First Choice Bancorp00017166972020Q3FALSE--12-31P3Y00017166972020-01-012020-09-30xbrli:shares00017166972020-11-02iso4217:USD00017166972020-09-3000017166972019-12-310001716697srt:DirectorMemberus-gaap:SecuredDebtMember2020-09-300001716697srt:DirectorMemberus-gaap:SecuredDebtMember2019-12-3100017166972020-07-012020-09-3000017166972020-04-012020-06-3000017166972019-07-012019-09-3000017166972019-01-012019-09-300001716697us-gaap:LineOfCreditMember2020-07-012020-09-300001716697us-gaap:LineOfCreditMember2020-04-012020-06-300001716697us-gaap:LineOfCreditMember2019-07-012019-09-300001716697us-gaap:LineOfCreditMember2020-01-012020-09-300001716697us-gaap:LineOfCreditMember2019-01-012019-09-300001716697us-gaap:SeniorNotesMember2020-07-012020-09-300001716697us-gaap:SeniorNotesMember2020-04-012020-06-300001716697us-gaap:SeniorNotesMember2019-07-012019-09-300001716697us-gaap:SeniorNotesMember2020-01-012020-09-300001716697us-gaap:SeniorNotesMember2019-01-012019-09-300001716697fcbp:ServiceChargesandFeesonDepositAccountsMember2020-07-012020-09-300001716697fcbp:ServiceChargesandFeesonDepositAccountsMember2020-04-012020-06-300001716697fcbp:ServiceChargesandFeesonDepositAccountsMember2019-07-012019-09-300001716697fcbp:ServiceChargesandFeesonDepositAccountsMember2020-01-012020-09-300001716697fcbp:ServiceChargesandFeesonDepositAccountsMember2019-01-012019-09-30iso4217:USDxbrli:shares0001716697us-gaap:CommonStockMember2020-06-300001716697us-gaap:AdditionalPaidInCapitalMember2020-06-300001716697us-gaap:RetainedEarningsMember2020-06-300001716697us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-06-3000017166972020-06-300001716697us-gaap:RetainedEarningsMember2020-07-012020-09-300001716697us-gaap:AdditionalPaidInCapitalMember2020-07-012020-09-300001716697us-gaap:CommonStockMember2020-07-012020-09-300001716697us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-07-012020-09-300001716697us-gaap:CommonStockMember2020-09-300001716697us-gaap:AdditionalPaidInCapitalMember2020-09-300001716697us-gaap:RetainedEarningsMember2020-09-300001716697us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-09-300001716697us-gaap:CommonStockMember2019-06-300001716697us-gaap:AdditionalPaidInCapitalMember2019-06-300001716697us-gaap:RetainedEarningsMember2019-06-300001716697us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-06-3000017166972019-06-300001716697us-gaap:RetainedEarningsMember2019-07-012019-09-300001716697us-gaap:AdditionalPaidInCapitalMember2019-07-012019-09-300001716697us-gaap:CommonStockMember2019-07-012019-09-300001716697us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-07-012019-09-300001716697us-gaap:CommonStockMember2019-09-300001716697us-gaap:AdditionalPaidInCapitalMember2019-09-300001716697us-gaap:RetainedEarningsMember2019-09-300001716697us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-09-3000017166972019-09-300001716697us-gaap:CommonStockMember2019-12-310001716697us-gaap:AdditionalPaidInCapitalMember2019-12-310001716697us-gaap:RetainedEarningsMember2019-12-310001716697us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-310001716697us-gaap:RetainedEarningsMember2020-01-012020-09-300001716697us-gaap:AdditionalPaidInCapitalMember2020-01-012020-09-300001716697us-gaap:CommonStockMember2020-01-012020-09-300001716697us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-012020-09-300001716697us-gaap:CommonStockMember2018-12-310001716697us-gaap:AdditionalPaidInCapitalMember2018-12-310001716697us-gaap:RetainedEarningsMember2018-12-310001716697us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-12-3100017166972018-12-310001716697us-gaap:RetainedEarningsMember2019-01-012019-09-300001716697us-gaap:AdditionalPaidInCapitalMember2019-01-012019-09-300001716697us-gaap:CommonStockMember2019-01-012019-09-300001716697us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-01-012019-09-30fcbp:branchfcbp:lending_office0001716697us-gaap:USGovernmentAgenciesDebtSecuritiesMember2020-09-300001716697us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember2020-09-300001716697us-gaap:MortgageBackedSecuritiesMember2020-09-300001716697fcbp:SBAPoolsMember2020-09-300001716697us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember2019-12-310001716697us-gaap:MortgageBackedSecuritiesMember2019-12-310001716697fcbp:SBAPoolsMember2019-12-310001716697us-gaap:USGovernmentAgenciesDebtSecuritiesMember2019-12-310001716697us-gaap:USGovernmentAgenciesDebtSecuritiesMember2020-01-012020-09-30fcbp:security0001716697fcbp:MutualFundsMember2020-09-300001716697fcbp:MutualFundsMember2019-12-310001716697fcbp:MutualFundsMember2020-07-012020-09-300001716697fcbp:MutualFundsMember2020-04-012020-06-300001716697fcbp:MutualFundsMember2019-07-012019-09-300001716697fcbp:MutualFundsMember2020-01-012020-09-300001716697fcbp:MutualFundsMember2019-01-012019-09-30xbrli:pure0001716697srt:MinimumMember2020-09-300001716697fcbp:OtherBankStockMember2020-09-300001716697fcbp:OtherBankStockMember2019-12-310001716697fcbp:OtherBankStockMember2020-01-012020-09-300001716697fcbp:OtherBankStockMember2019-07-012019-09-300001716697fcbp:OtherBankStockMember2020-07-012020-09-300001716697fcbp:OtherBankStockMember2019-01-012019-09-300001716697fcbp:ClearinghouseCommunityDevelopmentFinancialInstitutionMember2019-12-310001716697fcbp:ClearinghouseCommunityDevelopmentFinancialInstitutionMember2020-09-300001716697fcbp:ClearinghouseCommunityDevelopmentFinancialInstitutionMember2020-01-012020-09-30fcbp:partnership0001716697fcbp:PaycheckProtectionProgramLoansMemberfcbp:SBALoansPortfolioSegmentMember2020-09-300001716697fcbp:PaycheckProtectionProgramCARESActMemberfcbp:PaycheckProtectionProgramLoansMemberfcbp:SBALoansPortfolioSegmentMember2020-09-300001716697fcbp:PaycheckProtectionProgramLiquidityFacilityMemberus-gaap:LineOfCreditMember2020-09-300001716697fcbp:FinanceReceivablesMainStreetLoansMember2020-09-300001716697fcbp:FinanceReceivablesMainStreetLoansMember2020-07-012020-09-300001716697us-gaap:FederalHomeLoanBankAdvancesMember2020-09-300001716697us-gaap:FederalReserveBankAdvancesMember2020-09-300001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMember2020-09-300001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMember2019-12-310001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMember2020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMember2019-12-310001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMember2020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMember2019-12-310001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2019-12-310001716697fcbp:CommercialAndIndustrialPortfolioSegmentMember2020-09-300001716697fcbp:CommercialAndIndustrialPortfolioSegmentMember2019-12-310001716697fcbp:SBALoansPortfolioSegmentMember2020-09-300001716697fcbp:SBALoansPortfolioSegmentMember2019-12-310001716697us-gaap:ConsumerPortfolioSegmentMember2020-09-300001716697us-gaap:ConsumerPortfolioSegmentMember2019-12-310001716697us-gaap:FinancialAssetAcquiredWithCreditDeteriorationMember2020-09-300001716697us-gaap:FinancialAssetAcquiredWithCreditDeteriorationMember2019-12-310001716697fcbp:PacificCommerceBancorpMember2020-09-300001716697fcbp:PacificCommerceBancorpMember2020-01-012020-09-300001716697fcbp:PacificCommerceBancorpMember2019-12-310001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMember2020-06-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMember2020-06-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMember2020-06-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2020-06-300001716697fcbp:CommercialAndIndustrialPortfolioSegmentMember2020-06-300001716697fcbp:SBALoansPortfolioSegmentMember2020-06-300001716697us-gaap:ConsumerPortfolioSegmentMember2020-06-300001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMember2020-07-012020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMember2020-07-012020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMember2020-07-012020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2020-07-012020-09-300001716697fcbp:CommercialAndIndustrialPortfolioSegmentMember2020-07-012020-09-300001716697fcbp:SBALoansPortfolioSegmentMember2020-07-012020-09-300001716697us-gaap:ConsumerPortfolioSegmentMember2020-07-012020-09-300001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMemberus-gaap:FinancialAssetAcquiredWithCreditDeteriorationMember2020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:FinancialAssetAcquiredWithCreditDeteriorationMemberus-gaap:ResidentialRealEstateMember2020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:FinancialAssetAcquiredWithCreditDeteriorationMemberfcbp:CommercialRealEstateOwnerOccupiedMember2020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:FinancialAssetAcquiredWithCreditDeteriorationMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2020-09-300001716697us-gaap:FinancialAssetAcquiredWithCreditDeteriorationMemberfcbp:CommercialAndIndustrialPortfolioSegmentMember2020-09-300001716697us-gaap:FinancialAssetAcquiredWithCreditDeteriorationMemberfcbp:SBALoansPortfolioSegmentMember2020-09-300001716697us-gaap:FinancialAssetAcquiredWithCreditDeteriorationMemberus-gaap:ConsumerPortfolioSegmentMember2020-09-300001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMember2020-01-012020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMember2020-01-012020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMember2020-01-012020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2020-01-012020-09-300001716697fcbp:CommercialAndIndustrialPortfolioSegmentMember2020-01-012020-09-300001716697fcbp:SBALoansPortfolioSegmentMember2020-01-012020-09-300001716697us-gaap:ConsumerPortfolioSegmentMember2020-01-012020-09-300001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMember2020-03-310001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMember2020-03-310001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMember2020-03-310001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2020-03-310001716697fcbp:CommercialAndIndustrialPortfolioSegmentMember2020-03-310001716697fcbp:SBALoansPortfolioSegmentMember2020-03-310001716697us-gaap:ConsumerPortfolioSegmentMember2020-03-3100017166972020-03-310001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMember2020-04-012020-06-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMember2020-04-012020-06-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMember2020-04-012020-06-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2020-04-012020-06-300001716697fcbp:CommercialAndIndustrialPortfolioSegmentMember2020-04-012020-06-300001716697fcbp:SBALoansPortfolioSegmentMember2020-04-012020-06-300001716697us-gaap:ConsumerPortfolioSegmentMember2020-04-012020-06-300001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMemberus-gaap:FinancialAssetAcquiredWithCreditDeteriorationMember2020-06-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:FinancialAssetAcquiredWithCreditDeteriorationMemberus-gaap:ResidentialRealEstateMember2020-06-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:FinancialAssetAcquiredWithCreditDeteriorationMemberfcbp:CommercialRealEstateOwnerOccupiedMember2020-06-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:FinancialAssetAcquiredWithCreditDeteriorationMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2020-06-300001716697us-gaap:FinancialAssetAcquiredWithCreditDeteriorationMemberfcbp:CommercialAndIndustrialPortfolioSegmentMember2020-06-300001716697us-gaap:FinancialAssetAcquiredWithCreditDeteriorationMemberfcbp:SBALoansPortfolioSegmentMember2020-06-300001716697us-gaap:FinancialAssetAcquiredWithCreditDeteriorationMemberus-gaap:ConsumerPortfolioSegmentMember2020-06-300001716697us-gaap:FinancialAssetAcquiredWithCreditDeteriorationMember2020-06-300001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMember2019-06-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMember2019-06-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMember2019-06-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2019-06-300001716697fcbp:CommercialAndIndustrialPortfolioSegmentMember2019-06-300001716697fcbp:SBALoansPortfolioSegmentMember2019-06-300001716697us-gaap:ConsumerPortfolioSegmentMember2019-06-300001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMember2019-07-012019-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMember2019-07-012019-09-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMember2019-07-012019-09-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2019-07-012019-09-300001716697fcbp:CommercialAndIndustrialPortfolioSegmentMember2019-07-012019-09-300001716697fcbp:SBALoansPortfolioSegmentMember2019-07-012019-09-300001716697us-gaap:ConsumerPortfolioSegmentMember2019-07-012019-09-300001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMember2019-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMember2019-09-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMember2019-09-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2019-09-300001716697fcbp:CommercialAndIndustrialPortfolioSegmentMember2019-09-300001716697fcbp:SBALoansPortfolioSegmentMember2019-09-300001716697us-gaap:ConsumerPortfolioSegmentMember2019-09-300001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMemberus-gaap:FinancialAssetAcquiredWithCreditDeteriorationMember2019-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:FinancialAssetAcquiredWithCreditDeteriorationMemberus-gaap:ResidentialRealEstateMember2019-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:FinancialAssetAcquiredWithCreditDeteriorationMemberfcbp:CommercialRealEstateOwnerOccupiedMember2019-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:FinancialAssetAcquiredWithCreditDeteriorationMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2019-09-300001716697us-gaap:FinancialAssetAcquiredWithCreditDeteriorationMemberfcbp:CommercialAndIndustrialPortfolioSegmentMember2019-09-300001716697us-gaap:FinancialAssetAcquiredWithCreditDeteriorationMemberfcbp:SBALoansPortfolioSegmentMember2019-09-300001716697us-gaap:FinancialAssetAcquiredWithCreditDeteriorationMemberus-gaap:ConsumerPortfolioSegmentMember2019-09-300001716697us-gaap:FinancialAssetAcquiredWithCreditDeteriorationMember2019-09-300001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMember2018-12-310001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMember2018-12-310001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMember2018-12-310001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2018-12-310001716697fcbp:CommercialAndIndustrialPortfolioSegmentMember2018-12-310001716697fcbp:SBALoansPortfolioSegmentMember2018-12-310001716697us-gaap:ConsumerPortfolioSegmentMember2018-12-310001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMember2019-01-012019-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMember2019-01-012019-09-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMember2019-01-012019-09-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2019-01-012019-09-300001716697fcbp:CommercialAndIndustrialPortfolioSegmentMember2019-01-012019-09-300001716697fcbp:SBALoansPortfolioSegmentMember2019-01-012019-09-300001716697us-gaap:ConsumerPortfolioSegmentMember2019-01-012019-09-300001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMemberus-gaap:PassMember2020-09-300001716697us-gaap:SpecialMentionMemberfcbp:ConstructionAndLandDevelopmentPortfolioSegmentMember2020-09-300001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMemberus-gaap:SubstandardMember2020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:PassMemberus-gaap:ResidentialRealEstateMember2020-09-300001716697us-gaap:SpecialMentionMemberfcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMember2020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMemberus-gaap:SubstandardMember2020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:PassMemberfcbp:CommercialRealEstateOwnerOccupiedMember2020-09-300001716697us-gaap:SpecialMentionMemberfcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMember2020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMemberus-gaap:SubstandardMember2020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:PassMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2020-09-300001716697us-gaap:SpecialMentionMemberfcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMemberus-gaap:SubstandardMember2020-09-300001716697us-gaap:PassMemberfcbp:CommercialAndIndustrialPortfolioSegmentMember2020-09-300001716697us-gaap:SpecialMentionMemberfcbp:CommercialAndIndustrialPortfolioSegmentMember2020-09-300001716697us-gaap:SubstandardMemberfcbp:CommercialAndIndustrialPortfolioSegmentMember2020-09-300001716697us-gaap:PassMemberfcbp:SBALoansPortfolioSegmentMember2020-09-300001716697us-gaap:SpecialMentionMemberfcbp:SBALoansPortfolioSegmentMember2020-09-300001716697fcbp:SBALoansPortfolioSegmentMemberus-gaap:SubstandardMember2020-09-300001716697us-gaap:PassMemberus-gaap:ConsumerPortfolioSegmentMember2020-09-300001716697us-gaap:SpecialMentionMemberus-gaap:ConsumerPortfolioSegmentMember2020-09-300001716697us-gaap:ConsumerPortfolioSegmentMemberus-gaap:SubstandardMember2020-09-300001716697us-gaap:PassMember2020-09-300001716697us-gaap:SpecialMentionMember2020-09-300001716697us-gaap:SubstandardMember2020-09-300001716697fcbp:ImpairedMember2020-09-300001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMemberus-gaap:PassMember2019-12-310001716697us-gaap:SpecialMentionMemberfcbp:ConstructionAndLandDevelopmentPortfolioSegmentMember2019-12-310001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMemberus-gaap:SubstandardMember2019-12-310001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:PassMemberus-gaap:ResidentialRealEstateMember2019-12-310001716697us-gaap:SpecialMentionMemberfcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMember2019-12-310001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMemberus-gaap:SubstandardMember2019-12-310001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:PassMemberfcbp:CommercialRealEstateOwnerOccupiedMember2019-12-310001716697us-gaap:SpecialMentionMemberfcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMember2019-12-310001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMemberus-gaap:SubstandardMember2019-12-310001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:PassMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2019-12-310001716697us-gaap:SpecialMentionMemberfcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2019-12-310001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMemberus-gaap:SubstandardMember2019-12-310001716697us-gaap:PassMemberfcbp:CommercialAndIndustrialPortfolioSegmentMember2019-12-310001716697us-gaap:SpecialMentionMemberfcbp:CommercialAndIndustrialPortfolioSegmentMember2019-12-310001716697us-gaap:SubstandardMemberfcbp:CommercialAndIndustrialPortfolioSegmentMember2019-12-310001716697us-gaap:PassMemberfcbp:SBALoansPortfolioSegmentMember2019-12-310001716697us-gaap:SpecialMentionMemberfcbp:SBALoansPortfolioSegmentMember2019-12-310001716697fcbp:SBALoansPortfolioSegmentMemberus-gaap:SubstandardMember2019-12-310001716697us-gaap:PassMemberus-gaap:ConsumerPortfolioSegmentMember2019-12-310001716697us-gaap:SpecialMentionMemberus-gaap:ConsumerPortfolioSegmentMember2019-12-310001716697us-gaap:ConsumerPortfolioSegmentMemberus-gaap:SubstandardMember2019-12-310001716697us-gaap:PassMember2019-12-310001716697us-gaap:SpecialMentionMember2019-12-310001716697us-gaap:SubstandardMember2019-12-310001716697fcbp:ImpairedMember2019-12-310001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMemberus-gaap:FinancingReceivables30To59DaysPastDueMember2020-09-300001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMemberus-gaap:FinancingReceivables60To89DaysPastDueMember2020-09-300001716697us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMemberfcbp:ConstructionAndLandDevelopmentPortfolioSegmentMember2020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:FinancingReceivables30To59DaysPastDueMemberus-gaap:ResidentialRealEstateMember2020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMemberus-gaap:FinancingReceivables60To89DaysPastDueMember2020-09-300001716697us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMemberfcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMember2020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:FinancingReceivables30To59DaysPastDueMemberfcbp:CommercialRealEstateOwnerOccupiedMember2020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMemberus-gaap:FinancingReceivables60To89DaysPastDueMember2020-09-300001716697us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMemberfcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMember2020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:FinancingReceivables30To59DaysPastDueMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2020-09-300001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMemberus-gaap:FinancingReceivables60To89DaysPastDueMember2020-09-300001716697us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMemberfcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2020-09-300001716697us-gaap:FinancingReceivables30To59DaysPastDueMemberfcbp:CommercialAndIndustrialPortfolioSegmentMember2020-09-300001716697us-gaap:FinancingReceivables60To89DaysPastDueMemberfcbp:CommercialAndIndustrialPortfolioSegmentMember2020-09-300001716697us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMemberfcbp:CommercialAndIndustrialPortfolioSegmentMember2020-09-300001716697us-gaap:FinancingReceivables30To59DaysPastDueMemberfcbp:SBALoansPortfolioSegmentMember2020-09-300001716697fcbp:SBALoansPortfolioSegmentMemberus-gaap:FinancingReceivables60To89DaysPastDueMember2020-09-300001716697us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMemberfcbp:SBALoansPortfolioSegmentMember2020-09-300001716697us-gaap:FinancingReceivables30To59DaysPastDueMemberus-gaap:ConsumerPortfolioSegmentMember2020-09-300001716697us-gaap:ConsumerPortfolioSegmentMemberus-gaap:FinancingReceivables60To89DaysPastDueMember2020-09-300001716697us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMemberus-gaap:ConsumerPortfolioSegmentMember2020-09-300001716697us-gaap:FinancingReceivables30To59DaysPastDueMember2020-09-300001716697us-gaap:FinancingReceivables60To89DaysPastDueMember2020-09-300001716697us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember2020-09-300001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMemberus-gaap:FinancingReceivables30To59DaysPastDueMember2019-12-310001716697fcbp:ConstructionAndLandDevelopmentPortfolioSegmentMemberus-gaap:FinancingReceivables60To89DaysPastDueMember2019-12-310001716697us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMemberfcbp:ConstructionAndLandDevelopmentPortfolioSegmentMember2019-12-310001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:FinancingReceivables30To59DaysPastDueMemberus-gaap:ResidentialRealEstateMember2019-12-310001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMemberus-gaap:FinancingReceivables60To89DaysPastDueMember2019-12-310001716697us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMemberfcbp:RealEstatePortfolioSegmentMemberus-gaap:ResidentialRealEstateMember2019-12-310001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:FinancingReceivables30To59DaysPastDueMemberfcbp:CommercialRealEstateOwnerOccupiedMember2019-12-310001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMemberus-gaap:FinancingReceivables60To89DaysPastDueMember2019-12-310001716697us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMemberfcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateOwnerOccupiedMember2019-12-310001716697fcbp:RealEstatePortfolioSegmentMemberus-gaap:FinancingReceivables30To59DaysPastDueMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2019-12-310001716697fcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMemberus-gaap:FinancingReceivables60To89DaysPastDueMember2019-12-310001716697us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMemberfcbp:RealEstatePortfolioSegmentMemberfcbp:CommercialRealEstateNonOwnerOccupiedMember2019-12-310001716697us-gaap:FinancingReceivables30To59DaysPastDueMemberfcbp:CommercialAndIndustrialPortfolioSegmentMember2019-12-310001716697us-gaap:FinancingReceivables60To89DaysPastDueMemberfcbp:CommercialAndIndustrialPortfolioSegmentMember2019-12-310001716697us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMemberfcbp:CommercialAndIndustrialPortfolioSegmentMember2019-12-310001716697us-gaap:FinancingReceivables30To59DaysPastDueMemberfcbp:SBALoansPortfolioSegmentMember2019-12-310001716697fcbp:SBALoansPortfolioSegmentMemberus-gaap:FinancingReceivables60To89DaysPastDueMember2019-12-310001716697us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMemberfcbp:SBALoansPortfolioSegmentMember2019-12-310001716697us-gaap:FinancingReceivables30To59DaysPastDueMember2019-12-310001716697us-gaap:FinancingReceivables60To89DaysPastDueMember2019-12-310001716697us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember2019-12-310001716697fcbp:TroubledDebtRestructuringOnAccrualMember2020-09-300001716697fcbp:TroubledDebtRestructuringOnAccrualMember2019-12-310001716697fcbp:RestructuredLoansMember2020-09-300001716697fcbp:RestructuredLoansMember2019-12-31fcbp:loan0001716697us-gaap:PaymentDeferralMemberfcbp:CARESActLoanModificationMember2020-01-012020-09-300001716697us-gaap:PaymentDeferralMemberfcbp:CARESActLoanModificationMember2020-09-300001716697us-gaap:PaymentDeferralMemberfcbp:CARESActLoanModificationMember2020-06-300001716697fcbp:ThirdPartyPaymentMemberfcbp:CARESActLoanModificationMember2020-09-300001716697fcbp:SBALoansMember2020-09-300001716697fcbp:SBALoansMember2019-12-310001716697srt:MinimumMember2020-01-012020-09-300001716697srt:MaximumMember2020-01-012020-09-300001716697srt:MinimumMemberfcbp:SBALoansMember2020-01-012020-09-300001716697fcbp:SBALoansMembersrt:MaximumMember2020-01-012020-09-300001716697fcbp:SBALoansMember2020-01-012020-09-300001716697fcbp:SBALoansMember2020-07-012020-09-300001716697fcbp:SBALoansMember2019-07-012019-09-300001716697fcbp:SBALoansMember2019-01-012019-09-300001716697fcbp:PacificCommerceBancorpMember2018-07-310001716697fcbp:PacificCommerceBancorpMemberus-gaap:CoreDepositsMember2018-07-310001716697us-gaap:CoreDepositsMember2020-06-300001716697us-gaap:CoreDepositsMember2019-06-300001716697us-gaap:CoreDepositsMember2019-12-310001716697us-gaap:CoreDepositsMember2018-12-310001716697us-gaap:CoreDepositsMember2020-07-012020-09-300001716697us-gaap:CoreDepositsMember2019-07-012019-09-300001716697us-gaap:CoreDepositsMember2020-01-012020-09-300001716697us-gaap:CoreDepositsMember2019-01-012019-09-300001716697us-gaap:CoreDepositsMember2020-09-300001716697us-gaap:CoreDepositsMember2019-09-300001716697fcbp:FederalHomeLoanBankRecoveryAdvanceLoanMembersrt:FederalHomeLoanBankOfSanFranciscoMember2020-09-300001716697srt:FederalHomeLoanBankOfSanFranciscoMemberfcbp:ShortTermRecoveryAdvanceMaturingNovember2020Member2020-09-300001716697srt:FederalHomeLoanBankOfSanFranciscoMemberfcbp:ShortTermRecoveryAdvanceMaturingMay2020Member2020-09-300001716697fcbp:ShortTermFixedRateAdvanceMaturingNovember2020Member2020-09-300001716697fcbp:ShortTermFixedRateAdvanceMaturingNovember2020Member2019-12-310001716697fcbp:ShortTermFixedRateAdvanceMaturingFebruary2021Member2020-09-300001716697fcbp:ShortTermFixedRateAdvanceMaturingMay2021Member2020-09-300001716697fcbp:ShortTermAdvanceMaturingJune2021Member2020-09-300001716697fcbp:ShortTermAdvanceMaturingJune2021Member2019-12-310001716697us-gaap:FederalReserveBankAdvancesMember2019-12-310001716697fcbp:PaycheckProtectionProgramLiquidityFacilityMemberus-gaap:LineOfCreditMember2020-07-012020-09-300001716697fcbp:PaycheckProtectionProgramLiquidityFacilityMemberus-gaap:LineOfCreditMember2020-01-012020-09-300001716697us-gaap:FederalFundsPurchasedMember2020-09-30fcbp:bank0001716697us-gaap:FederalFundsPurchasedMember2020-01-012020-09-300001716697us-gaap:FederalFundsPurchasedMember2019-12-310001716697us-gaap:SecuredDebtMember2020-09-300001716697us-gaap:SecuredDebtMember2019-12-310001716697us-gaap:SecuredDebtMember2020-07-012020-09-300001716697us-gaap:SecuredDebtMember2019-07-012019-09-300001716697us-gaap:SecuredDebtMember2020-01-012020-09-300001716697us-gaap:SecuredDebtMember2019-01-012019-09-300001716697srt:AffiliatedEntityMemberus-gaap:SecuredDebtMember2020-09-300001716697us-gaap:CommitmentsToExtendCreditMember2020-09-300001716697us-gaap:CommitmentsToExtendCreditMember2019-12-310001716697us-gaap:StandbyLettersOfCreditMember2020-09-300001716697us-gaap:StandbyLettersOfCreditMember2019-12-310001716697fcbp:CommitmentsToContributeCapitalMember2020-09-300001716697fcbp:CommitmentsToContributeCapitalMember2019-12-310001716697us-gaap:EquityMethodInvestmentsMember2020-09-300001716697us-gaap:EquityMethodInvestmentsMember2019-12-310001716697fcbp:FederalFundMembersrt:DirectorMember2020-09-300001716697fcbp:FederalFundMembersrt:DirectorMember2019-12-310001716697srt:DirectorMember2020-09-300001716697srt:DirectorMember2019-12-310001716697fcbp:A2013PlanMember2020-09-300001716697fcbp:IncentiveStockOptionMemberfcbp:A2013PlanMember2020-09-300001716697fcbp:IncentiveStockOptionMemberfcbp:A2013PlanMember2020-06-012020-06-300001716697us-gaap:EmployeeStockOptionMembersrt:MinimumMember2020-01-012020-09-300001716697us-gaap:EmployeeStockOptionMembersrt:MaximumMember2020-01-012020-09-300001716697us-gaap:EmployeeStockOptionMember2020-01-012020-09-300001716697us-gaap:RestrictedStockMember2020-06-300001716697us-gaap:RestrictedStockMember2019-06-300001716697us-gaap:RestrictedStockMember2020-07-012020-09-300001716697us-gaap:RestrictedStockMember2019-07-012019-09-300001716697us-gaap:RestrictedStockMember2020-09-300001716697us-gaap:RestrictedStockMember2019-09-300001716697us-gaap:RestrictedStockMember2019-12-310001716697us-gaap:RestrictedStockMember2018-12-310001716697us-gaap:RestrictedStockMember2020-01-012020-09-300001716697us-gaap:RestrictedStockMember2019-01-012019-09-300001716697us-gaap:FairValueInputsLevel1Memberus-gaap:CarryingReportedAmountFairValueDisclosureMember2020-09-300001716697us-gaap:FairValueInputsLevel1Memberus-gaap:EstimateOfFairValueFairValueDisclosureMember2020-09-300001716697us-gaap:FairValueInputsLevel1Memberus-gaap:CarryingReportedAmountFairValueDisclosureMember2019-12-310001716697us-gaap:FairValueInputsLevel1Memberus-gaap:EstimateOfFairValueFairValueDisclosureMember2019-12-310001716697us-gaap:FairValueInputsLevel2Memberus-gaap:CarryingReportedAmountFairValueDisclosureMember2020-09-300001716697us-gaap:FairValueInputsLevel2Memberus-gaap:EstimateOfFairValueFairValueDisclosureMember2020-09-300001716697us-gaap:FairValueInputsLevel2Memberus-gaap:CarryingReportedAmountFairValueDisclosureMember2019-12-310001716697us-gaap:FairValueInputsLevel2Memberus-gaap:EstimateOfFairValueFairValueDisclosureMember2019-12-310001716697us-gaap:FairValueInputsLevel3Memberus-gaap:CarryingReportedAmountFairValueDisclosureMember2020-09-300001716697us-gaap:EstimateOfFairValueFairValueDisclosureMemberus-gaap:FairValueInputsLevel3Member2020-09-300001716697us-gaap:FairValueInputsLevel3Memberus-gaap:CarryingReportedAmountFairValueDisclosureMember2019-12-310001716697us-gaap:EstimateOfFairValueFairValueDisclosureMemberus-gaap:FairValueInputsLevel3Member2019-12-310001716697us-gaap:FairValueInputsLevel1Memberus-gaap:USGovernmentAgenciesDebtSecuritiesMemberus-gaap:FairValueMeasurementsRecurringMember2020-09-300001716697us-gaap:FairValueInputsLevel2Memberus-gaap:USGovernmentAgenciesDebtSecuritiesMemberus-gaap:FairValueMeasurementsRecurringMember2020-09-300001716697us-gaap:USGovernmentAgenciesDebtSecuritiesMemberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Member2020-09-300001716697us-gaap:USGovernmentAgenciesDebtSecuritiesMemberus-gaap:FairValueMeasurementsRecurringMember2020-09-300001716697us-gaap:FairValueInputsLevel1Memberus-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMemberus-gaap:FairValueMeasurementsRecurringMember2020-09-300001716697us-gaap:FairValueInputsLevel2Memberus-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMemberus-gaap:FairValueMeasurementsRecurringMember2020-09-300001716697us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMemberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Member2020-09-300001716697us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMemberus-gaap:FairValueMeasurementsRecurringMember2020-09-300001716697us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:MortgageBackedSecuritiesMember2020-09-300001716697us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:MortgageBackedSecuritiesMember2020-09-300001716697us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Memberus-gaap:MortgageBackedSecuritiesMember2020-09-300001716697us-gaap:FairValueMeasurementsRecurringMemberus-gaap:MortgageBackedSecuritiesMember2020-09-300001716697us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMemberfcbp:SBAPoolsMember2020-09-300001716697us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMemberfcbp:SBAPoolsMember2020-09-300001716697us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Memberfcbp:SBAPoolsMember2020-09-300001716697us-gaap:FairValueMeasurementsRecurringMemberfcbp:SBAPoolsMember2020-09-300001716697us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2020-09-300001716697us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2020-09-300001716697us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Member2020-09-300001716697us-gaap:FairValueMeasurementsRecurringMember2020-09-300001716697us-gaap:FairValueInputsLevel1Memberus-gaap:MutualFundMemberus-gaap:FairValueMeasurementsRecurringMember2020-09-300001716697us-gaap:FairValueInputsLevel2Memberus-gaap:MutualFundMemberus-gaap:FairValueMeasurementsRecurringMember2020-09-300001716697us-gaap:MutualFundMemberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Member2020-09-300001716697us-gaap:MutualFundMemberus-gaap:FairValueMeasurementsRecurringMember2020-09-300001716697us-gaap:FairValueInputsLevel1Memberus-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMemberus-gaap:FairValueMeasurementsRecurringMember2019-12-310001716697us-gaap:FairValueInputsLevel2Memberus-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMemberus-gaap:FairValueMeasurementsRecurringMember2019-12-310001716697us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMemberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Member2019-12-310001716697us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMemberus-gaap:FairValueMeasurementsRecurringMember2019-12-310001716697us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:MortgageBackedSecuritiesMember2019-12-310001716697us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:MortgageBackedSecuritiesMember2019-12-310001716697us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Memberus-gaap:MortgageBackedSecuritiesMember2019-12-310001716697us-gaap:FairValueMeasurementsRecurringMemberus-gaap:MortgageBackedSecuritiesMember2019-12-310001716697us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMemberfcbp:SBAPoolsMember2019-12-310001716697us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMemberfcbp:SBAPoolsMember2019-12-310001716697us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Memberfcbp:SBAPoolsMember2019-12-310001716697us-gaap:FairValueMeasurementsRecurringMemberfcbp:SBAPoolsMember2019-12-310001716697us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2019-12-310001716697us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2019-12-310001716697us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Member2019-12-310001716697us-gaap:FairValueMeasurementsRecurringMember2019-12-310001716697us-gaap:FairValueInputsLevel1Memberus-gaap:MutualFundMemberus-gaap:FairValueMeasurementsRecurringMember2019-12-310001716697us-gaap:FairValueInputsLevel2Memberus-gaap:MutualFundMemberus-gaap:FairValueMeasurementsRecurringMember2019-12-310001716697us-gaap:MutualFundMemberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel3Member2019-12-310001716697us-gaap:MutualFundMemberus-gaap:FairValueMeasurementsRecurringMember2019-12-310001716697us-gaap:FairValueMeasurementsNonrecurringMemberus-gaap:FairValueInputsLevel1Member2020-09-300001716697us-gaap:FairValueMeasurementsNonrecurringMemberus-gaap:FairValueInputsLevel2Member2020-09-300001716697us-gaap:FairValueMeasurementsNonrecurringMemberus-gaap:FairValueInputsLevel3Member2020-09-300001716697us-gaap:FairValueMeasurementsNonrecurringMember2020-09-300001716697us-gaap:FairValueMeasurementsNonrecurringMemberus-gaap:FairValueInputsLevel1Member2019-12-310001716697us-gaap:FairValueMeasurementsNonrecurringMemberus-gaap:FairValueInputsLevel2Member2019-12-310001716697us-gaap:FairValueMeasurementsNonrecurringMemberus-gaap:FairValueInputsLevel3Member2019-12-310001716697us-gaap:FairValueMeasurementsNonrecurringMember2019-12-310001716697us-gaap:FairValueMeasurementsNonrecurringMemberfcbp:ImpairedLoansMember2020-01-012020-09-300001716697us-gaap:FairValueMeasurementsNonrecurringMemberus-gaap:MeasurementInputCostToSellMember2020-07-012020-09-300001716697us-gaap:FairValueMeasurementsNonrecurringMemberfcbp:ImpairedLoansMemberus-gaap:FairValueInputsLevel3Member2020-07-012020-09-300001716697us-gaap:FairValueMeasurementsNonrecurringMemberfcbp:ImpairedLoansMemberus-gaap:FairValueInputsLevel3Member2020-01-012020-09-300001716697fcbp:OtherNoninterestIncomeMember2020-07-012020-09-300001716697fcbp:OtherNoninterestIncomeMember2019-07-012019-09-300001716697fcbp:OtherNoninterestIncomeMember2020-01-012020-09-300001716697fcbp:OtherNoninterestIncomeMember2019-01-012019-09-300001716697fcbp:GainonSaleofLoansMember2020-07-012020-09-300001716697fcbp:GainonSaleofLoansMember2019-07-012019-09-300001716697fcbp:GainonSaleofLoansMember2020-01-012020-09-300001716697fcbp:GainonSaleofLoansMember2019-01-012019-09-300001716697fcbp:NetServicingFeesMember2020-07-012020-09-300001716697fcbp:NetServicingFeesMember2019-07-012019-09-300001716697fcbp:NetServicingFeesMember2020-01-012020-09-300001716697fcbp:NetServicingFeesMember2019-01-012019-09-300001716697fcbp:StockRepurchasePlanMember2018-12-032018-12-030001716697fcbp:StockRepurchasePlanMember2018-12-030001716697fcbp:StockRepurchasePlanMember2020-07-012020-09-300001716697fcbp:StockRepurchasePlanMember2019-07-012019-09-300001716697fcbp:StockRepurchasePlanMember2020-01-012020-09-300001716697fcbp:StockRepurchasePlanMember2019-01-012019-09-300001716697fcbp:StockRepurchasePlanMember2018-12-032020-09-300001716697fcbp:StockRepurchasePlanMember2020-09-300001716697fcbp:CommunityBankLeverageRatioMember2020-09-300001716697us-gaap:SubsequentEventMember2020-11-05


