0001716697-18-000003.txt : 20180612 0001716697-18-000003.hdr.sgml : 20180612 20180611193156 ACCESSION NUMBER: 0001716697-18-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 86 CONFORMED PERIOD OF REPORT: 20180331 FILED AS OF DATE: 20180612 DATE AS OF CHANGE: 20180611 FILER: COMPANY DATA: COMPANY CONFORMED NAME: First Choice Bancorp CENTRAL INDEX KEY: 0001716697 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 822711227 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38476 FILM NUMBER: 18893250 BUSINESS ADDRESS: STREET 1: 17785 CENTER COURT DRIVE N., SUITE 750 CITY: CERRITOS STATE: CA ZIP: 90703 BUSINESS PHONE: 562-345-9092 MAIL ADDRESS: STREET 1: 17785 CENTER COURT DRIVE N., SUITE 750 CITY: CERRITOS STATE: CA ZIP: 90703 10-Q 1 fcbp-033118x10xq.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

fcbq12018form10qv2201_image1.gif
(Exact Name of Registrant as Specified in its Charter)
     
 
California
 
 
 
82-2711227
(State or Other Jurisdiction of
 
 
 
(I.R.S. Employer
Incorporation or Organization)
 
 
 
Identification Number)
 
 
 
 
 
17785 Center Court Drive N, Suite 750
Cerritos, CA
 
 
 
90703
(Address of principal executive offices)
 
 
 
(Zip Code)

562-345-9092
(Registrants telephone number, including area code)
  
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).             ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer [  ]
Accelerated Filer: [  ]
Non-accelerated Filer: [X]
(Do not check if a
smaller reporting company)
Smaller Reporting Company: [  ]
 
Emerging growth company [X]

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. x

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

There were 7,254,438 shares of common stock outstanding as of May 31, 2018.


FIRST CHOICE BANCORP AND SUBSIDIARIES
FORM 10-Q
March 31, 2018

TABLE OF CONTENTS




 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



First Choice Bancorp and Subsidiary
Condensed Consolidated Balance Sheets 
(unaudited)


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
 
March 31, 2018 (unaudited)
 
December 31, 2017
 
(in thousands, except share data)
ASSETS
 
 
 
Cash and due from banks
$
6,840

 
$
5,405

Interest-bearing deposits at other banks
93,225

 
97,727

Total cash and cash equivalents
100,065

 
103,132

 
 
 
 
Securities available-for-sale, at fair value
31,045

 
35,002

Securities held-to-maturity, at cost
5,292

 
5,300

Loans held for sale, at lower of cost or fair value
11,525

 
10,599

Gross loans
793,582

 
745,887

Discounts and unearned fees, net
(4,152
)
 
(4,174
)
Allowance for loan losses
(10,010
)
 
(10,497
)
Loans receivable, net
779,420

 
731,216

Federal Home Loan Bank, at cost
3,640

 
3,640

Equity securities, at fair value
2,508

 

Accrued interest receivable
3,358

 
3,108

Premises and equipment
1,055

 
1,035

Servicing assets, at lower of carrying value or fair value
2,508

 
2,618

Other assets
7,260

 
8,145

 
 
 
 
TOTAL ASSETS
$
947,676


$
903,795

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits:
 
 
 
Noninterest-bearing demand
$
197,503

 
$
235,584

Money market, interest checking and savings
352,592

 
372,209

Time deposits
208,706

 
164,886

Total deposits
758,801

 
772,679

Federal Home Loan Bank borrowings
57,000

 
20,000

Federal funds purchased
18,000

 

Senior secured notes
2,550

 
350

Accrued interest payable
165

 
114

Other liabilities
4,679

 
4,958

Total liabilities
841,195

 
798,101

 
 
 
 
Commitments and contingencies - Notes 8 and 10

 

 
 
 
 
Shareholders’ equity:
 
 
 
Preferred stock 100,000,000 shares authorized, none outstanding

 

Common stock no par value; 100,000,000 shares authorized; issued and outstanding: 7,251,584 at March 31, 2018 and 7,260,119 at December 31, 2017
88,442

 
87,837

Additional paid-in capital
1,492

 
1,940

Retained earnings
17,363

 
16,459

Accumulated other comprehensive loss - net
 
 
 
Unrealized loss on available-for-sale securities, net of taxes of $342 at March 31, 2018 and $228 at December 31, 2017
(816
)
 
(542
)
Total shareholders’ equity
106,481


105,694

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
947,676


$
903,795

See accompanying notes to condensed consolidated financial statements.

3

First Choice Bancorp and Subsidiary
Condensed Consolidated Statements of Income
(unaudited)

 
For the Three Months Ended
March 31,
 
2018
 
2017 (restated(1))
 
(in thousands, except share data)
INTEREST INCOME
 
 
 
Interest and fees on loans
$
10,621

 
$
8,474

Interest on investment securities
239

 
255

Dividends on FHLB and other stock
69

 
89

Other interest income
260

 
246

Total interest income
11,189

 
9,064

 
 
 
 
INTEREST EXPENSE
 
 
 
Interest on savings, interest checking and money market accounts
819

 
1,026

Interest on time deposits
616

 
408

Interest on borrowings
202

 
2

Total interest expense
1,637

 
1,436

Net interest income
9,552

 
7,628

Provision for loan losses
200

 

Net interest income after provision for loan losses
9,352

 
7,628

 
 
 
 
NONINTEREST INCOME
 
 
 
Gain on sale of loans
247

 
1,190

Service charges and fees on deposit accounts
215

 
66

Net servicing fees
153

 
171

Other (loss) income
(52
)
 
44

Total noninterest income
563

 
1,471

 
 
 
 
NONINTEREST EXPENSE
 
 
 
Salaries and employee benefits
4,116

 
3,645

Occupancy expenses
348

 
301

Professional fees
304

 
79

Data processing
421

 
330

Equipment expenses
172

 
180

Office expenses
192

 
161

Deposit insurance and regulatory assessments
111

 
107

Loan related expenses
84

 
139

Customer service expenses
140

 
144

Merger-related and public company registration expenses
374

 

Provision for credit losses - off-balance sheet
53

 
72

Other expenses
362

 
349

Total noninterest expense
6,677

 
5,507

Income before taxes
3,238

 
3,592

Income taxes
859

 
1,466

Net income
$
2,379


$
2,126

Net income per share:
 
 
 
Basic
$
0.33

 
$
0.30

Diluted
$
0.33

 
$
0.30

Weighted-average common shares outstanding
 
 
 
Basic
7,160,938

 
7,081,366

Diluted
7,200,057

 
7,114,488

(1)
Certain amounts have been restated to reflect adjustments related to the correction of an error (see Note 2 to the Consolidated Financial Statements for additional information).
See accompanying notes to condensed consolidated financial statements.

