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two 1531
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
or
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)

California81-3114676
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, no par value
OPBK
NASDAQ Global Market

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

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

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

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO

The number of shares outstanding of the Registrant’s Common Stock as of November 6, 2023 was 14,999,203.


Table of Contents
PART I - FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
PART II - OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



Introduction

This Quarterly Report on Form 10-Q is filed by OP Bancorp, a California corporation and a registered bank holding company (“Company”) with respect to its financial condition, results of operations, and business as of September 30, 2023. The Company’s primary business operations are conducted through its wholly owned subsidiary, Open Bank, a California chartered commercial bank (“Bank”), and unless the context requires otherwise, statements about the Company generally are intended to describe the consolidated operations of the Company and the Bank.
Cautionary Note Regarding Forward-Looking Statements
Certain matters set forth herein (including any exhibits hereto) constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Rule 175 promulgated thereunder, Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements that are not statements of historical fact are forward-looking, but such statements include comments about the Company’s current business plans and expectations regarding future operating results, as well as management’s statements about expected future events and economic developments. All such statements reflect the current intentions, beliefs and expectations of the Company’s executive management based on currently available information and current and expected market conditions. Forward-looking statements can sometimes be identified by 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:

our ability to meet our liquidity needs, particularly as those obligations relate to the ability to fund deposit withdrawals and undrawn lines of credit;
the effect of recent bank failures, particularly with the impacts of such events on customer confidence in the Bank and in the banking system generally, and the further impacts of the current market uncertainties on the value of our common stock; interest rate fluctuations, which could have an adverse effect on our profitability;
external economic and/or market factors, such as changes in monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve, inflation or deflation, changes in the demand for loans, and fluctuations in consumer spending, borrowing and savings habits, which may have an adverse impact on our financial condition;
business and economic conditions, particularly those affecting the financial services industry and our primary market areas;
management's ability to assess and accurately estimate the risk of losses in our credit portfolio and to establish and maintain adequate reserves to offset those risks;
•    economic, market and political factors that affect our borrowers’ ability to repay and timely to perform their obligations under their borrowing obligations;
•    geopolitical factors inside and outside the United States, including war and regional hostilities, acts of terrorism, civil unrest, riots, and demonstrations;
government, quasi-governmental and extra-governmental actions in response to significant economic, political or social events, such as disease outbreaks, domestic or international terrorism, or war or other hostilities, as such government actions restrict our ability to conduct business or that have the effect of reducing our customers’ ability to maintain compliance with their borrowing obligations or that affect their need for deposit liquidity or increased borrowing capacity;
our ability to effectively execute our strategic plan and manage our growth;
liquidity issues, including fluctuations in the fair value and liquidity of the securities we hold for sale and our ability to raise additional capital, if necessary;
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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;
liquidity, earnings and other factors that impact the Bank’s ability to continue paying dividends to the Company, which would restrict the Company's ability to meet its operating capital needs;
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;
the effectiveness and operation of the internal controls we maintain to address the risks inherent to the business of banking, including but not limited to our ability to detect promptly any physical security breach, employee misfeasance or malfeasance, data security violation, disclosure controls and procedures, or internal control over financial reporting;
inaccuracies in our assumptions about future events, which could result in material differences between our financial projections and actual financial performance, or which could call into question the adequacy of our reserves for loan and lease losses or various other estimates in our financial statements;
changes in our management personnel or our inability to retain, motivate and hire qualified management personnel;
disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems;
disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions;
an inability to keep pace with the rate of technological advances due to a lack of resources to invest in new technologies;
risks related to potential acquisitions;
the effects of natural disasters, such as earthquakes, drought, pandemic diseases (such as the coronavirus) or extreme weather events, any of which may affect services we use or affect our customers, employees or third parties with which we conduct business;
the impact of any claims or legal actions to which we may be subject, including any effect of such events on our reputation;
compliance with governmental and regulatory requirements 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 manage and respond to changes in 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 read all forward looking statements in the context of the foregoing and should not consider them to be reliable predictions of future events or as assurances of a particular level of performance or intended course of action. 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 AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
($ in thousands)September 30, 2023
(unaudited)
December 31, 2022
ASSETS
Cash and cash equivalents$105,740 $82,972 
Available-for-sale debt securities, at fair value191,313 209,809 
Other investments16,100 12,098 
Loans held for sale 44,335 
Loans receivable, net of allowance for credit losses of $21,617 in 2023 and $19,241 in 2022
1,737,908 1,659,051 
Premises and equipment, net5,378 4,400 
Accrued interest receivable7,996 7,180 
Servicing assets11,931 12,759 
Company owned life insurance22,071 21,613 
Deferred tax assets, net15,061 14,316 
Operating right-of-use assets8,993 9,097 
Other assets20,184 16,867 
Total assets$2,142,675 $2,094,497 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits:
Noninterest-bearing$605,509 $701,584 
Interest-bearing:
Money market and others348,869 526,321 
Time deposits greater than $250
420,162 356,197 
Other time deposits450,631 301,669 
Total deposits1,825,171 1,885,771 
Federal Home Loan Bank advances95,000  
Accrued interest payable13,552 2,771 
Operating lease liabilities9,926 10,213 
Other liabilities14,719 18,826 
Total liabilities1,958,368 1,917,581 
Shareholders’ equity
Preferred stock no par value; 10,000,000 shares authorized; no shares issued or outstanding in 2023 and 2022
  
Common stock – no par value; 50,000,000 shares authorized; 15,149,203 and 15,270,344 shares issued and outstanding in 2023 and 2022, respectively
77,632 79,326 
Additional paid-in capital10,606 9,743 
Retained earnings117,483 105,690 
Accumulated other comprehensive loss(21,414)(17,843)
Total shareholders’ equity184,307 176,916 
Total liabilities and shareholders' equity$2,142,675 $2,094,497 
See accompanying notes to unaudited consolidated financial statements
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OP BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
($ in thousands, except per share data)2023202220232022
INTEREST INCOME
Interest and fees on loans$28,250 $21,780 $81,549 $58,145 
Interest on available-for-sale debt securities1,519 881 4,647 2,114 
Other interest income1,417 573 3,686 1,067 
Total interest income31,186 23,234 89,882 61,326 
Interest expense
Interest on deposits13,006 2,890 35,308 4,613 
Interest on borrowings867  2,117  
Total interest expense13,873 2,890 37,425 4,613 
Net interest income17,313 20,344 52,457 56,713 
Provision for credit losses1,359 662 1,021 1,999 
Net interest income after provision for credit losses15,954 19,682 51,436 54,714 
NONINTEREST INCOME
Service charges on deposits575 454 1,566 1,269 
Loan servicing fees, net of amortization468 610 1,909 1,711 
Gain on sale of loans1,179 3,490 5,847 10,601 
Other income379 267 1,179 815 
Total noninterest income2,601 4,821 10,501 14,396 
NONINTEREST EXPENSE
Salaries and employee benefits7,014 7,343 21,947 20,109 
Occupancy and equipment1,706 1,537 4,874 4,404 
Data processing and communication369 586 1,465 1,571 
Professional fees440 602 1,180 1,290 
FDIC insurance and regulatory assessments333 238 1,220 637 
Promotion and advertising207 177 528 531 
Directors’ fees164 170 535 537 
Foundation donation and other contributions529 875 1,876 2,542 
Other expenses773 810 2,118 1,882 
Total noninterest expense11,535 12,338 35,743 33,503 
INCOME BEFORE INCOME TAX EXPENSE7,020 12,165 26,194 35,607 
Income tax expense1,899 3,515 7,448 10,325 
NET INCOME$5,121 $8,650 $18,746 $25,282 
EARNINGS PER SHARE - BASIC$0.33 $0.56 $1.21 $1.63 
EARNINGS PER SHARE - DILUTED$0.33 $0.55 $1.21 $1.62 

See accompanying notes to unaudited consolidated financial statements
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OP BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

Three Months Ended September 30,Nine Months Ended September 30,
($ in thousands)2023202220232022
Net income$5,121 $8,650 $18,746 $25,282 
Other comprehensive loss
Change in unrealized loss on available-for-sale debt securities
(4,608)(9,404)(5,069)(23,285)
Tax effect1,362 2,780 1,498 6,884 
Total other comprehensive loss(3,246)(6,624)(3,571)(16,401)
Comprehensive income$1,875 $2,026 $15,175 $8,881 

See accompanying notes to unaudited consolidated financial statements
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OP BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)
($ in thousands, except per share data)Common Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
Shares
Outstanding
Amount
Three Months Ended
Balance at July 1, 202315,118,268 $77,464 $10,297 $114,177 $(18,168)$183,770 
Net income— — — 5,121 — 5,121 
Other comprehensive loss
— — — — (3,246)(3,246)
Stock issued under stock-based compensation plans, net of forfeitures
30,935 168 (14)— — 154 
Stock-based compensation, net— — 323 — — 323 
Cash dividends declared ($0.12 per share)
— — — (1,815)— (1,815)
Balance at September 30, 202315,149,203 $77,632 $10,606 $117,483 $(21,414)$184,307 
Balance at July 1, 202215,189,203 $78,718 $9,089 $92,659 $(10,974)$169,492 
Net income— — — 8,650 — 8,650 
Other comprehensive loss
— — — — (6,624)(6,624)
Stock issued under stock-based compensation plans, net of forfeitures
10,637 64  — — 64 
Stock-based compensation, net— — 335 — — 335 
Cash dividends declared ($0.12 per share)
— — — (1,822)— (1,822)
Balance at September 30, 202215,199,840 $78,782 $9,424 $99,487 $(17,598)$170,095 
Nine Months Ended
Balance at January 1, 202315,270,344 $79,326 $9,743 $105,690 $(17,843)$176,916 
Cumulative effect related to adoption of ASC 326, net of tax— — — (1,484)— (1,484)
Adjusted balance at January 1, 202315,270,344 79,326 9,743 104,206 (17,843)175,432 
Net income— — — 18,746 — 18,746 
Other comprehensive loss
— — — — (3,571)(3,571)
Stock issued under stock-based compensation plans, net of forfeitures
177,343 888 (98)— — 790 
Stock-based compensation, net— — 961 — — 961 
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Repurchase of common stock(298,484)(2,582)— — — (2,582)
Cash dividends declared ($0.36 per share)
— — — (5,469)— (5,469)
Balance at September 30, 202315,149,203 77,632 10,606 117,483 (21,414)$184,307 
Balance at January 1, 202215,137,808 $78,718 $8,645 $79,056 $(1,197)$165,222 
Net income— — — 25,282 — 25,282 
Other comprehensive loss
— — — — (16,401)(16,401)
Stock issued under stock-based compensation plans, net of forfeitures
62,032 64 (79)— — (15)
Stock-based compensation, net— — 858 — — 858 
Cash dividends declared ($0.32 per share)
— — — (4,851)— (4,851)
Balance at September 30, 202215,199,840 78,782 9,424 99,487 (17,598)$170,095 
See accompanying notes to unaudited consolidated financial statements
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OP BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended September 30,
($ in thousands)20232022
Cash flows from operating activities
Net income$18,746 $25,282 
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Provision for credit losses1,021 1,999 
Depreciation and amortization of premises and equipment975 1,020 
Amortization of net premiums on securities187 546 
Amortization of servicing assets3,302 3,512 
Accretion of net discounts on loans(2,199)(3,972)
Amortization of low income housing partnerships1,084 584 
Stock-based compensation961 858 
Deferred income taxes753 (2,003)
Gain on sale of loans(5,847)(10,601)
Earnings on company owned life insurance(458)(330)
Net change in fair value of equity investment with readily determinable fair value
106 438 
Origination of loans held for sale(64,362)(86,033)
Proceeds from sales of loans held for sale112,070 161,287 
Net change in:
Accrued interest receivable(816)(1,072)
Other assets(2,929)(11,068)
Accrued interest payable10,781 541 
Other liabilities(4,200)(229)
Net cash provided by operating activities69,175 80,759 
Cash flows from investing activities
Net change in loans receivable(57,247)(127,999)
Proceeds from matured, called, or paid-down securities available for sale
18,887 26,194 
Purchase of company owned life insurance (10,000)
Purchase of loans(21,916)(175,753)
Purchase of available-for-sale debt securities(5,647)(86,019)
Purchase of equity investments(63) 
Purchase of Federal Home Loan Bank stock(4,044)(1,477)
Purchase of premises and equipment, net(1,953)(1,048)
Investment in low income housing partnerships(1,563)(714)
Net cash used in investing activities(73,546)(376,816)
Cash flows from financing activities
Net change in deposits(60,600)282,745 
Cash received from stock option exercises888 64 
Proceeds from Federal Home Loan Bank advances95,000 10,000 
Repurchase of common stock(2,582) 
Cash dividend paid on common stock(5,469)(4,851)
Payments related to tax-withholding for vested restricted stock awards(98)(79)
Net cash provided by financing activities27,139 287,879 
Net change in cash and cash equivalents22,768 (8,178)
Cash and cash equivalents at beginning of period82,972 115,459 
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Cash and cash equivalents at end of period$105,740 $107,281 
Supplemental cash flow information:
Cash paid during the period for
Income taxes$8,377 $10,557 
Interest26,644 5,890 
Supplemental non-cash disclosure:
Initial recognition of right-of-use assets$1,369 $ 
See accompanying notes to unaudited consolidated financial statements
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OP BANCORP AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business and Basis of Presentation
OP Bancorp is a California corporation that was formed to acquire 100% of the voting equity of Open Bank (the “Bank”) and commenced operation as a bank holding company on June 1, 2016. This transaction was treated as an internal reorganization as all shareholders of the Bank became shareholders of OP Bancorp. OP Bancorp has no operations other than ownership of the Bank. The Bank is a California state-chartered and FDIC-insured financial institution, which began its operations on June 10, 2005. Headquartered in downtown Los Angeles, California, OP Bancorp operates primarily in the traditional banking business arena that includes accepting deposits and making loans and investments. OP Bancorp’s primary deposit products are demand and time deposits, and the primary lending products are commercial business loans to small to medium sized businesses. OP Bank opened its eleventh full service branch in Las Vegas, Nevada during the third quarter of 2023.

The accompanying unaudited Consolidated Financial Statements and notes thereto of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited Consolidated Financial Statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of the financial results for the interim periods presented, including eliminating intercompany transactions and balances. Certain items on the Consolidated Financial Statements and notes for prior years have been reclassified to conform to the 2023 presentation. The results of operations for the interim periods are not necessarily indicative of the results for the full year. These interim unaudited financial statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Annual Report on Form 10-K”). Descriptions of our significant accounting policies are included in Note 1. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in the 2022 Annual Report on Form 10-K.
New Accounting Pronouncements Adopted
Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The Company adopted ASU 2016-13 using a modified retrospective approach on January 1, 2023 without electing the fair value option on eligible financial instruments under ASU 2019-05. The Company replaced the current incurred loss accounting model with the Current Expected Credit Losses ("CECL") approach for financial instruments measured at amortized cost and other commitments to extend credit. CECL requires the immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset. The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable forecasts.
The adoption of this ASU increased the allowance for credit losses by $1.9 million and allowance for off-balance sheet commitments by $184 thousand. The Company also recorded a deferred tax assets of $624 thousand and a decrease to opening retained earnings of $1.5 million on January 1, 2023. The increase to allowance for credit losses was primarily longer duration of home mortgage loans, offset primarily by shorter duration of commercial and industrial ("C&I") loans. The Company did not record an allowance for credit losses on the Company’s available-for-sale debt securities as a result of this adoption. Disclosures for periods after January 1, 2023 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies.