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

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission File Number 001-38476
fcbp-20200930_g1.gif
(Exact Name of Registrant as Specified in its Charter)
         
California82-2711227
(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)
 
 Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Shares, no par valueFCBP
Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                          ☒ Yes ☐ No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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: ☐
Smaller Reporting Company: ☒
Emerging growth company ☒



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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: There were 11,706,130 shares of common stock outstanding as of November 2, 2020.

FIRST CHOICE BANCORP AND SUBSIDIARY
FORM 10-Q
September 30, 2020


TABLE OF CONTENTS

    

 


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

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

September 30, 2020 (unaudited)December 31, 2019 (audited)
ASSETS(dollars in thousands, except share data)
Cash and due from banks$23,611 $27,359 
Interest-bearing deposits at other banks157,925 134,442 
Total cash and cash equivalents181,536 161,801 
Securities available-for-sale, at fair value37,999 26,653 
Securities held-to-maturity, at cost1,680 5,056 
Equity securities, at fair value2,792 2,694 
Restricted stock investments, at cost12,999 12,986 
Loans held for sale, at lower of cost or fair value36,474 7,659 
Loans held for investment1,884,930 1,374,675 
Allowance for loan losses(18,734)(13,522)
Loans held for investment, net1,866,196 1,361,153 
Accrued interest receivable11,500 5,451 
Premises and equipment2,341 1,542 
Servicing asset2,368 3,202 
Deferred taxes, net6,095 6,163 
Goodwill73,425 73,425 
Core deposit intangible5,149 5,728 
Other assets15,788 16,811 
TOTAL ASSETS$2,256,342 $1,690,324 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand$736,118 $626,569 
Money market, interest checking and savings649,613 514,366 
Time deposits174,181 172,758 
Total deposits1,559,912 1,313,693 
Borrowings150,000 90,000 
Paycheck Protection Program Liquidity Facility253,140 — 
Senior secured notes4,400 9,600 
Accrued interest payable and other liabilities16,419 15,226 
Total liabilities1,983,871 1,428,519 
Commitments and contingencies - Note 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: 11,705,878 at September 30, 2020 and 11,635,531 at December 31, 2019
217,680 216,398 
Additional paid-in capital2,838 3,493 
Retained earnings51,308 41,920 
Accumulated other comprehensive income (loss), net645 (6)
Total shareholders’ equity272,471 261,805 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$2,256,342 $1,690,324 

See accompanying notes to condensed consolidated financial statements.
4
First Choice Bancorp and Subsidiary
Condensed Consolidated Statements of Income
(unaudited)

Three Months EndedNine Months Ended September 30,
September 30, 2020June 30,
2020		September 30, 201920202019
(dollars in thousands, except share and per share data)
INTEREST and DIVIDEND INCOME
Interest and fees on loans$22,671 $21,348 $23,206 $64,799 $65,466 
Interest on investment securities180 225 208 623 659 
Interest on deposits in other financial institutions103 92 701 696 1,600 
Dividends on restricted stock investments200 179 228 624 676 
Total interest and dividend income23,154 21,844 24,343 66,742 68,401 
INTEREST EXPENSE
Interest on savings, interest checking and money market accounts382 318 1,283 1,809 3,776 
Interest on time deposits588 856 1,605 2,439 4,073 
Interest on borrowings207 197 253 780 967 
Interest on Paycheck Protection Program Liquidity Facility212 112 — 324 — 
Interest on senior secured notes39 57 176 187 531 
Total interest expense1,428 1,540 3,317 5,539 9,347 
Net interest income21,726 20,304 21,026 61,203 59,054 
Provision for loan losses1,000 2,100 700 5,800 1,600 
Net interest income after provision for loan losses20,726 18,204 20,326 55,403 57,454 
NONINTEREST INCOME
Gain on sale of loans990 — 528 1,367 2,727 
Service charges and fees on deposit accounts495 447 475 1,497 1,579 
Net servicing fees (expense)228 (9)242 443 763 
Other income230 617 428 1,106 1,048 
Total noninterest income1,943 1,055 1,673 4,413 6,117 
NONINTEREST EXPENSE
Salaries and employee benefits7,126 6,386 6,472 20,742 19,552 
Occupancy and equipment1,137 1,108 1,097 3,308 3,513 
Data processing955 874 718 2,636 1,961 
Professional fees492 450 392 1,413 1,237 
Office, postage and telecommunications274 289 253 821 780 
Deposit insurance and regulatory assessments386 198 30 645 345 
Loan related59 226 244 560 529 
Customer service related81 328 437 781 1,187 
Amortization of core deposit intangible193 193 197 579 590 
Other expenses825 1,048 811 2,662 2,262 
Total noninterest expense11,528 11,100 10,651 34,147 31,956 
Income before taxes11,141 8,159 11,348 25,669 31,615 
Income taxes3,260 2,429 3,277 7,512 9,725 
Net income$7,881 $5,730 $8,071 $18,157 $21,890 
Net income per share:
Basic$0.67 $0.49 $0.69 $1.55 $1.87 
Diluted$0.67 $0.49 $0.68 $1.55 $1.85 
Weighted-average common shares outstanding:
Basic11,573,138 11,564,965 11,584,955 11,565,398 11,605,687 
Diluted11,612,270 11,606,280 11,659,146 11,616,839 11,714,020 
5
First Choice Bancorp and Subsidiary
Condensed Consolidated Statements of Income
(unaudited)
See accompanying notes to condensed consolidated financial statements.
6
First Choice Bancorp and Subsidiary
Condensed Consolidated Statements of Comprehensive Income
(unaudited)

 Three Months EndedNine Months Ended September 30,
 September 30, 2020June 30,
2020		September 30, 201920202019
(dollars in thousands)
Net income$7,881 $5,730 $8,071 $18,157 $21,890 
Other comprehensive income:
Unrealized gain on investment securities:
Change in net unrealized gain on available-for-sale securities8 389 177 924 1,050 
Income tax expense:
Change in net unrealized gain on available-for-sale securities(2)(115)(52)(273)(311)
Total other comprehensive income6 274 125 651 739 
Total comprehensive net income$7,887 $6,004 $8,196 $18,808 $22,629 


See accompanying notes to condensed consolidated financial statements.



7
First Choice Bancorp and Subsidiary
Condensed Consolidated Statement of Shareholders’ Equity
(unaudited)

Common Stock
Number
of
Shares		AmountAdditional
Paid-in
Capital		Retained
Earnings 		Accumulated
Other
Comprehensive
Income (Loss), net		Total
(dollars in thousands, except share and per share data)
Three Months Ended September 30, 2020
Balance at June 30, 202011,697,766 $217,420 $2,538 $46,352 $639 $266,949 
Net income— — — 7,881 — 7,881 
Stock-based compensation— — 525 — — 525 
Cash dividends ($0.25 per share)
— — — (2,925)— (2,925)
Exercise of stock options8,686 237 (195)— — 42 
Issuance of restricted shares, net of forfeiture(140)— — — — — 
Vesting of restricted shares— 30 (30)— — — 
Repurchase of shares from restricted shares vesting (434)(7)— — — (7)
Other comprehensive income, net of taxes— — — — 6 6 
Balance at September 30, 202011,705,878 $217,680 $2,838 $51,308 $645 $272,471 
Three Months Ended September 30, 2019
Balance at June 30, 201911,737,441 $218,532 $2,588 $33,086 $(85)$254,121 
Net income— — — 8,071 — 8,071 
Stock-based compensation— — 527 — — 527 
Cash dividends ($0.20 per share)
— — — (2,292)— (2,292)
Exercise of stock options2,512 52 (23)— — 29 
Issuance of restricted shares, net of forfeiture129 — — — — — 
Vesting of restricted shares— 119 (119)— — — 
Common stock repurchased under stock repurchase program(87,500)(1,911)— — — (1,911)
Other comprehensive income, net of taxes— — — — 125 125 
Balance at September 30, 201911,652,582 $216,792 $2,973 $38,865 $40 $258,670 
See accompanying notes to condensed consolidated financial statements
 


8
First Choice Bancorp and Subsidiary
Condensed Consolidated Statement of Shareholders’ Equity
(unaudited)
Common Stock
Number
of
Shares		AmountAdditional
Paid-in
Capital		Retained
Earnings 		Accumulated
Other
Comprehensive
Income (Loss), net		Total
(dollars in thousands, except share and per share data)
Nine Months Ended September 30, 2020
Balance at December 31, 201911,635,531 $216,398 $3,493 $41,920 $(6)$261,805 
Net income— — — 18,157 — 18,157 
Stock-based compensation— — 1,524 3 — 1,527 
Cash dividends ($0.75 per share)
— — — (8,772)— (8,772)
Exercise of stock options17,648 402 (275)— — 127 
Issuance of restricted shares, net of forfeiture98,811 — — — — — 
Vesting of restricted shares— 1,904 (1,904)— — — 
Repurchase of shares from restricted shares vesting (7,701)(166)— — — (166)
Common stock repurchased under stock repurchase program(38,411)(858)— — — (858)
Other comprehensive income, net of taxes— — — — 651 651 
Balance at September 30, 202011,705,878 $217,680 $2,838 $51,308 $645 $272,471 
Nine Months Ended September 30, 2019
Balance at December 31, 201811,726,074 $217,514 $7,269 $23,985 $(699)$248,069 
Net income— — — 21,890 — 21,890 
Stock-based compensation— — 1,493 3 — 1,496 
Cash dividends ($0.60 per share)
— — — (7,013)— (7,013)
Exercise of stock options244,249 6,863 (4,275)— — 2,588 
Issuance of restricted shares, net of forfeiture103,537 — — — — — 
Vesting of restricted shares— 1,406 (1,406)— — — 
Repurchase of shares from restricted shares vesting (5,008)— (108)— — (108)
Common stock repurchased under stock repurchase program(416,270)(8,991)— — — (8,991)
Other comprehensive income, net of taxes— — — — 739 739 
Balance at September 30, 201911,652,582 $216,792 $2,973 $38,865 $40 $258,670 

See accompanying notes to condensed consolidated financial statements
9
First Choice Bancorp and Subsidiary
Condensed Consolidated Statements of Cash Flows
(unaudited)

For the Nine Months Ended September 30,
20202019
OPERATING ACTIVITIES(dollars in thousands)
Net income$18,157 $21,890 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization1,375 1,231 
Amortization of premiums of investment securities170 129 
Amortization of servicing asset1,013 699 
Provision for loan losses5,800 1,600 
Provision for losses - unfunded commitments300 — 
Gain on sale of loans(1,367)(2,727)
Impairment charges of fixed assets and right-of-use assets— 400 
Loans originated for sale(103,084)(28,626)
Proceeds from loans originated for sale76,715 47,364 
Accretion of net discounts and deferred loan fees, net(6,039)(5,304)
Change in fair value of equity securities(48)(88)
Deferred income taxes(205)1,958 
Stock-based compensation1,527 1,496 
     Appreciation of Bank Owned Life Insurance(83)(80)
Net decrease in other items, net(4,029)(796)
Net cash (used in) provided by operating activities(9,798)39,146 
INVESTING ACTIVITIES
Proceeds from maturities and paydown of securities available-for-sale7,398 3,132 
Proceeds from maturities and paydown of securities held-to-maturity3,379 244 
Purchase of securities available-for-sale(17,993)— 
Net increase in loans held-for-investment(505,907)(61,428)
Purchase of restricted stock investments(13)(115)
Purchase of equity and qualified CRA investments(675)(388)
Proceeds from disposal of premises and equipment31 — 
Purchases of premises and equipment(1,177)(679)
Net cash used in investing activities(514,957)(59,234)
FINANCING ACTIVITIES
Net increase in deposits246,219 87,199 
Net increase in short-term borrowings60,000 (104,998)
Proceeds from long-term borrowings— 30,000 
Proceeds from Paycheck Protection Program Liquidity Facility253,140 — 
(Decrease) increase in senior secured notes(5,200)4,650 
Cash dividends paid(8,772)(7,013)
Repurchase of shares(1,024)(9,099)
Proceeds from exercise of stock options127 2,588 
Net cash provided by financing activities544,490 3,327 
Net increase in cash and cash equivalents19,735 (16,761)
Cash and cash equivalents, beginning of period161,801 197,376 
Cash and cash equivalents, end of period$181,536 $180,615 
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest paid$5,325 $9,173 
Taxes paid$6,372 $8,013 
Noncash investing and financing activities:
Transfers of loans to (from) held for investment from (to) held for sale$933 $(51)
Transfers of loans to foreclosed assets$602 $— 
Servicing rights asset recognized$179 $883 
Initial recognition of operating lease right-of-use assets$— $6,022 
Initial recognition of operating lease liabilities$— $6,141 

See accompanying notes to condensed consolidated financial statements.
10

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, headquartered in Cerritos, California, is a California corporation that was incorporated on September 1, 2017 and is the registered bank holding company for First Choice Bank. Incorporated in March 2005 and commencing commercial bank operations in August 2005, First Choice Bank is a California-chartered member bank. First Choice Bank has a wholly-owned subsidiary, PCB Real Estate Holdings, LLC, which was acquired as part of the acquisition of Pacific Commerce Bank. PCB Real Estate Holding, LLC is used for holding other real estate owned and other assets acquired by foreclosure. References herein to “First Choice Bancorp,” “Bancorp” or the “holding company,” refer to First Choice Bancorp on a stand-alone basis. The words “we," "us," "our," or the "Company" refer to First Choice Bancorp, First Choice Bank and PCB Real Estate Holdings, LLC collectively and on a consolidated basis. References to the “Bank” refer to First Choice Bank and PCB Real Estate Holdings, LLC on a consolidated basis.

    Headquartered in Cerritos, California, the Bank is a community-based financial institution that serves commercial and consumer clients in diverse communities. The Bank specializes in loans to small- to medium-sized businesses and private banking clients, commercial and industrial loans, and commercial real estate loans with a specialization in providing financial solutions for the hospitality industry. The Bank is a Preferred Small Business Administration (“SBA”) Lender. The Bank conducts business through nine full-service branches and two loan production offices located in Los Angeles, Orange and San Diego Counties. Effective May 17, 2019, the Little Tokyo branch was closed and consolidated with the 6th and Figueroa branch located in downtown Los Angeles and the San Diego branch operations were consolidated into the Carlsbad branch. The San Diego location remains as a loan production office.
 
    As a California-chartered member bank, the Bank is primarily regulated by the California Department of Financial Protection and Innovation (the “DFPI”) and the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Bank’s deposits are insured up to the maximum legal limit by the Federal Deposit Insurance Corporation (the “FDIC”).

First Choice Bancorp's stock is traded on the Nasdaq Capital Market under the ticker symbol “FCBP.”

Basis of Presentation
 
    The accompanying unaudited condensed consolidated financial statements include the accounts of First Choice Bancorp, and its wholly-owned subsidiary, First Choice Bank, and the Bank's wholly-owned subsidiary, PCB Real Estate Holdings, LLC, 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 for interim financial information. 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 to a fair presentation of the results for the interim periods presented have been included. Unaudited interim results for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020. These unaudited interim period condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements as of and for the years ended December 31, 2019 and 2018, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC"). The December 31, 2019 condensed consolidated balance sheet presented herein has been derived from the audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC.

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

Use of Estimates in the Preparation of Consolidated Financial Statements

11

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 significantly differ from those estimates. Material estimates that are particularly susceptible to significant change are the determination of the allowance for loan losses, the valuation of acquired loans, the valuation of goodwill and separately identifiable intangible assets associated with mergers and acquisitions, and the valuation of deferred tax assets.

Accounting Policies

The Company's accounting policies are based upon GAAP and conform to predominant practices within the banking industry. They were disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 under the section entitled "Summary of Critical Accounting Policies" in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 1 - Basis of Presentation and Summary of Significant Accounting Policies to the audited consolidated financial statements included therewith. Updates to our significant accounting policies are described below.

Guidance On Non-TDR Loan Modifications Due To COVID-19

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law. Section 4013 of the CARES Act, entitled "Temporary Relief From Troubled Debt Restructurings," provides banks with the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings ("TDRs") for the period beginning March 1, 2020 and ending on the earlier of December 31, 2020 and the date that is 60 days following the termination of the federal emergency declaration relating to the Coronavirus Disease 2019 ("COVID-19") pandemic.

On April 7, 2020, the federal banking agencies issued a revised joint statement, entitled "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus ("Revised Statement"). The Revised Statement clarifies the accounting treatment of loan modifications under Section 4013 of the CARES Act or in accordance with ASC Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors (“ASC Subtopic 310-40”). To be an eligible loan under section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020 (applicable period). Financial institutions that account for loans under Section 4013 are not required to apply ASC Subtopic 310-40 to these loans for the term of the loan modification and will not have to report these loans as TDRs in regulatory reports.

In addition, the joint interagency statement encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. Pursuant to the interagency statement, loan modifications that do not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. Specifically, the agencies confirmed with the staff of the Financial Accounting Standards Board (FASB) that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief are not TDRs under GAAP. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payments that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Appropriate allowances for loan and lease losses are expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual.

For loan modifications that do not qualify for treatment under Section 4013 or ASC Subtopic 310-40, as clarified by the Revised Statement, financial institutions will be required to comply with existing accounting policies to determine whether the modification should be accounted for as a TDR.

The Company's initial loan deferral program provided a deferral of principal and/or interest-only payments for periods not exceeding 90-days for all loans that qualify under Section 4013 of the CARES Act. Loans qualifying for deferral
12

under this program continue to accrue interest during the deferral period and are not reported as past due loans or TDRs for the term of the deferral period. At the end of the deferral period, borrowers will be required to resume making regularly scheduled loan payments and the loans will be re-amortized over the remaining term. All payments received will be applied first to interest payments that were deferred during the deferral period, and then to interest and principal as provided under the terms of the loan. The Company may grant an extension of an additional 90-day deferment. The accrued interest will be reviewed to determine if a reserve for uncollectible interest is required.

 Accounting Standards Adopted in 2020
    
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). The primary objective of ASU 2018-13 was to improve the effectiveness of disclosures in the notes to financial statements. ASU 2018-13 was effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption was permitted. The Company adopted this guidance on January 1, 2020. The adoption of ASU 2018-13 did not have a material impact to the Company's consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) ("ASU 2018-15"). ASU 2018-15 aligned the requirements for capitalizing implementation costs incurred in a hosting arrangement that was a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). ASU 2018-15 was effective on January 1, 2020, including interim periods within the years of adoption although early adoption was permitted. The adoption of ASU 2018-15 did not have a material impact to the Company's consolidated financial statements.

Recent Accounting Guidance Not Yet Effective
   
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) (“ASU 2016-13”), also known as "CECL." This guidance will replace the incurred loss impairment methodology used to estimate the allowance for credit losses in current GAAP with a methodology that reflects future expected credit losses and requires consideration of a broader range of reasonable and supportable forecasts in the credit loss estimates. On October 16, 2019, the FASB delayed the effective date of ASU 2016-13 for smaller reporting companies, private companies and other non-SEC filers. The Company qualifies as a "smaller reporting company" under the regulations of the SEC. Therefore, this ASU will be effective for the Company on January 1, 2023 with early adoption permitted. The Company is considering early adoption of ASU 2016-13 on January 1, 2021. Management has a cross functional committee in place to oversee the project, has selected a software to implement the new guidance using peer historical loss data, has engaged an existing third-party service provider to assist in implementation and has subscribed to a third-party application vendor for economic forecasts. The Company has completed data gap analyses, developed initial modeling assumptions, and run a high level sensitivity analysis. The Company expects to complete parallel calculations, testing, and further sensitivity analysis in the fourth quarter of 2020. The Company has not yet determined the potential impact of the adoption of ASU 2016-13 to the consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the current goodwill impairment test. Step 2 currently measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. On October 16, 2019, the FASB delayed the effective date of ASU 2017-04 for smaller reporting companies, such as the Company, as well as private companies and other non-SEC filers. Therefore, this ASU will be effective for the Company on January 1, 2023. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 is not expected to have a material impact to the Company's consolidated financial statements.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument (ASU 2019-05) which grants entities with transition relief upon the adoption of ASU
13

2016-13 by providing an option to elect the fair value option on certain financial instruments measured at amortized cost. This ASU will be effective upon adoption of ASU 2016-13 (Topic 326). The Company plans to adopt this guidance with ASU 2016-13 (Topic 326). The Company has not yet determined the potential impact of the adoption of ASU 2019-05 to the consolidated financial statements.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Financial Instruments - Credit Losses (Topic 326) which clarifies certain aspects of Topic 326 guidance issued in ASU 2016-13 including guidance providing transition relief for TDRs. This ASU will be effective upon adoption of ASU 2016-13 (Topic 326). The Company plans to adopt this guidance with ASU 2016-13 (Topic 326). The Company has not yet determined the potential impact of the adoption of ASU 2019-11 to the consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12) which simplifies the accounting for income taxes by removing certain exceptions for investments, intraperiod allocations, and interim calculations, and adds guidance to reduce the complexity of applying Topic 740. This ASU will be effective for fiscal years after December, 31, 2020. The Company plans to adopt this guidance on January 1, 2021. The adoption of ASU 2019-12 is not expected to have a material impact to the Company's consolidated financial statements.

On March 12, 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04), which provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for contract modifications as of March 12, 2020 through December 31, 2022. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The Company has not yet determined the potential impact of the adoption of ASU 2020-04 to the consolidated financial statements.

Effective April 27, 2020, the SEC amended the definitions of “accelerated” and “large accelerated filer” to exclude from those definitions registrants that are eligible to be treated as a smaller reporting company and that had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available. Prior to these changes, the Company met the definition of an “accelerated filer" because the Company's public float was greater than $75 million but less than $700 million at the end of the Company’s most recent second quarter. The Company does not anticipate that it will qualify as an “accelerated filer” with respect to its annual report on form 10-K for the year ending December 31, 2020 under these amended definitions. Whether an issuer qualifies as an “accelerated” or “large accelerated filer” or a “smaller reporting company” is determinative of whether the issuer is required to have their management’s assessment of the effectiveness of internal control over financial report attested to, and reported on, by an independent auditor, as required by Section 404(b) of the Sarbanes-Oxley Act. Unlike “large accelerated” and “accelerated” filers, smaller reporting companies are not required to have independent auditor attestations of internal control over financial reporting, but remain obligated, among other things, to establish and maintain internal controls over financial reporting as required by SOX Section 404(a) and have management assess the effectiveness of these controls. In addition, smaller reporting companies also have additional time to file quarterly and annual financial statements.

