opbk-10q_20210331.htm

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2021

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

For the transition period from __________ to __________

Commission File Number: 001-38437

OP BANCORP

(Exact Name of Registrant as Specified in its Charter)

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

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

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

Title of each class

Common Stock, no par value

Trading

Symbol(s)

OPBK

Name of each exchange on which registered

NASDAQ Global Market

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

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

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

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

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

As of May 5, 2021, there were 15,044,540 outstanding shares of the Registrant’s common stock.

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		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	5
	Consolidated Balance Sheets	5
	Consolidated Statements of Income and Comprehensive Income	6
	Consolidated Statements of Changes in Shareholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Unaudited Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	49

PART II.	OTHER INFORMATION

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

Signatures		53

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Cautionary Note Regarding Forward-Looking Statements

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

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

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•

risks related to potential acquisitions;

•

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

•

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

•

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

•

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

•

changes in federal tax law or policy; and

•

our ability to the manage the foregoing.

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

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

OP BANCORP

CONSOLIDATED BALANCE SHEETS (unaudited)

As of March 31, 2021 and December 31, 2020

	March 31, 2021		December 31, 2020
	(Dollars in thousands, except share data)
ASSETS
Cash and cash equivalents	$	127,524	$	106,405
Securities available for sale, at fair value		102,413		91,791
Other investments		9,953		10,006
Loans held for sale		28,575		26,659
Loans receivable, net of allowance of $15,339 at March 31, 2021 and $15,352 at December 31, 2020		1,140,533		1,084,384
Premises and equipment, net		4,368		4,544
Accrued interest receivable, net of allowance of $1,279 at March 31, 2021 and $643 at December 31, 2020		3,096		3,985
Servicing assets		7,492		7,360
Company owned life insurance (COLI)		10,941		10,879
Deferred tax assets		5,391		5,242
Operating right-of-use assets		6,443		6,786
Other assets		8,605		8,785
Total assets	$	1,455,334	$	1,366,826
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits:
Noninterest bearing	$	571,985	$	522,754
Interest bearing:
Money market and others		354,148		328,323
Time deposits greater than $250,000		190,960		200,210
Other time deposits		168,297		148,803
Total deposits		1,285,390		1,200,090
Federal Home Loan Bank advances		5,000		5,000
Accrued interest payable		622		1,021
Operating lease liabilities		8,016		8,429
Other liabilities		9,313		8,920
Total liabilities		1,308,341		1,223,460
Shareholders’ equity
Preferred stock – no par value; 10,000,000 shares authorized; no shares issued or outstanding at March 31, 2021 and December 31, 2020		—		—
Common stock – no par value; 50,000,000 shares authorized; 15,037,635 and 15,016,700 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively		78,654		78,657
Additional paid-in capital		8,652		8,521
Retained earnings		59,373		55,348
Accumulated other comprehensive income		314		840
Total shareholders’ equity		146,993		143,366
Total liabilities and shareholders' equity	$	1,455,334	$	1,366,826

See accompanying notes to consolidated financial statements

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OP BANCORP

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)

For the Three Months ended March 31, 2021 and 2020

	Three Months Ended
	March 31,
	2021			2020
	(Dollars in thousands, except share data)
Interest income
Interest and fees on loans	$	13,284		$	13,694
Interest on investment securities		236			319
Other interest income		112			332
Total interest income		13,632			14,345
Interest expense
Interest on deposits		877			3,229
Total interest expense		877			3,229
Net interest income		12,755			11,116
Provision for loan losses		620			743
Net interest income after provision for loan losses		12,135			10,373

Noninterest income
Service charges on deposits		274			368
Loan servicing fees, net of amortization		531			392
Gain on sale of loans		1,882			1,155
Other income		279			381
Total noninterest income		2,966			2,296
Noninterest expense
Salaries and employee benefits		4,662			5,071
Occupancy and equipment		1,235			1,230
Data processing and communication		448			409
Professional fees		314			273
FDIC insurance and regulatory assessments		132			106
Promotion and advertising		177			162
Directors’ fees		116			233
Foundation donation and other contributions		507			330
Other expenses		375			393
Total noninterest expense		7,966			8,207
Income before income taxes		7,135			4,462
Income tax expense		2,058			1,163
Net income	$	5,077		$	3,299
Earnings per share - Basic	$	0.33		$	0.21
Earnings per share - Diluted	$	0.33		$	0.21
Other comprehensive (loss)/income:
Change in unrealized (loss)/income on securities available for sale		(747	)		1,294
Tax effect		221			(382	)
Total other comprehensive (loss)/income		(526	)		912
Comprehensive income	$	4,551		$	4,211

See accompanying notes to consolidated financial statements

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OP BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

	Common Stock						Additional					Accumulated Other			Total
	Shares Outstanding			Amount			Paid-in Capital		Retained Earnings			Comprehensive Income (Loss)			Shareholders’ Equity
	(Dollars in thousands, except share data)
Balance at January 1, 2020		15,703,276		$	86,381		$	7,524	$	46,483		$	188		$	140,576
Net income		—			—			—		3,299			—			3,299
Stock issued under stock-based compensation plans		130,046			305			—		—			—			305
Stock-based compensation		—			—			358		—			—			358
Repurchase of common stock		(717,454	)		(6,264	)		—		—			—			(6,264	)
Cash dividends declared		—			—			—		(1,087	)		—			(1,087	)
Change in other comprehensive income(loss)		—			—			—		—			912			912
Balance at March 31, 2020		15,115,868		$	80,422		$	7,882	$	48,695		$	1,100		$	138,099

Balance at January 1, 2021		15,016,700		$	78,657		$	8,521	$	55,348		$	840		$	143,366
Net income		—			—			—		5,077			—			5,077
Stock issued under stock-based compensation plans		24,765			25			—		—			—			25
Stock-based compensation		—			—			131		—			—			131
Repurchase of common stock		(3,830	)		(28	)		—		—			—			(28	)
Cash dividends declared		—			—			—		(1,052	)		—			(1,052	)
Change in other comprehensive income(loss)		—			—			—		—			(526	)		(526	)
Balance at March 31, 2021		15,037,635		$	78,654		$	8,652	$	59,373		$	314		$	146,993

See accompanying notes to consolidated financial statements

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OP BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

For the Three Months ended March 31, 2021 and 2020

	Three Months Ended March 31,
	2021			2020
	(Dollars in thousands)
Cash flows from operating activities
Net income	$	5,077		$	3,299
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Provision for loan losses		620			743
Depreciation and amortization of premises and equipment		328			329
Amortization of net premiums on securities		232			58
Stock-based compensation		131			358
Gain on sales of loans		(1,882	)		(1,155	)
Earnings on company owned life insurance (COLI)		(62	)		(65	)
Origination of loans held for sale		(25,413	)		(20,566	)
Proceeds from sales of loans held for sale		24,716			19,012
Amortization of servicing assets		438			467
Amortization of low income housing partnerships		127			54
Net change in fair value of equity investment with readily determinable fair value		66			(58	)
Net change in:
Accrued interest receivable		253			110
Deferred tax assets		72			98
Other assets		41			968
Accrued interest payable		(399	)		(94	)
Other liabilities		510			(1,192	)
Net cash from operating activities		4,855			2,366
Cash flows from investing activities
Net change in loans receivable		(56,039	)		(6,445	)
Proceeds from matured, called, or paid-down securities available for sale		8,325			5,605
Purchase of securities available for sale		(19,926	)		—
Purchase of premises and equipment, net		(152	)		(245	)
Investment in low income housing partnerships		(189	)		(759	)
Net cash from investing activities		(67,981	)		(1,844	)
Cash flows from financing activities
Net change in deposits		85,300			31,487
Cash received from stock option exercises		25			305
Repurchase of common stock		(28	)		(6,264	)
Cash dividend paid on common stock		(1,052	)		(1,087	)
Net cash from financing activities		84,245			24,441
Net change in cash and cash equivalents		21,119			24,963
Cash and cash equivalents at beginning of period		106,405			86,036
Cash and cash equivalents at end of period	$	127,524		$	110,999
Supplemental cash flow information
Cash paid during the period for:
Income taxes	$	2,868		$	1,335
Interest		3,628			3,323
Supplemental noncash disclosure:
New commitments to low income housing partnership investments	$	—		$	3,477

See accompanying notes to consolidated financial statements

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OP BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Note 1. Business Description

OP Bancorp (the “Company”) is a California corporation whose common stock is quoted on the Nasdaq Global Market under the ticker symbol, “OPBK.” The Company was formed to acquire 100% of the voting equity of Open Bank (the “Bank”) and commenced operation as a bank holding company on June 1, 2016. This transaction was treated as an internal reorganization as all shareholders of the Bank became shareholders of the Company. The Company has no operations other than ownership of the Bank. The Bank is a California state-chartered and FDIC-insured financial institution, which began its operations on June 10, 2005. Headquartered in downtown Los Angeles, California, the 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, and one full service branch is located in Carrollton, Texas. The Company also has four loan production offices in Atlanta, Georgia, Aurora, Colorado, and Lynwood and Seattle, Washington.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation: The accompanying unaudited consolidated financial statements and notes thereto of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of the financial results for the interim periods presented, including eliminating intercompany transactions and balances. 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, 2020, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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

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

There have been no significant or material changes to the Company’s accounting policies during the three months ended March 31, 2021, as compared to the Summary of Significant Accounting Policies as described in “Note 1 of the Notes to Consolidated Financial Statements” in the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2020.

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Recent Accounting Pronouncements:

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

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

In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is in transition to use SOFR to replace LIBOR and does not expect the transition willl be material to its consolidated statement of income.

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

Note 3. Securities

The following table summarizes the amortized cost, the corresponding amounts of gross unrealized gains and losses, and estimated fair value of securities available for sale as of March 31, 2021 and December 31, 2020:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
As of March 31, 2021:	(Dollars in thousands)
Available for sale:
U.S. Government sponsored agency securities	$	1,000	$	1	$	—		$	1,001
Mortgage-backed securities: residential		25,196		352		(120	)		25,428
Collateralized mortgage obligations: residential		75,772		679		(467	)		75,984
Total available for sale	$	101,968	$	1,032	$	(587	)	$	102,413

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

There were no sales of securities available for sale in the three months ended March 31, 2021 or 2020. The amortized cost and estimated fair value of securities available for sale at March 31, 2021, by contractual maturity, are shown below. Securities without a contractual maturity are shown separately.