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The following table illustrates the impact of ASU 2016-13:
January 1, 2023, Adoption Date
($ in thousands)As ReportedPre-ASU 2016-13Impact
Assets:
Loans:
Commercial real estate$7,826 $6,951 $875 
SBA—real estate1,369 1,607 (238)
SBA—non-real estate65 207 (142)
C&I1,323 1,643 (320)
Home mortgage10,579 8,826 1,753 
Consumer3 7 (4)
Allowance for credit losses on loans$21,165 $19,241 $1,924 
Liabilities:
Allowance for credit losses on off-balance sheet commitments$446 $262 $184 
FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ("ASU 2022-02"). ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings in Accounting Standards Codification (“ASC”) Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, ASU 2022-02 requires entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. The Company adopted ASU 2022-02 on January 1, 2023, and the adoption of ASU 2022-02 did not have a significant impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements under Evaluation
In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. This ASU permits reporting entities to elect to account for tax equity investments, regardless of the tax credit program for which the income tax credits are received, using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense. A reporting entity makes an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. This ASU also requires specific disclosures of investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method. The updated guidance is effective for fiscal years beginning after December 15, 2023. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and the adoption is not expected to have a significant impact on the consolidated financial statements.

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Note 2. Securities

The following table summarizes the amortized cost, the corresponding amounts of gross unrealized gains and losses, and estimated fair value of available-for-sale ("AFS") debt securities as of September 30, 2023 and December 31, 2022:

September 30, 2023
($ in thousands)
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Loss
Fair
Value
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities$49,819 $ $(6,458)$43,361 
Residential collateralized mortgage obligations166,195  (23,324)142,871 
Municipal securities - tax exempt5,701  (620)5,081 
Total AFS debt securities$221,715 $ $(30,402)$191,313 

December 31, 2022
($ in thousands)
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Loss
Fair
Value
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities$55,189 $ $(5,425)$49,764 
Residential collateralized mortgage obligations179,953 1 (19,909)160,045 
Total AFS debt securities$235,142 $1 $(25,334)$209,809 

There were no sales of AFS debt securities during the three and nine months ended September 30, 2023 and 2022.

The amortized cost and estimated fair value of AFS debt securities as of September 30, 2023, by contractual maturity, are shown below:

($ in thousands)Amortized
Cost
Fair
Value
After one year through five years$1,506 $1,433 
After five years through ten years3,551 3,155 
After ten years216,658 186,725 
Total AFS debt securities$221,715 $191,313 
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. As of September 30, 2023 and December 31, 2022, 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.

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The following table presents the fair value and the associated gross unrealized losses on AFS debt securities by length of time those individual securities in each category have been in a continuous loss as of September 30, 2023 and December 31, 2022:

September 30, 2023
Less Than 12 Months12 Months or LongerTotal
($ in thousands)
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities$6,443 $(289)$36,918 $(6,169)$43,361 $(6,458)
Residential collateralized mortgage obligations45,025 (1,425)97,846 (21,899)142,871 (23,324)
Municipal securities - tax exempt5,081 (620)  5,081 (620)
Total AFS debt securities$56,549 $(2,334)$134,764 $(28,068)$191,313 $(30,402)
December 31, 2022
Less Than 12 Months12 Months or LongerTotal
($ in thousands)
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities$26,347 $(1,485)$23,417 $(3,940)$49,764 $(5,425)
Residential collateralized mortgage obligations81,320 (3,888)71,604 (16,021)152,924 (19,909)
Total AFS debt securities$107,667 $(5,373)$95,021 $(19,961)$202,688 $(25,334)

As a result of the Company's adoption of ASU 2016-03 on January 1, 2023, available-for-sale debt securities are measured at fair value and are subject to impairment testing. A security is impaired if the fair value of the security is less than its amortized cost basis. When an available-for-sale debt security is considered impaired, the Company must determine if the decline in fair value has resulted from a credit-related loss or other factors and then, (1) recognize an allowance for credit losses by a charge to earnings for the credit-related component of the decline in fair value, and (2) recognize in other comprehensive income (loss) any non-credit related components of the fair value decline. If the amount of the amortized cost basis expected to be recovered increases in a future period, the valuation reserve would be reduced, but not more than the amount of the current existing reserve for that security.

As of September 30, 2023, the Company's AFS debt securities consisted of 86 securities, all of which were in an unrealized loss position.
The unrealized losses from the decline in fair value is attributable to changes in interest rates, and not credit quality. The issuers of the AFS debt securities are of high credit quality. Approximately 97% of the AFS debt securities are residential mortgage-backed securities and residential collateralized mortgage obligations that were issued by U.S. government-sponsored agencies, such as Ginnie Mae, Fannie Mae and Freddie Mac. The remaining 3% of the AFS debut securities are tax-exempt municipal securities.
We believe that the unrealized losses presented in the previous tables are temporary and no credit losses are expected. As a result, the Company expects full collection of the carrying amount of these securities, does not intend to sell
13


the securities in an unrealized loss position, and it was more-likely-than-not the Company will not have to sell these securities prior to recovery of amortized cost. Accordingly, for available-for-sale debt securities, the Company did not record allowance for credit losses on January 1, 2023 and did not have allowance for credit losses as of September 30, 2023.

As of September 30, 2023 or December 31, 2022, there were no pledged securities to secure public deposits, borrowing and letters of credit from Federal Home Loan Bank ("FHLB") and the Board of Governors of the Federal Reserve System, and for other purposes required or permitted by law.

The following table presents the other investment securities, which are included in Other investments on the Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022:

($ in thousands)September 30, 2023December 31, 2022
FHLB stock$12,527 $8,483 
Pacific Coast Bankers Bank ("PCBB") stock190 190 
Mutual fund - Community Reinvestment Act ("CRA") qualified3,287 3,330 
Time deposits placed in other banks96 95 
Total other investments$16,100 $12,098 
The Company has equity investment in a mutual fund with readily determinable fair value of $3.3 million and $3.3 million as of September 30, 2023 and December 31, 2022, respectively, which is measured at fair value with changes in fair value recorded in net income. The Company invested in the mutual fund for CRA purposes. For the mutual fund, the Company recorded a $106 thousand loss and a $145 thousand loss for the three months ended September 30, 2023 and 2022, respectively, and a $106 thousand loss and a $438 thousand loss for the nine months ended September 30, 2023 and 2022, respectively. The losses of the mutual fund are included in Other income in the Consolidated Statements of Income.
Note 3. Loans and Allowance for Credit Losses on Loans

Loans Receivable

The following table presents the composition of the loan portfolio as of September 30, 2023 and December 31, 2022:

($ in thousands)September 30, 2023December 31, 2022
Commercial real estate$878,824 $842,208 
SBA—real estate225,579 221,340 
SBA—non-real estate14,575 13,377 
C&I124,632 116,951 
Home mortgage515,789 482,949 
Consumer126 1,467 
Gross loans receivable1,759,525 1,678,292 
Allowance for credit losses(21,617)(19,241)
Loans receivable, net (1)
$1,737,908 $1,659,051 
(1)Includes net deferred loan costs (fees) and unamortized premiums (unaccreted discounts) of $314 thousand and $160 thousand as of September 30, 2023 and December 31, 2022, respectively.
No loans were outstanding to related parties as of September 30, 2023 and December 31, 2022.

Allowance for Credit Losses on Loans

The Company employs a modeled approach that takes into account current and future economic conditions to estimate lifetime expected losses on a collective basis. With the adoption of CECL, the Company elected not to consider
14


accrued interest receivable in its estimated credit losses because the Company writes off uncollectible accrued interest receivable in a timely manner. The Company considers writing off accrued interest amounts once the amounts become 90 days past due to be considered within a timely manner. The Company has elected to write off accrued interest receivable by reversing interest income. The Company uses transition matrices to develop the Probability of Default ("PD") and Loss Given Default ("LGD") approach, incorporating quantitative factors and qualitative considerations in the calculation of the allowance for credit losses for collectively assessed loans. The model provides forecasts of PD and LGD based on national unemployment rates using regression analysis. The Company incorporates future economic conditions using a weighted multiple scenario approach: baseline and adverse. The Company applies a reasonable and supportable period of one year for the baseline scenario and two years for the adverse scenario, after which loss assumptions revert to historical loss information through a one-year reversion period for the baseline scenario and a two-year reversion period for the adverse scenario.

In order to quantify the credit risk impact of other trends and changes within the loan portfolio, the Company utilizes qualitative adjustments to the modeled estimated loss approaches. The parameters for making adjustments are established under a Credit Risk Matrix that provides different possible scenarios for each of the factors listed below. The Credit Risk Matrix and the possible scenarios enable the Bank to qualitatively adjust the loss rates. This matrix considers the following nine factors, which are patterned after the guidelines provided under the Federal Financial Institutions Examination Council Interagency Policy Statement on the Allowance for Credit Losses, updated to reflect the adoption of CECL:

•    Changes in lending policies and procedures, including changes in underwriting standards and practices for collection, charge-offs, and recoveries;
•    Actual and expected changes in national and local economic and business conditions and developments in which the institution operates that affect the collectivity of loans;
•    Changes in the nature and volume of the loan portfolio;
•    Changes in the experience, ability, and depth of lending management and staff;
•    Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans;
•    Changes in the quality of the credit review function;
•    Changes in the value of the underlying collateral for loans that are not collateral-dependent;
•    The existence, growth, and effect of any concentrations of credit, and
•    The effect of other external factors, such as the regulatory, legal and technological environments; competition; and events such as natural disasters.

For loans that do not share similar risk characteristics such as nonaccrual loans above $250 thousand, the Company evaluates these loans on an individual basis in accordance with ASC 326. Such nonaccrual loans are considered to have different risk profiles than performing loans and are therefore evaluated individually. The Company elected to collectively assess nonaccrual loans with balances below $250 thousand along with the performing and accrual loans, in order to reduce the operational burden of individually assessing small nonaccrual loans with immaterial balances. For individually assessed loans, the allowance for credit losses is measured using either 1) the present value of future cash flows discounted at the loan’s effective interest rate; or 2) the fair value of the collateral, if the loan is collateral-dependent. For the collateral-dependent loans, the Company obtains a new appraisal to determine the fair value of collateral. The appraisals are based on an “as-is” valuation. To ensure that appraised values remain current, the Company obtains updated appraisals every twelve months from a qualified independent appraiser. If the fair value of the collateral is less than the amortized balance of the loan, the Company recognizes an allowance for credit losses with a corresponding charge to the provision for credit losses.

The Company maintains a separate allowance for credit losses for its off-balance sheet commitments. The Company uses an estimated funding rate to allocate an allowance to undrawn exposures. This funding rate is used as a credit conversion factor to capture how much undrawn lines of credit can potentially become drawn at any point. The funding rate is determined based on a look-back period of 8 quarters. Credit loss is not estimated for off-balance sheet commitments that are unconditionally cancellable by the Company.

15


The following table summarizes the activity in the allowance for credit losses on loans by portfolio segment for the three and nine months ended September 30, 2023 and 2022:

($ in thousands)
Commercial
Real Estate
SBA—
Real Estate
SBANon-
Real Estate
C&I
Home
Mortgage
ConsumerTotal
Three Months Ended September 30, 2023
Beginning balance$6,784 $1,218 $55 $1,270 $11,472 $3 $20,802 
Provision for (reversal of) credit losses1,171 34 91 (115)125 (3)1,303 
Charge-offs(457)(35)    (492)
Recoveries  4    4 
Ending balance$7,498 $1,217 $150 $1,155 $11,597 $ $21,617 
Three Months Ended September 30, 2022
Beginning balance$7,743 $1,800 $135 $2,102 $5,913 $9 $17,702 
Provision for (reversal of) credit losses(895)(261)7 291 1,521 (1)662 
Charge-offs       
Recoveries  5    5 
Ending balance$6,848 $1,539 $147 $2,393 $7,434 $8 $18,369 

($ in thousands)
Commercial
Real Estate
SBA—
Real Estate
SBANon-
Real Estate
C&I
Home
Mortgage
ConsumerTotal
Nine Months Ended September 30, 2023
Beginning balance$6,951 $1,607 $207 $1,643 $8,826 $7 $19,241 
Impact of CECL adoption875 (238)(142)(320)1,753 (4)1,924 
Provision for (reversal of) credit losses220 (106)84 (168)1,018 (3)1,045 
Charge-offs(548)(46)(34)   (628)
Recoveries  35    35 
Ending balance$7,498 $1,217 $150 $1,155 $11,597 $ $21,617 
Nine Months Ended September 30, 2022
Beginning balance$8,150 $2,022 $199 $2,848 $2,891 $13 $16,123 
Provision for (reversal of) credit losses(1)
(1,302)(476)(100)(455)4,543 (6)2,204 
Charge-offs (14)(18)   (32)
Recoveries 7 66   1 74 
Ending balance$6,848 $1,539 $147 $2,393 $7,434 $8 $18,369 
(1)Excludes reversal of uncollectible accrued interest receivable of $205 thousand for the nine months ended September 30, 2022.

16


The following table presents the allowance for credit losses on loans and recorded investment (not including accrued interest receivable) by portfolio segment and impairment methodology as of September 30, 2023 and December 31, 2022:

($ in thousands)
Individually
Evaluated
for Impairment
Collectively
Evaluated
for Impairment
Total
As of September 30, 2023
Allowance for credit losses:
Commercial real estate$ $7,498 $7,498 
SBA—real estate14 1,203 1,217 
SBA—non-real estate 150 150 
C&I 1,155 1,155 
Home mortgage 11,597 11,597 
Consumer   
Total$14 $21,603 $21,617 
Loans (1):
Commercial real estate$739 $878,085 $878,824 
SBA—real estate (2)
773 224,806 225,579 
SBA—non-real estate 14,575 14,575 
C&I 124,632 124,632 
Home mortgage2,241 513,548 515,789 
Consumer 126 126 
Total$3,753 $1,755,772 $1,759,525 
As of December 31, 2022
Allowance for credit losses:
Commercial real estate$ $6,951 $6,951 
SBA—real estate 1,607 1,607 
SBA—non-real estate 207 207 
C&I279 1,364 1,643 
Home mortgage 8,826 8,826 
Consumer 7 7 
Total$279 $18,962 $19,241 
Loans(1):
Commercial real estate$ $842,208 $842,208 
SBA—real estate423 220,917 221,340 
SBA—non-real estate 13,377 13,377 
C&I279 116,672 116,951 
Home mortgage 482,949 482,949 
Consumer 1,467 1,467 
Total$702 $1,677,590 $1,678,292 
(1)Excludes accrued interest receivables of $7.1 million and $6.4 million as of September 30, 2023 and December 31, 2022, respectively.
(2)$773 thousand of SBA—non-real estate excludes the guaranteed portion of $3.4 million as of September 30, 2023.

17


The following table presents the recorded investment in impaired loans and the specific allowance for loan losses as of December 31, 2022.

December 31, 2022(1)
($ in thousands)Unpaid Principal BalanceRecorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Related
Allowance
SBA—real estate$423 $423 $ $ 
C&I279  279 279 
Total$702 $423 $279 $279 
(1)    The difference between the unpaid principal balance (net of partial charge-offs) and the recorded investment in the loans was not considered to be material

Collateral-dependent loans are loans where repayment is expected to be provided solely by the sale of the underlying collateral and there are no other available and reliable sources of repayment. The estimated credit losses for these loans are based on the collateral’s fair value less selling costs. In most cases, the Company records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less selling costs at the time of foreclosure.

As of September 30, 2023, there were $3.8 million of collateral-dependent loans which are primarily secured by residential and commercial real estate, as well as equipment. The allowance for credit losses allocated to these loans as of September 30, 2023 was $14 thousand.

The following table represents the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2023, for which repayment is expected to be obtained through the sale of the underlying collateral.

($ in thousands)Hotel / MotelGas StationSingle-Family ResidentialTotal
As of September 30, 2023
Commercial real estate$739 $ $ $739 
SBA—real estate(1)
422 351  773 
Home mortgage  2,241 2,241 
Total$1,161 $351 $2,241 $3,753 
(1)    Excludes guaranteed portion of SBA loans of $3.4 million as of September 30, 2023.

18


The following table presents the recorded investment in nonaccrual loans and loans past due 90 or more days and still accruing interest, by portfolio as of September 30, 2023 and December 31, 2022:

($ in thousands)Nonaccrual Loans with a Related Allowance for Credit LossesNonaccrual Loans without a Related Allowance for Credit LossesTotal Nonaccrual Loans
90 or More
Days
Past Due &
Still Accruing
Total(1)
As of September 30, 2023
Commercial real estate$ $739 $739 $ $739 
SBA—real estate398 421 819  819 
SBA—non-real estate163  163  163 
Home mortgage249 2,241 2,490  2,490 
Total$810 $3,401 $4,211 $ $4,211 
As of December 31, 2022
SBA—real estate$423 $ $423 
SBA—non-real estate657 442 1,099 
C&I279  279 
Home mortgage1,280  1,280 
Total$2,639 $442 $3,081 
(1)     Excludes guaranteed portion of SBA loans of $5.2 million and $1.0 million as of September 30, 2023 and December 31, 2022, respectively.
Nonaccrual loans and loans past due 90 or more days and still accruing interest include both homogeneous loans that are collectively and individually evaluated for impairment and individually classified impaired loans.

