost of deposits (1)	0.65		%	0.21		%	0.37		%	0.24		%
Net interest margin (1)	4.31		%	4.21		%	4.22		%	4.01		%
Efficiency ratio (2)	49.03		%	47.29		%	47.11		%	49.90		%
							46.07		%	51.51		%

(1) Annualized

(2) Represent noninterest expense divided by the sum of net interest income and noninterest income.



	As of
($ in thousands)	September 30, 2022			December 31, 2021
Balance Sheet Data:
Gross loans receivable	$	1,618,018		$	1,314,019
Loans held for sale	36,642			89,428
Allowance for loan losses	18,369			16,123
Total assets	2,029,575			1,726,691
Deposits	1,816,811			1,534,066
Shareholders’ equity	170,095			165,222
Asset Quality Data:
Net charge-offs to average gross loans receivable (1)	0.00		%	0.02		%
Nonperforming loans to gross loans receivable	0.14		%	0.24		%
Allowance for loan losses to nonperforming loans	816.04		%	503.84		%
Allowance for loan losses to gross loans receivable	1.14		%	1.23		%
Balance Sheet and Capital Ratios:
Gross loans receivable to deposits	89.06		%	85.66		%
Noninterest-bearing deposits to deposits	43.74		%	50.50		%
Average equity to average total assets	8.88		%	9.71		%
Leverage ratio	9.52		%	9.58		%
Common equity tier 1 ratio	11.92		%	12.42		%
Tier 1 risk-based capital ratio	11.92		%	12.42		%
Total risk-based capital ratio	13.10		%	13.66		%

(1) Annualized

Loan Payment Deferrals Related to the COVID-19 Pandemic

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 to borrowers who were current as of December 31, 2019. As of September 30, 2022, we had no loan in deferment status, compared to total outstanding balance of remaining in deferment status balance of $5.0 million, or 0.4% of the total portfolio, as of December 31, 2021.

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 September 30, 2022, we have funded $154.5 million, and $153.4 million of principal forgiveness has been provided on qualifying PPP loans. As of September 30, 2022, there were unamortized net deferred fees and unaccreted discounts of $28 thousand 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.

Critical Accounting Policies and Estimates

Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) and conform to general practices within the industry in which we operate. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the

financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statement. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements.

The following is a discussion of the critical accounting policies and significant estimates that require us to make complex and subjective judgments. Additional information about these policies can be found in the “Notes to Consolidated Financial Statements, Note 1. Summary of Significant Accounting Policies.”

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.

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 Sheets 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.

RESULTS OF OPERATIONS

Net Income

We reported net income for the three months ended September 30, 2022 of $8.7 million, compared to net income of $8.3 million for the same period of 2021. The increase was primarily due to a $5.9 million increase in interest income, partially offset by a $2.8 million increase in noninterest expense and a $1.5 million increase in provision for loan losses.



	Three Months Ended September 30,
($ in thousands)	2022		2021		Change
Interest income	$	23,234	$	17,355	$	5,879
Interest expense	2,890		766		2,124
Net interest income	20,344		16,589		3,755
Provision for (reversal of) loan losses	662		(884)		1,546
Noninterest income	4,821		3,542		1,279
Noninterest expense	12,338		9,519		2,819
Income before taxes	12,165		11,496		669
Income tax expense	3,515		3,246		269
Net income	$	8,650	$	8,250	$	400

We reported net income for the nine months ended September 30, 2022 of $25.3 million, compared to net income of $19.7 million for the same period of 2021. The increase was primarily due to a $15.0 million increase in interest income, partially offset by a $7.2 million increase in noninterest expense and a $3.4 million increase in provision for loan losses.



	Nine Months Ended September 30,
($ in thousands)	2022		2021		Change
Interest income	$	61,326	$	46,336	$	14,990
Interest expense	4,613		2,406		2,207
Net interest income	56,713		43,930		12,783
Provision for (reversal of) loan losses	1,999		(1,376)		3,375
Noninterest income	14,396		8,728		5,668
Noninterest expense	33,503		26,274		7,229
Income before taxes	35,607		27,760		7,847
Income tax expense	10,325		8,054		2,271
Net income	$	25,282	$	19,706	$	5,576

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 September 30,
	2022						2021
($ in thousands)	Average Balance		Interest and Fees		Yield / Rate (1)		Average Balance		Interest and Fees		Yield / Rate (1)
Interest-earning assets:
Interest-bearing deposits in other banks	$	75,599	$	427	2.21	%	$	137,662	$	47	0.13	%
Federal funds sold and other investments (2)	12,221		146		4.78		11,041		117		4.25
Available-for-sale debt securities	172,696		881		2.04		109,009		269		0.99
Total investments	260,516		1,454		2.23		257,712		433		0.67
Real estate loans	810,158		10,144		4.97		678,642		7,680		4.49
SBA loans	286,903		5,850		8.09		403,279		6,835		6.72
Commercial and industrial loans	140,098		1,952		5.53		107,614		1,074		3.96
Home mortgage loans	375,804		3,820		4.07		117,825		1,317		4.47
Consumer & other loans	1,037		14		4.88		978		16		6.49
Loans (3)	1,614,000		21,780		5.36		1,308,338		16,922		5.13
Total interest-earning assets	1,874,516		23,234		4.92		1,566,050		17,355		4.40
Noninterest-earning assets	83,398						56,807
Total assets	$	1,957,914					$	1,622,857

Interest-bearing liabilities:
Money market deposits and others	$	502,166	$	1,506	1.19	%	$	368,507	$	299	0.32	%
Time deposits	445,271		1,383		1.23		383,503		467		0.48
Total interest-bearing deposits	947,437		2,889		1.21		752,010		766		0.40
Borrowings	130		1		—		—		—		0.00
Total interest-bearing liabilities	947,567		2,890		1.21		752,010		766		0.40
Noninterest-bearing liabilities:
Noninterest-bearing deposits	806,289						696,761
Other noninterest-bearing liabilities	30,258						19,169
Total noninterest-bearing liabilities	836,547						715,930
Shareholders’ equity	173,800						154,917
Total liabilities and shareholders’ equity	$	1,957,914					$	1,622,857
Net interest income / interest rate spreads			$	20,344	3.71	%			$	16,589	4.00	%
Net interest margin					4.31	%					4.21	%

Cost of deposits					0.65	%					0.21	%
Cost of funds					0.65	%					0.21	%

(1)Annualized

(2)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.