	Amortized Cost		Fair Value
As of March 31, 2021:	(Dollars in thousands)
Available for sale:
Within one year	$	1,000	$	1,001
One to five years		938		978
Mortgage-backed securities: residential		24,258		24,450
Collateralized mortgage obligations: residential		75,772		75,984
Total available for sale	$	101,968	$	102,413

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At March 31, 2021 and December 31, 2020, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

The following table summarizes securities with unrealized losses as of March 31, 2021 and December 31, 2020, respectively, aggregated by length of time held in a continuous unrealized loss position:

	Less Than 12 Months					12 Months or Longer				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
As of March 31, 2021:	(Dollars in thousands)
Available for sale:
Mortgage-backed securities: residential	$	12,426	$	(120	)	$	—	$	—	$	12,426	$	(120	)
Collateralized mortgage obligations: residential		34,616		(467	)		—		—		34,616		(467	)
Total available for sale	$	47,042	$	(587	)	$	—	$	—	$	47,042	$	(587	)

	Less Than 12 Months					12 Months or Longer				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
As of December 31, 2020:	(Dollars in thousands)
Available for sale:
Mortgage-backed securities: residential	$	3,089	$	(7	)	$	—	$	—	$	3,089	$	(7	)
Collateralized mortgage obligations: residential		13,593		(50	)		—		—		13,593		(50	)
Total available for sale	$	16,682	$	(57	)	$	-	$	-	$	16,682	$	(57	)

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Management evaluates securities for other-than-temporary impairment (“OTTI”) on 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, along with the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or whether it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components, as follows: (i) OTTI related to credit loss, which must be recognized in the income statement, and (ii) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. As of March 31, 2021, management believes no securities with unrealized losses were OTTI.

There were no securities pledged as collateral as of March 31, 2021 or December 31, 2020.

Other investments as of March 31, 2021 and December 31, 2020, consisted of the following:

	March 31, 2021		December 31, 2020
	(Dollars in thousands)
Federal Home Loan Bank (FHLB) stock	$	6,043	$	6,043
Pacific Coast Bankers Bank (PCBB) stock		190		190
Mutual fund - CRA qualified		3,720		3,773
Total other investments	$	9,953	$	10,006

As of March 31, 2021 and December 31, 2020, the Company has $3.7 million and $3.8 million, respectively, of a mutual fund that the Company invested to satisfy the CRA requirements, which is reported at fair value. Unrealized holding losses on this investment were $79,000 for the three months ended March 31, 2021 and unrealized holding gains on this investment were $58,000 for the three months ended March 31, 2020. These gains and losses are included in Other Income in the Statements of Income.

Note 4. Loans

The composition of the loan portfolio was as follows at March 31, 2021 and December 31, 2020:

	March 31, 2021				December 31, 2020
	(Dollars in thousands)
Real estate:
Commercial real estate	$	662,445			$	651,684
SBA loans—real estate		139,503				136,224
Total real estate		801,948				787,908
SBA loans—non-real estate		123,682		(1)		75,151
Commercial and industrial		103,883				107,307
Home mortgage		125,285				128,212
Consumer		1,074				1,158
Gross loans receivable		1,155,872				1,099,736
Allowance for loan losses		(15,339	)			(15,352	)
Loans receivable, net	$	1,140,533			$	1,084,384

(1) At March 31, 2021 and December 31, 2020, SBA loans - non-real estate balances include SBA PPP loans of $113.6 million and $64.9 million, respectively.

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

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The activity in the allowance for loan losses for the three months ended March 31, 2021 and 2020 was as follows:

					SBA
	Commercial		SBA Loans		Loans Non-			Commercial			Home
	Real Estate		Real Estate		Real Estate			and Industrial			Mortgage			Consumer			Total
	(Dollars in thousands)
Three months ended March 31, 2021:
Beginning balance	$	8,505	$	1,802	$	278		$	2,563		$	2,185		$	19		$	15,352
Provision for loan losses (1)		89		228		14			(232	)		(110	)		(5	)		(16	)
Charge-offs		—		—		—			—			—			—			—
Recoveries		—		—		—			—			—			3			3
Ending balance	$	8,594	$	2,030	$	292		$	2,331		$	2,075		$	17		$	15,339
Three months ended March 31, 2020:
Beginning balance	$	6,000	$	939	$	121		$	1,289		$	1,667		$	34		$	10,050
Provision for loan losses		210		143		116			3			254			17			743
Charge-offs		—		—		(45	)		—			—			—			(45	)
Recoveries		—		—		—			—			—			—			—
Ending balance	$	6,210	$	1,082	$	192		$	1,292		$	1,921		$	51		$	10,748
(1) Loan loss provision for the three months ended March 31, 2021, reported on income statement is $620,000. The difference of $636,000 is allocated to allowance on accrued interest receivable on loan deferrals and loans that are no longer on deferral but have not fully caught up on their accrued interest.

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The following table presents the balance in the allowance for loan losses and the recorded investment in loans (including accrued interest receivable of $4.1 million and $4.4 million as of March 31, 2021 and December 31, 2020, respectively) by portfolio segment as of March 31, 2021 and December 31, 2020:

	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total
As of March 31, 2021:	(Dollars in thousands)
Allowance for loan losses:
Commercial real estate	$	—	$	8,594	$	8,594
SBA loans—real estate		—		2,030		2,030
SBA loans—non-real estate		125		167		292
Commercial and industrial		326		2,005		2,331
Home mortgage		—		2,075		2,075
Consumer		—		17		17
Total	$	451	$	14,888	$	15,339
Loans:
Commercial real estate	$	—	$	664,672	$	664,672
SBA loans—real estate		—		140,160		140,160
SBA loans—non-real estate		335		123,876		124,211
Commercial and industrial		327		103,785		104,112
Home mortgage		—		125,759		125,759
Consumer		—		1,076		1,076
Total	$	662	$	1,159,328	$	1,159,990
As of December 31, 2020:
Allowance for loan losses:
Commercial real estate	$	—	$	8,505	$	8,505
SBA loans—real estate		—		1,802		1,802
SBA loans—non-real estate		87		191		278
Commercial and industrial		330		2,233		2,563
Home mortgage		—		2,185		2,185
Consumer		—		19		19
Total	$	417	$	14,935	$	15,352
Loans:
Commercial real estate	$	—	$	654,235	$	654,235
SBA loans—real estate		—		136,873		136,873
SBA loans—non-real estate		174		75,477		75,651
Commercial and industrial		330		107,175		107,505
Home mortgage		—		128,683		128,683
Consumer		—		1,161		1,161
Total	$	504	$	1,103,604	$	1,104,108

The following table presents the recorded investment of individually impaired loans and the specific allowance for loan losses as of March 31, 2021 and December 31, 2020. The difference between the unpaid principal balance (net of partial charge-offs) and the recorded investment in the loans is not considered to be material.

	As of March 31, 2021				As of December 31, 2020
	Recorded		Allowance		Recorded		Allowance
	Investment		Allocated		Investment		Allocated
	(Dollars in thousands)
With an allowance recorded:
SBA loans—non-real estate	$	335	$	124	$	174	$	87
Commercial and industrial		327		327		330		330
Total	$	662	$	451	$	504	$	417

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The following table presents information related to impaired loans by class of loans for the three months ended March 31, 2021 and 2020. The difference between interest income recognized and cash basis interest recognized was immaterial.

	Average		Interest
	Recorded		Income
	Investment		Recognized
For the three months ended March 31, 2021:	(Dollars in thousands)
With an allowance recorded:
SBA loans—non-real estate	$	255	$	4
Commercial and industrial		330		3
Total	$	585	$	7
For the three months ended March 31, 2020:
With no related allowance recorded:
SBA loans—real estate	$	480	$	—
SBA loans—non-real estate		33		—
With an allowance recorded:
SBA loans—non-real estate		126		9
Commercial and industrial		331		4
Total	$	970	$	13

The following table presents the recorded investment in nonaccrual loans and loans past due greater than 90 days still accruing interest, by class of loans, as of March 31, 2021 and December 31, 2020:

	Nonaccrual		Loans >90 Days Past Due & Still Accruing		Total
	(Dollars in thousands)
As of March 31, 2021:
SBA loans—non-real estate	$	221	$	—	$	221
Commercial and industrial		327		—		327
Home mortgage		600		—		600
Total	$	1,148	$	—	$	1,148
As of December 31, 2020:
SBA loans—non-real estate	$	56	$	—	$	56
Commercial and industrial		330		—		330
Home mortgage		599		—		599
Total	$	985	$	—	$	985

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

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

	30-59 Days Past Due		60-89 Days Past Due		> 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
As of March 31, 2021:	(Dollars in thousands)
Commercial real estate	$	—	$	—	$	—	$	—	$	664,672	$	664,672
SBA—real estate		—		—		—		—		140,160		140,160
SBA—non-real estate		—		—		221		221		123,990		124,211
Commercial and industrial		—		—		—		—		104,112		104,112
Home mortgage		—		—		600		600		125,159		125,759
Consumer		—		—		—		—		1,076		1,076
	$	—	$	—	$	821	$	821	$	1,159,169	$	1,159,990
As of December 31, 2020:
Commercial real estate	$	—	$	—	$	—	$	—	$	654,235	$	654,235
SBA—real estate		—		—		—		—		136,873		136,873
SBA—non-real estate		—		—		—		—		75,651		75,651
Commercial and industrial		—		—		—		—		107,505		107,505
Home mortgage		—		—		599		599		128,084		128,683
Consumer		—		—		—		—		1,161		1,161
	$	—	$	—	$	599	$	599	$	1,103,509	$	1,104,108

Troubled Debt Restructurings: As of March 31, 2021 and December 31, 2020, the Company had a recorded investment in TDRs of $327,000 and $330,000, respectively. As of March 31, 2021 and December 31, 2020, the Company has allocated $327,000 and $330,000 of specific reserves to customers whose loan terms have been modified in TDRs, respectively. The Company has not committed to lend any additional amounts to customers with outstanding loans that are classified as TDRs.

Modifications made were primarily extensions of existing payment modifications on loans previously identified as TDRs. There were no new loans identified as TDRs during the three months ended March 31, 2021 or 2020. There were no payment defaults during the three months ended March 31, 2021, and March 31, 2020, of loans that had been modified as TDRs within the previous twelve months.

Loan payment deferrals: Through March 31, 2021, the Company has processed loan deferments for borrowers across multiple industries representing 185 loan accounts, with an aggregate loan balance of $236.8 million under the interagency guidance and Section 4013 of the CARES Act. Recent interagency guidance from the Federal Reserve and the Federal Deposit Insurance Corporation confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. We believe our loan modification program satisfies the applicable requirements.

As of March 31, 2021, 171 loans with an aggregate balance of $217.8 million, including 64 home mortgage loans with an aggregate balance of $27.4 million, have resumed regular payments.