4

First Choice Bancorp and Subsidiary
Condensed Consolidated Statements of Shareholders’ Equity
(unaudited)

 
Preferred Stock
 
Common Stock
 
 
 
 
 
Accumulated
 
 
 
Number of
Shares
 
Amount
 
Number of
Shares
 
Amount
 
AdditionalPaid-in Capital
 
Retained Earnings
 
Other Comprehensive
Income (Loss)
 
Total
 
(in thousands, except share data)
Balance at December 31, 2017

 
$

 
7,260,119

 
$
87,837

 
$
1,940

 
$
16,459

 
$
(542
)
 
$
105,694

Cumulative adjustment – adoption of ASU No. 2016-01 (1)

 

 

 

 

 
(24
)
 
24

 

Net income

 

 

 

 

 
2,379

 

 
2,379

Stock-based compensation

 

 

 

 
458

 

 

 
458

Cash dividends ($0.20 per share)

 

 

 

 

 
(1,451
)
 

 
(1,451
)
Issuance of restricted shares, net

 

 
3,721

 

 

 

 

 

Vesting of restricted shares

 

 

 
605

 
(605
)
 

 

 

Repurchase of shares

 

 
(12,256
)
 

 
(301
)
 

 

 
(301
)
Other comprehensive income, net of taxes

 

 

 

 

 

 
(298
)
 
(298
)
Balance at March 31, 2018

 
$

 
7,251,584

 
$
88,442

 
$
1,492

 
$
17,363

 
$
(816
)
 
$
106,481

 

(1) Impact due to adoption on January 1, 2018 of ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities"

See accompanying notes to condensed consolidated financial statements.

5

First Choice Bancorp and Subsidiary
Condensed Consolidated Statements of Cash Flows
(unaudited)

 
For the Three Months Ended March 31,
 
2018
 
2017
 
(in thousands)
OPERATING ACTIVITIES
 
 
 
Net income
$
2,379

 
$
2,126

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization
99

 
141

Amortization of premiums of investment securities
54

 
78

Amortization of servicing asset
165

 
98

Provision for loan losses
200

 

Provision for losses - unfunded commitments
53

 
72

Gain on sale of loans
(247
)
 
(1,190
)
Loans originated for sale
(3,709
)
 
(12,433
)
Proceeds from loans originated for sale
3,021

 
14,688

Amortization of premiums and deferred loan fees, net
28

 
409

Change in fair value of equity securities
66

 

Stock-based compensation
458

 
324

Decrease in other items, net
465

 
516

Net cash provided by operating activities
3,032

 
4,829

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Proceeds from maturities and paydown of securities available-for-sale
936

 
1,112

Proceeds from maturities and paydown of securities held-to-maturity
10

 
11

Purchase of securities available-for-sale

 
(4,966
)
Net increase in loans
(48,479
)
 
(40,784
)
Purchase of equity investment
(17
)
 

Purchases of premises and equipment
(119
)
 
(80
)
Net cash used in investing activities
(47,669
)
 
(44,707
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Net (decrease) increase in deposits
(13,878
)
 
10,875

Net increase in borrowings from Federal Home Loan Bank
37,000

 
40,000

Net increase in senior secured notes
2,200

 

Net increase in federal funds purchased
18,000

 
 
Cash dividends paid
(1,451
)
 
(1,439
)
Repurchase of shares
(301
)
 
(41
)
Proceeds from exercise of stock options

 
213

Net cash provided by financing activities
41,570

 
49,608

(Decrease) increase in cash and cash equivalents
(3,067
)

9,730

Cash and cash equivalents, beginning of period
103,132

 
110,032

Cash and cash equivalents, end of period
$
100,065


$
119,762

 
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid during the period for:
 
 
 
Interest paid
$
1,585

 
$
1,453

Noncash investing and financing activities:
 
 
 
Servicing asset recognized
$
55

 
$
293

Transfer of securities available-for-sale to equity securities
$
2,540

 
$



See accompanying notes to condensed consolidated financial statements.

6


First Choice Bancorp and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Operations
 
First Choice Bancorp, also known as First Choice or the Holding Company, a California corporation, was organized on September 1, 2017 to become the holding company for First Choice Bank (the "Bank"), collectively with First Choice, the Company. In December 2017, the Bank received requisite shareholder and regulatory approval necessary for the reorganization of First Choice Bank into the Holding Company form of ownership pursuant to which First Choice Bank became a wholly-owned subsidiary of First Choice. The reorganization was completed as of the close of business on December 21, 2017.
 
The Bank was incorporated under the laws of the State of California in March 2005, and commenced banking operations in August 2005 and has been organized as a single operating segment operating with five full-service branches in Cerritos, Rowland Heights, Alhambra, Anaheim and Carlsbad, California. The Bank’s primary source of revenue is providing loans to customers, who are predominately small and middle-market businesses and individuals within its principal market area of Los Angeles County, Orange County and San Diego County.

Basis of Presentation
 
The accompanying condensed consolidated financial statements include the accounts of First Choice, and its wholly-owned subsidiary, First Choice Bank, a California state-chartered bank and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. These interim period condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of and for the years ended December 31, 2017 and 2016, which are included in the Company’s Form S-4, dated April 25, 2018 (the “Form S-4”), with the United States Securities and Exchange Commission (“SEC”).

All significant intercompany balances and transactions have been eliminated in consolidation.

Certain reclassifications have been made to the December 31, 2017 condensed consolidated balance sheet to conform to the presentation as of March 31, 2018. These reclassifications, which consisted of a $2.9 million increase to "Gross loans" and "Discounts and unearned fees, net", had no impact on the Company’s previously reported "Loans receivable, net".
 
Accounting Policies

Our accounting policies are described in Note 1. Summary of Significant Accounting Policies of the Company’s audited consolidated financial statements as of and for the years ended December 31, 2017 and 2016 included in the Form S-4 filed with the SEC.

Use of Estimates in the Preparation of Consolidated Financial Statements
 
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for loan losses and fair value of financial instruments are particularly subject to change in the near term.
 

