opbk-10q_20190630.htm

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

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

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

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

As of August 8, 2019, there were 15,861,582 outstanding shares of the Registrant’s common stock.

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

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

The 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.

	June 30, 2019		December 31, 2018
	(Dollars in thousands, except share data)
ASSETS
Cash and cash equivalents	$	83,111	$	77,726
Securities available for sale, at fair value		51,829		55,336
Other investments		8,134		7,260
Loans held for sale		1,245		752
Loans receivable, net of allowance of $9,525 at June 30, 2019 and $9,636 at December 31, 2018		937,481		865,423
Premises and equipment, net		5,341		4,633
Accrued interest receivable		3,301		3,068
Servicing assets		6,996		6,987
Company owned life insurance		10,482		11,394
Deferred tax assets		2,858		3,672
Operating right-of-use assets (1)		8,959		—
Other assets		7,819		7,935
Total assets	$	1,127,556	$	1,044,186

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits:
Noninterest bearing	$	274,976	$	285,132
Interest bearing:
Savings		3,527		3,421
Money market and others		279,748		261,349
Time deposits greater than $250,000		211,305		164,281
Other time deposits		205,116		190,993
Total deposits		974,672		905,176
Accrued interest payable		2,287		1,715
Operating lease liabilities (1)		10,737		—
Other liabilities		4,378		7,508
Total liabilities		992,074		914,399

Shareholders’ equity
Preferred stock – no par value; 10,000,000 shares authorized; no shares issued or outstanding at June 30, 2019 and December 31, 2018		—		—
Common stock – no par value; 50,000,000 shares authorized; 15,723,007 and 15,860,306 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively		88,455		91,209
Additional paid-in capital		6,965		6,249
Retained earnings		39,878		32,877
Accumulated other comprehensive loss		184		(548	)
Total shareholders’ equity		135,482		129,787
Total liabilities and shareholders' equity	$	1,127,556	$	1,044,186
(1) The adoption of ASU 2016-02, Leases (Topic 842) in the first quarter of 2019 resulted in the recognition of right-of-use assets and lease liabilities on balance sheet.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
	(Dollars in thousands, except share data)
Interest income
Interest and fees on loans	$	14,093		$	11,670		$	27,447		$	22,517
Interest on investment securities		327			208			687			396
Other interest income		458			184			831			329
Total interest income		14,878			12,062			28,965			23,242
Interest expense
Interest on deposits		3,701			2,060			6,989			3,593
Interest on borrowed funds		—			15			-			103
Total interest expense		3,701			2,075			6,989			3,696
Net interest income		11,177			9,987			21,976			19,546
Provision for loan losses		401			33			401			609
Net interest income after provision for loan losses		10,776			9,954			21,575			18,937

Noninterest income
Service charges on deposits		499			398			1,026			935
Loan servicing fees, net of amortization		227			372			610			696
Gain on sale of loans		1,588			1,728			2,665			2,717
Other income		333			285			1,878			648
Total noninterest income		2,647			2,783			6,179			4,996
Noninterest expense
Salaries and employee benefits		5,344			4,615			10,513			8,826
Occupancy and equipment		1,132			1,064			2,209			2,089
Data processing and communication		367			297			725			627
Professional fees		247			166			451			318
FDIC insurance and regulatory assessments		105			104			210			200
Promotion and advertising		183			231			360			377
Directors’ fees		223			209			452			418
Foundation donation and other contributions		379			386			767			715
Other expenses		378			406			744			719
Total noninterest expense		8,358			7,478			16,431			14,289
Income before income taxes		5,065			5,259			11,323			9,644
Income tax expense		1,229			1,468			2,747			2,637
Net income	$	3,836		$	3,791		$	8,576		$	7,007
Earnings per share - Basic	$	0.24		$	0.24		$	0.53		$	0.47
Earnings per share - Diluted	$	0.23		$	0.23		$	0.52		$	0.45
Other comprehensive income (loss):
Change in unrealized income (loss) on securities available for sale		536			(98	)		1,039			(606	)
Tax effect		(158	)		29			(307	)		104
Total other comprehensive income (loss)		378			(69	)		732			(502	)
Comprehensive income	$	4,214		$	3,722		$	9,308		$	6,505

	Common Stock					Additional				Accumulated Other			Total
	Shares Outstanding		Amount			Paid-in Capital		Retained Earnings		Comprehensive Income (Loss)			Shareholders’ Equity
Balance at January 1, 2018		13,190,527	$	67,926		$	5,280	$	18,624	$	(350	)	$	91,480
Net income		—		—			—		3,216		—			3,216
Stock issued under stock offering, net of expenses		2,300,000		22,637			—		—		—			22,637
Stock issued under stock-based compensation plans		40,000		114			—		—		—			114
Stock-based compensation		—		—			246		—		—			246
Change in unrealized loss on securities available for sale net of reclassifications and tax effects		—		—			—		—		(433	)		(433	)
Balance at March 31, 2018		15,530,527	$	90,677		$	5,526	$	21,840	$	(783	)	$	117,260

Net income		—		—			—		3,791		—			3,791
Stock issued under stock offering, net of expenses		—		(64	)		—		—		—			(64	)
Stock issued under stock-based compensation plans		98,688		281			—		—		—			281
Stock-based compensation		—		—			194		—		—			194
Change in unrealized loss on securities available for sale net of reclassifications and tax effects		—		—			—		—		(69	)		(69	)
Balance at June 30, 2018		15,629,215	$	90,894		$	5,720	$	25,631	$	(852	)	$	121,393

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

Net income	—			—			—		3,836			—			3,836
Stock issued under stock-based compensation plans	77,809			—			—		—			—			—
Stock-based compensation	—			—			339		—			—			339
Repurchase of common stock	(74,385	)		(665	)		—		—			—			(665	)
Cash dividends declared	—			—			—		(782	)		—			(782	)
Change in unrealized loss on securities available for sale net of reclassifications and tax effects	—			—			—		—			378			378
Balance at June 30, 2019	15,723,007		$	88,455		$	6,965	$	39,878		$	184		$	135,482

	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities
Net income	$	8,576		$	7,007
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Provision for loan losses		401			609
Depreciation and amortization of premises and equipment		538			489
Amortization of net premiums on securities		122			124
Stock-based compensation		716			440
Gain on sales of loans		(2,665	)		(2,717	)
Earnings on company owned life insurance (COLI)		(1,376	)		(153	)
Origination of loans held for sale		(41,079	)		(32,822	)
Proceeds from sales of loans held for sale		42,251			41,528
Amortization of servicing assets		991			809
Net change in fair value of equity investment with readily determinable fair value		(98	)		—
Net change in:
Accrued interest receivable		(233	)		(134	)
Deferred tax assets		814			855
Other assets		(191	)		(3,460	)
Accrued interest payable		572			450
Other liabilities		(1,352	)		(1,988	)
Net cash from operating activities		7,987			11,037
Cash flows from investing activities
Net change in loans receivable		(72,459	)		(78,041	)
Proceeds from calls of securities available for sale		4,424			3,193
Proceeds from COLI		2,288			—
Purchase of securities available for sale		—			(9,975	)
Purchase of premises and equipment, net		(1,246	)		(826	)
Purchase of other investments		(776	)		(421	)
Net cash from investing activities		(67,769	)		(86,070	)
Cash flows from financing activities
Net change in deposits		69,496			50,067
Cash received from stock option exercises		292			395
Issuance of common stock, net of expenses		—			22,573
Repurchase of common stock		(3,046	)		—
Cash dividend paid on common stock		(1,575	)		—
Net cash from financing activities		65,167			73,035
Net change in cash and cash equivalents		5,385			(1,998	)
Cash and cash equivalents at beginning of period		77,726			63,250
Cash and cash equivalents at end of period	$	83,111		$	61,252
Supplemental cash flow information
Cash paid during the period for:
Income taxes	$	3,040		$	4,419
Interest	$	6,417		$	3,246
Supplemental noncash disclosure:
The adoption of ASU 2016-02, leases (Topic 842) recognition right-of-use assets	$	8,959		$	—
Transfer from securities available for sale to other investments	$	—		$	2,486

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

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

Basis of Presentation: The accompanying unaudited consolidated financial statements and notes thereto of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results for the full year. These interim unaudited financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto as of and for the year ended December 31, 2018, included in the Companys’ Annual Report on Form 10-K for the year ended December 31, 2018.

Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

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

Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions with original maturities less than 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions and Federal Home Loan Bank advances transactions.

Securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement, and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

Other investments: Other investments includes the followings : (i) Federal Home Loan Bank (“FHLB”) Stock - the Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income; (ii) Pacific Coast Bankers Bank (“PCBB”) Stock - the Bank is a member of PCBB. PCBB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income; and (iii) the Company’s investment in a mutual fund to satisfy the Company’s requirements under the Community Reinvestment Act (“CRA”). CRA mutual fund is reported at fair value. Unrealized gains and losses are recognized in other income in the Consolidated Statements of Income and Comprehensive Income.

Loans Held for Sale: Certain Small Business Administration (“SBA”) loans that may be sold prior to maturity are designated as held for sale at origination and are recorded at the lower of their cost or fair value less costs to sell, determined on an aggregate basis. A valuation allowance is established if the market value of such loans is lower than their cost, and operations are charged or credited for valuation adjustments. Origination fees on loans held for sale, net of certain costs of processing and closing the loans, are deferred until the time of sale and are included in the computation of the gain or loss from the sales of the related loans. A portion of the premium on sale of SBA loans is recognized as gains on sales of loans at the time of the sale. These loans are generally sold with servicing retained.

Loans Receivable: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. The recorded investment in loans includes accrued interest receivable, deferred loan fees and costs, and unearned income.

The accrual of interest income on commercial real estate and other commercial and industrial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

All interest accrued but not received for loans placed on nonaccrual status is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial real estate and construction loans. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Income recognition on impaired loans materially conforms to the method the Company uses for income recognition on nonaccrual loans.

Allowance for impaired loans is determined based on the present value of the estimated cash flows or on the fair value of the collateral if the loan is collateral dependent, less costs to sell. If the measured fair value is less than the recorded investment in the loan, the deficiency will be charged off against the allowance for loan losses, or alternatively, a specific allocation will be established. For consumer loans, management will generally charge off the balance if the loan is 90 days or more past due.

The general component of the allowance covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent two years. For those portfolio segments that the Company does not have sufficient historical data available to track the loss migration, the loss factors are based on the actual loss history experienced by the Company over the most recent five years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

The following portfolio segments have been identified in the Company’s loan portfolio, and are also representative of the classes within the portfolio: commercial real estate, SBA loans—real estate, SBA loans—non-real estate, commercial and industrial, home mortgage, and consumer. The Company reviews the credit risk exposure of all its portfolio segments by internally assigned grades. The Company categorizes loans into risk grades 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 the home mortgage and consumer portfolio segments, the Company’s primary monitoring tool is reviewing past due listings to determine if the loans are performing.

The determination of the allowance for loan losses is based on estimates that are particularly susceptible to changes in the economic environment and market conditions.

