OP Bancorp Reports Third Quarter Result of 2020

OP Bancorp (the “Company”) (NASDAQ: OPBK), the holding company of Open Bank (the “Bank”), today reported unaudited financial results for the third quarter of 2020. Net income for the third quarter of 2020 was $3.6 million, or $0.23 per diluted common share, compared to net income of $2.4 million, or $0.16 per diluted common share, for the second quarter of 2020, and net income of $4.0 million, or $0.24 per diluted common share, for the third quarter of 2019.

“We are pleased to report a solid quarter with strong loan and deposit growth and an improved net interest margin during this challenging environment. We provided an additional loan loss provision of $1.4 million for the quarter resulting from further adjustments to our qualitative factors to reflect potential negative impact caused by COVID-19 pandemic. We will continue to be proactive in assisting our customers in navigating their businesses during this difficult and unprecedented period. Furthermore, we continue to put our priority in managing various risks to maintain safe and sound banking operations,” commented Min Kim, President and Chief Executive Officer of OP Bancorp and Open Bank.

Financial Highlights (unaudited)
(Dollars in thousands, except per share data)		As of or for the Three Months Ended
		September 30,					June 30,					September 30,
		2020					2020					2019
Income Statement Data:
Interest income		$	13,016				$	12,920				$	15,112
Interest expense			1,597					2,272					3,893
Net interest income			11,419					10,648					11,219
Provision for loan losses			1,399					1,988					290
Noninterest income			3,021					2,062					2,732
Noninterest expense			7,987					7,334					8,424
Income before taxes			5,054					3,388					5,237
Provision for income taxes			1,459					972					1,237
Net Income		$	3,595				$	2,416				$	4,000
Diluted earnings per share		$	0.23				$	0.16				$	0.24
Balance Sheet Data:
Loans held for sale		$	41,430				$	8,795				$	368
Gross loans, net of unearned income			1,072,790					1,043,506					964,370
Allowance for loan losses (ALL)			14,164					12,764					9,640
Total assets			1,339,821					1,288,011					1,151,934
Deposits			1,170,164					1,120,720					995,993
Shareholders’ equity			141,549					139,136					137,593
Performance Ratios:
Return on average assets (annualized)			1.11	%				0.77	%				1.41	%
Return on average equity (annualized)			10.22	%				6.97	%				11.74	%
Net interest margin (annualized)			3.66	%				3.55	%				4.13	%
Efficiency ratio (1)			55.31	%				57.70	%				60.39	%
Credit Quality:
Nonperforming loans		$	330				$	1,019				$	1,570
Nonperforming assets			330					1,019					3,387
Net charge-offs(recoveries) to average gross loans (annualized)			0.00	%				-0.01	%				0.08	%
Nonperforming assets to gross loans plus OREO			0.03	%				0.10	%				0.35	%
ALL to nonperforming loans			4,295	%				1,252	%				614	%
ALL to gross loans, net of unearned income			1.32	%				1.22	%				1.00	%
Capital Ratios:
Total risk-based capital ratio			14.93	%				15.16	%				15.36	%
Tier 1 risk-based capital ratio			13.67	%				13.91	%				14.35	%
Common equity tier 1 ratio			13.67	%				13.91	%				14.35	%
Leverage ratio			10.85	%				10.98	%				12.11	%
(1) Represents noninterest expense divided by the sum of net interest income and noninterest income.

Financial Highlights (unaudited)
(Dollars in thousands, except per share data)			For the Nine Months Ended
			September 30,					September 30,
			2020					2019
Income Statement Data:
Interest income			$	40,281				$	44,077
Interest expense				7,098					10,883
Net interest income				33,183					33,194
Provision for loan losses				4,130					691
Noninterest income				7,379					8,912
Noninterest expense				23,528					24,855
Income before taxes				12,904					16,560
Provision for income taxes				3,594					3,984
Net Income			$	9,310				$	12,576
Diluted earnings per share			$	0.60				$	0.77
Performance Ratios:
Return on average assets				1.00	%				1.54	%
Return on average equity				8.88	%				12.55	%
Net interest margin				3.71	%				4.25	%
Efficiency ratio (1)				58.00	%				59.03	%
(1) Represents noninterest expense divided by the sum of net interest income and noninterest income.

Financial Highlights, excluding Gain on COLI
(Dollars in thousands, except per share data)			For the Nine Months Ended
			September 30,					September 30,
			2020					2019
Income before taxes, as reported			$	12,904				$	16,560
Gain on COLI				—					1,228
Provision for income taxes				3,594					3,887
Net Income, excluding gain on COLI			$	9,310				$	11,445
Diluted earnings per share			$	0.60				$	0.70
Return on average assets				1.00	%				1.40	%
Return on average equity				8.88	%				11.42	%

Results of Operations

The reported interest income and yield on our loan portfolio are impacted by a number of components, including changes in the average contractual interest rate earned on loans and the amount of discount accretion on SBA loans. The following table reconciles both the contractual interest income and yield on our loan portfolio to the reported interest income and yield for the periods indicated.

		Three Months Ended
		September 30,								June 30,								September 30,
		2020								2020								2019
(Dollars in thousands)		Interest & Fees				Yield				Interest & Fees				Yield				Interest & Fees				Yield
Contractual interest rate		$	11,715				4.39	%		$	11,667				4.49	%		$	13,492				5.66	%
SBA discount accretion			389				0.15	%			413				0.16	%			717				0.30	%
Amortization of net deferred fees/(costs)			393				0.15	%			375				0.15	%			37				0.02	%
Interest recognized on nonaccrual loans			48				0.02	%			83				0.03	%			(12	)			-0.01	%
Prepayment penalties and other fees			36				0.01	%			11				0.00	%			44				0.02	%
Yield on loans (as reported)		$	12,581				4.72	%		$	12,549				4.83	%		$	14,278				5.99	%

		Nine Months Ended
		September 30,								September 30,
		2020								2019
(Dollars in thousands)		Interest & Fees				Yield				Interest & Fees				Yield
Contractual interest rate		$	36,482				4.71	%		$	39,285				5.69	%
SBA discount accretion			1,359				0.17	%			1,928				0.28	%
Amortization of net deferred fees/(costs)			790				0.10	%			192				0.03	%
Interest recognized on nonaccrual loans			132				0.02	%			(12	)			0.00	%
Prepayment penalties and other fees			60				0.01	%			332				0.05	%
Yield on loans (as reported)		$	38,823				5.01	%		$	41,725				6.05	%

Net interest margin for the third quarter of 2020 increased 11 basis points to 3.66% from 3.55% for the second quarter of 2020 primarily due to a 30 basis point decrease in the cost of interest-bearing liabilities, partially offset by a 13 basis point decrease in the reported yield on interest-earning assets.