7


Accounting Standards Adopted in 2018

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (Topic606)(“ASU 2014-09”). ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2015-14, Revenue from Contracts with Customers (Topic 606) (“ASU 2015-14”) was issued in August 2015 which defers adoption to annual reporting periods beginning after December 15, 2017. The adoption of ASU 2014-09 on January 1, 2018 did not have a material impact on the Company’s consolidated financial statements. The timing of the Company’s revenue recognition did not materially change. The Company’s largest portions of revenue, interest and fees on loans and gain on sales of loans, are specifically excluded from the scope of the guidance, and the Company currently recognizes the majority of the remaining revenue sources in a manner that management believes is consistent with the new guidance. Because of this, management believes that revenue recognized under the new guidance will generally approximate revenue recognized under current GAAP. See Note 16 - Revenue Recognition.
 
In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This guidance changes how entities account for equity investments that do not result in consolidation and are not accounted for under the equity method of accounting. Entities will be required to measure these investments at fair value at the end of each reporting period and recognize changes in fair value in net income. A practicability exception will be available for equity investments that do not have readily determinable fair values; however, the exception requires the Company to adjust the carrying amount for impairment and observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This guidance also changes certain disclosure requirements and other aspects of current US GAAP. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within the fiscal year. Early adoption is permitted for only one of the six amendments. In addition, this update also changes the presentation and disclosure requirements for financial instruments, including a requirement that public business entities us the exit price when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes. The Company measures the fair value of financial instruments reported at amortized cost in the balance sheet using the exit price notion (refer to Note 15 - Fair Value of Financial Instruments for further discussion). The Company has evaluated its applicable equity investments and determined that other bank stocks qualify for the measurement exception, which allows those investments to be measured at cost less any impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Any impairment will be recorded prospectively through earnings, with related disclosures to be made. Upon adoption on January 1, 2018, the Company recognized a net $24 thousand reclassification from accumulated other comprehensive income to retained earnings relating to equity securities with a readily determinable fair value.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”). This guidance clarifies and provides guidance on several cash receipt and cash payment classification issues, including debt prepayment and extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The amendments in this guidance are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance on January 1, 2018 did not have a significant impact on the Company’s consolidated financial statements.
 
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) (“ASU 2016-18”). This guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this guidance are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance on January 1, 2018 did not have a significant impact on the Company’s consolidated financial statements.


8


In March 2018, the FASB issued ASU 2018-4, Investments-Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273 (ASU 2018-04) which incorporate into the Accounting Standards Codification recent SEC guidance which was issued in order to make the relevant interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The amendments were effective upon issuance. The adoption of these amendments did not have a material effect on the Company's consolidated financial statements.
 
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (ASU 2018-05). The amendments incorporate into the Accounting Standards Codification recent SEC guidance related to the income tax accounting implications of the Tax Cuts and Jobs Act. The amendments were effective upon issuance. The adoption of these amendments did not have a material effect on the Company's consolidated financial statements.

In May 2018, FASB issued ASU 2018-06, Codification Improvements to Topic 942, Depository and Lending-Income Taxes. The amendments in this ASU supersede the guidance within Subtopic 942-741 that has been rescinded by the OCC and no longer relevant. A cross-reference between Subtopic 740-30, Income Taxes-Other Considerations or Special Areas, and Subtopic 942-740 is being added to the remaining guidance in Subtopic 740-30 to improve the usefulness of the codification. The amendments in this update are effective upon issuance, as no accounting requirements are affected. The adoption of these amendments did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Guidance Not Yet Effective
  
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). The new guidance establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. Entities will be required to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within the fiscal year. The Company is currently evaluating the impact of the adoption of ASU 2016-02 to determine the potential impact it will have on its consolidated financial statements. The Company’s assets and liabilities will increase based on the present value of the remaining lease payments for leases in place at the adoption date; however, this is not expected to be material to the Company’s consolidated financial statements.
 
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) (“ASU 2016-13”). This guidance is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this guidance replace the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to credit loss estimates. This ASU will be effective for fiscal years beginning after December 15, 2019. Early adoption is available as of the fiscal year beginning after December 15, 2018. The Company is evaluating the provisions of the guidance, and will closely monitor developments and additional guidance to determine the potential impact on the Company’s consolidated financial statements. Management is in the process of identifying the methodologies and the additional data requirements necessary to implement the guidance and has engaged an existing third-party service provider to assist in implementation.

In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments provide targeted improvements to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Specifically, the amendments include clarifications related to: measurement elections, transition requirements, and adjustments associated with equity securities without readily determinable fair values; fair value measurement requirements for forward contracts and purchased options on equity securities; presentation requirements for hybrid financial liabilities for which the fair value option has been elected; and measurement requirements for liabilities denominated in a foreign currency for which the fair value option has been elected. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-03 to have a material impact on its consolidated financial statements.
 


9


NOTE 2.    RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
 
On February 5, 2018, the Company announced that the Audit Committee of the Board of Directors of the Company, after consultation with management and its independent registered accounting firm, determined that the Company’s consolidated financial statements for the fiscal year ended December 31, 2016, and for each of the first three quarters of 2017, were not in compliance with generally accepted accounting principles and would be restated.
 
The decision to restate these consolidated financial statements was based on the Company’s conclusion that it had been overly conservative in its earnings calculations, primarily as a result of the complex accounting treatment for the Company’s equity compensation plan. In addition, the Company had provided accruals for expenses in years 2014, 2015 and 2016 in anticipation of incurring certain expenses, which expenses, for a number of different reasons, were never incurred. The result was that the Company had over-accrued for expenses. The net after-tax result of the restatement was that the Company earned approximately $1.06 million more in income after taxes than was reported in the consolidated financial statements for the years ended December 31, 2014 through 2016. In each of the quarters ended March 31, 2017, June 30, 2017 and September 30, 2017, the Company had incorrectly accrued for certain expenses resulting in $156 thousand less in income after taxes for the nine months ended September 30, 2017. The restatement for the years ended 2014 through 2016 and the nine months ended September 30, 2017 are reflected in the Company's audited consolidated financial statements as of and for the years ended December 31, 2017 and 2016, which are included in the Company's Form S-4, dated April 25, 2018, filed with the United States Securities and Exchange Commission.

The net after-tax impact on net income for the three months ended March 31, 2017 was a reduction of $8 thousand. The primary components of the impact on noninterest expense were an $80 thousand decrease in professional fees, offset by a $44 thousand increase in customer service expense and a $26 thousand increase in deposit insurance and regulatory assessments. As of March 31, 2017, the restatement resulted in an increase in other assets and total assets of $733 thousand, an increase in other liabilities and total liabilities of $741 thousand and an $8 thousand decrease in retained earnings and total equity.
 