Management believes that as of June 30, 2019 and December 31, 2018 the allowance for loan losses is adequate based on information currently available. If a deterioration in the economy of the Company’s principal market area occurs, the Company’s loan portfolios could be adversely impacted and higher charge-offs and increases in non-performing assets could result. Such an adverse impact could also require a larger allowance for loan losses.

Servicing Assets: When SBA loans are sold with servicing retained, servicing assets are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, prepayment speeds, and default rates and losses. The Company compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. Servicing assets are subsequently measured using the amortization method which requires servicing assets to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

Servicing assets are evaluated for impairment based upon the fair value of the assets as compared to their carrying amount. Impairment is recognized through a valuation allowance to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists, a reduction of the valuation allowance may be recorded as an increase to income. Changes in the valuation allowances are reported with other income on the income statement. The fair values of servicing rights are subject to fluctuations as a result of changes in estimated and actual prepayment speeds, default rates, and losses.

Servicing fee income, which is reported on the income statement as other income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned. The amortization of servicing assets is netted against loan servicing fee income. Late fees and ancillary fees related to loan servicing are not material.

Company Owned Life Insurance: The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation. Equipment and furnishings are depreciated over 3 to 10 years, and leasehold improvements are amortized over the lesser of the terms of the respective leases or the estimated useful lives. The straight-line method of depreciation is used for financial reporting purposes. Repairs and maintenance are charged to operating expenses as incurred.

Other Real Estate Owned, Net: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when the legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through the completion of a deed in lieu of foreclosure or through a similar legal agreement. These assets are subsequently accounted for at the lower of their cost or fair value less estimated costs to sell. If their fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Stock-Based Compensation: Compensation cost is recognized for stock options and restricted stock awards issued to employees based on the fair value of the awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of the grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

Earnings per Common Share: Basic and diluted earnings per share is based on the two-class method prescribed in ASC Topic 260, Earnings Per Share (ASC 260). Stock options and restricted stock awards are considered outstanding for this calculation unless unearned. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock-based compensation plans. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. There were no interest or penalties recognized in the three and six months ended June 30, 2019 or 2018.

Comprehensive Income/(Loss): Comprehensive income/(loss) consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, which are also recognized as separate components of shareholders’ equity, net of tax.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 15—Fair Value of Financial Instruments. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.

Operating Segments: While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Discrete financial information is not available other than on a Company-wide basis.

Reclassifications: Some items in the prior period financial statements were reclassified to conform to the current presentation. Reclassification had no effect on prior year net income or shareholders’ equity.

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

ASU 2016-13 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019, initially, and early adoption is permitted for fiscal years, including interim periods, beginning after December 15, 2018. ASU 2016-13 will be applied through a cumulative effect adjustment to retained earnings (modified-retrospective approach), except for debt securities for which an other-than-temporary impairment had been recognized before the effective date. A prospective transition approach is required for these debt securities. The Company is currently evaluating the effects of ASU 2016-13 on its financial statements and disclosures, including software solutions, data requirements and loss estimation methodologies. The company has engaged a third party advisor to develop a new expected loss model. While the effects cannot yet be quantified, the Company expects ASU 2016-13 to add complexity and costs to its current credit loss evaluation process. On July 2019, FASB proposed the effective date delay to January 2020 for SEC filers, excluding smalller reporting companies (SRCs), and January 2023 for all other entities including SRCs.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement”. ASU 2018-13 adds, modifies, and removes disclosure requirements for fair value measurements. ASU 2018-13 is effective annual periods in fiscal years beginning after December 15, 2019, including interim

periods within those annual periods. Early adoption is permitted upon the issuance of ASU 2018-13. The Company does not expect this ASU to have a material impact on its financial statements and disclosures.

In February 2016, the FASB issued its new lease accounting guidance in ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. ASU No. 2018-10 provides improvements related to ASU No. 2016-02 to increase stakeholders’ awareness of the amendments and to expedite the improvements. The amendments affect narrow aspects of the guidance issued in ASU No. 2016-02. ASU No. 2018-11 allows entities adopting ASU No. 2016-02 to choose an additional (and optional) transition method, under which an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. ASU No. 2018-11 also allows lessors to not separate non-lease components from the associated lease component if certain conditions are met. The amendments in these updates become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. The Company elected the optional transition method permitted by ASU No. 2018-11. Under this method, an entity shall recognize and measure leases that exist at the application date and prior comparative periods are not adjusted. In addition, the Company elected the package of practical expedients to leases that commenced before the effective date: (1) An entity need not reassess whether any expired or existing contracts contain leases; (2) An entity need not reassess the lease classification for any expired or existing leases; (3) An entity need not reassess initial direct costs for any existing leases. The Company also elected the practical expedient, which must be applied consistently to all leases, to use hindsight in determining the lease term and in assessing impairment of our right-of-use assets. We also elected a practical expedient to not assess whether existing or expired land easements that were not previously accounted for as leases under Topic 840 contain a lease under this Topic. At the adoption date, the Company reported a lease liability of approximately $9.9 million, a right-of-use asset of approximately $8.0 million, and no cumulative-effect adjustment to retained earnings. See Note 5, “Leases” for further details.

In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20) (ASU 2017-08). ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at a premium. Prior to the issuance of this guidance, premiums were amortized as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 requires premiums on purchased callable debt securities that have explicit, noncontingent call features that are callable at fixed prices to be amortized to the earliest call date. There are no accounting changes for securities held at a discount. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018, and early adoption is permitted. ASU 2017-08 will be applied through a cumulative effect adjustment through equity (modified-retrospective approach). The Company did not have callable debt securities held at a premium at December 31, 2018 or June 30, 2019.

The following table summarizes the amortized cost, fair value, and the corresponding amounts of gross unrealized gains and losses for available for sale securities at June 30, 2019 and December 31, 2018:

There were no sales of securities available for sale in the three or six months ended June 30, 2019 or 2018. The amortized cost and estimated fair value of securities available for sale at June 30, 2019, by contractual maturity, are shown below. Securities without a contractual maturity are shown separately.

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At June 30, 2019 and December 31, 2018, 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 summarizes securities with unrealized losses at June 30, 2019 and December 31, 2018, aggregated by length of time in a continuous unrealized loss position:

The Company believes that the unrealized losses are temporary, arising mainly from fluctuations in interest rates and do not reflect a deterioration of credit quality of the issuers. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The fair value is expected to recover as the securities approach maturity.

Management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery.

There were no securities pledged as collateral at June 30, 2019 or December 31, 2018.

Other investments at June 30, 2019 and December 31, 2018, consisted of the following:

The composition of the loan portfolio was as follows at June 20, 2019 and December 31, 2018:

No loans were outstanding to related parties as of June 30, 2019 or December 31, 2018.

The activity in the allowance for loan losses for the three and six months ended June 30, 2019 and 2018 was as follows:

							SBA
	Commercial			SBA Loans			Loans Non-			Commercial			Home
	Real Estate			Real Estate			Real Estate			and Industrial			Mortgage			Consumer			Total
	(Dollars in thousands)
Three months ended June 30, 2019:
Beginning balance	$	5,196		$	930		$	129		$	1,673		$	1,660		$	31		$	9,619
Provision for loan losses		358			6			(10	)		86			(51	)		12			401
Charge-offs		—			(3	)		—			(493	)		—			—			(496	)
Recoveries		—			—			—			—			—			1			1
Ending balance	$	5,554		$	933		$	119		$	1,266		$	1,609		$	44		$	9,525
Three months ended June 30, 2018:
Beginning balance	$	5,211		$	1,006		$	501		$	1,580		$	1,376		$	42		$	9,716
Provision for loan losses		(407	)		(28	)		61			297			113			(3	)		33
Charge-offs		—			—			(28	)		—			—			—			(28	)
Recoveries		—			—			2			—			—			—			2
Ending balance	$	4,804		$	978		$	536		$	1,877		$	1,489		$	39		$	9,723

						SBA
	Commercial		SBA Loans			Loans Non-			Commercial			Home
	Real Estate		Real Estate			Real Estate			and Industrial			Mortgage			Consumer			Total
	(Dollars in thousands)
Six months ended June 30, 2019:
Beginning balance	$	4,805	$	894		$	505		$	1,746		$	1,653		$	33		$	9,636
Provision for loan losses		749		59			(386	)		13			(44	)		10			401
Charge-offs		—		(20	)		—			(493	)		—			—			(513	)
Recoveries		—		—			—			—			—			1			1
Ending balance	$	5,554	$	933		$	119		$	1,266		$	1,609		$	44		$	9,525
Six months ended June 30, 2018:
Beginning balance	$	4,801	$	1,082		$	538		$	1,265		$	1,408		$	45		$	9,139
Provision for loan losses		3		(104	)		23			612			81			(6	)		609
Charge-offs		—		—			(28	)		—			—			—			(28	)
Recoveries		—		—			3			—			—			—			3
Ending balance	$	4,804	$	978		$	536		$	1,877		$	1,489		$	39		$	9,723

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment as of June 30, 2019 and December 31, 2018:

	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total
As of June 30, 2019:	(Dollars in thousands)
Allowance for loan losses:
Commercial real estate	$	—	$	5,554	$	5,554
SBA loans—real estate		—		933		933
SBA loans—non-real estate		—		119		119
Commercial and industrial		358		908		1,266
Home mortgage		—		1,609		1,609
Consumer		—		44		44
Total	$	358	$	9,167	$	9,525
Loans:
Commercial real estate	$	—	$	585,138	$	585,138
SBA loans—real estate		497		120,969		121,466
SBA loans—non-real estate		41		10,132		10,173
Commercial and industrial		1,511		103,932		105,443
Home mortgage		—		124,465		124,465
Consumer		—		3,341		3,341
Total	$	2,049	$	947,977	$	950,026
As of December 31, 2018:
Allowance for loan losses:
Commercial real estate	$	—	$	4,805	$	4,805
SBA loans—real estate		—		894		894
SBA loans—non-real estate		362		143		505
Commercial and industrial		836		910		1,746
Home mortgage		—		1,653		1,653
Consumer		—		33		33
Total	$	1,198	$	8,438	$	9,636
Loans:
Commercial real estate	$	—	$	505,229	$	505,229
SBA loans—real estate		834		117,159		117,993
SBA loans—non-real estate		57		9,875		9,932
Commercial and industrial		1,516		112,781		114,297
Home mortgage		—		127,806		127,806
Consumer		—		2,586		2,586
Total	$	2,407	$	875,436	$	877,843

The following table presents information related to impaired loans by class of loans as of and for the three and six months ended June 30, 2019 and 2018. The difference between the unpaid principal balance (net of partial charge-offs) and the recorded investment in the loans is not considered to be material. The difference between interest income recognized and cash basis interest recognized was immaterial.