The following table represents the loan deferment status change by loan type as of March 31, 2021:

Loan Deferment Status Change by Loan Type
	Total deferments				Payment resumed
	under the CARES Act				or paid off				Remaining deferments
(Dollars in thousands)	as of March 31, 2021				through March 31, 2021				as of March 31, 2021
Loan Type	Number of accounts		Balance		Number of accounts		Balance		Number of accounts		Balance
Loans, excluding home mortgage and consumer loans		116		206,582		107		190,353		9		16,229
Home Mortgage loans		69		30,205		64		27,444		5		2,761
Total		185	$	236,787		171	$	217,797		14	$	18,990

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

The Company originated 978 loans with an aggregate loan balance of $66.3 million under the first draw of SBA PPP, and $22.9 million and 429 loans from the first draw of SBA PPP loans have been forgiven as of March 31, 2021. The Company originated 1,336 loans with an aggregate loan balance of $74.2 million under the second draw of the SBA PPP loans as of March 31, 2021. The PPP loans are included in the SBA—non-real estate in the Company’s loan portfolio.

Credit Quality Indicators: The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. For consumer loans, a credit grade is established at inception, and generally only adjusted based on performance. The Company analyzes loans individually by classifying the loans according to their credit risk. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

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

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

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

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

As of March 31, 2021 and December 31, 2020, and based on the most recent analysis performed, the balance of loans categorized by risk category and class of loans is as follows:

	Pass		Special Mention		Substandard			Doubtful		Total
As of March 31, 2021:	(Dollars in thousands)
Commercial real estate	$	664,672	$	—	$	—		$	—	$	664,672
SBA loans—real estate		138,861		530		769			—		140,160
SBA loans—non-real estate		123,826		—		385			—		124,211
Commercial and industrial		99,280		—		4,832			—		104,112
Home mortgage		125,159		—		600			—		125,759
Consumer		1,076		—		—			—		1,076
	$	1,152,874	$	530	$	6,586	(1)	$	—	$	1,159,990
As of December 31, 2020:
Commercial real estate	$	654,235	$	—	$	—		$	—	$	654,235
SBA loans—real estate		134,815		535		1,523			—		136,873
SBA loans—non-real estate		75,453		—		198			—		75,651
Commercial and industrial		102,500		—		5,005			—		107,505
Home mortgage		128,084		—		599			—		128,683
Consumer		1,161		—		—			—		1,161
	$	1,096,248	$	535	$	7,325	(1)	$	—	$	1,104,108

(1) Substandard loans include the guaranteed portion of unsold SBA loans. The aggregate balance of substandard loans, net of the guaranteed portion of unsold SBA loans is $6.4 million as of March 31, 2021. The Company did not have the guaranteed portion of unsold SBA loans as of December 31, 2020.

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Note 5. Leases

The Company’s operating leases are real estate leases which are comprised of its headquarters and office facilities from nonaffiliated parties with remaining lease terms ranging from four months to nine years as of March 31, 2021. Certain lease arrangements contain extension options which are typically around five years. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term.

At March 31, 2021 and December 31, 2020, operating right-of-use (“ROU”) assets were $6.4 million $6.8 million, respectively, and related liabilities were $8.0 million and $8.4 million, respectively. Short-term operating leases, which are defined as leases with term of twelve months or less, were not recognized as ROU assets with related lease liabilities as permitted under ASU No. 2016-02. The lease payments on short-term operating leases are immaterial. The Company did not have any finance leases at March 31, 2021 and December 31, 2020.

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

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

	Three Months Ended March 31,
(Dollars in thousands)	2021		2020
Operating lease cost	$	420	$	444
Variable lease cost		218		184
Total lease cost	$	638	$	628

The table below summarizes supplemental information related to the Company’s operating leases, as of the associated period:

(Dollars in thousands)	March 31, 2021			December 31, 2020
Operating right-of-use assets	$	6,443		$	6,786
Operating lease liabilities		8,016			8,429

Weighted average remaining lease term - operating leases	4.8 years			5.0 years
Weighted average discount rate - operating leases		2.99	%		2.99	%

	Three Months Ended March 31,
(Dollars in thousands)	2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	505	$	500

Rent expense was $638,000 and $628,000 for the three months ended March 31, 2021 and 2020, respectively.

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The table below summarizes the remaining contractually obligated lease payments and a reconciliation to the lease liability reported on the consolidated balance sheet as of March 31, 2021:

(Dollars in thousands)	March 31, 2021
2021 remaining	$	1,536
2022		2,032
2023		1,811
2024		1,700
2025		676
Thereafter		956
Total lease payments		8,711
Discount to present value		(695	)
Total lease liability	$	8,016

Note 6. Premises and equipment

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

	March 31, 2021			December 31, 2020
	(Dollars in thousands)
Leasehold improvements	$	6,882		$	6,878
Furniture and fixtures		3,316			3,307
Equipment and others		2,732			2,593
Total cost		12,930			12,778
Accumulated depreciation		(8,562	)		(8,234	)
Net book value	$	4,368		$	4,544

Total depreciation expense included in occupancy and equipment expenses was $328,000 and $329,000 for the three months ended March 31, 2021 and 2020, respectively.

Note 7. Servicing Assets

Servicing assets at March 31, 2021 and December 31, 2020 were $7.5 million and $7.4 million, respectively.

Activity for loan servicing assets during the three months ended March 31, 2021 and 2020 is as follows:

	Three Months Ended March 31,
		2021			2020
	(Dollars in thousands)
Beginning balance	$	7,360		$	7,024
Additions		570			406
Amortized to expense		(438	)		(467	)
Ending balance	$	7,492		$	6,963

There was no valuation allowance recorded against the carrying value of the servicing assets as of March 31, 2021 or 2020.

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The fair value of the servicing assets was $9.3 million at March 31, 2021, which was determined using discount rates ranging from 5.4% to 11.9% and prepayment speeds ranging from 14.3% to 14.4%, depending on the stratification of the specific assets.

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

Note 8. Deposits

Time deposits that exceed the FDIC insurance limit of $250,000 at March 31, 2021 and December 31, 2020 were $191.0 million and $200.2 million, respectively.

The scheduled maturities of time deposits as of March 31, 2021 were as follows:

	March 31, 2021
	(Dollars in thousands)
2021 remaining	$	272,931
2022		83,228
2023		1,694
2024		789
2025		582
Thereafter		33
Total	$	359,257

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

Note 9. Borrowing Arrangements

As of March 31, 2021, the Company had $5.0 million in borrowings from the Federal Home Loan Bank (“FHLB”) of San Francisco which had 0% rate under the Zero-Rate Recovery Advance Program, FHLB’s pandemic relief initiative. The Company has a letter of credit with the FHLB in the amount of $67.0 million to secure a public deposit.

The Company had available borrowings from the following institutions as of March 31, 2021:

	March 31, 2021
	(Dollars in thousands)
Federal Home Loan Bank—San Francisco	$	269,708
Federal Reserve Bank		132,073
Pacific Coast Bankers Bank		50,000
Zions Bank		25,000
First Horizon Bank		25,000
Total	$	501,781

The Company has pledged approximately $914.0 million of loans as collateral for these lines of credit as of March 31, 2021.

Note 10. Income Taxes

The Company’s income tax expense was $2.1 million and $1.2 million for the three months ended March 31, 2021 and 2020, respectively. The effective income tax rate was 28.8% and 26.1% for the three months ended March 31, 2021 and 2020, respectively.

The Company is subject to U.S. Federal income tax as well as various state taxing jurisdictions. The Company is no longer subject to examination by Federal taxing authorities for tax years prior to 2017 and for state taxing authorities for tax years prior to 2016.

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There were no significant unrealized tax benefits recorded as of March 31, 2021 and 2020, and the Company does not expect any significant increase in unrealized tax benefits in the next twelve months.

Note 11. Commitments and Contingencies

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

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

	March 31, 2021		December 31, 2020
	(Dollars in thousands)
Commitments to extend credit	$	108,887	$	75,740
Standby letter of credit		8,586		9,212
Commercial letter of credit		981		1,552
Total undisbursed loan commitments	$	118,454	$	86,504

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

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

	March 31, 2021		December 31, 2020
	(Dollars in thousands)
Investments in low income housing partnerships	$	4,806	$	4,932
Unfunded commitments to fund investments for low income housing partnerships		1,965		2,154

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

The Company recognized amortization expense of $127,000 and $54,000, for the three months ended March 31, 2021 and 2020, respectively, which was included within income tax expense on the consolidated statements of income. Additionally, the Company recognized tax credits and other benefits from the investments in low income housing partnerships of $114,000 and $50,000, for the three months ended March 31, 2021 and 2020, respectively.

Note 12. Stock-based Compensation

The Company has two stock-based compensation plans currently in effect as of March 31, 2021, as described further below. Total compensation cost charged against earnings for these plans was $131,000 and $358,000 for the three months ended March 31, 2021 and 2020, respectively.

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

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The exercise prices of the options may not be less than 100% of the fair value of the Company’s common stock at the date of grant. The options, when granted, vest either immediately or ratably over five years from the date of the grant and expire after ten years if not exercised. The 2005 Plan expired in 2015 and no future grants can be made under the 2005 Plan.

A summary of the transactions under the 2005 Plan for the three months ended March 31, 2021 is as follows:

				Weighted
	Number of			Average		Aggregate
	Options			Exercise		Intrinsic
	Outstanding			Price		Value
	(Dollars in thousands, except per share data)
Outstanding, as of January 1, 2021		100,000		$	5.77
Options granted		—			—
Options exercised		(30,000	)		—
Options forfeited		—			—
Options expired		—			—
Outstanding, as of March 31, 2021		70,000			6.30	$	295
Fully vested and expected to vest		70,000			6.30	$	295
Vested		70,000		$	6.30	$	295

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

	Three Months Ended March 31,
		2021		2020
	(Dollars in thousands)
Intrinsic value of options exercised	$	132	$	370
Cash received from option exercises		—		63
Tax benefit realized from option exercised		20		17

The weighted average remaining contractual term of stock options outstanding under the 2005 Plan at March 31, 2021 was 2.49 years. The weighted average remaining contractual term of stock options that were exercisable at March 31, 2021 was 2.49 years. All of the stock options that are outstanding under the 2005 Plan were fully vested as of March 31, 2021.

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 from 1,350,000 shares of common stock to 2,500,000 shares of common stock. The 2010 Plan was assumed by the Company in 2016 at the time of the bank holding company reorganization.

The exercise prices of stock options granted under the plan may not be less than 100% of the fair value of the Company’s stock at the date of grant. The options, when granted, vest ratably over five years from the date of the grant and expire after ten years if not exercised. There were no stock options granted under the 2010 Plan during the three months ended March 31, 2021 or 2020.

Restricted stock awards issued under the 2010 Plan may or may not be subject to vesting provisions. No awards were granted in the three months ended March 31, 2021, or 2020. 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.