NOTE 3.    BUSINESS COMBINATION

On February 26, 2018, the Company announced that it entered into an Agreement and Plan of Reorganization and Merger, dated February 23, 2018, by which Pacific Commerce Bancorp will be merged with and into First Choice Bancorp; and Pacific Commerce Bancorp’s bank subsidiary, Pacific Commerce Bank, will be merged with and into First Choice Bancorp’s bank subsidiary, First Choice Bank (collectively, the “Merger”). Under the terms of the merger agreement, each shareholder will receive 0.46531 shares (referred to as the exchange ratio) of First Choice Bancorp for each outstanding share of Pacific Commerce Bancorp common stock. The Merger is an all stock transaction valued at approximately $119.0 million, or $12.38 per share, based on a closing price of $26.60 for First Choice’s common stock as of April 30, 2018. The merger agreement is subject to satisfaction of customary closing conditions, including regulatory approvals and approval by both the shareholders of the Company and Pacific Commerce Bancorp. Pacific Commerce Bancorp’s and the Company’s shareholder meetings are scheduled for June 15th, 2018 and June 19th, 2018, respectively. The Company expects the transaction to close early in the third quarter of 2018. Pacific Commerce Bancorp is headquartered in Los Angeles, California, with $566.0 million in total assets, $422.3 million in gross loans and $492.6 million in total deposits as of March 31, 2018. Pacific Commerce Bancorp has six full-service branches in Los Angeles and San Diego Counties, including its operating division, ProAmérica Bank, in Downtown Los Angeles. The transaction will increase First Choice’s total assets to approximately $1.6 billion on a pro forma basis as of March 31, 2018. At March 31, 2018, the Company's interest checking deposits included a $5.0 million balance from Pacific Commerce Bancorp.

On May 10, 2018, the Company was advised by the Federal Deposit Insurance Corporation (the “FDIC”) that the Merger was approved, subject to the completion of certain conditions in the approval order. In addition, the Board of Governors of the Federal Reserve System (the “Board”) has advised the Company that, subject to FDIC approval, the Board has waived the requirement for a separate application. On May 25, 2018, the Commissioner of the California Department of Business Oversight ("CDBO") approved the Merger. All bank regulatory approvals and waivers required in connection with the Merger have now been obtained. See Note 17 - Subsequent Events.


10


NOTE 4.    INVESTMENT SECURITIES
 
Investment securities have been classified in the condensed consolidated balance sheets according to management’s intent. The carrying amount of securities held-to-maturity and securities available-for-sale and their approximate fair values at March 31, 2018 and December 31, 2017 were as follows:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
March 31, 2018
(in thousands)
Securities available-for-sale:
 
 
 
 
 
 
 
Mortgage-backed securities
$
8,348

 
$

 
$
(358
)
 
$
7,990

Collateralized mortgage obligations
13,365

 
27

 
(387
)
 
13,005

SBA pools
10,426

 

 
(376
)
 
10,050

 
$
32,139

 
$
27

 
$
(1,121
)
 
$
31,045

 
 
 
 
 
 
 
 
Securities held-to-maturity:
 
 
 
 
 
 
 
U.S. Government and agency securities
$
3,276

 
$

 
$
(78
)
 
$
3,198

Mortgage-backed securities
2,016

 

 
(95
)
 
1,921

 
$
5,292


$


$
(173
)

$
5,119

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
Mortgage-backed securities
$
8,698

 
$
4

 
$
(206
)
 
$
8,496

Collateralized mortgage obligations
13,872

 
40

 
(253
)
 
13,659

SBA pools
10,559

 

 
(254
)
 
10,305

Mutual fund investment
2,577

 

 
(35
)
 
2,542

 
$
35,706


$
44


$
(748
)

$
35,002

 
 
 
 
 
 
 
 
Securities held-to-maturity:
 
 
 
 
 
 
 
U.S. Government and agency securities
$
3,273

 
$

 
$
(18
)
 
$
3,255

Mortgage-backed securities
2,027

 

 
(53
)
 
1,974

 
$
5,300


$


$
(71
)

$
5,229


The amortized cost and estimated fair value of all investment securities held-to-maturity and available-for-sale at March 31, 2018, by contractual maturities are shown below. Contractual maturities may differ from expected maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Held to Maturity
Available for Sale
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
(in thousands)
Due in one year or less
$

 
$

 
$

 
$

Due after one year through five years

 

 

 

Due after five years through ten years
3,276

 
3,198

 

 

Due after ten years (1)
2,016

 
1,921

 
32,139

 
31,045

 
$
5,292


$
5,119


$
32,139


$
31,045

(1)
 Mortgage-backed securities, collateralized mortgage obligations and SBA pools do not have a single stated maturity date and therefore have been included in the "Due after ten years" category.


11


There were no sales of any investment securities available-for-sale or held-to-maturity during the three months ended March 31, 2018 and 2017. There were no maturities or calls of investment securities during the three months ended March 31, 2018 and 2017.

At March 31, 2018 securities held-to-maturity with a carrying amount of $5.3 million were pledged to the Federal Reserve Bank as discussed in Note 8 – Borrowing Arrangements.
 
As of March 31, 2018 and December 31, 2017, unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows:
 
Less Than Twelve Months
 
Over Twelve Months
 
Total
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
March 31, 2018
(in thousands)
Securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
(4
)
 
$
737

 
$
(354
)
 
$
7,199

 
$
(358
)
 
$
7,936

Collateralized mortgage obligations
(125
)
 
4,114

 
(262
)
 
7,567

 
(387
)
 
11,681

SBA pools
(87
)
 
3,735

 
(289
)
 
6,315

 
(376
)
 
10,050

 
$
(216
)

$
8,586


$
(905
)

$
21,081

 
$
(1,121
)
 
$
29,667

 
 
 
 
 
 
 
 
 
 
 
 
Securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and agency securities
$

 
$

 
$
(78
)
 
$
3,198

 
$
(78
)
 
$
3,198

Mortgage-backed securities
(23
)
 
926

 
(72
)
 
995

 
(95
)
 
1,921

 
$
(23
)

$
926


$
(150
)

$
4,193

 
$
(173
)
 
$
5,119

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
(1
)
 
$
59

 
$
(205
)
 
$
7,639

 
$
(206
)
 
$
7,698

Collateralized mortgage obligations
(74
)
 
4,329

 
(179
)
 
7,946

 
(253
)
 
12,275

SBA pools
(20
)
 
3,858

 
(234
)
 
6,447

 
(254
)
 
10,305

Mutual fund investment

 

 
(35
)
 
2,542

 
(35
)
 
2,542

 
$
(95
)

$
8,246


$
(653
)

$
24,574


$
(748
)

$
32,820

 
 
 
 
 
 
 
 
 
 
 
 
Securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and agency securities
$

 
$

 
$
(18
)
 
$
3,255

 
$
(18
)
 
$
3,255

Mortgage-backed securities
(6
)
 
949

 
(47
)
 
1,025

 
(53
)
 
1,974

 
$
(6
)

$
949


$
(65
)

$
4,280


$
(71
)

$
5,229


As of March 31, 2018, the Company had 25 investment securities where estimated fair value had decreased 3.6% from amortized cost. Unrealized losses on debt securities have not been recognized into income because the issuers’ bonds are above investment grade, management does not intend to sell and it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the bonds approach maturity.
 