Net interest income before provision for loan losses for the third quarter of 2020 was $11.4 million, an increase of $771,000, or 7.2%, compared to the second quarter of 2020, primarily due to a $675,000 decrease in interest expense and a $96,000 increase in interest income.

Interest income on securities available for sale and other investments for the third quarter of 2020 increased $64,000, or 17.3%, compared to the second quarter of 2020. The increase was primarily due to a $38,000 increase in interest income on securities available for sale from investment purchases during the second and third quarters of 2020 and a $26,000 increase in dividend accrual on Federal Home Loan Bank stock.

Interest income from contractual interest rates on loans for the third quarter of 2020 increased $48,000, or 0.4% compared to the second quarter of 2020, reflecting an increase of $17.2 million, or 1.6% in the average balance of loans, partially offset by a 10 basis point decrease in the average contractual interest rate on loans. The amount of discount accretion on SBA loans for the third quarter of 2020 decreased $24,000 compared to the second quarter of 2020 due to a decrease in SBA loan payoffs. The reported interest income on loans, net of SBA discount accretions and other components, for the third quarter of 2020 increased $32,000, or 0.3%, compared to the second quarter of 2020.

Interest expense for the third quarter of 2020 decreased $675,000, or 29.7%, compared to the second quarter of 2020, primarily due to continued downward adjustments of the Bank’s deposit rates after the rate cuts by the Federal Reserve in March of 2020 and a decrease of $61.7 million, or 8.4%, in the average balance of interest-bearing liabilities.

Net interest margin for the third quarter of 2020 decreased 47 basis points to 3.66% from 4.13% for the third quarter of 2019, primarily due to a 138 basis point decrease in the reported yield on interest-earning assets, partially offset by a 126 basis point decrease in the cost of interest-bearing liabilities as a result of cumulative market rate cuts of 175 basis points by the Federal Reserve in the last quarter of 2019 and first quarter of 2020.

Net interest income before provision for loan losses for the third quarter of 2020 increased $200,000, or 1.8%, to $11.4 million, compared to $11.2 million for the third quarter of 2019, primarily due to a $2.3 million decrease in interest expense, partially offset by a $2.1 million decrease in interest income.

Interest income on securities available for sale and other investments for the third quarter of 2020 decreased $399,000, or 47.8%, compared to the third quarter of 2019. The decrease was primarily due to a $362,000 decrease in interest income on Fed funds as a result of the aforementioned cumulative rate cuts.

Interest income from contractual interest rates on loans for the third quarter of 2020 decreased $1.8 million, or 13.2%, compared to the third quarter of 2019, reflecting a 127 basis point decrease in the average contractual interest rate on loans, primarily due to the aforementioned cumulative rate cuts, partially offset by an increase of $115.7 million, or 12.2% in the average balance of loans. The amount of discount accretion on SBA loans for the third quarter of 2020 decreased $328,000 compared to the third quarter of 2019, due to a decrease in SBA loan payoffs. The reported interest income on loans, net of SBA discount accretions and other components, for the third quarter of 2020 decreased $1.7 million, or 11.9%, compared to the third quarter of 2019.

Interest expense for the third quarter of 2020 decreased $2.3 million, or 59.0%, compared to the third quarter of 2019, primarily due to the Bank’s downward adjustments in deposit rates after the rate cuts by the Federal Reserve in March of 2020 and a decrease of $27.8 million, or 4.0%, in the average balance of interest-bearing liabilities.

The following tables show the asset yields, liability costs, net interest spread, and net interest margin for the periods indicated, along with the percentage changes in the periods indicated.

		Three Months Ended													Percentage Change
		September 30,				June 30,				September 30,					Q3-20				Q3-20
		2020				2020				2019					vs. Q2-20				vs. Q3-19
Yield on loans			4.72	%			4.83	%			5.99	%				-0.11	%			-1.27	%
Yield on interest-earning assets			4.18	%			4.31	%			5.56	%				-0.13	%			-1.38	%
Cost of interest-bearing liabilities			0.94	%			1.24	%			2.20	%				-0.30	%			-1.26	%
Cost of deposits			0.56	%			0.83	%			1.58	%				-0.27	%			-1.02	%
Cost of funds			0.56	%			0.83	%			1.58	%				-0.27	%			-1.02	%
Net interest spread			3.24	%			3.07	%			3.36	%				0.17	%			-0.12	%
Net interest margin			3.66	%			3.55	%			4.13	%				0.11	%			-0.47	%

		Nine Months Ended								Percentage Change
		September 30,				September 30,				2020 YTD
		2020				2019				vs. 2019 YTD
Yield on loans			5.01	%			6.05	%			-1.04	%
Yield on interest-earning assets			4.51	%			5.65	%			-1.14	%
Cost of interest-bearing liabilities			1.33	%			2.17	%			-0.84	%
Cost of deposits			0.88	%			1.54	%			-0.66	%
Cost of funds			0.87	%			1.54	%			-0.67	%
Net interest spread			3.18	%			3.48	%			-0.30	%
Net interest margin			3.71	%			4.25	%			-0.54	%

The Bank recorded $1.4 million in provision for loan losses for the third quarter of 2020. Management has made further adjustments to the qualitative factors on all loan types during the third quarter of 2020 to reflect persistent adverse impacts on national, state, and local economies caused by the COVID-19 pandemic. The increases in qualitative factors accounted for $1.2 million, or 80%, of provision for loan losses for the quarter. The Bank recorded provision for loan losses of $2.0 million for the second quarter of 2020 and $290,000 for the third quarter of 2019.