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



	Nine Months Ended September 30,
	2022						2021
($ in thousands)	Average Balance		Interest and Fees		Yield / Rate (1)		Average Balance		Interest and Fees		Yield / Rate (1)
Interest-earning assets:
Interest-bearing deposits in other banks	$	80,659	$	665	1.09	%	$	111,799	$	97	0.11	%
Federal funds sold and other investments (2)	11,720		402		4.59		10,668		339		4.22
Available-for-sale debt securities	165,094		2,114		1.71		103,699		723		0.93
Total investments	257,473		3,181		1.65		226,166		1,159		0.68
Real estate loans	757,950		26,689		4.71		667,547		22,870		4.58
SBA loans	332,659		17,392		6.99		339,968		14,931		5.87
Commercial and industrial loans	152,189		5,300		4.66		108,402		3,129		3.86
Home mortgage loans	296,331		8,731		3.93		122,008		4,200		4.59
Consumer & other loans	866		33		5.04		1,115		47		5.61
Loans (3)	1,539,995		58,145		5.05		1,239,040		45,177		4.87
Total interest-earning assets	1,797,468		61,326		4.56		1,465,206		46,336		4.23
Noninterest-earning assets	73,410						52,573
Total assets	$	1,870,878					$	1,517,779

Interest-bearing liabilities:
Money market deposits and others	$	461,821	$	2,260	0.65	%	$	357,525	$	851	0.32	%
Time deposits	403,242		2,352		0.78		370,715		1,555		0.56
Total interest-bearing deposits	865,063		4,612		0.71		728,240		2,406		0.44
Borrowings	44		1		3.00		2,657		—		—
Total interest-bearing liabilities	865,107		4,613		0.71		730,897		2,406		0.44
Noninterest-bearing liabilities:
Noninterest-bearing deposits	811,263						619,437
Other noninterest-bearing liabilities	25,213						17,726
Total noninterest-bearing liabilities	836,476						637,163
Shareholders’ equity	169,295						149,719
Total liabilities and shareholders’ equity	$	1,870,878					$	1,517,779

Net interest income / interest rate spreads			$	56,713	3.85	%			$	43,930	3.79	%
Net interest margin					4.22	%					4.01	%

Cost of deposits					0.37	%					0.24	%
Cost of funds					0.37	%					0.24	%

(1)Annualized

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

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



	Three Months Ended September 30,
	2022 vs 2021
	Increases (Decreases) Due to Change in
($ in thousands)	Volume		Rate		Total
Interest-earning assets:
Interest-bearing deposits in other banks	$	(185)	$	565	$	380
Federal funds sold and other investments	21		8		29
Available-for-sale debt securities	242		370		612
Total investments	78		943		1,021
Real estate loans	1,567		897		2,464
SBA loans	(4,112)		3,127		(985)
Commercial and industrial loans	173		705		878
Home mortgage loans	1,273		1,230		2,503
Consumer & other loans	2		(4)		(2)
Total loans	(1,097)		5,955		4,858
Total interest-earning assets	(1,019)		6,898		5,879
Interest-bearing liabilities:
Money market deposits and others	348		859		1,207
Time deposits	125		791		916
Total interest-bearing deposits	473		1,650		2,123
Borrowings	1		—		1
Total interest-bearing liabilities	474		1,650		2,124
Net interest income	$	(1,493)	$	5,248	$	3,755



	Nine Months Ended September 30,
	2022 vs 2021
	Increases (Decreases) Due to Change in
($ in thousands)	Volume		Rate		Total
Interest-earning assets:
Interest-bearing deposits in other banks	$	(142)	$	710	$	568
Federal funds sold and other investments	53		10		63
Available-for-sale debt securities	610		781		1,391
Total investments	521		1,501		2,022
Real estate loans	3,141		678		3,819
SBA loans	(1,077)		3,538		2,461
Commercial and industrial loans	864		1,307		2,171
Home mortgage loans	2,293		2,238		4,531
Consumer & other loans	(10)		(4)		(14)
Total loans	5,211		7,757		12,968
Total interest-earning assets	5,732		9,258		14,990
Interest-bearing liabilities:
Money market deposits and others	452		957		1,409
Time deposits	173		624		797
Total interest-bearing deposits	625		1,581		2,206
Borrowings	1		—		1
Total interest-bearing liabilities	626		1,581		2,207
Net interest income	$	5,106	$	7,677	$	12,783

Comparison for the Three Months ended September 30, 2022 and 2021

Net interest income increased $3.8 million, or 22.6%, to $20.3 million for the three months ended September 30, 2022 from $16.6 million for the same period of 2021, primarily due to higher interest income on loans. A $4.9 million increase in interest income on loans for the three months ended September 30, 2022, compared with the same period of 2021, was primarily due to higher average loan balance from loan growth in home loans, real estate loans, and C&I loans.

Average yield on interesting-bearing deposits in other banks was 2.21% for the three months ended September 30, 2022, a 208 basis point increase from 0.13% for the same period of 2021, primarily due to the Federal Reserve’s rate increases. Average yield on available-for-sale debt securities was 2.04% for the three months ended September 30, 2022, a 105 basis point increase from 0.99% for the same period of 2021, primarily due to purchases of securities that earn higher yields than existing investment portfolio.