Nevertheless, because the Bank’s total assets exceed $1.0 billion, the Bank is separately required by the Federal Deposit Insurance Corporation Improvement Act ("FDICIA") to have its management’s assessment of the effectiveness of the Bank’s regulatory financial reporting attested to, and reported on, by an independent auditor. Accordingly, the SEC’s amended definitions of “large accelerated” and “accelerated” filer do not materially impact the Company's annual reporting and audit requirements other than providing the Company with additional time to prepare and file its periodic reports required to be filed with the SEC under the Exchange Act.


14

NOTE 2.    INVESTMENT SECURITIES
 
Investment securities have been classified in the condensed consolidated balance sheets according to management’s intent to either hold them to maturity or make them available for sale. The carrying amount of securities held-to-maturity and securities available-for-sale and their approximate fair values at September 30, 2020 and December 31, 2019 were as follows:

Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
September 30, 2020(dollars in thousands)
Securities available-for-sale:
U.S. Government and agency securities$2,679 $27 $— $2,706 
Mortgage-backed securities6,040 117 — 6,157 
Collateralized mortgage obligations20,611 353 (56)20,908 
SBA pools7,754 474 — 8,228 
$37,084 $971 $(56)$37,999 
Securities held-to-maturity:
Mortgage-backed securities$1,680 $121 $— $1,801 
$1,680 $121 $— $1,801 
December 31, 2019
Securities available-for-sale:
Mortgage-backed securities$7,480 $20 $(69)$7,431 
Collateralized mortgage obligations10,571 52 (25)10,598 
SBA pools8,610 58 (44)8,624 
$26,661 $130 $(138)$26,653 
Securities held-to-maturity:
U.S. Government and agency securities$3,342 $9 $— $3,351 
Mortgage-backed securities1,714 27 (15)1,726 
$5,056 $36 $(15)$5,077 

The amortized cost and estimated fair value of all investment securities held-to-maturity and available-for-sale at September 30, 2020, by contractual maturities are shown below. Contractual maturities may differ from expected maturities because the obligors and/or issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Held to MaturityAvailable for Sale
Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
(dollars in thousands)
Due in one year or less$— $— $— $— 
Due after one year through five years— — — — 
Due after five years through ten years— — — — 
Due after ten years (1)1,680 1,801 37,084 37,999 
$1,680 $1,801 $37,084 $37,999 
(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.

    At September 30, 2020 and December 31, 2019, there were no holdings of securities of any one issuer in an amount greater than 10% of our shareholders’ equity. There were $5.0 million in purchases of investment securities available-for-sale
15

and $295 thousand in calls of U.S. Government and agency securities available-for-sale during the three months ended September 30, 2020. There were no sales and maturities of any investment securities held-to-maturity during the three months ended September 30, 2020. There were no purchases, sales and maturities or calls of any investment securities available-for-sale or held-to-maturity during the three months ended June 30, 2020 and September 30, 2019.

There were $18.0 million in purchases of investment securities available-for-sale, $295 thousand in calls of U.S. Government and agency securities available-for-sale and $3.4 million in calls of U.S. Government and agency securities held-to-maturity during the nine months ended September 30, 2020. There were no purchases, sales and maturities or calls of any investment securities available-for-sale or held-to-maturity during the nine months ended September 30, 2019. At September 30, 2020 securities held-to-maturity with a carrying amount of $1.7 million were pledged to the Federal Reserve Bank as discussed in Note 8 – Borrowing Arrangements.
 
As of September 30, 2020 and December 31, 2019, 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 MonthsOver Twelve MonthsTotal
Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value
September 30, 2020(dollars in thousands)
Securities available-for-sale:
Collateralized mortgage obligations$(56)$4,042 $— $— $(56)$4,042 
$(56)$4,042 $— $— $(56)$4,042 
Securities held-to-maturity:
Mortgage-backed securities$— $— $— $— $— $— 
$— $— $— $— $— $— 
December 31, 2019
Securities available-for-sale:
Mortgage-backed securities$— $— $(69)$6,271 $(69)$6,271 
Collateralized mortgage obligations(2)1,342 (23)1,288 (25)2,630 
SBA pools(44)3,043 — — (44)3,043 
$(46)$4,385 $(92)$7,559 $(138)$11,944 
Securities held-to-maturity:
Mortgage-backed securities$— $— $(15)$790 $(15)$790 
$— $— $(15)$790 $(15)$790 

    At September 30, 2020, the Company had two investment securities available-for-sale in an unrealized loss position with total unrealized losses of $56 thousand. Such unrealized losses on these investment securities have not been recognized into income. The Company does not believe these unrealized losses are other-than-temporary because the issuers’ bonds are above investment grade, the decline in fair value is largely due to changes in interest rates, and management does not intend to sell these securities nor is it more likely than not that management would be required to sell the securities prior to their anticipated recovery.

Equity Securities with a Readily Determinable Fair Value

    At September 30, 2020 and December 31, 2019, equity securities with a readily determinable fair value of $2.8 million and $2.7 million were represented by a mutual fund investment consisting of high-quality debt securities and other debt instruments supporting domestic affordable housing and community development. The Company recognized net losses of $6 thousand, and net gains of $12 thousand and $15 thousand related to changes in fair value during the three months ended September 30, 2020, June 30, 2020 and September 30, 2019, respectively, all of which related to equity securities held during those periods. During the nine months ended September 30, 2020 and 2019, the Company recognized net gains of $48 thousand and $88 thousand related to changes in fair value.

16

Restricted Stock Investments

The Bank is a member of the FHLB system. Members are required to own FHLB stock of the greater of 1% of FHLB membership asset value or 2.7% of outstanding FHLB advances. At September 30, 2020 and December 31, 2019, the Bank owned $6.1 million of FHLB stock which is carried at cost. During the nine months ended September 30, 2020 and 2019, there were no required purchases of FHLB stock. The Company evaluated the carrying value of our FHLB stock investment at September 30, 2020 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 and special dividends, and our intent and ability to hold this investment for a period of time sufficient to recover our recorded investment.
    
    As a member of the Federal Reserve Bank of San Francisco, the Bank owned $6.9 million of Federal Reserve stock, which is carried at cost, at September 30, 2020 and December 31, 2019. There were no required purchases of Federal Reserve stock during the three months ended September 30, 2020. The Company purchased $13 thousand of Federal Reserve stock during the nine months ended September 30, 2020. The Bank purchased $43 thousand and $117 thousand of Federal Reserve stock during the three and nine months ended September 30, 2019. The Company evaluated the carrying value of our Federal Reserve stock investment at September 30, 2020 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 Federal Reserve, repurchase activity of excess stock by the Federal Reserve at its carrying value, the return on the investment from recurring dividends, and our intent and ability to hold this investment for a period of time sufficient to recover our recorded investment.

Other Equity Securities Without A Readily Determinable Fair Value

    The Company also has equity securities in the form of capital stock invested in two different banker’s bank stocks (collectively "Other Bank Stocks") which totaled $1.0 million at September 30, 2020 and December 31, 2019 and are reported in other assets in the condensed consolidated balance sheets. During the three and nine months ended September 30, 2020 and 2019, the Company evaluated the carrying value of these equity securities and determined that they were not impaired, and no loss related to changes in the fair value of these equity securities was recognized.

The Company has an investment in Class A common stock of Clearinghouse Community Development Financial Institution ("CDFI") totaling $500 thousand at September 30, 2020 and December 31, 2019. Clearinghouse CDFI is a for-profit institution that is committed to provide economic opportunities and to improve the quality of life for low-income individuals and to improve the communities through innovative and affordable financing. The purpose of this investment, first and foremost, aligns with our mission statement as a community bank to help the underserved people in our communities, while achieving a satisfactory return on capital. Additionally, this investment provides the Bank with Community Reinvestment Act ("CRA") investment credits. This equity security is recorded at cost and is included in other assets in the condensed consolidated balance sheets. During the three and nine months ended September 30, 2020 and 2019, the Company did not purchase additional securities. At September 30, 2020, the Company evaluated the carrying value of this equity security and determined that it was not impaired, and no loss was recognized related to changes in the fair value.

Qualified Affordable Housing Project Investments

The Company also has commitments and investments in two partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit ("LIHTC") pursuant to Section 42 of the Internal Revenue Code. These investments are recorded net of accumulated amortization, using the proportional amortization method. Under the proportional amortization method, the initial cost of the investments is being amortized in proportion to the tax credits and other tax benefits received, and the amortization is recognized as part of income tax expense in the condensed consolidated statements of income. Total estimated tax credits allocated and proportional amortization expense recognized were $22 thousand and $21 thousand for the three months ended September 30, 2020. Total estimated tax credits allocated and proportional amortization expense recognized were $65 thousand and $54 thousand for the nine months ended September 30, 2020. At September 30, 2020 and December 31, 2019, the net LIHTC investment totaled $687 thousand and $236 thousand. During the three and nine months ended September 30, 2020, the Company made capital contributions of $153 thousand and $504 thousand. There were $204 thousand in capital contributions during the three and nine months ended September 30, 2019. At September 30, 2020, the Company evaluated the carrying value of these securities and determined they were not impaired, and no loss was recognized related to changes in the fair value.
17

 
NOTE 3.    LOANS
 
The Company's loan portfolio consists primarily of loans to borrowers within our principal market area of Los Angeles, Orange and San Diego Counties, 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 to hold in the loan portfolio. Loans identified as held for sale are carried at the lower of their net 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 and servicing 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.

Beginning in April of 2020, the Company participated in the Paycheck Protection Program ("PPP"), administrated by the SBA, in assisting borrowers with additional liquidity. PPP loans are 100% guaranteed by the SBA and carry a fixed rate of 1.00% with a two-year contractual maturity (loans originated before June 5, 2020) or five years (loans originated on or after June 5, 2020), if not forgiven. On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) was signed into law which changed key provisions of the PPP, including provisions relating to the maturity of PPP loans, the deferral of PPP loan payments, and the forgiveness of PPP loans. Under the Flexibility Act, as clarified by the SBA in an October 7, 2020 update, the maturity date for PPP loans funded before June 5, 2020 remained at two years from funding while the maturity date for PPP loans funded after June 5, 2020 was five years from funding. In addition, the Flexibility Act, increased the period during which PPP loan proceeds are to be used for purposes that would qualify the loan for forgiveness (the “covered period”) from 8 weeks to 24 weeks, at the borrower’s election, for PPP loans made prior to June 5, 2020, and set the covered period for loans made after June 5, 2020 at 24 weeks from funding. Under the Flexibility Act, PPP borrowers are not required to make any payments of principal or interest on their PPP loan before the date on which SBA remits the loan forgiveness amount to the Company (or notifies the Company that no loan forgiveness is allowed) and, although PPP borrowers may submit an application for loan forgiveness at any time prior to the maturity date, if PPP borrowers do not submit a loan forgiveness application within 10 months after the end of their covered period, such borrowers will be required to begin paying principal and interest after that period.

At loan origination, the Company was paid a processing fee from the SBA ranging from 1% to 5% based on the loan size. At September 30, 2020, PPP loans, net of unearned fees of $9.9 million, totaled $390.2 million. The unearned fees are being accreted to interest income based on the two-year contractual maturity. The SBA did not act on any PPP loan forgiveness applications in the third quarter of 2020 and, accordingly, no PPP loans were forgiven in the quarter. The SBA has commenced making determinations as to PPP forgiveness applications in the fourth quarter of 2020 and, the Company anticipates that the SBA will continue reviewing and making determinations with respect to forgiveness applications, at which point the recognition of fee income will be accelerated. On April 14, 2020, the Company was approved by the Federal Reserve to access its SBA Paycheck Protection Program Liquidity Facility ("PPPLF"). The PPPLF enables the Company to borrow funds through the Federal Reserve Discount Window to fund PPP loans. At September 30, 2020, the Company had $253.1 million in borrowings under the PPPLF with a fixed rate of 0.35% which were collateralized by PPP loans. See Note 8 –Borrowing Arrangements for additional information regarding the PPPLF.
 
The Company participates in the Main Street Lending Program to support lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. Under this program, the Company originates loans to borrowers meeting the terms and requirements of the program, including requirements as to eligibility, use of proceeds and priority, and sells a 95% participation interest in these loans to Main Street Facilities, LLC, a special purpose vehicle ("SPV") organized by the Federal Reserve to purchase the participation interest from eligible lenders, including the Bank. During the three months ended September 30, 2020, the Company originated Main Street loans totaling $69.8 million in principal and sold participation interest totaling $66.3 million to the Main Street SPV, resulting in a gain of $486 thousand.

As of September 30, 2020, the Company had pledged $1.64 billion of loans with the FHLB under a blanket lien, of which $860.3 million was considered as eligible collateral under this secured borrowing arrangement, and loans with an unpaid principal balance of $203.1 million were pledged as collateral under a secured borrowing arrangement with the
18

Federal Reserve. See Note 8 –Borrowing Arrangements for additional information regarding the FHLB and Federal Reserve secured lines of credit.
 
    The loans held for investment portfolio includes originated and acquired loans. The acquired loans includes: (i) loans that were not credit impaired on the date of acquisition ("Non-PCI"); and (ii) purchased credit impaired ("PCI") loans, which are defined as loans with evidence of credit deterioration since their originations and for which it is probable that collection of all contractually required payments are unlikely as of the acquisition date. The following table presents loans held for investment, net, by loan class at September 30, 2020 and December 31, 2019:
September 30, 2020December 31, 2019
(dollars in thousands)
Construction and land development$215,109 $249,504 
Real estate:
     Residential30,067 43,736 
     Commercial real estate - owner occupied159,603 171,595 
     Commercial real estate - non-owner occupied528,201 423,823 
Commercial and industrial361,170 309,011 
SBA loans (1)
602,407 177,633 
Consumer8 430 
Loans held for investment, net of discounts (2)
1,896,565 1,375,732 
Net deferred origination fees (1)
(11,635)(1,057)
Loans held for investment1,884,930 1,374,675 
Allowance for loan losses(18,734)(13,522)
Loans held for investment, net$1,866,196 $1,361,153 
(1) Includes PPP loans with total outstanding principal of $400.1 million and net unearned fees of $9.9 million at September 30, 2020.
(2) Loans held for investment, net of discounts includes the net carrying value of PCI loans of $792 thousand and $1.1 million at September 30, 2020 and December 31, 2019.


The following table presents the components of loans held for investment at September 30, 2020 and December 31, 2019:
September 30, 2020December 31, 2019
(dollars in thousands)
Gross loans(1)
$1,904,019 $1,385,142 
Unamortized net discounts(2)
(7,454)(9,410)
Net unamortized deferred origination fees(3)
(11,635)(1,057)
Loans held for investment$1,884,930 $1,374,675 
(1) Gross loans include PPP loans of $400.1 million at September 30, 2020 and the net carrying value of PCI loans of $792 thousand and $1.1 million at September 30, 2020 and December 31, 2019.
(2) Unamortized net discounts include discounts related to the retained portion of SBA loans and Main Street loans and net discounts on acquired loans. At September 30, 2020, unamortized net discounts include $4.3 million associated with loans acquired in the PCB acquisition and expected to be accreted into interest income over a weighted average life of 4.1 years. At December 31, 2019, unamortized net discounts on acquired loans associated with the PCB acquisition totaled $6.0 million.
(3) Net unamortized deferred origination fees include $9.9 million for PPP loans at September 30, 2020.

19

The following table presents a summary of the changes in the allowance for loan losses for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(dollars in thousands)
Balance, beginning of period$17,822 $12,053 $13,522 $11,056 
Provision for loan losses (1)
1,000 700 5,800 1,600 
Charge-offs(194)(437)(772)(561)
Recoveries106 24 184 245 
Net charge-offs(88)(413)(588)(316)
Balance, end of period$18,734 $12,340 $18,734 $12,340 
(1) No provision for loan losses on PPP loans was recognized for the three and nine months ended at September 30, 2020 as these loans are 100% guaranteed by the SBA under the program.


The following tables present the activity in the allowance for loan losses, the composition of the period end allowance, and the loans evaluated for impairment by loan class for the three months ended September 30, 2020, June 30, 2020 and September 30, 2019 and nine months ended September 30, 2020 and 2019:
Three Months Ended September 30, 2020
Real Estate
Construction and Land DevelopmentResidentialCommercial - Owner OccupiedCommercial - Non-owner OccupiedCommercial and IndustrialSBA LoansConsumerTotal
(dollars in thousands)
Balance, June 30, 2020
$2,470 $361 $1,365 $5,347 $5,607 $2,672 $— $17,822 
Provision for (reversal of) loan losses(100)(86)(85)233 745 293 — 1,000 
Charge-offs— — — — (194)— — (194)
Recoveries— — — — 106 — — 106 
Net charge-offs— — — — (88)— — (88)
Balance, September 30, 2020
$2,370 $275 $1,280 $5,580 $6,264 $2,965 $— $18,734 
Reserves:
Specific$— $— $— $165 $— $377 $— $542 
General2,370 275 1,280 5,415 6,264 2,588 — 18,192 
$2,370 $275 $1,280 $5,580 $6,264 $2,965 $— $18,734 
Loans evaluated for impairment:
Individually$— $259 $1,312 $6,286 $183 $5,271 $— $13,311 
Collectively215,109 29,808 158,196 521,915 360,710 596,716 8 1,882,462 
PCI loans— — 95 — 277 420 — 792 
$215,109 $30,067 $159,603 $528,201 $361,170 $602,407 $8 $1,896,565 

Nine Months Ended September 30, 2020
Real Estate
Construction and Land DevelopmentResidentialCommercial - Owner OccupiedCommercial - Non-owner OccupiedCommercial and IndustrialSBA LoansConsumerTotal
(dollars in thousands)
Balance, December 31, 2019$2,350 $292 $918 $3,074 $4,145 $2,741 $2 $13,522 
Provision for (reversal of) loan losses20 (17)362 2,506 2,273 658 (2)5,800 
Charge-offs— — — — (326)(446)— (772)
Recoveries— — — — 172 12 — 184 
Net charge-offs— — — — (154)(434)— (588)
Balance, September 30, 2020
$2,370 $275 $1,280 $5,580 $6,264 $2,965 $— $18,734 


20


Three Months Ended June 30, 2020
Real Estate
Construction and Land DevelopmentResidentialCommercial - Owner OccupiedCommercial - Non-owner OccupiedCommercial and IndustrialSBA LoansConsumerTotal
(dollars in thousands)
Balance, March 31, 2020$2,498 $333 $844 $4,131 $5,455 $2,954 $3 $16,218 
Provision for (reversal of) loan losses(28)28 521 1,216 223 143 (3)2,100 
Charge-offs— — — — (125)(425)— (550)
Recoveries— — — — 54 — — 54 
Net charge-offs— — — — (71)(425)— (496)
Balance, June 30, 2020$2,470 $361 $1,365 $5,347 $5,607 $2,672 $— $17,822 
Reserves:
Specific$— $— $— $188 $— $348 $— $536 
General2,470 361 1,365 5,159 5,607 2,324 — 17,286 
$2,470 $361 $1,365 $5,347 $5,607 $2,672 $— $17,822 
Loans evaluated for impairment:
Individually$— $— $1,515 $1,339 $185 $5,428 $— $8,467 
Collectively218,226 39,145 160,890 501,354 334,751 580,959 34 1,835,359 
PCI loans— — 103 — 475 433 — 1,011 
$218,226 $39,145 $162,508 $502,693 $335,411 $586,820 $34 $1,844,837 

Three Months Ended September 30, 2019
Real Estate
Construction and Land DevelopmentResidentialCommercial - Owner OccupiedCommercial - Non-owner OccupiedCommercial and IndustrialSBA LoansConsumerTotal
(dollars in thousands)
Balance, June 30, 2019$1,892 $379 $905 $2,587 $4,502 $1,788 $— $12,053 
Provision for (reversal of) loan losses247 (47)(107)(179)384 399 3 700 
Charge-offs— — — — (437)— — (437)
Recoveries— — — — 24 — — 24 
Net charge-offs— — — — (413)— — (413)
Balance, September 30, 2019$2,139 $332 $798 $2,408 $4,473 $2,187 $3 $12,340 
Reserves:
Specific$— $— $— $— $— $624 $— $624 
General2,139 332 798 2,408 4,473 1,563 3 11,716 
$2,139 $332 $798 $2,408 $4,473 $2,187 $3 $12,340 
Loans evaluated for impairment:
Individually$— $— $— $— $730 $7,002 $— $7,732 
Collectively221,857 48,896 171,250 401,710 309,969 154,042 424 1,308,148 
PCI loans— — 110 — 506 564 — 1,180 
$221,857 $48,896 $171,360 $401,710 $311,205 $161,608 $424 $1,317,060 

21

Nine Months Ended September 30, 2019
Real Estate
Construction and Land DevelopmentResidentialCommercial - Owner OccupiedCommercial - Non-owner OccupiedCommercial and IndustrialSBA LoansConsumerTotal
(dollars in thousands)
Balance, December 31, 2018$1,721 $422 $734 $2,686 $3,686 $1,807 $— $11,056 
Provision for (reversal of) loan losses418 (90)64 (278)1,292 191 3 1,600 
Charge-offs— — — — (561)— — (561)
Recoveries— — — — 56 189 — 245 
Net (charge-off) recoveries— — — — (505)189 — (316)
Balance, September 30, 2019$2,139 $332 $798 $2,408 $4,473 $2,187 $3 $12,340 

The Company categorizes loans by 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.

Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable and improbable.

Loss - Loans classified loss are considered uncollectible and of such little value that their continuance as loans is not warranted.
 
22

The following tables present loans held for investment, net of discounts by loan class and risk category, excluding PCI loans, as of September 30, 2020 and December 31, 2019:
September 30, 2020
PassSpecial
Mention
Substandard (1)
Total
(dollars in thousands)
Construction and land development$215,109 $— $— $215,109 
Real estate:
     Residential29,808 — 259 30,067 
     Commercial real estate - owner occupied158,072 — 1,436 159,508 
     Commercial real estate - non-owner occupied521,212 — 6,989 528,201 
Commercial and industrial 359,800 — 1,093 360,893 
SBA loans593,776 — 8,211 601,987 
Consumer8 — — 8 

$1,877,785 $— $17,988 $1,895,773 
(1)At September 30, 2020, substandard loans included $13.0 million of impaired loans. There were no loans classified as special mention, doubtful or loss at September 30, 2020.

December 31, 2019
PassSpecial
Mention
Substandard (1)
Total
(dollars in thousands)
Construction and land development$249,504 $— $— $249,504 
Real estate:
     Residential43,736 — — 43,736 
     Commercial real estate - owner occupied161,863 — 9,624 171,487 
     Commercial real estate - non-owner occupied421,731 — 2,092 423,823 
Commercial and industrial305,918 — 2,630 308,548 
SBA loans166,820 — 10,260 177,080 
Consumer430 — — 430 
$1,350,002 $— $24,606 $1,374,608 
(1)At December 31, 2019, substandard loans included $11.3 million of impaired loans. There were no loans classified as special mention, doubtful or loss at December 31, 2019.

    The following tables present past due and nonaccrual loans, net of discounts by loan class, excluding PCI loans, at September 30, 2020 and December 31, 2019: 
September 30, 2020
Still Accruing 
30-59 Days
Past Due		60-89 Days
Past Due		90 Days or more
Past Due		Nonaccrual
(dollars in thousands)
Construction and land development$— $— $— $— 
Real estate:
Residential— — — 259 
Commercial real estate - owner occupied— — — 1,312 
Commercial real estate - non-owner occupied— — — 6,286 
Commercial and industrial 3 — — 183 
SBA loans1,117 113 — 4,951 
Consumer— — — — 
Total$1,120 $113 $— $12,991 

23


December 31, 2019
Still Accruing
30-59 Days
Past Due		60-89 Days
Past Due		90 Days or more
Past Due		Nonaccrual
(dollars in thousands)
Construction and land development$— $— $— $— 
Real estate:
Residential1,471 290 — — 
Commercial real estate - owner occupied— — — 3,049 
Commercial real estate - non-owner occupied— — — 1,368 
Commercial and industrial4 2 — 229 
SBA loans— — — 6,619 
Total$1,475 $292 $— $11,265 

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

The following tables present impaired loans, excluding PCI loans, by loan class at September 30, 2020 and December 31, 2019:
September 30, 2020
Impaired Loans
Unpaid
Principal
Balance		Recorded
Investment(1)		Without
Specific
Reserve		With
Specific
Reserve		Related
Allowance
(dollars in thousands)
Real estate:
     Residential$259 $259 $259 $— $— 
     Commercial real estate - owner occupied1,363 1,312 1,312 — — 
     Commercial real estate - non-owner occupied6,329 6,286 5,004 1,282 165 
Commercial and industrial 183 183 183 — — 
SBA loans5,598 5,271 3,718 1,553 377 
Total$13,732 $13,311 $10,476 $2,835 $542 
(1)Includes TDRs on accrual of $320 thousand.


December 31, 2019
Impaired Loans
Unpaid
Principal
Balance		Recorded
Investment(1)		Without
Specific
Reserve		With
Specific
Reserve		Related
Allowance
(dollars in thousands)
Real estate:
     Commercial real estate - owner occupied$3,132 $3,049 $3,049 $— $— 
     Commercial real estate - non-owner occupied1,411 1,368 — 1,368 215 
Commercial and industrial229 229 229 — — 
SBA loans7,344 6,940 4,750 2,190 939 
Total$12,116 $11,586 $8,028 $3,558 $1,154 
(1)    Includes TDRs on accrual of $321 thousand.

24

The following tables present the average recorded investment in impaired loans, excluding PCI loans, and related interest income recognized by loan class for the periods indicated:
Three Months Ended
September 30, 2020June 30, 2020September 30, 2019
Average
Recorded
Investment		Interest
Income
Recognized		Average
Recorded
Investment		Interest
Income
Recognized		Average
Recorded
Investment		Interest
Income
Recognized
(dollars in thousands)
Real estate:
     Residential$263 $— $133 $3 $— $— 
     Commercial real estate - owner occupied1,413 — 1,550 — — — 
     Commercial real estate - non-owner occupied3,813 — 1,361 — — — 
Commercial and industrial 184 — 185 — 732 — 
SBA loans5,350 6 6,074 6 4,179 54 
Total$11,023 $6 $9,303 $9 $4,911 $54 


Nine Months Ended September 30,
20202019
Average
Recorded
Investment		Interest
Income
Recognized		Average
Recorded
Investment		Interest
Income
Recognized
(dollars in thousands)
Real estate:
     Residential$131 $3 $— $— 
     Commercial real estate - owner occupied1,855 — — — 
     Commercial real estate - non-owner occupied3,018 — — — 
Commercial and industrial 188 — 304 — 
SBA loans6,030 19 2,563 71 
Total$11,222 $22 $2,867 $71 


At September 30, 2020 and December 31, 2019, the total recorded investment for loans identified as a TDR was approximately $464 thousand and $479 thousand. There were no specific reserves allocated for these loans and the Company had not committed to lend any additional amounts to customers with outstanding loans that are classified as TDRs at September 30, 2020.

Loan modifications resulting in TDR status generally included one or a combination of the following concessions: extensions of the maturity date, principal payment deferments or signed forbearance agreements with a payment plan. During the three months ended September 30, 2020, June 30, 2020 and September 30, 2019, there were no new loan modifications resulting in TDRs. During the nine months ended September 30, 2020 and September 30, 2019, there were no new loan modifications resulting in TDRs.
 
During the three months ended September 30, 2020, June 30, 2020 and September 30, 2019, there was one loan in each period totaling $81 thousand, $85 thousand and $92 thousand modified as a TDR for which there was a payment default within twelve months following the modification. During the nine months ended September 30, 2020 and September 30, 2019, there was one loan in each period totaling $81 thousand and $92 thousand modified as a TDR for which there was a payment default within twelve months following the modification. A loan is considered to be in payment default once it is 90 days contractually past due under the modification.

25

COVID-Related Loan Deferments

At September 30, 2020, the Company had 12 non-PPP loans totaling $37 million on payment deferral for COVID-19 related reasons, down from $626 million at June 30, 2020. Over 97% of loans that were granted a deferral have resumed making regular, contractually agreed-upon payments or were paid off. As a part of the CARES Act, the SBA is paying six months of principal, interest and associated fees for borrowers with current SBA 7(a) loans that were disbursed prior to September 27, 2020. At September 30, 2020, the Company had 193 SBA loans with balances totaling $73 million having payments made by the SBA under that SBA debt relief program. One deferred payment loan of $113 thousand was reported as past due, two loans totaling $5 million were reported as nonaccrual and none are reported as troubled debt restructurings ("TDRs") under Section 4013 of the CARES Act.

Loans Held for Sale

At September 30, 2020 and December 31, 2019, loans held for sale consisted of SBA 7(a) loans and totaled $36.5 million and $7.7 million. The Company accounts for loans held for sale at the lower of carrying value or fair value. The fair value of loans held for sale totaled $39.3 million and $8.4 million at September 30, 2020 and December 31, 2019.



NOTE 4.    OTHER REAL ESTATE OWNED AND OTHER FORECLOSED ASSETS

Other real estate owned and other assets ("OREO") acquired by foreclosure or deed in lieu of foreclosure are recorded at fair value less estimated selling costs at the date of foreclosure. On an ongoing basis, properties are appraised as required by market conditions and applicable regulations. At September 30, 2020, there was no other real estate owned and other foreclosed assets. In the third quarter of 2020, the Company sold all of its foreclosed assets at a gain of $2 thousand. There was a net gain on sale of the foreclosed assets and transfer of loan collateral to foreclosed assets of $2 thousand and $155 thousand included in other income in the condensed consolidated statements of income for the three and nine months ended September 30, 2020. There were no provisions and reserves for OREO recorded for the three and nine months ended September 30, 2020 and 2019.