Noninterest income for the third quarter of 2020 was $3.0 million, an increase of $959,000, or 46.5%, from $2.1 million for the second quarter of 2020, primarily due to an increase of $877,000 in gain on sale of loans and an increase of $69,000 in loan servicing fees from slower SBA loan payoffs.

Gain on sale of loans for the third quarter of 2020 was $1.8 million, an increase of $877,000, compared to $936,000 for the second quarter of 2020. The Bank sold $24.0 million in SBA loans with an average premium of 9.66% in the third quarter of 2020, compared to the sale of $14.9 million in SBA loans with an average premium of 7.94% in the second quarter of 2020.

Noninterest income for the third quarter of 2020 was $3.0 million, an increase of $289,000, compared to $2.7 million for the third quarter of 2019, primarily due to an increase of $340,000 in loan servicing fees from slower SBA loan payoffs and an increase of $99,000 in gain on sale of loans, partially offset by a decrease of $140,000 in service charges on deposits. Gain on sale of loans for the third quarter of 2019 was $1.7 million from the sale of $22.2 million in SBA loans with an average premium of 8.85%.

Noninterest expense for the third quarter of 2020 was $8.0 million, an increase of $653,000, or 8.9%, compared to $7.3 million for the second quarter of 2020. The increase was primarily due to an increase of $739,000 in salary and employee benefits and an increase of $115,000 in foundation donation and other contributions. The increase in salary and employee benefits was primarily due to a decrease in deferred loan origination costs. The deferred loan origination costs for the third quarter of 2020 was $612,000, a decrease of $801,000, compared to $1.4 million for the second quarter of 2020 with the origination of 924 SBA Paycheck Protection Program (PPP) loans.

Noninterest expense for the third quarter of 2020 was $8.0 million, a decrease of $437,000, or 5.2%, compared to $8.4 million for the third quarter of 2019. The decrease was primarily due to a decrease of $263,000 in salary and employee benefits, a decrease of $101,000 in promotion and advertising expenses, and a decrease of $182,000 in other expenses, partially offset by an increase of $133,000 in FDIC insurance and regulatory assessments expenses. The decrease in salary and employee benefits was primarily due to an increase in deferred loan origination costs. The deferred loan origination costs of $612,000 for the third quarter of 2020 was $339,000 higher than $273,000 for the third quarter of 2019, primarily due to more loan originations in the third quarter of 2020. The FDIC insurance and regulatory assessments expenses was lower during the second half of 2019 due to the small bank assessment credits that were applied. Management continues to monitor and manage overhead expenses as earnings have been adversely impacted by a lower rate environment and higher loan loss provisions in 2020.

Income tax provision was $1.5 million for the third quarter of 2020, $972,000 for the second quarter of 2020 and $1.2 million for the third quarter of 2019. The effective tax rate for the third quarter of 2020 was 28.9%, compared to 28.7% for the second quarter of 2020 and 23.6% for the third quarter of 2019. The higher effective tax rate for the third quarter of 2020 compared to the third quarter of 2019 was primarily due to realizing a lower amount of tax benefits resulting from the exercise of non-qualified stock options during the third quarter of 2020.

Balance Sheet

Total assets were $1.34 billion at September 30, 2020, an increase of $51.8 million, or 4.0%, compared to $1.29 billion at June 30, 2020, and an increase of $187.9 million, or 16.3%, compared to $1.15 billion at September 30, 2019.

Gross loans, net of unearned income, were $1.07 billion at September 30, 2020, an increase of $29.3 million, or 2.8.%, from $1.04 billion at June 30, 2020, and an increase of $108.4 million, or 11.2%, from $964.4 million at September 30, 2019.

New loan originations totaled $140.2 million for the third quarter of 2020, including $1.3 million in SBA PPP loans and $76.3 million in other SBA loans, compared to $104.1 million for the second quarter of 2020, including $64.9 million in SBA PPP loans and $19.3 million in other SBA loans, and $100.3 million for the third quarter of 2019, including $30.9 million in SBA loans. Loan payoffs were $47.1 million for the third quarter of 2020, compared to $21.7 million for the second quarter of 2020, and $38.7 million for the third quarter of 2019.

Total deposits were $1.17 billion at September 30, 2020, an increase of $49.4 million, or 4.4%, from $1.12 billion at June 30, 2020, and an increase of $174.2 million, or 17.5%, from $996.0 million at September 30, 2019. Noninterest-bearing deposits were $488.8 million at September 30, 2020, compared to $428.8 million at June 30, 2020, and $296.8 million at September 30, 2019. The increase in noninterest-bearing deposits during the third quarter of 2020 was primarily due to new accounts being opened during the quarter as well as increased balances from our existing accounts.

Noninterest-bearing deposits accounted for 41.8% of total deposits at September 30, 2020, compared to 38.2% at June 30, 2020, and 29.8% at September 30, 2019. The following table shows the Bank’s deposits, by type as a percentage of total deposits as of the periods indicated.

		As of
		September 30,				June 30,				September 30,
		2020				2020				2019
Noninterest-bearing deposits			41.8	%			38.2	%			29.8	%
Interest-bearing demand deposits			28.6	%			26.2	%			27.6	%
Savings			0.5	%			0.5	%			0.3	%
Time deposits over $250,000			16.6	%			18.8	%			22.1	%
Other time deposits			12.5	%			16.3	%			20.2	%
Total deposits			100.0	%			100.0	%			100.0	%

The Bank had $10.0 million in borrowings from the Federal Home Loan Bank (FHLB) at September 30, 2020 and June 30, 2020, which has a 0% rate under the Zero-Rate Recovery Advance Program, FHLB’s pandemic relief initiatives. The Bank had no borrowings from the FHLB at September 30, 2019.

The Company’s consolidated regulatory capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at September 30, 2020, as summarized in the following table.