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A summary of stock options outstanding under the 2010 Plan for the three months ended March 31, 2021 is as follows:

				Weighted
	Number of			Average		Aggregate
	Options			Exercise		Intrinsic
	Outstanding			Price		Value
	(Dollars in thousands, except per share data)
Outstanding, as of January 1, 2021		220,000		$	7.75
Options granted		—			—
Options exercised		(10,000	)		2.53
Options forfeited		—			—
Options expired		—			—
Outstanding, as of March 31, 2021		210,000			8.00	$	529
Fully vested and expected to vest		202,500			8.00	$	510
Vested		180,000		$	8.00	$	454

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

	Three Months Ended March 31,
		2021		2020
	(Dollars in thousands)
Intrinsic value of options exercised	$	86	$	519
Cash received from option exercises		25		242
Tax benefit realized from option exercised		—		134

The weighted average remaining contractual term of stock options outstanding under the 2010 Plan at March 31, 2021 was 3.01 years. The weighted average remaining contractual term of stock options that were exercisable at March 31, 2021 was 3.01 years.

A summary of the changes in the Company’s non-vested restricted stock awards under the 2010 Plan for the three months ended March 31, 2021 is as follows:

	Shares Issued		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
	(Dollars in thousands, except share data)
Non-vested, as of January 1, 2021		154,500	$	11.66
Awards granted		—		—
Awards vested		—		—
Awards forfeited		—		—
Non-vested, as of March 31, 2021		154,500	$	11.66	$	1,625

No tax benefits or expenses were realized from restricted stock awards under the 2010 Plan for the three months ended March 31, 2021 or 2020.

The 2010 Plan expired in August 2020, and no future grants can be made under the 2010 Plan. The Company had approximately $235,000 of unrecognized compensation cost related to unvested stock options and restricted stock awards under the 2010 Plan as of March 31, 2021. The Company expects to recognize these costs over a weighted average period of 0.52 years.

Note 13. Employee Benefit Plan

The Company established a 401(k) profit sharing plan (the “401(k) Plan”), which is open to all eligible employees who are at least 18 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 $174,000 and $180,000 for the three months ended March 31, 2021 and 2020, respectively.

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Note 14. Revenue Recognition

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

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

Service charges on deposits: Income from service charges on deposits is within the scope of ASC 606. These include general service fees for monthly account maintenance and activity or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue on these types of fees are recognized when the Company’s performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payment for such performance obligations are generally received at the time the performance obligations are satisfied. Total revenues from services charges on deposits in the three months ended March 31, 2021 and 2020, on a dollar and percentage of total revenue basis was $227,000 or 1.4%, and $152,000 or 1.1%, respectively, of service charges on deposits is related to these revenue streams. Service charges on deposits also include overdraft and non-sufficient funds (“NSF”) fees. Overdraft fees are charged when a depositor has a draw on their account that has inadequate funds. In certain instances, the Company, at its sole discretion, may pay to the party requesting the draw on the deposit account, the balance of the draw for which there are inadequate funds rather than denying payment of the item. The Company then charges a fee for this short-term extension of credit to the depositor for not complying with the balance requirements stipulated in the deposit agreement with the Bank, and as well as to cover the cost of advancing those funds. NSF fees are charged to customers when in the event of a draw on the customer's account that has insufficient funds to meet the payment of the draw (such as through written checks or ACH transactions), the Company returns the item rather than paying the balance of the draw for which the customer has inadequate funds. This typically happens when the customer has fairly sizable draws or multiple draws on an account that has inadequate funds to meet the demands for payment. Total revenues from service charges on deposits from overdraft and NSF fees for the three months ended March 31, 2021 and 2020, on a dollar and percentage of total revenue basis was $47,000, or 0.3%, and $215,000, or 1.6%, respectively.

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 $81,000, or 0.5%, and $63,000, or 0.6% of total revenues for the three months ended March 31, 2021 and 2020, 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 COLI. These revenue streams are either not material or out of scope of ASC 606.

Note 15. Fair Value of Financial Instruments

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

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

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

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

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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 March 31, 2021 and December 31, 2020 are summarized below:

			Fair Value Measure Using
			Quoted		Significant Other		Significant
			Prices in		Observable		Unobservable
	Total		Active Markets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
As of March 31, 2021:
U.S. Government sponsored agency securities	$	1,001	$	—	$	1,001	$	—
Mortgage-backed securities - residential		25,428		—		25,428		—
Collateralized mortgage obligations		75,984		—		75,984		—
Other investments:
Mutual fund - CRA qualified		3,720		3,720		—		—

As of December 31, 2020:
U.S. Government sponsored agency securities	$	5,001	$	—	$	5,001	$	—
Mortgage-backed securities - residential		15,641		—		15,641		—
Collateralized mortgage obligations		35,907		—		35,907		—
Other investments:
Mutual fund - CRA qualified		3,628		3,628		—		—

There were no transfers between Level 1 and Level 2 in the three months ended March 31, 2021 or 2020. There were no assets or liabilities measured at fair value on a non-recurring basis as of March 31, 2021 or December 31, 2020.

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Financial Instruments: The carrying amounts and estimated fair values of financial instruments not carried at fair value as of March 31, 2021 are as follows:

	Carrying Amount		Level 1		Level 2		Level 3		Value
As of March 31, 2021:	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	127,524	$	127,524	$	—	$	—	$	127,524
Loans held for sale		28,575		—		31,238		—		31,238
Loans receivable, net		1,140,533		—		—		1,156,500		1,156,500
Accrued interest receivable, net		3,096		8		249		2,839		3,096
Other investments:
FHLB and PCBB stock		6,233	N/A		N/A		N/A		N/A
Financial Liabilities:
Deposit	$	1,285,390	$	—	$	1,285,750	$	—	$	1,285,750
FHLB Advances		5,000		—		5,000		—		5,000
Accrued interest payable		622		—		622		—		622

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

	Carrying Amount		Level 1		Level 2		Level 3		Value
As of December 31, 2020:	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	106,405	$	106,405	$	—	$	—	$	106,405
Loans held for sale		26,659		—		26,659		—		26,659
Loans receivable, net		1,084,384		—		—		1,109,217		1,109,217
Accrued interest receivable, net		3,985		7		249		3,729		3,985
Other investments:
FHLB and PCBB stock		6,233	N/A		N/A		N/A		N/A
Financial Liabilities:
Deposit	$	1,200,090	$	—	$	1,200,789	$	—	$	1,200,789
FHLB Advances		5,000	$	—	$	5,000	$	—		5,000
Accrued interest payable		1,021		—		1,021		—		1,021

Note 16. Regulatory Capital Matters

Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. As of March 31, 2021, the capital conservation buffers for the Company is 2.50%. Management believes that as of March 31, 2021 and December 31, 2020, the Bank met all capital adequacy requirements to which they are subject to. Based on recent changes to the Federal Reserve’s definition of a “Small Bank Holding Company” that increased the threshold to $3 billion in assets, the Company is not currently subject to separate minimum capital measurements. At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank. For comparison purposes, the Company’s ratios are included in following discussion as well. Unrealized gain or loss on securities available-for-sale is not included in computing regulatory capital.

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

						Required for					Minimum
						Capital Adequacy					To be Considered
	Actual					Purposes					"Well Capitalized"
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2021:
Total capital (to risk-weighted assets)
Consolidated	$	159,626		15.04	%	N/A		N/A			N/A		N/A
Bank		156,697		14.77	%		84,884		8.00	%		106,106		10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated		146,319		13.79	%	N/A		N/A			N/A		N/A
Bank		143,391		13.51	%		63,663		6.00	%		84,884		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)
Consolidated		146,319		13.79	%	N/A		N/A			N/A		N/A
Bank		143,391		13.51	%		47,747		4.50	%		68,969		6.50	%
Tier 1 capital (to average assets)
Consolidated		146,319		10.38	%	N/A		N/A			N/A		N/A
Bank		143,391		10.17	%		56,376		4.00	%		70,470		5.00	%
Note: The capital requirements are only applicable to the Bank, and the Company's ratios are included for comparison purpose.

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

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Note 17. Earnings per Share

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

	Three Months Ended
	March 31,
(Dollars in thousands, except share data)	2021			2020
Basic
Net income	$	5,077		$	3,299
Undistributed earnings allocated to participating securities		(52	)		(62	)
Net income allocated to common shares		5,025			3,237
Weighted average common shares outstanding		15,022,876			15,486,549
Basic earnings per common share	$	0.33		$	0.21
Diluted
Net income allocated to common shares	$	5,025		$	3,237
Weighted average common shares outstanding for basic earnings per common share		15,022,876			15,486,549
Add: Dilutive effects of assumed exercises of stock options		46,568			99,706
Average shares and dilutive potential common shares		15,069,444			15,586,255
Diluted earnings per common share	$	0.33		$	0.21

No shares of common stock were antidilutive for the three months ended March 31, 2021 or 2020.

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

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

Overview

As of March 31, 2021, we had total assets of $1.46 billion, gross loans of $1.16 billion, total deposits of $1.29 billion, and total consolidated shareholders’ equity of $147.0 million. For the three months ended March 31, 2021 and 2020, we recorded net income of $5.1 million and $3.3 million, respectively.

The following significant items are of note for the three months ended March 31, 2021:

•

Net income totaled $5.1 million, or $0.33 per diluted common share, for the three months ended March 31, 2021, compared to $3.3 million, or $0.21 per diluted common share, for the three months ended March 31, 2020

•

Net interest income for the three months ended March 31, 2021 increased to $12.8 million, up 14.7% from $11.1 million for the three months ended March 31, 2020

•

Total assets of $1.46 billion, a 6.5% increase over the three months ended March 31, 2021

•

Gross loans of $1.16 billion, a 5.1% increase over the three months ended March 31, 2021

•

Total deposits of $1.29 billion, a 7.1% increase over the three months ended March 31, 2021

•

Shareholders’ equity of $147.0 million, a 2.5% increase over the three months ended March 31, 2021

Critical Accounting Policies and Estimates

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

The following is a discussion of the critical accounting policies and significant estimates that require us to make complex and subjective judgments. Additional information about these policies can be found in the “Notes to Consolidated Financial Statements, Note 1. Summary of Significant Accounting Policies” of the audited consolidated financial statements included in the Company’s Form 10-K for the period ended December 31, 2020.

