UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________________________________________

Form 10-K

_________________________________________________________________

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

For the fiscal year ended December 31, 2020

or

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

Commission File Number: 001-38476

_________________________________________________________________

(Exact name of Registrant as specified in its charter)

_________________________________________________________________

California	82-2711227
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification Number)
17785 Center Court Drive N., Suite 750 Cerritos, CA	90703
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number, including area code: 562-345-9092

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Shares, no par value	FCBP	Nasdaq Capital Market

Securities registered pursuant to Section 12(g) of the Act: None

_________________________________________________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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

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

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

Large accelerated filer	☐	Accelerated Filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging Growth Company	☒

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant was approximately $162,397,315 based on the closing price of the common stock of $16.38 as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2020) as reported by the Nasdaq Capital Market. The market value of shares held by registrant’s directors and executive officers have been excluded because they may be considered to be affiliates of the registrant.

As of March 1, 2021, the Registrant had 11,821,987 shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement relating to Registrant’s 2021 Annual Meeting of Shareholders, which will be filed

within 120 days of the fiscal year ended December 31, 2020 are incorporated by reference in this Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.

INDEX

TABLE OF CONTENTS

PART I.
Item 1.	Business	5
Item 1A.	Risk Factors	19
Item 1B.	Unresolved Staff Comments	33
Item 2.	Properties	33
Item 3.	Legal Proceedings	34
Item 4.	Mine Safety Disclosures	34
PART II.
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	34
Item 6.	Selected Financial Data	36
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	37
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	66
Item 8.	Financial Statements and Supplementary Data	68
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	115
Item 9A.	Controls and Procedures	115
Item 9B.	Other Information	115
PART III.
Item 10.	Directors, Executive Officers, and Corporate Governance	115
Item 11.	Executive Compensation	116
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	116
Item 13.	Certain Relationships and Related Transactions and Director Independence	116
Item 14.	Principal Accountant Fees and Services	116
PART IV.
Item 15.	Exhibits and Financial Statement Schedules	117
Item 16.	Form 10-K Summary	119
SIGNATURES		120

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

    In this Annual Report on Form 10-K, the terms “First Choice Bancorp,” “Bancorp,” or the “holding company” refer to First Choice Bancorp on a stand-alone basis, and the term “Bank” refers to Bancorp's wholly-owned subsidiary, First Choice Bank. The terms “we,” “us,”, “our” or the “Company” refer to First Choice Bancorp and First Choice Bank collectively and on a consolidated basis. The statements in this report include forward looking statements within the meaning of the applicable provisions 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 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 including 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 deposits as customers pursue other higher-yield investment.

• Possible changes in consumer and business spending and savings 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 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.

    The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included herein. These and other factors are further described in this Annual Report on Form 10-K at Item 1A “Risk Factors.”

    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 we caution you about relying on forward-looking statements.

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PART I

ITEM 1. BUSINESS

Overview

First Choice Bancorp, a California corporation, was organized on September 1, 2017 to serve as the holding company for its wholly-owned subsidiary, First Choice Bank, a California state-chartered commercial bank. On December 21, 2017, the Bank received requisite shareholder and regulatory approvals for the Bank to reorganize into the holding company form of ownership pursuant to which the Bank became a wholly-owned subsidiary of First Choice Bancorp. We are regulated as a bank holding company by the Board of Governors of the Federal Reserve System (“Federal Reserve”) and the Bank is regulated by the California Department of Financial Protection and Innovation (the “DFPI”) and, as a member bank, by the Federal Reserve.

Our headquarters is located at 17785 Center Court Drive N., Suite 750, Cerritos, California 90703, and our telephone number at that location is (562) 345-9092. Our common stock began trading on the Nasdaq Stock Market under the trading symbol of “FCBP” on May 1, 2018.

Acquisition and Expansion

    Effective July 31, 2018, we acquired Pacific Commerce Bancorp ("PCB") and its wholly-owned subsidiary bank, Pacific Commerce Bank, by merger in an all-stock transaction. The acquisition has been accounted for using the acquisition method of accounting and, accordingly, the operating results of PCB have been included in the consolidated financial statements from August 1, 2018.

Business of the Bank

The Bank was incorporated under the laws of the State of California in March 2005, is licensed by the DFPI, and commenced banking operations in August 2005 as a California state-chartered commercial bank headquartered in Cerritos, California. The Bank has a wholly-owned subsidiary, PCB Real Estate Holdings, LLC, which was acquired as part of the acquisition of Pacific Commerce Bank and is used primarily to hold other real estate owned and other assets acquired by foreclosure. On October 1, 2018, the Bank became a state member bank of the Federal Reserve. Accordingly, the Bank is subject to periodic examination and supervision by the DFPI and by the Federal Reserve as the Bank's primary banking regulators. In addition, the Bank's deposits are insured under the Federal Deposit Insurance Act by the Federal Deposit Insurance Corporation ("FDIC") and, as a result, the FDIC has examination authority over the Bank.

The Bank is a full-service commercial bank offering a broad range of retail and commercial banking products and services to individuals and businesses. Our primary market area is broadly defined as Southern California, which includes Los Angeles, Orange, San Diego, Ventura, Riverside, San Bernardino and Imperial Counties of California, with a particular focus on Los Angeles, Orange and San Diego Counties. We operate eight full-service branches located in Alhambra, Anaheim, Carlsbad, Cerritos, Chula Vista, Downtown Los Angeles, Pasadena, and West Los Angeles, and two loan production offices located in Manhattan Beach and San Diego, California. We also maintain the brand name ProAmérica.

Effective January 29, 2021, the Rowland Heights branch was sold to a third party financial institution who acquired certain branch assets and assumed certain branch liabilities, including deposit liabilities and the Bank’s obligations under the Rowland Heights branch lease. No loans were sold as part of this transaction. As of the date of sale, the Rowland Heights branch had total deposits of $22 million.

Strategy

Our strategic objective focuses on offering business-oriented loans and deposits products, financial solutions, and relationship banking services to customers throughout Southern California. Our value proposition is to provide a premier business banking experience through relationship banking by leveraging our depth of expertise, resources and the breadth of our products and services while maintaining disciplined credit underwriting standards and focusing on operational efficiency. We focus on originating high-quality loans and growing our deposit base through our relationship-based business lending. We pride ourselves on being “First in Speed, Service and Solutions.”

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Marketing Strategy

Our products and services are targeted to small- and medium-sized businesses, non-profit organizations, business owners and entrepreneurs, and the professional community, including attorneys, certified public accountants, financial advisors, healthcare providers and investors, who desire personalized services of a local bank and access to top-level decision makers who know the individual community. The small- to middle- business market, generally defined as companies with revenues of less than $50 million, is our primary commercial banking target. At December 31, 2020, our capital enabled us to provide unsecured loans (defined as a loan not secured by a first deed of trust on real estate or cash collateral) and secured loans (defined as a loan secured by a first deed of trust on real estate or cash collateral) to a single borrower up to a maximum of $34 million and $56 million, respectively.

We are locally-owned and operated, with a management team and Board of Directors charged with monitoring the financial needs of our communities and, as such, we are in a position to respond promptly to the requirements of potential new customers, as well as the changing needs of our existing customers.