Average loan yield was 5.36% for the three months ended September 30, 2022, a 23 basis point increase from 5.13% for the same period of 2021. The increase was primarily due to a 70 basis point increase in contractual loan yield as a result of market rate increases by the Federal Reserve, partially offset by a 15 basis point decrease from lower SBA discount accretion income as a result of lower SBA loan payoffs and a 35 basis point decrease in amortization of net deferred fees as a result of lower payoffs on SBA PPP loans.

Average cost of interest-bearing deposits was 1.21% for the three months ended September 30, 2022, an 81 basis point increase from 0.40% for the same period of 2021, primarily due to the Federal Reserve’s rate increases. Average cost of deposits was 0.65% for the three months ended September 30, 2022, a 44 basis point increase from 0.21% for the same period of 2021, primarily due to the Federal Reserve’s rate increases, partially offset by higher average balance of noninterest-bearing deposits.

Net interest margin was 4.31% for the three months ended September 30, 2022, an increase of 10 basis points from 4.21% for the same period of 2021, primarily due to a 52 basis point increase in average yield on interest-earning assets.

Comparison for the Nine Months ended September 30, 2022 and 2021

Net interest income increased $12.8 million, or 29.1%, to $56.7 million for the nine months ended September 30, 2022 from $43.9 million for the same period of 2021, primarily due to higher interest income on loans. A $13.0 million increase in interest income on loans for the nine months ended September 30, 2022, compared with the same period of 2021, was primarily due to higher average loan balance from loan growth in home loans, real estate loans and C&I loans.

Average yield on interesting-bearing deposits in other banks was 1.09% for the nine months ended September 30, 2022, a 98 basis point increase from 0.11% for the same period of 2021, primarily due to the Federal Reserve’s rate increases. Average yield on available-for-sale debt securities was 1.71% for the nine months ended September 30, 2022, a 78 basis point increase from 0.93% for the same period of 2021, primarily due to purchases of securities that earn higher yields than existing investment portfolio.

Average loan yield was 5.05% for the nine months ended September 30, 2022, a 18 basis point increase from 4.87% for the same period of 2021. The increase was primarily due to a 33 basis point increase in contractual loan yield as a result of market rate increases by the Federal Reserve.

Average cost of interest-bearing deposits was 0.71% for the nine months ended September 30, 2022, a 27 basis point increase from 0.44% for the same period of 2021. Average cost of deposits was 0.37% for the nine months ended September 30, 2022, a 13 basis point increase from 0.24% for the same period of 2021, primarily due to higher average balance of noninterest-bearing deposits.

Net interest spread was 3.85% for the nine months ended September 30, 2022, a 6 basis point increase from 3.79% for the same period of 2021. Net interest margin was 4.22% for the nine months ended September 30, 2022, a 21 basis point increase from 4.01% for the same period of 2021, primarily due to a 33 basis point increase in average yield on interest-earning assets.

Provision for Loan Losses

Management evaluated the qualitative and quantitative factors on all loan types to reflect the COVID-19 pandemic’s prolonged potential adverse impacts on national, state, and local economic and business conditions. The provision for loan losses was $662 thousand for the three months ended September 30, 2022, an increase of $1.5 million compared to a $884 thousand reversal of loan losses for the same period of 2021. The provision for loan losses was $2.0 million for the nine months ended September 30, 2022, an increase of $3.4 million compared to a $1.4 million reversal of loan losses for the same period of 2021. The increases was primarily due to quantitative reserves from loan growth in real estate and home mortgage loans.

The allowance for loan losses as a percentage of gross loans was 1.14% as of September 30, 2022 and 1.23% as of December 31, 2021.

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.

Comparison for the Three Months ended September 30, 2022 and 2021

The following table sets forth the various components of our noninterest income for the three months ended September 30, 2022 and 2021:



	Three Months Ended September 30,
($ in thousands)	2022		2021		$ Change		% Change
Noninterest income:
Service charges on deposit	$	454	$	409	$	45	11.0	%
Loan servicing fees, net of amortization	610		599		11		1.8
Gain on sale of loans	3,490		2,188		1,302		59.5
Other income	267		346		(79)		(22.8)
Total noninterest income	$	4,821	$	3,542	$	1,279	36.1	%

Noninterest income for the three months ended September 30, 2022 was $4.8 million, an increase of $1.3 million, or 36.1%, compared to $3.5 million for the same period of 2021, primarily due to a $1.3 million increase in gain on sale of loans.

Gain on sale of loans was $3.5 million for the three months ended September 30, 2022, compared to $2.2 million for the same period of 2021, an increase of $1.3 million or 59.5%. The increase was primarily due to higher sales volume partially offset by lower average premium on loan sales. We sold $59.3 million of SBA loans with an average premium of 6.67% for the three months ended September 30, 2022, compared to a sale of $20.6 million of SBA loans with an average premium of 11.59% in the same period of 2021.

Comparison for the Nine Months ended September 30, 2022 and 2021

The following table sets forth the various components of our noninterest income for the nine months ended September 30, 2022 and 2021:



	Nine Months Ended September 30,
($ in thousands)	2022		2021		$ Change		% Change
Noninterest income:
Service charges on deposit	$	1,269	$	1,157	$	112	9.7	%
Loan servicing fees, net of amortization	1,711		1,432		279		19.5
Gain on sale of loans	10,601		5,280		5,321		100.8
Other income	815		859		(44)		(5.1)
Total noninterest income	$	14,396	$	8,728	$	5,668	64.9	%

Noninterest income for the nine months ended September 30, 2022 was $14.4 million, an increase of $5.7 million, or 64.9%, compared to $8.7 million for the same period of 2021, primarily due to a $5.3 million increase in gain on sale of loans.

Gain on sale of loans was $10.6 million for the nine months ended September 30, 2022, compared to $5.3 million for the same period of 2021, an increase of $5.3 million or 100.8%. The increase was primarily due to higher sales volume partially offset by lower average premium on loan sales. We sold $149.7 million of SBA loans with an average premium of 7.73% for the nine months ended September 30, 2022, compared to a sale of $53.6 million of SBA loans with an average premium of 11.12% in the same period of 2021.