The following table represents the aging analysis of the recorded investment in past due loans as of September 30, 2023 and December 31, 2022:

($ in thousands)
30-59
Days
Past Due
60-89
Days
Past Due
> 90 Days
Past Due
Total
Past Due(1)
Loans Not
Past Due
Total(2)
As of September 30, 2023
Commercial real estate$1,199 $739 $ $1,938 $876,886 $878,824 
SBA—real estate1,668 499 398 2,565 223,014 225,579 
SBA—non-real estate 6 162 168 14,407 14,575 
C&I789   789 123,843 124,632 
Home mortgage3,199 1,872 1,615 6,686 509,103 515,789 
Consumer    126 126 
Total$6,855 $3,116 $2,175 $12,146 $1,747,379 $1,759,525 
As of December 31, 2022
Commercial real estate$ $ $ $ $842,208 $842,208 
SBA—real estate199 175  374 220,966 221,340 
SBA—non-real estate38  26 64 13,313 13,377 
C&I    116,951 116,951 
Home mortgage1,707 1,522 342 3,571 479,378 482,949 
Consumer    1,467 1,467 
Total$1,944 $1,697 $368 $4,009 $1,674,283 $1,678,292 
(1)Excludes guaranteed portion of SBA loans of $5.1 million and $924 thousand as of September 30, 2023 and December 31, 2022, respectively..
(2)Excludes accrued interest receivables of $7.1 million and $6.4 million as of September 30, 2023 and December 31, 2022, respectively.
19



Loan Modifications to Borrowers Experiencing Financial Difficult: On January 1, 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”, which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This guidance was applied on a prospective basis. Upon adoption of this guidance, the Company no longer establishes a specific reserve for modifications to borrowers experiencing financial difficulty, unless those loans do not share the same risk characteristics with other loans in the portfolio. Provided that is not the case, these modifications are included in their respective cohort and the allowance for credit losses is estimated on a pooled basis consistent with the other loans with similar risk characteristics.

Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, other than insignificant payment deferrals, other than insignificant term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. The disclosure below provide information on loan modification to borrowers experiencing financial difficulty. No charge-offs of previously modified loans were recorded for the three and nine months ended September 30, 2023.

The following table presents the amortized cost of modified loans and the financial effects of the modification as of September 30, 2023 by loan class and modification type:

Financial Effects of Loan Modification
($ in thousands)Interest OnlyTotalPercentage to Each Loan TypeWeighted-Average Payment Deferral (in years)
As of September 30, 2023
SBA—non-real estate$136 $136 0.93 %0.17
Total$136 $136 0.93 %

The Company tracks the performance of modified loans. A modified loan may become delinquent and may result in a payment default (generally 90 days past due) subsequent to modification. There were no loans that received a modification during the three and nine months ended September 30, 2023 that subsequently defaulted.

The following table presents the performance of loans that were modified as of September 30, 2023 since the adoption of ASU 2022-02 on January 1, 2023:

($ in thousands)CurrentTotal
As of September 30, 2023
SBA—non-real estate$136 $136 
Total$136 $136 

The Company had no additional commitments to lend to borrowers whose loans were modified as of September 30, 2023.
Credit Quality Indicators: The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. For consumer loans, a credit grade is established at inception, and generally only adjusted based on performance. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
Special Mention—Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.
20


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.

The following table presents the loan portfolio's amortized cost by loan type, risk rating and year of origination as of September 30, 2023:

September 30, 2023
Term Loans by Origination YearRevolving LoansRevolving Loans Converted to Term Loans
Total(1)
($ in thousands)2023
2022
202120202019Prior
Commercial real estate
Pass$86,002 $210,555 $155,300 $97,776 $142,549 $168,058 $13,454 $ $873,694 
Special mention         
Substandard 739    4,391   5,130 
Doubtful         
Subtotal$86,002 $211,294 $155,300 $97,776 $142,549 $172,449 $13,454 $ $878,824 
Current period charge-offs$ $457 $ $ $91 $ $ $ $548 
SBA— real estate
Pass$20,487 $47,043 $27,044 $25,778 $27,900 $67,077 $ $ $215,329 
Special mention 1,783   940 928   3,651 
Substandard  4,852   1,747   6,599 
Doubtful         
Subtotal$20,487 $48,826 $31,896 $25,778 $28,840 $69,752 $ $ $225,579 
Current period charge-offs$ $ $46 $ $ $ $ $ $46 
SBA—non-real estate
Pass$4,306 $2,623 $240 $1,670 $982 $3,625 $ $ $13,446 
Special mention         
Substandard 640    377   1,017 
Doubtful     112   112 
Subtotal$4,306 $3,263 $240 $1,670 $982 $4,114 $ $ $14,575 
Current period charge-offs$ $ $ $ $ $34 $ $ $34 
C&I
Pass$11,996 $20,185 $25,264 $5,338 $4,235 $2,472 $53,954 $1,188 $124,632 
Special mention         
Substandard         
Doubtful         
Subtotal$11,996 $20,185 $25,264 $5,338 $4,235 $2,472 $53,954 $1,188 $124,632 
Current period charge-offs$ $ $ $ $ $ $ $ $ 
Home mortgage
Pass$62,587 $308,845 $80,092 $19,229 $9,335 $33,211 $ $ $513,299 
Special mention         
Substandard 2,241 249      2,490 
Doubtful         
Subtotal$62,587 $311,086 $80,341 $19,229 $9,335 $33,211 $ $ $515,789 
Current period charge-offs$ $ $ $ $ $ $ $ $ 
Consumer
21


Pass$13 $ $ $ $102 $15 $(4)$ $126 
Special mention         
Substandard         
Doubtful         
Subtotal$13 $ $ $ $102 $15 $(4)$ $126 
Current period charge-offs$ $ $ $ $ $ $ $ $ 
Total loans
Pass$185,391 $589,251 $287,940 $149,791 $185,103 $274,458 $67,404 $1,188 $1,740,526 
Special mention 1,783   940 928   3,651 
Substandard 3,620 5,101   6,515   15,236 
Doubtful     112   112 
Subtotal$185,391 $594,654 $293,041 $149,791 $186,043 $282,013 $67,404 $1,188 $1,759,525 
Current period charge-offs$ $457 $46 $ $91 $34 $ $ $628 
(1)Excludes accrued interest receivables of $7.1 million as of September 30, 2023.

The following table presents the loan portfolio's amortized cost by loan type and risk rating of as of December 31, 2022:

($ in thousands)Pass
Special
Mention
SubstandardDoubtful
Total(1)
As of December 31, 2022
Commercial real estate$841,645 $563 $ $ $842,208 
SBA—real estate220,348  992  221,340 
SBA—non-real estate12,897  480  13,377 
C&I116,396  279 276 116,951 
Home mortgage481,669  1,280  482,949 
Consumer1,467    1,467 
Total$1,674,422 $563 $3,031 $276 $1,678,292 
(1)Excludes accrued interest receivables of $6.4 million as of December 31, 2022.
Note 4. Premises and Equipment

The following table presents information regarding the premises and equipment as of September 30, 2023 and December 31, 2022:

($ in thousands)September 30, 2023December 31, 2022
Leasehold improvements$9,013 $7,998 
Furniture and fixtures4,695 3,983 
Equipment and others3,514 3,288 
Total premises and equipment17,222 15,269 
Accumulated depreciation(11,844)(10,869)
Total premises and equipment, net$5,378 $4,400 
Total depreciation expense included in occupancy and equipment expenses was $308 thousand and $349 thousand for the three months ended September 30, 2023 and 2022, respectively, and $975 thousand and $1.0 million for the nine months ended September 30, 2023 and 2022, respectively.
22


Note 5. Servicing Assets

The Company recognizes the right to service SBA loans for others as servicing assets when the servicing income the Company receives is more than adequate compensation. Servicing assets are accounted for using the amortization method. Under this method, the Company amortizes the servicing assets over the period of the economic life of the assets arising from estimated net servicing revenue.
The Company periodically stratifies its servicing assets into groupings based on risk characteristics and assesses each group for impairment based on fair value. Based on the results of the impairment test, there was no valuation allowance for impairment as of September 30, 2023 and December 31, 2022.
The following table presents an analysis of the changes in activity for loan servicing assets during the three and nine months ended September 30, 2023 and 2022:

Three Months Ended September 30, 2023Nine Months Ended September 30, 2023
($ in thousands)2023202220232022
Beginning balance$12,654 $12,341 $12,759 $12,720 
Additions from loans sold with servicing retained505 1,532 2,474 3,681 
Amortized to expense(1,228)(984)(3,302)(3,512)
Ending balance$11,931 $12,889 $11,931 $12,889 
The fair value of the servicing assets was $17.0 million as of September 30, 2023, which was determined using discount rates ranging from 4.50% to 11.22% and prepayment speeds ranging from 12.60% to 13.20%, depending on the stratification of the specific assets.
The fair value of the servicing assets was $17.3 million as of September 30, 2022, which was determined using discount rates ranging from 4.83% to 10.33% and prepayment speeds ranging from 13.00% to 13.30% depending on the stratification of the specific assets.
Note 6. Deposits
Time deposits that exceed the FDIC insurance limit of $250 thousand as of September 30, 2023 and December 31, 2022 were $420.2 million and $356.2 million, respectively.

The following table presents the scheduled contractual maturities of time deposits as of September 30, 2023:

($ in thousands)
Remainder of 2023$363,264 
2024465,871 
202523,893 
202617,345 
2027 and thereafter420 
Total$870,793 
Deposits from principal officers, directors, and their affiliates as of September 30, 2023 and December 31, 2022 were $1.5 million and $810 thousand, respectively.
The Company had estimated uninsured deposits of $1.06 billion, or 58.2% of total deposits, and $1.14 billion, or 60.3% of total deposits, as of September 30, 2023 and December 31, 2022, respectively.
23


Note 7. Borrowing Arrangements
As of September 30, 2023, the Company had $95.0 million advances from FHLB with a weighted average interest rate of 4.54% and a weighted average remaining term of 1.2 years, compared to no borrowings as of December 31, 2022. The Company has a letter of credit with the FHLB in the amount of $67.0 million to secure a public deposit as of both September 30, 2023 and December 31, 2022.

The Company had available borrowing capacity from the following institutions as of September 30, 2023:

($ in thousands)
FHLB$375,874 
Federal Reserve Bank186,380 
Pacific Coast Bankers Bank50,000 
Zions Bank25,000 
First Horizon Bank25,000 
Total$662,254 
The Company has pledged approximately $1.37 billion and $1.24 billion of loans as collateral for these lines of credit as of September 30, 2023 and December 31, 2022, respectively.
Note 8. Income Taxes

The Company’s income tax expense was $1.9 million and $3.5 million for the three months ended September 30, 2023 and 2022, respectively, and $7.4 million and $10.3 million for the nine months ended September 30, 2023 and 2022, respectively. The effective income tax rate was 27.1% and 28.9% for the three months ended September 30, 2023 and 2022, respectively, and 28.4% and 29.0% for the nine months ended September 30, 2023 and 2022, 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 2019 and for state taxing authorities for tax years prior to 2018.
There were no significant unrealized tax benefits recorded as of September 30, 2023 and 2022, and the Company does not expect any significant increase in unrealized tax benefits in the next twelve months.
Note 9. Commitments and Contingencies
Off-Balance-Sheet Credit Risk: In the normal course of business, the Company enters into commitments to extend credit such as loan commitments and standby letters of credits (“SBLC”s). These commitments expose the Company to varying degrees of credit and market risk and are subject to the same credit and market risk limitation reviews as those instruments recorded on the Consolidated Balance Sheets. Loan commitments represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These commitments generally have fixed expiration dates or contain termination clauses in the event the customer’s credit quality deteriorates. Since many of the commitments are expected to expire without being drawn upon, the commitment amounts do not necessarily represent future funding requirements.
The Company applies the same credit underwriting criteria to extend loans and commitments to customers. Each customer’s credit worthiness is evaluated on a case-by-case basis. Collateral may be obtained based on management’s assessment of a customer’s credit. Collateral may include securities, accounts receivable, inventory, property, plant and equipment, and income producing commercial or other properties.
24



The following table presents the distribution of undisbursed credit-related commitments as of September 30, 2023 and December 31, 2022:

($ in thousands)September 30, 2023December 31, 2022
Loan commitments$255,858 $265,110 
Standby letter of credit5,814 5,286 
Commercial letter of credit296 451 
Total undisbursed credit related commitments$261,968 $270,847 
The majority of these off-balance sheet commitments have a variable interest rate. Management does not anticipate any material losses as a result of these transactions.

Investments in low-income housing partnership: The Company invests in qualified affordable housing partnerships.

The following table shows the balance of the investments in low-income housing partnerships and the total unfunded commitments related to the investments in low-income housing partnerships as of September 30, 2023 and December 31, 2022:

($ in thousands)September 30, 2023December 31, 2022
Investments in low-income housing partnerships$11,128 $12,212 
Unfunded commitments to fund investments for low-income housing partnerships
7,185 8,748 
These balances are reflected in the other assets and other liabilities lines on the Consolidated Balance Sheets. The Company expects to finish fulfilling these commitments during the year ending 2039.
Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credit and other benefits received and recognizes the amortization in income tax expense on the Consolidated Statements of Income. The Company recognized amortization expense of $361 thousands and $210 for the three months ended September 30, 2023 and 2022, respectively, and $1.1 million and $584 thousand for the nine months ended September 30, 2023 and 2022, respectively. Additionally, the Company recognized tax credits and other benefits from the investments in low-income housing partnerships of $456 thousand and $418 thousand for the three months ended September 30, 2023 and 2022, respectively, and $1.4 million and $738 thousand, respectively, for the nine months ended September 30, 2023 and 2022, respectively.
Note 10. Stock-Based Compensation
The Company has three stock-based compensation plans currently in effect as of September 30, 2023, as described further below. Total compensation cost that has been charged against earnings for these plans for the three months ended September 30, 2023 and 2022 was $323 thousand and $335 thousand, respectively, and $961 thousand and $858 thousand for the nine months ended September 30, 2023 and 2022, respectively.
2005 Plan: In 2005, the Board of Directors and shareholders of the Bank approved a stock option plan for the benefit of directors and employees of the Bank (the “2005 Plan”). The 2005 Plan was assumed by the Company in 2016 at the time of the bank holding company reorganization. Under the 2005 Plan, the Bank was authorized to grant options to purchase up to 770,000 shares of the Company’s common stock.
The exercise prices of the options may not be less than 100% of the fair value of the Company’s common stock at the date of grant. The options, when granted, vest either immediately or ratably over five years from the date of the grant and expire after ten years if not exercised. The 2005 Plan expired in 2015, and no future grants can be made under the 2005 Plan.
25



A summary of the transactions under the 2005 Plan for the nine months ended September 30, 2023 is as follows:

($ in thousands, except share data)Number of
Options
Outstanding
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
Outstanding, as of January 1, 202330,000 $6.18 $149 
Options granted  
Options exercised(30,000)6.18 
Options forfeited  
Options expired  
Outstanding, as of September 30, 2023 $ $ 
Fully vested and expected to vest $ $ 
Vested $ $ 
Information related to stock options exercised under the 2005 Plan for the periods indicated follows:

Three Months Ended September 30,Nine Months Ended September 30,
($ in thousands)2023202220232022
Intrinsic value of options exercised$86 $60 $86 $60 
Cash received from option exercises128 64 128 64 
Tax benefit realized from option exercised2 2 2 2 
2010 Plan: In 2010, the Board of Directors of the Bank approved a new equity incentive plan for granting stock options and restricted stock awards to key employees, officers, and non-employee directors of the Bank (the “2010 Plan”). In 2013, the 2010 Plan was amended and approved by the shareholders to increase the number of shares authorized to be issued under from 1,350,000 shares to 2,500,000 shares of common stock. The 2010 Plan was assumed by the Company in 2016 at the time of the bank holding company reorganization.
The exercise prices of stock options granted under the plan may not be less than 100% of the fair value of the Company’s stock at the date of grant. The options, when granted, vest ratably over five years from the date of the grant and expire after ten years if not exercised. The 2010 Plan expired in August 2020, and no further grants can be made under the 2010 Plan.
Restricted stock awards issued under the 2010 Plan may or may not be subject to vesting provisions. Owners of the restricted stock awards shall have all of the rights of a shareholder including the right to vote the shares and to all dividends (cash or stock). Compensation expense related to restricted stock awards will be recognized over the vesting period of the awards based on the fair value of the Company’s common stock at the issue date.
26



A summary of the stock options outstanding under the 2010 Plan for the nine months ended September 30, 2023 is as follows:

($ in thousands, except share data)Number of
Options
Outstanding
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
Outstanding, as of January 1, 2023150,000 $8.00 $474 
Options granted  
Options exercised(90,000)8.00 
Options forfeited  
Options expired  
Outstanding, as of September 30, 202360,000 $8.00 $69 
Fully vested and expected to vest60,000 $8.00 $69 
Vested60,000 $8.00 $69 

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

Three Months Ended September 30,Nine Months Ended September 30,
($ in thousands)2023202220232022
Intrinsic value of options exercised$ $ $186 $ 
Cash received from option exercises  720 $ 
Tax provision realized from option exercised  (3)$ 
The weighted average remaining contractual term of stock options outstanding as of September 30, 2023 was 0.5 years. The weighted average remaining contractual term of stock options that were exercisable as of September 30, 2023 was 0.5 years.