Our strategy includes attracting and retaining experienced and proven bankers as relationship managers who are familiar with our market area, along with a full offering of products. This provides each of our customers with access to a strong trusted advisor, who can offer knowledgeable advice and an extensive suite of products, including the advanced treasury management products and specialized personnel for non-deposit products. Our approach is to staff offices with experienced bankers who are familiar with the area and preferably live or have worked in the area.

Products Offered

We offer a full array of competitively priced commercial loan and deposit products, as well as other services delivered directly or through strategic alliances with other service providers. The products offered are aimed at both business and individual customers in our target market.

Loan Products

We have a diversified mix of business loans primarily encompassing the following loan products: (i) construction and land development loans; (ii) residential real estate loans for business investment; (iii) real estate loans for owner occupied and non-owner occupied commercial property; (iv) commercial and industrial loans and (v) U.S. Small Business Administration ("SBA") loans, guaranteed in part by the U.S. Government.

Beginning in April 2020, we participated in the SBA's Paycheck Protection Program ("PPP"), to provide loans to qualifying small business borrowers to assist them in paying eligible operational expenses, including payroll expenses. PPP loans are fully guaranteed by the SBA. Beginning in July 2020, we participated in the Federal Reserve's Main Street Lending program to offer non-forgivable loans to eligible borrowers. Loans originated under the program have a five-year repayment term, an interest rate of 3-month 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% of principal in the third and fourth years, and the remaining 70% is due in the final year. The program expired on January 8, 2021.

In addition, we occasionally offer lines of credit, secured by a lien on real estate owned by our clients (or their principals), which may include their primary personal residence. However, such lines of credit generally are requested to accommodate the business and investment needs of that customer segment.

We encourage relationship banking, obtaining a substantial portion of each borrower’s banking business, including deposit accounts. We will engage in transactional-based lending only for borrowers with strong sponsorship characteristics, experience and historical repayment performance. We do not originate residential mortgage loans. We may, from time to time, acquire single-family residential loans. At December 31, 2020, loans held for investment, net, totaled $1.86 billion.

Construction and Land Development Loans. We originate interim land and construction loans for commercial purposes, including hospitality and speculative residential. Land loans are primarily to allow the borrower time to complete entitlements or as bridge financing prior to construction. We also provide new construction and renovation loans. Land and construction loans are generally limited to experienced and financially supportive sponsorships, known to management, and in markets that support the development. We impose limits on the loan amount for land, acquisition and construction loans based on loan-to-cost ratios and loan-to-value ratios based on "as-is" and "as completed appraisal." Our loan-to-cost policy limits are typically 70% or less and loan-to-value limits are typically 65% or less based upon an as-completed basis for construction. There were no non-performing construction and land development loans at December 31, 2020 and 2019. There were no construction and land development loans on payment deferral at December 31, 2020.

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The following table presents the components of our construction and land development portfolio at the periods indicated:

	December 31, 2020				December 31, 2019
	Amount		% of Total		Amount		% of Total
	(dollars in thousands)
Residential construction (single family 1-4 units)	$	78,628	39.78	%	$	86,798	34.79	%
Commercial real estate construction	64,228		32.49	%	115,769		46.40	%
Land acquisition & development	54,778		27.73	%	46,937		18.81	%
Total construction and land development loans	$	197,634	100.00	%	$	249,504	100.00	%

Real Estate Loans - Residential. We purchased residential real estate loans within our market that had been originated by unaffiliated third parties. We took a comprehensive and conservative approach to mortgage underwriting. These loans were carefully selected and audited by third parties for compliance with all applicable mortgage regulations. The typical loan is a five-year hybrid adjustable rate mortgage with an initial rate in the range of between 4.0% and 6.6%, which re-prices after five years to the one-year LIBOR plus a specified margin. As of December 31, 2020, our residential real estate portfolio had an average loan-to-value of the portfolio of 50%. At December 31, 2020 and 2019, we had $27.7 million and $43.7 million of single-family residential real estate loans, representing 1.5% and 3.2% of our total loans held for investment, net of discounts. There was one non-performing single-family residential real estate loan of $254 thousand, or 0.92% of the total single-family residential real loans at December 31, 2020. There were no non-performing single-family residential real estate loans at December 31, 2019. There were no single-family residential real estate loans on payment deferral at December 31, 2020.

Commercial Real Estate ("CRE") Loans. We originate commercial property and occasionally multi-family loans, principally within our market for both owner-users and investors. Typically, these loans are held in our loan portfolio and collateralized by the underlying property. The property financed must be supported by current appraisals at the date of origination and other relevant information, and the loan underwriting is managed with a loan-to-value policy limit between 65% and 75%, an in-house guidance limit of 65%, and minimum debt service coverage ratio of 1.25x. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as office buildings, warehouses and production facilities, hospitality properties (such as hotels and motels), mixed-use residential and commercial, retail, commercial land and multi-family properties.

At December 31, 2020 and 2019, CRE loans totaled $712.6 million and $595.4 million, representing 37.7% and 43.3% of our total loans held for investment, net of discounts. This includes $550.8 million and $423.8 million of CRE loans secured by non-owner occupied properties and $161.8 million and $171.6 million of CRE loans secured by owner occupied properties at December 31, 2020 and 2019. Non-performing CRE loans totaled $2.8 million and $4.4 million, or 0.39% and 0.74% of total CRE loans at December 31, 2020 and 2019. There were no CRE loans on payment deferral at December 31, 2020.

Commercial and Industrial ("C&I") Loans. Our C&I loans are generally made to businesses located in the Southern California region and surrounding communities whose borrowing needs are generally $10.0 million or less. These loans may be secured by a deed of trust on real estate or secured by a perfected commercial lien on non-real estate assets, such as accounts receivable and inventory or operating equipment. These loans may be revolving lines of credit, term equipment financing, amortizing or interest only, or lines of credit secured by general liens on accounts receivable, inventory or a borrower’s other business assets, which may include loans made to third parties.

At December 31, 2020 and 2019, C&I loans amounted to $388.8 million and $309.0 million, representing 20.5% and 22.5% of our total loans held for investment, net of discounts. We have non-performing C&I loans of $183 thousand and $229 thousand, which represented 0.05% and 0.07% of total C&I loans, as of December 31, 2020 and 2019. At December 31, 2020, two C&I loans on payment deferral totaling $2.8 million were reported as non-accrual and none were reported as TDRs pursuant to Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act ("CARES") Act.

We also make loans that provide funding for executive retirement benefit programs. These loans are frequently secured by at least 90% of cash equivalent collateral, typically the cash surrender value ("CSV"), of one or more life insurance policies. The amount of the acceptable loan to CSV is dependent upon the credit quality of the insurer. A decline in the credit quality of the insurer would require the borrower to pledge additional collateral or substitute the CSV of one insurer for another or reduce the loan principal balance. At December 31, 2020 and 2019, these loans totaled $48.6 million and $49.7 million and the ratio of aggregate unpaid principal balance to aggregate CSV for this portfolio was 97.5% and 99.4%.