As of March 31, 2018, the Company had one mutual fund investment consisting of high quality debt securities and other debt instruments supporting affordable housing and community development in the United States. There is a readily determinable market value available for this equity investment and therefore with the adoption of ASU No. 2016-01 on January 1, 2018, changes in the fair value of this equity security are recognized in earnings. Upon adoption of ASU 2016-01, the Company recorded a transition adjustment to reclassify $24 thousand in net unrealized losses from accumulated other comprehensive income ("AOCI") to retained earnings. ASU 2016-01 also eliminated the requirement to classify equity

12


investments into different categories such as "available-for-sale." The adoption of ASU 2016-01 may result in more earnings volatility as changes in fair value of certain equity investments will now be recorded in the statement of earnings as opposed to AOCI. The fair value of equity securities was $2.5 million at March 31, 2018. During the three months ended March 31, 2018, the Company recognized a gross loss of $51 thousand related to negative changes in fair value during the period.

At March 31, 2018, the Company held investment securities issued by Fannie Mae whose market value represented approximately 15.2% of shareholders’ equity. No other issuers represented 10% or more of the Company’s shareholders’ equity at March 31, 2018.

Federal Home Loan Bank Stock and Other Bank Stocks
 
In connection with outstanding Federal Home Loan Bank ("FHLB") advances, the Company owned FHLB stock carried at cost of $3.6 million at both March 31, 2018 and December 31, 2017. At March 31, 2018 and December 31, 2017, the Bank was required to own FHLB stock at least equal to the greater of 1% of FHLB membership asset value or 2.7% of outstanding FHLB advances. During the three months ended March 31, 2018, there were no required purchases of FHLB stock. The Company evaluated the carrying value of its FHLB stock investment at March 31, 2018, and determined that it was not impaired. This evaluation considered the long-term nature of the investment, the current financial and liquidity position of the FHLB, repurchase activity of excess stock by the FHLB at its carrying value, the return on the investment from recurring dividends, and the Company’s intent and ability to hold this investment for a period of time sufficient to recover our recorded investment.
 
The Company also has restricted securities in the form of capital stock invested in two different banker’s bank stocks ("other bank stock"). Capital stock invested in these entities totaled $278 thousand and $293 thousand at March 31, 2018 and December 31, 2017, respectively. With the adoption of ASU No. 2016-01 on January 1, 2018, equity investments (except those accounted for under the equity method of accounting or that result in the consolidation of the investee) are recorded at fair value, with changes in the fair value recognized in earnings. There is no readily determinable fair value for the other bank stock; therefore, these restricted securities are measured under the practicability exception which requires the Company to adjust the carrying amount for impairment and observable price changes in orderly transactions for the identical or a similar investment of the same issuer. During the three months ended March 31, 2018, the Company recognized a $15 thousand loss related to changes in the fair value of these equity securities.
 
NOTE 5. LOANS
 
The Company’s loan portfolio consists primarily of loans to borrowers within Los Angeles County, Orange County and San Diego County of California. Although the Company seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses, such as hospitality businesses, are among the principal industries in the Company’s market area and, as a result, the Company’s loan and collateral portfolios are, to some degree, concentrated in those industries.
 
The Company also originates SBA loans either for sale to institutional investors or for retention in the loan portfolio. Loans identified as held for sale are carried at lower of carrying value or market value and separately designated as such in the condensed consolidated financial statements. A portion of the Company’s revenues are from origination of loans guaranteed by the SBA under its various programs and sale of the guaranteed portions of the loans. Funding for these loans depends on annual appropriations by the U.S. Congress.
 
The Company has pledged loans to secure lines of credit with the FHLB and as collateral for letters of credit issued by FHLB to guarantee $40.0 million in state public deposits as discussed in Note 8 – Borrowing Arrangements and Note 10 – Commitments.
 

13


The composition of the Company’s loan portfolio at March 31, 2018 and December 31, 2017 was as follows:
 
March 31, 2018
 
December 31, 2017
 
(in thousands)
Construction and land development
$
113,481

 
$
115,427

Real estate:
 
 
 
     Residential
57,234

 
62,719

     Commercial real estate - owner occupied
63,832

 
53,106

     Commercial real estate - non-owner occupied
265,961

 
252,114

Commercial and industrial (1)
200,339

 
169,184

SBA loans
91,887

 
92,509

Consumer
848

 
828

Gross loans
$
793,582


$
745,887

Net deferred fees
(469
)
 
(400
)
Net discounts
(3,683
)
 
(3,774
)
Allowance for loan losses
(10,010
)
 
(10,497
)
Loans receivable, net
$
779,420

 
$
731,216


(1)
Includes loans secured by the cash surrender values (CSV) of life insurance policies totaling $35.0 million and $32.8 million at the March 31, 2018 and December 31, 2017, respectively. At March 31, 2018 and December 31, 2017, the ratio of aggregate unpaid principal balances to the aggregate CSVs for this portfolio totaled 94.0% and 88.1%, respectively.