A summary of the changes in the Company's non-vested restricted stock awards under the 2010 Plan for the nine months ended September 30, 2023 is as follows:

($ in thousands, except share data)Shares IssuedWeighted Average Grant Date Fair ValueAggregate
Intrinsic
Value
Non-vested, as of January 1, 202314,500 $8.66 $162 
Awards granted  
Awards vested(4,500)6.37 
Awards forfeited  
Non-vested, as of September 30, 202310,000 $9.69 $92 
Information related to vested restricted stock awards under the 2010 Plan for the periods indicated follows:

Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Tax benefit realized from awards vested$4 $ $4 $ 
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As of September 30, 2023, the Company had approximately $23 thousand of unrecognized compensation cost related to unvested restricted stock awards under the 2010 Plan. The Company expects to recognize these costs over a weighted average period of 1.1 years.
2021 Plan: In 2021, the Board of Directors of the Company approved a new equity incentive plan for granting stock options and restricted stock awards to key employees, officers, and non-employee directors of the Company and the Bank (the “2021 Plan”). The 2021 Plan was approved by the Company’s shareholders at the 2021 Annual Meeting. The number of shares authorized to be issued under the 2021 Plan was 1,500,000 shares of the Company’s common stock.

The exercise prices of stock options granted under the plan may not be less than 100.00% of the fair value of the Company’s stock at the date of grant. There are no stock options granted under the 2021 Plan as of September 30, 2023.

Restricted stock awards issued under the 2021 Plan may or may not be subject to vesting provisions. Owners of the restricted stock awards shall have all rights of a shareholder including the right to vote the shares and to all dividends (cash or stock). Compensation expense related to restricted stock awards will be recognized over the vesting period of the awards based on the fair value of the Company’s common stock at the issue date.

A summary of the changes in the Company’s non-vested restricted stock awards under the 2021 Plan for the nine months ended September 30, 2023 is as follows:

($ in thousands, except share data)
Shares
Issued
Weighted
Average
Grant Date
Fair Value
Aggregate
Intrinsic
Value
Non-vested, as of January 1, 2023317,366 $11.60 $3,542 
Awards granted35,047 8.25 
Awards vested(66,062)10.31 
Awards forfeited(7,500)12.90 
Non-vested, as of September 30, 2023278,851 $11.45 $2,551 

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

Three Months Ended September 30,Nine Months Ended September 30,
($ in thousands)2023202220232022
Tax (provision) benefit realized from awards vested$ $ $(34)$12 
There were 1,112,690 shares available for future grants of either stock options or restricted stock awards under the 2021 Plan as of September 30, 2023. The Company had approximately $2.0 million of unrecognized compensation cost related to unvested restricted stock awards under the 2021 Plan as of September 30, 2023. The Company expects to recognize these costs over a weighted average period of 1.9 years.
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Note 11. Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability on the measurement date and is determined using an exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Assets and liabilities recorded at fair value on a recurring basis, such as AFS securities and equity investments. Additionally, from time to time, the Company records fair value adjustments on a nonrecurring basis. These nonrecurring adjustments typically involve application of lower of cost or fair value accounting and write-downs of individual assets.
The Company classifies its assets and liabilities recorded at fair value as one of the following three categories and a financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement:
Level 1—Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2—Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Securities AFS: The fair values of investment securities are determined by matrix pricing, which is a mathematical technique used to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Management obtains the fair values of investment securities on a monthly basis from a third-party pricing service.
Other Investment: The Company has an 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.
29



Assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 are summarized below:

Fair Value Measure on a Recurring Basis
($ in thousands)Total
Fair Value
Quoted
Prices in
Active Markets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
September 30, 2023
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities$43,361 $ $43,361 $ 
Residential collateralized mortgage obligations142,871  142,871  
Municipal securities - tax exempt5,081  5,081  
Other investments:
Mutual fund - CRA qualified3,287 3,287   
December 31, 2022
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities$49,764 $ $49,764 $ 
Residential collateralized mortgage obligations160,045  160,045  
Other investments:
Mutual fund - CRA qualified3,330 3,330   
There were no transfers of assets or liabilities between the Level 1 and Level 2 classifications for the three and nine months ended September 30, 2023 or 2022.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or fair value and write-downs of individual assets.
Collateral-dependent loans: Collateral-dependent loans are loans where repayment is expected to be provided solely by the sale of the underlying collateral and there are no other available and reliable sources of repayment. Prior to the adoption of ASU 2016-13, impaired loans were evaluated and valued at the time the loan was identified as impaired, at the lower of cost or fair value. Fair value for both collateral-dependent and impaired loans are measured based on the value of the collateral securing these loans and are classified at a Level 3 in the fair value hierarchy. Collateral may include real estate, or business assets including equipment, inventory and accounts receivable. The value of real estate collateral is determined based on an appraisal by qualified licensed appraisers hired by the Company. The value of business equipment is based on an appraisal by qualified licensed appraisers hired by the Company if significant, or the equipment’s net book value on the business’ financial statements. Inventory and accounts receivable collateral are valued based on independent field examiner review or aging reports. Appraisals may utilize a single valuation approach or a combination or 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 for similar loans and collateral underlying such loans. Appraised values are reviewed by management using historical knowledge, market considerations, and knowledge of the client and client’s business.

30


The following table presents the fair value hierarchy and fair value of assets that were still held and had fair value adjustments measured on a nonrecurring basis as of September 30, 2023 and December 31, 2022:

Fair Value Measure on a Nonrecurring Basis
($ in thousands)Total
Fair Value
Quoted
Prices in
Active Markets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
September 30, 2023
Collateral-dependent loans:
Commercial real estate$739 $ $ $739 
SBA—real estate759   759 
Home mortgage2,241   2,241 
Total$3,739 $ $ $3,739 
December 31, 2022
Impaired loans:
SBA—real estate$423 $ $ $423 
Total$423 $ $ $423 
Total

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

Three Months Ended September 30,Nine Months Ended September 30,
($ in thousands)2023202220232022
Collateral-dependent loans:
SBA—real estate$ $5 $1 $15 
Total$ $5 $1 $15 

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The following table presents information about significant unobservable inputs utilized in the Company’s nonrecurring Level 3 fair value measurements as of September 30, 2023 and December 31, 2022:

($ in thousands)Fair Value
Measurements
(Level 3)
Valuation
Techniques
Unobservable
Inputs
Range of
Inputs
Weighted-
Average of
Inputs(1)
September 30, 2023
Collateral-dependent loans:
Commercial real estate$739 
Income approach - income capitalization
Capitalization rate
6.5% to 9.9%
8.2%
SBA—real estate759 
Income approach - income capitalization
Capitalization rate
9.8% to 12.5%
11.0%
Home mortgage2,241 Sales comparison approachMarket data comparison
0.5% to 15.1%
6.5%
December 31, 2022
Impaired loans:
SBA—real estate$423 Income approach - income capitalizationCapitalization rate11.5%11.5%
(1)Weighted-average of inputs is based on the relative fair value of the respective assets as of September 30, 2023 and December 31, 2022.

Financial Instruments: The carrying amounts and estimated fair values of financial instruments that are not carried at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 are as follows. These financial assets and liabilities are measured at amortized cost basis on the Company’s Consolidated Balance Sheets:

September 30, 2023
($ in thousands)Carrying
Amount
Level 1Level 2Level 3Fair Value
Financial assets:
Cash and cash equivalents$105,740 $105,740 $ $ $105,740 
Loans receivable, net1,737,908   1,739,499 1,739,499 
Accrued interest receivable, net7,996 131 808 7,057 7,996 
Other investments:
FHLB and PCBB stock12,717 N/AN/AN/AN/A
Time deposits placed96  96  96 
Servicing assets11,931   16,978 16,978 
Financial liabilities:
Deposits1,825,171  1,823,429  1,823,429 
FHLB advances95,000  94,050  94,050 
Accrued interest payable13,552  13,552  13,552 
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December 31, 2022
($ in thousands)Carrying
Amount
Level 1Level 2Level 3Fair Value
Financial assets:
Cash and cash equivalents$82,972 $82,972 $ $ $82,972 
Loans held for sale44,335  47,217  47,217 
Loans receivable, net1,659,051   1,626,036 1,626,036 
Accrued interest receivable, net7,180 51 716 6,413 7,180 
Other investments:
FHLB and PCBB stock8,673 N/AN/AN/AN/A
Time deposits placed95  95  95 
Servicing assets12,759   16,845 16,845 
Financial liabilities:
Deposits1,885,771  1,880,508  1,880,508 
Accrued interest payable2,771  2,771  2,771 
Note 12. Regulatory Capital Matters
The Bank is subject to certain risk-based capital and leverage ratio requirements under the U.S. Basel III capital rules administered by the federal and state banking agencies. Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on the Company's operations or financial condition. The Basel III capital rules also require the Bank to maintain a capital conservation buffer of 2.5% above the minimum risk-based capital ratios in order to absorb losses during periods of economic stress, effective January 1, 2019. Banking institutions with a ratio of common equity tier 1 capital to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends. equity repurchases and compensation based on the amount of the shortfall. Management believes that as of September 30, 2023 and December 31, 2022, 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.
33



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

September 30, 2023
Actual(1)
Required for
Capital Adequacy
Purposes
Minimum
To be Considered
"Well Capitalized"
($ in thousands)AmountRatioAmountRatioAmountRatio
Total capital (to risk-weighted assets)
Consolidated$227,275 13.31 % N/A N/A N/A N/A
Bank225,386 13.20 $136,568 8.00 %$170,711 10.00 %
Tier 1 capital (to risk-weighted assets)
Consolidated206,350 12.09  N/A N/A N/A N/A
Bank204,461 11.98 102,426 6.00 136,568 8.00 
Common equity Tier 1 capital (to risk-weighted
 assets)
Consolidated206,350 12.09  N/A N/A N/A N/A
Bank204,461 11.98 76,820 4.50 110,962 6.50 
Tier 1 capital (to average assets)
Consolidated206,350 9.63  N/A N/A N/A N/A
Bank204,461 9.55 85,675 4.00 107,093 5.00 
(1)The capital requirements are only applicable to the Bank, and the Company's ratios are included for comparison purpose.
December 31, 2022
Actual(1)
Required for
Capital Adequacy
Purposes
Minimum
To be Considered
"Well Capitalized"
($ in thousands)AmountRatioAmountRatioAmountRatio
Total capital (to risk-weighted assets)
Consolidated$213,862 13.06 %N/AN/AN/AN/A
Bank211,981 12.94 $131,020 8.00 %$163,775 10.00 %
Tier 1 capital (to risk-weighted assets)
Consolidated194,358 11.87 N/AN/AN/AN/A
Bank192,477 11.75 98,265 6.00 131,020 8.00 
Common equity Tier 1 capital (to risk-weighted
 assets)
Consolidated194,358 11.87 N/AN/AN/AN/A
Bank192,477 11.75 73,699 4.50 106,454 6.50 
Tier 1 capital (to average assets)
Consolidated194,358 9.38 N/AN/AN/AN/A
Bank192,477 9.29 82,836 4.00 103,545 5.00 
(1)The capital requirements are only applicable to the Bank, and the Company's ratios are included for comparison purpose.
Note 13. Earnings Per Share

Basic EPS is calculated using the two-class method. Under the two-class method, all earnings (distributed and undistributed) are allocated to common stock and participating securities. The Company grants restricted stock awards, which entitle recipients to receive nonforfeitable dividends during the vesting period on a basis equivalent to dividends paid to holders of the Company's common stock. These restricted stock awards meet the definition of participating
34


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

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

The following table presents the calculation of net income applicable to common stockholders and basic and diluted EPS for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended September 30,Nine Months Ended September 30,
($ in thousands, except share and per share data)2023202220232022
Basic
Net income$5,121 $8,650 $18,746 $25,282 
Distributed and undistributed earnings allocated to participating securities(96)(188)(379)(532)
Net income allocated to common shares$5,025 $8,462 $18,367 $24,750 
Weighted average common shares outstanding15,131,587 15,195,826 15,149,203 15,158,749 
Basic earnings per common share$0.33 $0.56 $1.21 $1.63 
Diluted
Net income allocated to common shares$5,025 $8,462 $18,367 $24,750 
Weighted average common shares outstanding for basic earnings per common share
15,131,587 15,195,826 15,149,203 15,158,749 
Add: Dilutive effects of assumed exercises of stock options8,990 79,330 51,409 87,596 
Average shares and dilutive potential common shares15,140,577 15,275,156 15,200,612 15,246,345 
Diluted earnings per common share$0.33 $0.55 $1.21 $1.62 

No share of common stock was antidilutive for the three and nine months ended September 30, 2023 and 2022.

35


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical financial statements and the related notes thereto contained in this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
OVERVIEW
We are a bank holding company headquartered in Los Angeles, California. Our commercial community banking activities are operated through Open Bank, our banking subsidiary. We offer commercial banking services to small and medium-sized businesses, their owners and retail customers primarily in the Korean-American community.
Our results of operations depend primarily on our net interest income. We drive our income from interest received on our loan portfolio and the fee income we receive in connection with our deposits, and the sale and service of SBA loans. Our major operating expenses are the interest we pay on deposits, the salaries and related benefits we pay our management and staff, and the rent we pay on our leased properties. We rely primarily on locally-generated deposits, mostly from the Korean-American market within California, to fund our loan activities. We currently operate eight branches in Los Angeles County and Orange County, California, one branch in Santa Clara County, California, one branch in Carrollton, Texas and one branch in Las Vegas, Nevada. We have four loan production offices in Pleasanton, California, Atlanta, Georgia, Aurora, Colorado, and Lynnwood, Washington.

We adopted Accounting Standards Update (“ASU”) 2016-13, which replaced the current incurred loss accounting model with the Current Expected Credit Losses approach. The adoption of this ASU increased the allowance for credit losses by $1.9 million and allowance for off-balance sheet commitments by $184 thousand and recorded a deferred tax assets of $624 thousand and decrease to opening retained earnings of $1.5 million on January 1, 2023.