					Average		Interest
	Recorded		Allowance		Recorded		Income
	Investment		Allocated		Investment		Recognized
As of and for the three months ended June 30, 2019:	(Dollars in thousands)
With no related allowance recorded:
SBA loans—real estate	$	497	$	—	$	504	$	—
SBA loans—non-real estate		41		—		45		—
With an allowance recorded:
Commercial and industrial		1,511		358		1,512		14
Total	$	2,049	$	358	$	2,061	$	14
As of and for the three months ended June 30, 2018:
With no related allowance recorded:
SBA loans—real estate	$	140	$	—	$	140	$	—
Commercial and industrial		749		—		749		11
With an allowance recorded:
SBA loans—non-real estate		419		419		434		4
Commercial and industrial		939		939		974		14
Total	$	2,247	$	1,358	$	2,297	$	29

					Average		Interest
	Recorded		Allowance		Recorded		Income
	Investment		Allocated		Investment		Recognized
As of and for the six months ended June 30, 2019:	(Dollars in thousands)
With no related allowance recorded:
SBA loans—real estate	$	497	$	—	$	510	$	—
SBA loans—non-real estate		41		—		49		—
With an allowance recorded:
Commercial and industrial		1,511		358		1,513		28
Total	$	2,049	$	358	$	2,072	$	28
As of and for the six months ended June 30, 2018:
With no related allowance recorded:
Home mortgage	$	140	$	—	$	140	$	—
Consumer		749		—		749		21
With an allowance recorded:
SBA loans—non-real estate		419		419		435		8
Commercial and industrial		939		939		988		28
Total	$	2,247	$	1,358	$	2,312	$	57

The following table presents the recorded investment in nonaccrual loans and loans past due greater than 90 days still accruing interest by class of loans as of June 30, 2019 and December 31, 2018:

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following table represents the aging of the recorded investment in past due loans as of June 30, 2019 and December 31, 2018:

	30-59 Days Past Due		60-89 Days Past Due		> 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
As of June 30, 2019:	(Dollars in thousands)
Commercial real estate	$	—	$	—	$	—	$	—	$	585,138	$	585,138
SBA—real estate		—		1,013		—		1,013		120,453		121,466
SBA—non-real estate		—		—		—		—		10,173		10,173
Commercial and industrial		—		493		—		493		104,950		105,443
Home mortgage		1,065		701		—		1,766		122,699		124,465
Consumer		—		—		—		—		3,341		3,341
	$	1,065	$	2,207	$	—	$	3,272	$	946,754	$	950,026
As of December 31, 2018:
Commercial real estate	$	—	$	—	$	—	$	—	$	505,229	$	505,229
SBA—real estate		—		—		311		311		117,682		117,993
SBA—non-real estate		—		—		—		—		9,932		9,932
Commercial and industrial		—		—		680		680		113,617		114,297
Home mortgage		449		—		—		449		127,357		127,806
Consumer		—		—		—		—		2,586		2,586
	$	449	$	—	$	991	$	1,440	$	876,403	$	877,843

Troubled Debt Restructurings: As of June 30, 2019 and December 31, 2018, the Company had a recorded investment in troubled debt restructurings of $338,000 and $343,000, respectively. The Company has allocated $338,000 and $343,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2019 and December 31, 2018, respectively. The Company has not committed to lend any additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

Modifications made were primarily extensions of existing payment modifications on loans previously identified as troubled debt restructurings. There were no new loans identified as trouble debt restructurings during the three and six months ended June 30, 2019 or during the year ended December 31, 2018. There were no payment defaults during the three and six months ended June 30, 2019 or during the year ended December 31, 2018 of loans that had been modified as troubled debt restructurings within the previous twelve months.

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 June 30, 2019 and December 31, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

	Pass		Special Mention		Substandard		Doubtful		Total
As of June 30, 2019:	(Dollars in thousands)
Commercial real estate	$	585,138	$	—	$	—	$	—	$	585,138
SBA loans—real estate		118,425		777		2,264		—		121,466
SBA loans—non-real estate		10,117		15		41		—		10,173
Commercial and industrial		102,653		898		1,892		—		105,443
Home mortgage		124,465		—		—		—		124,465
Consumer		3,341		—		—		—		3,341
	$	944,139	$	1,690	$	4,197	$	—	$	950,026
As of December 31, 2018:
Commercial real estate	$	505,229	$	—	$	—	$	—	$	505,229
SBA loans—real estate		115,993		—		2,000		—		117,993
SBA loans—non-real estate		9,859		16		57		—		9,932
Commercial and industrial		112,781		—		1,516		—		114,297
Home mortgage		127,806		—		—		—		127,806
Consumer		2,586		—		—		—		2,586
	$	874,254	$	16	$	3,573	$	—	$	877,843

On January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842), using the optional transition method permitted by ASU No. 2018-11, Leases (Topic 842): Targeted Improvements.

The Company’s operating leases are real estate leases which are comprised of its headquarters and office facilities from nonaffiliated parties with remaining lease terms ranging from 1 to 10 years as of June 30, 2019. Certain lease arrangements contain extension option which are typically around 5 years. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term.

At June 30, 2019, operating right-of-use (“ROU”) assets and related liabilities were $9.0 million and $10.7 million, respectively. Short-term operating leases, which are defined as leases with term of twelve months or less, were not recognized as ROU assets with related lease liabilities as permitted under ASU No. 2016-02. The lease payments on short-term operating leases are immaterial. The Company did not have any finance leases at June 30, 2019.

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

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

Rent expense was $616,000 and $538,000 for the three months ended June 30, 2019 and 2018, and $1.2 million and $1.1 million for the six months ended June 30, 2019 and 2018, respectively.

The table below summarizes the remaining contractually obligated lease payments and a reconciliation to the lease liability reported on the consolidated balance sheet as of June 30, 2019:

Rent commitments related to the lease of the Company’s main office and branch facilities, before considering renewal options and additional lessor charges as of December 31, 2018, were as follows:

The Company’s premises and equipment consisted of the following at June 30, 2019 and December 31, 2018:

Total depreciation expense included in occupancy and equipment expenses was $270,000 and $249,000 for the three months ended June 30, 2019 and 2018, and $538,000 and $489,000 for the six months ended June 30, 2019 and 2018, respectively.

Activity for loan servicing assets during the three and six months ended June 30, 2019 and 2018 is as follows:

There was no valuation allowance recorded against the carrying value of the servicing assets as of June 30, 2019 or 2018.

The fair value of the servicing assets was $8.5 million at June 30, 2019, which was determined using discount rates ranging from 1.75% to 10.00% and prepayment speeds ranging from 12.8% to 13.8%, depending on the stratification of the specific assets.

The fair value of the servicing assets was $8.5 million at June 30, 2018, which was determined using discount rates ranging from 4.50% to 10.75% and prepayment speeds ranging from 11.2% to 11.9%, depending on the stratification of the specific assets.

Deposits from principal officers, directors, and their affiliates at June 30, 2019 and December 31, 2018 were $928,000 and $778,000, respectively.

As of June 30, 2019, the Company had no borrowings from the Federal Home Loan Bank of San Francisco. The Company has a letter of credit with the FHLB in the amount of $49,000,000 to secure a public deposit.

The Company had available borrowings from the following institutions as of June 30, 2019:

The Company has pledged approximately $782.9 million of loans as collateral for these lines of credit as of June 30, 2019.

The Company’s income tax expense was $1.2 million and $1.5 million for the three months ended June 30, 2019 and 2018, and $2.7 million and $2.6 million for the six months ended June 30, 2019 ad 2018, respectively. The effective income tax rate was 24.3 percent and 27.9 percent for the three months ended June 30, 2019 and 2018, and 24.3 percent and 27.3 percent for the six months ended June 30, 2019 and 2018, 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 2015 and for state taxing authorities for tax years prior to 2014.

There were no significant unrealized tax benefits recorded as of June 30, 2019 and 2018, and the Company does not expect any significant increase in unrealized tax benefits in the next twelve months.

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

The Company evaluates the creditworthiness of each customer. Collateral, if deemed necessary by the Company upon the extension of credit, is obtained based on management’s evaluation of the borrower. Collateral for commercial and industrial loans may

vary, but may include securities, accounts receivable, inventory, property, plant and equipment, and income producing commercial or other properties. The following table shows the distribution of undisbursed loan commitments as of the dates indicated:

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.

The Company has two stock-based compensation plans currently in effect as of June 30, 2019, as described further below. Total compensation cost that has been charged against earnings for these plans was $339,000 and $194,000 in the three months ended June 30, 2019 and 2018, and $716,000 and $440,000 for the six months ended June 30, 2019 and 2018, respectively.

2005 Plan: In 2005, the Board of Directors and shareholders of the Bank approved a stock option plan for the benefit of directors and employees of the Bank (the “2005 Plan”). The 2005 Plan was assumed by the Company in 2016 at the time of the bank holding company reorganization. Under the 2005 Plan, the Bank was authorized to grant options to purchase up to 770,000 shares of the Company’s common stock. The exercise prices of the options may not be less than 100 percent of the fair value of the Company’s common stock at the date of grant.

The options, when granted, vest either immediately or ratably over five years from the date of the grant and expire after ten years if not exercised.

There were no stock options granted under the 2005 Plan during the six months ended June 30, 2019 or 2018.

A summary of the transactions under the 2005 Plan for the six months ended June 30, 2019 is as follows:

There were no shares available for grant under the 2005 Plan as of June 30, 2019. The weighted average remaining contractual term of stock options outstanding under the 2005 Plan at June 30, 2019 was 2.63 years. The weighted average remaining contractual term of stock options that were exercisable at June 30, 2019 was 2.63 years. The stock option under the 2015 Plan was fully vested as of June 30, 2019.

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 percent of the fair value of the Company’s stock at the date of grant. The options, when granted, vest ratably over five years from the date of the grant and expire after ten years if not exercised. There were no stock options granted under the 2010 Plan during the six months ended June 30, 2019 or 2018.

Restricted stock awards issued under the 2010 Plan may or may not be subject to vesting provisions. Awards which were granted in the six months ended June 30, 2019 and 2018 vest at the end of three years from the date of the grant. 3,000 shares were granted at weighted average fair value of $8.15 and 148,000 shares were granted at weighted average fair value of $12.7 in the six months ended June 30, 2019 and 2018, respectively. Owners of the restricted stock awards shall have all of the rights of a shareholder including the right to vote the shares and to all dividends (cash or stock). Compensation expense related to restricted stock awards will be recognized over the vesting period of the awards based on the fair value of the Company’s common stock at the issue date.

A summary of stock options outstanding under the 2010 Plan for the six months ended June 30, 2019 is as follows:

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

The weighted average remaining contractual term of stock options outstanding under the 2010 Plan at June 30, 2019 was 2.84 years. The weighted average remaining contractual term of stock options that were exercisable at June 30, 2019 was 2.55 years.

A summary of the changes in the Company’s non-vested restricted stock awards under the 2010 Plan for the six months ended June 30, 2019 is as follows:

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

There were 87,427 shares available for grant under the 2010 Plan as of June 30, 2019 (in either stock options or restricted stock awards). As of June 30, 2019, the Company had approximately $2.3 million of unrecognized compensation cost related to unvested stock options and restricted stock awards under the 2010 Plan. The Company expects to recognize these costs over a weighted average period of 1.33 years.