Loan servicing fees, net of amortization, were $1.7 million, for the nine months ended September 30, 2022, compared to $1.4 million for the same period of 2021. The increase was primarily due to an increase in loan servicing portfolio and lower amortization of loan servicing fees as a result of lower SBA loan payoffs. Our total SBA loan

servicing portfolio was $701.6 million as of September 30, 2022, compared to $646.6 million as of the same period of 2021.

Noninterest Expense

Comparison for the Three Months ended September 30, 2022 and 2021

The following table sets forth the major components of our noninterest expense for the three months ended September 30, 2022 and 2021:



	Three Months Ended September 30,
($ in thousands)	2022		2021		$ Change		% Change
Noninterest expense:
Salaries and employee benefits	$	7,343	$	5,724	$	1,619	28.3	%
Occupancy and equipment	1,537		1,326		211		15.9
Data processing and communication	586		448		138		30.8
Professional fees	602		308		294		95.5
FDIC insurance and regulatory assessments	238		146		92		63.0
Promotion and advertising	177		175		2		1.1
Directors' fees	170		183		(13)		(7.1)
Foundation donation and other contributions	875		842		33		3.9
Other expenses	810		367		443		120.7
Total noninterest expense	$	12,338	$	9,519	$	2,819	29.6	%

Noninterest expense for the three months ended September 30, 2022 was $12.3 million, compared with $9.5 million for the same period of 2021, an increase of $2.8 million, or 29.6%. The increase was primarily attributable to higher salaries and employee benefits, and other expenses.

Salaries and employee benefits expense for the three months ended September 30, 2022 was $7.3 million, compared to $5.7 million for the same period of 2021, an increase of $1.6 million, or 28.3%. The increase was primarily due to an increase in salaries and employee incentive accruals as a result of 30 additional employees to support continued growth of the Company.

Occupancy and equipment expense for the three months ended September 30, 2022 was $1.5 million, compared to $1.3 million for the same period of 2021, an increase of $211 thousand, or 15.9%. The increase was primarily due to a new branch opened in the first quarter of 2022.

Professional fees for the three months ended September 30, 2022 were $602 thousand, compared to $308 thousand for the same period of 2021, an increase of $294 thousand, or 95.5%. The increase was primarily due to increases in other consulting fees.

Other expenses for the three months ended September 30, 2022 were $810 thousand, compared to $367 thousand for the same period of 2021, an increase of $443 thousand, or 120.7%. The increases were primarily due to an increase in business development expense.

Comparison for the Nine Months ended September 30, 2022 and 2021

The following table sets forth the major components of our noninterest expense for the nine months ended September 30, 2022 and 2021:



	Nine Months Ended September 30,
($ in thousands)	2022		2021		$ Change		% Change
Noninterest expense:
Salaries and employee benefits	$	20,109	$	15,693	$	4,416	28.1	%
Occupancy and equipment	4,404		3,795		609		16.0
Data processing and communication	1,571		1,363		208		15.3
Professional fees	1,290		925		365		39.5
FDIC insurance and regulatory assessments	637		401		236		58.9
Promotion and advertising	531		528		3		0.6
Directors' fees	537		427		110		25.8
Foundation donation and other contributions	2,542		1,989		553		27.8
Other expenses	1,882		1,153		729		63.2
Total noninterest expense	$	33,503	$	26,274	$	7,229	27.5	%

Noninterest expense for the nine months ended September 30, 2022 was $33.5 million, compared with $26.3 million for the same period of 2021, an increase of $7.2 million, or 27.5%. The increase was primarily attributable to higher salaries and employee benefits, occupancy and equipment, foundation donation and other contributions, and other expenses.

Salaries and employee benefits expense for the nine months ended September 30, 2022 was $20.1 million, compared to $15.7 million for the same period of 2021, an increase of $4.4 million, or 28.1%. The increase was primarily due to increased salaries as a result of additional employees to support continued growth of the Company.

Occupancy and equipment expense for the nine months ended September 30, 2022 was $4.4 million, compared to $3.8 million for the same period of 2021, an increase of $609 thousand, or 16.0%. The increase was primarily due to a new branch opened in the first quarter of 2022 and increased equipment expense to support our continued growth.

Foundation donation and other contributions for the nine months ended September 30, 2022 were $2.5 million, compared to $2.0 million for the same period of 2021, an increase of $553 thousand, or 27.8%. The increase was primarily due to higher donation accruals for Open Stewardship Foundation as a result of higher net income.

Other expenses for the nine months ended September 30, 2022 were $1.9 million, compared to $1.2 million for the same period of 2021, an increase of $729 thousand, or 63.2%. The increase were primarily due to an increase in business development expense.

Income Tax Expense

Income tax expense was $3.5 million for the three months ended September 30, 2022, compared to $3.2 million for the same period of 2021. The increase was primarily due to higher tax provision as a result of higher net income. Effective tax rates were 28.9% and 28.2% for the three months ended September 30, 2022 and 2021, respectively.

Income tax expense was $10.3 million for the nine months ended September 30, 2022, compared to $8.1 million for the same period of 2021. Effective tax rates were 29.0% for each of the three months ended September 30, 2022 and 2021.

FINANCIAL CONDITION

Investment Portfolio

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

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

All securities in our investment portfolio were classified as available-for-sale as of September 30, 2022. There were no held-to-maturity or trading securities in our investment portfolio as of September 30, 2022. All available-for-sale securities are carried at fair value and consist of U.S. government agencies or sponsored agency securities.

Securities available-for-sale increased $36.0 million, or 23.9%, to $186.4 million at September 30, 2022 from $150.4 million at December 31, 2021, primarily due to purchases of $86.0 million, partially offset by principal paydowns of $26.2 million and unrealized loss increases of $23.3 million for the nine months ended September 30, 2022. No issuer of the available-for-sale securities, other than U.S. Government and its agencies, comprised more than ten percent of our shareholders’ equity as of September 30, 2022 and December 31, 2021.