NOTE 5.    TRANSFERS AND SERVICING OF FINANCIAL ASSETS
 
    The Company sells loans in the secondary market and, for certain loans, retains the servicing responsibility. The loans serviced for others are accounted for as sales and, therefore, are not included in the accompanying condensed consolidated balance sheets. Loans serviced for others totaled $327.4 million and $278.6 million at September 30, 2020 and December 31, 2019. This includes SBA loans serviced for others of $196.6 million at September 30, 2020 and $214.8 million at December 31, 2019 for which there is a related servicing asset of $2.4 million and $3.2 million. In addition, the loan servicing portfolio includes construction and land development loans, commercial real estate loans and commercial & industrial loans participated with various other institutions and Main Street SPV of $130.8 million and $63.8 million at September 30, 2020 and December 31, 2019 for which there is no related servicing asset.

    Consideration for each SBA loan sale includes the cash received and a related servicing asset. The Company receives servicing fees ranging from 0.25% to 1.00% for the services provided over the life of the loan. The servicing asset is based on the estimated fair value of these future cash flows to be collected. The risk inherent in the SBA servicing asset primarily relates to accelerated prepayment of loans in excess of what was originally modeled driven by changes in interest rates and a reduction in the estimated future cash flows.

    The servicing asset activity includes additions from loan sales with servicing retained and reductions from amortization as the serviced loans are repaid and servicing fees are earned. The SBA servicing asset activity is summarized for the periods indicated:


26

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(dollars in thousands)
Balance, beginning of period$2,516 $3,482 $3,202 $3,186 
Additions111 170 179 883 
Amortization(259)(282)(1,013)(699)
Balance, end of period$2,368 $3,370 $2,368 $3,370 

The fair value of the servicing asset for SBA loans is measured quarterly and was $3.1 million and $3.2 million as of September 30, 2020 and December 31, 2019. The significant assumptions used in the valuation of the SBA servicing asset at September 30, 2020 included discount rates, ranging from 0.7% to 49.4%, and a weighted average prepayment speed assumption of 21.5%.

The following table summarizes the estimated change in the value of servicing assets as of September 30, 2020 given hypothetical shifts in prepayments speeds and yield assumptions: 
 Change in Assumption Change in Estimated Fair Value
(dollars in thousands)
Prepayment speeds
+10%
$(198)
Prepayment speeds
+20%
(373)
Discount rate
+1%
(81)
Discount rate
+2%
(158)

During the three months ended September 30, 2020 and 2019, SBA loans sold totaled $6.2 million and $9.7 million resulting in total gains on sale of SBA loans of $504 thousand and $528 thousand. During the nine months ended September 30, 2020 and 2019, SBA loans sold totaled $9.6 million and $44.7 million resulting in total gains on sale of SBA loans of $881 thousand and $2.7 million.

Net servicing (costs) fees, a component of noninterest income, represent contractually specified servicing fees reported net of the servicing asset amortization. Net servicing fees totaled $228 thousand and $242 thousand for the three months ended September 30, 2020 and 2019 including contractually specified servicing fees of $487 thousand and $524 thousand, offset by the amortization indicated in the table above. Net servicing fees totaled $443 thousand and $763 thousand for the nine months ended September 30, 2020 and 2019, including contractually specified servicing fees of $1.5 million and $1.5 million, offset by the amortization indicated in the table above.

Under the Main Street Lending Program, the Company originates loans to borrowers meeting the terms and requirements of the program, including requirements as to eligibility, use of proceeds and priority, and sells a 95% participation interest in these loans to Main Street Facilities, LLC, a special purpose vehicle ("SPV") organized by the Federal Reserve to purchase the participation interest from eligible lenders, including the Bank. During the three months ended September 30, 2020, the Company originated Main Street loans totaling $69.8 million in principal amount and sold participation interest totaling $66.3 million to the Main Street SPV, resulting in a gain on sale of $486 thousand. The SPV will pay the Company a servicing fee of 0.25% per annum of the participation interest. The Company and the Federal Reserve believe that the terms of the Servicing Agreement are commercially reasonable and comparable to terms that unaffiliated third parties would accept to provide Enhanced Reporting Services, under the terms and conditions set out in the Servicing Agreement, with respect to the participation interest. Therefore, no servicing asset or liability was recorded at the time of sale.


NOTE 6.    GOODWILL AND INTANGIBLE ASSETS

    In connection with the acquisition of Pacific Commerce Bancorp ("PCB"), the Company recognized goodwill of $73.4 million and a core deposit intangible ("CDI") of $6.9 million on July 31, 2018. Due to the COVID-19 pandemic and
27

the resulting volatility in our stock price during the first nine months of 2020, the Company evaluated goodwill for impairment at September 30, 2020 and tested for impairment by comparing an estimated fair value of the Company to our book value. The fair value was estimated using the following two tests: (i) recent acquisition price-to-tangible book multiples were applied to the Company's tangible book value to compute the estimated fair value; and (ii) an “average price to last twelve month earnings” market multiple was applied to: (i) actual earnings and (ii) forecasted fiscal year 2020 earnings. Both tests resulted in the estimated fair value exceeding book value, and therefore, the Company did not recognize any impairment of goodwill for the three and nine months ended September 30, 2020. For the three and nine months ended September 30, 2020 and 2019, the Company recognized the CDI amortization indicated in the table below.     

Three Months EndedNine Months Ended September 30,
September 30, 2020September 30, 201920202019
(dollars in thousands)
Core deposit intangible:
Gross balance, beginning of period$6,908 $6,908 $6,908 $6,908 
Additions— — — — 
Gross balance, end of period$6,908 $6,908 $6,908 $6,908 
Accumulated amortization:
Balance, beginning of period(1,566)(725)(1,180)(332)
Amortization(193)(197)(579)(590)
Balance, end of period$(1,759)$(922)$(1,759)$(922)
Net core deposit intangible, end of period$5,149 $5,986 $5,149 $5,986 
    
The following table shows the estimated amortization expense for CDI during the next five fiscal years:

Year Ending December 31,(dollars in thousands)
Remainder of 2020$193 
2021753 
2022732 
2023707 
2024678 
Thereafter2,086 
$5,149 


NOTE 7.    DEPOSITS
 
The ten largest depositor relationships accounted for approximately 27% of total deposits at September 30, 2020 and 28% at December 31, 2019.

Brokered non-maturity deposits totaled $118.7 million and $48.1 million at September 30, 2020 and December 31, 2019. Brokered time deposits totaled $101.3 million and $50.4 million at September 30, 2020 and December 31, 2019.

Time deposits that exceeded the FDIC insurance limit of $250,000 amounted to $30.6 million and $61.7 million as of September 30, 2020 and December 31, 2019. The Company participates 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. Total collateralized deposits, including the deposits of State of California and other public agencies, were $46.5 million at September 30, 2020 and were collateralized by letters of credit issued by the FHLB under the Bank's secured line of credit with the FHLB. See Note 8 –Borrowing Arrangements for additional information regarding the FHLB secured line of credit.

28

NOTE 8.    BORROWING ARRANGEMENTS
 
Federal Home Loan Bank Secured Line of Credit

    At September 30, 2020, the Bank had a secured line of credit of $407.1 million from the FHLB, of which $186.1 million was available. This secured borrowing arrangement is collateralized under a blanket lien and is subject to the Bank providing adequate collateral and continued compliance with the Advances and Security Agreement and other eligibility requirements established by the FHLB. At September 30, 2020, the Bank had pledged $1.64 billion of loans under the blanket lien, including PPP loans, of which $860.3 million was considered as eligible collateral. PPP loans are not considered eligible collateral under this borrowing agreement.

At September 30, 2020, the Bank also participated in the FHLB San Francisco's new Recovery Advance loan program for $10 million at zero percent interest with maturity dates in November 2020 and May 2021. The following table shows the interest rates and maturity dates of FHLB advances at periods indicated:
September 30, 2020December 31, 2019
BalanceRateMaturity DateBalanceRateMaturity Date
Advances:(dollars in thousands)
Recovery advance$5,000 — %11/19/2020$— — %— 
Recovery advance5,000 — %5/19/2021— — %— 
Term and fixed-rate advance30,000 0.22 %11/27/202060,000 1.72 %3/20/2020
Term and fixed-rate advance50,000 0.19 %2/26/2021— — %— 
Term and fixed-rate advance30,000 0.25 %5/26/2021— — %— 
Term and fixed-rate advance30,000 1.93 %6/11/202130,000 1.93 %6/11/2021
$150,000 0.54 %$90,000 1.79 %

    In addition, at September 30, 2020, the Bank used $71.0 million of its secured FHLB borrowing capacity by having the FHLB issue letters of credit to meet collateral requirements for deposits from the State of California and other public agencies.

The average outstanding balance of total FHLB borrowings was $152.7 million and $48.3 million with an average interest rate of 0.54% and 2.08% for the three months ended September 30, 2020 and 2019. The average balance of total FHLB borrowings was $129.4 million and $53.1 million with an average interest rate of 0.80% and 2.39% for the nine months ended September 30, 2020 and 2019.

Federal Reserve Bank Secured Line of Credit

    At September 30, 2020, the Bank had a secured line of credit of $138.2 million from the Federal Reserve Bank. During the third quarter of 2019, the Bank expanded the existing secured borrowing capacity with the Federal Reserve through the Borrower-in-Custody ("BIC") program. At September 30, 2020, the Bank had pledged qualifying loans with an unpaid principal balance of $203.1 million and securities held-to-maturity with a carrying value of $1.7 million as collateral for this line. Borrowings under this BIC program are overnight advances with interest chargeable at Federal Reserve discount window ("Primary Credit") borrowing rate. There were no borrowings under this credit facility at or during the three and nine months ended September 30, 2020 and there were no borrowings at December 31, 2019.

Paycheck Protection Program Liquidity Facility

On April 14, 2020, the Bank was approved by the Federal Reserve to access its SBA Paycheck Protection Program Liquidity Facility ("PPPLF") through the discount window. The PPPLF enables the Company to fund PPP loans without taking on additional liquidity or funding risks by providing non-recourse loans collateralized by the PPP loans. Borrowings under the PPPLF have a fixed-rate of 0.35%, with a term that matches the underlying loans pledged of two years. At September 30, 2020, the Bank had $253.1 million in borrowings under the PPPLF which were collateralized by PPP loans.
29

The average outstanding borrowings were $240.6 million and $123.1 million during the three and nine months ended September 30, 2020.

Federal Funds Unsecured Lines of Credit

    The Bank has established unsecured overnight borrowing arrangements for an aggregate amount of $125.0 million, subject to availability, with five of its correspondent banks. In general, interest rates on these lines approximate the federal funds target rate. There were no borrowings under these credit facilities at or during the three and nine months ended September 30, 2020 and there were no borrowings at December 31, 2019.

Senior Secured Notes

    The holding company has a senior secured revolving line of credit for $25 million, which matures on March 22, 2022. At September 30, 2020, the outstanding balance under this secured line of credit totaled $4.4 million with a floating interest rate equal to Wall Street Journal Prime, or 3.25%. At December 31, 2019, the outstanding balance totaled $9.6 million with an interest rate of 5.00%. The average outstanding borrowings under this facility totaled $4.6 million and $12.3 million with an average interest rate of 3.36% and 5.69% for the three months ended September 30, 2020 and 2019, respectively. The average outstanding borrowings under this facility totaled $6.5 million and $12.2 million with an average interest rate of 3.87% and 5.82% for the nine months ended September 30, 2020 and 2019. At September 30, 2020, the Company was in compliance with all loan covenants on the facility and the remaining available credit was $20.6 million. One of our executives is also a member of the lending bank's board of directors.


NOTE 9.    INCOME TAXES
    
    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 decreased by approximately $68 thousand during the nine months ended September 30, 2020 as a result of changes to temporary differences and the reversal of interest accrued related to unrecognized tax benefits. 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 at September 30, 2020.
    
    For the three months ended September 30, 2020 and 2019, income tax expense was $3.3 million and $3.3 million, resulting in an effective income tax rate of 29.3% and 28.9%. For the nine months ended September 30, 2020 and 2019, income tax expense was $7.5 million and $9.7 million, resulting in an effective income tax rate of 29.3% and 30.8%. Our effective tax rate varies from the statutory rate of 29.6% during the three and nine months ended September 30, 2020 and September 30, 2019 due to the tax effect of stock-based compensation.

     The Company is subject to federal income and California franchise tax. At September 30, 2020, the federal statute of limitations for the assessment of income tax is closed for all tax years up to and including 2015. The California statute of limitations for the assessment of franchise tax is closed for all years up to and including 2014. The Company is currently not under examination in any taxing jurisdiction.
    
There were no unrecognized tax benefits at September 30, 2020 due to the expiration of the statute of limitations for the assessment of taxes. There were $113 thousand of unrecognized tax benefits at December 31, 2019, primarily comprised of unrecognized tax benefits from tax positions taken in prior years. The total amount of tax benefits that, if recognized, would favorably impact the effective tax rate was $0 at September 30, 2020 and December 31, 2019.

There were no interest and penalties related to unrecognized tax benefits in income tax expense at September 30, 2020. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense, and had
30

accrued $19 thousand of interest at December 31, 2019. No amounts for penalties were accrued at September 30, 2020 and December 31, 2019.

On June 29, 2020, the Assembly Bill No. 85 (AB 85) was signed into law by California Governor Gavin Newsom to raise additional income tax revenue to assist in balancing the California budget caused by the COVID-19 pandemic. The most significant provision of this bill is the suspension of the net operating losses (NOL) deduction for tax years beginning on or after January 1, 2020 and before January 1, 2023. The existing 20-year carry forward period for NOLs (10 years for losses incurred in the tax year 2000 through 2007) would be extended for up to three years if losses are not used due to the NOL suspension.

On March 27, 2020, the U.S. government enacted the CARES Act. Among other provisions, the CARES Act makes several modifications to federal net operating losses, including requiring a taxpayer with a net operating loss (“NOL”) arising in a taxable year beginning in 2018, 2019, or 2020 to carry that loss back to each of the five preceding years unless the taxpayer elects to waive or reduce the carryback. The Company did not generate NOLs in 2018 and 2019.


NOTE 10.    COMMITMENTS AND CONTINGENCIES
 
In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of our 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 condensed 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 the Company does for loans reflected in our condensed consolidated financial statements.
 
As of September 30, 2020 and December 31, 2019, the Company had the following outstanding financial commitments whose contractual amounts represent credit risk:
September 30, 2020December 31, 2019
(dollars in thousands)
Commitments to extend credit$383,666 $376,879 
Standby letters of credit7,210 7,616 
Commitments to contribute capital to low income housing projects2,234 1,738 
Commitments to contribute capital to other CRA equity investments61 236 
Total$393,171 $386,469 
 
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 commitments to extend credit and standby letters of credit are secured by real estate. The Company did not recognize any provision for unfunded loan commitments for the three months ended September 30, 2020 and 2019. The provision for unfunded loan commitments is included in "other expense" in the condensed consolidated statements of income and was $300 thousand for the nine months ended September 30, 2020; there was no provision for unfunded loan commitments recognized for the nine months ended September 30, 2019. The reserve for unfunded commitments was $1.5 million and $1.2 million at September 30, 2020 and December 31, 2019. The reserve for unfunded commitments is included in "other liabilities" in our condensed consolidated balance sheets.

The Company committed to invest in two partnerships that sponsors affordable housing projects utilizing the Low Income Housing Tax Credit ("LIHTC") pursuant to Section 42 of the Internal Revenue Code. The purpose of this investment is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing projects, and to assist in achieving goals associated with the Community Reinvestment Act ("CRA"). Capital contributions are called for up to an amount specified in the partnership agreement. In addition, the Company invested in other CRA investments such as the
31

Small Business Investment Company ("SBIC") program. At September 30, 2020 and December 31, 2019, the Company had unfunded commitments to contribute capital to LIHTC investments and other CRA investments totaling $2.3 million and $2.0 million.

In the normal course of business, the Company is named or threatened to be named as a defendant in various lawsuits. The Company is from time to time engaged in various litigation matters including the defense of claims of improper or fraudulent loan practices or lending violations, and other matters, and the Company has a number of unresolved claims pending. In addition, as part of the ordinary course of business, the Company is party to litigation involving claims to the ownership of funds in particular accounts, the collection of delinquent accounts, challenges to security interests in collateral, and foreclosure interests that are incidental to our regular business activities. While the ultimate liability with respect to these other litigation matters and claims cannot be determined at this time, the Company believes that damages, if any, and other amounts relating to pending matters are not likely to be material to the condensed consolidated balance sheets or condensed consolidated statements of income.
 

NOTE 11.    RELATED PARTY TRANSACTIONS
 
In the ordinary course of business, the Company may provide loans to certain executive officers and directors and the companies with which they are associated. There were no related party loans for the three and nine months ended September 30, 2020 and 2019. Deposits from certain officers and directors and the companies with which they are associated totaled $26.0 million and $35.0 million at September 30, 2020 and December 31, 2019.
 
The holding company has a $25.0 million senior secured facility and a $20.0 million federal funds unsecured line of credit (refer to Note 8 - Borrowing Arrangements) with a correspondent bank in which one of the Company's executives is also a member of the correspondent bank’s Board of Directors. At September 30, 2020 and December 31, 2019, the outstanding balance of the senior secured facility was $4.4 million and $9.6 million. There were no borrowings under the unsecured line of credit at September 30, 2020 and December 31, 2019. The Company maintains a correspondent deposit relationship with the correspondent bank, and had deposits of $2.2 million and $1.4 million at September 30, 2020 and December 31, 2019. The Company has invested in stock of the correspondent bank which totaled $102 thousand at September 30, 2020 and December 31, 2019. In addition, the Company has loan participation agreements where the Company may participate out a portion of loans to the correspondent bank. The total participated loan balance was $20.0 million and $16.3 million at September 30, 2020 and December 31, 2019.

 
NOTE 12.    STOCK-BASED COMPENSATION PLANS
 
The Company's 2013 Omnibus Stock Incentive Plan (“2013 Plan”) was approved by shareholders in May 2013. Under the terms of the 2013 Plan, officers and key employees may be granted both nonqualified and incentive stock options and directors and other consultants, who are not also an officer or employee, may only be granted nonqualified stock options. The 2013 Plan also permits the grant of stock appreciation rights (“SARs”), restricted shares, deferred shares, performance shares and performance unit awards. The 2013 Plan provides that the total number of awards of common stock that may be issued over the term of the plan shall not exceed 1,590,620 shares, of which a maximum of 300,000 shares may be granted as incentive stock options. An increase of 200,000 shares available for issuance under the 2013 Plan was approved by the Company's shareholders in June 2020. Stock options, SARs, performance share and unit awards are granted at a price not less than 100% of the fair market value of the stock on the date of grant. Options generally vest over a period of three to five years. The 2013 Plan provides for accelerated vesting if there is a change of control, as defined in the 2013 Plan. Stock options expire no later than ten years from the grant date. The 2013 Plan expires in 2023.

The Company recognized stock-based compensation expense of $525 thousand and $527 thousand for the three months ended September 30, 2020 and 2019. For the nine months ended September 30, 2020 and 2019, the Company recognized stock-based compensation expense of $1.5 million for both periods.
 
32

A summary of activity in our outstanding stock options during the three and nine months ended September 30, 2020 and 2019 is as follows:
Three Months Ended September 30,
20202019
SharesWeighted
Average
Exercise Price		SharesWeighted
Average
Exercise Price
Outstanding, beginning of period131,424 $10.33 141,089 $10.18 
Exercised(8,686)4.86 (2,512)11.60 
Granted— — — — 
Forfeited(3,576)18.04 — — 
Outstanding, end of period119,162 $10.50 138,577 $10.16 
Options exercisable114,162 $10.33 138,577 $10.16 


Nine Months Ended September 30,
20202019
SharesWeighted
Average
Exercise Price		Weighted Average Remaining Contractual Life (Years)Aggregate Intrinsic ValueSharesWeighted
Average
Exercise Price		Weighted Average Remaining Contractual Life (Years)Aggregate Intrinsic Value
(dollars in thousands, except share and per share data)
Outstanding, beginning of period137,531 $10.20 383,212 $10.44 
Exercised(17,648)7.22 (244,249)10.60 
Granted5,000 14.42 — — 
Forfeited(5,721)16.67 (386)12.94 
Outstanding, end of period119,162 $10.50 3.5 years$359 138,577 $10.16 4.2 years$1,547 
Options exercisable114,162 $10.33 3.3 years$359 138,577 $10.16 4.2 years$1,547 


As of September 30, 2020, there was $10 thousand unrecognized compensation cost related to the outstanding stock options. The intrinsic value of options exercised during the three months ended September 30, 2020 and 2019 was approximately $83 thousand and $25 thousand. The intrinsic value of options exercised during the nine months ended September 30, 2020 and 2019 was approximately $145 thousand and $2.7 million.
 
A summary of activity for outstanding restricted shares for the three and nine months ended September 30, 2020 and 2019 is as follows:
Three Months Ended September 30,
20202019
SharesWeighted Average
Grant-Date
Fair Value		SharesWeighted Average
Grant-Date
Fair Value
Nonvested, beginning of period128,661 $21.79 128,053 $22.91 
Granted100 16.27 972 22.56 
Vested(1,146)25.24 (4,537)26.41 
Forfeited(240)23.36 (843)21.43 
Nonvested, end of period127,375 $21.75 123,645 $22.79 


33

Nine Months Ended September 30,
20202019
SharesWeighted Average
Grant-Date
Fair Value		SharesWeighted Average
Grant-Date
Fair Value
Nonvested, beginning of period113,635 $22.50 84,120 $23.90 
Granted102,367 21.62 111,205 22.19 
Vested(85,071)22.37 (64,012)23.32 
Forfeited(3,556)27.09 (7,668)21.83 
Nonvested, end of period127,375 $21.75 123,645 $22.79 

As of September 30, 2020, there was approximately $1.4 million of total unrecognized compensation cost related to the restricted shares that will be recognized over the weighted-average period of 1.9 years. The value of restricted shares that vested was approximately $29 thousand and $120 thousand during the three months ended September 30, 2020 and 2019. The value of restricted shares that vested was approximately $1.9 million and $1.5 million for the nine months ended September 30, 2020 and 2019.


NOTE 13.    EARNINGS PER SHARE
 
Earnings per share (“EPS”) is computed on a basic and diluted basis. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Basic shares outstanding exclude unvested shares of restricted stock and stock options. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that shares in our earnings. The Company's unvested grants of restricted stock contain non-forfeitable rights to dividends, which are required to be treated as participating securities and included in the computation of earnings per share.
The following is a reconciliation of net income and shares outstanding used in the computation of basic and diluted EPS:
Three Months EndedNine Months Ended September 30,
September 30, 2020June 30,
2020		September 30, 201920202019
Numerator for basic earnings per share:(dollars in thousands, except share and per share data)
Net income$7,881 $5,730 $8,071 $18,157 $21,890 
Less: dividends and net income allocated to participating securities(86)(60)(86)(182)(222)
Net income available to common shareholders$7,795 $5,670 $7,985 $17,975 $21,668 
Denominator for basic earnings per share:
Basic weighted average common shares outstanding during the period11,573,138 11,564,965 11,584,955 11,565,398 11,605,687 
Denominator for diluted earnings per share:
Basic weighted average common shares outstanding during the period11,573,138 11,564,965 11,584,955 11,565,398 11,605,687 
Net effect of dilutive stock options39,132 41,315 74,191 51,441 108,333 
Diluted weighted average common shares11,612,270 11,606,280 11,659,146 11,616,839 11,714,020 
Net income per common share:
Basic$0.67 $0.49 $0.69 $1.55 $1.87 
Diluted$0.67 $0.49 $0.68 $1.55 $1.85 

34

NOTE 14.    FAIR VALUE MEASUREMENTS
 
The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged (using an exit price notion) in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
 
Fair value of financial instruments

Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial
instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in many of the estimates. The methods and assumptions used to
estimate the fair value of certain financial instruments are described below:

Cash and Due from Banks. The carrying amounts of cash and short-term instruments approximate fair values
because of the liquidity of these instruments.

Interest Bearing Deposits at Other Banks. The carrying amount is assumed to be the fair value given the short-term
nature of these deposits.

Loans. The fair value of loans, which is based on an exit price notion, is generally determined using an income based approach based on discounted cash flow analysis. This approach utilizes the contractual maturity of the loans and
market indications of interest rates, prepayment speeds, defaults and credit risk in determining fair value. For impaired loans,
an asset-based approach is applied to determine the estimated fair values of the underlying collateral. This approach utilizes
the estimated net sales proceeds to determine the fair value of the loans when deemed appropriate. The implied sales
proceeds value provides a better indication of value than using an income-based approach as these loans are not performing
or exhibit strong signs indicative of non-performance.

Securities. The fair values of securities available-for-sale and held-to-maturity are determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

Equity Securities and Other Bank Stock. The fair value of equity securities is based on quoted prices in active markets for identical assets to determine the fair value. If quoted prices are not available to determine fair value, the Company estimates the fair values by using independent pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.

Restricted Stock Investments. Investments in FHLB and Federal Reserve stocks are recorded at cost and measured for impairment. Ownership of FHLB and Federal Reserve stocks are restricted to member banks and the securities do not have a readily determinable market value. Purchases and sales of these securities are at par value with the issuer. The fair value of investments in FHLB and Federal Reserve stock and other bank stock is equal to the carrying amount.

Servicing Asset. The fair value of servicing assets is based, in part, by third-party valuations that project estimated
future cash inflows that include servicing fees and outflows that include market rates for costs of servicing.

Deposits. The fair values disclosed for demand deposits, including interest and non-interest demand accounts,
savings, and certain types of money market accounts are, by definition based on carrying value. Fair value for fixed-rate
certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered
on certificates to a schedule of aggregate expected monthly maturities on time deposits. Early withdrawal of fixed-rate
35

certificates of deposit is not expected to be significant.

Federal Home Loan Bank Borrowings. The fair values of the Company’s overnight borrowings from Federal Home Loan Bank approximates their carrying value as the advances were recently borrowed at market rate. The fair value of fixed-rated term borrowings is estimated using a discounted cash flow through the remaining maturity dates based on the current borrowing rates for similar types of borrowing arrangements.

Paycheck Protection Program Liquidity Facility. The fair value of the PPPLF is estimated using a discounted cash flow based on the remaining contractual term and current borrowing rates for similar terms.

Senior Secured Notes. The fair value of the senior secured notes approximates carrying value as the note was recently borrowed at a variable market rate.

Accrued Interest Receivable and Payable. The fair value of accrued interest receivable and payable approximates their carrying amounts.

Off-Balance Sheet Financial Instruments. The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair value of these financial instruments is not material.

The following table provides the fair value hierarchy level and estimated fair value of significant financial instruments at September 30, 2020 and December 31, 2019:

September 30, 2020December 31, 2019
Fair Value
Hierarchy		Carrying
Amount		Fair
Value		Carrying
Amount		Fair
Value
Financial Assets:(dollars in thousands)
Cash and cash equivalents Level 1$181,536 $181,536 $161,801 $161,801 
Securities available-for-sale Level 237,999 37,999 26,653 26,653 
Securities held-to-maturity Level 21,680 1,801 5,056 5,077 
Equity securitiesLevel 12,792 2,792 2,694 2,694 
Loans held for sale Level 236,474 39,271 7,659 8,420 
Loan held for investment, net Level 31,866,196 1,906,039 1,361,153 1,393,282 
Restricted stock investments, at cost Level 212,999 12,999 12,986 12,986 
Servicing asset Level 32,368 3,063 3,202 3,246 
Accrued interest receivable Level 211,500 11,500 5,451 5,451 
Financial Liabilities:
Deposits Level 2$1,559,912 $1,561,061 $1,313,693 $1,316,287 
Borrowings Level 2150,000 150,336 90,000 91,029 
PPP Liquidity Facility Level 2253,140 253,245 — — 
Senior secured notes Level 24,400 4,400 9,600 9,600 
Accrued interest payable Level 2418 418 203 203 

36

Recurring fair value measurements

The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019:
Recurring Fair Value Measurements
Level 1Level 2Level 3Total
September 30, 2020:(dollars in thousands)
Securities available-for-sale:
U.S. Government and agency securities$— $2,706 $— $2,706 
Mortgage-backed securities — 6,157 — 6,157 
Collateralized mortgage obligations— 20,908 — 20,908 
SBA Pools— 8,228 — 8,228 
Securities available-for-sale$— $37,999 $— $37,999 
Equity securities:
Mutual fund investment$2,792 $— $— $2,792 
December 31, 2019:
Securities available-for-sale:
Mortgage-backed securities $— $7,431 $— $7,431 
Collateralized mortgage obligations— 10,598 — 10,598 
SBA Pools— 8,624 — 8,624 
Securities available-for-sale$— $26,653 $— $26,653 
Equity securities:
Mutual fund investment$2,694 $— $— $2,694 

Nonrecurring fair value measurements

These fair value measurements typically result from the application of specific accounting pronouncements under GAAP. The fair value measurements are considered nonrecurring fair value measurements under FASB ASC 820-10.

The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2020 and December 31, 2019:


Nonrecurring Fair Value Measurements
Level 1Level 2Level 3Total
September 30, 2020:(dollars in thousands)
Impaired loans$— $— $2,293 $2,293 
December 31, 2019:
Impaired loans$— $— $3,558 $3,558 

The majority of the impaired loans are considered collateral-dependent loans or are supported by a SBA guaranty. The collateral-dependent impaired loans were written down to the fair value of their underlying collateral less costs to sell of $2.3 million and $3.6 million at September 30, 2020 and December 31, 2019, by establishing specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans. The Company generally utilized selling costs of 10% of appraised values for nonrecurring fair value measurements related to collateral-dependent impaired loans during the three and nine months ended September 30, 2020. The fair value adjustments (which include charge-offs, net of recoveries and changes in specific reserves) resulted in $93 thousand in losses and $25
37

thousand in gains for the three and nine months ended September 30, 2020. There were no collateral-dependent impaired loans measured at fair value on a nonrecurring basis during the three and nine months ended September 30, 2019. In addition, there were no fair value adjustments for the three and nine months ended September 30, 2019.

Other real estate owned and other foreclosed assets (OREO) are recorded at fair value less estimated selling costs through a charge-off to the allowance for loan and lease losses or gain on transfer of OREO included in other income in the condensed consolidated statements of income based upon the fair value of the foreclosed property at acquisition. The fair value of an OREO is based on third party information and appraisals including comparable sales and the income approach. Adjustments are regularly made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification. When the carrying amount exceeds the fair value less estimated selling costs, and impairment loss is recognized through a valuation allowance, and the property is reported as nonrecurring Level 3.