The Company established a 401(k) profit sharing plan (the “401(k) Plan”) which is open to all eligible employees who are at least 21 years old and have completed 90 days of service. Each employee is allowed to contribute to the 401(k) Plan up to the maximum percentage allowable, not to exceed the limits of applicable IRS Code Sections. Each year, the Company may, in its discretion, make matching contributions to the 401(k) Plan. Total employer contributions to the 401(k) Plan amounted to $293,000 and $227,000 for the six months ended June 30, 2019 and 2018, respectively.

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

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

Service charges on deposits: Income from service charges on deposits is within the scope of ASC 606. These include general service fees for monthly account maintenance and activity or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue on these types of fees are recognized when the Company’s performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payment for such performance obligations are generally received at the time the performance obligations are satisfied. $362,000 or 1.3%, and $368,000 or 1.5% of total revenues in the six months ended June 30, 2019 and 2018, respectively, of service charges on deposits is related to these revenue streams. Service charges on deposits also include overdraft and NSF fees. Overdraft fees are charged when a depositor has a draw on their account that has inadequate funds. In certain instances, the Company, at its sole discretion, may pay to the party requesting the draw on the deposit account, the balance of the draw for which there are inadequate funds rather than denying payment of the item. The Company then charges a fee for this short

term extension of credit to the depositor for not complying with the balance requirements stipulated in the deposit agreement with the Bank, and as well as to cover the cost of advancing those funds. NSF fees are charged to customers when in the event of a draw on the customer's account that has insufficient funds to meet the payment of the draw (such as through written checks or ACH transactions), the Company returns the item rather than paying the balance of the draw for which the customer has inadequate funds. This typically happens when the customer has fairly sizable draws or multiple draws on an account that has inadequate funds to meet the demands for payment. $500,000, or 1.8%, and $567,000, or 2.3% of total revenues in the six months ended June 30, 2019 and 2018, respectively, of service charges on deposits is from overdraft and NSF fees.

Wire transfer fee income: This revenue stream is generated through the processing of customers’ incoming and outgoing wire transfers. Income generated from wire transfer fees is within the scope of ASC 606 and approximately $165,000, or 0.6%, and $163,000, or 0.7% of total revenues for the six months ended June 30, 2019 and 2018, respectively, is included in other income in noninterest income.

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

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

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

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

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

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

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

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

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

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

Assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018 are summarized below:

			Fair Value Measuring Using
			Quoted		Significant Other		Significant
			Prices in		Observable		Unobservable
	Total		Active Markets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
As of June 30, 2019:
U.S. Government sponsored agency securities	$	6,981	$	—	$	6,981	$	—
Mortgage-backed securities - residential		12,730		—		12,730		—
Collateralized mortgage obligations		32,118		—		32,118		—
Other investments:
Mutual fund - CRA qualified		2,586		2,586		—		—

As of December 31, 2018:
U.S. Government sponsored agency securities	$	6,906	$	—	$	6,906	$	—
Mortgage-backed securities - residential		14,129		—		14,129		—
Collateralized mortgage obligations		34,301		—		34,301		—
Other investments:
Mutual fund - CRA qualified		2,488		2,488		—		—

There were no transfers between Level 1 and Level 2 in the six months ended June 30, 2019 or 2018. There were no other assets or liabilities measured at fair value on a non-recurring basis as of June 30, 2019 or December 31, 2018.

Financial Instruments: The carrying amounts and estimated fair values of financial instruments not carried at fair value as of June 30, 2019 are as follows:

	Carrying Amount		Level 1		Level 2		Level 3		Value
As of June 30, 2019:	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	83,111	$	83,111	$	—	$	—	$	83,111
Loans held for sale		1,245		—		1,335		—		1,335
Loans receivable, net		937,481		—		—		958,575		958,575
Accrued interest receivable		3,301		45		237		3,019		3,301
Financial Liabilities:
Deposit	$	974,672	$	—	$	975,505	$	—	$	975,505
Accrued interest payable		2,287		—		2,287		—		2,287

The carrying amounts and estimated fair values of financial instruments not carried at fair value at December 31, 2018 are as follows:

	Carrying Amount		Level 1		Level 2		Level 3		Value
As of December 31, 2018:	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	77,726	$	77,726	$	—	$	—	$	77,726
Loans held for sale		752		—		806		—		806
Loans receivable, net		865,423		—		—		862,394		862,394
Accrued interest receivable		3,068		44		240		2,784		3,068
Financial Liabilities:
Deposit	$	905,176	$	—	$	904,466	$	—	$	904,466
Accrued interest payable		1,715		—		1,715		—		1,715

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was 0.625% in 2016 and increased 0.625% annually until 2019. As of June 30, 2019, the capital conservation buffer for the Company is 2.50%. Management believes as of June 30, 2019 and December 31, 2018, the Bank met all capital adequacy requirements to which they are subject to. Based on recent changes to the Federal Reserve’s definition of a “Small Bank Holding Company” that increased the threshold to $3 billion in assets, the Company is not currently subject to separate minimum capital measurements. At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank. For comparison purposes, the Company’s ratios are included in following discussion as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of June 30, 2019 and December 31, 2018, the Company and Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At June 30, 2019 and December 31, 2018, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

Actual and required capital amounts (in thousands) and ratios, exclusive of the capital conservation buffer, are presented below as of June 30, 2019 and December 31, 2018:

						Required for					Minimum
						Capital Adequacy					To be Considered
	Actual					Purposes					"Well Capitalized"
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2019:
Total capital (to risk-weighted assets)
Consolidated	$	144,488		15.45	%	N/A		N/A			N/A		N/A
Bank		143,731		15.37	%		74,800		8.00	%		93,500		10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated		134,887		14.42	%	N/A		N/A			N/A		N/A
Bank		134,130		14.35	%		56,100		6.00	%		74,800		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)
Consolidated		134,887		14.42	%	N/A		N/A			N/A		N/A
Bank		134,130		14.35	%		42,075		4.50	%		60,775		6.50	%
Tier 1 capital (to average assets)
Consolidated		134,887		12.24	%	N/A		N/A			N/A		N/A
Bank		134,130		12.18	%		44,061		4.00	%		55,076		5.00	%

						Required for					Minimum
						Capital Adequacy					To be Considered
	Actual					Purposes					"Well Capitalized"
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2018:
Total capital (to risk-weighted assets)
Consolidated	$	139,593		16.26	%	N/A		N/A			N/A		N/A
Bank		139,538		16.25	%		68,686		8.00	%		85,857		10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated		129,893		15.13	%	N/A		N/A			N/A		N/A
Bank		129,838		15.12	%		51,514		6.00	%		68,686		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)
Consolidated		129,893		15.13	%	N/A		N/A			N/A		N/A
Bank		129,838		15.12	%		38,636		4.50	%		55,807		6.50	%
Tier 1 capital (to average assets)
Consolidated		129,893		12.88	%	N/A		N/A			N/A		N/A
Bank		129,838		12.87	%		40,346		4.00	%		50,432		5.00	%

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

No shares of common stock were antidilutive for the three and six months ended June 30, 2019. Restricted stock awards for 148,000 shares of common stock were not considered in computing diluted earnings per common share for the three and six months ended June 30, 2018 because they were antidilutive.

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

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

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

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 Note 2 of our unaudited consolidated financial statements included in this quarterly report on Form 10-Q.

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

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

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

Financial Highlights (unaudited)
(Dollars in thousands, except per share data)	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2019			2018			2019			2018
Income Statement Data:
Interest income	$	14,878		$	12,062		$	28,965		$	23,242
Interest expense		3,701			2,075			6,989			3,695
Net interest income		11,177			9,987			21,976			19,547
Provision for loan losses		401			33			401			609
Noninterest income		2,647			2,783			6,179			4,996
Noninterest expense		8,358			7,478			16,431			14,290
Income before taxes		5,065			5,259			11,323			9,644
Provision for income taxes		1,229			1,468			2,747			2,637
Net Income	$	3,836		$	3,791		$	8,576		$	7,007
Diluted earnings per share	$	0.23		$	0.23		$	0.52		$	0.45
Performance Ratios:
Return on average assets (annualized)		1.39	%		1.61	%		1.60	%		1.52	%
Return on average equity (annualized)		11.50	%		12.70	%		12.97	%		13.11	%
Net interest margin (annualized)		4.26	%		4.46	%		4.32	%		4.51	%
Efficiency ratio ⁽¹⁾		60.45	%		58.56	%		58.36	%		58.22	%
(1) Represents noninterest expense divided by the sum of net interest income and noninterest income.

Financial Highlights (unaudited)
(Dollars in thousands, except per share data)	As of
	June 30,			June 30,
	2019			2018
Balance Sheet Data:
Loans held for sale	$	1,245		$	8,718
Gross loans, net of unearned income		947,006			826,040
Allowance for loan losses		9,525			9,723
Total assets		1,127,556			979,441
Deposits		974,672			823,373
Shareholders’ equity		135,482			121,393
Credit Quality:
Nonperforming loans	$	1,556		$	991
Nonperforming assets		1,556			991
Net charge-offs to average gross loans (annualized)		0.21	%		0.01	%
Nonperforming assets to gross loans plus OREO		0.16	%		0.12	%
ALL to nonperforming loans		612	%		981	%
ALL to gross loans		1.01	%		1.18	%
Capital Ratios:
Leverage ratio		12.24	%		12.91	%
Common equity tier 1 ratio		14.42	%		14.90	%
Tier 1 risk-based capital ratio		14.42	%		14.90	%
Total risk-based capital ratio		15.45	%		12.91	%

Results of Operations—Comparison for the Three Months Ended June 30, 2019 and 2018

The following discussion of our results of operations compares the three months ended June 30, 2019 to the three months ended June 30, 2018.

We reported net income for the three months ended June 30, 2019 of $3.8 million, or $0.23 per diluted common share in line with the net income of $3.8 million, or $0.23 per diluted common share for the three months ended June 30, 2018, an increase of $45,000, or 1.2%. The increase was primarily due to a $1.2 million increase in net interest income, and a $239,000 decrease in income tax expense, partially offset by an $880,000 increase in noninterest expense, a $368,000 increase in provision for loan losses, and a $136,000 decrease in noninterest income.

The management of interest income and expense is fundamental to our financial performance. Net interest income, the difference between interest income and interest expense, is the largest component of the Company’s total revenue. Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets). We seek to maximize net interest income without exposing the Company to an excessive level of interest rate risk through our asset and liability policies. Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities. Our net interest margin is also adversely impacted by the reversal of interest on nonaccrual loans and the reinvestment of loan payoffs into lower yielding investment securities and other short-term investments.