Banking Economy and Recent Developments

Beginning in late 2021, the Federal Reserve Board Open Markets Committee, which strives to manage benchmark interest rates in the United States, began a series of upward adjustments to the “discount rate” for short-term borrowings in response to perceived increases in inflationary pressures. Financial institutions and markets promptly followed these adjustments, significantly increasing interest rate pricing on loans and deposits. While such adjustments are commonplace and tend to affect the banking industry as a whole, the pace and degree of these adjustments were nearly unprecedented, resulting in banks, including the Bank, experiencing substantial pressure on multiple fronts. In particular, banks were forced to increase interest rates paid on deposits in order to meet competitive pressures from other financial institutions, as well as from treasury securities and other investment opportunities that offered greater earning capabilities for those customers. These increases correspondingly increased the Bank’s cost of funds and exerted downward pressure on our net interest margins.

The increases in market interest rates also were reflected in loan pricing, which had multiple effects, including a reduction in borrowing (and thus a reduction in interest paid to banks) by customers that had the ability to avoid or defer additional indebtedness, a decline in the origination of new loans, and an increase in credit risk as borrowers who faced rising interest rates found it more difficult to comply with their loan obligations. The combination of these factors has exerted downward pressure on our fee income, the volume of our interest-earning assets and our net interest income. 

Lastly, as a result of the prolonged low-interest-rate environment that had prevailed for years prior to the more recent market rate increases, the Bank, like most other financial institutions, had invested in treasury securities and other relatively low-yielding but stable instruments as a means to preserve liquidity, accepting the lower returns as a trade-off for a perceived lower risk profile. However, the rapidity of the Federal Reserve’s rate increases resulted in a dramatic loss of value for bonds that were paying at lower interest rates as investors eschewed those investments for higher-yielding fixed- and adjustable-rate debt securities. These forces even resulted in the closure of three large U.S. banks, including two banks with extensive operations in our market area, when customers alarmed at the apparent instability in the banking sector quickly demanded a return of their deposits at a time when banks were confronting substantial challenges.
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The following significant items are of note as of or for the periods presented:
As of September 30, 2023 compared to as of December 31, 2022
Total assets were $2.14 billion, an increase of $48.2 million, or 2.3%, from $2.09 billion.
Gross loans were $1.76 billion, an increase of $81.2 million, or 4.8%, from $1.68 billion.
Total deposits were $1.83 billion, a decrease of $60.6 million, or 3.2%, from $1.89 billion.
Shareholders’ equity was $184.3 million, an increase of $7.4 million, or 4.2%, from $176.9 million.
For the three months ended September 30, 2023 compared to the three months ended September 30, 2022
Net interest income decreased to $17.3 million, a decrease of $3.0 million, or 14.9%, from $20.3 million.
Net income was $5.1 million or $0.33 per diluted common share, a decrease of $3.5 million, or 40.8%, from $8.7 million or $0.55 per diluted common share.
For the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022
Net interest income decreased to $52.5 million, a decrease of $4.3 million, or 7.5%, from $56.7 million.
Net income was $18.7 million or $1.21 per diluted common share, a decrease of $6.5 million, or 25.9%, from $25.3 million or $1.62 per diluted common share.

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SELECTED FINANCIAL DATA
Three Months Ended September 30,Nine Months Ended September 30,
($ in thousands, except share and per share data)2023202220232022
Income Statement Data:
Interest income$31,186 $23,234 $89,882 $61,326 
Interest expense13,873 2,890 37,425 4,613 
Net interest income17,313 20,344 52,457 56,713 
Provision for credit losses1,359 662 1,021 1,999 
Noninterest income2,601 4,821 10,501 14,396 
Noninterest expense11,535 12,338 35,743 33,503 
Income before income taxes7,020 12,165 26,194 35,607 
Income tax expense1,899 3,515 7,448 10,325 
Net income5,121 8,650 18,746 25,282 
Per Share Data:
Basic income per share$0.33 $0.56 $1.21 $1.63 
Diluted income per share0.33 0.55 1.21 1.62 
Book value per share12.17 11.19 12.17 11.19 
Shares of common stock outstanding15,149,203 15,199,840 15,149,203 15,199,840 
Performance Ratios:
Return on average assets(1)
0.96 %1.77 %1.18 %1.80 %
Return on average equity(1)
11.07 19.91 13.69 19.91 
Yield on total loans(1)
6.45 5.36 6.30 5.05 
Yield on average earning assets(1)
6.08 4.92 5.91 4.56 
Cost of average interest-bearing liabilities(1)
4.23 1.21 3.94 0.71 
Cost of deposits(1)
2.83 0.65 2.57 0.37 
Net interest margin(1)
3.38 4.31 3.45 4.22 
Efficiency ratio(2)
57.92 49.03 56.77 47.11 
(1)    Annualized
(2)    Represent noninterest expense divided by the sum of net interest income and noninterest income.

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As of
($ in thousands)September 30, 2023December 31, 2022
Balance Sheet Data:
Gross loans receivable$1,759,525 $1,678,292 
Loans held for sale— 44,335 
Allowance for credit losses(21,617)(19,241)
Total assets2,142,675 2,094,497 
Deposits1,825,171 1,885,771 
Shareholders’ equity184,307 176,916 
Asset Quality Data:
Nonperforming loans to gross loans receivable0.24 %0.18 %
Allowance for credit losses to nonperforming loans513 625 
Allowance for credit losses to gross loans receivable1.23 1.15 
Balance Sheet and Capital Ratios:
Gross loans receivable to deposits96.40 %89.00 %
Noninterest-bearing deposits to deposits33.18 37.20 
Average equity to average total assets8.72 8.88 
Leverage ratio9.63 9.38 
Common equity tier 1 ratio12.09 11.87 
Tier 1 risk-based capital ratio12.09 11.87 
Total risk-based capital ratio13.31 13.06 

RESULTS OF OPERATIONS
Net Income

We reported net income for the three months ended September 30, 2023 of $5.1 million, a decrease of $3.5 million, or 40.8%, compared to net income of $8.7 million for the same period of 2022. The decrease was primarily due to a $3.0 million decrease in net interest income, a $2.2 million decrease in noninterest income and a $697 thousand increase in provision for credit losses, offset by a $1.6 million decrease in income tax expense and a $803 thousand decrease in noninterest expense.

Three Months Ended September 30,
($ in thousands)20232022Change
Interest income$31,186 $23,234 $7,952 
Interest expense13,873 2,890 10,983 
Net interest income17,313 20,344 (3,031)
Provision for credit losses1,359 662 697 
Noninterest income2,601 4,821 (2,220)
Noninterest expense11,535 12,338 (803)
Income before income tax expense7,020 12,165 (5,145)
Income tax expense1,899 3,515 (1,616)
Net income$5,121 $8,650 $(3,529)

We reported net income for the nine months ended September 30, 2023 of $18.7 million, a decrease of $6.5 million, or 25.9%, compared to net income of $25.3 million for the same period of 2022. The decrease was primarily due to a $4.3 million decrease in net interest income, a $3.9 million decrease in noninterest income and a $2.2 million increase
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in noninterest expense, offset by a $2.9 million decrease income tax expense and a $1.0 million decrease in provision for credit losses.

Nine Months Ended September 30,
($ in thousands)20232022Change
Interest income$89,882 $61,326 $28,556 
Interest expense37,425 4,613 32,812 
Net interest income52,457 56,713 (4,256)
Provision for credit losses1,021 1,999 (978)
Noninterest income10,501 14,396 (3,895)
Noninterest expense35,743 33,503 2,240 
Income before income tax expense26,194 35,607 (9,413)
Income tax expense7,448 10,325 (2,877)
Net income$18,746 $25,282 $(6,536)
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 our 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 us 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.

40


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

Three Months Ended September 30,
20232022
($ in thousands)Average
Balance
Interest
and Fees
Yield /
Rate(1)
Average
Balance
Interest
and Fees
Yield /
Rate(1)
Interest-earning assets:
Interest-bearing deposits in other banks$82,752 $1,116 5.28 %$75,599 $427 2.21 %
Federal funds sold and other investments(2)
16,176 301 7.44 12,221 146 4.78 
Available-for-sale debt securities199,205 1,519 3.05 172,696 881 2.04 
Total investments298,133 2,936 3.91 260,516 1,454 2.23 
Commercial real estate loans856,911 12,207 5.65 810,158 10,144 4.97 
SBA loans248,960 7,303 11.64 286,903 5,850 8.09 
Commercial and industrial loans117,578 2,340 7.90 140,098 1,952 5.53 
Home mortgage loans516,465 6,393 4.95 375,804 3,820 4.07 
Consumer & other loans274 10.01 1,037 14 4.88 
Loans(3)
1,740,188 28,250 6.45 1,614,000 21,780 5.36 
Total interest-earning assets2,038,321 31,186 6.08 1,874,516 23,234 4.92 
Noninterest-earning assets84,580 83,398 
Total assets$2,122,901 $1,957,914 
Interest-bearing liabilities:
Money market deposits and others$352,424 $3,487 3.93 %$502,166 $1,506 1.19 %
Time deposits869,675 9,519 4.34 445,271 1,383 1.23 
Total interest-bearing deposits1,222,099 13,006 4.22 947,437 2,889 1.21 
Borrowings79,891 867 4.31 130 — 
Total interest-bearing liabilities1,301,990 13,873 4.23 947,567 2,890 1.21 
Noninterest-bearing liabilities:
Noninterest-bearing deposits599,262 806,289 
Other noninterest-bearing liabilities36,620 30,258 
Total noninterest-bearing liabilities635,882 836,547 
Shareholders’ equity185,029 173,800 
Total liabilities and shareholders’ equity$2,122,901 $1,957,914 
Net interest income / interest rate spreads$17,313 1.85 %$20,344 3.71 %
Net interest margin3.38 %4.31 %
Cost of deposits2.83 %0.65 %
Cost of funds2.90 %0.65 %
(1)Annualized
(2)Includes income and average balances for Federal Home Loan Bank (“FHLB”) and Pacific Coast Bankers Bank stock, CRA qualified mutual fund, term federal funds, interest-earning time deposits and other miscellaneous interest-earning assets.
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(3)Average loan balances include non-accrual loans and loans held for sale.

Nine Months Ended September 30,
20232022
($ in thousands)Average
Balance
Interest
and Fees
Yield /
Rate(1)
Average
Balance
Interest
and Fees
Yield /
Rate(1)
Interest-earning assets:
Interest-bearing deposits in other banks$78,736 $2,965 4.97 %$80,659 $665 1.09 %
Federal funds sold and other investments(1)
14,575 721 6.59 11,720 402 4.59 
Available-for-sale debt securities206,448 4,647 3.00 165,094 2,114 1.71 
Total investments299,759 8,333 3.69 257,473 3,181 1.65 
Commercial real estate loans845,340 35,208 5.57 757,950 26,689 4.71 
SBA loans262,130 21,459 10.94 332,659 17,392 6.99 
Commercial and industrial loans117,850 6,772 7.68 152,189 5,300 4.66 
Home mortgage loans504,188 18,070 4.78 296,331 8,731 3.93 
Consumer & other loans994 40 5.40 866 33 5.04 
Loans(2)
1,730,502 81,549 6.30 1,539,995 58,145 5.05 
Total interest-earning assets2,030,261 89,882 5.91 1,797,468 61,326 4.56 
Noninterest-earning assets84,044 73,410 
Total assets$2,114,305 $1,870,878 
Interest-bearing liabilities:
Money market deposits and others$373,041 $9,837 3.53 %$461,821 $2,260 0.65 %
Time deposits833,603 25,471 4.09 403,242 2,352 0.78 
Total interest-bearing deposits1,206,644 35,308 4.91 865,063 4,612 0.71 
Borrowings63,078 2,117 4.49 44 3.00 
Total interest-bearing liabilities1,269,722 37,425 3.94 865,107 4,613 0.71 
Noninterest-bearing liabilities:
Noninterest-bearing deposits628,569 811,263 
Other noninterest-bearing liabilities33,377 25,213 
Total noninterest-bearing liabilities661,946 836,476 
Shareholders’ equity182,637 169,295 
Total liabilities and shareholders’ equity$2,114,305 $1,870,878 
Net interest income / interest rate spreads$52,457 1.97 %$56,713 3.85 %
Net interest margin3.45 %4.22 %
Cost of deposits2.57 %0.37 %
Cost of funds2.64 %0.37 %
(1)Annualized
(2)Includes income and average balances for Federal Home Loan Bank (“FHLB”) and Pacific Coast Bankers Bank stock, CRA qualified mutual fund, term federal funds, interest-earning time deposits and other miscellaneous interest-earning assets.
(3)Average loan balances include non-accrual loans and loans held for sale.

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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 September 30,
2023 vs 2022
Increases (Decreases) Due to Change in
($ in thousands)VolumeRateTotal
Interest-earning assets:
Interest-bearing deposits in other banks$68 $621 $689 
Federal funds sold and other investments74 81 155 
Available-for-sale debt securities173 465 638 
Total investments315 1,167 1,482 
Commercial real estate loans626 1,437 2,063 
SBA loans(1,060)2,513 1,453 
Commercial and industrial loans(429)817 388 
Home mortgage loans1,654 919 2,573 
Consumer & other loans(15)(7)
Total loans776 5,694 6,470 
Total interest-earning assets1,091 6,861 7,952 
Interest-bearing liabilities:
Money market deposits and others(902)2,883 1,981 
Time deposits3,304 4,832 8,136 
Total interest-bearing deposits2,402 7,715 10,117 
Borrowings734 132 866 
Total interest-bearing liabilities3,136 7,847 10,983 
Net interest income$(2,045)$(986)$(3,031)
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Nine Months Ended September 30,
2023 vs 2022
Increases (Decreases) Due to Change in
($ in thousands)VolumeRateTotal
Interest-earning assets:
Interest-bearing deposits in other banks$(44)$2,344 $2,300 
Federal funds sold and other investments154 165 319 
Available-for-sale debt securities738 1,795 2,533 
Total investments848 4,304 5,152 
Commercial real estate loans3,358 5,161 8,519 
SBA loans(4,608)8,675 4,067 
Commercial and industrial loans(1,777)3,249 1,472 
Home mortgage loans6,949 2,390 9,339 
Consumer & other loans
Total loans3,927 19,477 23,404 
Total interest-earning assets4,775 23,781 28,556 
Interest-bearing liabilities:
Money market deposits and others(456)8,033 7,577 
Time deposits8,170 14,949 23,119 
Total interest-bearing deposits7,714 22,982 30,696 
Borrowings1,765 351 2,116 
Total interest-bearing liabilities9,479 23,333 32,812 
Net interest income$(4,704)$448 $(4,256)

Comparison for the Three Months Ended September 30, 2023 and 2022

Net interest income decreased $3.0 million, or 14.9%, primarily due to higher interest expense on deposits, partially offset by higher interest income on loans. Net interest margin was 3.38%, a decrease of 93 basis points from 4.31%.

A $10.1 million increase in interest expense on deposits was primarily due to a $274.7 million increase in average balance and a 301 basis point increase in average cost driven by the Federal Reserve’s rate increases.

A $6.5 million increase in interest income on loans was primarily due to a $126.2 million increase in average balance and a 109 basis point increase in loan yield as a result of the Federal Reserve’s rate increases.
Comparison for the Nine Months Ended September 30, 2023 and 2022
Net interest income decreased $4.3 million, or 7.5%, primarily due to higher interest expense on deposits, partially offset by higher interest income on loans. Net interest margin was 3.45%, a decrease of 77 basis points from 4.22%.

A $30.7 million increase in interest expense on deposits was primarily due to a $341.6 million increase in average balance and a 420 basis point increase in average cost driven by the Federal Reserve’s rate increases.

A $23.4 million increase in interest income on loans was primarily due to a $190.5 million increase in average balance and a 125 basis point increase in loan yield as a result of the Federal Reserve’s rate increases.