NOTE 15.    REVENUE RECOGNITION

    The portion of our noninterest income which is in scope of Topic 606, Revenue from Contracts with Customers, includes fees from deposit customers for transaction-based fees, account maintenance charges, and overdraft services. Transaction-based fees include items such as ATM and ACH fees, overdraft and stop payment charges, and are recognized at the time such transactions are executed and service has been fulfilled. Account maintenance charges, which are primarily monthly fees, are earned over the course of the month, which represents the period through which the Company satisfies its performance obligation. Overdraft fees are recognized at the time the overdraft occurs. Service charges are typically withdrawn from the customer’s account balance. 

    The following is a summary of our noninterest income in-scope and not in-scope of Topic 606:
Three Months EndedNine Months Ended September 30,
September 30, 2020September 30, 201920202019
(dollars in thousands)
Noninterest income, in-scope:
Service charges and fees on deposit accounts$495 $475 $1,497 $1,579 
Other income45 46 268 133 
Total noninterest income, in-scope540 521 1,765 1,712 
Noninterest income, not in-scope:
Gain on sale of loans990 528 1,367 2,727 
Net servicing fees228 242 443 763 
Other income185 382 838 915 
Total noninterest income, not in-scope1,403 1,152 2,648 4,405 
Total noninterest income$1,943 $1,673 $4,413 $6,117 


NOTE 16.     EQUITY

Dividends

During the three months ended September 30, 2020 and 2019, total quarterly cash dividends declared were $0.25 and $0.20 per share and total cash dividends paid were $2.9 million and $2.3 million. During the nine months ended September 30, 2020 and 2019, total quarterly cash dividends declared were $0.75 and $0.60 per share and total cash dividends paid were $8.8 million and $7.0 million.

38

Stock Repurchase Plan
 
    On December 3, 2018, the Company announced a stock repurchase plan, providing for the repurchase of up to 1.2 million shares, or approximately 10%, of our then outstanding shares (the "repurchase plan"). The repurchase plan permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18. The repurchase plan may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of tentative investment opportunities, liquidity, and other factors management deems appropriate. These factors may also affect the timing and amount of share repurchases. The repurchase plan does not obligate us to purchase any particular number of shares.

    On March 17, 2020, the Company suspended the stock repurchase plan. There were no repurchases of common stock during the three months ended September 30, 2020, compared to 87,500 shares of the Company's common stock repurchased at an average price of $21.84 per share and a total cost of $1.9 million during the three months ended September 30, 2019. During the nine months ended September 30, 2020 and 2019, the Company repurchased 38,411 and 416,270 shares of the Company's common stock at an average price of $22.34 and $21.60 and a total cost of $858 thousand and $9.0 million. Since the plan was announced, the Company has repurchased a total of 504,511 shares at an average price of $21.70 per share. The remaining number of shares authorized to be repurchased under this plan was 695,489 shares at September 30, 2020.


NOTE 17.     REGULATORY CAPITAL

First Choice Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. 

At September 30, 2020, the Company qualified for treatment under the Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) and, therefore, is not subject to consolidated capital rules at the bank holding company level. The Bank has also opted into the Community Bank Leverage Ratio ("CBLR") framework, beginning with the Call Report filed for the first quarter of 2020. At September 30, 2020, the Bank's CBLR ratio was 10.29% which exceeded all regulatory capital requirements under the CBLR framework and the Bank was considered to be ‘‘well-capitalized.’’

    Banks and their bank holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9%, are eligible to opt into the CBLR framework. Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules (generally applicable rule) and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act. Accordingly, a qualifying community banking organization that exceeds the 9% CBLR will be considered to have met: (i) the generally applicable risk-based and leverage capital requirements of the generally applicable capital rules; (ii) the capital ratio requirements in order to be considered well-capitalized under the prompt corrective action framework; and (iii) any other applicable capital or leverage requirements. A qualifying community banking organization that elects to be under the CBLR framework generally would be exempt from the current capital framework, including risk-based capital requirements and capital conservation buffer requirements. A banking organization meets the definition of a “qualifying community banking organization” if the organization has:

•A leverage ratio of greater than 9%;

•Total consolidated assets of less than $10 billion;
39


•Total off-balance sheet exposures (excluding derivatives other than sold credit derivatives and unconditionally cancellable commitments) of 25% or less of total consolidated assets; and

•Total trading assets plus trading liabilities of 5% or less of total consolidated assets.

Even though a banking organization meets the above-stated criteria, federal banking regulators have reserved the authority to disallow the use of the CBLR framework by a depository institution or depository institution holding company, based on the risk profile of the banking organization.

On April 6, 2020, the federal banking regulators, implementing the applicable provisions of the CARES Act, issued interim rules which modified the CBLR framework so that: (i) beginning in the second quarter 2020 and until the end of the year, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the CBLR framework; and (ii) community banking organizations will have until January 1, 2022, before the CBLR requirement is reestablished at greater than 9%. Under the interim rules, the minimum CBLR is 8% beginning in the second quarter and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. The interim rules also maintain a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1% below the applicable community bank leverage ratio. Assets originated under the PPP which are also pledged under the PPPLF are deducted from average total consolidated assets for purposes of the CBLR. However, such assets are included in total consolidated assets for purposes of determining the eligibility to elect the CBLR framework.


NOTE 18.     SUBSEQUENT EVENTS
    
On November 5, 2020, the Company declared a $0.25 cash dividend payable on December 28, 2020 to shareholders of record as of December 14, 2020.
40

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    The purpose of this management's discussion and analysis of financial condition and results of operations ("MD&A") is to focus on information about our condensed consolidated financial condition at September 30, 2020 and December 31, 2019, and our condensed consolidated results of operations for the quarters ended September 30, 2020, June 30, 2020, and September 30, 2019 and for the nine months ended September 30, 2020 and 2019. Our condensed consolidated financial statements and the accompanying notes appearing elsewhere in this report, and our Annual Report on Form 10-K for the year ended December 31, 2019, should be read in conjunction with this MD&A.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

    In addition to the historical information, this Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding management’s beliefs, projections and assumptions concerning future results and events. Forward-looking statements include descriptions of management’s plans or objectives for future operations, products or services, and forecasts of the Company’s revenues, earnings or other measures of economic performance. These forward-looking statements involve risks and uncertainties and are based on management's beliefs and assumptions and on the information available to management at the time that this report was prepared and can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words or phrases such as "aim," "can," "may," "could," "predict," "should," "will," "would," "believe," "anticipate," "estimate," "expect," "hope," "intend," "plan," "potential," "project," "will likely result," "continue," "seek," "shall," "possible," "projection," "optimistic," and "outlook," and variations of these words and similar expressions or the negative version of those words or phrases.

Forward-looking statements involve substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. There are many factors that could cause actual results to differ materially from those contemplated by these forward-looking statements. Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the SEC, Item 1A of our Annual Report on Form 10-K, and the following:

•The effects of the global COVID-19 pandemic and governmental and regulatory responses thereto.

•The effects of trade, monetary and fiscal policies and laws.

•Possible losses of businesses and population in the Los Angeles, Orange, or San Diego Counties.

•Loss of customer checking and money-market account deposits as customers pursue other higher-yield investments.

•Possible changes in consumer and business spending and saving habits and the related effect on our ability to increase assets and to attract deposits.

•Possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans.

•Changes in the speed of loan prepayments, loan origination and sale volumes, loan loss provisions, charge-offs or actual loan losses.

•Compression of our net interest margin.

•Inability of our framework to manage risks associated with our business, including but not limited to operational risk, regulatory risk, cyber risk, liquidity risk, customer risk and credit risk, to mitigate all risk or loss to us.

•The effects of any damage to our reputation resulting from developments related to any of the items identified above.

For a more detailed discussion of some risks and uncertainties that could materially and adversely affect our financial condition and results of operations, see Part 1, Item 1A - Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and Part II, Item 1A — Risk Factors in the Company's Quarterly Reports on Form 10-Q for quarters ended March 31, 2020 and June 3, 2020 and this Quarterly Report on Form 10-Q for discussion relating to risk factors impacting us.

41

    Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events and specifically disclaims any obligation to revise or update such forward-looking statements for any reason, except as may be required by applicable law. You should consider any forward-looking statements in light of this explanation, and the Company cautions you about relying on forward-looking statements.


Overview
 
    First Choice Bancorp, headquartered in Cerritos, California, is a California corporation that was incorporated on September 1, 2017 and is the registered bank holding company for First Choice Bank. Incorporated in March 2005 and commencing commercial bank operations in August 2005, First Choice Bank is a California-chartered member bank. First Choice Bank has a wholly-owned subsidiary, PCB Real Estate Holdings, LLC, which was acquired as part of the acquisition of Pacific Commerce Bank. PCB Real Estate Holding, LLC is used for holding other real estate owned and other assets acquired by foreclosure. References herein to “First Choice Bancorp,” “Bancorp” or the “holding company,” refer to First Choice Bancorp on a stand-alone basis. The words “we," "us," "our," or the "Company" refer to First Choice Bancorp, First Choice Bank and PCB Real Estate Holdings, LLC collectively and on a consolidated basis. References to the “Bank” refer to First Choice Bank and PCB Real Estate Holdings, LLC on a consolidated basis.

    Headquartered in Cerritos, California, the Bank is a community-based financial institution that serves commercial and consumer clients in diverse communities. The Bank specializes in loans to small- to medium-sized businesses and private banking clients, commercial and industrial loans, and commercial real estate loans with a specialization in providing financial solutions for the hospitality industry. The Bank is a Preferred Small Business Administration (“SBA”) Lender. The Bank conducts business through nine full-service branches and two loan production offices located in Los Angeles, Orange and San Diego Counties.  

    As a California-chartered member bank, the Bank is primarily regulated by the California Department of Financial Protection and Innovation (the “DFPI”) and the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Bank’s deposits are insured up to the maximum legal limit by the Federal Deposit Insurance Corporation (the “FDIC”) and, as a result, the FDIC also has examination authority over the Bank.

    First Choice Bancorp's stock is traded on the Nasdaq Capital Market under the ticker symbol “FCBP.”
         
Recent Developments

The COVID-19 pandemic has resulted in, and is likely to continue to result in, significant economic disruption affecting our business and the business of our clients. As of the date of this filing, significant uncertainty continues to exist concerning the magnitude of the impact and duration of the COVID-19 pandemic. For a more detailed discussion of some risks and uncertainties from or relating to the COVID-19 pandemic that could materially and adversely affect our financial condition and results of operations, see Part 1, Item 1A - Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and Part II, Item 1A — Risk Factors in the Company's Quarterly Reports on Form 10-Q for quarters ended March 31, 2020 and June 30, 2020 and this Quarterly Report on Form 10-Q for discussion relating to risk factors impacting us. See also “CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS,” herein.

For accounting policies related to COVID-19 loan payment deferrals authorized under the CARES Act, please refer to NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Guidance On Non-TDR Loan Modifications Due To COVID-19 and NOTE 3. LOANS included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Key Events Related to COVID-19 During Third Quarter of 2020:

The ongoing COVID-19 pandemic has caused serious disruptions in the U.S. economy and financial markets, and entire industries within our loan portfolio, such as hospitality and restaurants, have been impacted due to quarantines and
42

travel restrictions and other industries we serve are experiencing or likely to experience similar disruptions and economic hardships as the COVID-19 pandemic persists.
    

COVID-19 Updates for the Third Quarter of 2020:

Continued Support for Employees, Clients, and Communities.

•All branches re-opened in July with appropriate safety precautions in place. Implemented measures include: germ guards, social distancing markers, PPE (masks, gloves and hand sanitizer), daily enhanced cleaning with CDC recommended disinfectants, limited same time client entry and reduced lobby hours

•No employee lay-offs, furloughs, or reduced hours

•$80,000 in donations to over 31 non-profits organizations within our footprint that serve communities disproportionately impacted by COVID-19 and the economic distress of this pandemic

Governmental Credit Assistance Programs

In response to the market volatility and instability resulting from the pandemic, the federal government passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in March 2020 which authorized certain government sponsored credit programs, including the Paycheck Protection Program ("PPP") and the Main Street Lending Program. The loan programs and the Company's participation in these programs are discussed below:

Paycheck Protection Program. On March 27, 2020, the CARES Act was signed into law authorizing the U.S. Small Business Administration (the “SBA”) to guarantee an aggregate of up to $349 billion in forgivable small business loans in order to assist small businesses nationwide adversely impacted by the COVID-19 pandemic. On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act was signed into law providing an additional $310 billion in funding and authority for the PPP. On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) was signed into law which changed key provisions of the PPP, including provisions relating to the maturity of PPP loans, the deferral of PPP loan payments, and the forgiveness of PPP loans. Under the Flexibility Act, the maturity date for PPP loans funded before June 5, 2020 remained at two years from funding while the maturity date for PPP loans funded after June 5, 2020 was five years from funding. In addition, the Flexibility Act, increased the period during which PPP loan proceeds are to be used for purposes that would qualify the loan for forgiveness (the “covered period”) from 8 weeks to 24 weeks, for PPP loans made prior to June 5, 2020, and set the covered period for loans made after June 5, 2020 at 24 weeks from funding. Under the Flexibility Act, PPP borrowers are not required to make any payments of principal or interest on their PPP loan before the date on which SBA remits the loan forgiveness amount to the Company (or notifies the Company that no loan forgiveness is allowed) and, although PPP borrowers may submit an application for loan forgiveness at any time prior to the maturity date, if PPP borrowers do not submit a loan forgiveness application within 10 months after the end of their covered period, such borrowers will be required to begin paying principal and interest after that period. At origination, the Company was paid a processing fee ranging from 1% to 5% based on the size of the PPP loan. All PPP loans were funded prior to June 5, 2020 and, accordingly, unless forgiven prior to October 5, 2021, it is possible that repayment of principal and interest on these PPP loans will be deferred through October 2021.

At September 30, 2020, PPP loans, net of unearned fees of $9.9 million, totaled $390.2 million. The unearned fees have been received from the SBA and are being accreted to interest income based on the two-year contractual maturity. The SBA did not act on any PPP loan forgiveness applications in the third quarter of 2020 and, accordingly, no PPP loans were forgiven in the quarter. The SBA has commenced making determinations as to PPP forgiveness applications in the fourth quarter of 2020 and, the Company anticipates that the SBA will continue reviewing and making determinations with respect to forgiveness applications, at which point the recognition of fee income will be accelerated.

PPP Liquidity Facility. On April 14, 2020, the Company was approved by the Federal Reserve to access its SBA Paycheck Protection Program Liquidity Facility ("PPPLF"). The PPPLF enables the Company to borrow funds through the Federal Reserve Discount Window to fund PPP loans. At September 30, 2020, the Company had $253.1 million in borrowings under the PPPLF with a fixed-rate of 0.35% which were collateralized by PPP loans.
43

Main Street Lending Program. On April 9, 2020, the Federal Reserve established the Main Street Lending Program to support lending to small and medium-sized for-profit businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. To encourage banks to participate in and lend under this program, the Federal Reserve purchases 95% of new or existing loans to qualified borrowers, while the issuing bank keeps 5%. In exchange for the loan, borrowers must make reasonable efforts to maintain payroll and retain workers. Loans originated under the program have a five-year repayment term, an interest rate of LIBOR plus 3%, interest payments are deferred for one year and principal payments are deferred for the first two years. The borrower must repay 15% in the third and fourth years, and the remaining 70% is due in the final year. Loans originated under the Main Street Lending Program do not have a forgiveness feature.

During the third quarter of 2020, we originated Main Street loans totaling $69.8 million in principal and sold participation interest totaling $66.3 million to the Main Street SPV, resulting in a gain on sale of $486 thousand. The SPV will pay the Company a servicing fee of 0.25% per annum of the total participation interest. The Company and the Federal Reserve believe that the terms of the Servicing Agreement are commercially reasonable and comparable to terms that unaffiliated third parties would accept to provide Enhanced Reporting Services, under the terms and conditions set out in the Servicing Agreement, with respect to the participation interest. Therefore, no servicing asset or liability was recorded at the time of sale.

Payment Deferral Program. At September 30, 2020, the Company had 12 non-PPP loans totaling $37 million on payment deferral for COVID-related reasons, down from $626 million at June 30, 2020. Over 97% of loans that were granted a deferral have resumed making regular, contractually agreed-upon payments or were paid off. Five loans totaling $12 million have been granted additional 90-day deferrals. At September 30, 2020, two loans from one relationship totaling $5 million were downgraded to nonaccrual during the third quarter after the deferral period ended. One deferred payment loan of $113 thousand was reported as past due, and none are reported as troubled debt restructurings ("TDRs") under Section 4013 of the CARES Act. As a part of the CARES Act, the SBA is paying six months of principal, interest and associated fees for borrowers with current SBA 7(a) loans that were disbursed prior to September 27, 2020. At September 30, 2020, the Company had 193 SBA loans with balances totaling $73 million having payments made by the SBA under the SBA debt relief program.

The following table shows the composition of the payment deferral program at September 30, 2020 and June 30, 2020:

At September 30, 2020At June 30, 2020
Total loan
balance (1)
# of loan deferments (2)
Loan balance on deferments (2)
% of category balance (3)
Total loan
balance (1)
# of loan deferments (2)
Loan balance on deferments (2)
% of category balance (3)
(dollars in millions)
Construction and land development$214 2$15 7 %$217 18$53 24 %
Commercial real estate687 4112 %664 17932449 %
Commercial and industrial360 — — — %335 10510832 %
SBA loans (4)
630 281 %597 21313322 %
Others30 4310 %39 5821 %
$1,921 12 $37 2 %$1,852 520 $626 34 %
(1) Loan balances include loans held for sale, and total loans held for investment net of discounts and deferred fees at September 30, 2020 and June 30, 2020 .
(2) # of loan deferments and loan balance on deferments reflect loans with active payment deferrals as of September 30, 2020 and June 30, 2020.
(3) Percentage of category balance is calculated based on total loans including loans held for sale, and total loans held for investment net of discounts and deferred fees at September 30, 2020 and June 30, 2020.
(4) Under the CARES Act, SBA loan monthly principal and interest payments are being paid by the SBA for 6 months after the deferment period. At September 30, 2020, the SBA is making monthly loan payments on 193 SBA loans with total outstanding loan balances of $73 million.


44

Impacts from COVID-19:

The ongoing COVID-19 global pandemic has caused significant disruption in the international and United States economies and financial markets and has had an adverse effect on our business, financial condition and results of operations. In response to the COVID-19 pandemic, the state government of California has taken preventative or protective actions which have resulted in significant adverse effects for many different types of businesses, including, among others, those in the travel, hospitality and food and beverage industries, and have resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which we operate. Because we have not recently experienced a comparable crisis which resulted in, among other things, the complete cessation of operations for entire industries in our portfolio, our ability to be predictive is uncertain. In addition, the magnitude, duration and speed of the global pandemic is uncertain. As a consequence, we cannot estimate the impact on our business, financial condition or near- or longer-term financial or operational results with reasonable certainty.

Net interest income and net interest margin. The Federal Reserve’s 150 basis point reduction in interest rates in March 2020 negatively impacted our net interest income and net interest margin for the nine months ended September 30, 2020, and put further pressure on the net interest margin for the remainder of 2020. We have proactively worked to lower interest expense by lowering deposit rates and taking advantage of lower interest rate borrowing facilities. Participation in the PPP had a significant impact on our asset mix and net interest income for the nine months ended September 30, 2020 and will continue to impact both asset mix and net interest income for the remainder of 2020. These loans contributed $2.6 million and $4.5 million to interest income for the three and nine months ended September 30, 2020. The weighted average loan yield for PPP loans was 2.66% and 2.65% which lowered the total loan yield by 54 basis points and 39 basis points for the three and nine months ended September 30, 2020, respectively. We anticipate the accelerated unearned fee income as PPP loans payoff or are forgiven will partially offset the decrease in interest income due to the lower interest rates.

Provision for loan losses. The provision for loan losses in the first and second quarter of 2020 was negatively impacted by an increase in qualitative factors related to COVID-19 and macro-economic conditions, in addition to loan growth. While the economy gradually reopened during the second and third quarters of 2020, the Governor of California has since implemented further restrictions and the timing of an economic recovery remains uncertain. The assumptions underlying the COVID-19 related qualitative factors included (a) uncertain and volatile macroeconomic conditions caused by the pandemic; (b) a stabilized unemployment rate; and (c) the loan deferment program and Main Street Lending program. No provision for loan losses on PPP loans was recognized in 2020 as the SBA guarantees 100% of loans funded under the programs.

Loans to the hospitality industry. At September 30, 2020, our total loan commitments to the hospitality industry was $244 million, of which $225 million was outstanding, representing 11.7% of total loans including loans held for sale, and loans held for investment net of discount and deferred fees. The total outstanding balance consisted of $107 million CRE, $12 million C&I, $38 million Construction and Land and $68 million SBA, of which $32 million were SBA PPP. At September 30, 2020, non-accrual loans totaled $81 thousand. As of September 30, 2020, only one loan was on deferment with outstanding balance of $10.6 million.

Loans to the restaurant industry. At September 30, 2020, our total loan commitments to the restaurant industry was $98 million, of which $93 million was outstanding, representing 4.8% of total loans including loans held for sale, and loans held for investment net of discount and deferred fees. The total outstanding balance consisted of $7 million CRE, $15 million C&I, $71 million SBA, of which $51 million were SBA PPP. At September 30, 2020, non-accrual loans totaled $2 million, and no loans were downgraded during the third quarter of 2020. As of September 30, 2020, only one loan was on deferment with outstanding balance of $8.3 million.

Capital and liquidity. The Bank opted into the CBLR framework in the first quarter of 2020 and, because the Bank's CBLR was 10.29% as of September 30, 2020, we exceeded the reduced regulatory minimum required of 8%, and were considered "well-capitalized" at September 30, 2020. The Bank's primary and secondary liquidity sources were over $900 million at September 30, 2020.



45

Highlights for the Third Quarter of 2020:

•Net income of $7.9 million, up 37.5% over Q2'20
•Diluted earnings per common share of $0.67, up 36.7% over Q2'20
•Pre-tax pre-provision income was $12.1 million, up 18.3% from Q2'20
•Net interest margin of 4.05%, down 7 bps from Q2'20
•Cost of funds of 0.29%, down 5 bps from Q2'20, due to active balance sheet management
•Return on average assets and average equity of 1.39% and 11.57%
•Efficiency ratio of 48.7%
•Provision for loan loss expense of $1.0 million, down $1.1 million from Q2'20
•Total loans held for investment increased $53.3 million, up 2.9% over Q2'20
•Noninterest-bearing demand deposits were $736.1 million, representing 47.2% of total deposits
•Tangible book value per share of $16.56, up $0.47 per share from Q2'20
•Community bank leverage ratio was 10.29% at September 30, 2020
•Quarterly cash dividend of $0.25 per share



Financial Highlights

At or for the Three Months EndedAt or for the Nine Months Ended September 30,
September 30, 2020June 30,
2020		September 30, 201920202019
(dollars in thousands, except per share amounts)
Results of Operations
Total interest and dividend income$23,154 $21,844 $24,343 $66,742 $68,401 
Total interest expense1,428 1,540 3,317 5,539 9,347 
Net interest income21,726 20,304 21,026 61,203 59,054 
Total noninterest income1,943 1,055 1,673 4,413 6,117 
Total net interest income and noninterest income23,669 21,359 22,699 65,616 65,171 
Total noninterest expense11,528 11,100 10,651 34,147 31,956 
Pre-tax pre-provision income (1)12,141 10,259 12,048 31,469 33,215 
Provision for loan losses1,000 2,100 700 5,800 1,600 
Income before taxes11,141 8,159 11,348 25,669 31,615 
Income taxes3,260 2,429 3,277 7,512 9,725 
NET INCOME$7,881 $5,730 $8,071 $18,157 $21,890 
46

At or for the Three Months EndedAt or for the Nine Months Ended September 30,
September 30, 2020June 30,
2020		September 30, 201920202019
(dollars in thousands, except per share amounts)
Performance Ratios
Net income per share-diluted$0.67 $0.49 $0.68 $1.55 $1.85 
Return on average assets1.39 %1.09 %1.98 %1.19 %1.86 %
Return on average equity11.57 %8.59 %12.45 %9.05 %11.60 %
Return on average tangible common equity (1)16.31 %12.18 %18.03 %12.83 %16.95 %
Net interest margin4.05 %4.12 %5.52 %4.28 %5.39 %
Average loan yield4.77 %4.94 %6.93 %5.15 %6.66 %
Cost of deposits0.25 %0.31 %0.89 %0.38 %0.84 %
Cost of funds0.29 %0.34 %0.98 %0.42 %0.95 %
Efficiency ratio (1)48.7 %52.0 %46.9 %52.0 %49.0 %
(1) Non-GAAP measure. See – Non-GAAP Financial Measures in this MD&A.


Financial Performance
September 30, 2020June 30,
2020		December 31, 2019
(dollars in thousands, except per share amounts)
Financial Conditions
Total assets$2,256,342 $2,223,603 $1,690,324 
Loans held for investment1,884,930 1,831,619 1,374,675 
Noninterest-bearing deposits736,118 789,770 626,569 
Total deposits1,559,912 1,604,997 1,313,693 
Shareholders’ equity272,471 266,949 261,805 
Key Ratios
Noninterest-bearing deposits to total deposits47.2 %49.2 %47.7 %
Equity to assets ratio12.08 %12.01 %15.49 %
Tangible common equity to tangible asset ratio (1)8.90 %8.77 %11.34 %
Book value per share$23.28 $22.82 $22.50 
Tangible book value per share (1)$16.56 $16.09 $15.70 
Credit Quality
Nonperforming loans as a percentage of total assets0.58 %0.41 %0.67 %
Allowance for loan losses as a percentage of total loans held for investment0.99 %0.97 %0.98 %
Allowance for loan losses as a percentage of total loans held for investment without PPP loans1.25 %1.24 %0.98 %
(1) Non-GAAP measure. See - Non-GAAP Financial Measures in this MD&A.


Non-GAAP Financial Measures

     The following tables present a reconciliation of non-GAAP financial measures to GAAP financial measures for: (1) efficiency ratio, (2) pre-tax pre-provision income; (3) average tangible common equity, (4) return on average tangible common equity, (5) tangible common equity, (6) tangible assets, (7) tangible common equity to tangible asset ratio, and (8) tangible book value per share. We believe the presentation of certain non-GAAP financial measures provides useful information to assess our consolidated financial condition and consolidated results of operations and to assist investors in evaluating our financial results relative to our peers. These non-GAAP financial measures complement our GAAP reporting and are presented below to provide investors and others with information that we use to manage the business each period. Because not all companies use identical calculations, the presentation of these non-GAAP financial measures may not be
47

comparable to other similarly titled measures used by other companies. These non-GAAP measures should be taken together with the corresponding GAAP measures and should not be considered a substitute of the GAAP measures.


Three Months EndedNine Months Ended September 30,
September 30, 2020June 30,
2020		September 30, 201920202019
(dollars in thousands)
Efficiency Ratio
Noninterest expense (numerator)$11,528 $11,100 $10,651 $34,147 $31,956 
Net interest income21,726 20,304 21,026 61,203 59,054 
Plus: Noninterest income1,943 1,055 1,673 4,413 6,117 
Total net interest income and noninterest income (denominator)$23,669 $21,359 $22,699 $65,616 $65,171 
Efficiency ratio (1)
48.7 %52.0 %46.9 %52.0 %49.0 %
Pre-tax pre-provision income
Net interest income$21,726 $20,304 $21,026 $61,203 $59,054 
Noninterest income1,943 1,055 1,673 4,413 6,117 
Total net interest income and noninterest income23,669 21,359 22,699 65,616 65,171 
Less: Noninterest expense11,528 11,100 10,651 34,147 31,956 
Pre-tax pre-provision income (1)
$12,141 $10,259 $12,048 $31,469 $33,215 
Return on Average Assets, Equity, and Tangible Equity
Net income$7,881 $5,730 $8,071 $18,157 $21,890 
Average assets$2,254,461 $2,109,208 $1,620,804 $2,031,175 $1,574,960 
Average shareholders’ equity270,903 268,168 257,158 267,990 252,362 
Less: Average intangible assets78,696 78,901 79,535 78,888 79,730 
Average tangible common equity (1)
$192,207 $189,267 $177,623 $189,102 $172,632 
Return on average assets1.39 %1.09 %1.98 %1.19 %1.86 %
Return on average equity11.57 %8.59 %12.45 %9.05 %11.60 %
Return on average tangible common equity (1)
16.31 %12.18 %18.03 %12.83 %16.95 %
(1) Non-GAAP measure.

September 30, 2020June 30,
2020		December 31, 2019
Tangible Common Equity Ratio/Tangible Book Value Per Share(dollars in thousands, except share and per share data)
Shareholders’ equity$272,471 $266,949 $261,805 
Less: Intangible assets78,574 78,767 79,153 
Tangible common equity (1)
$193,897 $188,182 $182,652 
Total assets$2,256,342 $2,223,603 $1,690,324 
Less: Intangible assets78,574 78,767 79,153 
Tangible assets (1)
$2,177,768 $2,144,836 $1,611,171 
Equity to asset ratio12.08 %12.01 %15.49 %
Tangible common equity to tangible asset ratio (1)
8.90 %8.77 %11.34 %
Book value per share$23.28 $22.82 $22.50 
Tangible book value per share (1)
$16.56 $16.09 $15.70 
48

September 30, 2020June 30,
2020		December 31, 2019
Tangible Common Equity Ratio/Tangible Book Value Per Share(dollars in thousands, except share and per share data)
Shares outstanding11,705,878 11,697,766 11,635,531 
(1) Non-GAAP measure.
49


Results of Operations

In addition to net income, the primary factors we use to evaluate and manage our results of operations include net interest income, provision for loan losses, noninterest income and noninterest expense.