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

	Three months Ended June 30,
	2019							2018
(Dollars in thousands)	Average Balance		Interest and Fees		Yield / Rate			Average Balance		Interest and Fees		Yield / Rate
Earning assets:
Federal funds sold and other investments (1)	$	66,277	$	458		2.74	%	$	26,857	$	184		2.72	%
Securities available for sale		53,329		327		2.45			40,372		208		2.06
Total investments		119,606		785		2.61			67,229		392		2.33
Real estate loans		562,256		7,837		5.59			464,899		6,008		5.18
SBA loans		137,133		3,063		8.96			143,604		2,714		7.58
C & I loans		104,273		1,558		5.99			107,546		1,473		5.49
Home Mortgage loans		125,577		1,588		5.06			110,476		1,425		5.16
Consumer loans		2,814		47		6.70			3,608		50		5.56
Total loans (2)		932,053		14,093		6.06			830,133		11,670		5.64
Total earning assets		1,051,659		14,878		5.67			897,362		12,062		5.39
Noninterest-earning assets		50,387							46,970
Total assets	$	1,102,046						$	944,332

Interest-bearing liabilities:
NOW and savings deposits	$	4,725	$	3		0.25	%	$	6,615	$	4		0.24	%
Money market deposits		281,239		1,335		1.90			253,162		804		1.27
Time deposits		389,294		2,363		2.43			298,535		1,252		1.68
Total interest-bearing deposits		675,258		3,701		2.20			558,312		2,060		1.48
Borrowings		2		—		2.76			3,132		15		1.92
Total interest-bearing liabilities		675,260		3,701		2.20			561,444		2,075		1.48
Noninterest-bearing liabilities:
Noninterest-bearing deposits		276,569							254,700
Other noninterest-bearing liabilities		16,778							8,816
Total noninterest-bearing liabilities		293,347							263,516
Shareholders’ equity		133,439							119,373
Total liabilities and shareholders’ equity	$	1,102,046						$	944,333
Net interest income / interest rate spreads			$	11,177		3.47	%			$	9,987		3.91	%
Net interest margin						4.26	%						4.46	%
Cost of deposits & cost of funds:
Total deposits / cost of deposits	$	951,827	$	3,701		1.56	%	$	813,012	$	2,060		1.02	%
Total funding liabilities / cost of funds	$	951,829	$	3,701		1.56	%	$	816,144	$	2,075		1.02	%

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

	Three Months Ended June 30,
	2019 over 2018
	Change due to:
(Dollars in thousands)	Volume			Rate			Interest Variance
Earning assets:
Federal funds sold and other investments	$	273		$	1		$	274
Securities available for sale		75			44			119
Total investments		348			45			393
Real estate loans		1,327			502			1,829
SBA loans		(127	)		476			349
C & I loans		(46	)		131			85
Home Mortgage loans		191			(28	)		163
Consumer loans		(12	)		9			(3	)
Total loans		1,333			1,090			2,423
Total earning assets		1,681			1,135			2,816

NOW and savings deposits		(1	)		—			(1	)
Money market deposits		97			434			531
Time deposits		450			661			1,111
Total interest-bearing deposits		546			1,095			1,641
Borrowings		(7	)		(8	)		(15	)
Total interest-bearing liabilities		539			1,087			1,626

Net interest income	$	1,142		$	48		$	1,190

Interest income increased $2.8 million, or 23.3%, to $14.9 million for the three months ended June 30, 2019 from $12.1 million for the same period in 2018, primarily due to the growth in average loans and securities and an increase in the average yields on loans and securities.

Average loans increased $101.9 million, or 12.3%, to $932.1 million for the three months ended June 30, 2019 from $830.1 million for the same period in 2018. Average total investments including Federal funds and securities available for sale increased $52.4 million, or 77.9%, to $119.6 million for the three months ended June 30, 2019 from $67.2 million for the same period in 2018. Average interest-earning assets increased $154.3 million, or 17.2%, to $1.05 billion for the three months ended June 30, 2019 from $897.4 million for the same period in 2018. The increase in average loans was primarily due to new loan production, and the increase in average total investments was due to purchases of available for sale securities and Federal funds.

The average yield on loans increased 42 basis points to 6.06% for the three months ended June 30, 2019 from 5.64% for the same period in 2018, primarily due to cumulative market rate increases by the Federal Reserve in 2018. The average yield on securities increased 39 basis points to 2.45% for the three months ended June 30, 2019 from 2.06% for the same period in 2018, attributable primarily to purchasing higher yielding securities.

The average yield on Federal funds and other investments increased 2 basis points to 2.74% for the three months ended June 30, 2019 from 2.72% for the same period in 2018, primarily due to aforementioned market rate increases by the Federal Reserve and an increase in average Federal Funds.

The average yield on interest-earning assets increased 28 basis points to 5.67% for the three months ended June 30, 2019 from 5.39% for the same period in 2018.

Interest expense increased $1.6 million, or 78.4%, to $3.7 million for the three months ended June 30, 2019 from $2.1 million for the same period in 2018, primarily due to the growth in average interest-bearing deposits and higher rates paid on interest-bearing deposits due to cumulative market rate increases by the Federal Reserve.

Average interest-bearing liabilities increased $113.8 million, or 20.3%, to $675.3 million for the three months ended June 30, 2019, compared with $561.4 million for the same period in 2018. The increase in average interest-bearing liabilities resulted primarily from a $90.8 million increase in average time deposits. Average noninterest-bearing demand deposits increased $21.9 million, or 8.6%, to $276.6 million for the three months ended June 30, 2019 compared to $254.7 million for the same period in 2018.

The average cost of interest-bearing liabilities increased 72 basis points to 2.20% for the three months ended June 30, 2019 from 1.48% for the same period in 2018.

Net interest income increased $1.2 million, or 11.9%, for the three months ended June 30, 2019, to $11.2 million compared to $10.0 million for the same period in 2018. The net interest spread and net interest margin for the three months ended June 30, 2019 were 3.47% and 4.26%, respectively, compared with 3.91% and 4.46%, respectively, for the same period in 2018.

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

The provision for loan losses for the three months ended June 30, 2019 was $401,000 compared to $33,000 for the same period in 2018, an increase of $368,000, or 1,115.2%. A provision for loan losses was not required for the first three month of 2019. The increase in the provision for loan losses for the three months ended June 30, 2019 was primarily due to an increase in loan balance during the period.

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

Noninterest income for the three months ended June 30, 2019 decreased $136,000, or 4.9%, to $2.6 million compared to the same period in 2018. The decrease was primarily attributable to a decrease of $145,000 in loan servicing fees, a decrease of $140,000 in gain on sale of SBA loans, partially offset by an increase of $101,000 in service charges on deposits. We sold $21.2 million in SBA loans with a gain of $1.6 million on sale for the three months ended June 30, 2019 and $24.8 million in SBA loans with a gain of $1.7 million on sale for the same period in 2018.

The following table sets forth the various components of our noninterest income for the three months ended June 30, 2019 and 2018:

Noninterest expense for the three months ended June 30, 2019 was $8.4 million compared to $7.5 million for the same period in 2018, an increase of $880,000 or 11.8%. The increase was primarily attributable to increased salaries and employee benefits, professional fees, and data processing and communication expenses.

The following table sets forth the major components of our noninterest expense for the three months ended June 30, 2019 and 2018:

Salaries and employee benefits expense for the three months ended June 30, 2019 increased $729,000, or 15.8%, to $5.3 million from $4.6 million for the same period in 2018. This increase was attributable to an increase in the number of employees to support continued growth, annual salary adjustments, and increased benefit costs. The average number of full-time equivalent employees was 166.8 and 138.0 in the three months ended June 30, 2019 and 2018, respectively.

Occupancy and equipment expenses for the three months ended June 30, 2019 were $1.1 million, a $68,000, or 6.4% increase compared to the same period in 2018. Data processing and communication expenses increased $70,000, or 23.6%, to $367,00 for the three months ended June 30, 2019 compared to $297,000 for the same period in 2018. Those increase were primarily attributable to support the new loan production offices and a new branch opened in 2019.

Professional fees increased $81,000, or 49.0% to $247,000 for the three months ended June 30, 2019 compared to $166,000 for the same period in 2018. The increase was due to an increase in financial reporting and auditing costs as additional regulatory reporting requirements became applicable in 2019.

Income tax expense was $1.2 million and $1.5 million for the three months ended June 30, 2019 and 2018, respectively. The effective income tax rate was 24.3 percent and 27.9 percent for the three months ended June 30, 2019 and 2018, respectively. The decrease in the effective tax rate for the three months ended June 30, 2019 compared to the same period in 2018 was primarily due to additional tax benefits from an increase in non-qualified stock option exercises during the three months ended June 30, 2019.

Results of Operations—Comparison for the Six Months Ended June 30, 2019 and 2018

The following discussion of our results of operations compares the six months ended June 30, 2019 to the six months ended June 30, 2018.

We reported net income for the six months ended June 30, 2019 of $8.6 million compared to net income of $7.0 million for the six months ended June 30, 2018, an increase of $1.6 million or 22.4%. The increase was primarily due to a $2.4 million increase in net interest income, and a $1.2 million increase in noninterest income, partially offset by a $2.1 million increase in noninterest expense, and a $110,000 increase in income tax expense.

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.

	Six months Ended June 30,
	2019							2018
(Dollars in thousands)	Average Balance		Interest and Fees		Yield / Rate			Average Balance		Interest and Fees		Yield / Rate
Earning assets:
Federal funds sold and other investments (1)	$	59,657	$	831		2.77	%	$	24,386	$	329		2.67	%
Securities available for sale		54,046		687		2.54			39,297		396		2.02
Total investments		113,703		1,518		2.66			63,683		725		2.26
Real estate		540,766		14,986		5.59			454,619		11,543		5.12
SBA		134,219		5,996		9.01			139,293		5,264		7.62
C & I		105,469		3,152		6.03			103,887		2,839		5.51
Home Mortgage		127,034		3,224		5.08			107,382		2,770		5.16
Consumer		2,674		89		6.71			3,619		101		5.63
Loans (2)		910,162		27,447		6.08			808,800		22,517		5.61
Total earning assets		1,023,865		28,965		5.70			872,483		23,242		5.36
Noninterest-earning assets		46,453							49,513
Total assets	$	1,070,318						$	921,996

Interest-bearing liabilities:
NOW and savings deposits	$	4,949	$	6		0.25	%	$	6,511	$	7		0.22	%
Money market deposits		266,492		2,456		1.86			257,015		1,512		1.19
Time deposits		384,389		4,527		2.38			271,218		2,074		1.54
Total interest-bearing deposits		655,830		6,989		2.15			534,744		3,593		1.35
Borrowings		1		—		2.76			13,398		103		1.54
Total interest-bearing liabilities		655,831		6,989		2.15			548,142		3,696		1.36
Noninterest-bearing liabilities:
Noninterest-bearing deposits		269,585							257,445
Other noninterest-bearing liabilities		12,635							9,493
Total noninterest-bearing liabilities		282,220							266,938
Shareholders’ equity		132,267							106,915
Total liabilities and shareholders’ equity	$	1,070,318						$	921,995
Net interest income / interest rate spreads			$	21,976		3.55	%			$	19,546		4.00	%
Net interest margin						4.32	%						4.51	%
Cost of deposits & cost of funds:
Total deposits / cost of deposits	$	925,415	$	6,989		1.52	%	$	792,189	$	3,593		0.91	%
Total funding liabilities / cost of funds	$	925,416	$	6,989		1.52	%	$	805,587	$	3,696		0.92	%
(1) Includes income and average balances for Federal Home Loan Bank (“FHLB”) and Pacific Coast Bankers Bank (“PCBB”) stock, CRA qualified mutual fund, term federal funds, interest-earning time deposits and other miscellaneous interest-earning assets.
(2) Average loan balances include non-accrual loans and loans held for sale.