														Regulatory
										Well-capitalized				Capital Ratio
										Financial				Requirements (1),
										Institution				Including
										Basel III				Fully Phased-in
										Regulatory				Capital Conservation
Capital Ratios		OP Bancorp				Open Bank				Guidelines				Buffer
Total risk-based capital ratio			14.93	%			14.51	%			10.00	%			10.50	%
Tier 1 risk-based capital ratio			13.67	%			13.26	%			8.00	%			8.50	%
Common equity tier 1 ratio			13.67	%			13.26	%			6.50	%			7.00	%
Leverage ratio			10.85	%			10.52	%			5.00	%			4.00	%
(1) Fully phased in Basel III requirement for both OP Bancorp and Open Bank includes a 2.5% capital conservation buffer, except the leverage ratio.

The Company announced a fourth stock repurchase program on September 9, 2020, which authorizes the Company to repurchase up to 500,000 shares of its common stock. As of October 19, 2020, as part of its fourth stock repurchase program, the Company repurchased 82,000 shares of its common stock at an average price of $6.10. Since the announcement of the initial stock repurchase program in January 2019, the Company has repurchased a total of 1.45 million shares of its common stock at an average repurchase price of $8.69 per share through October 19, 2020.

Asset Quality

Nonperforming loans were $330,000 at September 30, 2020, a decrease of $689,000 from $1.0 million at June 30, 2020 and a decrease of $1.2 million from $1.6 million at September 30, 2019.

The Bank had no other real estate owned (OREO) at September 30, 2020 and June 30, 2020. The Bank had OREO of $1.8 million at September 30, 2019.

Nonperforming assets were $330,000, or 0.02% of total assets, at September 30, 2020, compared to $1.0 million, or 0.08% of total assets, at June 30, 2020, and $3.4 million, or 0.29% of total assets, at September 30, 2019.

Nonperforming loans to gross loans were 0.3% at September 30, 2020, compared to 0.10% at June 30, 2020, and 0.16% at September 30, 2019. Total classified loans were $2.1 million, or 0.20% of gross loans, at September 30, 2020, compared to $2.8 million, or 0.27% of gross loans, at June 30, 2020, and $3.2 million, or 0.34% of gross loans, at September 30, 2019.

The following tables shows the trend of classified loans by loan type as of the date stated.

		As of
		September 30,				June 30,				March 31,				December 31,				September 30,
		2020				2020				2020				2019				2019
Classified loans by loan type		(Dollars in thousands)
Commercial real estate		$	—			$	—			$	—			$	—			$	—
SBA loans—real estate			774				786				2,021				2,036				2,247
SBA loans—non-real estate			121				124				159				33				36
Commercial and industrial			1,207				1,211				686				697				710
Home mortgage			—				689				694				698				256
Consumer			—				—				—				—				—
Total classified loans		$	2,102			$	2,810			$	3,560			$	3,464			$	3,249
SBA guarantee balance retained
SBA loans—real estate			—				—				357				363				516
SBA loans—non-real estate			—				—				33				33				36
Total SBA unsold guarantee portion		$	—			$	—			$	390			$	396			$	552
Total classified loans, net of SBA guarantee balance retained		$	2,102			$	2,810			$	3,170			$	3,068			$	2,697

Loans in deferred status were 42 loans for an aggregate balance of $56.9 million, or 5% of total loans at September 30, 2020, compared to 155 loans for an aggregate balance of $190.9 million, or 18% of total loans at June 30, 2020. Since we started loan deferments under the CARES Act in the second quarter of 2020, 130 loans for an aggregate balance of $173.0 million have resumed regular payments or paid off through September 30, 2020.

The allowance for loan losses (ALL) was $14.2 million at September 30, 2020, compared to $12.8 million at June 30, 2020, and $9.6 million at September 30, 2019. The ALL was 1.32% of gross loans at September 30, 2020, 1.22% of gross loans at June 30, 2020 and 1.00% at September 30, 2019. Excluding fully guaranteed SBA PPP loans, the ALL was 1.40% of gross loans at September 30, 2020, 1.30% of gross loans at June 30, 2020, and 1.00% of gross loans at September 30, 2019. The ALL was 4,295% of nonperforming assets at September 30, 2020, 1,252% at June 30, 2020, and 285% at September 30, 2019.

About OP Bancorp

OP Bancorp, the holding company for Open Bank (the “Bank”), is a California corporation whose common stock is quoted on the Nasdaq Global Market under the ticker symbol, “OPBK.” The Bank is engaged in the general commercial banking business in Los Angeles, Orange, and Santa Clara Counties, California, and Carrollton, Texas and is focused on serving the banking needs of small- and medium-sized businesses, professionals, and residents with a particular emphasis on Korean and other ethnic minority communities. The Bank currently operates with nine full branch offices in Downtown Los Angeles, Los Angeles Fashion District, Los Angeles Koreatown, Gardena, Buena Park, and Santa Clara, California and Carrollton, Texas. The Bank also has four loan production offices in Atlanta, Georgia, Aurora, Colorado, and Lynnwood and Seattle, Washington. The Bank commenced its operations on June 10, 2005 as First Standard Bank and changed its name to Open Bank in October 2010. Its headquarters is located at 1000 Wilshire Blvd., Suite 500, Los Angeles, California 90017. Phone [phone]; www.myopenbank.com Member FDIC, Equal Housing Lender.