Net Interest Income

    Net interest income is affected by changes in both interest rates and the volume of average interest-earning assets and interest-bearing liabilities. The following tables summarize the distribution of average assets, liabilities and shareholders’ equity, as well as interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities for the periods indicated:

Three Months Ended
September 30, 2020June 30, 2020September 30, 2019
Average
Balance		Interest
Income / Expense		Yield / CostAverage
Balance		Interest
Income / Expense		Yield / CostAverage
Balance		Interest
Income / Expense		Yield / Cost
Interest-earning assets:(dollars in thousands)
Loans (1) (2)
$1,892,450 $22,671 4.77 %$1,738,172 $21,348 4.94 %$1,328,088 $23,206 6.93 %
Investment securities43,154 180 1.66 %42,553 225 2.13 %35,651 208 2.31 %
Deposits at other financial institutions184,606 103 0.22 %186,741 92 0.20 %134,557 701 2.07 %
Restricted stock investments and other bank stocks14,534 200 5.47 %14,534 179 4.95 %13,988 228 6.47 %
Total interest-earning assets2,134,744 23,154 4.31 %1,982,000 21,844 4.43 %1,512,284 24,343 6.39 %
Noninterest-earning assets119,717 127,208 108,520 
Total assets$2,254,461 $2,109,208 $1,620,804 
Interest-bearing liabilities:
Interest checking$279,945 $111 0.16 %$251,398 $101 0.16 %$116,107 $337 1.15 %
Money market accounts338,970 260 0.31 %298,040 207 0.28 %267,493 890 1.32 %
Savings accounts31,639 11 0.14 %30,104 10 0.13 %29,070 56 0.76 %
Time deposits81,837 201 0.98 %91,051 292 1.29 %147,568 676 1.82 %
Brokered time deposits107,347 387 1.43 %90,349 564 2.51 %138,682 929 2.66 %
Total interest-bearing deposits839,738 970 0.46 %760,942 1,174 0.62 %698,920 2,888 1.64 %
Borrowings152,762 207 0.54 %145,440 197 0.54 %48,263 253 2.08 %
Paycheck Protection Program Liquidity Facility240,602 212 0.35 %127,962 112 0.35 %— — — %
Senior secured notes4,620 39 3.36 %6,754 57 3.39 %12,267 176 5.69 %
Total interest-bearing liabilities1,237,722 1,428 0.46 %1,041,098 1,540 0.59 %759,450 3,317 1.73 %
Noninterest-bearing liabilities:
Demand deposits730,306 783,258 590,212 
Other liabilities15,530 16,684 13,984 
Shareholders’ equity270,903 268,168 257,158 
Total liabilities and shareholders' equity$2,254,461 $2,109,208 $1,620,804 
Net interest spread$21,726 3.85 %$20,304 3.84 %$21,026 4.66 %
Net interest margin4.05 %4.12 %5.52 %
Total deposits$1,570,044 $970 0.25 %$1,544,200 $1,174 0.31 %$1,289,132 $2,888 0.89 %
Total funding sources$1,968,028 $1,428 0.29 %$1,824,356 $1,540 0.34 %$1,349,662 $3,317 0.98 %
(1)    Average loans include net discounts, net deferred loan fees and costs and non-performing loans.
(2)     Interest income on loans includes $1.7 million, $1.3 million and $254 thousand related to the accretion of net deferred loan fees for the quarters ended September 30, 2020, June 30, 2020 and September 30, 2019. In addition, interest income also includes $835 thousand, $421 thousand, and $2.2 million related to discount accretion on loans acquired in a business combination, including the interest recognized on the payoff of PCI loans, for the quarters ended September 30, 2020, June 30, 2020 and September 30, 2019.

50

Nine Months Ended September 30,
20202019
Average
Balance		Interest
Income / Expense		Yield / CostAverage
Balance		Interest
Income / Expense		Yield / Cost
Interest-earning assets:(dollars in thousands)
Loans (1) (2)
$1,679,206 $64,799 5.15 %$1,314,513 $65,466 6.66 %
Investment securities40,645 623 2.05 %36,355 659 2.42 %
Deposits at other financial institutions176,393 696 0.53 %99,711 1,570 2.11 %
Federal funds sold/resale agreements— — — %1,662 30 2.41 %
Restricted stock investments and other bank stocks14,531 624 5.74 %13,937 676 6.48 %
Total interest-earning assets1,910,775 66,742 4.67 %1,466,178 68,401 6.24 %
Noninterest-earning assets120,400 108,782 
Total assets$2,031,175 $1,574,960 
Interest-bearing liabilities:
Interest checking$229,436 $473 0.28 %$115,358 $944 1.09 %
Money market accounts318,567 1,267 0.53 %270,163 2,658 1.32 %
Savings accounts30,008 69 0.31 %30,731 174 0.76 %
Time deposits96,764 983 1.36 %156,095 2,080 1.78 %
Brokered time deposits96,885 1,456 2.01 %109,598 1,993 2.43 %
Total interest-bearing deposits771,660 4,248 0.74 %681,945 7,849 1.54 %
Borrowings130,344 780 0.80 %53,987 967 2.39 %
Paycheck Protection Program Liquidity Facility123,138 324 0.35 %— — — %
Senior secured notes6,458 187 3.87 %12,190 531 5.82 %
Total interest-bearing liabilities1,031,600 5,539 0.72 %748,122 9,347 1.67 %
Noninterest-bearing liabilities:
Demand deposits715,180 562,195 
Other liabilities16,405 12,281 
Shareholders’ equity267,990 252,362 
Total liabilities and shareholders' equity$2,031,175 $1,574,960 
Net interest spread$61,203 3.95 %$59,054 4.57 %
Net interest margin4.28 %5.39 %
Total deposits$1,486,840 $4,248 0.38 %$1,244,140 $7,849 0.84 %
Total funding sources$1,746,780 $5,539 0.42 %$1,310,317 $9,347 0.95 %
(1) Average loans include net discounts, net deferred loan fees and costs and non-performing loans.
(2) Interest income on loans includes $3.3 million and $721 thousand related to the accretion of net deferred loan fees for the nine months ended September 30, 2020 and 2019. In addition, interest income includes $1.9 million and $3.8 million of discount accretion on loans acquired in a business combination, including the interest recognized on the payoff of PCI loans, for the nine months ended September 30, 2020 and 2019.


51

Rate/Volume Analysis

    The volume and interest rate variance tables below set forth the dollar difference in interest earned for each major category of interest-earning assets and interest-bearing liabilities for the periods indicated, and the amount of such change attributable to changes in average balances (volume) or in average interest rates (rate). Volume variances are equal to the increase or decrease in the average balance multiplied by the prior period rate, and rate variances are equal to the increase or decrease in the average rate multiplied by the prior period average balance. Variances attributable to both rate and volume changes are allocated proportionately based on the amounts of the individual rate and volume changes.
 
Three Months Ended
September 30, 2020 vs. June 30, 2020September 30, 2020 vs. September 30, 2019
Change Attributable toTotal ChangeChange Attributable toTotal Change
VolumeRateVolumeRate
Interest income:(dollars in thousands)
Interest and fees on loans$2,024 $(701)$1,323 $8,011 $(8,546)$(535)
Interest on investment securities3 (48)(45)37 (65)(28)
Interest on deposits at other financial institutions(1)12 11 192 (790)(598)
Dividends on restricted stock investments and other bank stocks— 21 21 8 (36)(28)
Change in interest income2,026 (716)1,310 8,248 (9,437)(1,189)
Interest expense:
Savings, interest checking and money market accounts27 37 64 356 (1,257)(901)
Time deposits69 (337)(268)(411)(606)(1,017)
Borrowings11 (1)10 243 (289)(46)
Paycheck Protection Program Liquidity Facility100 — 100 212 — 212 
Senior secured notes(18)— (18)(83)(54)(137)
Change in interest expense189 (301)(112)317 (2,206)(1,889)
Change in net interest income$1,837 $(415)$1,422 $7,931 $(7,231)$700 


Nine Months Ended September 30,
2020 vs. 2019
Change Attributable toTotal Change
VolumeRate
Interest income:(dollars in thousands)
Interest and fees on loans$15,987 $(16,654)$(667)
Interest on investment securities39 (75)(36)
Interest on deposits at other financial institutions752 (1,626)(874)
Interest on Federal funds sold/resale agreements(15)(15)(30)
Dividends on restricted stock investments and other bank stocks28 (80)(52)
Change in interest income16,791 (18,450)(1,659)
Interest expense:
Savings, interest checking and money market accounts867 (2,834)(1,967)
Time deposits(893)(741)(1,634)
Borrowings739 (926)(187)
Paycheck Protection Program Liquidity Facility324 — 324 
Senior secured notes(201)(143)(344)
Change in interest expense836 (4,644)(3,808)
Change in net interest income$15,955 $(13,806)$2,149 
52

Third Quarter of 2020 Compared to Second Quarter of 2020

Net interest income for the third quarter of 2020 totaled $21.7 million, an increase of $1.4 million from the second quarter of 2020 due to higher interest income of $1.3 million, coupled with lower interest expense of $112 thousand. The increase in net interest income was due primarily to higher discount accretion from loans acquired in a business combination, full quarter impact of interest income from PPP loans, strong organic loan growth, and lower cost of interest-bearing time deposits. Average loans increased by $154.3 million from organic loan growth and PPP loans in the third quarter of 2020. The decrease in interest expense for the third quarter of 2020 was due primarily to a higher run-off of high cost time deposits and the Company's proactive strategy to lower the cost of interest-bearing customer deposits and wholesale brokered CDs. Interest expense on interest-bearing deposits decreased $204 thousand, partially offset by an increase of $92 thousand on total
borrowings. Interest expense on the PPP Liquidity Facility ("PPPLF") was $212 thousand for the third quarter of 2020,
compared to $112 thousand in the second quarter of 2020 due to higher average borrowings.

Net interest margin for the third quarter of 2020 decreased 7 basis points to 4.05% from 4.12% for the second quarter of 2020. The decrease in the net interest margin was due primarily to a 17 basis point decrease in loan yields (including fees and discounts), partially offset by a 5 basis point decrease in total funding costs. The decrease in loan yields were partially offset by higher accelerated discount accretion in the third quarter of 2020. The discount accretion from loans acquired in a business combination of $835 thousand contributed 16 basis points to the net interest margin in the third quarter of 2020 compared to $421 thousand and 9 basis points in the second quarter of 2020.

The decrease in the interest-earning assets yield and loan yield were driven by the lower market interest rates and the lower yielding PPP loans. The yield on loans decreased to 4.77% for the third quarter of 2020, compared to 4.94% for the second quarter of 2020. The weighted average loan yield for PPP loans was 2.66%, which lowered the total loan yield by 54 basis points for the third quarter of 2020, compared to 46 basis points for the second quarter of 2020.

The cost of funds decreased to 0.29% for the third quarter of 2020, compared to 0.34% for the second quarter of 2020, due primarily to lower market interest rates, runoff of higher cost time deposits and active balance sheet management. Average noninterest-bearing demand deposits decreased $53.0 million to $730.3 million and represented 46.5% of total average deposits for the third quarter of 2020, compared to $783.3 million, or 50.7% of total average deposits, for the second quarter of 2020. The decrease in average noninterest-bearing demand deposits was primarily due to our customers' use of funds during the third quarter of 2020 from the new deposit accounts opened for PPP loans in the second quarter of 2020. The total cost of deposits decreased 6 basis points to 0.25% for the third quarter of 2020, compared to 0.31% for the second quarter of 2020. Average borrowings increased $7.3 million to $152.8 million, coupled with an increase of $112.6 million in average PPPLF outstanding with an average rate of 0.35% to support the PPP loans funded. The average cost of total borrowings remained relatively flat at 0.54% for the third quarter of 2020. Average senior secured notes decreased $2.1 million to $4.6 million and the average cost of such borrowings decreased 3 basis points to 3.36% for the third quarter of 2020..

Third Quarter of 2020 Compared to Third Quarter of 2019

    Net interest income increased $700 thousand to $21.7 million for the third quarter of 2020 when compared to the same quarter of 2019 primarily due to a decrease of interest expense of $1.9 million, partially offset by lower interest income of $1.2 million. The increase in net interest income was due to a number of factors, including but not limited to the following: (i) lower market interest rates partially offset by higher average loans and other interest-earning assets; (ii) higher noninterest-bearing demand deposits in relationship to total deposits; and (iii) lower costs on interest-bearing liabilities. The decrease in loan yields, yields on other interest-earning assets and cost of funds for the third quarter of 2020 primarily related to the reduction in the target Federal Fund rate starting in July 2019 and through March 2020. Average loans increased by $564.4 million, of which $389.6 million was from PPP loans, net of earned fees, funded in 2020, contributing an increase in interest income of $8.0 million, partially offset by a decrease of $1.3 million in discount accretion on loans acquired in a business combination, and lower market interest rates in the third quarter of 2020. The decrease in interest expense for the third quarter of 2020 was due primarily to lower market interest rates and our proactive strategy to lower the cost of interest-bearing customer deposits, partially offset by an increase in borrowing costs from higher average borrowings to support organic loan growth and PPP loan fundings. Interest expense on interest-bearing deposits decreased $1.9 million, coupled with a decrease of $183 thousand on borrowings and senior secured notes, partially offset by an increase of $212 thousand on PPPLF.

53

    Our net interest margin decreased 147 basis points to 4.05% for the third quarter of 2020 compared to 5.52% for the same quarter of 2019. The decrease in the net interest margin was due primarily to a 216 basis point decrease in loan yields (including fees and discounts), partially offset by a change in the interest-earning asset mix and a 69 basis point decrease in funding costs. The net interest margin compression was driven by lower market interest rates resulting from the target Federal Fund rate reduction after the second quarter of 2019 through March 2020. The average effective federal funds target rate was 0.09% for the third quarter of 2020 compared to 2.20% for the same quarter of 2019. The average yield on interest-earning assets decreased 208 basis points to 4.31% for the third quarter of 2020 compared to 6.39% for the same quarter of 2019 due mostly to lower loan yields and yields on deposits at other financial institutions. Our loan yield decreased 216 basis points to 4.77% for the third quarter of 2020 compared to 6.93% for the same quarter of 2019, was driven by lower market interest rates, lower-yielding PPP loans, and lower discount accretion from loans acquired in a business combination. Our yields on deposits at other financial institutions decreased 185 basis points to 0.22% for the third quarter of 2020 compared to 2.07% for the same quarter of 2019 was driven primarily by the lower market interest rates.

    The discount accretion related to loans acquired in a business combination, including the interest income recognized on the payoff of PCI loans, of $835 thousand contributed 16 basis points to the net interest margin in the third quarter of 2020 compared to $2.2 million and 57 basis points in the same quarter of 2019.

    Our average cost of funds decreased 69 basis points to 0.29% for the third quarter of 2020 compared to 0.98% for the same quarter of 2019 due to a lower market interest rates and a change in the funding mix with a higher percentage of average noninterest-bearing demand deposits, and a higher percentage of average total borrowings and PPPLF. Average noninterest-bearing deposits totaled $730.3 million and represented 46.5% of average total deposits for the third quarter of 2020 compared to $590.2 million and 45.8% of average total deposits for the same quarter of 2019. Average interest-bearing liabilities were $1.24 billion during the third quarter of 2020 compared to $759.5 million for the same quarter of 2019. Our cost of interest-bearing liabilities decreased 127 basis points to 0.46% compared to 1.73% for the same quarter of 2019. The average borrowings increased $104.5 million to $152.8 million, coupled with an increase of $240.6 million in average PPPLF. The average cost of borrowings decreased 154 basis points to 0.54%, partially offset by 35 basis points increase from the PPPLF. Average senior secured notes balance decreased $7.6 million to $4.6 million for the third quarter of 2020 compared to $12.3 million for the same quarter of 2019 and the average cost of such borrowings decreased 233 basis points to 3.36%.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Net interest income increased $2.1 million to $61.2 million for the nine months ended September 30, 2020 when compared to $59.1 million for the nine months ended September 30, 2019 due to lower interest expense of $3.8 million, offset by lower interest income of $1.7 million. The increase in net interest income was due primarily to a number of factors (i) higher average loans and other interest-earning assets offset by lower market interest rates, (ii) higher noninterest-bearing demand deposits in relationship to total deposits, and (iii) lower costs on interest-bearing liabilities. Average loans increased by $364.7 million contributing an increase in interest income of $16.0 million, partially offset by a decrease in discount accretion on loans acquired in a business combination, and lower market interest rates in the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. PPP loans averaged $226.2 million and contributed $4.5 million to interest income for the nine months ended September 30, 2020. The decrease in interest expense for the nine months ended September 30, 2020 was due primarily to lower market interest rates, and lower average time deposits and senior secured notes. Interest expense on interest-bearing deposits decreased $3.6 million, coupled with a decrease of $531 thousand on borrowings and senior secured notes, offset by an increase of $324 thousand on PPPLF.

    Our net interest margin decreased 111 basis points to 4.28% for the nine months ended September 30, 2020 compared to 5.39% for the nine months ended September 30, 2019. The decrease in the net interest margin was due primarily to a 157 basis point decrease in interest-earnings asset yields, of which loan yields (including fees and discounts) decreased 151 basis points, partially offset by a change in the interest-earning asset mix, and a 53 basis points decrease in funding costs. The net interest margin compression was driven by lower market interest rates resulting from the reduction in the target Federal Funds rate. The average effective federal funds target rate was 0.45% for the nine months ended September 30, 2020 compared to 2.33% for the same 2019 period. The average yield on interest-earning assets decreased to 4.67% for the nine months ended September 30, 2020 compared to 6.24% for the same 2019 period resulting from lower market interest rates. Our loan yield decreased to 5.15% for the nine months ended September 30, 2020 compared to 6.66%
54

for the same 2019 period, driven by lower market interest rates, lower-yielding PPP loans, and lower discount accretion from loans acquired in a business combination.

    The discount accretion related to loans acquired in a business combination, including the interest income recognized on the payoff of PCI loans, of $1.9 million contributed 13 basis points to the net interest margin for the nine months ended September 30, 2020 compared to $3.8 million and 34 basis points for the nine months ended September 30, 2019.

    Our average cost of funds decreased 53 basis points to 0.42% for the nine months ended September 30, 2020 compared to 0.95% for the nine months ended September 30, 2019 due to a lower market interest rates and a change in the funding mix with a higher percentage of average noninterest-bearing demand deposits, and a higher percentage of average total borrowings. Average noninterest-bearing deposits totaled $715.2 million and represented 48.1% of average total deposits for the nine months ended September 30, 2020 compared to $562.2 million and 45.2% of average total deposits for the same 2019 period. Average interest-bearing liabilities were $1.03 billion for the nine months ended September 30, 2020 compared to $748.1 million for the same 2019 period. Our cost of interest-bearing liabilities decreased 95 basis points to 0.72% compared to 1.67% for the same 2019 period. Our average borrowings increased $76.4 million to $130.3 million, coupled with an increase of $123.1 million from the average PPPLF. The average cost of borrowings decreased 159 basis points to 0.80%, offset by 35 basis points increase from the PPPLF. Average senior secured notes balance decreased $5.7 million to $6.5 million for the nine months ended September 30, 2020 compared to $12.2 million for the same 2019 period.


Provision for Loan Losses

The provision for loan losses for the third quarter of 2020 was $1.0 million, compared to $2.1 million for the second quarter of 2020 and $700 thousand for the third quarter of 2019. The provision for loan losses for the nine months ended September 30, 2020 was $5.8 million, an increase of $4.2 million compared to the nine months ended September 30, 2019. The increase in the provision for loan losses for the three months ended September 30, 2020 over second quarter of 2020 and the comparable period in 2019 was primarily related to organic growth in the loan portfolio. The provision for loan losses for the nine months ended September 30, 2020 was also impacted by an increase in qualitative factors relating to the COVID-19 pandemic and macro-economic conditions. The assumptions underlying the COVID-19 related qualitative factors included (a) uncertain and volatile macroeconomic conditions caused by the pandemic; (b) the high unemployment rate; and (c) the loan deferment program and Main Street Lending Program. Loans held for investment, excluding PPP loans, increased to $1.49 billion at September 30, 2020 as compared to $1.32 billion at September 30, 2019. No provision for loan losses on PPP loans was recognized for the nine months ended September 30, 2020 as the SBA guarantees 100% of loans funded under the program.

Noninterest Income

    The following table shows the components of noninterest income for the periods indicated:
Three Months EndedNine Months Ended September 30,
September 30, 2020June 30,
2020		September 30, 201920202019
(dollars in thousands)
Gain on sale of loans$990 $— $528 $1,367 $2,727 
Service charges and fees on deposit accounts495 447 475 1,497 1,579 
Net servicing fees (costs)228 (9)242 443 763 
Other income230 617 428 1,106 1,048 
Total noninterest income$1,943 $1,055 $1,673 $4,413 $6,117 

Third Quarter of 2020 Compared to Second Quarter of 2020

Noninterest income for the third quarter of 2020 was $1.9 million, an increase of $888 thousand from $1.1 million for the second quarter of 2020 due primarily to higher gains on loan sales of $990 thousand and higher net servicing fees of $237 thousand, partially offset by lower other income of $387 thousand. SBA loans sold during the third quarter of 2020
55

totaled $6.2 million resulting in a gain on sale of $504 thousand. Gains on loan sales for the third quarter of 2020 also included the sale of 95% of the principal balance of Main Street loans resulting in gains of $486 thousand. There were no gains on loan sales in the second quarter of 2020. The $237 thousand increase in net servicing fees was due primarily to lower amortization of servicing asset from early loan pay-offs which totaled $68 thousand for the third quarter of 2020 compared to $277 thousand for the second quarter of 2020. Other income decreased $387 thousand for the third quarter of 2020 due to $153 thousand gain on sale of foreclosed assets and $233 thousand Community Development Financial Institutions Bank Enterprise Award (“CDFI BEA”) recognized in the second quarter of 2020. There was no similar income in the third quarter of 2020.

Third Quarter of 2020 Compared to Third Quarter of 2019

    Noninterest income increased $270 thousand to $1.9 million for the third quarter of 2020 compared to $1.7 million for the same quarter of 2019 due primarily to higher gain on sale of loans, partially offset by lower other income. The $462 thousand increase in gain on sale of loans for the third quarter of 2020 compared to the same quarter of 2019 was due primarily to the sale of 95% of the principal balance of Main Street loans resulting in gains of $486 thousand.
    
    Other income was $230 thousand for the third quarter of 2020 compared to $428 thousand for the same quarter of 2019. The decrease of $198 thousand primarily related to CDFI BEA of $233 thousand recognized in the third quarter of 2019. There was no similar income in the third quarter of 2020.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Noninterest income decreased $1.7 million to $4.4 million for the nine months ended September 30, 2020 compared to $6.1 million for the same period of 2019 due primarily to lower gain on sale of loans and lower net servicing fees. The $1.4 million decrease in gain on sale of loans for the nine months ended September 30, 2020 compared to the same period of 2019 is due to a lower volume of SBA loans sold, offset by the gain from the Main Street loans sold. Loans sold during the nine months ended September 30, 2020 totaled $75.2 million, of which $65.6 million related to the 95% of the principal balance of Main Street loans, resulting in a gain on sale of $1.4 million, compared to $44.7 million of SBA loans sold, resulting in a gain on sale of $2.7 million for the same period of 2019.

    Net servicing fees decreased due to higher amortization expense of the related servicing asset in the nine months ended September 30, 2020. Our SBA loan servicing portfolio averaged $203.4 million for the nine months ended September 30, 2020 compared to $206.4 million for the same period of 2019. During the nine months ended September 30, 2020 and 2019, contractually-specified servicing fees were $1.5 million and $1.5 million, offset by the amortization of the servicing asset of $1.0 million and $699 thousand. The increase in amortization of the servicing asset was due to the higher level of early loan pay-offs in the current period. Amortization expense related to early loan pay-offs totaled $414 thousand for the nine months ended September 30, 2020 compared to $307 thousand for the same period of 2019.

56

Noninterest Expense

The following table shows the components of noninterest expense for the periods indicated:
Three Months EndedNine Months Ended September 30,
September 30, 2020June 30,
2020		September 30, 201920202019
(dollars in thousands)
Salaries and employee benefits$7,126 $6,386 $6,472 $20,742 $19,552 
Occupancy and equipment1,137 1,108 1,097 3,308 3,513 
Data processing955 874 718 2,636 1,961 
Professional fees492 450 392 1,413 1,237 
Office, postage and telecommunications274 289 253 821 780 
Deposit insurance and regulatory assessments386 198 30 645 345 
Loan related59 226 244 560 529 
Customer service related81 328 437 781 1,187 
Amortization of core deposit intangible193 193 197 579 590 
Other expenses825 1,048 811 2,662 2,262 
Total noninterest expense$11,528 $11,100 $10,651 $34,147 $31,956 
Efficiency ratio (1)
48.7 %52.0 %46.9 %52.0 %49.0 %
(1) Non-GAAP measure. See - Non-GAAP Financial Measures in this MD&A.

Third Quarter of 2020 Compared to Second Quarter of 2020

Noninterest expense increased $428 thousand to $11.5 million for the third quarter of 2020 from $11.1 million for the second quarter of 2020. This increase was due primarily to higher salaries and employee benefit expenses, higher FDIC assessment fees, offset by lower loan related expenses, lower customer service related expenses, and lower other expenses.
The $740 thousand increase in salaries and employee benefits was due to higher incentive accruals resulting from an increase in organic loan production in the third quarter of 2020. The $188 thousand increase in FDIC assessment fees was due primarily to the organic growth in total assets during the third quarter of 2020.

The $167 thousand decrease in loan related expenses was due primarily to a recovery of expenses in the third quarter of 2020 and lower expense incurred for PPP loans in the third quarter of 2020. The $247 thousand decrease in customer service related expenses was due primarily to lower average demand deposits for certain deposit accounts during the third quarter of 2020. The decrease in other expenses resulted from no provision for unfunded loan commitments recognized in the third quarter of 2020 compared to a $300 thousand provision for unfunded loan commitments in the second quarter of 2020. Total unfunded loan commitments decreased $2.5 million to $390.9 million at September 30, 2020 from $393.4 million at June 30, 2020.

The efficiency ratio remained favorable and decreased to 48.7% in the third quarter of 2020, compared to 52.0% in the second quarter of 2020. The lower efficiency ratio in the third quarter of 2020 was driven by higher revenue including the gains from SBA and Main Street loan sales.

Third Quarter of 2020 Compared to Third Quarter of 2019

    Noninterest expense for the third quarter of 2020 increased $877 thousand to $11.5 million from $10.7 million for the same quarter of 2019. The increase was due to higher salaries and employee benefits expense, data processing expense, FDIC assessment fees, partially offset by loan related expense and customer service related expense.

The $654 thousand increase in salaries and employee benefits was due mostly to higher incentives from the loan growth, partially offset by increased deferred loan origination costs during the third quarter of 2020.

The $237 thousand increase in data processing expenses was due to increases in transaction volumes from loans and deposit growth and enhancing automation such as online account opening solutions, coupled with higher software amortization of new and upgraded technology. The $356 thousand increase in FDIC assessment fees was due primarily to the
57

organic growth in the total assets during the third quarter of 2020 and the Small Bank Assessment Credits received from the FDIC in the third quarter of 2019.

The $185 thousand decrease in loan related expenses was due primarily to higher reimbursements for loan related expenses. The $356 thousand decrease in customer service related expenses was due primarily to lower average demand deposits for certain deposit accounts during the third quarter of 2020.

The efficiency ratio remained strong at 48.7% in the third quarter of 2020, compared to 46.9% in the third quarter of 2019. The higher efficiency ratio in the third quarter of 2020 was driven by higher noninterest expense, partially offset by higher revenues.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Noninterest expense for the nine months ended September 30, 2020 increased $2.2 million to $34.1 million from $32.0 million for the nine months ended September 30, 2019. The increase was due to higher salaries and employee benefits, data processing, FDIC assessment fees and other expenses, partially offset by lower occupancy and equipment expense and customer service related expense.

The $1.2 million increase in salaries and employee benefits was due to annual merit increases, higher overtime expense for the roll-out of PPP loans, higher incentives, partially offset by increased deferred loan origination costs for the nine months ended September 30, 2020. The $675 thousand increase in data processing expenses was due to increases in transaction volumes from production growth and enhancing automation such as online account opening solutions, coupled with higher software amortization of new and upgraded technology. The $300 thousand increase in FDIC assessment fees was due primarily to the organic growth in the total assets and the Small Bank Assessment Credits received from the FDIC in the third quarter of 2019. The $400 thousand increase in other expense related primarily to a $300 thousand increase in the provision for unfunded loan commitments resulting from an increase in unfunded loan commitments and historical loss rates.

Occupancy and equipment expense decreased by $205 thousand due primarily to a $400 thousand impairment charge in the nine months ended September 30, 2019 for the relocation and consolidation of branches in 2019. There was no impairment charge in 2020, partially offset by $125 thousand accrued expenses for asset retirement obligations recognized in 2020. The $406 thousand decrease in customer service related expenses was due primarily to lower average demand deposits for certain deposit accounts during the nine months ended September 30, 2020.

The efficiency ratio remained strong at 52.0% for the nine months ended September 30, 2020, compared to 49.0% for the nine months ended September 30, 2019. The higher efficiency ratio in the nine months ended September 30, 2020 was driven by higher noninterest expense.

Income Taxes

    Income tax expense was $3.3 million, $2.4 million and $3.3 million for the three months ended September 30, 2020, June 30, 2020 and September 30, 2019. The effective tax rates were 29.3%, 29.8% and 28.9% for the three months ended September 30, 2020, June 30, 2020 and September 30, 2019. For the nine months ended September 30, 2020 and 2019, income tax expense was $7.5 million and $9.7 million and the effective tax rates were 29.3% and 30.8%. The difference in our effective tax rate compared to the statutory rate of 29.5% for the respective reporting periods was primarily attributable to the impact of the vesting and exercise of equity awards combined with changes in the Company's stock price over time.