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Small Business Administration (SBA) Loans. We are designated as a Preferred Lender under the SBA Preferred Lender Program. We have both a SBA 7(a) loan program, generally at variable rates, and a SBA 504 loan program, generally with an initial fixed rate for a term of between 5 and 7 years. We originate SBA 7(a) loans with the intention of selling the guaranteed portion as soon as the loan is fully funded and the guaranteed portion may be sold. The SBA 7(a) loan 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 PPP loans. 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 loan program is not guaranteed by the SBA, as there is a junior lien loan that is funded separately by the SBA. The SBA 504 loan 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 loan program loans at origination date. Our SBA 504 loans are typically made to manufacturing companies, wholesalers and retailers, hotels/motels, and other service businesses for the purpose of purchasing real estate, refinancing real estate, and property improvements or business equipment needs. SBA 504 loans can have maturities of up to 25 years. Typically, non-real estate secured loans mature in 10 years or less. In addition to real estate, collateral may also include inventory, accounts receivable and equipment. SBA loans are personally guaranteed. We generally sell the guaranteed portion of the SBA 7(a) loans and often the senior lien portion of SBA 504 loans in the secondary market and, for certain loans, retain the servicing responsibility. Consideration for the sale includes the cash received as well as the related servicing asset. We receive servicing fees ranging from 0.25% to 1.00% for the services provided. The portions of the SBA 7(a) loans not sold but collateralized by real estate are monitored by collateral type and included in our CRE stress testing. Excluding PPP loans, our SBA portfolio represents 15.1% of total loans held for investment, net of discounts at December 31, 2020.

SBA PPP Loans. We participated in the PPP and had gross outstanding balances of $326.7 million, or $320.1 million, net of deferred fees of $6.6 million at December 31, 2020. Borrowers who used 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 began approving forgiveness applications relating to PPP loans we originated in 2020 and making payments as forgiveness was approved in the fourth quarter of 2020. At December 31, 2020, approximately $73 million of PPP loans were forgiven by the SBA or repaid by the borrowers. Net deferred fees of $1.8 million was accelerated to income at the time of SBA forgiveness or borrower repayment.

In 2021, we are participating in the First Draw and Second Draw PPP Loan Programs signed into law on December 27, 2020 as part of the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act ("Economic Act"), which was included in the Consolidated Appropriations Act, 2021 (also known as "PPP Round 3"). Unless otherwise extended, PPP Round 3 is scheduled to expire on March 31, 2021. The maximum loan amount for First Draw borrowers is $10 million and is $2 million for the Second Draw borrowers. Like the 2020 PPP, loans originated in PPP Round 3 are fully guaranteed by the SBA and are subject to potential forgiveness by the SBA.

The following table presents the components of our SBA portfolio by program at the periods indicated:

	December 31, 2020				December 31, 2019
	Amount		% of Total		Amount		% of Total
	(dollars in thousands)
SBA 7(a) (1)	$	418,621	74.4	%	$	100,103	56.4	%
SBA 504	144,221		25.6	%	77,530		43.6	%
Total SBA loans	$	562,842	100.0	%	$	177,633	100.0	%

(1) SBA 7(a) includes PPP loans with total gross outstanding principal of $326.7 million at December 31, 2020.

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The following table summarizes the amount of guaranteed and unguaranteed SBA loans by top 5 industries at December 31, 2020:

Top 5 Industries (1)	SBA Guaranteed (2)		SBA Unguaranteed		Total		% of Total
	(dollars in thousands)
Hospitality (3)	$	76,821	$	42,484	$	119,305	21.2	%
Construction	41,102		6,993		48,095		8.5	%
Health care and social assistance	37,455		9,738		47,193		8.4	%
Professional, scientific, and technical services	33,047		28,312		61,359		10.9	%
Manufacturing	31,239		21,948		53,187		9.4	%
Others	131,240		102,463		233,703		41.6	%
Total	$	350,904	$	211,938	$	562,842	100.0	%

(1) Based on Industry NAICS code.

(2) Included PPP loans with total gross outstanding principal of $326.7 million at December 31, 2020.

(3) Included restaurants industry.

    Non-performing SBA loans totaled $3.3 million and $6.6 million, which represented 0.58% and 3.73% of total SBA loans, at December 31, 2020 and December 31, 2019. There was one SBA 7(a) loan of $542 thousand on payment deferral at December 31, 2020.

Main Street Lending Program. We participated in the Federal Reserve's Main Street Lending Program in 2020. The program was intended 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 originated loans to borrowers meeting the terms and requirements of the program, including requirements as to eligibility, use of proceeds and priority, and sold 95% participation interests in these loans to Main Street Facilities, LLC, a special purpose vehicle ("SPV") organized by the Federal Reserve to purchase these interests. During the year ended December 31, 2020, the Company originated 32 loans under the Main Street Lending Program totaling $172.2 million in principal and sold participation interests totaling $163.6 million to the SPV, resulting in a gain on sale of $1.1 million. The program expired on January 8, 2021.

Deposit Products

As a full-service commercial bank, we focus deposit generation on operating and transaction accounts, including noninterest-bearing demand, interest-bearing demand, and money market accounts. We also offer time deposits and savings accounts. We market deposits by offering the convenience of “online banking,” “remote deposit capture” products, and mobile banking technology, which allows checks to be deposited from a mobile device. We also offer “e-statements” which allows customers to receive statements electronically. To assist in our marketing efforts, we hire seasoned business development officers and focus on generating noninterest-bearing demand deposits.

Our ability to gather deposits, particularly low-cost core non-volatile deposits, is an important aspect of our business and a significant driver of franchise value as a cost efficient and stable source of funding to support our growth. At December 31, 2020, we had total deposits of $1.63 billion, including noninterest-bearing demand deposits of $820.7 million, or 50.2% of total deposits. This compares to $1.31 billion of total deposits, including $626.6 million of noninterest-bearing demand deposits, or 47.7% of total deposits, at December 31, 2019. Our total deposit cost for the year ended December 31, 2020 was 0.34% compared to 0.81% for the year ended December 31, 2019.

    As of December 31, 2020, our 10 largest deposit relationships totaled $460.1 million, or 28% of total deposits; this compares to $370.9 million, or 28.2% of total deposits, at December 31, 2019. In addition, we have 109 deposit relationships with aggregate balances over $2 million, including our 10 largest depositors, which total $1.00 billion, representing 61% of total deposits at December 31, 2020.

For customers that want full FDIC insurance on time deposits in excess of $250,000, we offer the CDARS® program which allows us to place the time deposits with other participating banks to maximize the customers’ FDIC insurance. In December 2018, the FDIC issued a final rule under Section 202 of the Economic Growth, Regulatory Relief, and Consumer Protection Act that exempted well-capitalized and well-rated institutions for treating reciprocal deposits as brokered deposits up to the lesser of 20% of its total liabilities or $5 billion. At December 31, 2020, our Community Bank Leverage Ratio ("CBLR") of 10.28% qualified us as a "well-capitalized" financial institution. At December 31, 2020, our reciprocal CDARS® deposits totaled $25.1 million, representing 1.3% of total liabilities. We also had one-way CDARS®

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deposits which are considered brokered deposits. At December 31, 2020, our one-way CDARS® deposits totaled $16.5 million, representing 1.01% of total deposits.

In addition to the CDARS® program, we offer the Demand Deposit MarketplaceSM ("DDM") program which provides additional FDIC insurance for customers with non-interest bearing or interest-bearing deposits. The deposits are processed through the DDM deposit network into other member banks in increments of less than the FDIC insured maximum in order to provide the customer full FDIC insurance coverage. We receive an equal dollar amount of deposits ("reciprocal deposits") from other DDM member banks in exchange for the deposits we place into the DDM network. These reciprocal deposits are considered non-brokered deposits and recorded as interest checking deposits and money market accounts in the consolidated balance sheets at December 31, 2020. The DDM reciprocal deposits totaled $165.9 million at December 31, 2020.