Cautionary Note Regarding Forward-Looking Statements

Certain matters set forth herein (including any exhibits hereto) constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to the Company’s current business plans and expectations regarding future operating results. Forward-looking statements may include, but are not limited to, the use of forward-looking language, such as “likely result in,” “expects,” “anticipates,” “estimates,” “forecasts,” “projects,” “intends to,” or may include other similar words or phrases, such as “believes,” “plans,” “trend,” “objective,” “continues,” “remains,” or similar expressions, or future or conditional verbs, such as “will,” “would,” “should,” “could,” “may,” “might,” “can,” or similar verbs. These forward-looking statements are subject to risks and uncertainties that could cause actual results, performance or achievements to differ materially from those projected. These risks and uncertainties, some of which are beyond our control, include, but are not limited to: business and economic conditions, particularly those affecting the financial services industry and our primary market areas; our ability to successfully manage our credit risk and the sufficiency of our allowance for loan losses; factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers, the success of construction projects that we finance, including any loans acquired in acquisition transactions; our ability to effectively execute our strategic plan and manage our growth; interest rate fluctuations, which could have an adverse effect on our profitability; liquidity issues, including fluctuations in the fair value and liquidity of the securities we hold for sale and our ability to raise additional capital, if necessary; external economic and/or market factors, such as changes in monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve, inflation or deflation, changes in the demand for loans, and fluctuations in consumer spending, borrowing and savings habits, which may have an adverse impact on our financial condition; continued or increasing competition from other financial institutions, credit unions, and non-bank financial services companies, many of which are subject to different regulations than we are; challenges arising from unsuccessful attempts to expand into new geographic markets, products, or services; restraints on the ability of Open Bank to pay dividends to us, which could limit our liquidity; increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; a failure in the internal controls we have implemented to address the risks inherent to the business of banking; inaccuracies in our assumptions about future events, which could result in material differences between our financial projections and actual financial performance; changes in our management personnel or our inability to retain motivate and hire qualified management personnel; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems; disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions; an inability to keep pace with the rate of technological advances due to a lack of resources to invest in new technologies; risks related to potential acquisitions; political developments, uncertainties or instability, catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, pandemic diseases (such as the coronavirus) or extreme weather events, any of which may affect services we use or affect our customers, employees or third parties with which we conduct business; incremental costs and obligations associated with operating as a public company; the impact of any claims or legal actions to which we may be subject, including any effect on our reputation; compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities and tax matters, and our ability to maintain licenses required in connection with commercial mortgage origination, sale and servicing operations; changes in federal tax law or policy; the rapidly changing uncertainties related to the Coronavirus pandemic including, but not limited to, the potential adverse effect of the pandemic on the economy, our employees and customers, and our financial performance; the impact of the federal CARES Act and the significant additional lending activities undertaken by the Company in connection with the Small Business Administration’s Paycheck Protection Program enacted thereunder, including risks to the Company with respect to the uncertain application by the Small Business Administration of new borrower and loan eligibility, forgiveness and audit criteria; and our ability the manage the foregoing and other factors set forth in the Company’s public reports. We describe these and other risks that could affect our results in Item 1A. “Risk Factors,” of our latest Annual Report on Form 10-K for the year ended December 31, 2019 and in our other subsequent filings with the Securities and Exchange Commission. The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this report. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this report. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

Consolidated Balance Sheet (unaudited)
(Dollars in thousands)
		As of
		09/30/2020				06/30/2020				% change				09/30/2019				% change
Assets
Cash and cash equivalents		$	87,983			$	112,217				-21.6	%		$	89,107				-1.3	%
Securities available for sale, at fair value			93,482				75,402				24.0	%			52,295				78.8	%
Other investments			10,002				9,987				0.2	%			9,173				9.0	%
Loans held for sale			41,430				8,795				371.1	%			368				11158.2	%
Real Estate Loans			640,281				637,295				0.5	%			594,447				7.7	%
SBA Loans			213,678				195,605				9.2	%			136,232				56.8	%
C & I Loans			91,814				88,375				3.9	%			107,730				-14.8	%
Home Mortgage Loans			125,656				120,597				4.2	%			123,092				2.1	%
Consumer & Other Loans			1,361				1,634				-16.7	%			2,869				-52.6	%
Gross loans, net of unearned income			1,072,790				1,043,506				2.8	%			964,370				11.2	%
Allowance for loan losses			(14,164	)			(12,764	)			11.0	%			(9,640	)			46.9	%
Net loans receivable			1,058,626				1,030,742				2.7	%			954,730				10.9	%
Premises and equipment, net			4,756				4,881				-2.6	%			5,367				-11.4	%
Accrued interest receivable			4,968				4,823				3.0	%			3,140				58.2	%
Servicing assets			7,222				6,972				3.6	%			6,959				3.8	%
Company owned life insurance			10,815				10,748				0.6	%			10,551				2.5	%
Deferred tax assets			3,911				3,535				10.6	%			2,358				65.9	%
Other real estate owned (OREO)			-				-				0.0	%			1,817				-100.0	%
Operating right-of-use assets			7,151				7,517				-4.9	%			8,606				-16.9	%
Other assets			9,475				12,392				-23.5	%			7,463				27.0	%
Total assets		$	1,339,821			$	1,288,011				4.0	%		$	1,151,934				16.3	%
Liabilities and Shareholders' Equity
Noninterest-bearing deposits		$	488,815			$	428,416				14.1	%		$	296,831				64.7	%
Savings			5,382				5,868				-8.3	%			3,316				62.3	%
Money market and others			334,599				293,165				14.1	%			274,698				21.8	%
Time deposits over $250,000			194,630				210,691				-7.6	%			219,547				-11.3	%
Other time deposits			146,738				182,580				-19.6	%			201,601				-27.2	%
Total deposits			1,170,164				1,120,720				4.4	%			995,993				17.5	%
Other borrowings			10,000				10,000				0.0	%			-				100.0	%
Accrued interest payable			1,355				1,964				-31.0	%			2,541				-46.7	%
Operating lease liabilities			8,857				9,282				-4.6	%			10,335				-14.3	%
Other liabilities			7,896				6,909				14.3	%			5,472				44.3	%
Total liabilities			1,198,272				1,148,875				4.3	%			1,014,341				18.1	%
Common stock			79,600				79,925				-0.4	%			87,085				-8.6	%
Additional paid-in capital			8,382				8,218				2.0	%			7,154				17.2	%
Retained earnings			52,590				50,056				5.1	%			43,086				22.1	%
Accumulated other comprehensive income			977				937				4.3	%			268				264.6	%
Total shareholders' equity			141,549				139,136				1.7	%			137,593				2.9	%
Total Liabilities and Shareholders' Equity		$	1,339,821			$	1,288,011				4.0	%		$	1,151,934				16.3	%