The following tables set forth the effects of changing rates and volumes on our net interest income during the period shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Change applicable to both volume and rate have been allocated to volume and rate ratably.

	Six months Ended June 30,
	2019 over 2018
	Change due to:
(Dollars in thousands)	Volume			Rate			Interest Variance
Earning assets:
Federal funds sold and other investments	$	491		$	11		$	502
Securities available for sale		171			120			291
Total investments		662			131			793
Real estate		2,319			1,124			3,443
SBA		(200	)		932			732
C & I		43			270			313
Home Mortgage		498			(44	)		454
Consumer		(29	)		17			(12	)
Loans		2,631			2,299			4,930
Total earning assets		3,293			2,430			5,723

NOW and savings deposits		(2	)		1			(1	)
Money market deposits		58			886			944
Time deposits		1,070			1,383			2,453
Total interest-bearing deposits		1,126			2,270			3,396
Borrowings		(52	)		(51	)		(103	)
Total interest-bearing liabilities		1,074			2,219			3,293

Net interest income	$	2,219		$	211		$	2,430

Interest income increased $5.7 million, or 24.6%, to $29.0 million for the six months ended June 30, 2019 from $23.2 million for the same period in 2018, primarily due to the growth in average loans and increase in the average yields on loans.

Average loans increased $101.4 million, or 12.5%, to $910.2 million for the six months ended June 30, 2019 from $808.8 million for the same period in 2018. Average securities available for sale increased $14.7 million, or 37.5%, to $54.0 million for the six months ended June 30, 2019 from $39.3 million for the same period in 2018. Average interest-earning assets increased $151.4 million, or 17.4%, to $1.02 billion for the six months ended June 30, 2019 from $872.5 million for the same period in 2018. The increase in average loans was primarily due to new loan production, and the increase in average securities was due to purchases of available for sale securities.

The average yield on loans increased 47 basis points to 6.08% for the six months ended June 30, 2019 from 5.61% for the same period in 2018, primarily due to cumulative market rate increases by the Federal Reserve. The average yield on securities increased 52 basis points to 2.54% for the six months ended June 30, 2019 from 2.02% for the same period in 2018, attributable primarily to purchasing higher yielding securities. The average yield on interest-earning assets increased 34 basis points to 5.70% for the six months ended June 30, 2019 from 5.36% for the same period in 2018.

The average yield on Federal funds and other investments increased 10 basis points to 2.77% for the six months ended June 30, 2019 from 2.67% for the same period in 2018, primarily due to aforementioned market rate increases by the Federal Reserve and an increase in the average balance of Federal funds and other investments with higher yields due to a purchase of additional Federal funds and FHLB stock.

Interest expense increased $3.3 million, or 89.1%, to $7.0 million for the six months ended June 30, 2019 from $3.7 million for the same period in 2018, primarily due to the growth in average interest-bearing deposits and higher rates paid on interest-bearing deposits.

Average interest-bearing liabilities increased $107.7 million, or 19.6%, to $655.8 million for the six months ended June 30, 2019, compared with $548.1 million for the same period in 2018. The increase in average interest-bearing liabilities resulted primarily from an $113.2 million increase in average time deposits, partially offset by a $13.4 million decrease in average borrowings. Average noninterest-bearing demand deposits increased $12.1 million, or 4.7%, to $269.6 million for the six months ended June 30, 2019 compared to $257.4 million for the same period in 2018.

The average cost of interest-bearing liabilities increased 79 basis points to 2.15% for the six months ended June 30, 2019 from 1.36% for the same period in 2018.

Net interest income increased $2.4 million, or 12.4%, for the six months ended June 30, 2019, to $22.0 million compared to $19.5 million for the same period in 2018. The net interest spread and net interest margin for the six months ended June 30, 2019 were 3.55% and 4.32%, respectively, compared with 4.00% and 4.51%, respectively, for the same period in 2018.

The provision for loan losses for the six months ended June 30, 2019 was $401,000 compared to $609,000 for the same period in 2018, a decrease of $208,000, or 34.2%. The decrease was primarily due to a decrease in specific reserve for an SBA commercial loan upon the confirmation of SBA government guarantee, and a decrease in the required reserve for loan losses as a percentage of gross loans for June 30, 2019 as overall loss factors, including qualitative factors, used in the second quarter of 2019 were lower than those for the same period of 2018. The allowance for loan losses as a percentage of gross loans was 1.01% and 1.18% at June 30, 2019 and 2018, respectively.

Noninterest income for the six months ended June 30, 2019 was $6.2 million, an increase of $1.2 million, or 23.7%, compared to $5.0 million for the same period in 2018. The increase was primarily attributable to one time gain on company owned life insurance of $1.2 million, and a $91,000 increase in service charges on deposit accounts, partially off by a decrease of $86,000 in loan servicing fees. Service charges on deposit accounts increased $91,000 to $1.0 million in the six months ended June 30, 2019 compared to $935,000 in the same period in 2018, primarily due to increased activities on noninterest bearing deposit accounts.

We sold $38.9 million in SBA loans with a gain of $2.6 million on sale for six months ended June 30, 2019 and $38.2 million in SBA loans with gain of $2.7 million on sale for the same period in 2018.

The following table sets forth the various components of our noninterest income for the six months ended June 30, 2019 and 2018:

Noninterest expense for the six months ended June 30, 2019 was $16.4 million compared to $14.3 million for the same period in 2018, an increase of $2.1 million, or 15.0%. The increase was primarily attributable to increased salaries and employee benefits, occupancy and equipment expense, and professional fees.

The following table sets forth the major components of our noninterest expense for the six months ended June 30, 2019 and 2018:

Salaries and employee benefits expense for the six months ended June 30, 2019 increased $1.7 million, or 19.1%, to $10.5 million from $8.8 million for the same period in 2018. This increase was attributable to an increase in the number of employees to support continued growth, annual salary adjustments, and increased benefit costs. The average number of full-time equivalent employees was 162.4 and 138.5 in the six months ended June 30, 2019 and 2018, respectively.

Occupancy and equipment expense increased $120,000, or 5.7%, to $2.2 million for the six months ended June 30, 2019 compared to $2.1 million for the same period in 2018. The increase was primarily attributable to support the new loan production offices and a new branch opened in 2019.

Professional fees increased $133,000, or 41.8% to $451,000 for the six months ended June 30, 2019 compared to $318,000 for the same period in 2018. The increase was due to an increase in financial reporting and auditing costs as additional regulatory reporting requirements became applicable in 2019.

Income tax expense was $2.7 million and $2.6 million for the six months ended June 30, 2019 and 2018, respectively. The effective income tax rate was 24.3 percent and 27.3 percent for the six months ended June 30, 2019 and 2018, respectively. The decrease in the effective tax rate for the six months ended June 30, 2019 compared to the same period in 2018 was primarily due to additional tax benefits from an increase in non-qualified stock option exercises during the six months ended June 30, 2019.

Total assets increased $83.4 million, or 8.0%, to $1.13 billion at June 30, 2019 compared to $1.04 billion at December 31, 2018. This increase primarily resulted from an increase of $71.9 million, or 8.2%, in gross loans. We funded our asset growth primarily with an increase of $69.5 million in deposits during the six months ended June 30, 2019.

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

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

All of the securities in our investment portfolio were classified as available-for-sale at June 30, 2019. There were no held-to-maturity securities in our investment portfolio at June 30, 2019. All available-for-sale securities are carried at fair value. Securities available-for-sale consist primarily of US government-sponsored agency securities, home mortgage-backed securities and collateralized mortgage obligations.

Securities available-for-sale decreased $3.5 million, or 6.3%, to $51.8 million at June 30, 2019 from $55.3 million at December 31, 2018, primarily due to the paydowns on home mortgage-backed securities and collateralized mortgage obligations. No issuer of the available-for-sale securities, other than FNMA and FHLMC, comprised more than ten percent of our shareholders’ equity as of June 30, 2019 or December 31, 2018.

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

	June 30, 2019							December 31, 2018
	Amortized		Fair		Unrealized			Amortized		Fair		Unrealized
(Dollars in thousands)	Cost		Value		Gain/(Loss)			Cost		Value		Gain/(Loss)
Available for sale
U.S. Government agencies	$	6,997	$	6,981	$	(16	)	$	6,994	$	6,906	$	(88	)
Mortgage-backed securities: residential		12,753		12,730		(23	)		14,465		14,129		(336	)
Collateralized mortgage obligations		31,818		32,118		300			34,655		34,301		(354	)
Total available for sale	$	51,568	$	51,829	$	261		$	56,114	$	55,336	$	(778	)

Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. At June 30, 2019, 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.

	As of June 30, 2019
	Due in One Year					Due after One Year					Due after Five Years
	or Less					Through Five Years					Through Ten Years					Due after Ten Years
			Weighted					Weighted					Weighted					Weighted
	Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Average
(Dollars in thousands)	Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield
Available for sale
U.S. Government agencies	$	4,997		1.69	%	$	2,000		1.65	%	$	—		—	%	$	—		—	%
Mortgage-backed securities - residential		—		—	%		—		—	%		7,176		7.90	%		5,577		2.41	%
Collateralized mortgage obligations		—		—	%		—		—	%		1,226		1.73	%		30,592		2.81	%
Total available for sale	$	4,997		1.69	%	$	2,000		1.65	%	$	8,402		1.88	%	$	36,169		2.75	%

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

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

At June 30, 2019, gross loans including deferred costs totaled $947.0 million compared to $875.1 million at December 31, 2018, an increase of $71.9 million, or 8.2%. The increase in our gross loans resulted from organic growth in most of our loan categories.

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

	June 30, 2019						December 31, 2018
(Dollars in thousands)	Amount			% of Total			Amount			% of Total
Real estate:
Commercial real estate	$	583,634			62	%	$	503,834			58	%
SBA loan - real estate		120,841			13	%		117,834			13	%
Total real estate		704,475			75	%		621,668			71	%
SBA loan - non-real estate		10,116			1	%		9,541			1	%
Commercial and industrial		105,133			11	%		113,975			13	%
Home mortgage		123,951			13	%		127,298			15	%
Consumer		3,331		<1%				2,577		<1%
Gross loans		947,006			100	%		875,059			100	%
Allowance for loan losses		(9,525	)					(9,636	)
Net loans	$	937,481					$	865,423

The following tables presents the maturity distribution of our loans as of June 30, 2019 and December 31, 2018. The table shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates.