Well-capitalized institutions are not subject to limitations on brokered deposits. Generally, we limit the use of brokered deposits to long-term (maturity dates in excess of one year at the time of placement) and callable deposits. Because the deposits pay a fixed interest rate for a longer period of time, they provide us with protection against increasing deposit costs as a result of rising interest rates. Furthermore, because the deposits can be called by us, they also provide us with the ability to decrease deposit cost if there is a fall in market interest rates. During 2020, we also participated in the Insured Cash Sweep ("ICS") deposit program. Through this ICS deposit program, we have the ability to place deposits through the networks for which we receive no matching deposits ("one-way" deposits). These one-way ICS deposits are considered brokered deposits and recorded as interest-bearing non-maturity deposits in the consolidated balance sheets. Total brokered non-maturity deposits at December 31, 2020 and 2019 were $78.7 million and $48.1 million, representing 4.8% and 3.7% of total deposits. Total brokered time deposits as of December 31, 2020 and 2019 were $101.1 million and $50.4 million, representing 6.2% and 3.8% of total deposits.

We participate in the Time Deposit Program administered by the California State Treasurer. At December 31, 2020 and 2019, time deposits from the State of California totaled $10.0 million and $25.1 million. These deposits are included in our aforementioned 10 largest deposits. In connection with our participation in this program, we purchased $11.0 million and $27.5 million in letters of credit issued by FHLB as collateral at December 31, 2020 and 2019.

Treasury Management Services. Treasury Management products play an integral role in growing our deposit base by providing our customers with the tools to bank efficiently and conveniently. These products and services are a critical component in attracting complex business and specialty deposit customers, such as 1031 Exchange companies, property management companies, developers, attorneys, accountants, manufacturers and real estate contractors that have specialized deposit service needs. The Treasury Management services we offer include automatic transfer (sweep) of funds between accounts, automated clearing house services (e.g., ACH origination, direct deposit, direct debit and electronic cash concentration and disbursement), commercial cash vault services, lockbox, zero balance accounts, current and prior day transaction reporting, bank statement retrieval, reconciliation services, fraud prevention tools and account analysis.

Online Banking. We offer banking services online from our secure website – www.firstchoicebankca.com. Our online banking systems allow customers the ability to access their accounts 7-days-a-week, 24-hours-a-day to obtain account information and complete many common transactions including electronic bill pay, data download, transfer funds, view images of canceled checks, view deposits, view account statements, issue stop payment requests, and transfer funds via Zelle® (available for consumer accounts only). Commercial online customers can view their accounts online, transfer funds internally, place stop payments, initiate wire transfers, initiate Automated Clearing House (“ACH”) debits and credits, pay state and federal taxes electronically, export information to Quicken®, QuickBooks®, or Excel Spreadsheets and utilize robust reporting tool features. We also offer ACH and Check Positive Pay antifraud services which allows a business to review their ACH debit transactions and their issued checks daily and then provides them with the ability to pay or reject any item.

    Mobile Banking. We offer mobile banking services to consumer and business customers. Our mobile banking applications allow customers to access their account information, make transfers, deposit checks, manage their debit card security and pay bills while on the go and from the convenience of their registered mobile device.

Remote Deposit. We also offer qualified commercial customers a remote deposit capture (“RDC”) product that allows businesses to process check deposits from the convenience of their location.

Specialty Deposit Group. Our Specialty Deposit Group was established to focus on banking large complex business customers. The dedicated service team manages new and existing specialty relationships and provides ongoing analysis, monitoring and support. Targeted specialty niches include but are not limited to escrow companies, 1031 exchange accommodators, contractor retention escrows, receivership, healthcare, and property management companies.

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Other Services. In addition to a full complement of lending and deposit products and related services, we provide customers, through other providers, access to Automated Teller Machines (“ATMs”) using their Visa® EMV Debit Cards; bank-by-mail, courier services, domestic and international wires, credit cards and documentary collection. We reimburse customers for surcharges for any transactions conducted on another bank’s ATMs.

Market Area and Competition

Our primary market area includes the seven Southern California counties composed of Los Angeles, Orange, San Diego, Ventura, Riverside, San Bernardino and Imperial. The economic base of the area is heavily dependent on small- and medium-sized businesses. Our relationship management team consists of experienced bankers involved with the business communities in their market areas. Their business development efforts are augmented by referrals from our Board of Directors and existing customers. The members of our management team, in particular, are well experienced in business lending, supporting middle-market banking needs, and generating value-added banking services to small- and medium-sized businesses.

The banking business in California is highly competitive with respect to both loans and deposits and is dominated by a relatively small number of major financial institutions with many offices operating over a wide geographic area, including institutions based outside of California. The increasingly competitive environment faced by banks is a result primarily of changes in laws and regulations, changes in technology and product delivery systems, the accelerating pace of consolidation among financial services providers and the emergence of non-regulated financial technology companies. We compete for loans and deposits with other commercial banks, as well as with finance companies, credit unions, securities and brokerage companies, money market funds and other non-financial institutions. Larger financial institutions offer certain services (such as trust services or wealth management) that we do not offer. These institutions also have the ability to finance extensive advertising campaigns. By virtue of their greater total capitalization, such institutions also have substantially higher lending limits than we have.

Our ability to compete is based primarily on our ability to develop a relationship, built upon customer service and responsiveness to customer needs. Our “preferred lender” status with the SBA allows us to approve SBA loans faster than many of our competitors. We distinguish ourselves with the availability and accessibility of our senior management to customers and prospects. In addition, our knowledge of our markets and industries assists us in locating, recruiting and retaining customers. Our ability to compete also depends on our ability to continue to attract and retain our senior management and experienced relationship managers.

Implications of Being an Emerging Growth Company

We are an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth company may take advantage of reduced reporting requirements and is exempted from certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company:

•we may present as few as two years of audited consolidated financial statements and two years of related management discussion and analysis of financial condition and results of operations;

•we are exempt from the requirement to obtain an attestation and report from our auditors on management’s assessment of our internal control over financial reporting under the Sarbanes-Oxley Act of 2002;

•we are permitted to provide less extensive disclosure about our executive compensation arrangements; and

•we are not required to give our shareholders non-binding advisory votes on executive compensation or golden parachute arrangements.

We have elected to take advantage of the reduced disclosure requirements relating to executive compensation and the number of years of financial information presented and, in the future, we may take advantage of any or all of these exemptions for so long as we remain an emerging growth company. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which we have total annual gross revenues of $1.0 billion or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of our initial public offering which would be December 31, 2023, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt, and (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934.

In addition to the relief described above, the JOBS Act provided an optional extended transition period for complying with new or revised accounting standards affecting public companies. We have irrevocably opted to decline this

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extended transition period, which means that the consolidated financial statements included in this Annual Report on Form 10-K, as well as any consolidated financial statements that we file in the future, will be subject to all new or revised accounting standards generally applicable to public companies.

Human Capital

    At December 31, 2020, we had 186 full time equivalent (“FTE”) employees. We have been named as one of American Banker's Best Banks to Work For by American Banker and Best Companies Group for the three most recent consecutive years, including 2020.