Consolidated Statements of Income (unaudited)
(Dollars in thousands, except per share data)		Three Months Ended
		09/30/2020				06/30/2020				% change				09/30/2019				% change
Interest income
Interest and fees on loans		$	12,581			$	12,549				0.3	%		$	14,278				-11.9	%
Interest on securities available for sale			319				281				13.5	%			332				-3.9	%
Other interest income			116				90				28.9	%			502				-76.9	%
Total interest income			13,016				12,920				0.7	%			15,112				-13.9	%
Interest expense
Interest on deposits			1,597				2,272				-29.7	%			3,893				-59.0	%
Total interest expense			1,597				2,272				-29.7	%			3,893				-59.0	%
Net interest income			11,419				10,648				7.2	%			11,219				1.8	%
Provision for loan losses			1,399				1,988				-29.6	%			290				382.4	%
Net interest income after provision for loan losses			10,020				8,660				15.7	%			10,929				-8.3	%
Noninterest income
Service charges on deposits			251				230				9.1	%			391				-35.8	%
Loan servicing fees, net of amortization			583				514				13.4	%			243				139.9	%
Gain on sale of loans			1,813				936				93.7	%			1,714				5.8	%
Other income			374				382				-2.1	%			384				-2.6	%
Total noninterest income			3,021				2,062				46.5	%			2,732				10.6	%
Noninterest expense
Salaries and employee benefits			5,086				4,347				17.0	%			5,349				-4.9	%
Occupancy and equipment			1,266				1,241				2.0	%			1,232				2.8	%
Data processing and communication			424				414				2.4	%			385				10.1	%
Professional fees			287				276				4.0	%			261				10.0	%
FDIC insurance and regulatory assessments			112				117				-4.3	%			(21	)			-633.3	%
Promotion and advertising			81				163				-50.3	%			182				-55.5	%
Directors’ fees			147				223				-34.1	%			228				-35.5	%
Foundation donation and other contributions			360				245				46.9	%			402				-10.4	%
Other expenses			224				308				-27.3	%			406				-44.8	%
Total noninterest expense			7,987				7,334				8.9	%			8,424				-5.2	%
Income before income taxes			5,054				3,388				49.2	%			5,237				-3.5	%
Provision for income taxes			1,459				972				50.1	%			1,237				17.9	%
Net income		$	3,595			$	2,416				48.8	%		$	4,000				-10.1	%
Book value per share		$	9.36			$	9.23				1.4	%		$	8.76				6.8	%
Basic EPS		$	0.23			$	0.16				43.8	%		$	0.25				-8.0	%
Diluted EPS		$	0.23			$	0.16				43.8	%		$	0.24				-4.2	%
Shares of common stock outstanding			15,126,270				15,068,030				0.4	%			15,711,580				-3.7	%
Weighted Average Shares:
- Basic			15,148,833				15,072,423				0.5	%			15,768,654				-3.9	%
- Diluted			15,182,733				15,112,618				0.5	%			16,007,486				-5.2	%

Key Ratios
(Dollars in thousands, except ratios)		Three Months Ended
		9/30/2020				6/30/2020				% change				9/30/2019				% change
Return on average assets (ROA)*			1.11	%			0.77	%			0.34	%			1.41	%			-0.30	%
Return on average equity (ROE) *			10.22	%			6.97	%			3.25	%			11.74	%			-1.52	%
Net interest margin *			3.66	%			3.55	%			0.11	%			4.13	%			-0.47	%
Efficiency ratio			55.31	%			57.70	%			-2.39	%			60.39	%			-5.08	%
Total risk-based capital ratio			14.93	%			15.16	%			-0.23	%			15.36	%			-0.43	%
Tier 1 risk-based capital ratio			13.67	%			13.91	%			-0.24	%			14.35	%			-0.68	%
Common equity tier 1 ratio			13.67	%			13.91	%			-0.24	%			14.35	%			-0.68	%
Leverage ratio			10.85	%			10.98	%			-0.13	%			12.11	%			-1.26	%
* Annualized

Consolidated Statements of Income (unaudited)
(Dollars in thousands, except per share data)		Nine Months Ended
		09/30/2020				09/30/2019				% change
Interest income
Interest and fees on loans		$	38,823			$	41,725				-7.0	%
Interest on securities available for sale			920				1,019				-9.7	%
Other interest income			538				1,333				-59.6	%
Total interest income			40,281				44,077				-8.6	%
Interest expense
Interest on deposits			7,098				10,883				-34.8	%
Total interest expense			7,098				10,883				-34.8	%
Net interest income			33,183				33,194				0.0	%
Provision for loan losses			4,130				691				497.7	%
Net interest income after provision for loan losses			29,053				32,503				-10.6	%
Noninterest income
Service charges on deposits			849				1,252				-32.2	%
Loan servicing fees, net of amortization			1,489				853				74.6	%
Gain on sale of loans			3,904				4,379				-10.8	%
Other income			1,137				2,428				-53.2	%
Total noninterest income			7,379				8,912				-17.2	%
Noninterest expense
Salaries and employee benefits			14,505				15,862				-8.6	%
Occupancy and equipment			3,737				3,441				8.6	%
Data processing and communication			1,247				1,110				12.3	%
Professional fees			836				711				17.6	%
FDIC insurance and regulatory assessments			334				188				77.7	%
Promotion and advertising			405				543				-25.4	%
Directors’ fees			603				680				-11.3	%
Foundation donation and other contributions			935				1,169				-20.0	%
Other expenses			926				1,151				-19.5	%
Total noninterest expense			23,528				24,855				-5.3	%
Income before income taxes			12,904				16,560				-22.1	%
Provision for income taxes			3,594				3,984				-9.8	%
Net income		$	9,310			$	12,576				-26.0	%
Book value per share		$	9.36			$	8.76				6.8	%
Basic EPS		$	0.60			$	0.78				-23.1	%
Diluted EPS		$	0.60			$	0.77				-22.1	%
Shares of common stock outstanding			15,126,270				15,711,580				-3.7	%
Weighted Average Shares:
- Basic			15,235,617				15,756,886				-3.3	%
- Diluted			15,284,190				15,992,015				-4.4	%