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



	September 30, 2022						December 31, 2021
($ in thousands)	Amortized Cost		Fair Value		Unrealized Gain/(Loss)		Amortized Cost		Fair Value		Unrealized Gain/(Loss)
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	49,249	$	43,307	$	(5,942)	$	37,555	$	37,412	$	(143)
Residential collateralized mortgage obligations	162,173		143,131		(19,042)		114,588		113,032		(1,556)
Total available-for-sale debt securities	$	211,422	$	186,438	$	(24,984)	$	152,143	$	150,444	$	(1,699)

Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. At September 30, 2022, we evaluated the securities which had an unrealized loss for other than temporary impairment (“OTTI”) and determined all decline in value to be temporary. We anticipate full recovery of amortized cost with respect to these securities by maturity, or sooner in the event of a more favorable market interest rate environment. We do not intend to sell these securities and it is not more likely than not that we will be required to sell them before recovery of the amortized cost basis, which may be at maturity.

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



	September 30, 2022
	Due in One Year or Less				Due after One Year Through Five Years				Due after Five Years Through Ten Years				Due after Ten Years
($ in thousands)	Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities	$	—	—	%	$	921	2.17	%	$	1,886	2.07	%	$	46,442	1.91	%
Residential collateralized mortgage obligations	—		—		—		—		1,054		2.04		161,119		2.43
Total available-for-sale debt securities	$	—	—	%	$	921	2.17	%	$	2,940	2.06	%	$	207,561	2.31	%

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.

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 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 the dates indicated:



	September 30, 2022				December 31, 2021
($ in thousands)	Amount		% of Total		Amount		% of Total
Commercial real estate	$	830,125	51.3	%	$	701,450	53.3	%
SBA loan - real estate	217,793		13.5		220,099		16.8
SBA loan - non-real estate	14,776		0.9		55,759		4.2
Commercial and industrial	133,855		8.3		162,543		12.4
Home mortgage	419,469		25.9		173,303		13.2
Consumer	2,000		0.1		865		0.1
Gross loans receivable	1,618,018		100.0	%	1,314,019		100.0	%
Allowance for loan losses	(18,369)				(16,123)
Loans receivable, net (1)	$	1,599,649			$	1,297,896

(1) Includes net deferred loan fees or costs, unamortized premiums and unaccreted discounts of $2.9 million and $7.0 million as of September 30, 2022 and December 31, 2021, respectively.

Gross loans increased $304.0 million, or 23.1%, to $1.62 billion as of September 30, 2022, compared to $1.31 billion as of December 31, 2021. The increase was primarily attributable to new loan production of $441.0 million and home mortgage loan purchases of $175.2 million, offset by loan payoffs and paydowns of $208.0 million and SBA loan sales of $150.1 million.

The following tables presents the contractual loan maturities by loan category and the contractual distribution of loans to changes in interest rates as of September 30, 20221 and December 31, 2021:



	September 30, 2022
	Due in One Year or Less				Due after One Year Through Five Years				Due after Five Years
($ in thousands)	Fixed Rate		Adjustable Rate		Fixed Rate		Adjustable Rate		Fixed Rate		Adjustable Rate		Total
Commercial real estate	$	31,151	$	40,588	$	375,425	$	102,842	$	254,758	$	25,361	$	830,125
SBA loans—real estate	—		—		—		36		—		217,757		217,793
SBA loan—non- real estate	—		71		1,079		4,133		—		9,493		14,776
Commercial and industrial	30,439		34,009		1,345		24,678		23,999		19,385		133,855
Home mortgage	—		—		—		—		402,364		17,105		419,469
Consumer	—		1,526		—		474		—		—		2,000
Gross loans	$	61,590	$	76,194	$	377,849	$	132,163	$	681,121	$	289,101	$	1,618,018



	December 31, 2021
	Due in One Year or Less				Due after One Year Through Five Years				Due after Five Years
($ in thousands)	Fixed Rate		Adjustable Rate		Fixed Rate		Adjustable Rate		Fixed Rate		Adjustable Rate		Total
Commercial real estate	$	32,142	$	64,919	$	317,631	$	116,053	$	132,727	$	37,978	$	701,450
SBA loans—real estate	—		—		—		42		395		219,662		220,099
SBA loan—non- real estate	612		128		39,995		5,147		—		9,877		55,759
Commercial and industrial	13,886		66,111		193		43,207		22,885		16,261		162,543
Home mortgage	—		—		—		—		154,864		18,439		173,303
Consumer	—		216		—		649		—		—		865
Gross loans	$	46,640	$	131,374	$	357,819	$	165,098	$	310,871	$	302,217	$	1,314,019

Our loan portfolio is concentrated in commercial real estate with the remaining balances in SBA loans (unguaranteed portion and PPP loans), home mortgage and commercial (primarily manufacturing, wholesale, and services oriented entities). We do not have any material concentrations by industry or group of industries in the loan portfolio.

However, 90.7% of our gross loans were secured by real property as of September 30, 2022, compared to 83.3% as of December 31, 2021.

Loans — Commercial Real Estate: 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. Our commercial real estate loan portfolio totaled $830.1 million at September 30, 2022 compared to $701.5 million at December 31, 2021. During the nine months ended September 30, 2022, we originated $155.7 million of commercial real estate loans. As of September 30, 2022, approximately 79.7% 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 September 30, 2022, our average loan to value for commercial real estate loans was 56%.

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 September 30, 2022, our SBA portfolio totaled $232.6 million, including $1.1 million of SBA PPP loans, compared to $275.9 million, including $40.6 million of SBA PPP loans as of December 31, 2021. We originated $136.5 million for the nine months ended September 30, 2022. We sold SBA loans of $149.7 million with 7.73% average premium and $53.6 million with 11.12% average premium during the nine months ended September 30, 2022 and 2021, respectively.