We have assembled a diverse and experienced staff of dedicated and qualified professionals who are committed to delivering the highest levels of customer service. The majority of our senior management team has at least 15 years of banking experience, and several key personnel have more than 30 years of banking experience. None of our employees are represented by collective bargaining agreements with us.

We believe that diversity encourages innovation and problem-solving, and our team's differences give us a competitive advantage. Our goal is to foster a culture in which those differences are valued and respected. We are proud of our cultural- and gender-diverse workforce, with a majority of our active employees identifying as ethnic minorities approximately 37% identify as Asian and 32% identify as Hispanic at December 31, 2020, and approximately 66% of our workforce and 43% of our executive management team are made up of women. In 2020, we appointed a female director to our Board of Directors (“Board”) and hope to continue to increase diversity on our Board to align with our culture of a diverse workforce. We have achieved this level of diversity and inclusion through concerted efforts to raise awareness about gender roles, religion, disability, ethnicity and sexual orientation and all other characteristics protected by federal, state and local laws, by using formal and mandatory training. We promote the fair inclusion of minorities, women and other protected classes in our workforce by publicizing employment opportunities, creating relationships with minority and women professional organizations and educational institutions, creating a culture that values the contribution of all employees, and encouraging a focus on these objectives when evaluating the performance of managers. In addition, we are certified as a Minority Depository Institution (MDI), as a majority of our Board of Directors are minorities and the communities we serve are comprised predominantly of ethnic minorities.

As our workforce continues to grow, we know that diversity, equity and inclusion are the keys to ensuring we can continue to best serve our clients. Our focus is to support a culture of acceptance and to provide the necessary tools to all employees to be well-equipped for success, including ongoing diversity and leadership training, policies that support diversity and prohibit discrimination, continual implementation of innovative technology and an emphasis on teamwork. We believe our employees are our best asset, and investing in our people will help them and the Company to grow and thrive.

In addition to the charities and community programs we support through donations, we have a dedicated volunteer time program that encourages our employees to volunteer with local charities and community organizations of their choice. We also provide opportunities for directors and employees to volunteer in support of local community development organizations and initiatives.

We are committed to providing our employees and customers with a safe environment in which to work and transact. Although the COVID-19 pandemic presents challenges to maintaining employees and customers' safety we continue to be opened for business. We launched a proactive response to the escalating COVID-19 outbreak that included an internal coronavirus resource page, we encouraged employees to work remotely where possible during the pandemic and reimbursed them for certain home office expenses. As of December 31, 2020, we have approximately 60% of non-branch employees working remotely. We did not furlough or lay-off any employees as a result of the pandemic. We also provided free COVID-19 testing, expanded our leave policies and enhanced access to 401(k) funds. Our banking centers are open for business, while our online banking network is continuously available for digital banking transactions.

Regulation and Supervision

    Banks and bank holding companies are heavily regulated by federal and state laws and regulations.  Most banking regulations are intended primarily for the protection of depositors and the deposit insurance fund and not for the benefit of shareholders.  

    The following is a summary of certain statutes, regulations and regulatory guidance affecting the holding company and the Bank.  This summary is not intended to be a complete explanation of such statutes, regulations and guidance, all of which are subject to change in the future, nor does it fully address their effects and potential effects on the Company and the Bank.

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Regulation of the Holding Company Generally

    The holding company is a legal entity separate and distinct from the Bank. As a bank holding company, it is regulated under the Bank Holding Company Act of 1956 (the “BHC Act”) and, therefore, is subject to supervision, regulation and inspection by the Federal Reserve. The holding company is also subject to certain provisions of the California Financial Code which are applicable to bank holding companies. In addition, because the holding company’s common stock is registered with the Securities and Exchange Commission, or SEC, it is subject to the SEC’s disclosure and periodic filing requirements as promulgated by the SEC under the Securities Act of 1933 and the Securities Exchange Act of 1934. Our common stock is listed on the Nasdaq Capital Market under the trading symbol “FCBP” and, accordingly, we are also subject to the rules of Nasdaq for listed companies.

    The holding company is required to file annual reports and other information with the Federal Reserve regarding its business operations and those of its subsidiaries. In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the Federal Reserve has determined to be so closely related to banking as to be a proper incident thereto, including securities brokerage services, investment advisory services, fiduciary services, and management advisory and data processing services, among others.

    The BHC Act requires the prior approval of the Federal Reserve for the direct or indirect acquisition of more than 5% of the voting shares of a commercial bank or its parent holding company. Acquisitions by the Bank are subject instead to the Bank Merger Act, which requires the prior approval of an acquiring bank’s primary federal regulator for any merger with or acquisition of another bank. Acquisitions by both the holding company and the Bank also require the prior approval of the DFPI pursuant to the California Financial Code.

    The holding company and the Bank are deemed to be “affiliates” of each other and thus are subject to Sections 23A and 23B of the Federal Reserve Act as well as related Federal Reserve Regulation W which impose both quantitative and qualitative restrictions on transactions between affiliates. The Bank is also subject to laws and regulations requiring that all extensions of credit to our executive officers, directors, principal shareholders and related parties must, among other things, be made on substantially the same terms and follow credit underwriting procedures no less stringent than those prevailing at the time for comparable transactions with persons not related to the Bank.

    A bank holding company is required to act as a source of financial and managerial strength for its subsidiary banks and must commit resources as necessary to support such subsidiaries. Under certain conditions, the Federal Reserve has the authority to restrict the payment of cash dividends by a bank holding company as an unsafe and unsound banking practice and may require a bank holding company to obtain the approval of the Federal Reserve prior to purchasing or redeeming its own equity securities. The Federal Reserve may require a bank holding company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the holding company’s payment of dividends to the shareholders in such circumstances. The Federal Reserve also has the authority to regulate the debt of bank holding companies.

    The holding company meets the eligibility criteria of a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) (the “Policy Statement”) and, therefore is not subject to consolidated capital rules at the bank holding company level. On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Relief Act”) was signed into law. Among the Relief Act's key provisions are targeted tailoring measures to reduce the regulatory burden on community banks, including increasing the threshold for institutions qualifying for relief under the Policy Statement to bank holding companies with total consolidated assets of less than $3 billion (up from the prior $1 billion threshold). Under the Policy Statement, qualifying bank holding companies, such as First Choice Bancorp, have additional flexibility in the amount of debt they can issue and are also exempt from the Basel III Capital Rules. The Policy Statement does not apply to the Bank and the Bank must comply with the Basel III Capital Rules. The Bank must also comply with the capital requirements set forth in the Prompt Corrective Action Provisions regulations as described below.

    Sarbanes-Oxley Act of 2002. The Company is subject to the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) which addresses, among other issues, (i) corporate governance and disclosure issues, including the controls and procedures and internal control over financial reporting, (ii) certification of financial statements by the chief executive officer and the chief financial officer, (iii) auditing and accounting, (iv) forfeiture of bonuses and profits made by directors and senior officers in the 12-month period covered by restated financial statements, (v) a prohibition on insider trading during black-out periods, (vi) disclosure of off-balance sheet transactions, and (vii) accelerated share transaction filing requirements for officers and directors. In addition, Sarbanes-Oxley increased penalties for non-compliance with the Exchange Act of 1934. SEC rules, promulgated pursuant to Sarbanes-Oxley, impose obligations and restrictions on auditors and audit committees

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with the intention of enhancing their independence from management, and include extensive additional disclosure, corporate governance and other related rules.