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Provision for Credit Losses
Credit risk is inherent in the business of making loans. We establish an allowance for credit losses both on loans and off-balance sheet commitments through charges to earnings, which are shown in the statements of operations as the provision for credit losses. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. The provision for credit losses is determined by conducting a quarterly evaluation of the adequacy of our allowance for credit 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 credit 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 credit losses of $1.4 million for the three months ended September 30, 2023 was composed of a $488 thousand in net charge-offs, a $356 thousand increase from loan balance and historical loss factor changes, and a $575 thousand increase in qualitative factor adjustments in the third quarter of 2023. The provision for credit losses was $662 thousand for the same period of 2022.
The provision for credit losses of $1.0 million for the nine months ended September 30, 2023 was composed of a $593 thousand in net charge-offs, a $692 thousand increase in qualitative factor adjustments in 2023, partially offset by a $250 thousand decrease on individually evaluated loans. The provision for credit losses was $2.0 million for the same period of 2022.
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 service charges on deposit.
Comparison for the Three Months Ended September 30, 2023 and 2022
The following table sets forth the various components of our noninterest income for the three months ended September 30, 2023 and 2022:

Three Months Ended September 30,
($ in thousands)20232022$ Change% Change
Noninterest income:
Service charges on deposits$575 $454 $121 26.7 %
Loan servicing fees, net of amortization468 610 (142)(23.3)
Gain on sale of loans1,179 3,490 (2,311)(66.2)
Other income379 267 112 41.9 
Total noninterest income$2,601 $4,821 $(2,220)(46.0)%
Noninterest income for the three months ended September 30, 2023 was $2.6 million, a decrease of $2.2 million, or 46.0%, compared to $4.8 million for the same period of 2022, primarily due to a decrease of 2.3 million in gain on sale of loans.
Gain on sale of loans was $1.2 million for the three months ended September 30, 2023, compared to $3.5 million for the same period of 2022, a decrease of $2.3 million or 66.2%. The decrease was primarily due to a lower SBA loans sold amount and a lower average sales premium. We sold $23.4 million of SBA loans with an average premium of 6.50% for the three months ended September 30, 2023, compared to a sale of $59.3 million of SBA loans with an average premium of 6.67% in the same period of 2022.

45


Comparison for the Nine Months Ended 2023 and 2022
The following table sets forth the various components of our noninterest income for the Nine Months Ended September 30, 2023 and 2022:

Nine Months Ended September 30,
($ in thousands)20232022$ Change% Change
Noninterest income:
Service charges on deposit$1,566 $1,269 $297 23.4 %
Loan servicing fees, net of amortization1,909 1,711 198 11.6 
Gain on sale of loans5,847 10,601 (4,754)(44.8)
Other income1,179 815 364 44.7 
Total noninterest income$10,501 $14,396 $(3,895)(27.1)%
Noninterest income for the nine months ended September 30, 2023 was $10.5 million, a decrease of $3.9 million, or 27.1%, compared to $14.4 million for the same period of 2022, primarily due to a decrease of $4.8 million in gain on sale of loans, partially offset by increases $364 thousand in other income.
Gain on sale of loans was $5.8 million for the nine months ended September 30, 2023, compared to $10.6 million for the same period of 2022, a decrease of $4.8 million or 44.8%. The decrease was primarily due to a lower average sales premium and a lower SBA loans sold amount. We sold $104.8 million of SBA loans with an average premium of 6.91% for the nine months ended September 30, 2023, compared to a sale of $149.7 million of SBA loans with an average premium of 7.73% in the same period of 2022.
Other income was $1.2 million, an increase of $364 thousand from $815 thousand, primarily due to a $330 thousand decrease in holding loss on equity investment.
Noninterest Expense
Comparison for the Three Months Ended September 30, 2023 and 2022
The following table sets forth the major components of our noninterest expense for the three months ended September 30, 2023 and 2022:
Three Months Ended September 30,
($ in thousands)20232022$ Change% Change
Noninterest expense:
Salaries and employee benefits$7,014 $7,343 $(329)(4.5)%
Occupancy and equipment1,706 1,537 169 11.0 
Data processing and communication369 586 (217)(37.0)
Professional fees440 602 (162)(26.9)
FDIC insurance and regulatory assessments333 238 95 39.9 
Promotion and advertising207 177 30 16.9 
Directors' fees164 170 (6)(3.5)
Foundation donation and other contributions529 875 (346)(39.5)
Other expenses773 810 (37)(4.6)
Total noninterest expense$11,535 $12,338 $(803)(6.5)%
Noninterest expense for the three months ended September 30, 2023 was $11.5 million, compared with $12.3 million for the same period of 2022, a decrease of $803 thousand or 6.5%, primarily due to lower foundation donation and other contributions, salaries and employee benefits, and data processing and communication.
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Foundation donations and other contributions for the three months ended September 30, 2023 was $529 thousand, compared to $875 thousand, a decrease of $346 thousand, of 39.5%. The decrease was primarily due to lower donation accruals for Open Stewardship as a result of lower net income.
Salaries and employee benefits for the three months ended September 30, 2023 was $7.0 million, compared to $7.3 million for the same period of 2022, a decrease of $329 thousand, or 4.5%. The decrease was primarily due to a lower accrual on employee incentives.
Data processing and communication for the three months ended September 30, 2023 was $369 thousand, compared to $586 thousand, a decrease of $217 thousand, or 37.0%. The decrease was primarily due to an accrual adjustment for a credit received on data processing fees.
Comparison for the Nine Months Ended 2023 and 2022
Nine Months Ended September 30,
($ in thousands)20232022$ Change% Change
Noninterest expense:
Salaries and employee benefits$21,947 $20,109 $1,838 9.1 %
Occupancy and equipment4,874 4,404 470 10.7 
Data processing and communication1,465 1,571 (106)(6.7)
Professional fees1,180 1,290 (110)(8.5)
FDIC insurance and regulatory assessments1,220 637 583 91.5 
Promotion and advertising528 531 (3)(0.6)
Directors' fees535 537 (2)(0.4)
Foundation donation and other contributions1,876 2,542 (666)(26.2)
Other expenses2,118 1,882 236 12.5 
Total noninterest expense$35,743 $33,503 $2,240 6.7 %
Noninterest expense for the nine months ended September 30, 2023 was $35.7 million, compared with $33.5 million for the same period of 2022, an increase of $2.2 million or 6.7%, primarily due to a higher salaries and employee benefits, FDIC insurance and regulatory assessments, and occupancy and equipment, partially offset by a lower foundation donation and other contributions.
Salaries and employee benefits for the nine months ended September 30, 2023 was $21.9 million, compared to $20.1 million for the same period of 2022, an increase of $1.8 million, or 9.1%. The increase was primarily due to a $1.0 million increase from 20 additional full-time employees to support our continued growth and a $656 thousand decrease in loan origination costs as a result of lower loan originations.
FDIC insurance and regulatory assessments for the nine months ended September 30, 2023 was $1.2 million, compared to $637 thousand, an increase of $583 thousand, or 91.5%. The increase was primarily due to our deposit growth from the same period of 2022 and increases in FDIC assessment fees in 2023.
Occupancy and equipment for the nine months ended September 30, 2023 was $4.9 million, compared to $4.4 million for the same period of 2022, an increase of $470 thousand, or 10.7%. The increase was primarily due to increases in leasehold improvements and equipment expense accrual adjustments.
Foundation donations and other contributions for the nine months ended September 30, 2023 was $1.9 million, compared to $2.5 million, a decrease of $666 thousand, or 26.2%. The decrease was primarily due to lower donation accruals for Open Stewardship as a result of lower net income.

Income Tax Expense
Income tax expense was $1.9 million and $3.5 million for the three months ended September 30, 2023 and 2022, respectively. Effective tax rates were 27.1% and 28.9% for the three months ended September 30, 2023 and 2022,
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respectively. Income tax expense was $7.4 million and $10.3 million for the nine months ended September 30, 2023 and 2022, respectively. Effective tax rates were 28.4% and 29.0% for the nine months ended September 30, 2023 and 2022, respectively. The decrease in the effective tax rate was primarily due to adjustments for differences between the prior year tax provision and the final tax returns that were applied in the third quarter of 2023.

After consideration of the matters in the preceding paragraph, we have determined that it is more likely than not that net deferred tax assets as of September 30, 2023 will be fully realized in future years.

FINANCIAL CONDITION
Investment Portfolio
The securities portfolio is the second largest component of our interest earning assets, and the structure and composition of this portfolio is important to an analysis of our financial condition. The portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk management tool, because it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and our other funding sources; and (iv) it is an alternative interest-earning use of funds when loan demand is weak or when deposits grow more rapidly than loans.
We classify our securities as either available-for-sale or held-to-maturity at the time of purchase. Accounting guidance requires available-for-sale securities to be marked to fair value with an offset to accumulated other comprehensive income (loss), a component of shareholders’ equity. Monthly adjustments are made to reflect changes in the fair value of our available-for-sale securities.
All securities in our investment portfolio were classified as available-for-sale as of September 30, 2023. There were no held-to-maturity or trading securities in our investment portfolio as of September 30, 2023. All available-for-sale securities are carried at fair value and consist of U.S. government agencies or sponsored agency securities and tax-exempt municipal securities.
Available-for-sale debt securities decreased $18.5 million, or 8.8%, to $191.3 million at September 30, 2023 from $209.8 million at December 31, 2022, primarily due to principal paydowns of 18.9 million, mainly offset by purchases of $5.6 million in tax exempt municipal securities for the nine months ended September 30, 2023. No issuer of the available-for-sale securities, other than U.S. Government and its agencies, comprised more than ten percent of our shareholders’ equity as of September 30, 2023 and December 31, 2022.

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

September 30, 2023December 31, 2022
($ in thousands)
Amortized
Cost
Fair Value
Unrealized Loss
Amortized
Cost
Fair Value
Unrealized Loss
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities$49,819 $43,361 $(6,458)$55,189 $49,764 $(5,425)
Residential collateralized mortgage obligations166,195 142,871 (23,324)179,953 160,045 (19,908)
Municipal securities - tax exempt5,701 5,081 (620)— — — 
Total available-for-sale debt securities$221,715 $191,313 $(30,402)$235,142 $209,809 $(25,333)
Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. The unrealized losses were primarily attributable to interest rate movement, not credit quality. These securities (Fannie Mae, Ginnie Mae, and Freddie Mac) are guaranteed or sponsored by agencies of the U.S. government, and the issuers of the securities are of high credit quality. We believe that the net unrealized losses presented in the previous tables are temporary
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and no credit losses are expected. As a result, we expects full collection of the carrying amount of these securities, does not intend to sell the securities in an unrealized loss position, and it was more-likely-than-not we will not have to sell these securities prior to recovery of amortized cost. Accordingly, for available-for-sale debt securities, we did not record allowance for credit losses on January 1, 2023 and does not have allowance for credit losses as of September 30, 2023.
The following table sets forth certain information regarding contractual maturities and the weighted average yields of our investment securities as of the dates presented. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

September 30, 2023
Due in One Year or LessDue after One Year Through Five YearsDue after Five Years Through Ten YearsDue after Ten Years
($ in thousands)
Amortized
Cost
Weighted Average Yield
Amortized
Cost
Weighted Average Yield
Amortized
Cost
Weighted Average Yield
Amortized
Cost
Weighted Average Yield
U.S. Government agencies or sponsored agency securities:
Residential mortgage-backed securities$— — %$1,222 2.17 %$692 2.37 %$47,905 2.25 %
Residential collateralized mortgage obligations— — 284 1.82 2,859 1.45 163,052 2.81 
Municipal securities - tax exempt— — — — — — 5,701 5.13 
Total available-for-sale debt securities$— — %$1,506 2.11 %$3,551 1.63 %$216,658 2.75 %
We have not used interest rate swaps or other derivative instruments to hedge fixed rate loans or securities to otherwise mitigate interest rate risk.
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.

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

September 30, 2023December 31, 2022
($ in thousands)Amount% of TotalAmount% of Total
Commercial real estate$878,824 50.0 %$842,208 50.1 %
SBA—real estate225,579 12.8 221,340 13.2 
SBA—non-real estate14,575 0.8 13,377 0.8 
Commercial and industrial124,632 7.1 116,951 7.0 
Home mortgage515,789 29.3 482,949 28.8 
Consumer126 — 1,467 0.1 
Gross loans receivable1,759,525 100.0 %1,678,292 100.0 %
Allowance for credit losses(21,617)(19,241)
Loans receivable, net(1)
$1,737,908 $1,659,051 
(1)     Includes net deferred loan costs(fees) and unamortized premiums(unaccreted discounts) of $314 thousand and $160 thousand as of September 30, 2023 and December 31, 2022, respectively.
Gross loans increased $81.2 million, or 4.8%, to $1.76 billion as of September 30, 2023, compared to $1.68 billion as of December 31, 2022. The increase was primarily attributable to new loan production of $277.6 million, partially offset by loan payoffs and paydowns of $170.3 million.

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The following tables presents the contractual loan maturities by loan category and the contractual distribution of loans to changes in interest rates as of September 30, 2023 and December 31, 2022:

September 30, 2023
Due in One Year or LessDue after One Year Through Five YearsDue after Five Years
($ in thousands)Fixed RateAdjustable RateFixed RateAdjustable RateFixed RateAdjustable RateTotal
Commercial real estate$52,161 $64,183 $403,477 $87,637 $228,324 $43,042 $878,824 
SBA—real estate— — — 27 — 225,552 225,579 
SBA—non- real estate— 139 3,524 — 10,911 14,575 
Commercial and industrial25,688 26,661 8,681 22,020 24,976 16,606 124,632 
Home mortgage— — — — 493,391 22,398 515,789 
Consumer— 126 — — — — 126 
Gross loans$77,849 $91,109 $412,159 $113,208 $746,691 $318,509 $1,759,525 
December 31, 2022
Due in One Year or LessDue after One Year Through Five YearsDue after Five Years
($ in thousands)Fixed RateAdjustable RateFixed RateAdjustable RateFixed RateAdjustable RateTotal
Commercial real estate$27,735 $33,894 $387,902 $116,088 $248,812 $27,777 $842,208 
SBA—real estate— — — 34 — 221,306 221,340 
SBA—non- real estate— 75 442 3,964 — 8,896 13,377 
Commercial and industrial8,905 27,917 1,611 28,082 31,185 19,251 116,951 
Home mortgage— — — — 465,749 17,200 482,949 
Consumer— 1,136 — 331 — — 1,467 
Gross loans$36,640 $63,022 $389,955 $148,499 $745,746 $294,430 $1,678,292 
Our loan portfolio is concentrated in commercial real estate, which includes unguaranteed balances in SBA loans, home mortgage and commercial (primarily manufacturing, wholesale, and services oriented entities). We do not have any material concentrations by industry or group of industries in the loan portfolio. However, 92.1% of our gross loans were secured by real property as of September 30, 2023, compared to 92.1% as of December 31, 2022.
Loans — Commercial Real Estate: We have established concentration limits in the loan portfolio for commercial real estate loans, commercial and industrial loans, and unsecured lending, among others. All loan types are within established limits. We use underwriting guidelines to assess the borrowers’ historical cash flow to determine debt service, and we further stress test the debt service under higher interest rate scenarios. Financial and performance covenants are used in commercial lending agreements to allow us to react to a borrower’s deteriorating financial condition, should that occur.
Commercial real estate loans include owner-occupied and non-occupied commercial real estate. We originate both fixed and adjustable rate loans. Adjustable rate loans are based on the Wall Street Journal prime rate. Our commercial real estate loan portfolio totaled $878.8 million at September 30, 2023 compared to $842.2 million at December 31, 2022. During the nine months ended September 30, 2023, we originated $87.4 million of commercial real estate loans. As of September 30, 2023, approximately 77.8% of the commercial real estate portfolio consisted of fixed-rate loans. Our policy maximum loan-to-value, or LTV, is 70% for commercial real estate loans. As of September 30, 2023, our average loan to value for commercial real estate loans was 49.8%.
Loans — SBA: We are designated as an SBA Preferred Lender under the SBA Preferred Lender Program. We offer mostly SBA 7(a) variable-rate loans. We generally sell the 75% guaranteed portion of the SBA loans that we originate. Our SBA loans are typically made to small-sized manufacturing, wholesale, retail, hotel/motel and service businesses for working capital needs or business expansions. SBA loans have maturities up to 25 years. Typically, non-real estate secured loans mature in less than 10 years. Collateral may also include inventory, accounts receivable and equipment, and may include personal guarantees. Our unguaranteed SBA loans collateralized by real estate are monitored by collateral type and included in our commercial real estate Concentration Guidance.
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As of September 30, 2023, our SBA portfolio totaled $240.2 million, compared to $234.7 million as of December 31, 2022. We originated $89.6 million for the nine months ended September 30, 2023. We sold SBA loans of $104.8 million with a 6.91% average premium during the nine months ended September 30, 2023.
From our total SBA loan portfolio, $225.6 million is secured by real estate and $14.6 million is unsecured or secured by business assets as of September 30, 2023.
Loans — Commercial and Industrial: Commercial and industrial loans totaled $124.6 million as of September 30, 2023, compared to $117.0 million as of December 31, 2022. We originated $48.0 million for the nine months ended September 30, 2023.
Loans - Home Mortgage: We originate mainly non-qualified, alternative documentation single-family home mortgage loans (“home mortgage”) primarily through our retail branch network and our correspondent lender network. The primary loan product is a five-year or seven-year hybrid adjustable rate mortgage, which reprices after five years to a selected SOFR plus certain spreads. We also purchase residential mortgage loans from third party mortgage originators based on the review of their underwriting and file quality as opportunities arise.
Home mortgage loans totaled $515.8 million as of September 30, 2023, compared to $482.9 million as of December 31, 2022. For the nine months ended September 30, 2023, we originated $52.5 million of home mortgage loans and purchased $21.9 million of home mortgage loans from third party mortgage originators.
Loan Servicing