Allowance for Loan Losses

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

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

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

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Selected Financial Data

Financial Highlights (unaudited)
(Dollars in thousands, except per share data)	Three Months Ended
	March 31,			March 31,
	2021			2020
Income Statement Data:
Interest income	$	13,632		$	14,345
Interest expense		877			3,229
Net interest income		12,755			11,116
Provision for loan losses		620			743
Noninterest income		2,966			2,296
Noninterest expense		7,966			8,207
Income before taxes		7,135			4,462
Provision for income taxes		2,058			1,163
Net Income	$	5,077		$	3,299
Diluted earnings per share	$	0.33		$	0.21
Performance Ratios:
Return on average assets (annualized)		1.44	%		1.12	%
Return on average equity (annualized)		14.02	%		9.44	%
Net interest margin (annualized)		3.80	%		3.95	%
Efficiency ratio ⁽¹⁾		50.67	%		61.19	%

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

Financial Highlights (unaudited)
(Dollars in thousands, except per share data)	As of
	March 31,			December 31,
	2021			2020
Balance Sheet Data:
Loans held for sale	$	28,575		$	26,659
Gross loans, net of unearned income		1,155,872			1,099,736
Allowance for loan losses		15,339			15,352
Total assets		1,455,334			1,366,826
Deposits		1,285,390			1,200,090
Shareholders’ equity		146,993			143,366
Credit Quality:
Nonperforming loans	$	1,148		$	985
Nonperforming assets		1,148			985
Net charge-offs to average gross loans (annualized)		0.00	%		0.00	%
Nonperforming assets to gross loans plus OREO		0.10	%		0.09	%
ALL to nonperforming loans		1,337	%		1,558	%
ALL to gross loans, net of unearned income		1.33	%		1.40	%
Capital Ratios:
Total risk-based capital ratio		15.04	%		14.81	%
Tier 1 risk-based capital ratio		13.79	%		13.56	%
Common equity tier 1 ratio		13.79	%		13.56	%
Leverage ratio		10.38	%		10.55	%

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COVID-19 AND GOVERNMENT RESPONSE

The COVID-19 pandemic has caused significant, unprecedented disruption around the world that has affected daily living and negatively impacted the local, state, national and global economies. The pandemic has resulted in temporary closures of many businesses and the institution of social distancing and shelter-in-place requirements in many states and communities. This has increased unemployment levels and caused extreme volatility in the financial markets. While COVID-19 has negatively impacted the economy, the CARES Act provided for financial stimulus and government lending program. The benefits of these programs, as well as additional stimulus, supported businesses and consumers within the economy.

The Company was able to react quickly to these changes because of the commitment and flexibility of its workforce coupled with a well-prepared business continuity plan. The Company has taken various steps to help our customers, employees, and communities, while maintaining safe and sound banking operations. The Company has been assisting customers with loan deferrals and the PPP loans and has provided employees remote working environment while maintaining fully functioning operations in all areas. As the recent distribution of vaccinations for the virus accelerates and state and local governments focus on reopening and increased capacity of businesses, the Company anticipates that many of business customers will soon resume their operation to full capacity.

The following tables summarize loan portfolio breakdown by industry and loan deferral requests as of the dates presented:

Loan Portfolio Breakdown by Industry
Excluding Home mortgage and consumer loans
(Dollars in thousands)	As of March 31, 2021
Industry	Number of accounts		% of total			Balance		% of total
Hotel / motel		225		7.5	%	$	150,375		14.1	%
Wholesale		375		12.4			77,331		7.2
Food services / restaurant		432		14.3			62,716		5.9
Laundry services		152		5.0			21,196		2.0
Real estate lessor		240		8.0			396,092		37.1
Car washes		52		1.7			36,459		3.4
Educational service		32		1.1			7,166		0.7
Other		1,505		50.0			315,396		29.6
Total		3,013		100	%	$	1,066,731		100	%

Loan Deferment Summary by Industry
Excluding Home mortgage and consumer loans
(Dollars in thousands)	As of March 31, 2021
Industry	Number of accounts		% of deferment			% of total loans			Balance		% of deferment			% of total loans
Hotel / motel		6		66.7	%		2.7	%	$	15,188		93.6	%		10.1	%
Wholesale		1		11.1			0.3			486		3.0			0.6
Food services / restaurant		1		11.1			0.2			465		2.9			0.7
Laundry services		1		11.1			0.7			90		0.6			0.4
Total		9		100.0	%		0.3	%	$	16,229		100.0	%		1.5	%

Loan Deferment Summary by Loan Type
(Dollars in thousands)	As of March 31, 2021
Loan Type	Number of accounts		% of deferment			% of total loans			Balance		% of deferment			% of total loans
Real estate loans		6		42.9	%		1.7	%	$	15,188		80.0	%		2.3	%
C & I loans		3		21.4			1.3			1,041		5.5			1.0
Loans, excluding home mortgage and consumer loans		9		64.3			0.3			16,229		85.5			1.5
Home mortgage loans		5		35.7			1.6			2,761		14.5			2.2
Total		14		100.0	%		0.4	%	$	18,990		100.0	%		1.6	%

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Loan Deferment Status Change by Loan Type
	Total deferments				Payment resumed
	under the CARES Act				or paid off				Remaining deferments
(Dollars in thousands)	as of March 31, 2021				through March 31, 2021				as of March 31, 2021
Loan Type	Number of accounts		Balance		Number of accounts		Balance		Number of accounts		Balance
Loans, excluding home mortgage and consumer loans		116		206,582		107		190,353		9		16,229
Home mortgage loans		69		30,205		64		27,444		5		2,761
Total		185	$	236,787		171	$	217,797		14	$	18,990

Results of Operations—Comparison for the Three Months Ended March 31, 2021 and 2020

The following discussion of our results of operations compares the three months ended March 31, 2021 to the three months ended March 31, 2020.

We reported net income for the three months ended March 31, 2021 of $5.1 million, or $0.33 per diluted common share, compared to net income of $3.3 million, or $0.21 per diluted common share, for the three months ended March 31, 2020, an increase of $1.8 million, or 53.9%. The increase was primarily due to a $1.6 million increase in net interest income and a $670,000 increase in noninterest income, partially offset by a $895,000 increase in income tax expense.

Net Interest Income

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

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

	Three Months Ended March 31,
	2021							2020
(Dollars in thousands)	Average Balance		Interest and Fees		Yield / Rate			Average Balance		Interest and Fees		Yield / Rate
Interest earning assets:
Federal Funds sold and other investments (1)	$	99,349	$	112		0.45	%	$	78,256	$	332		1.68	%
Securities available for sale		92,951		236		1.02			54,647		319		2.33
Total investments		192,300		348		0.72			132,903		651		1.95
Real estate loans		653,498		7,466		4.63			633,963		8,198		5.20
SBA loans		268,440		3,280		4.95			138,900		2,667		7.72
C & I loans		116,327		1,072		3.74			100,686		1,277		5.10
Home Mortgage loans		125,698		1,451		4.62			121,768		1,514		4.97
Consumer loans		1,187		15		5.12			2,774		38		5.51
Total loans (2)		1,165,150		13,284		4.62			998,091		13,694		5.51
Total earning assets		1,357,450		13,632		4.07			1,130,994		14,345		5.10
Noninterest-earning assets		52,376							48,189
Total assets	$	1,409,826						$	1,179,183

Interest-bearing liabilities:
Money market deposits and others	$	336,796	$	270		0.33	%	$	297,202	$	957		1.29	%
Time deposits		361,803		607		0.68			431,772		2,272		2.12
Total interest-bearing deposits		698,599		877		0.51			728,974		3,229		1.78
Borrowings		5,000		—		0.00			45		—		0.00
Total interest-bearing liabilities		703,599		877		0.51			729,019		3,229		1.78
Noninterest-bearing liabilities:
Noninterest-bearing deposits		544,492							292,453
Other noninterest-bearing liabilities		16,865							17,921
Total noninterest-bearing liabilities		561,357							310,374
Shareholders’ equity		144,870							139,790
Total liabilities and shareholders’ equity	$	1,409,826						$	1,179,183
Net interest income / interest rate spreads			$	12,755		3.56	%			$	11,116		3.32	%
Net interest margin						3.80	%						3.95	%
Cost of deposits & cost of funds:
Total deposits / cost of deposits	$	1,243,091	$	877		0.29	%	$	1,021,427	$	3,229		1.27	%
Total funding liabilities / cost of funds	$	1,248,091	$	877		0.28	%	$	1,021,472	$	3,229		1.27	%

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

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

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

	Three Months Ended March 31,
	2021 over 2020
	Change due to:
(Dollars in thousands)	Volume			Rate			Interest Variance
Interest earning assets:
Federal Funds sold and other investments	$	70		$	(290	)	$	(220	)
Securities available for sale		153			(236	)		(83	)
Total investments		223			(526	)		(303	)
Real estate loans		236			(968	)		(732	)
SBA loans		1,831			(1,218	)		613
C & I loans		177			(382	)		(205	)
Home Mortgage loans		47			(110	)		(63	)
Consumer loans		(20	)		(3	)		(23	)
Total loans		2,271			(2,681	)		(410	)
Total earning assets		2,494			(3,207	)		(713	)

Money market deposits and others		111			(798	)		(687	)
Time deposits		(320	)		(1,345	)		(1,665	)
Total interest-bearing deposits		(209	)		(2,143	)		(2,352	)
Borrowings		—			—			—
Total interest-bearing liabilities		(209	)		(2,143	)		(2,352	)
Net interest income	$	2,703		$	(1,064	)	$	1,639

Total interest income decreased $713,000, or 5.0%, to $13.6 million for the three months ended March 31, 2021 from $14.3 million for the same period in 2020, primarily due to a decrease in interest earned on our loan portfolio and a decrease in interest earned on federal funds sold.

Interest and fees on loans was $13.3 million for the three months ended March 31, 2021, compared to $13.7 million for the same period in 2020, a decrease of $410,000, or 3.0%. This decrease in interest income on loans was primarily due to an 89 basis point decrease to 4.62% for the three months ended March 31, 2021 from 5.51% for the same period in 2020 in the average yield on loans, partially offset by an increase in the average balance of loans outstanding. Average loans increased $167.1 million, or 16.7%, to $1.17 billion for the three months ended March 31, 2021 from $998.1 million for the same period in 2020, primarily due to increases in real estate and SBA loans including SBA PPP loans.

Interest income on total investment was $348,000 for the three months ended March 31, 2021, compared to $651,000 for the same period in 2020. Interest income on the securities portfolio decreased $83,000, or 26.0%, to $236,000 for the three months ended March 31, 2021, compared to $319,000 for the same period in 2020. The decrease in interest income on the securities portfolio was due to a 131 basis point decrease in the average yield on the securities portfolio, offset by 70.1% increase in the average balance of securities available for sale. Interest income on federal funds sold and other investments decreased $220,000, or 66.3%, to $112,000 the three months ended March 31, 2021 from $332,000 for the same period in 2020, due to a 123 basis point decrease in the average yield on the federal funds sold and other investments, offset by 27.0% increase in the average balance of federal funds sold and other investments.