Key Ratios
(Dollars in thousands, except ratios)		Nine Months Ended
		9/30/2020				9/30/2019				% change
Return on average assets (ROA)*			1.00	%			1.54	%			-0.54	%
Return on average equity (ROE) *			8.88	%			12.55	%			-3.67	%
Net interest margin *			3.71	%			4.25	%			-0.54	%
Efficiency ratio			58.00	%			59.03	%			-1.03	%
Total risk-based capital ratio			14.93	%			15.36	%			-0.43	%
Tier 1 risk-based capital ratio			13.67	%			14.35	%			-0.68	%
Common equity tier 1 ratio			13.67	%			14.35	%			-0.68	%
Leverage ratio			10.85	%			12.11	%			-1.26	%
* Annualized

Asset Quality
(Dollars in thousands, except ratios)		Three Months Ended
		9/30/2020				6/30/2020				3/31/2020				12/31/2019				9/30/2019
Nonaccrual Loans		$	-			$	689			$	1,203			$	1,215			$	1,234
Loans 90 days or more past due, accruing			-				-				-				-				-
Accruing restructured loans			330				330				330				333				336
Nonperforming loans			330				1,019				1,533				1,548				1,570
Other real estate owned (OREO)			-				-				-				-				1,817
Nonperforming assets			330				1,019				1,533				1,548				3,387
Classified loans			2,102				2,810				3,560				3,464				3,249
Nonperforming assets/total assets			0.02	%			0.08	%			0.13	%			0.13	%			0.29	%
Nonperforming assets/gross loans plus OREO			0.03	%			0.10	%			0.15	%			0.16	%			0.35	%
Nonperforming loans/gross loans			0.03	%			0.10	%			0.15	%			0.16	%			0.16	%
Allowance for loan losses/nonperforming loans			4295	%			1252	%			701	%			649	%			614	%
Allowance for loan losses/nonperforming assets			4295	%			1252	%			701	%			649	%			285	%
Allowance for loan losses/gross loans			1.32	%			1.22	%			1.08	%			1.02	%			1.00	%
Classified loans/gross loans			0.20	%			0.27	%			0.36	%			0.35	%			0.34	%
Net charge-offs(recoveries)		$	-			$	(28	)		$	45			$	(1	)		$	175
Net charge-offs(recoveries) to average gross loans *			0.00	%			-0.01	%			0.02	%			0.00	%			0.07	%
* Annualized
Accruing delinquent loans 30-89 days past due		9/30/2020				6/30/2020				3/31/2020				12/31/2019				9/30/2019
30-59 days		$	600			$	565			$	1,788			$	3,899			$	2,580
60-89 days			-				-				2,277				126				580
Total			600				565				4,065				4,025				3,160

Average Balance Sheet, Interest and Yield/Rate Analysis
(Dollars in thousands)		Three Months Ended
		September 30, 2020																June 30, 2020																	September 30, 2019
		Average Balance					Interest and Fees						Yield/ Rate					Average Balance						Interest and Fees						Yield/ Rate					Average Balance					Interest and Fees						Yield/ Rate
Interest-Earning assets:
Federal funds sold and other investments			$	93,827					$	116						0.49		%		$	100,083					$	90						0.36	%		$	78,216					$	502						2.52	%
Securities available for sale				84,869						319						1.50					60,544						281						1.86				54,472						332						2.44
Total investments				178,696						435						0.97					160,627						371						0.92				132,688						834						2.49
Real estate loans				630,255						7,461						4.71					638,359						7,500						4.73				573,102						7,978						5.52
SBA loans				219,183						2,719						4.94					190,042						2,615						5.53				144,439						3,213						8.83
C & I loans				89,103						847						3.78					93,633						920						3.95				102,311						1,489						5.77
Home Mortgage loans				122,222						1,531						5.01					119,998						1,476						4.92				123,336						1,546						5.01
Consumer & other loans				1,412						23						6.48					2,912						38						5.28				3,239						52						6.39
Loans (1)				1,062,175						12,581						4.72					1,044,944						12,549						4.83				946,427						14,278						5.99
Total interest-earning assets				1,240,871						13,016						4.18					1,205,571						12,920						4.31				1,079,115						15,112						5.56
Noninterest-earning assets				52,145																	49,837																51,680
Total assets			$	1,293,016																$	1,255,408															$	1,130,795
Interest-bearing liabilities:
NOW and savings deposits			$	9,430						2						0.08		%		$	8,614						2						0.10	%		$	5,321						3						0.25	%
Money market deposits				289,512						392						0.54					296,327						481						0.65				275,259						1,295						1.87
Time deposits				364,928						1,203						1.31					426,645						1,789						1.69				420,922						2,595						2.45
Total interest-bearing deposits				663,870						1,597						0.96					731,586						2,272						1.25				701,502						3,893						2.20
Borrowings				10,001						-						-					3,959						-						-				120						-						0.00
Total interest-bearing liabilities				673,871						1,597						0.94					735,545						2,272						1.24				701,622						3,893						2.20
Noninterest-bearing liabilities:
Noninterest-bearing deposits				460,965																	362,779																275,316
Other noninterest-bearing liabilities				17,507																	18,362																17,628
Total noninterest-bearing liabilities				478,472																	381,141																292,944
Shareholders’ equity				140,673																	138,722																136,229
Total liabilities and shareholders’ equity			$	1,293,016																$	1,255,408															$	1,130,795
Net interest income / interest rate spreads									$	11,419						3.24		%								$	10,648						3.07	%								$	11,219						3.36	%
Net interest margin																3.66		%															3.55	%															4.13	%
Cost of deposits & cost of funds:
Total deposits / cost of deposits			$	1,124,835					$	1,597						0.56		%		$	1,094,365					$	2,272						0.83	%		$	976,818					$	3,893						1.58	%
Total funding liabilities / cost of funds			$	1,134,836					$	1,597						0.56		%		$	1,098,324					$	2,272						0.83	%		$	976,938					$	3,893						1.58	%

(1) The average loan balance includes loans held for sale.