	As of June 30, 2019
					Due after One Year
	Due in One Year or Less				Through Five Years				Due after Five Years
			Adjustable				Adjustable				Adjustable
(Dollars in thousands)	Fixed Rate		Rate		Fixed Rate		Rate		Fixed Rate		Rate		Total
Real estate:
Commercial real estate	$	28,301	$	42,577	$	230,451	$	170,075	$	64,259	$	47,971	$	583,634
SBA loans - real estate		—		—		—		—		—		120,841		120,841
Total real estate		28,301		42,577		230,451		170,075		64,259		168,812		704,475
SBA loan - non-real estate		—		1		—		760		—		9,355		10,116
Commercial and industrial		—		58,424		175		31,872		—		14,662		105,133
Home mortgage		—		—		—		—		116,807		7,144		123,951
Consumer		—		1,689		—		970		—		672		3,331
Gross loans	$	28,301	$	102,691	$	230,626	$	203,677	$	181,066	$	200,645	$	947,006

	As of December 31, 2018
					Due after One Year
	Due in One Year or Less				Through Five Years				Due after Five Years
			Adjustable				Adjustable				Adjustable
(Dollars in thousands)	Fixed Rate		Rate		Fixed Rate		Rate		Fixed Rate		Rate		Total
Real estate:
Commercial real estate	$	26,460	$	39,204	$	201,385	$	133,085	$	49,598	$	54,102	$	503,834
SBA loans - real estate		—		—		—		—		—		117,834		117,834
Total real estate		26,460		39,204		201,385		133,085		49,598		171,936		621,668
SBA loan - non-real estate		—		—		—		703		—		8,838		9,541
Commercial and industrial		—		69,358		1,675		32,278		—		10,664		113,975
Home mortgage		—		—		—		—		122,886		4,412		127,298
Consumer		—		1,030		—		1,110		—		437		2,577
Gross loans	$	26,460	$	109,592	$	203,060	$	167,176	$	172,484	$	196,287	$	875,059

Our loan portfolio is concentrated in commercial real estate, commercial (primarily manufacturing, wholesale, and services-oriented entities), SBA loans (unguaranteed portion) with the remaining balance in home mortgage, and consumer loans. We do not have any material concentrations by industry or group of industries in the loan portfolio. However, 87.5% of our gross loans are secured by real property as of June 30, 2019, compared to 85.6% as of December 31, 2018.

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

Commercial real estate loans include owner-occupied and non-occupied commercial real estate. We originate both fixed and adjustable rate loans. Adjustable rate loans are based on the Wall Street Journal prime rate. At June 30, 2019, approximately 55% of the commercial real estate portfolio consisted of fixed-rate loans. Our policy maximum loan-to-value, or LTV, is 70% for commercial real estate loans. At June 30, 2019, our average loan to value for commercial real estate loans was approximately 54%. Our commercial real estate loan portfolio totaled $583.6 million at June 30, 2019 compared to $503.8 million at December 31, 2018.

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

As of June 30, 2019, our SBA portfolio totaled $131.0 million compared to $127.4 million as of December 31, 2018, an increase of $3.6 million, or 2.8%. The Bank originated $52.2 million of SBA loans in the six months ended June 30, 2019 compared to $45.7 million in the six months ended June 30, 2018.

Commercial and industrial loans totaled $105.1 million at June 30, 2019 compared to $114.0 million at December 31, 2018.

We originate mainly non-qualified, alternative documentation single-family home mortgage loans (“home mortgage”) primarily through broker relationships, but also through our branch network. The loan product is a five-year or seven-year hybrid adjustable rate mortgage which reprices after five years to the one-year LIBOR plus certain spreads. We originate the non-qualified single-family home mortgage loans held by us for investment. Home mortgage loans totaled $124.0 million at June 30, 2019 compared to $127.3 million at December 31, 2018, a decrease of $3.3 million, or 2.63%.

As of June 30, 2019, and December 31, 2018, we serviced $333.0 million and $323.5 million respectively, of SBA loans for others. Activities for loan servicing rights for the three months ended June 30, 2019 and 2018 were as follows:

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

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

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

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 $9.5 million at June 30, 2019 compared to $9.6 million at December 31, 2018, a decrease of $111,000, or 1.15%. The decrease in allowance for loan losses while the increase in loan balances was due to a decrease in specific reserve for an SBA commercial loan upon the confirmation of SBA government guarantee, and a decrease in the required reserve for loan losses as a percentage of gross loans for June 30, 2019 as overall loss factors, including qualitative factors, used in 2019 were lower than those for the same period of 2018.

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

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

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 and six months ended June 30, 2019 and 2018.

	For the Three Months Ended June 30,
	2019											2018
						Net											Net
	Beginning					Charge-			Ending			Beginning					Charge-		Ending
(Dollars in thousands)	Balance		Provision			offs			Balance			Balance		Provision			offs		Balance
Real estate:
Commercial real estate	$	5,196	$	358		$	—		$	5,554		$	5,211	$	(407	)	$	—	$	4,804
SBA loans - real estate		930		6			3			933			1,006		(28	)		—		978
Total real estate		6,126		364			3			6,487			6,217		(435	)		—		5,782
SBA loan - non-real estate		129		(10	)		—			119			501		61			26		536
Commercial and industrial		1,673		86			493			1,266			1,580		297			—		1,877
Home mortgage		1,660		(51	)		—			1,609			1,376		113			—		1,489
Consumer		31		12			(1	)		44			42		(3	)		—		39
Total	$	9,619	$	401		$	495		$	9,525		$	9,716	$	33		$	26	$	9,723
Gross loans									$	947,006									$	826,040
Average gross loans										932,053										830,133
Net charge-offs to average gross loans(1)										0.21	%									0.01	%
Allowance for loans losses to gross loans										1.01	%									1.18	%

(1) Net charge-offs are loan charge-offs net of loan recoveries.

	As of and For the Six Months Ended June 30,
	2019											2018
						Net											Net
	Beginning					Charge-			Ending			Beginning					Charge-		Ending
(Dollars in thousands)	Balance		Provision			offs			Balance			Balance		Provision			offs		Balance
Real estate:
Commercial real estate	$	4,805	$	749		$	—		$	5,554		$	4,801	$	3		$	—	$	4,804
SBA loans - real estate		894		59			20			933			1,082		(104	)		—		978
Total real estate		5,699		808			20			6,487			5,883		(101	)		—		5,782
SBA loan - non-real estate		505		(386	)		—			119			538		23			25		536
Commercial and industrial		1,746		13			493			1,266			1,265		612			—		1,877
Home mortgage		1,653		(44	)		—			1,609			1,408		81			—		1,489
Consumer		33		10			(1	)		44			45		(6	)		—		39
Total	$	9,636	$	401		$	512		$	9,525		$	9,139	$	609		$	25	$	9,723
Gross loans									$	947,006									$	826,040
Average gross loans										910,162										808,800
Net charge-offs to average gross loans(1)										0.11	%									0.01	%
Allowance for loans losses to gross loans										1.01	%									1.18	%

(1) Net charge-offs are loan charge-offs net of loan recoveries.

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

Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as 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 at June 30, 2019 and no OREO at December 31, 2018.

Non-performing loans include loans 90 days past due and still accruing, loans accounted for on a non-accrual basis and accruing restructured loans. Non-performing assets consist of non-performing loans plus OREO. Non-performing loans were $1.6 million at June 30, 2019 compared to $1.9 million at December 31, 2018.

Classified loans were $4.2 million at June 30, 2019, an increase of $624,000 compared to $3.6 million at December 31, 2018. The increase of $1.6 million, partially offset by a removal of $1.1 million for two commercial loans and one SBA real estate loans in 2019. As of the reporting date, one commercial loan was paid off and an SBA real estate loan and a commercial loans, which are from a single borrower relationship are fully secured by real estate collateral.

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

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 continued our effort of 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.

Total deposits at June 30, 2019 were $974.7 million, representing an increase of $69.5 million, or 7.7%, compared to $905.2 million at December 31, 2018. As of June 30, 2019, 28.2% of total deposits were comprised of noninterest-bearing demand accounts, 29.1% of interest-bearing transaction accounts and 42.7% of time deposits.

The following tables summarize our average deposit balances and weighted average rates for the three and six months ended June 30, 2019 and 2018:

	Three Months Ended June 30,
	2019					2018
			Weighted					Weighted
	Average		Average			Average		Average
(Dollars in thousands)	Balance		Rate			Balance		Rate
Noninterest-bearing demand	$	276,569		―	%	$	254,700		―	%
Interest-bearing:
NOW and Savings deposits		4,725		0.25			6,615		0.24
Money market		281,239		1.90			253,162		1.27
Time deposits ($250,000 or less)		190,219		2.40			159,672		1.66
Time deposits (more than $250,000)		199,075		2.47			138,863		1.71
Total interest-bearing		675,258		2.20			558,312		1.48
Total deposits	$	951,827		1.56	%	$	813,012		1.02	%

	Six Months Ended June 30,
	2019					2018
			Weighted					Weighted
	Average		Average			Average		Average
(Dollars in thousands)	Balance		Rate			Balance		Rate
Noninterest-bearing demand	$	269,585		―	%	$	257,445		―	%
Interest-bearing:
NOW and Savings deposits		4,949		0.25			6,511		0.22
Money market		266,492		1.86			257,015		1.19
Time deposits ($250,000 or less)		195,781		2.35			144,790		1.53
Time deposits (more than $250,000)		188,608		2.40			126,428		1.55
Total interest-bearing		655,830		2.15			534,744		1.35
Total deposits	$	925,415		1.52	%	$	792,189		0.91	%

The following tables set forth the maturity of time deposits as of June 30, 2019 and December 31, 2018:

Other than deposits, we also utilized FHLB advances as a supplementary funding source to finance our operations. The advances from the FHLB are collateralized by residential and commercial real estate loans. At June 30, 2019 and December 31, 2018, we had maximum borrowing capacity from the FHLB of $383.9 million and $357.1 million, respectively. We had no borrowings from FHLB at June 30, 2019 or at December 31, 2018.

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

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

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

We had $13.5 million of unsecured federal funds lines with no amounts advanced as of June 30, 2019 and as of December 31, 2018, respectively. In addition, on such dates we had lines of credit from the Federal Reserve discount window of $118.1 million and $107.7 million, respectively. The Federal Reserve discount window lines were collateralized by a pool of commercial real estate loans and commercial and industrial loans totaling $193.4 million and $179.4 million as of June 30, 2019 and December 31, 2018, respectively. We did not have any borrowings outstanding with the Federal Reserve at June 30, 2019 or December 31, 2018, and our borrowing capacity is limited only by eligible collateral.

At June 30, 2019 and December 31, 2018, we had no borrowings from the FHLB. Based on the values of loans pledged as collateral, we had $220.3 million and $209.7 million of additional borrowing availability with the FHLB as of June 30, 2019 and December 31, 2018, respectively. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts.