Financial Condition

    Total assets increased $32.7 million during the third quarter of 2020 to $2.26 billion at September 30, 2020 from $2.22 billion at June 30, 2020. This increase was due mostly to a $1.2 million increase in investment securities available-for sale, a $16.1 million increase in loans held for sale, a $53.3 million increase in loans held for investment and $2.5 million increase in other assets, partially offset by a $36.3 million decrease in cash and cash equivalents, a $2.3 million decrease in accrued interest receivable primarily related to loans on a deferred payment program, a $912 thousand increase in the allowance for loan losses and a $602 thousand decrease in net foreclosed assets. Total liabilities increased $27.2 million during the third quarter of 2020 to $1.98 billion at September 30, 2020 from $1.96 billion at June 30, 2020. This increase was
58

due mostly to a $74.0 million increase in PPPLF, partially offset by a $45.1 million decrease in total deposits and a decrease in senior secured notes of $2.1 million.

Since December 31, 2019, total assets have increased $566.0 million due mostly to a $510.3 million increase in loans held for investment, including PPP loans, net of unearned fees of $390.2 million, to $1.88 billion at September 30, 2020, or an annualized growth rate of 12% without PPP loans. In addition, cash and cash equivalents increased $19.7 million, investment securities increased $8.0 million, loans held for sale increased $28.8 million, accrued interest receivable increased $6.0 million primarily related to loans on a deferred payment program and PPP loans, and premises and equipment increased $799 thousand, partially offset by a $5.2 million increase in allowance for loan losses, a $834 thousand decrease in servicing asset, and a $1.0 million decrease in other assets. Total liabilities at September 30, 2020 were $1.98 billion, an increase of $555.4 million, from $1.43 billion at December 31, 2019. Total deposits increased $246.2 million, borrowings increased $60.0 million, PPPLF increased $253.1 million, and other liabilities increased $1.2 million, partially offset by a decrease in senior secured notes of $5.2 million.

Cash and Cash Equivalents
 
Cash and cash equivalents are comprised of cash and due from banks, interest-bearing deposits at the Federal Reserve and other banks, with original maturities of less than 90 days. Cash and cash equivalents totaled $181.5 million at September 30, 2020, a decrease of $36.3 million from June 30, 2020, and an increase of $19.7 million from December 31, 2019. The decrease in cash and cash equivalents during the three months ended September 30, 2020 was primarily attributed to an increase in loans and decrease in deposits. The increase in cash and cash equivalents during the nine months ended September 30, 2020 was primarily attributable to increases in deposits, borrowings and PPPLF to fund the PPP loans and maintain appropriate on balance sheet liquidity, partially offset by an increase in loans.

Investment Securities

The following table presents the fair values of investment securities available-for-sale and amortized cost of investment securities held-to-maturity as of the periods indicated:
September 30, 2020June 30, 2020December 31, 2019
Fair
Value		Percentage of TotalFair
Value		Percentage of TotalFair
Value		Percentage of Total
Securities available-for-sale:(dollars in thousands)
U.S. Government and agency securities$2,706 7.1 %$3,000 8.2 %$— — %
Mortgage-backed securities6,157 16.2 %$6,830 18.6 %7,431 27.9 %
Collateralized mortgage obligations20,908 55.0 %18,610 50.5 %10,598 39.7 %
SBA pools8,228 21.7 %8,343 22.7 %8,624 32.4 %
$37,999 100.0 %$36,783 100.0 %$26,653 100.0 %
September 30, 2020June 30, 2020December 31, 2019
Amortized CostPercentage of TotalAmortized CostPercentage of TotalAmortized CostPercentage of Total
Securities held-to-maturity:
U.S. Government and agency securities$— — %$— — %$3,342 66.1 %
Mortgage-backed securities1,680 100.0 %1,691 100.0 %1,714 33.9 %
$1,680 100.0 %$1,691 100.0 %$5,056 100.0 %
        
59

The following table presents the contractual maturities of investment securities available-for-sale and held-to-maturity as of September 30, 2020:
September 30, 2020
One Year
or Less		After One Year Through Five YearsAfter Five Years Through Ten YearsAfter Ten Years (1)Total
Securities available-for-sale:(dollars in thousands)
U.S. Government and agency securities$— $— $— $2,706 $2,706 
Mortgage-backed securities— — — 6,157 6,157 
Collateralized mortgage obligations— — — 20,908 20,908 
SBA pools— — — 8,228 8,228 
$— $— $— $37,999 $37,999 
Weighted average yield:
U.S. Government and agency securities— %— %— %2.13 %2.13 %
Mortgage-backed securities— %— %— %1.82 %1.82 %
Collateralized mortgage obligations— %— %— %1.30 %1.30 %
SBA pools— %— %— %2.43 %2.43 %
— %— %— %1.68 %1.68 %
(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 "After Ten Years" category.


September 30, 2020
One Year
or Less		After One Year Through Five YearsAfter Five Years Through Ten YearsAfter Ten Years (1)Total
Securities held-to-maturity:(dollars in thousands)
Mortgage-backed securities$— $— $— $1,680 $1,680 
$— $— $— $1,680 $1,680 
Weighted average yield:
Mortgage-backed securities— %— %— %2.78 %2.78 %
— %— %— %2.78 %2.78 %
(1) Mortgage-backed securities do not have a single stated maturity date and, therefore, have been included in the "After Ten Years" category.


    At September 30, 2020, no issuer represented 10% or more of our shareholders’ equity. At September 30, 2020, securities held-to-maturity with a carrying amount of $1.7 million were pledged to the Federal Reserve Bank as collateral for a secured line of credit. There were no borrowings under this line of credit at September 30, 2020.

Loans
    
    Loans are the single largest contributor to our net income. It is our goal to continue to grow the consolidated balance sheet through the origination of loans, and to a lesser extent, through loan purchases. This effort will serve to maximize our yield on earning assets. We continue to manage our loan portfolio in accordance with what we believe are conservative and disciplined loan underwriting policies. Every effort is made to minimize credit risk, while tailoring loans to meet the needs of our target market. Our lending strategy emphasizes quality loan growth, product diversification, and competitive and profitable pricing.

60

The following table shows the composition of our loans held for investment as of the dates indicated:

September 30, 2020June 30, 2020December 31, 2019
AmountPercentage of TotalAmountPercentage of TotalAmountPercentage of Total
(dollars in thousands)
Construction and land development$215,109 11.3 %$218,226 11.8 %$249,504 18.1 %
Real estate:
Residential30,067 1.6 %39,145 2.1 %43,736 3.2 %
Commercial real estate - owner occupied159,603 8.4 %162,508 8.8 %171,595 12.5 %
Commercial real estate - non-owner occupied528,201 27.9 %502,693 27.3 %423,823 30.8 %
Commercial and industrial361,170 19.0 %335,411 18.2 %309,011 22.5 %
SBA loans (1)
602,407 31.8 %586,820 31.8 %177,633 12.9 %
Consumer8 — %34 — %430 — %
Loans held for investment, net of discounts (2)
$1,896,565 100.0 %$1,844,837 100.0 %$1,375,732 100.0 %
Net deferred origination fees (3)
(11,635)(13,218)(1,057)
Loans held for investment1,884,930 1,831,619 1,374,675 
Allowance for loan losses(18,734)(17,822)(13,522)
Loans held for investment, net$1,866,196 $1,813,797 $1,361,153 
 (1) SBA loans include PPP loans with total gross outstanding principal of $400.1 million and $400.7 million at September 30, 2020 and June 30, 2020.
(2) Loans held for investment, net of discounts includes the net carrying value of PCI loans of $792 thousand, $1.0 million and $1.1 million at September 30, 2020, June 30, 2020 and December 31, 2019.
(3) Net deferred origination fees include $9.9 million and $11.5 million for PPP loans at September 30, 2020 and June 30, 2020.


At September 30, 2020, loans held for investment totaled $1.88 billion, an increase of $53.3 million and $510.3 million from June 30, 2020 and December 31, 2019. During the third quarter of 2020 as compared to June 30, 2020, construction and land development loans decreased $3.1 million, commercial real estate loans ("CRE") increased $22.6 million, commercial and industrial ("C&I") loans increased $25.8 million, SBA loans increased $15.6 million, and residential loans decreased $9.1 million.

Since year-end, construction and land development loans decreased $34.4 million, commercial real estate loans ("CRE") increased $92.4 million, commercial and industrial ("C&I") loans increased $52.2 million, SBA loans increased $424.8 million, and residential loans decreased $13.7 million. The composition decreased in all categories, except commercial real estate loans ("CRE") and SBA loans compared to December 31, 2019. The overall increase in loans held for investment at September 30, 2020 as compared to December 31, 2019 relates to PPP loans, net of unearned fees of $389.2 and organic growth in the CRE, C&I and SBA portfolios at September 30, 2020.

The most significant categories in the loan portfolio are SBA, CRE (non-owner occupied) and commercial and industrial loans which represent 31.8%, 27.9% and 19.0% of total loans held for investment, net of discounts at September 30, 2020.

Being a preferred SBA lender, we participated in the PPP and had total gross loan outstanding balances of $400.1 million, or $390.2 million, net of unearned fees of $9.9 million at September 30, 2020. Borrowers who use the funds from their PPP loans to maintain payroll and pay for certain eligible non-payroll expenses may have up to 100% of their loans forgiven by the SBA. The SBA has commenced making determinations as to PPP forgiveness applications in the fourth quarter of 2020 and, the Company anticipates that the SBA will continue reviewing and making determinations with respect to forgiveness applications, at which point the recognition of fee income will be accelerated. This expectation is subject to change due to borrower behavior, changing SBA requirements and processes relating to loan forgiveness and other relevant factors. Excluding the PPP loans, our SBA portfolio represents 13.5% of total loans held for investment, net of discounts at September 30, 2020. Please refer to the Recent Developments “COVID-19 Updates for the Third Quarter of 2020” section for pandemic impact relating to PPP loans.

61

We participated in the Main Street Lending program during the third quarter of 2020. Under this program, we originate loans to borrowers meeting the terms and requirements of the program, including requirements as to eligibility, use of proceeds and priority, and sell a 95% participation interest in these loans to Main Street Facilities, LLC, a special purpose vehicle ("SPV") organized by the Federal Reserve to purchase the participation interest from eligible lenders, including us. During the third quarter of 2020, the Bank originated four Main Street loans totaling $69.8 million in principal amount and sold participation interest totaling $66.3 million to the Main Street SPV, resulting in a gain on sale of $486 thousand.

Per the regulatory definition of commercial real estate, at September 30, 2020, June 30, 2020 and December 31, 2019, our concentration of such loans represented 314%, 307% and 314% of our total risk-based capital and were below our internal policy limit of 350% of our total risk-based capital. In addition, at September 30, 2020, June 30, 2020 and December 31, 2019, total loans secured by commercial real estate under construction and land development represented 89%, 94% and 125% of our total risk-based capital and were likewise below our internal policy of 150% of our total risk-based capital. Historically, we have managed loan concentrations by selling participations in, or whole loan sales of, certain loans, primarily commercial real estate and construction and land development loan production.

We have total loans to the hospitality industry (including construction, CRE, C&I and SBA loans) of $220.1 million, $213.4 million and $158.9 million at September 30, 2020, June 30, 2020 and December 31, 2019. Some of the members of our Board of Directors are active in the hospitality sector, and therefore, are able to provide insights into the operations of the hotel properties. There are no loans to any of our board members or to members of their immediate families, but often to other hotel owners referred to us by these directors. We carefully manage our concentration and the levels of hospitality loans are measured against our total risk-based capital and reported to our Board of Directors regularly. Our internal guidance is to limit CRE and construction hospitality industry commitments to 150% and 75% of total risk-based capital, respectively. At September 30, 2020, June 30, 2020 and December 31, 2019, total commitments to fund CRE loans to the hospitality industry represented 73%, 62% and 50% of our total risk-based capital. Total commitments to fund construction loans to the hospitality industry were 15%, 28% and 36% of our total risk-based capital at September 30, 2020, June 30, 2020 and December 31, 2019. Please refer to the Recent Developments “COVID-19 Updates for the Third Quarter of 2020” section for pandemic impact relating to hospitality loans.

    We offer small business loans through the SBA 7(a) and 504 loan programs. The SBA 7(a) program provides up to a 75% guaranty for loans greater than $150,000, an 85% guaranty for loans $150,000 or less, and, in certain circumstances, up to a 90% guaranty. The maximum SBA 7(a) loan amount is $5 million, with the exception of CARES Act SBA PPP loans, which are limited to $10 million, and have a 100% guarantee. The guaranty is conditional and covers a portion of the risk of payment default by the borrower, but not the risk of improper closing and servicing by the lender. The SBA 504 program consists of real estate backed commercial mortgages where we have the first mortgage and the SBA has the second mortgage on the property. Generally, we have a less than 50% loan to value ratio on SBA 504 program loans at origination.

The following table summarizes the SBA loan types in the portfolio as of the dates indicated:

September 30, 2020June 30,
2020		December 31,
2019
(dollars in thousands)
SBA 7(a) (1)
$494,146 $490,732 $100,103 
SBA 504108,261 96,088 $77,530 
Total$602,407 $586,820 $177,633 
(1) SBA 7(a) includes PPP loans with total gross outstanding principal of $400.1 million and $400.7 million at September 30, 2020 and June 30, 2020.


62

The following table summarizes the amount of guaranteed and unguaranteed SBA loans in the portfolio, and the collateral categories for the unguaranteed portion of SBA loans as of the dates indicated:

September 30, 2020June 30, 2020December 31, 2019
(dollars in thousands)
Secured - industrial warehouse$43,361 $41,008 $23,364 
Secured - hospitality24,894 24,175 24,858 
Secured - retail center/building24,527 23,288 28,182 
Secured - other real estate71,083 60,203 58,757 
Unsecured or secured by other business assets13,528 11,868 11,921 
Total unguaranteed portion177,393 160,542 147,082 
Guaranteed portion (1)
425,014 426,278 30,551 
Total$602,407 $586,820 $177,633 
(1) Guaranteed portion includes PPP loans with total gross outstanding principal of $400.1 million and $400.7 million as the SBA guarantees 100% of loans funded under the program.at September 30, 2020 and June 30, 2020.

Loan Maturities
    
    The following table presents the contractual maturities and the distribution between fixed and adjustable interest rates for loans held for investment at September 30, 2020:
September 30, 2020
Within One YearAfter One Year Through Five YearsAfter Five Years
FixedAdjustable RateFixedAdjustable RateFixedAdjustable
Rate		Total
(dollars in thousands)
Construction and land development$4,188 $110,094 $12,044 $59,559 $— $29,224 $215,109 
Real estate:
     Residential— — — 845 2,249 26,973 30,067 
     Commercial real estate - owner occupied1,443 2,085 20,552 40,368 22,219 72,936 159,603 
     Commercial real estate - non-owner occupied12,968 22,451 77,413 125,237 62,791 227,341 528,201 
Commercial and industrial 7,075 86,878 21,860 106,274 24,209 114,874 361,170 
SBA loans (1)
— 8,490 402,885 11,525 10,004 169,503 602,407 
Consumer8 — — — — — 8 
Total$25,682 $229,998 $534,754 $343,808 $121,472 $640,851 $1,896,565 
(1) PPP loans with total gross outstanding principal of $400.1 million are fixed-rate with two-year contractual maturity.

Potential Problem Loans

Loans are considered delinquent when principal or interest payments are past due 30 days or more; delinquent loans may remain on accrual status between 30 days and 89 days past due. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income.
 
Loan delinquencies (30-89 days past due) totaled $1.2 million, $353 thousand and $1.8 million at September 30, 2020, June 30, 2020 and December 31, 2019. Deferred payment loans which met the requirement under Section 4013 of the CARES Act are not considered as TDRs and are accruing interest as of September 30, 2020.

63

The following tables present the recorded investment balances of substandard loans, excluding PCI loans, by loan class at September 30, 2020 and December 31, 2019:
September 30, 2020
Real Estate
Construction and land developmentResidentialCommercial real estate - owner occupiedCommercial real estate - non-owner occupiedCommercial and industrialSBA loansConsumerTotal
(dollars in thousands)
Substandard (1)
$— $259 $1,436 $6,989 $1,093 $8,211 $— $17,988 
Total$— $259 $1,436 $6,989 $1,093 $8,211 $— $17,988 
(1)At September 30, 2020, substandard loans included $13.0 million of impaired loans. There were no loans classified as special mention, doubtful or loss at September 30, 2020.

December 31, 2019
Real Estate
Construction and land developmentResidentialCommercial real estate - owner occupiedCommercial real estate - non-owner occupiedCommercial and industrialSBA loansConsumerTotal
(dollars in thousands)
Substandard (1)
$— $— $9,624 $2,092 $2,630 $10,260 $— $24,606 
Total$— $— $9,624 $2,092 $2,630 $10,260 $— $24,606 
(1)At December 31, 2019, substandard loans included $11.3 million of impaired loans. There were no loans classified as special mention, doubtful or loss at December 31, 2019.
    

Since year end, the decrease in the substandard loans was due to $821 thousand from upgrades, $756 thousand in charge-offs and $10.7 million in payoffs, and paydowns, offset by six loans totaling $5.6 million being downgraded to substandard.

Nonperforming Assets

Nonperforming assets, excluding PCI loans, are defined as nonperforming loans (accruing loans past due 90 days or more, non-accrual loans and non-accrual TDRs) plus other real estate owned and other assets acquired through foreclosure (“Foreclosed assets”). The balances of nonperforming loans reflect our net investment in these assets. The table below reflects the composition of non-performing assets at the periods indicated:

September 30, 2020June 30,
2020		December 31, 2019
(dollars in thousands)
Accruing loans past due 90 days or more$— $267 $— 
Non-accrual12,847 7,999 11,107 
Troubled debt restructurings on non-accrual144 150 158 
Total nonperforming loans12,991 8,416 11,265 
Foreclosed assets— 602 — 
Total nonperforming assets$12,991 $9,018 $11,265 
Troubled debt restructurings - on accrual$320 $319 $321 
Nonperforming loans as a percentage of total loans held for investment0.69 %0.46 %0.82 %
Nonperforming assets as a percentage of total assets0.58 %0.41 %0.67 %
    
64

The following table shows our nonperforming loans by loan class as of the dates indicated:
September 30, 2020June 30, 2020December 31, 2019
Nonperforming loans:(dollars in thousands)
Construction and land development$— $— $— 
Real estate:
Residential259 267 — 
Commercial real estate - owner occupied1,312 1,515 3,049 
Commercial real estate - non-owner occupied6,286 1,339 1,368 
Commercial and industrial 183 186 229 
SBA loans4,951 5,109 6,619 
Total nonperforming loans (1)$12,991 $8,416 $11,265 
 (1) There were no purchased credit impaired loans on nonaccrual at September 30, 2020, June 30, 2020 and December 31, 2019.

Since year end, the increase in nonperforming loans was due mostly to $756 thousand in charge-offs, $3.0 million in payoffs and paydowns, offset by five loans totaling $5.5 million being downgraded to nonaccrual. There were no loans over 90 days past due that were still accruing interest at September 30, 2020 and December 31, 2019. There was one loan over 90 days past due that was still accruing interest at June 30, 2020.

Troubled Debt Restructurings

At September 30, 2020 and December 31, 2019, the total recorded investment for loans identified as a TDR was approximately $464 thousand and $479 thousand. There were no specific reserves allocated for these loans and we have not committed to lend any additional amounts to customers with outstanding loans that are classified as TDRs at September 30, 2020 and December 31, 2019. During the three and nine months ended September 30, 2020, there were no new loan modifications resulting in TDRs. Loan modifications resulting in TDR status generally included one or a combination of the following concessions: extensions of the maturity date, principal payment deferments or signed forbearance agreements with a payment plan.

During the three months ended September 30, 2020, June 30, 2020 and September 30, 2019, there was one loan in each period totaling $81 thousand, $85 thousand and $92 thousand modified as a TDR for which there was a payment default within twelve months following the modification. During the nine months ended September 30, 2020 and September 30, 2019, there was one loan in each period totaling $81 thousand and $92 thousand modified as a TDR for which there was a payment default within twelve months following the modification. A loan is considered to be in payment default once it is 90 days contractually past due under the modification.

COVID Related Loan Deferments

At September 30, 2020, the Company had 12 non-PPP loans totaling $37 million on payment deferral for COVID-related reasons, down from $626 million at June 30, 2020. Over 97% of loans that were granted a deferral have resumed making regular, contractually agreed-upon payments or were paid off. One deferred payment loan of $113 thousand was reported as past due, two loans totaling $5 million were reported as nonaccrual and none are reported as TDRs under Section 4013 of the CARES Act. As a part of the CARES Act, the SBA is paying six months of loan payments for the Company’s SBA 7a borrowers. At September 30, 2020, 193 SBA loans with balances totaling $73 million were having payments made by the SBA.

Allowance for Loan losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the un-collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Amounts are charged-off when available
65

information confirms that specific loans or portions thereof, are uncollectible. This methodology for determining charge-offs is consistently applied to each loan portfolio segment.

The Company determines a separate allowance for each loan portfolio segment. The allowance consists of specific and general reserves. Specific reserves relate to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value and the probability of collecting all amounts when due. Measurement of impairment is based on the expected future cash flows of an impaired loan, which are to be discounted at the loan’s effective interest rate, or measured by reference to an observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan. We select the measurement method on a loan-by-loan basis except that collateral-dependent loans for which foreclosure is probable are measured at the fair value of the collateral, less estimated selling costs.

General reserves cover non-impaired loans and are based on historical loss rates for each portfolio segment adjusted for the effects of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience. Qualitative factors include consideration of the following: changes in lending policies and procedures; changes in economic conditions; changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for collateral-dependent loans; concentrations of credit; and the effect of other external factors such as competition, COVID-19 pandemic and legal and regulatory requirements.

Portfolio segments identified by the Company include construction and land development, residential and commercial real estate, commercial and industrial, SBA loans, and consumer loans. Relevant risk characteristics for these portfolio segments generally include debt service coverage, loan-to-value ratios, collateral type, borrower financial performance, credit scores, and debt-to-income ratios for consumer loans.

In addition, the evaluation of the appropriate allowance for loan losses on non-PCI loans in the various loan segments considers discounts recorded as a part of the initial determination of the fair value of the loans. For these loans, no allowance for loan losses is recorded at the acquisition date. Interest and credit discounts are components of the initial fair value. Additional credit deterioration on acquired non-PCI loans, in excess of the remaining discounts are being recognized in the allowance through the provision for loan losses.

The evaluation of the appropriate allowance for loan losses for purchased credit-impaired loans in the various loan segments considers the expected cash flows to be collected from the borrower. These loans are initially recorded at fair value and, therefore, no allowance for loan losses is recorded at the acquisition date. Subsequent to the acquisition date, the expected cash flows of purchased loans are subject to evaluation. Decreases in expected cash flows are recognized by recording an allowance for loan losses with the related provision for loan losses. If the expected cash flows on the purchased loans increase, a previously recorded impairment allowance can be reversed. Increases in expected cash flows of purchased loans, when there are no reversals of previous impairment allowances, are recognized over the remaining life of the loans.

At September 30, 2020, we evaluated and considered the impacts relating to COVID-19 and macro-economic conditions on our qualitative factors. The assumptions underlying these qualitative factors included (a) uncertain and volatile macro-economic conditions caused by the pandemic; (b) the stable unemployment rate; and (c) the loan deferment program and Main Street Lending program. No provision for loan losses on PPP loans was recognized in 2020 as the SBA guarantees 100% of loans funded under the program.

At September 30, 2020, the allowance for loan losses was $18.7 million, or 0.99% of loans held for investment, compared to $13.5 million, or 0.98% of loans held for investment at December 31, 2019. The allowance for loan losses as a percentage of total loans held for investment without PPP loans was 1.25% at September 30, 2020. At September 30, 2020, the net carrying value of acquired loans totaled $173.8 million and included a remaining net discount of $4.3 million. The discount is available to absorb losses on the acquired loans and represented 2.5% of the net carrying value of acquired loans and 0.22% of total gross loans held for investment.

66

Given the growth and the composition of our loan portfolio, as well as the unamortized discount on loans acquired, the ALLL was considered adequate to cover probable incurred losses inherent in the loan portfolio. We will continue to assess the adequacy of the allowance for loan losses for specific loans and the loan portfolio as a whole during the pandemic. Should any of the factors considered by management in evaluating the appropriate level of the ALLL change, our estimate of probable incurred loan losses could also change, which could affect the level of future provisions for loan losses. The table below presents a summary of activity in our allowance for loan losses for the periods indicated:

Three Months EndedNine Months Ended September 30,
September 30, 2020June 30,
2020		September 30, 201920202019
(dollars in thousands)
Balance, beginning of period$17,822 $16,218 $12,053 $13,522 $11,056 
Charge-offs:
Commercial and industrial (194)(125)(437)(326)(561)
SBA loans— (425)— (446)— 
Total charge-offs(194)(550)(437)(772)(561)
Recoveries:
Commercial and industrial 106 54 24 172 56 
SBA loans— — — 12 189 
Total recoveries106 54 24 184 245 
Net charge-offs(88)(496)(413)(588)(316)
Provision for loan losses1,000 2,100 700 5,800 1,600 
Balance, end of period$18,734 $17,822 $12,340 $18,734 $12,340 
16218000
Loans held for investment$1,884,930 $1,831,619 $1,316,620 $1,884,930 $1,316,620 
Average loans$1,892,450 $1,738,172 $1,328,088 $1,679,206 $1,314,513 
Allowance for loan losses as a percentage of total loans held for investment0.99 %0.97 %0.94 %0.99 %0.94 %
Allowance for loan losses as a percentage of total loans held for investment without PPP loans1.25 %1.24 %0.94 %1.25 %0.94 %
Annualized net charge-offs to average loans(0.02)%(0.11)%(0.12)%(0.05)%(0.03)%
    
The following table shows the allocation of the allowance for loan losses by loan type as of the dates indicated:

September 30, 2020June 30, 2020December 31, 2019
Allowance for Loan Losses% of Loans in Each Category to Total LoansAllowance for Loan Losses% of Loans in Each Category to Total LoansAllowance for Loan Losses% of Loans in Each Category to Total Loans
(dollars in thousands)
Construction and land development$2,370 11.3 %$2,470 11.8 %$2,350 18.1 %
Real estate:
Residential275 1.6 %361 2.1 %292 3.2 %
Commercial real estate - owner occupied1,280 8.4 %1,365 8.8 %918 12.5 %
Commercial real estate - non-owner occupied5,580 27.9 %5,347 27.3 %3,074 30.8 %
Commercial and industrial 6,264 19.0 %5,607 18.2 %4,145 22.5 %
SBA loans2,965 31.8 %2,672 31.8 %2,741 12.9 %
Consumer— — %— — %2 — %
$18,734 100.0 %$17,822 100.0 %$13,522 100.0 %

67

Loan Held for Sale

Loans held for sale typically consist of the guaranteed portion of SBA 7a loans and Main Street loans that are originated and intended for sale in the secondary market and to the Main Street SPV and may also include commercial real estate loans and SBA 504 loans. Loans held for sale are carried at the lower of carrying value or estimated market value. At September 30, 2020, loans held for sale were $36.5 million, an increase of $16.2 million from $20.3 million at June 30, 2020 and an increase of $28.8 million from $7.7 million at December 31, 2019. The change in loans held for sale was due to the origination of $87.9 million offset by SBA and Main Street loan sales during the three months ended September 30, 2020. The change in loans held for sale was due to the origination of $103.1 million in loans held for sale, offset by the sale of loans with a carrying value of $75.2 million during the nine months ended September 30, 2020.  In addition, there were no loans held for investment transferred to loans held for sale during the three months ended September 30, 2020 and $932 thousand of loans held for investment were transferred to loans held for sale during the nine months ended September 30, 2020. At September 30, 2020 and December 31, 2019, loans held for sale consisted entirely of SBA 7a loans and the fair value of loans held for sale totaled $39.3 million and $8.4 million.

Servicing Asset and Loan Servicing Portfolio

    Loans serviced for others totaled $327.4 million and $278.6 million at September 30, 2020 and December 31, 2019. The loan servicing portfolio includes SBA loans serviced for others of $196.6 million and $214.8 million for which there was a related servicing asset of $2.4 million and $3.2 million at September 30, 2020 and December 31, 2019. The fair value of the servicing asset for SBA loans is measured quarterly and was $3.1 million and $3.2 million as of September 30, 2020 and December 31, 2019. The significant assumptions used in the valuation of the SBA servicing asset at September 30, 2020 included discount rates, ranging from 0.7% to 49.4%, and a weighted average prepayment speed assumption of 21.5%.

    In addition, the loan servicing portfolio includes construction and land development loans, commercial real estate loans and commercial & industrial loans participated out to other institutions of $130.8 million and $63.8 million for which there is no related servicing asset at September 30, 2020 and December 31, 2019.

Under the Main Street Lending Program, the Company originates loans to borrowers meeting the terms and requirements of the program, including requirements as to eligibility, use of proceeds and priority, and sells a 95% participation interest in these loans to Main Street Facilities, LLC, a special purpose vehicle ("SPV") organized by the Federal Reserve to purchase the participation interest from eligible lenders, including the Bank. During the three months ended September 30, 2020, the Company originated four Main Street loans totaling $69.8 million in principal amount and sold participation interest totaling $66.3 million to the Main Street SPV, resulting in a gain on sale of $486 thousand. The SPV will pay the Company a servicing fee of 0.25% per annum of the total principal amount of the participation interest. The Company and the Federal Reserve believe that the terms of the Servicing Agreement are commercially reasonable and comparable to terms that unaffiliated third parties would accept to provide Enhanced Reporting Services, under the terms and conditions set out in the Servicing Agreement, with respect to the participation interest. Therefore no servicing asset or liability was recorded at the time of sale.

Goodwill and Other Intangible Assets

    As a result of the PCB acquisition completed on July 31, 2018, we recorded goodwill and a core deposit intangible ("CDI"), which total $73.4 million and $5.1 million at September 30, 2020. Due to the COVID-19 pandemic and the resulting volatility in our stock price during the first nine months of 2020, the Company evaluated goodwill for impairment at September 30, 2020 and tested for impairment by comparing an estimated fair value of the Company to our book value. The fair value was estimated using the following two tests: (i) recent acquisition price-to-tangible book multiples were applied to the Company's tangible book value to compute the estimated fair value; and (ii) an “average price to last twelve month earnings” market multiple was applied to: (i) actual earnings and (ii) forecasted fiscal year 2020 earnings. Both tests resulted in the estimated fair value exceeding book value, and therefore, the Company did not recognize any impairment of goodwill for the three and nine months ended September 30, 2020.