Average Balance Sheet, Interest and Yield/Rate Analysis
(Dollars in thousands)		Nine Months Ended
		September 30, 2020												September 30, 2019
		Average Balance				Interest and Fees				Yield/ Rate				Average Balance				Interest and Fees				Yield/ Rate
Interest-Earning assets:
Federal funds sold and other investments		$	90,733			$	538				0.78	%		$	65,911			$	1,332				2.67	%
Securities available for sale			66,752				920				1.84				54,190				1,019				2.51
Total investments			157,485				1,458				1.23				120,101				2,351				2.60
Real estate loans			634,178				23,159				4.88				551,663				22,964				5.57
SBA loans			182,842				8,001				5.85				137,663				9,209				8.94
C & I loans			94,455				3,044				4.30				104,405				4,641				5.94
Home Mortgage loans			121,332				4,521				4.97				125,788				4,770				5.06
Consumer & other loans			2,362				98				5.60				2,864				141				6.58
Loans (1)			1,035,169				38,823				5.01				922,383				41,725				6.05
Total interest-earning assets			1,192,654				40,281				4.51				1,042,484				44,076				5.65
Noninterest-earning assets			50,065												48,215
Total assets		$	1,242,719											$	1,090,699
Interest-bearing liabilities:
NOW and savings deposits		$	8,680				9				0.14	%		$	5,075				10				0.25	%
Money market deposits			291,676				1,826				0.84				269,446				3,751				1.86
Time deposits			407,625				5,263				1.72				396,701				7,122				2.40
Total interest-bearing deposits			707,981				7,098				1.34				671,222				10,883				2.17
Borrowings			4,688				-				0.00				41				-				0.00
Total interest-bearing liabilities			712,669				7,098				1.33				671,263				10,883				2.17
Noninterest-bearing liabilities:
Noninterest-bearing deposits			372,390												271,517
Other noninterest-bearing liabilities			17,929												14,317
Total noninterest-bearing liabilities			390,319												285,834
Shareholders’ equity			139,731												133,602
Total liabilities and shareholders’ equity		$	1,242,719											$	1,090,699
Net interest income / interest rate spreads						$	33,183				3.18	%						$	33,193				3.48	%
Net interest margin											3.71	%											4.25	%
Cost of deposits & cost of funds:
Total deposits / cost of deposits		$	1,080,371			$	7,098				0.88	%		$	942,739			$	10,883				1.54	%
Total funding liabilities / cost of funds		$	1,085,059			$	7,098				0.87	%		$	942,780			$	10,883				1.54	%
(1) The average loan balance includes loans held for sale.

Loan Portfolio Breakdown by Industry
Excluding Home mortgage and consumer loans
(Dollars in thousands)		As of September 30, 2020
Industry		Number of accounts				% of total			Balance				% of total
Real estate lessors			226				11.0	%	$	356,315				35.8	%
- Retail			91				4.4			154,921				15.6
- Industrial			45				2.2			91,728				9.2
- Mixed use			15				0.7			30,444				3.1
- Office			13				0.6			21,120				2.1
- Multifamily			8				0.4			5,682				0.6
- Other			54				2.6			52,420				5.3
Hotel / motel			194				9.4			159,911				16.1
Gas station			213				10.3			142,057				14.3
Wholesale			286				13.9			66,800				6.7
Food services / restaurant			284				13.8			40,461				4.1
Car washes			52				2.5			39,009				3.9
Laundry services			84				4.1			20,547				2.1
Church			23				1.1			14,048				1.4
Educational service			14				0.7			6,504				0.7
Other			684				33.2			149,845				15.1
Total			2,060				100.0	%	$	995,497				100.0	%

Loan Deferment Summary by Industry
As of September 30, 2020
Excluding Home mortgage and consumer loans
(Dollars in thousands)		Number of accounts												Loan balance
Industry		Number of accounts				% of deferment				% of total loans				Balance				% of deferment				% of total loans
Real estate lessors			6				25.0	%			2.7	%		$	7,097				14.5	%			2.0	%
- Retail			4				16.7				4.4				5,600				11.4				3.6
- Industrial			-				0.0				0.0				-				0.0				0.0
- Mixed use			-				0.0				0.0				-				0.0				0.0
- Office			-				0.0				0.0				-				0.0				0.0
- Multifamily			-				0.0				0.0				-				0.0				0.0
- Other			2				8.3				3.7				1,497				3.1				2.9
Hotel / motel			10				41.7				5.2				32,191				65.6				20.1
Gas station			-				0.0				0.0				-				0.0				0.0
Wholesale			-				0.0				0.0				-				0.0				0.0
Food services / restaurant			4				16.7				1.4				4,693				9.6				11.6
Car washes			2				8.3				3.8				3,954				8.1				10.1
Laundry services			1				4.2				1.2				329				0.7				1.6
Church			1				4.2				4.3				786				1.6				5.6
Educational service			-				0.0				0.0				-				0.0				0.0
Other			-				0.0				0.0				-				0.0				0.0
Total			24				100.0	%			1.2	%		$	49,050				100.0	%			4.9	%
* Number of accounts and balance information were as of September 30, 2020.

Loan Deferment Summary by Loan Type
As of September 30, 2020
(Dollars in thousands)		Number of accounts												Loan balance
Loan Type		Number of accounts				% of deferment				% of total loans				Balance				% of deferment				% of total loans
Real estate loans			18				42.9	%			5.1	%		$	43,806				77.0	%			6.8	%
C & I loans			6				14.3				3.0				5,244				9.2				5.7
Loans, excluding home mortgage and consumer loans			24				57.1				1.2				49,050				86.2				4.9
Home Mortgage loans			18				42.9				5.7				7,862				13.8				6.3
Total			42				100.0	%			1.8	%		$	56,912				100.0	%			5.1	%
* Number of accounts and balance information were as of September 30, 2020.

Loan Deferment Status Change by Loan Type
		Total deferments								Payment resumed
		under the CARES Act								or paid off								Remaining deferments
(Dollars in thousands)		through September 30, 2020								through September 30, 2020								as of September 30, 2020
Loan Type		Number of accounts				Balance				Number of accounts				Balance				Number of accounts				Balance
Loans, excluding home mortgage and consumer loans			103				199,728				79				150,677				24				49,050
Home Mortgage loans			69				30,205				51				22,344				18				7,862
Total			172			$	229,933				130			$	173,021				42			$	56,912

 

View source version on businesswire.com: https://www.businesswire.com/news/home/20201022006060/en/