Regulation of the Bank Generally

As a state-chartered member bank, the Bank is subject to broad federal regulation and oversight extending to all its operations by the Federal Reserve and to state regulation by the DFPI.

Community Bank Leverage Ratio. Section 201 of the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the “Growth Act”) directed federal banking agencies to draft regulations establishing a new CBLR pursuant to which 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;

•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 2020, 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 will be 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.

The Bank has opted into the CBLR framework, beginning with the Call Report filed for the first quarter of 2020. At December 31, 2020, the Bank's CBLR was 10.28% which exceeded all regulatory capital requirements under the CBLR framework and the Bank was considered to be ‘‘well-capitalized.’’

Prompt Corrective Action Provisions. Federal law requires each federal banking agency to take prompt corrective action to resolve the problems of insured financial institutions, including but not limited to those that fall below one or more of the prescribed minimum capital ratios. As discussed above, a qualifying community banking organization, such as the Bank, that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.

For community banking organization that do not qualify for, or qualify for but fall out of or do not opt into, the CBLR framework, the federal banking agencies have by regulation defined the following five capital categories: “well capitalized” (Total RBC Ratio of 10%; Tier 1 RBC Ratio of 8%; Common Equity Tier 1 RBC Ratio of 6.5%; and Leverage Ratio of 5%); “adequately capitalized” (Total RBC Ratio of 8%; Tier 1 RBC Ratio of 6%; Common Equity Tier 1 RBC Ratio of 4.5%; and Leverage Ratio of 4%); “undercapitalized” (Total RBC Ratio of less than 8%; Tier 1 RBC Ratio of less than

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6%; Common Equity Tier 1 RBC Ratio of less than 4.5%; or Leverage Ratio of less than 4%); “significantly undercapitalized” (Total RBC Ratio of less than 6%; Tier 1 RBC Ratio of less than 4%; Common Equity Tier 1 RBC Ratio of less than 3%; or Leverage Ratio less than 3%); and “critically undercapitalized” (tangible equity to total assets less than or equal to 2%). A bank may be treated as though it were in the next lower capital category if, after notice and the opportunity for a hearing, the appropriate federal agency finds an unsafe or unsound condition or practice merits a downgrade, but no bank may be treated as “critically undercapitalized” unless its actual tangible equity to assets ratio warrants such treatment.

    At each successively lower capital category, an insured bank is subject to increased restrictions on its operations. For example, a bank is generally prohibited from paying management fees to any controlling persons or from making capital distributions if to do so would cause the bank to be “undercapitalized.” Asset growth and branching restrictions apply to undercapitalized banks, which are required to submit written capital restoration plans meeting specified requirements (including a guarantee by the parent holding company, if any). “Significantly undercapitalized” banks are subject to broad regulatory authority, including among other things capital directives, forced mergers, restrictions on the rates of interest they may pay on deposits, restrictions on asset growth and activities, and prohibitions on paying bonuses or increasing compensation to senior executive officers without FDIC approval. Even more severe restrictions apply to “critically undercapitalized” banks. Most importantly, except under limited circumstances, not later than 90 days after an insured bank becomes critically undercapitalized the appropriate federal banking agency is required to appoint a conservator or receiver for the bank.

    In addition to measures taken under the prompt corrective action provisions, insured banks may be subject to potential actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the issuance of cease and desist orders, termination of insurance on deposits (in the case of a bank), the imposition of civil money penalties, the issuance of directives to increase capital, formal and informal agreements, or removal and prohibition orders against “institution-affiliated” parties.

    Safety and Soundness Standards. The federal banking agencies have also adopted guidelines establishing safety and soundness standards for all insured depository institutions. Those guidelines relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation, and liquidity and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet the requisite standards, the appropriate federal banking agency may require the institution to submit a compliance plan and could institute enforcement proceedings if an acceptable compliance plan is not submitted or followed.

    The Dodd-Frank Wall Street Reform and Consumer Protection Act. Legislation and regulations enacted and implemented since 2008 in response to the U.S. economic downturn and financial industry instability continue to impact most institutions in the banking sector. Certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which was enacted in 2010, are now effective and have been fully implemented, including revisions to the deposit insurance assessment base for FDIC insurance and a permanent increase in coverage to $250,000; the permissibility of paying interest on business checking accounts; the removal of barriers to interstate branching; and, required disclosures and shareholder advisory votes on executive compensation. Additional actions taken to implement Dodd-Frank provisions include (i) final capital rules, (ii) a final rule to implement the so-called Volcker rule restrictions on certain proprietary trading and investment activities, and (iii) final rules and increased enforcement action by the Consumer Finance Protection Bureau (discussed further below in connection with consumer protection).

    In reaction to the global financial crisis and particularly following the passage of the Dodd Frank Act, the Company experienced heightened regulatory requirements and scrutiny. Although the reforms primarily targeted systemically important financial service providers, their influence filtered down in varying degrees to community banks over time and caused the Company’s compliance and risk management processes, and the costs thereof, to increase. After the 2016 federal elections, momentum to decrease the regulatory burden on community banks gathered strength. In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Regulatory Relief Act”) was enacted to modify or remove certain financial reform rules and regulations. While the Regulatory Relief Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion, like the Company, and for large banks with assets of more than $50 billion. Many of these changes are intended to result in meaningful regulatory relief for community banks and their holding companies, including new rules that may make the capital requirements less complex. For a discussion of capital requirements, please refer to “-Capital Adequacy Requirements.” It also eliminated questions about the applicability of certain Dodd-Frank Act reforms to community bank systems, including relieving the Bank of any requirement to engage in mandatory stress tests or comply with the Volcker Rule’s complicated prohibitions on proprietary trading and ownership of private funds. We believe these

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reforms are favorable to our operations, but the true impact remains difficult to predict until rulemaking is complete and the reforms are fully implemented.

    Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured institutions pay insurance premiums at rates based on their risk classification as calculated based on its average consolidated total assets less its average tangible equity. The Dodd-Frank Act revised the FDIC’s fund management authority by establishing a minimum Designated Reserve Ratio of 1.35 percent of total estimated insured deposits and redefining the assessment base to be calculated as average consolidated total assets minus average tangible equity. The Bank’s Deposit Insurance Fund ("DIF") quarterly assessment is calculated by multiplying its assessment base by the applicable assessment rate. The Bank's annual assessment rate was 6.22 basis points based on its September 30, 2020 assessment invoice.

On September 30, 2018, the DIF reserve ratio reached 1.36%. The FDIC issued assessment credits to insured depository institutions, like the Bank, with total consolidated assets of less than $10 billion for their portion of their regular assessments that contributed to growth in the reserve ratio between 1.15% and 1.35%. The FDIC issued the assessment credits of $352 thousand to the Bank, of which $212 thousand was received in 2019 and the remaining assessment credits were applied in 2020. As of June 30, 2020, the DIF reserve ratio fell to 1.30% as result of extraordinary insured deposit growth from the COVID-19 pandemic. On September 15, 2020, the FDIC Board of Directors waived the provision of the FDIC’s assessment regulations requiring that the reserve ratio must be at least 1.35 percent for the FDIC to remit the full nominal value of an insured depository institution’s remaining assessment credits. All remaining small bank credits were refunded on the September 30, 2020, assessment invoice, ending the application of small bank credits.