As of September 30, 2023 and December 31, 2022, we serviced $706.9 million and $707.1 million, respectively, of SBA and USDA loans for others. Activity for loan servicing rights was as follows:

Three Months Ended September 30,Nine Months Ended September 30,
($ in thousands)2023202220232022
Beginning balance$12,654 $12,341 $12,759 $12,720 
Additions from loans sold with servicing retained505 1,532 2,474 3,681 
Amortized to expense(1,228)(984)(3,302)(3,512)
Ending balance$11,931 $12,889 $11,931 $12,889 
Loan servicing rights are reported on our Consolidated Balance Sheets and reported net of amortization.
Allowance for Credit Losses
We adopted ASU 2016-13 using a modified retrospective approach on January 1, 2023 without electing the fair value option on eligible financial instruments under ASU 2019-05. We replaced the current incurred loss accounting model with the Current Expected Credit Losses ("CECL") approach for financial instruments measured at amortized cost and other commitments to extend credit. CECL requires the immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset. The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable forecasts.
The adoption of this ASU increased the allowance for credit losses by $1.9 million and allowance for off-balance sheet commitments by $184 thousand. We also recorded a deferred tax assets of $624 thousand and decrease to opening retained earnings of $1.5 million on January 1, 2023. The increase to allowance for credit losses was primarily longer duration of home mortgage loans, offset primarily by shorter duration of commercial and industrial loans. We did not record an allowance for credit losses on our available-for-sale debt securities as a result of this adoption. Disclosures for periods after January 1, 2023 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies.

We employ a modeled approach that takes into account current and future economic conditions to estimate lifetime expected losses on a collective basis. With the adoption of CECL, we elected not to consider accrued interest
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receivable in its estimated credit losses because we write off uncollectible accrued interest receivable in a timely manner. We consider writing off accrued interest amounts once the amounts become 90 days past due to be considered within a timely manner. We have elected to write off accrued interest receivable by reversing interest income. We use transition matrices to develop the Probability of Default ("PD") and Loss Given Default ("LGD") approach, incorporating quantitative factors and qualitative considerations in the calculation of the allowance for credit losses for collectively assessed loans. The model provides forecasts of PD and LGD based on national unemployment rates using regression analysis. We incorporate future economic conditions using a weighted multiple scenario approach: baseline and adverse. We apply a reasonable and supportable period of one year for the baseline scenario and two years for the adverse scenario, after which loss assumptions revert to historical loss information through a one-year reversion period for the baseline scenario and a two-year reversion period for the adverse scenario.

In order to quantify the credit risk impact of other trends and changes within the loan portfolio, we utilize qualitative adjustments to the modeled estimated loss approaches. The parameters for making adjustments are established under a Credit Risk Matrix that provides different possible scenarios for each of the factors listed below. The Credit Risk Matrix and the possible scenarios enable the Bank to qualitatively adjust the loss rates. This matrix considers the following nine factors, which are patterned after the guidelines provided under the Federal Financial Institutions Examination Council Interagency Policy Statement on the Allowance for Credit Losses, updated to reflect the adoption of CECL:

•    Changes in lending policies and procedures, including changes in underwriting standards and practices for collection, charge-offs, and recoveries;
•    Actual and expected changes in national and local economic and business conditions and developments in which the institution operates that affect the collectivity of loans;
•    Changes in the nature and volume of the loan portfolio;
•    Changes in the experience, ability, and depth of lending management and staff;
•    Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans;
•    Changes in the quality of the credit review function;
•    Changes in the value of the underlying collateral for loans that are not collateral-dependent;
•    The existence, growth, and effect of any concentrations of credit, and
•    The effect of other external factors, such as the regulatory, legal and technological environments; competition; and events such as natural disasters.

For loans that do not share similar risk characteristics such as nonaccrual loans above $250 thousand, we evaluate these loans on an individual basis in accordance with ASC 326. Such nonaccrual loans are considered to have different risk profiles than performing loans and are therefore evaluated individually. We elected to collectively assess nonaccrual loans with balances below $250 thousand along with the performing and accrual loans, in order to reduce the operational burden of individually assessing small nonaccrual loans with immaterial balances. For individually assessed loans, the allowance for credit losses is measured using either 1) the present value of future cash flows discounted at the loan’s effective interest rate; or 2) the fair value of the collateral, if the loan is collateral-dependent. For the collateral-dependent loans, we obtain a new appraisal to determine the fair value of collateral. The appraisals are based on an “as-is” valuation. To ensure that appraised values remain current, we obtain updated appraisals every twelve months from a qualified independent appraiser. If the fair value of the collateral is less than the amortized balance of the loan, we recognize an allowance for credit losses with a corresponding charge to the provision for credit losses.

Collateral-dependent loans are loans where repayment is expected to be provided solely by the sale of the underlying collateral and there are no other available and reliable sources of repayment. The estimated credit losses for these loans are based on the collateral’s fair value less selling costs. In most cases, the Company records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less selling costs at the time of foreclosure.

As of September 30, 2023, there were $3.8 million of collateral-dependent loans which are primarily secured by residential and commercial real estate, as well as equipment. The allowance for credit losses allocated to these loans as of September 30, 2023 was $14 thousand.

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The following table represents the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2023, for which repayment is expected to be obtained through the sale of the underlying collateral.

($ in thousands)Hotel / MotelGas StationSingle-Family ResidentialTotal
As of September 30, 2023
Commercial real estate$739 $ $ $739 
SBA—real estate(1)
422 351  773 
Home mortgage  2,241 2,241 
Total$1,161 $351 $2,241 $3,753 
(1)    Excludes guaranteed portion of SBA loans of $3.4 million as of September 30, 2023.

We maintain a separate allowance for credit losses for off-balance sheet commitments. We use an estimated funding rate to allocate an allowance to undrawn exposures. This funding rate is used as a credit conversion factor to capture how much undrawn lines of credit can potentially become drawn at any point. The funding rate is determined based on a look-back period of 8 quarters. Credit loss is not estimated for off-balance sheet commitments that are unconditionally cancellable by us.
The allowance for credit losses was $21.6 million as of September 30, 2023, compared to $19.2 million as of December 31, 2022. $1.4 million provision of credit losses was recorded for the three months ended September 30, 2023, compared to provision for credit losses of $662 thousand for the same period in 2022.
Analysis of the Allowance for Credit Losses

The following table provides an analysis of the allowance for credit losses, provision for credit losses and net charge-offs, by category, for the three months ended September 30, 2023 and 2022:

As of and for the Three Months Ended September 30,
20232022
($ in thousands)BeginningProvision (Reversal)Net (Charge-offs) RecoveriesEndingBeginningProvision (Reversal)Net (Charge-offs) RecoveriesEnding
Commercial real estate$6,784 $1,171 $(457)$7,498 $7,743 $(895)$— $6,848 
SBA—real estate1,218 34 (35)1,217 1,800 (261)— 1,539 
SBA—non- real estate55 91 150 135 147 
Commercial and industrial1,270 (115)— 1,155 2,102 291 — 2,393 
Home mortgage11,472 125 — 11,597 5,913 1,521 — 7,434 
Consumer(3)$— — (1)— 
Total$20,802 $1,303 $(488)$21,617 $17,702 $662 $$18,369 
Gross loans(1)
$1,759,525 $1,618,018 
Average loans(1)
$1,740,188 $1,561,374 
Net (charge-offs) recoveries to average gross loans(2)
(0.11)%0.00 %
Allowance for credit losses to gross loans1.23 %1.14 %
(1)Excludes loans held for sale.
(2)Annualized.
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The following table provides an analysis of the allowance for credit losses, provision for credit losses and net charge-offs, by category, for the nine months ended September 30, 2023 and 2022:

As of and for the Nine Months Ended September 30,
20232022
($ in thousands)BeginningImpact of CECL Adoption(Reversal) ProvisionNet (Charge-offs) RecoveriesEndingBeginning(Reversal) ProvisionNet (Charge-offs) RecoveriesEnding
Commercial real estate$6,951 $875 $220 $(548)$7,498 $8,150 $(1,302)$— $6,848 
SBA—real estate1,607 (238)(106)(46)1,217 2,022 (476)(7)1,539 
SBA—non- real estate207 (142)84 150 199 (100)48 147 
Commercial and industrial1,643 (320)(168)— 1,155 2,848 (455)— 2,393 
Home mortgage8,826 1,753 1,018 — 11,597 2,891 4,543 — 7,434 
Consumer(4)(3)$— — 13 (6)
Total$19,241 $1,924 $1,045 $(593)$21,617 $16,123 $2,204 $42 $18,369 
Gross loans(1)
$1,759,525 $1,618,018 
Average loans(1)
$1,730,502 $1,458,410 
Net (charge-offs) recoveries to average gross loans(2)
(0.05)%(0.01)%
Allowance for credit losses to gross loans1.23 %1.14 %
(1)Excludes loans held for sale.
(2)Annualized.

The following table presents an allocation of the allowance for credit losses by portfolio as of September 30, 2023 and December 31, 2022:

September 30, 2023December 31, 2022
($ in thousands)Amount% to TotalAmount% to Total
Commercial real estate$7,498 34.7 %$6,951 36.1 %
SBA—real estate1,217 5.6 1,607 8.4 
SBA—non- real estate150 0.7 207 1.1 
Commercial and industrial1,155 5.3 1,643 8.5 
Home mortgage11,597 53.7 8,826 45.9 
Consumer— — — 
Total$21,617 100.0 %$19,241 100.0 %

Nonperforming Assets
Loans are considered delinquent when principal or interest payments are past due 30 days or more. Delinquent loans may remain on accrual status between 30 days and 90 days past due. Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are 90 days past due or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current period interest income. Income on non-accrual loans is subsequently recognized only to the extent that cash is received, and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable.
Nonperforming loans include loans that are 90 days past due and still accruing, loans accounted for on a non-accrual basis and accruing restructured loans. Nonperforming assets consist of nonperforming loans plus other real estate owned ("OREO").
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Nonperforming loans were $4.2 million at September 30, 2023, compared to $2.0 million at December 31, 2022. Nonperforming loans excluded the guaranteed portion of SBA loans of $5.2 million and $1.0 million as of September 30, 2023 and December 31, 2022, respectively.

Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as OREO until sold, and is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. We had no OREO as of September 30, 2023 and December 31, 2022.

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

($ in thousands)September 30, 2023December 31, 2022
Nonaccrual loans$4,211 $2,034 
Past due loans 90 days or more and still accruing— — 
Total nonperforming loans(1)
4,211 2,034 
OREO— — 
Total nonperforming assets$4,211 $2,034 
Nonperforming loans to gross loans0.24 %0.12 %
Nonperforming assets to total assets0.20 %0.10 %
Allowance for credit losses to nonperforming loans513 %946 %
(1)Excludes guaranteed portion of SBA loans of $5.2 million and $1.0 million as of September 30, 2023 and December 31, 2022, respectively.
Deposits and Other Sources of Funds
We gather deposits primarily through our branch locations. We offer a variety of deposit products including demand deposits accounts, interest-bearing products, savings accounts and certificate of deposits. We dedicate continuing effort into gathering noninterest demand deposits accounts through marketing to our existing and new loan customers, customer referrals, our marketing staff and various involvement with community networks.

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

September 30, 2023December 31, 2022
($ in thousands)AmountPercentAmountPercent
Noninterest-bearing demand$605,509 33.2 %$701,584 37.2 %
Interest-bearing:
Money market and others348,869 19.1 526,321 27.9 
Time deposits (more than $250)420,162 23.0 356,197 18.9 
Time deposits ($250 or less)450,631 24.7 301,669 16.0 
Total interest-bearing1,219,662 66.8 1,184,187 62.8 
Total deposits$1,825,171 100.0 %$1,885,771 100.0 %
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The following tables set forth the maturity of time deposits as of September 30, 2023:

Maturity Within:
($ in thousands)Three
Months
Three to
Six Months
Six to 12
Months
After
12 Months
Total
Time deposits (more than $250)$184,757 $141,526 $92,393 $1,486 $420,162 
Time deposits ($250 or less)178,507 92,788 137,314 42,022 450,631 
Total time deposits$363,264 $234,314 $229,707 $43,508 $870,793 
Other than deposits, we also utilized FHLB advances as a supplementary funding source to finance our operations. The advances from the FHLB are collateralized by residential and commercial real estate loans. As of September 30, 2023 and December 31, 2022, we had maximum borrowing capacity from the FHLB of $661.6 million and $582.8 million, respectively. We had $95.0 million borrowings from FHLB as of September 30, 2023 and no borrowing from FHLB as of December 31, 2022.
Liquidity and Capital Recourses
Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders. Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, and increases in customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis.

Deposits are the primarily funding source for the Bank. Deposits provide a stable source of funding and reduce our reliance on the wholesale funding markets. The following table presents the loan and deposit balances, the loans-to-deposit ratios, and deposits as a percentage of total liabilities as of September 30, 2023 and December 31, 2022:

($ in thousands)September 30, 2023December 31, 2022
Deposits$1,825,171 $1,885,771 
Deposits as a % of total liabilities93.2 %98.3 %
Loans, net$1,737,908 $1,659,051 
Loans-to-deposits ratio95.2 %88.0 %
In addition to deposits, we have access to various sources of wholesale funding, as well as borrowing capacity at the FHLB, Federal Reserve, and correspondent banks to sustain an adequate liquid asset portfolio, meet daily cash demands and allow management flexibility to execute the business strategy. Economic conditions and the stability of capital markets impact the access to and the cost of wholesale funding. The access to capital markets is also affected by the ratings received from various credit rating agencies.
We had $100.0 million of unsecured federal funds lines with no amounts advanced as of September 30, 2023 and December 31, 2022. In addition, on such dates we had lines of credit from the Federal Reserve discount window of $186.4 million and $175.6 million. The Federal Reserve discount window lines were collateralized by a pool of commercial real estate loans and commercial and industrial loans totaling $260.5 million and $254.7 million as of September 30, 2023 and December 31, 2022, respectively. We did not have any borrowings outstanding with the Federal Reserve as of September 30, 2023 or December 31, 2022, and our borrowing capacity is limited only by eligible collateral.
Based on the values of loans pledged as collateral, we had $375.9 million of additional borrowing availability with the FHLB as of September 30, 2023. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts.
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We maintain ample access to liquidity, including highly liquid assets on our balance sheet and available unused borrowings from other financial institutions. The following table presents our liquid assets and available borrowings as of September 30, 2023 and December 31, 2022:

($ in thousands)September 30, 2023December 31, 2022% Change
Liquid assets:
Cash and cash equivalents$105,740 $82,972 27.4 %
AFS debt securities191,313 209,809 (8.8)
Liquid assets$297,053 $292,781 1.5 %
Liquid assets to total deposits16.3 %15.5 %
Available borrowings:
FHLB$375,874 $440,358 (14.6)%
Federal Reserve Bank186,380 175,605 6.1 
Pacific Coast Bankers Bank50,000 50,000 — 
Zions Bank25,000 25,000 — 
First Horizon Bank25,000 24,950 0.2 
Total available borrowings$662,254 $715,913 (7.5)%
Total available borrowings to total deposits36.3 %38.0 %
Liquid assets and available borrowings to total deposits52.6 %53.5 %
The following tables summarizes short- and long-term material cash requirements as of September 30, 2023, which we believe that we will be able to fund these obligations through cash generated from our operations and available alternative sources of funds:

Material Cash Requirements
($ in thousands)Within
One Year
One to
Three Years
Three to
Five Years
After Five
Years
Indeterminable maturity(1)
Total
Deposits(1)
$363,264 $489,764 $17,765 $— $954,378 $1,825,171 
Operating lease commitments2,604 3,917 3,757 2,306 — 12,584 
Advances from FHLB(2)
20,000 75,000 — — — 95,000 
Commitments to fund investment for Low Income Housing Tax Credit4,571 2,246 139 229 — 7,185 
Total contractual obligations$390,439 $570,927 $21,661 $2,535 $954,378 $1,939,940 
(1)Includes deposits with no defined maturity, such as noninterest-bearing demand, savings and money market.
(2)Excludes accrued interest.
In addition to contractual obligations, other commitments of us impact liquidity. These include unused commitments to extend credit, standby letters of credit and commercial letters of credit. Since many of these commitments expire without being drawn upon, and each customer must continue to meet the conditions established in the contract, the total amount of these commercial commitments does not necessarily represent the future cash requirements of us. Our liquidity sources have been, and are expected to be, sufficient to meet the cash requirements of its lending activities, Information about our loan commitments, standby letters of credit and commercial letters of credit is provided in Note 9. Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-Q.
Capital Requirements
We are subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action”, we must meet specific capital guidelines
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that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. The capital amounts and classifications are subject to qualitative judgments by the federal banking regulators regarding components, risk weightings and other factors. Qualitative measures established by regulation to ensure capital adequacy required us to maintain minimum amounts and various ratios of CET1 capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets, referred to as the “leverage ratio.”