A summary of the changes in the allowance for loan losses for the three months ended March 31, 2018 and 2017 follows:
 
Three Months Ended March 31,
 
2018
 
2017
 
(in thousands)
Balance, beginning of period
$
10,497

 
$
11,599

Provision for loan losses
200

 

Charge-offs
(754
)
 
(76
)
Recoveries
67

 

Net charge-offs
(687
)
 
(76
)
Balance, end of period
$
10,010


$
11,523

 
The following table presents the activity in the allowance for loan losses for three months ended March 31, 2018 and 2017 by portfolio segment:

14


 
Three Months Ended March 31, 2018
 
 
 
Real Estate
 
 
 
 
 
 
 
 
Construction and Land Development
 
Residential
 
Commercial - Owner Occupied
 
Commercial - Non-owner Occupied
 
Commercial and Industrial
 
SBA Loans
 
Consumer
 
Total
 
(in thousands)
Balance, December 31, 2017
$
1,597

 
$
375

 
$
655

 
$
3,136

 
$
3,232

 
$
1,494

 
$
8

 
$
10,497

Provision for (reversal of) loan losses
(390
)
 
79

 
(18
)
 
(387
)
 
904

 
10

 
2

 
200

Charge-offs

 

 

 

 
(514
)
 
(240
)
 

 
(754
)
Recoveries

 

 

 

 
67

 

 

 
67

Net charge-offs








(447
)

(240
)



(687
)
Balance, March 31, 2018
$
1,207


$
454


$
637


$
2,749


$
3,689


$
1,264


$
10


$
10,010

Reserves:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Specific
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

General
1,207

 
454

 
637

 
2,749

 
3,689

 
1,264

 
10

 
10,010

 
$
1,207


$
454


$
637


$
2,749


$
3,689


$
1,264


$
10


$
10,010

Loans evaluated for impairment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually
$

 
$

 
$

 
$

 
$
111

 
$
950

 
$

 
$
1,061

Collectively
113,481

 
57,234

 
63,832

 
265,961

 
200,228

 
90,937

 
848

 
792,521

 
$
113,481


$
57,234


$
63,832


$
265,961


$
200,339


$
91,887


$
848


$
793,582


 
Three Months Ended March 31, 2017
 
 
 
Real Estate
 
 
 
 
 
 
 
 
Construction and Land Development
 
Residential
 
Commercial - Owner Occupied
 
Commercial - Non-owner Occupied
 
Commercial and Industrial
 
SBA Loans
 
Consumer
 
Total
 
(in thousands)
Balance, December 31, 2016
$
1,827

 
$
924

 
$
618

 
$
2,501

 
$
3,541

 
$
2,086

 
$
102

 
$
11,599

Provision for (reversal of) loan losses
(207
)
 
(161
)
 
(56
)
 
332

 
113

 
(21
)
 

 

Charge-offs

 

 

 

 

 
(76
)
 

 
(76
)
Recoveries

 

 

 

 

 

 

 

Net charge-offs

 

 

 

 

 
(76
)
 

 
(76
)
Balance, March 31, 2017
$
1,620

 
$
763

 
$
562

 
$
2,833

 
$
3,654

 
$
1,989

 
$
102

 
$
11,523

 
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, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:
 
Pass - Loans classified as pass represent assets with a level of credit quality which contain no well-defined deficiency or weakness.
 
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 institution’s credit position at some future date.
 
Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
 
The risk category of gross loans by class of loans was as follows as of March 31, 2018 and December 31, 2017:

15


 
March 31, 2018
 
Pass
 
Special
Mention
 
Substandard (1)
 
Total
 
(in thousands)
Construction and land development
$
113,481

 
$

 
$

 
$
113,481

Real estate:
 
 
 
 
 
 

     Residential
57,234

 

 

 
57,234

     Commercial real estate - owner occupied
63,832

 

 

 
63,832

     Commercial real estate - non-owner occupied
265,961

 

 

 
265,961

Commercial and industrial
194,283

 
5,945

 
111

 
200,339

SBA loans
85,662

 
4,761

 
1,464

 
91,887

Consumer
848

 

 

 
848

 
$
781,301


$
10,706


$
1,575


$
793,582

(1) At March 31, 2018, substandard loans included $1.1 million of impaired loans.
 
December 31, 2017
 
Pass
 
Special
Mention
 
Substandard (1)
 
Total
 
(in thousands)
Construction and land development
$
115,427

 
$

 
$

 
$
115,427

Real estate:
 
 
 
 
 
 

     Residential
62,719

 

 

 
62,719

     Commercial real estate - owner occupied
53,106

 

 

 
53,106

     Commercial real estate - non-owner occupied
252,114

 

 

 
252,114

Commercial and industrial
161,679

 
6,871

 
634

 
169,184

SBA loans
86,653

 
4,130

 
1,726

 
92,509

Consumer
828

 

 

 
828

 
$
732,526

 
$
11,001

 
$
2,360

 
$
745,887

(1) At December 31, 2017, substandard loans included $1.8 million of impaired loans.

Past due and nonaccrual loans presented by loan class were as follows as of March 31, 2018 and December 31, 2017: 
 
March 31, 2018
 
Still Accruing
 
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Over 90 Days
Past Due
 
Nonaccrual
 
(in thousands)
Construction and land development
$

 
$

 
$

 
$

Real estate:
 
 
 
 
 
 
 
     Residential
139

 

 

 

     Commercial real estate - owner occupied

 

 

 

     Commercial real estate - non-owner occupied

 

 

 

Commercial and industrial

 

 

 
111

SBA loans
427

 

 

 
950

Consumer

 

 

 

Total
$
566


$


$


$
1,061


16


 
December 31, 2017
 
Still Accruing
 
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Over 90 Days
Past Due
 
Nonaccrual
 
(in thousands)
Construction and land development
$

 
$

 
$

 
$

Real estate:
 
 
 
 
 
 
 
     Residential
1,079

 

 

 

     Commercial real estate - owner occupied

 

 

 

     Commercial real estate - non-owner occupied

 

 

 

Commercial and industrial

 

 

 
634

SBA loans

 

 

 
1,200

Consumer

 

 

 

Total
$
1,079


$


$


$
1,834


A loan is considered impaired, when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Information relating to individually impaired loans presented by class of loans was as follows as of March 31, 2018 and December 31, 2017:
 
March 31, 2018
 
 
 
 
 
Impaired Loans
 
 
 
Unpaid
Principal
Balance
 
Recorded
Investment(1)
 
Without
Specific
Reserve
 
With
Specific
Reserve
 
Related
Allowance
 
(in thousands)
Construction and land development
$

 
$

 
$

 
$

 
$

Real estate:
 
 
 
 
 
 
 
 
 
     Residential

 

 

 

 

     Commercial real estate - owner occupied

 

 

 

 

     Commercial real estate - non-owner occupied

 

 

 

 

Commercial and industrial
194

 
111

 
111

 

 

SBA loans
1,261

 
950

 
950

 

 

Consumer

 

 

 

 

Other

 

 

 

 

Total
$
1,455


$
1,061


$
1,061


$


$

(1)
Recorded investment represents unpaid principal balance, net of charge-offs and interest applied to principal on nonaccrual loans, if any.