Average yield on interest-earning assets decreased 103 basis points to 4.07% for the three months ended March 31, 2021 from 5.10% for the same period in 2020. Average interest-earning assets increased $226.5 million, or 20.0%, to $1.36 billion for the three months ended March 31, 2021 from $1.13 billion for the same period in 2020.

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Total interest expense decreased $2.4 million, or 72.8%, to $877,000 for the three months ended March 31, 2021 from $3.2 million for the same period in 2020, primarily due to a decrease in interest expense on deposits as a result of the downward adjustments of the Company’s rates paid on interest-bearing deposits in response to the rate decreases by the Federal Reserve and a decrease in the average balance of interest-bearing liabilities.

Average cost of interest-bearing liabilities decreased 127 basis points to 0.51% for the three months ended March 31, 2021 from 1.78% for the same period in 2020. Average interest-bearing liabilities decreased $25.4 million, or 3.5%, to $703.6 million for the three months ended March 31, 2021 compared to $729.0 million for the same period in 2020.

Net interest income increased $1.6 million, or 14.7%, to $12.8 million for the three months ended March 31, 2021 compared to $11.1 million for the same period in 2020. The net interest spread and net interest margin for the three months ended March 31, 2021, 2021, were 3.56% and 3.80%, respectively, compared to 3.32% and 3.95%, respectively, for the same period in 2020.

Provision for Loan Losses

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

The provision for loan losses for the three months ended March 31, 2021 was $620,000. Management has made adjustments to qualitative factors on all loan types to reflect the pandemic’s prolonged potential adverse impacts on national, state, and local economic and business conditions. The changes in qualitative factors accounted for $10,000, or 2% of the provision, and the changes in quantitative factors accounted $579,000, or 93% of the provision, which included a provision of $636,000 for accrued interest receivables on deferred loans and loans that are no longer on deferral but have not fully caught up on their accrued interest, and $56,000 in net reversal from loss factor change and loan balance change. The changes in specific reserve for impaired loans was $34,000 for the three month ended March 31, 2021. The provision for loan losses for the same period in 2020 was $743,000. The changes in qualitative factors accounted for $593,000, or 80% of the provision, and the changes in quantitative factors accounted $48,000, or 6% of the provision. The changes in specific reserve for impaired loans was $53,000 for the three month ended March 31, 2020.

Noninterest Income

While interest income remains the largest single component of total revenues, noninterest income is also an important component. A portion of our noninterest income is associated with SBA lending activity, consisting of gains on the sale of loans sold in the secondary market and servicing income from loans sold with servicing retained. Other sources of noninterest income include loan servicing fees, service charges and fees, and gains on the sale of securities.

Noninterest income for the three months ended March 31, 2021 increased $670,000, or 29.2%, to $3.0 million compared to $2.3 million for the same period in 2020, primarily due to increases of $727,000 in gain on sale of loans and $139,000 in loan servicing fees, partially offset by decreases of $94,000 in service charges on deposits and $102,000 in other income.

The following table sets forth the various components of our noninterest income for the three months ended March 31, 2021 and 2020:

	Three Months Ended March 31,
(Dollars in thousands)	2021		2020		Increase (Decrease)
Noninterest income:
Service charges on deposit accounts	$	274	$	368	$	(94	)
Loan servicing fees, net of amortization		531		392		139
Gain on sale of loans		1,882		1,155		727
Other income and fees		279		381		(102	)
Total noninterest income	$	2,966	$	2,296	$	670

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The increase in gain on sale of loans was due to a $1.8 million gain on $22.4 million sales in SBA loans for the three months ended March 31, 2021 compared to a $1.1 million gain on $17.5 million sales in SBA loans for the same period in 2020. The increase in loan servicing fees, net of amortization, was primarily due to a decrease in amortization from lower SBA loan payoffs in the three months ended March 31, 2021 compared to the same period in 2020.

The decrease in service charges on deposits was primarily due to lower overdraft charges, partially offset by an increase in analysis charges on business accounts for the three months ended March 31, 2021 compared to the same period in 2020. The decrease in other income was primarily due to unrealized holding loss of $66,000 on CRA qualified mutual fund for the three months ended March 31, 2021 compared to unrealized holding gain of $58,000 on CRA qualified mutual fund for the same period of 2020.

Noninterest Expense

Noninterest expense for the three months ended March 31, 2021 was $8.0 million compared to $8.2 million for the same period in 2020, a decrease of $241,000, or 2.9%. The decrease was primarily attributable to decreases of $407,000 in salaries and employee benefits, $117,000 in director’s fees and stock-based compensation expenses, partially offset by an increase of $177,000 in foundation and other contribution expenses.

The following table sets forth the major components of our noninterest expense for the three months ended March 31, 2021 and 2020:

	Three Months Ended March 31,
(Dollars in thousands)	2021		2020		Increase (Decrease)
Noninterest expense:
Salaries and employee benefits	$	4,662	$	5,071	$	(409	)
Occupancy and equipment		1,235		1,230		5
Data processing and communication		448		409		39
Professional fees		314		273		41
FDIC insurance and regulatory assessments		132		106		26
Promotion and advertising		177		162		15
Directors' fees and stock-based compensation		116		233		(117	)
Foundation donation and other contributions		507		330		177
Other expenses		375		393		(18	)
Total noninterest expense		7,966		8,207		(241	)

Salaries and employee benefits expense decreased $409,000, or 8.1%, to $4.7 million for the three months ended March 31, 2021 from $5.1 million for the same period in 2020, primarily attributable to an increase in deferred loan origination costs. The increase in deferred loan origination costs was due to higher loan origination of $169.2 million, including SBA PPP loan origination of $74.2 million for the three months ended March 31, 2021 compared to $77.9 million for the same period in 2020.

Director’s fees and stock-based compensation expenses decreased $117,000, or 50.2%, to $116,000 for the three months ended March 31, 2021 compared to $233,000 for the same period in 2020, primarily due to a decrease of $108,000 in restricted stock unit expense resulting from the full vesting of the restricted stock units in July 2020.

Foundation donation and other contributions expenses increased $177,000, or 53.6%, to $507,000 for the three months ended March 31, 2021 compared to $330,000 for the same period in 2020. The increase was due to increased donation accruals for Open Stewardship Foundation, which is directly proportionate to our after-tax net income.

Income Tax Expense

Income tax expense was $2.1 million and $1.2 million for the three months ended March 31, 2021 and 2020, respectively. The effective income tax rate increased to 28.8% for the three months ended March 31, 2021 compared to 26.1% for the same period in 2020, primarily due to realizing a lower amount of tax benefits resulting from a decrease in the number of non-qualified stock options exercises during the three months ended March 31, 2021 compared to the same period in 2020.

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Financial Condition

Total assets increased $88.5 million, or 6.5%, to $1.46 billion at March 31, 2021 compared to $1.37 billion at December 31, 2020, primarily due to increases of $56.1 million, or 5.1%, in gross loans, and $10.6 million, or 11.6%, in securities available for sale. We funded our asset growth primarily with an increase of $85.3 million, or 7.1% in total deposits during the three months ended March 31, 2021.

Investment portfolio

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

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

All securities in our investment portfolio were classified as available-for-sale at March 31, 2021. There were no held-to-maturity securities in our investment portfolio at March 31, 2021. 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 increased $10.6 million, or 11.6%, to $102.4 million at March 31, 2021 from $91.8 million at December 31, 2020, primarily due to purchases of $19.9 million, partially offset by principal paydowns of $8.3 million and a maturity of $3.1 million in securities available for sale for the three months ended March 31, 2021. No issuer of securities available for sale, other than the U.S. Government and its agencies, comprised more than 10% of our shareholders’ equity as of March 31, 2021 or December 31, 2020.

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

	March 31, 2021						December 31, 2020
	Amortized		Fair		Unrealized		Amortized		Fair		Unrealized
(Dollars in thousands)	Cost		Value		Gain/(Loss)		Cost		Value		Gain/(Loss)
Available for sale
U.S. Government agencies	$	1,000	$	1,001	$	1	$	1,000	$	1,005	$	5
Mortgage-backed securities: residential		25,196		25,428		232		19,281		19,704		423
Collateralized mortgage obligations		75,772		75,984		212		70,318		71,082		764
Total available for sale	$	101,968	$	102,413	$	445	$	90,599	$	91,791	$	1,192

Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. At March 31, 2021, we evaluated the securities which had an unrealized loss for other than temporary impairment (“OTTI”) and determined all decline in value to be temporary. We anticipate full recovery of amortized cost with respect to these securities by maturity, or sooner in the event of a more favorable market interest rate environment. We do not intend to sell these securities and it is not more likely than not that we will be required to sell them before recovery of the amortized cost basis, which may be at maturity.

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

	As of March 31, 2021
	Due in One Year					Due after One Year					Due after Five Years
	or Less					Through Five Years					Through Ten Years					Due after Ten Years
			Weighted					Weighted					Weighted					Weighted
	Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Average
(Dollars in thousands)	Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield
Available for sale
U.S. Government agencies	$	1,000		1.75	%	$	—		—	%	$	—		—	%	$	—		—	%
Mortgage-backed securities - residential		—		—	%		938		1.99	%		4,194		1.90	%		20,064		1.05	%
Collateralized mortgage obligations		—		—	%		—		—	%		708		1.73	%		75,064		1.06	%
Total available for sale	$	1,000		1.75	%	$	938		1.99	%	$	4,902		1.88	%	$	95,128		1.06	%

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

Loans

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

Gross loans including net deferred costs increased $56.1 million, or 5.1%, to $1.16 billion at March 31, 2021, compared to $1.10 billion at December 31, 2020, primarily due to originations of SBA PPP loans and organic growth in commercial real estate for the three months ended March 31, 2021.

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

	March 31, 2021						December 31, 2020
(Dollars in thousands)	Amount			% of Total			Amount			% of Total
Real estate:
Commercial real estate	$	662,445			57	%	$	651,684			59	%
SBA loan - real estate		139,503			12	%		136,224			12	%
Total real estate		801,948			69	%		787,908			71	%
SBA loan - non-real estate		123,682			11	%		75,151			7	%
Commercial and industrial		103,883			9	%		107,307			10	%
Home mortgage		125,285			11	%		128,212			12	%
Consumer		1,074		<1%				1,158		<1%
Gross loans		1,155,872			100	%		1,099,736			100	%
Allowance for loan losses		(15,339	)					(15,352	)
Net loans	$	1,140,533					$	1,084,384

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The following tables presents the maturity distribution of our loans as of March 31, 2021 and December 31, 2020. The table shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates.