From our total SBA loan portfolio, $217.8 million is secured by real estate and $14.8 million is unsecured or secured by business assets as of September 30, 2022.

Loans — Commercial and Industrial: Commercial and industrial loans totaled $133.9 million as of September 30, 2022, compared to $162.5 million as of December 31, 2021. We originated $24.3 million for the nine months ended September 30, 2022.

Loans - Home Mortgage: We originate mainly non-qualified, alternative documentation single-family home mortgage loans (“home mortgage”) primarily through our retail branch network and our correspondent lender network. The primary loan product is a five-year or seven-year hybrid adjustable rate mortgage, which reprices after five years to a selected SOFR plus certain spreads. We also purchase residential mortgage loans from third party mortgage originators based on the review of their underwriting and file quality as opportunities arise

Home mortgage loans totaled $419.5 million as of September 30, 2022, compared to $173.3 million as of December 31, 2021. For the nine months ended September 30, 2022, we originated $122.0 million of home mortgage loans and purchased $175.2 million of home mortgage loans from third party mortgage originators.

Loan Servicing

As of September 30, 2022 and December 31, 2021, we serviced $701.6 million and $667.0 million, respectively, of SBA loans for others. Activity for loan servicing rights was as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2022		2021		2022		2021
Beginning balance	$	12,341	$	12,903	$	12,720	$	7,360
Additions from loans sold with servicing retained	1,532		533		3,681		1,380
Additions from purchase of servicing rights	—		—		—		6,097
Amortized to expense	(984)		(1,047)		(3,512)		(2,448)
Ending balance	$	12,889	$	12,389	$	12,889	$	12,389

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

The allowance for loan losses was $18.4 million at September 30, 2022, compared to $16.1 million at December 31, 2021. The provision for loan losses was $662 thousand for the three months ended September 30, 2022, compared to the reversal of loan losses of $884 thousand for the same period in 2021. The $662 thousand provision for

loan losses was primarily due to an increase of $2.3 million in quantitative reserves from loan growth in real estate and home mortgage loans, partially offset by a decrease of $1.6 million in qualitative assessments of our loan portfolio. The provision for loan losses was $2.0 million for the nine months ended September 30, 2022, compared to the reversal of loan losses of $1.4 million for the same period in 2021. The $2.0 million provision for loan losses was primarily due to an increase of $4.9 million in quantitative reserves from loan growth in real estate and home mortgage loans, partially offset by a decrease of $2.8 million in qualitative assessments of our loan portfolio.

In determining the allowance and the related provision for loan losses, we consider three 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; (ii) allocations, by loan classes, on loan portfolios based on historical loan loss experience and qualitative factors; and (iii) review of the credit discounts in relationship to the valuation allowance calculated for purchased loans. Provisions for loan losses are charged to operations to record changes to the total allowance to a level deemed appropriate by us.

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

Analysis of the Allowance for Loan Losses

The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge-offs, by category, for the three months ended September 30, 2022 and 2021:



	As of and for the Three Months Ended September 30,
	2022									2021
($ in thousands)	Beginning		(Reversal of) Provision (1)		Net (Charge-offs) Recoveries		Ending			Beginning		(Reversal of) Provision (1)		Net (Charge-offs) Recoveries		Ending
Commercial real estate	$	7,743	$	(895)	$	—	$	6,848		$	8,456	$	(241)	$	—	$	8,215
SBA loans—real estate	1,800		(261)		—		1,539			1,997		99		—		2,096
SBA loan—non- real estate	135		7		5		147			228		(35)		3		196
Commercial and industrial	2,102		291		—		2,393			2,286		(332)		—		1,954
Home mortgage	5,913		1,521		—		7,434			1,704		(46)		—		1,658
Consumer	9		(1)		$	—	8			16		(2)		1		15
Total	$	17,702	$	662	$	5	$	18,369		$	14,687	$	(557)	$	4	$	14,134
Gross loans (2)							$	1,618,018								$	1,231,821
Average loans (2)							$	1,561,374								$	1,229,140
Net (recoveries) charge-offs to average gross loans							—		%							—		%
Allowance for loan losses to gross loans							1.14		%							1.15		%

(2)Excludes loans held for sale.

The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge-offs, by category, for the nine months ended September 30, 2022 and 2021:



	As of and for the Nine Months Ended September 30,
	2022									2021
($ in thousands)	Beginning		(Reversal of) Provision (1)		Net (Charge-offs) Recoveries		Ending			Beginning		(Reversal of) Provision (1)		Net (Charge-offs) Recoveries		Ending
Commercial real estate	$	8,150	$	(1,302)	$	—	$	6,848		$	8,505	$	(290)	$	—	$	8,215
SBA loans—real estate	2,022		(476)		(7)		1,539			1,802		294		—		2,096
SBA loan—non- real estate	199		(100)		48		147			278		(58)		(24)		196
Commercial and industrial	2,848		(455)		—		2,393			2,563		(609)		—		1,954
Home mortgage	2,891		4,543		—		7,434			2,185		(527)		—		1,658
Consumer	13		(6)		$	1	8			19		(8)		$	4	15
Total	$	16,123	$	2,204	$	42	$	18,369		$	15,352	$	(1,198)	$	(20)	$	14,134
Gross loans (2)							$	1,618,018								$	1,231,821
Average loans (2)							$	1,458,410								$	1,169,338
Net (recoveries) charge-offs to average gross loans							(0.01)		%							0.00		%
Allowance for loan losses to gross loans							1.14		%							1.15		%

(1)Excludes reversal of uncollectible accrued interest receivable of $205 thousand for the nine months ended September 30, 2022. Excludes reversal of uncollectible accrued interest receivable of $178 thousand for the nine months ended September 30, 2021.

(2)Excludes loans held for sale.