For the three months ended September 30, 2020, June 30, 2020 and September 30, 2019, we recognized CDI amortization of $193 thousand, $193 thousand and $197 thousand. For the nine months ended September 30, 2020 and 2019, we recognized CDI amortization of $579 thousand and $590 thousand.
68


Deposits

    The following table presents the ending balance and percentage of deposits as of the periods indicated:
September 30, 2020June 30, 2020December 31, 2019
AmountPercentage of TotalAmountPercentage of TotalAmountPercentage of Total
(dollars in thousands)
Noninterest-bearing demand$736,118 47.2 %$789,770 49.2 %$626,569 47.7 %
Interest-bearing deposits:
Interest checking (1)
272,052 17.4 %262,859 16.4 %167,581 12.8 %
Money market (2)
346,091 22.3 %326,744 20.4 %319,694 24.2 %
Savings31,470 2.0 %31,116 1.9 %27,091 2.1 %
Retail time deposits62,880 4.0 %68,987 4.3 %97,220 7.4 %
Wholesale time deposits111,301 7.1 %125,521 7.8 %75,538 5.8 %
$1,559,912 100.0 %$1,604,997 100.0 %$1,313,693 100.0 %
(1) Included brokered deposits of $33.7 million, $3 thousand and $33.0 million at September 30, 2020, June 30, 2020 and December 31, 2019.
(2) Included brokered deposits of $85.0 million, $25.0 million and $15.1 million at September 30, 2020, June 30, 2020 and December 31, 2019.

    During the three months ended September 30, 2020, total deposits decreased $45.1 million from the prior quarter but increased $246.2 million from year end to $1.60 billion at September 30, 2020.

The decrease during three months ended September 30, 2020 was due primarily to a decrease in noninterest-bearing deposit accounts and time deposit accounts, partially offset by increases in interest-bearing nonmaturity deposits. At September 30, 2020, noninterest-bearing deposits totaled $736.1 million, a decrease of $53.7 million in the third quarter of 2020, due primarily to the customers' use of PPP funds during the third quarter of 2020. Interest-bearing nonmaturity deposits increased $28.9 million due primarily to an increase in brokered deposits. Noninterest-bearing deposits were $736.1 million and represented 47.2% of total deposits at September 30, 2020, compared to $789.8 million and 49.2% of total deposits at June 30, 2020. At September 30, 2020, time deposits totaled $174.2 million and decreased $20.3 million due to a decrease in higher rate customer time deposits which matured in the third quarter of 2020, coupled with a decrease in brokered time deposits. At September 30, 2020, wholesale time deposits totaled $111.3 million, of which $73.6 million are callable within six months, compared to $125.5 million at June 30, 2020.

Since year end, the increase in total deposits was due primarily to an increase in all deposit categories, except retail time deposits. Noninterest-bearing deposits increased $109.5 million during the nine months ended September 30, 2020. Approximately $33.3 million of the increase was due to new deposit accounts for PPP loans at September 30, 2020. The remaining increase was due to core deposit growth. Interest-bearing nonmaturity deposits increased $135.2 million during the nine months ended September 30, 2020 primarily due to an increase in core deposits from the FDIC Insurance Program through Demand Deposit Marketplace ("DDM"), deposits from other financial institutions and brokered money market deposits. Noninterest-bearing deposits were $736.1 million and represented 47.2% of total deposits at September 30, 2020, compared to $626.6 million and 47.7% of total deposits at December 31, 2019.

During the nine months ended September 30, 2020, time deposits had a slight increase of $1.4 million due primarily to an increase in wholesale time deposits, offset by lower retail time deposits related to maturities that were not renewed at our current offer rates.

Wholesale time deposits includes brokered time deposits and collateralized time deposits from the State of California. Collateralized time deposits from the State of California totaled $10.0 million at September 30, 2020 and June 30, 2020 and $25.1 million at December 31, 2019. These deposits are collateralized by letters of credit issued by the FHLB under the Bank's secured line of credit with the FHLB. Please refer to Note 7 - Deposits and Note 8 - Borrowing Arrangements to the condensed consolidated financial statements. Our ten largest depositor relationships accounted for approximately 27% and 28% of total deposits at September 30, 2020 and December 31, 2019.

69

The following table shows time deposits greater than $250,000 by time remaining until maturity:
September 30, 2020
(dollars in thousands)
Three months or less$4,110 
Over three months through six months15,545 
Over six months through twelve months3,587 
Over twelve months7,349 
$30,591 

Borrowings

    In addition to deposits, we use borrowings, including short-term and long-term FHLB advances, Federal Reserve
secured lines of credit, federal funds unsecured lines of credit, Paycheck Protection Program Liquidity Facility and floating rate senior secured notes, as secondary sources of funds to meet our liquidity needs. The following tables presents the components of borrowings as of the periods indicated:
September 30, 2020December 31, 2019
(dollars in thousands)
Borrowings
FHLB advances - short term (1) (2)
$120,000 $60,000 
FHLB advances - long term (1)
30,000 30,000 
$150,000 $90,000 
Weighted-average interest rate, end of period0.54 %1.79 %
Paycheck Protection Program Liquidity Facility$253,140 $— 
Interest rate, end of period0.35 %— %
Senior secured notes$4,400 $9,600 
Interest rate, end of period3.25 %5.00 %
(1) Based on original maturity date.
(2) Included $10 million of 0% interest borrowings under the FHLB San Francisco's new Recovery Advance loan program at September 30, 2020.

Federal Home Loan Bank Secured Line of Credit

    At September 30, 2020, the Bank had a secured line of credit of $407.1 million from the FHLB, of which $186.1 million was available. This secured borrowing arrangement is collateralized under a blanket lien and is subject to the Bank providing adequate collateral and continued compliance with the Advances and Security Agreement and other eligibility requirements established by the FHLB. At September 30, 2020, the Bank had pledged $1.64 billion of loans under a blanket lien, including PPP loans, of which $860.3 million was considered as eligible collateral. PPP loans are not considered eligible collateral under this borrowing agreement. At September 30, 2020, the Bank also participated in the FHLB San Francisco's new Recovery Advance loan program for $10 million at zero percent interest with maturity dates in November 2020 and May 2021.
70

The following table shows the interest rates and maturity dates of FHLB advances at periods indicated:
September 30, 2020December 31, 2019
BalanceRateMaturity DateBalanceRateMaturity Date
Advances:(dollars in thousands)
Recovery advance$5,000 — %11/19/2020$— — %— 
Recovery advance5,000 — %5/19/2021— — %— 
Term and fixed-rate advance30,000 0.22 %11/27/202060,000 1.72 %3/20/2020
Term and fixed-rate advance50,000 0.19 %2/26/2021— — %— 
Term and fixed-rate advance30,000 0.25 %5/26/2021— — %— 
Term and fixed-rate advance30,000 1.93 %6/11/202130,000 1.93 %6/11/2021
$150,000 0.54 %$90,000 1.79 %

In addition, at September 30, 2020, the Bank used $71.0 million of its secured FHLB borrowing capacity by having the FHLB issue letters of credit to meet collateral requirements for deposits from the State of California and other public agencies.

The average outstanding balance of total FHLB borrowings was $152.7 million and $48.3 million with an average interest rate of 0.54% and 2.08% for the three months ended September 30, 2020 and 2019. The average balance of total FHLB borrowings was $129.4 million and $53.1 million with an average interest rate of 0.80% and 2.39% for the nine months ended September 30, 2020 and 2019.

Federal Reserve Bank Secured Line of Credit

    At September 30, 2020, the Bank had a secured line of credit of $138.2 million from the Federal Reserve Bank. During the third quarter of 2019, the Bank expanded the existing secured borrowing capacity with the Federal Reserve through the Borrower-in-Custody ("BIC") program. At September 30, 2020, the Bank had pledged qualifying loans with an unpaid principal balance of $203.1 million and securities held-to-maturity with a carrying value of $1.7 million as collateral for this line. Borrowings under this BIC program are overnight advances with interest chargeable at Federal Reserve discount window ("Primary Credit") borrowing rate. There were no borrowings under this credit facility at or during the three and nine months ended September 30, 2020 and there were no borrowings at December 31, 2019.

Paycheck Protection Program Liquidity Facility

On April 14, 2020, the Bank was approved by the Federal Reserve to access its SBA Paycheck Protection Program Liquidity Facility ("PPPLF") through the discount window. The PPPLF enables the Company to fund PPP loans without taking on additional liquidity or funding risks by providing non-recourse loans collateralized by the PPP loans. Borrowings under the PPPLF have a fixed-rate of 0.35%, with a term that matches the underlying loans pledged of two years. At September 30, 2020, the Bank had $253.1 million in borrowings under the PPPLF which were collateralized by PPP loans. The average outstanding borrowings were $240.6 million and $123.1 million during the three and nine months ended September 30, 2020.

Federal Funds Unsecured Lines of Credit

    The Bank has established unsecured overnight borrowing arrangements for an aggregate amount of $125.0 million, subject to availability, with five of its correspondent banks. In general, interest rates on these lines approximate the federal funds target rate. There were no borrowings under these credit facilities at or during the three and nine months ended September 30, 2020 and there were no borrowings at December 31, 2019.

71

Senior Secured Notes

    The holding company has a senior secured revolving line of credit for $25 million, which matures on March 22, 2022. At September 30, 2020, the outstanding balance under this secured line of credit totaled $4.4 million with a floating interest rate equal to Wall Street Journal Prime, or 3.25%. At December 31, 2019, the outstanding balance totaled $9.6 million with an interest rate of 5.00%. The average outstanding borrowings under this facility totaled $4.6 million and $12.3 million with an average interest rate of 3.36% and 5.69% for the three months ended September 30, 2020 and 2019, respectively. The average outstanding borrowings under this facility totaled $6.5 million and $12.2 million with an average interest rate of 3.87% and 5.82% for the nine months ended September 30, 2020 and 2019. At September 30, 2020, the Company was in compliance with all loan covenants on the facility and the remaining available credit was $20.6 million. One of our executives is also a member of the lending bank's board of directors.

Shareholders’ Equity

    Total shareholders’ equity increased $10.7 million to $272.5 million at September 30, 2020 from $261.8 million at December 31, 2019. The increase in shareholders' equity was primarily due to $18.2 million in net earnings, $1.5 million of share-based compensation, $127 thousand of stock options exercised and $651 thousand related to changes in the fair
value of investment securities, available-for-sale and the resulting impact on accumulated other comprehensive income,
partially offset by $8.8 million in cash dividends, and $1.0 million in stock repurchases during the nine months ended September 30, 2020.


Liquidity and Capital Resources
 
Liquidity is the ability to raise funds on a timely basis at an acceptable cost in order to meet cash needs. Adequate liquidity is necessary to handle fluctuations in deposit levels, to provide for client credit needs, and to take advantage of investment opportunities as they are presented in the market place. Although we believe that we currently have the ability to generate sufficient liquidity from our operating activities to meet our funding requirements, we may, in the future, need to acquire additional liquidity to fund our activities.
 
Holding Company Liquidity

    As a bank holding company, we currently have no significant assets other than our equity interest in the Bank. Our primary sources of liquidity at the holding company are dividends from the Bank, cash on hand at the holding company, which was approximately $622 thousand at September 30, 2020, a $25.0 million secured line of credit of which $20.6 million was available at September 30, 2020, and our ability to raise capital, issue subordinated debt, and secure other outside borrowings. The holding company's ability to declare and pay cash dividends to shareholders and repurchase our common stock depends upon cash on hand, availability on our senior secured revolving line of credit and dividends from the Bank. Dividends from the Bank to the holding company depend upon the Bank's earnings, financial position, regulatory standing, ability to meet current and anticipated regulatory capital requirements, and other factors deemed relevant by our Board of Directors. The Bank paid $15 million in dividends to the holding company during the nine months ended September 30, 2020. Please refer to the section "— Regulatory Capital" for a discussion of dividend limitations at both the holding company and the Bank.

Consolidated Company Liquidity
 
Our liquidity ratio is defined as liquid assets (cash and due from banks, fed funds sold and repos, interest-bearing deposits in other banks, other investments with a remaining maturity of one year or less, available-for-sale and equity securities, unpledged held-to-maturity securities and fully funded loans held for sale) divided by total assets. At September 30, 2020, our liquidity ratio was 11.4%.

Our objective is to ensure adequate liquidity at all times by maintaining liquid assets, gathering deposits and
arranging for secondary sources of funding. Having too little liquidity can present difficulties in meeting commitments to
fund loans or honor deposit withdrawals. Having too much liquidity can result in lower income because highly liquid assets
are short-term in nature and generally yield less than long-term assets. A proper balance is the goal of management and the
72

Board of Directors, as administered by various policies and guidelines. Our policy targets a minimum daily liquidity ratio of 11.0%.
 
Additional sources of liquidity available to us at September 30, 2020 included $186.1 million in remaining secured borrowing capacity with the FHLB, $138.2 million in secured borrowing capacity with the Federal Reserve Bank through the Borrower-in-Custody Program ("BIC"), unsecured lines of credit with correspondent banks with a remaining borrowing capacity of $125.0 million, and $147.0 million in PPPLF borrowing capacity with the Federal Reserve Bank through the Discount Window.

Since December 31, 2019, there was an increase in deposit balances due to the influx of funds from government stimulus, the PPP and other government actions. The Bank anticipates that these deposit balances will decline over time as the funds are used for intended business purposes; however, this deposit outflow should be partially offset as the associated PPP loans are forgiven and loan reimbursement is received.

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

Stock Repurchase Plan

On December 3, 2018, we announced a stock repurchase plan, providing for the repurchase of up to 1.2 million shares, or approximately 10%, of our then outstanding shares (the "repurchase plan"). The repurchase plan permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18. The repurchase plan may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of tentative investment opportunities, liquidity, and other factors management deems appropriate. These factors may also affect the timing and amount of share repurchases. The repurchase plan does not obligate us to purchase any particular number of shares.

The Company suspended the stock repurchase program on March 17, 2020. During the three months ended September 30, 2020 and June 30, 2020, there were no repurchases of common stock. The remaining number of shares authorized to be repurchased under this program was 695,489 shares at September 30, 2020. Since the plan's inception, we have repurchased a total of 504,511 shares at an average price of $21.70 per share.
    
Contractual Obligations

    The following table summarizes aggregated information about our outstanding contractual obligations and other long-term liabilities, excluding interest payments, at September 30, 2020.
Payments Due by Period
TotalLess Than
One Year		One to
Three Years		More than Three to
Five Years		After
Five Years
(dollars in thousands)
Deposits without a stated maturity$1,385,731 $1,385,731 $— $— $— 
Time deposits174,181 87,136 63,271 23,774 — 
Borrowings150,000 150,000 — — — 
Paycheck Protection Program Liquidity Facility253,140 253,140 
Senior secured notes4,400 — 4,400 — — 
Operating lease obligations5,747 2,332 3,198 217 — 
$1,973,199 $1,625,199 $324,009 $23,991 $— 

73

Off-Balance-Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in our consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. These transactions generally take the form of loan commitments, unused lines of credit and standby letters of credit.

At September 30, 2020, we had unused loan commitments of $383.7 million, standby letters of credit of $7.2 million and commitments to contribute capital to a low-income housing tax credit project partnership and other CRA equity investments of $2.2 million and $61 thousand. At December 31, 2019, we had unused loan commitments of $376.9 million, standby letters of credit of $7.6 million and commitments to contribute capital to a low-income housing tax credit project partnership and other CRA investments of $1.7 million and $236 thousand.

Regulatory Capital

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. 

At September 30, 2020, we qualify for treatment under the Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) and, therefore, are not subject to consolidated capital rules at the bank holding company level. The Bank also opted into the CBLR framework beginning with the Call Report filed for the first quarter of 2020. At September 30, 2020, the Bank's CBLR ratio was 10.29% which exceeded all regulatory capital requirements under the CBLR framework and, accordingly, the Bank was considered to be ‘‘well-capitalized.’’

    Banks and their bank holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9%, will be eligible to opt into the CBLR framework. Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules (generally applicable rule) and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act. Accordingly, a qualifying community banking organization that exceeds the 9% CBLR will be considered to have met: (i) the generally applicable risk-based and leverage capital requirements of the generally applicable capital rules; (ii) the capital ratio requirements in order to be considered well-capitalized under the prompt corrective action framework; and (iii) any other applicable capital or leverage requirements. A qualifying community banking organization that elects to be under the CBLR framework generally would be exempt from the current capital framework, including risk-based capital requirements and capital conservation buffer requirements. A banking organization meets the definition of a “qualifying community banking organization” if the organization has:

•A leverage ratio of greater than 9%;
•Total consolidated assets of less than $10 billion;
•Total off-balance sheet exposures (excluding derivatives other than sold credit derivatives and unconditionally cancelable commitments) of 25% or less of total consolidated assets; and
•Total trading assets plus trading liabilities of 5% or less of total consolidated assets.

Even though a banking organization meets the above-stated criteria, federal banking regulators have reserved the authority to disallow the use of the CBLR framework by a depository institution or depository institution holding company, based on the risk profile of the banking organization.

On April 6, 2020, the federal banking regulators, implementing the applicable provisions of the CARES Act, issued interim rules which modified the CBLR framework so that: (i) beginning in the second quarter 2020 and until the end of the
74

year, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the CBLR framework; and (ii) community banking organizations will have until January 1, 2022, before the CBLR requirement is reestablished at greater than 9%. Under the interim rules, the minimum CBLR is 8% beginning in the second quarter and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. The interim rules also maintain a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1% below the applicable community bank leverage ratio. Assets originated under the PPP which are also pledged under the PPPLF are deducted from average total consolidated assets for purposes of the CBLR. However, such assets are included in total consolidated assets for purposes of determining the eligibility to elect the CBLR framework.

Dividends    

    Our general dividend policy is to pay cash dividends within the range of typical peer payout ratios, provided that such payments do not adversely affect our consolidated financial condition and are not overly restrictive to our growth capacity. While we have paid a consistent level of quarterly cash dividends since the first quarter of 2017, no assurance can be given that our financial performance in any given year will justify the continued payment of a certain level of cash dividend, or any cash dividend at all. During three months ended September 30, 2020 and 2019, we declared cash dividends of $0.25 per share and $0.20 per share. During the nine months ended September 30, 2020 and 2019, we declared cash dividends of $0.75 per share and $0.60 per share.

The ability of the holding company and the Bank to pay dividends is limited by federal and state laws, regulations and policies of their respective banking regulators. California law allows a California corporation, such as the holding company, to pay dividends if retained earnings equal at least the amount of the proposed dividend. If a California corporation does not have sufficient retained earnings available for the proposed dividend, it may still pay a dividend to its shareholders if, immediately after the dividend, the value of its assets would equal or exceed the sum of its total liabilities. Policies of the Federal Reserve, our primary federal regulator, also limit the amount of dividends that bank holding companies may pay to income available over the past year, and only if prospective earnings retention is consistent with the institution's expected future needs and financial condition and consistent with the Federal Reserve's principle that bank holding companies should serve as a source of strength to their banking subsidiaries.

The holding company's primary source of funds is dividends from the Bank, as well as availability under our $25 million secured line of credit. Under the California Financial Code, the Bank is permitted to pay a dividend in the following circumstances: (i) without the consent of either the California Department of Financial Protection and Innovation ("DFPI") or the Bank's shareholders, in an amount not exceeding the lesser of (a) the retained earnings of the Bank; or (b) the net income of the Bank for its last three fiscal years, less the amount of any distributions made during the prior period; (ii) with the prior approval of the DFPI, in an amount not exceeding the greatest of: (x) the retained earnings of the Bank; (y) the net income of the Bank for its last fiscal year; or (z) the net income for the Bank for its current fiscal year; and (iii) with the prior approval of the DFPI and the Bank's shareholders in connection with a reduction of its contributed capital. Further, as a Federal Reserve member bank, the Bank is prohibited from declaring or paying a dividend if the dividend would exceed the Bank's undivided profits as reportable on its Reports of Condition and Income in the absence of prior regulatory and shareholder approvals.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. Our primary market risk is interest rate risk, which is the risk of loss of net interest income or net interest margin resulting from changes in market interest rates.

Interest Rate Risk

    Interest rate risk results from the following risks:

•Repricing risk - timing differences in the repricing and maturity of interest-earning assets and interest-bearing liabilities;
75

•    Option risk - changes in the expected maturities of assets and liabilities, such as borrowers’ ability to prepay loans at any time and depositors’ ability to redeem certificates of deposit before maturity;
•        Yield curve risk - changes in the yield curve where interest rates increase or decrease in a nonparallel fashion; and
•    Basis risk - changes in spread relationships between different yield curves, such as U.S. Treasuries, U.S. Prime Rate and London Interbank Offered Rate ("LIBOR").

    On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced
that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. The announcement indicates that the
continuation of LIBOR on the current basis cannot be guaranteed after 2021. The market transition away from LIBOR to an
alternative reference rates are complex and could have a range of adverse effects on our business, consolidated financial
condition, and consolidated results of operations. For more information, refer to Part I, Item 1A - "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2019.

Although the manner and impact of the transition from LIBOR to an alternative reference rate, as well as the effect
of these developments on our funding costs, loan and investment and trading securities portfolios, asset-liability management,
and business, is uncertain, because the Bank does not have a material amount of LIBOR-based products and the Bank’s credit
documentation provides for the flexibility to move to alternative reference rates; our Management does not believe that the
discontinuation of LIBOR will have any material adverse impact on the Company.

    Since our earnings are primarily dependent on our ability to generate net interest income, we actively monitor and manage the effects of adverse changes in interest rates on our net interest income. Management of our interest rate risk is overseen by our Asset Liability Committee (“ALCO”). ALCO ensures that we are following the appropriate and current regulatory guidance in the formulation and implementation of our interest rate risk program. Our Board of Directors review the results of our interest rate risk modeling quarterly to ensure that we have appropriately measured our interest rate risk, mitigated our exposures appropriately and any residual risk is acceptable. In addition, our Board of Directors reviews the interest rate risk policy, including pre-established risk management limits, at least annually.

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

    Our consolidated balance sheet is considered “asset sensitive” when an increase in short-term interest rates is expected to expand our net interest margin, as rates earned on our interest-earning assets reprice higher at a pace faster than rates paid on our interest-bearing liabilities. Conversely, our consolidated balance sheet is considered “liability sensitive” when an increase in short-term interest rates is expected to compress our net interest margin, as rates paid on our interest-bearing liabilities reprice higher at a pace faster than rates earned on our interest-earning assets. At September 30, 2020, we were "asset sensitive."

    In order to model and evaluate interest rate risk, we use two approaches: Net Interest Income at Risk ("NII at Risk"), and Economic Value of Equity ("EVE"). Under NII at Risk, the impact on net interest income, measured over a 12-month time horizon, from changes in interest rates on interest-earning assets and interest-bearing liabilities is modeled utilizing various assumptions for assets, liabilities, and derivatives. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.

    The following table presents the projected changes in NII at Risk and EVE that would occur upon an immediate change in interest rates based on independent analysis, but without giving effect to any steps that management might take to counteract that change as of September 30, 2020:

76

NII at RiskEVE
Adjusted Net Interest IncomePercentage Change from Base CaseMarket Value Percentage Change from Base Case
Interest Rate Scenario(dollars in thousands)
Up 300 basis points$102,563 14.8 %$362,503 7.7 %
Up 200 basis points96,685 8.2 %350,694 4.1 %
Up 100 basis points91,668 2.6 %341,155 1.3 %
Base89,343 — 336,737 — 
Down 100 basis points89,188 (0.2)%333,619 (0.9)%
Down 200 basis points89,164 (0.2)%334,795 (0.6)%
   
ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Principal Financial Officer have evaluated our disclosure controls and
procedures at September 30, 2020 and have concluded that these disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These
disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including
the Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
    
Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

    In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits. Management, following consultation with legal counsel, does not expect the ultimate disposition of any or a combination of these matters to have a material adverse effect on our results of operations and financial condition. However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security and anti-money laundering and anti-terrorism laws), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risks. Please also refer to Note 10. “Commitments and Contingencies” in the notes to consolidated financial statements included in Part I, Item 1 which is incorporated herein by reference.


ITEM 1A. RISK FACTORS

We have described in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”) the primary risks related to our business and securities and periodically update those risks. These risk factors were supplemented and updated in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 primarily to account for the risks relating to the novel Coronavirus Disease 2019 (“COVID-19”) pandemic on our consolidated results of operations and financial condition. Provided below is an update to our risk factors as previously disclosed in the 2019 Form 10-K and as supplemented by the risk factors previously disclosed in our 2020 First and Second Quarters Form 10-Q.
77


The COVID-19 pandemic has impacted our business, and the ultimate impact on our business, financial position, results of operations and/or cash flows will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the scope and duration of the pandemic and the actions taken by governmental authorities, our clients and our business partners in response to the pandemic.

The global pandemic resulting from the outbreak of COVID-19 has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. Some of the risks we face from the pandemic include, but are not limited to: the health and availability of our colleagues, the financial condition of our clients and the demand for our products and services, falling interest rates, recognition of credit losses and increases in the allowance for credit losses, especially if businesses remain closed, unemployment continues to rise and clients and customers draw on their lines of credit or seek additional loans to help finance their businesses.

While we have not experienced a significant impact on the availability of our employees to date, given the markets in which we operate, our colleagues are at risk of being exposed to COVID-19. While we have taken meaningful steps and precautions to ensure their health and well-being, COVID-19 could still impact our employees’ ability to work effectively and availability due to illness, quarantines, government actions, financial center closures or other reasons. In particular, our branches present an increased risk of exposure for our employees. If our employees are not able to work as effectively or a substantial number of employees are unable to work due to COVID-19, our business would be adversely affected.

Our customers are subject to many of the factors described above. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, and result in loss of revenue. It is possible that the spread of COVID-19 may also cause delays in the willingness or ability of clients to perform, including, but not limited to, making timely payments to us, and other unpredictable events.

The pandemic has also influenced the recognition of credit losses in our loan portfolio and increased our allowance for credit losses. The pandemic may continue to have a material adverse effect on our loan portfolio, particularly as businesses remain closed and as more clients may need to draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize other-than-temporary impairments in future periods on the securities we hold, as well as reductions in other comprehensive income.

The volatility in the global capital markets resulting from the pandemic and related business conditions may restrict our access to capital and/or increase our cost of capital.

To the extent the COVID-19 pandemic adversely affects our business, financial position, results of operations and/or cash flows, it may also have the effect of heightening many of the other risks we face, including the risks described in the section entitled “Risk Factors” in our 2019 Form 10-K and any subsequent Quarterly Reports on Form 10-Q.

We continue to work with our stakeholders (including employees, customers, and business partners) to assess, address and mitigate the impact of this global pandemic. However, we cannot predict the length and impact of the COVID-19 pandemic at this time.

Material risks relating to our business that are enhanced due to the COVID-19 pandemic are addressed at Item 1A Risk Factors in the 2019 Form 10-K under the headings:

•Difficult economic and market conditions may adversely affect our industry.

•Disruptions in the real estate market could materially and adversely affect our business.

•We could be liable for breaches of security in our online banking services. Fear of security breaches (including cybersecurity breaches) could limit the growth of our technology-driven products and services.

78

•Deteriorating credit quality has adversely impacted us in the past and may adversely impact us in the future.

•Our allowance for loan loss may not be adequate to cover actual losses.

•We have a concentration in loans secured by commercial real estate which could make us vulnerable to changes in the commercial real estate market.

•The repayment of our income property loans, consisting of non-owner occupied commercial real estate loans, may be dependent on factors outside our control or the control of our borrowers.

•Real estate construction loans are based upon estimates of costs and values associated with the completed project. These estimates may be inaccurate, and we may be exposed to significant losses on loans for these projects.

•We are or may become involved from time to time in information-gathering requests, investigations and litigation, regulatory or other enforcement proceedings by various governmental regulatory agencies and law enforcement authorities, as well as self-regulatory agencies which may lead to adverse consequences.

•We compete against larger banks and other institutions.

•Our accounting policies and processes are critical to how we report our consolidated financial condition and consolidated results of operations. They require Management to make estimates about matters that are uncertain.

•We may be unable to, or choose not to, pay dividends on, or repurchase, our common stock.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

    The following table presents information relating to the repurchase of shares of common stock during the periods indicated:
Period
(a) 
Total number of shares (or units) purchased (1)
(b) 
Average price paid per share (or unit)		(c) 
Total number of shares (or units) purchased as part of publicly announced plans or programs
(d)
Maximum number of shares (or units) that may yet be purchased under the plans or programs (2)
Jul 1 - 31, 2020357 $15.76 — 695,489 
Aug 1 - 31, 202045 $15.03 — 695,489 
Sep 1 - 30, 202032 $13.68 — 695,489 
Total434 $15.53 — 
(1) The total number of shares repurchased during the periods indicated were shares withheld for income tax purposes in connection with the vesting of restricted stock awards. The shares were valued at the closing price of our common stock on the dates of vesting.

(2) On December 3, 2018, the Company authorized a stock repurchase program providing for the repurchase of up to 1.2 million shares of our outstanding common stock, or approximately 10% of our then outstanding shares. The repurchase program does not obligate us to repurchase any particular number of shares. On March 17, 2020, the Company issued a press release announcing the suspension of the stock repurchase program in light of news reports indicating that members of Congress had voiced concerns about the practice of banks repurchasing shares during an economic crisis.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION
    
    None.

79

ITEM 6. EXHIBITS

EXHIBIT INDEX 
Exhibit No.Exhibit Description
2.1
3.1
 
3.2
31.1
31.2
32.1
32.2
Exhibit 101.INS
XBRL Instance Document
Exhibit 101.SCH
XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF
XBRL Taxonomy Extension Definitions Linkbase Document
Exhibit 101.LAB
XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document

1Filed as an Exhibit to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference.

80

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST CHOICE BANCORP
Dated: November 6, 2020/s/ Robert M. Franko
Robert M. Franko
President and Chief Executive Officer
(principal executive officer)
Dated: November 6, 2020/s/ Diana C. Hanson
Diana C. Hanson
Senior Vice President and Chief Accounting Officer
(principal financial officer)

81