Effective June 26, 2020, the FDIC adopted a Final Rule to mitigate the effect on deposit insurance assessments when an insured institution participates in either or both the PPP and Money Market Mutual Fund Liquidity Facility ("MMLF"). Under the rule, the FDIC provides adjustments to the risk based premium formula and certain of its risk ratios, and provides an offset to an insured institution’s total assessment amount due for the increase to its assessment base attributable to participation in the PPP and MMLF.

Community Reinvestment Act. The Bank is subject to certain requirements and reporting obligations involving the Community Reinvestment Act (“CRA”) activities. The CRA generally requires federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities, including low and moderate income neighborhoods. The CRA further requires the agencies to consider a financial institution’s efforts in meeting its community credit needs when evaluating applications for, among other things, domestic branches, mergers or acquisitions, or the formation of holding companies. In measuring a bank’s compliance with its CRA obligations, the regulators utilize a performance-based evaluation system under which CRA ratings are determined by the bank’s actual lending, service, and investment performance, rather than on the extent to which the institution conducts needs assessments, documents community outreach activities or complies with other procedural requirements. In connection with its assessment of CRA performance, the federal regulatory agencies assign a rating of “outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance.” The Bank received an “Outstanding” rating in its most recent CRA evaluation in 2019.

In April 2018, the U.S. Department of Treasury issued a memorandum to the federal banking regulators recommending changes to the CRA’s regulations to reduce their complexity and associated burden on banks, and in September 2020, the Federal Reserve Board issued for public comment proposed rules to modernize the agencies' regulations under the CRA. We will continue to evaluate the impact of any changes to the CRA regulations.

    Privacy and Data Security. The Gramm-Leach-Bliley Act, also known as the Financial Modernization Act of 1999 (the “Financial Modernization Act”), imposed requirements on financial institutions with respect to consumer privacy. Financial institutions, however, are required to comply with state law if it is more protective of consumer privacy than the Financial Modernization Act. The Financial Modernization Act generally prohibits disclosure of consumer information to non-affiliated third parties unless the consumer has been given the opportunity to object and has not objected to such disclosure. The statute also directed federal regulators, including the Federal Reserve and the FDIC, to establish standards for the security of consumer information, and requires financial institutions to disclose their privacy policies to consumers annually.

    In June 2018, California adopted the California Consumer Privacy Act of 2018 (“CCPA”) which became effective January 1, 2020. The CCPA gives “consumers” (generally natural persons who are California residents) four basic rights in relation to their personal information: (i) the right to know, through a general privacy policy and with more specifics available upon request, what personal information a business has collected about them, where it was sourced from, what it is being used for, whether it is being disclosed or sold, and to whom it is being disclosed or sold; (ii) the right to “opt out” of allowing a business to sell their personal information to third parties (or, for consumers who are under 16 years old, the right

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not to have their personal information sold absent their, or their parent’s, opt-in); (iii) the right to have a business delete their personal information, with some exceptions; and (iv) the right to receive equal service and pricing from a business, even if they exercise their privacy rights under the CCPA.

    In November 2020, the California Privacy Rights Act (“CPRA”) was enacted into law which enhances the CCPA with enforcement of stricter protection of consumer privacy and adds additional requirements for businesses. The CPRA will be in full effect on January 2023, with a 1-year look back period for all data collected as of January 1, 2022. The employee and business-to-business exemption has been extended from January 1, 2021 to January 1, 2023. As a regulated financial institution, we are already complying with both federal and state financial privacy laws and regulations, many of which either overlap with the requirements of the CCPA or supersede the requirements of the CCPA. However, given the expansion of CCPA rights under the CPRA and that the CPRA is not yet effective, we are not able to assess the impact of compliance with the additional requirements of the CPRA may have on operational expenses, which could be significant.

    Consumer Financial Protection and Financial Privacy. Dodd-Frank created the Consumer Finance Protection Bureau (the “CFPB”) as an independent entity with broad rulemaking, supervisory and enforcement authority over consumer financial products and services including deposit products, residential mortgages, home-equity loans and credit cards. The CFPB’s functions include investigating consumer complaints, conducting market research, rulemaking, supervising and examining bank consumer transactions, and enforcing rules related to consumer financial products and services. CFPB regulations and guidance apply to all financial institutions, including the Bank, although only banks with $10 billion or more in assets are subject to examination by the CFPB. Banks with less than $10 billion in assets, including the Bank, are examined for compliance by their primary federal banking agency.

    In January 2013, the CFPB issued final regulations governing consumer mortgage lending. Certain rules which became effective in January 2014 impose additional requirements on lenders, including the directive that lenders need to ensure the ability of their borrowers to repay mortgages. The CFPB also finalized a rule on escrow accounts for higher priced mortgage loans and a rule expanding the scope of the high-cost mortgage provision in the Truth in Lending Act. The CFPB also issued final rules implementing provisions of the Dodd-Frank Act that relate to mortgage servicing. In November 2013 the CFPB issued a final rule on integrated and simplified mortgage disclosures under the Truth in Lending Act and the Real Estate Settlement Procedures Act, which became effective in October 2015.

    The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. Abusive acts or practices are defined as those that materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product or service or take unreasonable advantage of a consumer’s: (i) lack of financial savvy, (ii) inability to protect himself in the selection or use of consumer financial products or services, or (iii) reasonable reliance on a covered entity to act in the consumer’s interests.

    In addition, as is the case with all financial institutions, the Bank is required to maintain the privacy of its customers’ non-public, personal information. Such privacy requirements direct financial institutions to: (i) provide notice to customers regarding privacy policies and practices; (ii) inform customers regarding the conditions under which their non-public personal information may be disclosed to non-affiliated third parties; and (iii) give customers an option to prevent disclosure of such information to non-affiliated third parties.

    The Company continues to be subject to numerous other federal and state consumer protection laws that extensively govern its relationship with its customers. Those laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Service Members Civil Relief Act, and respective state-law counterparts to these laws, as well as state usury laws and laws regarding unfair and deceptive acts and practices. These and other laws require disclosures including the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices, and otherwise subject the holding company to substantial regulatory oversight.

    Identity Theft. Under the Fair and Accurate Credit Transactions Act (the “FACT Act”), the Bank is required to develop and implement a written Identity Theft Prevention Program to detect, prevent and mitigate identity theft “red flags” in connection with certain existing accounts or the opening of certain accounts. Under the FACT Act, the Bank is required to adopt reasonable policies and procedures to (i) identify relevant red flags for covered accounts and incorporate those red flags into the program; (ii) detect red flags that have been incorporated into the program; (iii) respond appropriately to any red flags that are detected to prevent and mitigate identity theft; and (iv) ensure the program is updated periodically, to reflect

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changes in risks to customers or to the safety and soundness of the financial institution or creditor from identity theft. The Bank maintains a program to meet the requirements of the FACT Act and the Bank believes it is currently in compliance with these requirements.