The following table presents an allocation of the allowance for loan losses by portfolio as of September 30, 2022 and December 31, 2021:



	September 30, 2022				December 31, 2021
($ in thousands)	Amount		% to Total		Amount		% to Total
Commercial real estate	$	6,848	37.3	%	$	8,150	50.5	%
SBA loans—real estate	1,539		8.4	%	2,022		12.5	%
SBA loan—non- real estate	147		0.8	%	199		1.2	%
Commercial and industrial	2,393		13.0	%	2,848		17.7	%
Home mortgage	7,434		40.5	%	2,891		17.9	%
Consumer	8		—	%	13		0.1	%
Total	$	18,369	100.0	%	$	16,123	100.0	%

Nonperforming Assets

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

Nonperforming loans include loans that are 90 days past due and still accruing, loans accounted for on a non-accrual basis and accruing restructured loans. Nonperforming assets consist of nonperforming loans plus OREO.

Nonperforming loans were $2.3 million at September 30, 2022, compared to $3.2 million at December 31, 2021. As of September 30, 2022 and December 31, 2021, nonaccrual loans of $442 thousand and $166 thousand, respectively were the guaranteed portion of SBA loans that are in liquidation.

Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as OREO until sold, and is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. We had no OREO as of September 30, 2022 and December 31, 2021.

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



($ in thousands)	September 30, 2022			December 31, 2021
Nonaccrual loans	$	2,251		$	3,000
Past due loans 90 days or more and still accruing	—			200
Accruing troubled debt restructured loans	—			—
Total nonperforming loans	2,251			3,200
Other real estate owned	—			—
Total nonperforming assets	$	2,251		$	3,200
Nonperforming loans to gross loans	0.14		%	0.24		%
Nonperforming assets to total assets	0.11		%	0.19		%
Allowance for loan losses to nonperforming loans	816		%	504		%

Deposits and Other Sources of Funds

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 dedicate continuing effort into gathering noninterest demand deposits accounts through marketing to our existing and new loan customers, customer referrals, our marketing staff and various involvement with community networks.

The following table show the composition of deposits by type as of the dates presented:



	September 30, 2022				December 31, 2021
($ in thousands)	Amount		Percent		Amount		Percent
Noninterest-bearing demand	$	794,631	43.7	%	$	774,754	50.5	%
Interest-bearing:
Money market and others	524,911		28.9		380,226		24.8
Time deposits (more than $250,000)	277,785		15.3		207,288		13.5
Time deposits ($250,000 or less)	219,484		12.1		171,798		11.2
Total interest-bearing	1,022,180		56.3		759,312		49.5
Total deposits	$	1,816,811	100.0	%	$	1,534,066	100.0	%

The following tables set forth the maturity of time deposits as of September 30, 2022:



	Maturity Within:
($ in thousands)	Three Months		Three to Six Months		Six to 12 Months		After 12 Months		Total
Time deposits (more than $250,000)	$	76,174	$	15,362	$	182,947	$	3,302	$	277,785
Time deposits ($250,000 or less)	51,818		39,287		122,022		6,357		219,484
Total time deposits	$	127,992	$	54,649	$	304,969	$	9,659	$	497,269

Other than deposits, we also utilized FHLB advances as a supplementary funding source to finance our operations. The advances from the FHLB are collateralized by residential and commercial real estate loans. As of September 30, 2022, and December 31, 2021, we had maximum borrowing capacity from the FHLB of $532.9 million and $417.6 million, respectively. As of September 30, 2022, we had $10.0 million borrowings from the FHLB compared to no borrowings from FHLB as of December 31, 2021.

Liquidity and Capital Recourses

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

Deposits are the primarily funding source for the Bank. Deposits provide a stable source of funding and reduce the Company's reliance on the wholesale funding markets. The following table presents the loan and deposit balances, the loans-to-deposit ratios, and deposits as a percentage of total liabilities as of dates presented:



($ in thousands)	September 30, 2022			December 31, 2021
Deposits	$	1,816,811		$	1,534,066
Deposits as a % of total liabilities	97.7		%	98.2		%
Loans, net	$	1,599,649		$	1,297,896
Loans-to-deposits ratio	88.0		%	84.6		%

In addition to deposits, the Company has access to various sources of wholesale funding, as well as borrowing capacity at the FHLB, Federal Reserve, and correspondent banks to sustain an adequate liquid asset portfolio, meet daily cash demands and allow management flexibility to execute the business strategy. Economic conditions and the stability of capital markets impact the access to and the cost of wholesale funding. The access to capital markets is also affected by the ratings received from various credit rating agencies.

We had $100.0 million of unsecured federal funds lines with no amounts advanced as of September 30, 2022 and December 31, 2021. In addition, on such dates we had lines of credit from the Federal Reserve discount window of $179.9 million and $141.6 million, respectively. The Federal Reserve discount window lines were collateralized by a pool of commercial real estate loans and commercial and industrial loans totaling $259.4 million and $240.6 million as of September 30, 2022 and December 31, 2021, respectively. We did not have any borrowings outstanding with the Federal Reserve as of September 30, 2022 or December 31, 2021 and our borrowing capacity is limited only by eligible collateral.

Based on the values of loans pledged as collateral, we had $406.5 million of additional borrowing availability with the FHLB as of September 30, 2022. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts.

The Company maintains liquidity in the form of cash and cash equivalents, and unencumbered high-quality and liquid AFS debt securities. The following table presents the Company's liquid assets as of dates presented:



($ in thousands)	September 30, 2022		December 31, 2021
Cash and cash equivalents	$	107,281	$	115,459
AFS debt securities	186,438		150,444
Total liquid assets	$	293,719	$	265,903

The following tables summarizes short- and long-term material cash requirements as of September 30, 2022, which we believe that we will be able to fund these obligations through cash generated from our operations and available alternative sources of funds:



	Material Cash Requirements
($ in thousands)	Within One Year		One to Three Years		Three to Five Years		After Five Years		Indeterminable maturity (1)		Total
Deposits (2)	$	127,992	$	367,598	$	1,679	$	—	$	1,319,542	$	1,816,811
Operating lease commitments	2,346		3,603		3,291		3,198		—		12,438

Commitments to fund investment for Low Income Housing Tax Credit	3,951		4,736		50		323		51		9,111
Total contractual obligations	$	144,289	$	375,937	$	5,020	$	3,521	$	1,319,593	$	1,848,360

(1)Includes deposits with no defined maturity, such as noninterest-bearing demand, savings and money market.