17


 
December 31, 2017
 
 
 
 
 
Impaired Loans
 
 
 
Unpaid
Principal
Balance
 
Recorded
Investment(1)
 
Without
Specific
Reserve
 
With
Specific
Reserve
 
Related
Allowance
 
(in thousands)
Construction and land development
$

 
$

 
$

 
$

 
$

Real estate:
 
 
 
 
 
 
 
 
 
     Residential

 

 

 

 

     Commercial real estate - owner occupied

 

 

 

 

     Commercial real estate - non-owner occupied

 

 

 

 

Commercial and industrial
640

 
634

 
9

 
625

 
299

SBA loans
1,266

 
1,200

 
839

 
361

 
205

Consumer

 

 

 

 

Other

 

 

 

 

Total
$
1,906


$
1,834


$
848


$
986


$
504

(1)
Recorded investment represents unpaid principal balance, net of charge-offs and interest applied to principal on nonaccrual loans, if any.

The average recorded investment in impaired loans and related interest income recognized for the three months ended March 31, 2018 and 2017 was as follows:
 
Three Months Ended March 31,
 
2018
 
2017
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(in thousands)
Construction and land development
$

 
$

 
$

 
$

Real estate:
 
 
 
 
 
 
 
     Residential

 

 

 

     Commercial real estate - owner occupied

 

 

 

     Commercial real estate - non-owner occupied

 

 

 

Commercial and industrial
174

 

 
1,460

 

SBA loans
1,263

 

 
1,788

 

Consumer

 

 

 

Other

 

 

 

Total
$
1,437


$


$
3,248


$


At March 31, 2018 and December 31, 2017, the Company had approximately $1.1 million and $1.8 million, respectively, in recorded investment in loans identified as troubled debt restructurings (“TDR’s”) and had allocated approximately $0 and $504 thousand, respectively, as specific reserves for these loans. The Company has not committed to lend any additional amounts to customers with outstanding loans that are classified as TDR’s as of March 31, 2018.

At March 31, 2018 and December 31, 2017, loan modifications resulting in TDR status generally included one or a combination of the following: extensions of the maturity date, principal payment deferments or signed forbearance agreement with a payment plan. During the three months ended March 31, 2018 and 2017, there were no new loan modifications resulting in TDRs.
 
During the three months ended March 31, 2018, there was one loan totaling $390 thousand modified as a troubled debt restructuring for which there was a payment default within twelve months following the modification. There were no loans modified as troubled debt restructuring for which there was a payment default within twelve months following the

18


modification during the three months ended March 31, 2017. A loan is considered to be in payment default once it is 90 days contractually past due under the modification.

At March 31, 2018 and December 31, 2017, the Company had loans held for sale, consisting of SBA 7(a) loans totaling $11.5 million and $10.6 million, respectively. The Company accounts for loans held for sale at the lower of carrying value or market. At March 31, 2018 and December 31, 2017, the fair value of loans held for sale totaled $12.2 million and $11.5 million, respectively.

NOTE 6. TRANSFERS AND SERVICING OF FINANCIAL ASSETS
 
The Company sells loans in the secondary market and, for certain loans, retains the servicing responsibility. Consideration for the sale includes the cash received as well as the related servicing rights asset. The Company receives servicing fees ranging from 0.25% to 1.00% for the services provided.
 
Capitalized servicing rights as of March 31, 2018 and December 31, 2017 totaled $2.5 million and $2.6 million, respectively.
 
SBA loans sold during the three months ended March 31, 2018 and 2017 totaled $2.7 million and $13.3 million, respectively. Total gains on sale of SBA loans were $247 thousand and $1.2 million for the three months ended March 31, 2018 and 2017, respectively. SBA loans serviced for others totaled $137.3 million at March 31, 2018 and $140.4 million at December 31, 2017.
 
Additionally, the Company was servicing construction and land development loans, commercial real estate loans and commercial & industrial loans participated out to various other institutions amounting to $76.4 million and $81.6 million at March 31, 2018 and December 31, 2017, respectively.
 
During the three months ended March 31, 2018 and 2017, there were no sales of other commercial real estate loans, where servicing was not retained. The Company may sell loans to maintain its loan concentration limits.
 
SBA loans serviced for others are accounted for as sales and therefore are not included in the accompanying condensed consolidated balance sheets. The risks inherent in SBA servicing assets relate primarily to changes in prepayments that result from shifts in interest rates.
 
The significant assumptions used in the valuation for SBA servicing rights at March 31, 2018 included discount rates, ranging from 10.8% to 24.2% and a weighted average prepayment speed assumption of 10.6%.
 
Activity for SBA servicing assets follows:
 
Three Months Ended March 31,
 
2018
 
2017
 
(in thousands)
Balance, beginning of period
$
2,618

 
$
2,262

Additions
55

 
293

Amortization
(165
)
 
(98
)
Impairment

 

Balance, end of period
$
2,508

 
$
2,457

 
The fair value of servicing assets for SBA loans was $2.8 million and $3.0 million as of March 31, 2018 and December 31, 2017, respectively. Servicing fees net of servicing asset amortization totaled $153 thousand and $171 thousand for the three months ended March 31, 2018 and 2017, respectively. Contractually specified servicing fees were $318 thousand and $269 thousand for the three months ended March 31, 2018 and 2017, respectively, and were included as a component of net servicing fees within non-interest income.
 

19


The following table summarizes the estimated change in the value of servicing assets as of March 31, 2018 given hypothetical shifts in prepayments speeds and yield assumptions: 
 
Change in Assumption
 
Change in Estimated Fair Value
 
 
 
 
Prepayment speeds
+10%
 
$
(105
)
Prepayment speeds
+20%
 
(204
)
Discount rate
+1%
 
(93
)
Discount rate
+2%
 
(179
)

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NOTE 7. DEPOSITS
 
The Company’s ten largest depositor relationships accounted for approximately 19.6% of total deposits at March 31, 2018.

Time deposits that exceeded the FDIC insurance limit of $250,000 amounted to $106.7 million and $81.9 million as of March 31, 2018 and December 31, 2017, respectively. The Company qualifies to participate in a state public deposits program that allows it to receive deposits from the state or from political subdivisions within the state in amounts that would not be covered by the FDIC. This program provides a stable source of funding to the Company. As of March 31, 2018, deposit balances under this program totaled $40 million. In connection with our participation in this program, loans pledged with the FHLB serve as collateral for $44 million in letters of credit issued by FHLB as collateral for the state public deposits. See Note 8 –Borrowing Arrangements for information regarding pledged collateral with FHLB.
 