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

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

The table below also summarizes the capital requirements applicable to us and the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as our and the Bank’s capital ratios as of June 30, 2019 and December 31, 2018. We and the Bank exceeded all regulatory capital requirements under the Basel III Capital Rules and were considered to be “well-capitalized” as of the dates reflected in the table below. As of June 30, 2019, the FDIC categorized us as well-capitalized under the prompt corrective action framework. There have been no conditions or events since June 30, 2019 that management believes would change this classification.

																Regulatory
																Capital Ratio
																Requirements,
						Regulatory					Minimum					including fully
						Capital Ratio					To be Considered					phased in Capital
	Actual					Requirements					"Well Capitalized"					Conservation Buffer
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2019:
Total capital (to risk-weighted assets)
Consolidated	$	144,488		15.45	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		143,731		15.37	%		74,800		8.00	%		93,500		10.00	%		98,175		10.50	%
Tier 1 capital (to risk-weighted assets)
Consolidated		134,887		14.42	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		134,130		14.35	%		56,100		6.00	%		74,800		8.00	%		79,475		8.50	%
CET1 capital (to risk-weighted assets)
Consolidated		134,887		14.42	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		134,130		14.35	%		42,075		4.50	%		60,775		6.50	%		65,450		7.00	%
Tier 1 capital (to average assets)
Consolidated		134,887		12.24	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		134,130		12.18	%		44,061		4.00	%		55,076		5.00	%		44,061		4.00	%

																Regulatory
																Capital Ratio
																Requirements,
						Regulatory					Minimum					including fully
						Capital Ratio					To be Considered					phased in Capital
	Actual					Requirements					"Well Capitalized"					Conservation Buffer
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2018:
Total capital (to risk-weighted assets)
Consolidated	$	139,593		16.26	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		139,538		16.25	%		68,686		8.00	%		85,857		10.00	%		90,150		10.50	%
Tier 1 capital (to risk-weighted assets)
Consolidated		129,893		15.13	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		129,838		15.12	%		51,514		6.00	%		68,686		8.00	%		72,979		8.50	%
CET1 capital (to risk-weighted assets)
Consolidated		129,893		15.13	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		129,838		15.12	%		38,636		4.50	%		55,807		6.50	%		60,100		7.00	%
Tier 1 capital (to average assets)
Consolidated		129,893		12.88	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		129,838		12.87	%		40,346		4.00	%		50,432		5.00	%		40,346		4.00	%

The following tables contain supplemental information regarding our total contractual obligations at June 30, 2019 and December 31, 2018:

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

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

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

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

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

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

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

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

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

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 June 30, 2019 and December 31, 2018 are presented in the following table. The projections assume (i) immediate, parallel shifts downward of the yield curve of 100 basis points and (ii) immediate, parallel shifts upward of the yield curve of 100, 200, 300 and 400 basis points over 12 months. In the current interest rate environment, a downward shift of the yield curve of 200, 300 and 400 basis points does not provide us with meaningful results. In a downward parallel shift of the yield curve, interest rate at the short-end of the yield curve are not modeled to decline any further than 0%.

We are within board-established policy limits for the all rate scenarios. The EAR reported at June 30, 2019 projects that our earnings are expected to be sensitive to changes in interest rates over the next year. In recent periods, the amount of fixed rate assets decreased resulting in a position shift to be slightly more asset sensitive.

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.

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

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

In addition to the other information set forth in this Report, you should carefully consider the other factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2018. There were no material changes from risk factors previously disclosed in our Form 10-K. The risk factors identified are in addition to those contained in any other cautionary statements, written or oral, which may be or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the SEC.

On January 25, 2019, the Company announced that the board of directors approved a stock repurchase program that authorizes the Company to repurchase up to 400,000 shares of its common stock in open market. The Company may purchase share in open market transactions, through block trades, in privately negotiated transactions, or by other trading plans as determined by the Company’s management. The repurchase program may be suspended, terminated, or modified at any time. The time of purchases and amount of share repurchase may be affected by variety factors including market conditions, price, trading volume and regulatory requirements.

The following table summarizes share repurchase activities for the three months ended June 30, 2019.

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.

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)

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	5
	Consolidated Balance Sheets	5
	Consolidated Statements of Income and Comprehensive Income	6
	Consolidated Statements of Changes in Shareholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Unaudited Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55
Item 4.	Controls and Procedures	56

PART II.	OTHER INFORMATION

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

Signatures		59

	Less Than 12 Months				12 Months or Longer					Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
As of June 30, 2019:	(Dollars in thousands)
Available for sale:
U.S. Government sponsored agency securities	$	—	$	—	$	5,981	$	(16	)	$	5,981	$	(16	)
Mortgage-backed securities: residential		—		—		8,793		(53	)		8,793		(53	)
Collateralized mortgage obligations		—		—		9,587		(61	)		9,587		(61	)
Total available for sale	$	-	$	-	$	24,361	$	(130	)	$	24,361	$	(130	)

	Three Months Ended		Six Months Ended
(Dollars in thousands)	June 30, 2019		June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	479	$	915
Weighted average remaining lease term - operating leases			6.2 years
Weighted average discount rate - operating leases				2.98	%

(Dollars in thousands)	June 30, 2019
2019 remaining	$	793
2020		2,002
2021		2,032
2022		2,028
2023		1,816
Thereafter		3,343
Total lease payments		12,014
Discount to present value		(1,277	)
Total lease liability	$	10,737

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
As of June 30, 2019:	(Dollars in thousands)
Available for sale:
U.S. Government sponsored agency securities	$	6,997	$	—	$	(16	)	$	6,981
Mortgage-backed securities: residential		12,753		30		(53	)		12,730
Collateralized mortgage obligations: residential		31,818		361		(61	)		32,118
Total available for sale	$	51,568	$	391	$	(130	)	$	51,829

	Nonaccrual		Loans >90 Days Past Due & Still Accruing		Total
As of June 30, 2019:	(Dollars in thousands)
SBA loans—real estate	$	497	$	—	$	497
SBA loans—non-real estate		41		—		41
Commercial and industrial		680		—		680
Total	$	1,218	$	—	$	1,218
As of December 31, 2018:
SBA loans—real estate	$	834	$	—	$	834
SBA loans—non-real estate		57		—		57
Commercial and industrial		680		—		680
Total	$	1,571	$	—	$	1,571

	June 30, 2019
	(In thousands)
2019 remaining	$	228,384
2020		185,162
2021		1,497
2022		716
2023		615
Thereafter		47
Total	$	416,421

	June 30, 2019
	(In thousands)
Federal Home Loan Bank—San Francisco	$	220,279
Federal Reserve Bank		118,100
Pacific Coast Bankers Bank		8,000
Zions Bank		5,500
Total	$	351,879

				Weighted
	Number of			Average		Aggregate
	Options			Exercise		Intrinsic
	Outstanding			Price		Value
	(Dollars in thousands, except per share data)
Outstanding, as of January 1, 2019		250,000		$	4.00
Options granted		—			—
Options exercised		(60,000	)		1.78
Options forfeited		—			—
Options expired		—			—
Outstanding, as of June 30, 2019		190,000			4.37	$	1,229
Fully vested and expected to vest		190,000			4.37	$	1,229
Vested		190,000		$	4.37	$	1,229

	Shares Issued			Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
	(Dollars in thousands, except share data)
Non-vested, as of January 1, 2019		436,000		$	8.19
Awards granted		3,000			8.15
Awards vested		(10,000	)		8.00
Awards forfeited		—			—
Non-vested, as of June 30, 2019		429,000		$	8.19	$	4,650

	Six Months Ended June 30,
(Dollars in thousands)	2019		2018		Increase (decrease)
Noninterest income:
Service charges on deposit accounts	$	1,026	$	935	$	91
Loan servicing fees, net of amortization		610		696		(86	)
Gain on sale of loans		2,665		2,717		(52	)
Other income and fees		1,878		648		1,230
Total noninterest income	$	6,179	$	4,996	$	1,183

	As of June 30, 2019
	Maturity Within:
	Three		Three to		Six to 12		After
(Dollars in thousands)	Months		Six Months		Months		12 Months		Total
Time deposits ($250,000 or less)	$	62,197	$	57,442	$	73,694	$	11,783	$	205,116
Time deposits (greater than $250,000)		59,849		48,896		95,692		6,868		211,305
Total time deposits	$	122,046	$	106,338	$	169,386	$	18,651	$	416,421

	Payments Due at June 30, 2019
	Within		One to		Three to		After Five
(Dollars in thousands)	One Year		Three Years		Five Years		Years		Total
Deposits without a stated maturity	$	558,251	$	—	$	—	$	—	$	558,251
Time deposits		397,770		17,642		432		577		416,421
Operating lease commitments		1,789		4,077		3,663		2,485		12,014
Commitments to fund investment for Low Income Housing Tax Credit		322		11		19		14		366
Total contractual obligations	$	958,132	$	21,730	$	4,114	$	3,076	$	987,052

	Payments Due at December 31, 2018
	Within		One to		Three to		After Five
(Dollars in thousands)	One Year		Three Years		Five Years		Years		Total
Deposits without a stated maturity	$	549,902	$	—	$	—	$	—	$	549,902
Time deposits		338,521		16,001		752		—		355,274
Operating lease commitments		1,709		3,499		3,140		2,669		11,017
Commitments to fund investment for Low Income Housing Tax Credit		442		10		15		22		489
Total contractual obligations	$	890,574	$	19,510	$	3,907	$	2,691	$	916,682

	Net Interest Income Sensitivity						Economic Value of Equity Sensitivity
	06/30/2019			12/31/2018			06/30/2019			12/31/2018
+400 basis points		18.72	%		16.25	%		(1.18	) %		(2.94	)%
+300 basis points		14.96	%		13.16	%		1.35	%		(0.01	)%
+200 basis points		10.69	%		9.32	%		3.08	%		1.55	%
+100 basis points		5.86	%		5.11	%		3.03	%		2.62	%
-100 basis points		(4.96	) %		(3.30	)%		(7.48	) %		(4.38	)%

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Publicly Announced Program		Approximate Number of Shares that May Yet Be Purchased Under the Program
	(Dollars in thousands, except per share data)
April 1, 2019 to April 30, 2019		69,126	$	8.87	$	69,126		-
May 1, 2019 to May 31, 2019		3,200		9.29		3,200		-
June 1, 2019 to June 30, 2019		2,059		9.30		2,059		66,730
Total		74,385	$	8.90	$	74,385		66,730

Exhibit Number		Description
3.1		Articles of Incorporation of OP Bancorp included as Exhibit 3.1 to the Registration Statement on Form S-1 filed March 5, 2018 and incorporated herein by reference.
3.2		Amended and Restated Bylaws of OP Bancorp included as Exhibit 3.2 to the Registration Statement on Form S-1 filed March 5, 2018 and incorporated herein by reference.
31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

	Company Name

Date: August 8, 2019	By:	/s/ Min J. Kim
		Min J. Kim
		President and Chief Executive Officer

Date: August 8, 2019	By:	/s/ Christine Oh
		Christine Oh
		Chief Financial Officer