(2)Excludes accrued interest.

In addition to contractual obligations, other commitments of the Company impact liquidity. These include unused commitments to extend credit, standby letters of credit and commercial letters of credit. Since many of these commitments expire without being drawn upon, and each customer must continue to meet the conditions established in the contract, the total amount of these commercial commitments does not necessarily represent the future cash requirements of the Company. The Company's liquidity sources have been, and are expected to be, sufficient to meet the cash requirements of its lending activities, Information about the Company's loan commitments, standby letters of credit and commercial letters of credit is provided in Note 9. Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-Q.

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.”

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 September 30, 2022 and December 31, 2021. The Bank exceeded all regulatory capital requirements under the Basel III Capital Rules and were considered to be “well-capitalized” as of the dates reflected in the table below. As of September 30, 2022, the FDIC categorized us as well-capitalized under the prompt corrective action framework. There have been no conditions or events since September 30, 2022 that management believes would change this classification.



As of September 30, 2022	Actual (1)				Regulatory Capital Ratio Requirements				Minimum to be Considered "Well Capitalized"				Regulatory Capital Ratio Requirements, including fully phased in Capital Conservation Buffer
($ in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk-weighted assets)
Consolidated	$	205,902	13.10	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	203,851		12.97	%	$	125,716	8.00	%	$	157,145	10.00	%	$	165,002	10.50	%
Tier 1 capital (to risk-weighted assets)
Consolidated	187,343		11.92	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	185,293		11.79	%	94,287		6.00	%	125,716		8.00	%	133,573		8.50	%
CET1 capital (to risk-weighted assets)
Consolidated	187,343		11.92	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	185,293		11.79	%	70,715		4.50	%	102,144		6.50	%	110,002		7.00	%
Tier 1 leverage (to average assets)
Consolidated	187,343		9.52	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	185,293		9.41	%	78,726		4.00	%	98,408		5.00	%	78,726		4.00	%

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



As of December 31, 2021	Actual (1)				Regulatory Capital Ratio Requirements				Minimum to be Considered "Well Capitalized"				Regulatory Capital Ratio Requirements, including fully phased in Capital Conservation Buffer
($ in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk-weighted assets)
Consolidated	$	182,439	13.66	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	179,882		13.47	%	$	106,857	8.00	%	$	133,572	10.00	%	$	140,250	10.50	%
Tier 1 capital (to risk-weighted assets)
Consolidated	165,944		0.12%		N/A		N/A		N/A		N/A		N/A		N/A
Bank	163,387		0.12%		80,143		6.00	%	106,857		8.00	%	113,536		8.50	%
CET1 capital (to risk-weighted assets)
Consolidated	165,944		0.12%		N/A		N/A		N/A		N/A		N/A		N/A
Bank	163,387		12.23	%	60,107		4.50	%	86,822		6.50	%	93,500		7.00	%
Tier 1 leverage (to average assets)
Consolidated	165,944		9.58	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	163,387		9.44	%	69,266		4.00	%	86,582		5.00	%	69,266		4.00	%

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

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 repricing 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 SOFR (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.

Potential changes to our net interest income in hypothetical rising and declining rate scenarios calculated as of September 30, 2022 and December 31, 2021 are presented in the following table. The projections assume (1) immediate, parallel shifts downward of the yield curve of 100 basis points and (2) 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 Sensitivity				Economic Value of Equity Sensitivity
	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
+400 basis points	1.13	%	26.96	%	(52.12)	%	(8.18)	%
+300 basis points	1.63	%	21.44	%	(34.22)	%	0.62	%
+200 basis points	2.10	%	15.15	%	(18.84)	%	6.11	%
+100 basis points	1.28	%	8.07	%	(7.60)	%	6.92	%
-100 basis points	(1.64)	%	(2)	%	(3.66)	%	(23.05)	%
-200 basis points	(4.30)	%	(2.64)	%	(12.17)	%	(39.80)	%
-300 basis points	(8.56)	%	(2.92)	%	(25.13)	%	(42.11)	%

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 period covered to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

In the normal course of business, we are subject to legal proceedings or claims. Management has reviewed all legal claims against us and possible loss contingencies, and does not expect the amounts to be material to any of the consolidated financial statements.

Item 1A. Risk Factors.

A discussion of the risk factors affecting us is set forth in Part I, Item 1A. Risk Factors in our 2021 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.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.


Exhibit Number						Description
3.1						Articles of Incorporation of OP Bancorp (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form S-1 Registration Statement (Registration No. 333-223444) filed on March 5, 2018)

3.2						Amended and Restated Bylaws of OP Bancorp (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Form S-1 Registration Statement (Registration No. 333-223444) filed on March 5, 2018)

3.3						First Amendment to the Amended and Restated Bylaws of OP Bancorp (incorporated herein by reference to Exhibit 3.3 to the Registrant’s Annual Report on Form 10-K (File No. 001-38437) filed on March 15, 2021)

31.1						Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) or 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 Principal Financial Officer Pursuant to Rules 13a-14(a) or 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 Principal 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 Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS						XBRL Instance Document

101.SCH						XBRL Taxonomy Extension Schema Document

101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF						XBRL Taxonomy Extension Definition Linkbase Document

101.LAB						XBRL Taxonomy Extension Label Linkbase Document

101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document

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: November 14, 2022	By:	/s/ MIN J. KIM
		Min J. Kim President and Chief Executive Officer

Date: November 14, 2022	By:	/s/ CHRISTINE Y. OH
		Christine Y. Oh Chief Financial Officer