The table below also summarizes the capital requirements applicable to us and the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as our and the Bank’s capital ratios as of September 30, 2023 and December 31, 2022. The Bank exceeded all regulatory capital requirements under the Basel III Capital Rules and were considered to be “well-capitalized” as of the dates reflected in the table below. As of September 30, 2023, the FDIC categorized us as well-capitalized under the prompt corrective action framework. There have been no conditions or events since September 30, 2023 that management believes would change this classification.

As of 9/30/2023
Actual(1)
Regulatory Capital Ratio RequirementsMinimum to be Considered "Well Capitalized"Regulatory Capital Ratio Requirements, including fully phased in Capital Conservation Buffer
($ in thousands)AmountRatioAmountRatioAmountRatioAmountRatio
Total capital (to risk-weighted assets)
Consolidated$227,275 13.31 % N/A N/A N/A N/AN/AN/A
Bank225,386 13.20 $136,568 8.00 %$170,711 10.00 %$179,246 10.50 %
Tier 1 capital (to risk-weighted assets)
Consolidated206,350 12.09  N/A N/A N/A N/AN/AN/A
Bank204,461 11.98 102,426 6.00 136,568 8.00 145,104 8.50 
CET1 capital (to risk-weighted assets)
Consolidated206,350 12.09  N/A N/A N/A N/AN/AN/A
Bank204,461 11.98 76,820 4.50 110,962 6.50 119,497 7.00 
Tier 1 leverage (to average assets)
Consolidated206,350 9.63  N/A N/A N/A N/AN/AN/A
Bank204,461 9.55 85,675 4.00 107,093 5.00 85,675 4.00 
(1)    The capital requirements are only applicable to the Bank, and our ratios are included for comparison purpose.

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As of December 31, 2022
Actual(1)
Regulatory Capital Ratio RequirementsMinimum to be Considered "Well Capitalized"Regulatory Capital Ratio Requirements, including fully phased in Capital Conservation Buffer
($ in thousands)AmountRatioAmountRatioAmountRatioAmountRatio
Total capital (to risk-weighted assets)
Consolidated$213,862 13.06 %N/AN/AN/AN/AN/AN/A
Bank211,981 12.94 $131,020 8.00 %$163,775 10.00 %$171,964 10.50 %
Tier 1 capital (to risk-weighted assets)
Consolidated194,358 11.87 N/AN/AN/AN/AN/AN/A
Bank192,477 11.75 98,265 6.00 131,020 8.00 139,209 8.50 
CET1 capital (to risk-weighted assets)
Consolidated194,358 11.87 N/AN/AN/AN/AN/AN/A
Bank192,477 11.75 73,699 4.50 106,454 6.50 114,642 7.00 
Tier 1 leverage (to average assets)
Consolidated194,358 9.38 N/AN/AN/AN/AN/AN/A
Bank192,477 9.29 82,836 4.00 103,545 5.00 82,836 4.00 
(1)    The capital requirements are only applicable to the Bank, and our ratios are included for comparison purpose.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We have identified interest rate risk as our primary source of market risk.
Interest Rate Risk
Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricing and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay home mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and SOFR (basis risk).
Our board’s asset liability committee, or ALM, establishes broad policy limits with respect to interest rate risk. Our management’s asset liability committee, or ALCO, establishes specific operating guidelines within the parameters of the policies set by the ALM. In general, we seek to minimize the impact of changing interest rates on net interest income and the economic values of assets and liabilities. Our ALCO monitors the level of interest rate risk sensitivity on a quarterly basis to ensure compliance with the ALM-approved risk limits. The policy requires a periodic review of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan prepayment rates based on historical analysis, and noninterest-bearing and interest-bearing deposit durations based on historical analysis.
Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.
An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate
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lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.
Interest rate risk measurement is calculated and reported to the ALCO and ALM at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.
Evaluation of Interest Rate Risk
We use a net interest income simulation model to measure and evaluate potential changes in our net interest income. We run various hypothetical interest rate scenarios at least quarterly and compare these results against a scenario with no changes in interest rates. We use two approaches to model interest rate risk: Earnings at Risk, or EAR, and Economic Value of Equity, or EVE. Under EAR, net interest income is modeled utilizing various assumptions for assets and liabilities. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.
Our simulation model incorporates various assumptions, which we believe are reasonable but which may have a significant impact on results such as: (i) the timing of changes in interest rates; (ii) shifts or rotations in the yield curve; (iii) re-pricing characteristics for market-rate-sensitive instruments; (iv) varying loan prepayment speeds for different interest rate scenarios; and (v) the overall growth and mix of assets and liabilities. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results but rather as a means to better plan and execute appropriate asset-liability management strategies and manage our interest rate risk.
Potential changes to our net interest income in hypothetical rising and declining rate scenarios calculated as of September 30, 2023 and December 31, 2022 are presented in the following table. The projections assume (1) immediate, parallel shifts downward of the yield curve of 100, 200 and 300 basis points and (2) immediate, parallel shifts upward of the yield curve of 100, 200, and 300 basis points over 12 months.

Net Interest SensitivityEconomic Value of Equity Sensitivity
September 30, 2023December 31, 2022September 30, 2023December 31, 2022
+300 basis points(4.60)%0.12 %(41.93)%(42.72)%
+200 basis points(2.08)1.13 (21.26)(23.29)
+100 basis points(0.69)0.97 (8.79)(9.11)
-100 basis points1.15 (0.94)4.40 (1.78)
-200 basis points3.90 (0.70)4.24 (7.31)
-300 basis points7.32 (3.24)(0.11)(18.42)
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures
Our 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, our disclosure controls and procedures were effective as of that date to provide reasonable assurance that the information required to be disclosed by us 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 us in the reports it files or submits under the Exchange Act is accumulated and communicated to our management, including its President and Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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Changes in internal control over financial reporting
We identified, designed, and documented additional internal controls to address new risks posed by the new processes and estimation activities resulting from the CECL adoption. However, there have not been any material changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the period covered to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In the normal course of business, we are subject to legal proceedings or claims. Management has reviewed all legal claims against us and possible loss contingencies, and does not expect the amounts to be material to any of the consolidated financial statements.
Item 1A. Risk Factors.

A discussion of the risk factors affecting us is set forth in Part I, Item 1A. Risk Factors in our 2022 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. In addition to the disclosures set forth in such report, certain factors that developed or were discovered after the date of our Form 10-K are set forth below, and you should read those discussions carefully. 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.

Recent and continuing uncertainties surrounding the banking sector may disproportionately affect our business.

During the first quarter and early in the second quarter of 2023, a number of regional banks suffered liquidity crises that ultimately resulted in their closure by federal and state banking regulators. During and since those failures, customer confidence in the safety of their deposits has declined, particularly with respect to uninsured deposits. News articles and other media items have created greater skepticism among all banking customers, and both the news media and customers have tended to scrutinize smaller institutions much more closely than larger ones. Although we have been largely successful in maintaining our depositors’ confidence, a continuation or exacerbation of these developments may further erode customer confidence generally or with respect to smaller institutions such as the Bank. In part in response to these concerns, we have been forced to maintain, and we expect to continue to maintain, higher liquidity levels, which will limit our ability to invest funds from customer deposits into higher-yielding investments and thus will adversely impact our net income. Further, if we cannot maintain sufficient liquidity to assure an ability to meet customer withdrawal demands, our business could suffer or, in particularly acute circumstances, could fail. Because the Bank is the Company's primary operating subsidiary and is responsible for substantially all of the Company's financial capacity, a failure of the Bank would materially and adversely affect the value of the Company's securities.

Increasing challenges in credit markets and the effects on our current and future borrowers may have an adverse impact on our loan portfolio and may result in losses or increasing provision expense.

In late 2021 and early 2022, partially as a response to inflation in the U.S. and global economies, the Federal Reserve Board began tightening a years-long series of economic stimulus measures that had included historically low interest rates. As those measures were reversed, the Federal Reserve Open Markets committee increased benchmark interest rates from near zero to more than five percent in less than two years. These increases have had a variety of significant impacts, among them a substantial and rapid increase in the interest paid on variable-rate loans. These effects have included a significant reduction in borrowing on existing lines of credit by corporate and individual customers that have the ability to limit increasing indebtedness, and a reduction in the volume of new loans (each of which has the effect of reducing our interest-earning assets), as well as an increase in delinquencies and classified loans (which requires us to increase our reserves for loan and leases losses and increases our collection costs). These increases also effectively reduce demand for loans that we would typically originate and hold for resale, thus reducing our noninterest income. If interest rates increase further, or if they remain at relatively elevated levels for prolonged periods, our borrowers may experience increasing difficulty in repaying their loans.

Increasing delinquencies has resulted in our allowance for credit losses on loans decreasing as a percentage of nonperforming loans, from 625% as of December 31, 2022, to 513% as of September 30, 2023. If these trends continue, or if economic conditions affecting our borrowers worsen, we may be forced to increase our provision expense, which would result in a reduction in net income for the corresponding period, or in some cases we may experience losses in excess of established reserves, which would have a similar effect. These outcomes, alone or in combination with other factors, may have a material adverse effect on our results of operations.

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Adverse developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system and could have a material effect on the Company’s operations and/or stock price.

The recent high-profile bank failures of Silicon Valley Bank, Signature Bank and First Republic have generated significant market volatility among publicly traded bank holding companies. These market developments have negatively impacted customer confidence in the safety and soundness in the financial services industry. While negative publicity and public opinion appear to have diminished in recent months, we cannot offer assurances that the underlying risks have ameliorated or that adverse media stories, other bank failures, or geopolitical or market conditions will not exacerbate or continue these conditions. Partly as a result of these conditions, some community and regional bank depositors have chosen to place their deposits with larger financial institutions or to invest in higher yielding short-term fixed income securities, all of which have adversely affected, and may continue to materially adversely impact our liquidity, cost of funding, loan funding capacity, net interest margin, capital, and results of operations. In connection with high-profile bank failures, uncertainty and concern has been, and may be in the future, compounded by advances in technology that increase the speed at which deposits can be moved, as well as the speed and reach of media attention, including social media, and its ability to disseminate concerns or rumors, in each case potentially exacerbating liquidity concerns. Further, measures announced by the Department of the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation (“FDIC”) intended to reassure depositors of to the availability of their deposits may not be successful in restoring customer confidence in the banking system.

In addition, the interest rate environment and the prices of financial institutions stocks are often highly correlated, in particular during times of stress. These adverse conditions often tend to affect community banks disproportionately. These circumstances have at times adversely affected, and in the future are likely to continue to adversely affect, the trading prices of our common stock. Further, recent experience has shown that the effects of these events on bank stock prices can cause a much more pronounced and widespread decline in trading values than might be expected based on an individual institution’s specific risk profile.

These recent events may also result in potentially adverse changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our business. The cost of resolving the recent bank failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments.

Rising interest rates have decreased the value of a portion of the Bank's securities portfolio, and the Bank would realize losses if it were required to sell such securities to meet liquidity needs.

As a result of inflationary pressures and other general economic conditions, Federal Open Market Committee of the Board of Governors of the Federal Reserve System has rapidly and significantly increased interest rates over the last year. When interest rates increase, fixed-rate investment securities and loans held for sale tend to decline in value, because investors can often place funds in higher-yielding instruments rather than purchasing debt securities that have a yield that is lower than those earning at a newly-increased market interest rate. This sequence of events has caused a decline, and may cause a further decline, in the fair value of our securities classified as available-for-sale, resulting in both a charge against earnings to reflect the adverse impacts on securities and loans held for sale, and in unrealized losses affecting our loans and securities held to maturity. These trends can be exacerbated if the Bank were required to sell such securities to meet liquidity needs, including in the event of deposit outflows or slower deposit growth.

The loss of the Bank's deposit clients or a substantial reduction in deposit balances could force us to fund our business with more expensive and less stable funding sources.

The composition of our deposit base, and particularly the extent to which our deposits are not federally insured, may present a heightened risk of withdrawal, particularly during periods of economic uncertainty. Our measures to mitigate the risks, including correspondent deposit relationships, may not be completely effective in reassuring customers about the safety of their deposits. Further, significant economic fluctuations, or customers’ expectations about such events (whether or not those expectations materialize) may exacerbate depositors’ sensitivity to the availability of cash to fund immediate withdrawals. If our depositors were to experience such conditions, the resulting demand for withdrawals may materially decrease the volume of our deposits, thus adversely impacting our liquidity. This risk is particularly significant if the FDIC or other federal banking regulators were to withdraw or revise recently announced policies assuring the availability of both insured and uninsured deposits. A reduction in liquidity, particularly if it were to occur rapidly or at excessive levels, would have a material adverse effect upon our financial condition or results of operations, and on the trading price of our common stock.

We may be subject to greater than ordinary degrees of scrutiny from federal and state banking regulators.
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In times of significant uncertainty surrounding the banking industry, federal and state banking regulators have tended to scrutinize regulated institutions much more closely to assure the safety and soundness of deposits, the security of the banking system, and the integrity of the Federal Deposit Insurance Fund. These measures, as well as consumer protection regulations, are intended solely for the protection of depositors and other customers, and banking regulators charged with enforcing those regulations are not focused on the protection of shareholders. Among other things, regulators are vested with broad discretion regarding the adequacy of a bank’s liquidity and the quality of its loan and deposit portfolios. We expect the recent failures of two regional banks in California to cause our regulators to scrutinize our assets and our liquidity much more carefully. While we believe we have taken appropriate measures to respond to current market conditions and trends, our regulators may disagree, and may require us to take further actions such as increasing liquidity, reducing our loan-to-deposit ratio, increasing our reserves for credit losses, or both, or to take other measures to protect customers or the Deposit Insurance Fund. If our regulators impose additional requirements in response to these conditions, we may experience further reductions to our net income or we may be required to take other actions that adversely affect our results of operations.

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

None.

Item 3. Defaults Upon Senior Securities.

None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.

None.

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Item 6. Exhibits.
Exhibit NumberDescription
3.1
3.2
3.3
31.1
31.2
32.1
32.2
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
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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: November 13, 2023
By:/s/ MIN J. KIM
Min J. Kim
President and Chief Executive Officer
Date: November 13, 2023
By:/s/ CHRISTINE Y. OH
Christine Y. Oh
Chief Financial Officer
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