	As of March 31, 2021
					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	$	58,894	$	54,096	$	292,863	$	140,752	$	88,949	$	26,891	$	662,445
SBA loans - real estate		—		—		—		49		—		139,454		139,503
Total real estate		58,894		54,096		292,863		140,801		88,949		166,345		801,948
SBA loan - non-real estate		—		7		113,552		1,153		—		8,970		123,682
Commercial and industrial		139		37,438		216		38,531		18,556		9,003		103,883
Home mortgage		—		—		—		—		111,188		14,097		125,285
Consumer		—		250		—		824		—		—		1,074
Gross loans	$	59,033	$	91,791	$	406,631	$	181,309	$	218,693	$	198,415	$	1,155,872

	As of December 31, 2020
					Due after One Year
	Due in One Year or Less				Through Five Years				Due after Five Years
			Adjustable				Adjustable				Adjustable
(Dollars in thousands)	Fixed Rate		Rate		Fixed Rate		Rate		Fixed Rate		Rate		Total
Real estate:
Commercial real estate	$	58,101	$	44,439	$	293,045	$	155,303	$	74,302	$	26,494	$	651,684
SBA loans - real estate		—		—		—		—		—		136,224		136,224
Total real estate		58,101		44,439		293,045		155,303		74,302		162,718		787,908
SBA loan - non-real estate		—		11		64,906		952		—		9,282		75,151
Commercial and industrial		8,933		43,618		221		36,853		4,887		12,795		107,307
Home mortgage		—		—		—		—		114,141		14,071		128,212
Consumer		—		271		—		887		—		—		1,158
Gross loans	$	67,034	$	88,339	$	358,172	$	193,995	$	193,330	$	198,866	$	1,099,736

Our loan portfolio is concentrated in commercial real estate, commercial (primarily manufacturing, wholesale, and services-oriented entities), SBA loans (primarily unguaranteed portion) with the remaining balance in home mortgage, and consumer loans. We do not have any material concentrations by industry or group of industries in the loan portfolio. However, 80.2% of our gross loans are secured by real property as of March 31, 2021, compared to 83.3% as of December 31, 2020.

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

Commercial real estate loans include owner-occupied and non-occupied commercial real estate. We originate both fixed and adjustable rate loans. Adjustable rate loans are based on the Wall Street Journal prime rate. At March 31, 2021, approximately 66% of the commercial real estate portfolio consisted of fixed-rate loans. Our policy maximum loan-to-value, or LTV, is 70% for commercial real estate loans. At March 31, 2021, our average loan-to-value for commercial real estate loans was approximately 53%. Our commercial real estate loan portfolio totaled $662.4 million at March 31, 2021 compared to $651.7 million at December 31, 2020.

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.

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As of March 31, 2021, our SBA portfolio totaled $263.2 million, including $113.6 million of SBA PPP loans, compared to $211.4 million, including $64.9 million of SBA PPP loans as of December 31, 2020, an increase of $51.8 million, or 24.5%. We originated $105.3 million of SBA loans, including $74.2 million of SBA PPP loans during the three months ended March 31, 2021 compared to $25.7 million during the three months ended March 31, 2020. We sold $22.4 million and $17.5 million of SBA loans during the three months ended March 31, 2021 and 2020, respectively.

Loans held for sale was $28.6 million at March 31, 2021, compared to $26,7 million at December 31, 2020.

Commercial and industrial loans totaled $103.9 million at March 31, 2021 compared to $107.3 million at December 31, 2020.

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

Home mortgage loans totaled $125.3 million at March 31, 2021, compared to $128.2 million at December 31, 2020, a decrease of $2.9 million, or 2.3%. During the three months ended March 31, 2021, we originated $11.6 million and sold $4.3 million in home mortgage loans. Payoffs and paydowns for the same period were $9.1 million and $1.1 million, respectively. During the same period in 2020, we originated $9.3 million and sold $1.9 million in home mortgage loans. Payoffs and paydowns for the same period were $6.9 million and $1.9 million, respectively.

Loan Payment Deferrals: As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic. The Company has offered loan payment deferrals of up to twelve months for commercial and consumer borrowers impacted by the pandemic who have not been delinquent over 30 days on payments at the time of borrowers’ deferral requests. Through March 31, 2021, the Company has processed loan deferments for borrowers across multiple industries representing 185 loan accounts, with an aggregate loan balance of $236.8 million under the interagency guidance and Section 4013 of the CARES Act. Recent interagency guidance from the Federal Reserve and the Federal Deposit Insurance Corporation confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. We believe our loan modification program satisfies the applicable requirements.

As of March 31, 2021, 171 loans with an aggregate balance of $217.8 million, including 64 home mortgage loans with an aggregate balance of $27.4 million, have resumed regular payments.

The following tables summarize loan portfolio breakdown by industry and loan deferral requests as of the dates presented:

Loan Portfolio Breakdown by Industry
Excluding Home mortgage and consumer loans
(Dollars in thousands)	As of March 31, 2021
Industry	Number of accounts		% of total			Balance		% of total
Hotel / motel		225		7.5	%	$	150,375		14.1	%
Wholesale		375		12.4			77,331		7.2
Food services / restaurant		432		14.3			62,716		5.9
Laundry services		152		5.0			21,196		2.0
Real estate lessor		240		8.0			396,092		37.1
Car washes		52		1.7			36,459		3.4
Educational service		32		1.1			7,166		0.7
Other		1,505		50.0			315,396		29.6
Total		3,013		100	%	$	1,066,731		100	%

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Loan Deferment Summary by Industry
Excluding Home mortgage and consumer loans
(Dollars in thousands)	As of March 31, 2021
Industry	Number of accounts		% of deferment			% of total loans			Balance		% of deferment			% of total loans
Hotel / motel		6		66.7	%		2.7	%	$	15,188		93.6	%		10.1	%
Wholesale		1		11.1			0.3			486		3.0			0.6
Food services / restaurant		1		11.1			0.2			465		2.9			0.7
Laundry services		1		11.1			0.7			90		0.6			0.4
Total		9		100.0	%		0.3	%	$	16,229		100.0	%		1.5	%

Loan Deferment Summary by Loan Type
(Dollars in thousands)	As of March 31, 2021
Loan Type	Number of accounts		% of deferment			% of total loans			Balance		% of deferment			% of total loans
Real estate loans		6		42.9	%		1.7	%	$	15,188		80.0	%		2.3	%
C & I loans		3		21.4			1.3			1,041		5.5			1.0
Loans, excluding home mortgage and consumer loans		9		64.3			0.3			16,229		85.5			1.5
Home mortgage loans		5		35.7			1.6			2,761		14.5			2.2
Total		14		100.0	%		0.4	%	$	18,990		100.0	%		1.6	%

Loan Deferment Status Change by Loan Type
	Total deferments				Payment resumed
	under the CARES Act				or paid off				Remaining deferments
(Dollars in thousands)	as of March 31, 2021				through March 31, 2021				as of March 31, 2021
Loan Type	Number of accounts		Balance		Number of accounts		Balance		Number of accounts		Balance
Loans, excluding home mortgage and consumer loans		116		206,582		107		190,353		9		16,229
Home mortgage loans		69		30,205		64		27,444		5		2,761
Total		185	$	236,787		171	$	217,797		14	$	18,990

Loan Servicing

As of March 31, 2021, and December 31, 2020, we serviced $401.1 million and $388.8 million respectively, of SBA loans for others. Activities for loan servicing rights for the three months ended March 31, 2021 and 2020 were as follows:

	Three Months Ended March 31,
(Dollars in thousands)	2021			2020			Increase (decrease)
Beginning balance	$	7,360		$	7,024		$	336
Additions		570			406			164
Amortized to expense		(438	)		(467	)		29
Ending balance	$	7,492		$	6,963		$	529

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

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Allowance for loan losses

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

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

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

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

The allowance for loan losses was $15.3 million at March 31, 2021 and $15.4 million at December 31, 2020. The allowance for loan losses was 1.33% of gross loans at March 31, 2021 compared to 1.40% at December 31, 2020. Excluding fully guaranteed SBA PPP loans, the allowance for loan losses was 1.47% of gross loans at March 31, 2021 and 1.48% of gross loans at December 31, 2020.

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 Financial Protection and Innovation 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’s economic conditions and the real estate market in our market area were to weaken. The effect of such events, although uncertain at this time, could result in an increase in the level of nonperforming loans and increased loan losses, which could adversely affect our future growth and profitability. No assurance of the ultimate level of credit losses can be given with any certainty.

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Analysis of the Allowance for Loan Losses.

The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge-offs, by category, for the three months ended March 31, 2021 and 2020.

	As of and For the Three Months Ended March 31,
	2021												2020
							Net										Net
	Beginning						Charge-			Ending			Beginning				Charge-		Ending
(Dollars in thousands)	Balance			Provision			offs			Balance			Balance		Provision		offs		Balance
Real estate:
Commercial real estate	$	8,505		$	89		$	—		$	8,594		$	6,000	$	210	$	—	$	6,210
SBA loans - real estate		1,802			228			—			2,030			939		143		—		1,082
Total real estate		10,307			317			—			10,624			6,939		353		—		7,292
SBA loan - non-real estate		278			14			—			292			121		116		45		192
Commercial and industrial		2,563			(232	)		—			2,331			1,289		3		—		1,292
Home mortgage		2,185			(110	)		—			2,075			1,667		254		—		1,921
Consumer		19			(5	)		(3	)		17			34		17		—		51
Total	$	15,352	(1)	$	(16	)	$	(3	)	$	15,339		$	10,050	$	743	$	45	$	10,748
Gross loans (2)										$	1,155,872								$	996,559
Average gross loans (2)											1,139,458									992,736
Net charge-offs to average gross loans (3)											(0.00	)%								0.02	%
Allowance for loans losses to gross loans											1.33	%								1.08	%

(1) Loan loss provision for the three months ended March 31, 2021, reported on income statement is $620,000. The difference of $636,000 is allocated to allowance on accrued interest receivable on loan deferrals and loans that are no longer on deferral but have not fully caught up on their accrued interest.
(2) Gross loans balance and average gross loans balance exclude loans held for sale
(3) Net charge-offs are loan charge-offs net of loan recoveries.

Non-performing Loans

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

Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned (“OREO”) until sold, and is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. We had no OREO property at March 31, 2021 and at December 31, 2020.

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 $1.1 million at March 31, 2021, an increase of $163,000, compared to $985,000 at December 31, 2020.

Classified loans were $6.6 million at March 31, 2021, a decrease of $739,000, compared to $7.3 million at December 31, 2020. Excluding the SBA guarantee balance retained, classified loans were $6.4 million at March 31, 2021. No SBA guarantee balance was retained at December 31, 2020. Classified loans of $5.9 million as of March 31, 2021 are fully secured by real estate collaterals.