NOTE 8. BORROWING ARRANGEMENTS
 
Federal Home Loan Bank borrowings
 
As of March 31, 2018, the Company had total borrowing capacity up to $225.9 million from the Federal Home Loan Bank of San Francisco (“FHLB”) subject to providing adequate collateral and continued compliance with the Advances and Security Agreement and other eligibility requirements established by the FHLB. As of March 31, 2018, the Company had pledged loans in the amount of $680.3 million as collateral for this borrowing agreement. There were $57.0 million and $20.0 million in borrowings under this arrangement, with an interest rate of 1.87% and 1.41% as of March 31, 2018 and December 31, 2017, respectively. The entire amount outstanding is an overnight advance. The weighted average interest rate during the three months ended March 31, 2018 and 2017 was 1.58% and 0.80%. As of March 31, 2018, the remaining financing availability was $124.9 million.

Federal funds purchased

The Company may borrow up to $42.0 million overnight on an unsecured basis from three of its primary correspondent banks. In general, interest rates on these lines approximate the federal funds target rate. Overnight borrowings under these credit facilities were $18.0 million and zero at March 31, 2018 and December 31, 2017, respectively. The weighted average interest rate during the three months ended March 31, 2018 and 2017 was 2.37% and 0.00%, respectively.

Senior secured notes
 
On December 22, 2017, the Company entered into a loan agreement with another bank to borrow up to $10 million. One of the Company's executives is also a member of the lending bank's board of directors. This facility is secured by 100% of the common stock of the Bank and bears interest, due quarterly, at a rate of U.S. Prime rate plus 0.25% and matures on December 22, 2019 (“Maturity Date”). The terms of the loan agreement require the Bank to maintain minimum capital ratios, a minimum return on average assets, certain minimum loan and asset ratios and other covenants, including (i) leverage ratio greater than or equal to 9.0%, (ii) tier 1 capital ratio greater than or equal to 11.0% and $90 million, (iii) total capital ratio greater than or equal to 12.0%, (iv) CET1 capital ratio greater than or equal to 11.0%, (v) return on average assets greater than or equal to 0.85%, (vi) total loans to total assets less than or equal to 85.0% and (vii) classified assets to Tier 1 capital plus the allowance for loan losses of less than or equal to 35.0%. In the event of default, the lender has the option to declare all outstanding balances as immediately due.
 
Upon maturity, the Company will pay a lookback fee equal to sum of (i) 0.25% of the portion of the loan not requested and drawn on December 22, 2018 (“Anniversary Date”) and (ii) 0.25% of the portion of the loan not requested and drawn between the Anniversary Date and Maturity Date.

At March 31, 2018, the outstanding balance under the facility totaled $2.6 million and the interest rate was 5.00%. At December 31, 2017, the outstanding balance under the facility totaled $350 thousand and the interest rate was 4.75%. The weighted average interest rate during the three months ended March 31, 2018 was 4.77%. At March 31, 2018, the Company was in compliance with all loan covenants on the facility.

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On February 27, 2018, the Company received approval increasing the available credit under its senior secured notes facility from $10.0 million to $25.0 million, subject to completion of the merger with Pacific Commerce Bancorp (Refer to Note 3 – Business Combination).

Other borrowings
  
As of March 31, 2018, the Company had borrowing capacity of approximately $4.9 million with the Federal Reserve Bank discount window. As of March 31, 2018, the Company had pledged securities held-to-maturity with a carrying value of $5.3 million as collateral for this line. There were no borrowings under this arrangement as of March 31, 2018 and December 31, 2017.

NOTE 9. INCOME TAXES

The asset and liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

For the three months ended March 31, 2018 and 2017, income tax expense was $859 thousand and $1.5 million, respectively. The effective income tax rate was 26.5% and 40.8% for the three months ended March 31, 2018 and 2017, respectively. The Company’s effective tax rate was favorably impacted during the first quarter of 2018 by the reduction of the federal income tax rate from 35% to 21% under comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”) effective December 22, 2017.
 
As of March 31, 2018, the Company has not yet completed accounting for the enactment of the Tax Act; however, the Company believes it has reasonably estimated the effects of the Tax Act by recording a provisional income tax expense of $1.8 million for the year ended December 31, 2017 in accordance with SEC Staff Accounting Bulletin 118 (“SAB 118”). As required by SAB 118, the Company will continue to evaluate and re-measure the impact of the Tax Act on deferred tax amounts that existed at December 31, 2017 and record appropriate income tax provision amounts in 2018.

The Company and its subsidiary are subject to federal income and California franchise tax. The Federal statute of limitations for the assessment of income tax for the years ending after December 31, 2013 remain open and the California statute of limitations for the assessment of franchise tax remain open for the years ending after December 31, 2012.

The Company did not have unrecognized tax benefits that related to uncertainties associated with federal and state income tax matters as of March 31, 2018 and December 31, 2017.

The Company accounts for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the amounts for financial reporting purposes and tax basis of its assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary. Based on this analysis, Management has determined that a valuation allowance for deferred tax assets was not required as of March 31, 2018.

NOTE 10. COMMITMENTS
 
In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate risk not recognized in the Company’s consolidated financial statements.
 
The Company’s exposure to loan loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for loans reflected in the consolidated financial statements.
 

22


As of March 31, 2018 and December 31, 2017, the Company had the following outstanding financial commitments whose contractual amount represents credit risk:
 
March 31,
2018
 
December 31,
2017
 
(in thousands)
Commitments to extend credit
$
234,581

 
$
237,371

Standby letters of credit
1,346

 
996

Total
$
235,927

 
$
238,367

 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management’s credit evaluation of the customer. The majority of the Company’s commitments to extend credit and standby letters of credit are secured by real estate. The reserve for unfunded commitments was $1.0 million and $952 thousand at March 31, 2018 and December 31, 2017, respectively. The reserve for unfunded commitments is included in "other liabilities" in the condensed consolidated balance sheets.
 
In connection with the participation in a state public deposit program (Refer to Note 7 – Deposits), the Company has pledged $44 million in loans with the FHLB that serve as collateral for $44 million in letters of credit issued by FHLB to guarantee $40 million in state public deposits the Company received under the program as of March 31, 2018.
 
NOTE 11. RELATED PARTY TRANSACTIONS
 
In the ordinary course of business, the Company may grant loans to certain executive officers and directors and the companies with which they are associated. The change in outstanding balances during the three months ended March 31, 2018 and 2017 is as follows:
 
Three Months Ended March 31,
 
2018
 
2017