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

(Dollars in thousands)	March 31, 2021			December 31, 2020
Non-accrual loans	$	1,148		$	985
Past due loans 90 days or more and still accruing		—			—
Accruing troubled debt restructured loans		—			—
Total non-performing loans		1,148			985
Other real estate owned		—			—
Total non-performing assets	$	1,148		$	985
Non-performing loans to gross loans		0.10	%		0.09	%
Non-performing assets to total assets		0.08	%		0.07	%
Allowance for loan losses to non-performing loans		1,337	%		1,558	%

Deposits

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

Total deposits increased $85.3 million, or 7.1%, to $1.29 billion at March 31, 2021 compared to $1.20 billion at December 31, 2020. Noninterest-bearing deposits increased $49.2 million, or 9.4%, to $572.0 million at March 31, 2021 compared to $522.8 million at December 31, 2020, primarily due to the SBA PPP loans funded to customers’ noninterest-bearing deposits and new accounts opened during the three months ended March 31, 2021. Noninterest-bearing deposits accounted for 44.5% of total deposits at March 31, 2021 compared to 43.6% at December 31, 2020.

The following tables summarize our average deposit balances and weighted average rates for the three months ended March 31, 2021 and 2020:

	Three Months Ended March 31,
	2021					2020
			Weighted					Weighted
	Average		Average			Average		Average
(Dollars in thousands)	Balance		Rate			Balance		Rate
Noninterest-bearing demand	$	544,492		―	%	$	292,453		―	%
Interest-bearing:
Money market deposits and others		336,796		0.33			297,202		1.29
Time deposits (more than $250,000)		197,096		0.63			210,986		2.17
Time deposits ($250,000 or less)		164,707		0.74			220,786		2.07
Total interest-bearing		698,599		0.51			728,974		1.78
Total deposits	$	1,243,091		0.29	%	$	1,021,427		1.27	%

The following tables set forth the maturity of time deposits as of March 31, 2021 and December 31, 2020:

	As of March 31, 2021
	Maturity Within:
	Three		Three to		Six to 12		After
(Dollars in thousands)	Months		Six Months		Months		12 Months		Total
Time deposits (more than $250,000)	$	25,831	$	92,119	$	70,781	$	2,229	$	190,960
Time deposits ($250,000 or less)		46,430		40,932		73,795		7,140		168,297
Total time deposits	$	72,261	$	133,051	$	144,576	$	9,369	$	359,257

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

Borrowed Funds

Other than deposits, we also utilized FHLB advances as a supplementary funding source to finance our operations. The advances from the FHLB are collateralized by residential and commercial real estate loans. At March 31, 2021 and December 31, 2020, we had maximum borrowing capacity from the FHLB of $393.2 million and $394.0 million, respectively. We had $5.0 million in borrowings from the FHLB, which has a 0% interest rate under the Zero-Rate Recovery Advance Program, FHLB’s pandemic relief initiative at March 31, 2021 and December 31, 2020.

Liquidity

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

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

At March 31, 2021 and December 31, 2020, our gross loan to deposit ratio was 89.9% and 91.6%, respectively.

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

We had $100.0 million of unsecured Federal Funds lines with no amounts advanced as of March 31, 2021 and as of December 31, 2020. In addition, on such dates we had lines of credit from the Federal Reserve discount window of $132.1 million and $125.7 million, respectively. The Federal Reserve discount window lines were collateralized by a pool of commercial real estate loans and commercial and industrial loans totaling $223.0 million and $219.1 million as of March 31, 2021 and December 31, 2020, respectively. We did not have any borrowings outstanding with the Federal Reserve at March 31, 2021 or December 31, 2020, and our borrowing capacity is limited only by eligible collateral.

Based on the values of loans pledged as collateral, we had $262.7 million and $263.0 million of additional borrowing availability with the FHLB as of March 31, 2021 and December 31, 2020, respectively. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts.

Capital Requirements

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

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The table below also summarizes the capital requirements applicable to us and the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as our and the Bank’s capital ratios as of March 31, 2021 and December 31, 2020. The Bank exceeded all regulatory capital requirements under the Basel III Capital Rules and were considered to be “well-capitalized” as of the dates reflected in the table below. At March 31, 2021, the FDIC categorized us as well-capitalized under the prompt corrective action framework. There have been no conditions or events since March 31, 2021 that management believes would change this classification.

																Regulatory
																Capital Ratio
																Requirements,
						Regulatory					Minimum					including fully
						Capital Ratio					To be Considered					phased in Capital
	Actual					Requirements					"Well Capitalized"					Conservation Buffer
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2021:
Total capital (to risk-weighted assets)
Consolidated	$	159,626		15.04	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		156,697		14.77	%		84,884		8.00	%		106,106		10.00	%		111,411		10.50	%
Tier 1 capital (to risk-weighted assets)
Consolidated		146,319		13.79	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		143,391		13.51	%		63,663		6.00	%		84,884		8.00	%		90,190		8.50	%
CET1 capital (to risk-weighted assets)
Consolidated		146,319		13.79	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		143,391		13.51	%		47,747		4.50	%		68,969		6.50	%		74,274		7.00	%
Tier 1 capital (to average assets)
Consolidated		146,319		10.38	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		143,391		10.17	%		56,376		4.00	%		70,470		5.00	%		56,376		4.00	%
Note: The capital requirements are only applicable to the Bank, and the Company's ratios are included for comparison purpose.

																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, 2020:
Total capital (to risk-weighted assets)
Consolidated	$	155,287		14.81	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		152,232		14.52	%		83,859		8.00	%		104,824		10.00	%		110,065		10.50	%
Tier 1 capital (to risk-weighted assets)
Consolidated		142,147		13.56	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		139,092		13.27	%		62,894		6.00	%		83,859		8.00	%		89,101		8.50	%
CET1 capital (to risk-weighted assets)
Consolidated		142,147		13.56	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		139,092		13.27	%		47,171		4.50	%		68,136		6.50	%		73,377		7.00	%
Tier 1 capital (to average assets)
Consolidated		142,147		10.55	%	N/A		N/A			N/A		N/A			N/A		N/A
Bank		139,092		10.32	%		53,915		4.00	%		67,393		5.00	%		53,915		4.00	%
Note: The capital requirements are only applicable to the Bank, and the Company's ratios are included for comparison purpose.

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Contractual Obligations

The following tables contain supplemental information regarding our total contractual obligations as of March 31, 2021 and December 31, 2020:

	Payments Due at March 31, 2021
	Within		One to		Three to		After Five
(Dollars in thousands)	One Year		Three Years		Five Years		Years		Total
Deposits without a stated maturity	$	926,133	$	—	$	—	$	—	$	926,133
Time deposits		349,888		8,033		1,336		—		359,257
Operating lease commitments		2,056		3,764		2,025		866		8,711
Advanced from FHLB		5,000		—		—		—		5,000
Commitments to fund investments for low income housing partnerships		1,093		801		25		46		1,965
Total contractual obligations	$	1,284,170	$	12,598	$	3,386	$	912	$	1,301,066

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

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

Off-Balance Sheet Arrangements

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

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

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

The following table summarized commitments as of the dates presented.

(Dollars in thousands)	As of March 31, 2021		As of December 31, 2020
Commitments to extend credit	$	108,887	$	75,740
Standby letters of credit		8,586		9,212
Other commercial letters of credit		981		1,552
Total	$	118,454	$	86,504

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

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

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

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

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

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

Evaluation of Interest Rate Risk

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

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

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Potential changes to our net interest income in hypothetical rising and declining rate scenarios calculated as of March 31, 2021 and December 31, 2020 are presented in the following table. The projections assume (i) immediate, parallel shifts downward of the yield curve of 100 basis points and (ii) immediate, parallel shifts upward of the yield curve of 100, 200, 300 and 400 basis points over 12 months. In the current interest rate environment, a downward shift of the yield curve of 200, 300 and 400 basis points does not provide us with meaningful results. In a downward parallel shift of the yield curve, interest rate at the short-end of the yield curve are not modeled to decline any further than 0%.

	Net Interest Income Sensitivity						Economic Value of Equity Sensitivity
	March 31, 2021			December 31, 2020			March 31, 2021			December 31, 2020
+400 basis points		15.59	%		30.27	%		(9.02	) %		10.14	%
+300 basis points		12.96	%		23.87	%		(4.13	) %		12.73	%
+200 basis points		9.62	%		16.85	%		1.59	%		13.55	%
+100 basis points		5.37	%		8.99	%		3.85	%		11.14	%
-100 basis points		(0.66	) %		—	%		(19.07	) %		(20.87	)%

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

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

Management’s Annual Report on Internal Control Over Financial Reporting

The Company is not currently required to comply with the rules of the SEC implementing Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and is therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose.

Changes in internal control over financial reporting

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

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

A discussion of the risk factors affecting us is set forth in Part I, Item 1A. Risk Factors in our 2020 Annual Report on Form 10-K. The discussion of risk factors provides a description of some of the important risk factors that could affect our actual results and could cause our results to vary materially from those expressed in public statements or documents. However, other factors besides those included in the discussion of risk factors or discussed elsewhere in other of our reports filed with or furnished to the SEC could affect our business or results. The readers should not consider any description of such factors to be a complete set of all potential risks that we may face.

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

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

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

On February 28, 2020, the Company announced that the Board of Directors approved another stock repurchase program that authorized the Company to repurchase up to 500,000 shares of its common stock. The Company completed the third stock repurchase program in May 2020 at an average price of $7.77 per share.

On September 9, 2020, the Company announced a fourth stock repurchase program that authorizes the Company to repurchase up to 500,000 shares of its common stock. During the three month ended March 31, 2021, the Company repurchased an aggregate of 3,830 shares at an average price of $7.5 per share.

The following table summarizes share repurchase activities for the three months ended March 31, 2021.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Publicly Announced Program		Approximate Number of Shares that May Yet Be Purchased Under the Program
	(Dollars in thousands, except per share data)
January 1, 2021 to January 31, 2021		3,830	$	7.50	$	3,830		—
February 1, 2021 to February 28, 2021		—		—		—		—
March 1, 2021 to March 31, 2021		—		—		—		298,484
Total		3,830	$	7.50	$	3,830		298,484

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Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

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Item 6. Exhibits

Exhibit Number		Description

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

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

3.3		First Amendment to the Amended and Restated Bylaws of OP Bancorp included as Exhibit 3.3 to the Annual Report on Form 10-K filed March 15, 2021 and incorporated herein by reference.

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

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

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

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

101.INS		XBRL Instance Document – the instant document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH		Inline XBRL Taxonomy Schema Document

101.CAL		Inline XBRL Taxonomy Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Presentation Linkbase Document

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

⁺ Filed herewith.

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SIGNATURES

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

	OP Bancorp

Date: May 7, 2021	By:	/s/ Min J. Kim
		Min J. Kim
		President and Chief Executive Officer

Date: May 7, 2021	By:	/s/ Christine Oh
		Christine Oh
		Chief Financial Officer