Anti-Money Laundering and Suspicious Activity. Several federal laws, including the Bank Secrecy Act, the Money Laundering Control Act and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA Patriot Act) require all financial institutions, including banks, to implement policies and procedures relating to anti-money laundering, compliance, suspicious activities, and currency transaction reporting and due diligence on clients. The Patriot Act also requires federal bank regulators to evaluate the effectiveness of an applicant in combating money laundering when determining whether to approve a proposed bank acquisition. The Patriot Act of 2001 substantially enhanced anti-money laundering and financial transparency laws and required certain regulatory authorities to adopt rules that promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. Under the Patriot Act, financial institutions are subject to prohibitions regarding specified financial transactions and account relationships, as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers. The Patriot Act also requires all financial institutions to establish anti-money laundering programs. The Bank expanded its Bank Secrecy Act compliance staff and intensified due diligence procedures concerning the opening of new accounts to fulfill the anti-money laundering requirements of the Patriot Act, and also implemented systems and procedures to identify suspicious banking activity and report any such activity to the Financial Crimes Enforcement Network.

Office of Foreign Assets Control ("OFAC") Regulation. The United States has imposed economic sanctions that affect transactions with designated foreign countries, designated nationals and others. These rules are based on their administration by OFAC. The OFAC‑administered sanctions targeting designated countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment‑related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal, strategic, and reputational consequences, and result in civil money penalties on the Company and the Bank.

    Incentive Compensation.     In June 2010, the Federal Reserve and the FDIC issued comprehensive final guidance on incentive compensation policies intended to help ensure that banking organizations do not undermine their own safety and soundness by encouraging excessive risk-taking. The guidance, which covers all employees who have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization's board of directors. The regulatory agencies will review, as part of their regular risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” Where appropriate, the regulatory agencies will take supervisory or enforcement action to address perceived deficiencies in an institution’s incentive compensation arrangements or related risk-management, control, and governance processes. We believe that we are in compliance with the regulatory guidance on incentive compensation policies.

    Commercial Real Estate Lending Concentrations. As a part of their regulatory oversight, the federal regulators have issued guidelines on sound risk management practices with respect to a financial institution’s concentrations in CRE lending activities. These guidelines were issued in response to the agencies’ concerns that rising CRE concentrations might expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in the commercial real estate market. The guidelines identify certain concentration levels that, if exceeded, will expose the institution to additional supervisory analysis with regard to the institution’s CRE concentration risk. The guidelines are designed to promote appropriate levels of capital and sound loan and risk management practices for institutions with a concentration of CRE loans. In general, the guidelines establish the following supervisory criteria as preliminary indications of possible CRE concentration risk: (1) the institution’s total construction, land development and other land loans represent 100% or more of total risk-based capital; or (2) total CRE loans as defined in the regulatory guidelines represent 300% or more of total risk-based capital, and the institution’s CRE loan portfolio has increased by 50% or more during the prior 36 month period. The Company believes that the guidelines are applicable to it, as it has a relatively high concentration in CRE loans. The Company and its Board of Directors have discussed the guidelines and believe that the Bank’s underwriting policies,

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management information systems, independent credit administration process, and monitoring of real estate loan concentrations are sufficient to address the guidelines.

Other Pending and Proposed Legislation. Other legislative and regulatory initiatives which could affect the Company, the Bank and the banking industry in general are pending, and additional initiatives may be proposed or introduced before the United States Congress, the California legislature and other governmental bodies in the future. Such proposals, if enacted, may further alter the structure, regulation and competitive relationship among financial institutions, and may subject the Company to increased regulation, disclosure and reporting requirements. In addition, the various banking regulatory agencies often adopt new rules and regulations to implement and enforce existing legislation. It cannot be predicted whether, or in what form, any such legislation or regulations may be enacted or the extent to which the business of the Company would be affected thereby.

Available Information

    We invite you to visit our website at www.firstchoicebankca.com via the “Investor Relations” link, to access free of charge the Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, all of which are made available as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC. The content of our website is not incorporated into and is not part of this Annual Report on Form 10-K. In addition, you can write to us to obtain a free copy of any of those reports at First Choice Bancorp, 17785 Center Court Drive N., Suite 750, Cerritos, CA 90703, Attn: Investor Relations. These reports are also available through the SEC's Public Reference Room, located at 100 F Street NE, Washington, DC 20549 and online at the SEC’s website, located at www.sec.gov. The public can obtain information about the operation of the Public Reference Room by calling the SEC at 800-SEC-0330.

ITEM 1A. RISK FACTORS

In addition to the other information on the risks we face and our Management of risk contained in this Annual Report on Form 10-K or in our other SEC filings, the following are material risks which may affect us. Events or circumstances arising from one or more of these risks could adversely affect our business, consolidated financial condition, consolidated results of operations, and prospects-and the value and price of our common stock could decline. The risks identified below are not intended to be a comprehensive list of all risks we face, and additional risks that we may currently view as not material may also impair our consolidated financial condition and consolidated results of operations.

Readers and prospective investors in our securities should carefully consider the following risk factors as well as the other information contained or incorporated by reference in this report. This report is qualified in its entirety by these risk factors.

COVID-19 RELATED RISKS

The effects of widespread public health emergencies such as the outbreak of COVID-19, has negatively affected the U.S. economy and will likely negatively affect our local economies and may disrupt our operations, which would have an adverse effect on our business or results of operations.

Widespread health emergencies, such as the recent coronavirus disease 2019 (COVID-19) outbreak in China, U.S. and other countries, may disrupt our operations through their impact on our employees, customers and their businesses, and certain industries in which our customers operate. Disruptions to our customers may impair their ability to fulfill their obligations to the Company and result in increased risk of delinquencies, defaults, foreclosures, declining collateral values associated with our existing loans, and losses on our loans. Further, the spread of the outbreak has caused severe disruptions in the U.S. economy and may likely disrupt banking and other financial activity in the areas in which the Company operates. This would likely result in a decline in demand for our products and services, including loans and deposits which would negatively impact our liquidity position and our growth strategy. Any one or more of these developments would have a material adverse effect on our business, operations, consolidated financial condition, and consolidated results of operations.

Additional impacts of COVID-19 on our business could be widespread and material, and may include, or exacerbate, among other consequences, the following:

•employees contracting COVID-19;

•a work stoppage, forced quarantine, or other interruption of our business;

•unavailability of key personnel necessary to conduct our business activities;

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•sustained closures of our branch lobbies or the offices of our customers;

•declines in demand for loans and other banking services and products;

•reduced consumer spending due to both job losses and other effects attributable to COVID-19;

•volatile performance of our investment securities portfolio;

•decline in the credit quality of our loan portfolio, owing to the effects of COVID-19 in the markets we serve, leading to a need to increase our allowance for loan losses;

•declines in value of collateral for loans, including real estate collateral;

•declines in the net worth and liquidity of borrowers and loan guarantors, impairing their ability to honor commitments to us;

•difficult economic and market conditions may adversely affect our industry, including changes to the commercial real estate market where we have a concentration in loans secured by commercial real estate;

•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;

•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;

•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;

•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 who may have more resources to absorb some of the costs adverse effects of COVID19; or

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

These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect our business, consolidated financial condition and consolidated results of operations.

We are taking precautions to protect the safety and well-being of our employees and customers. However, no assurance can be given that the steps being taken will be adequate or deemed to be appropriate, nor can we predict the level of disruption which will occur to our employee’s ability to provide customer support and service. If we are unable to recover from a business disruption on a timely basis, our business, consolidated financial condition and consolidated results of operations could be materially and adversely affected. We may also incur additional costs to remedy damages caused by such disruptions, which could further adversely affect our business, consolidated financial condition and consolidated results of operations.

Concern about the spread of COVID-19 has caused and is likely to continue to cause business disruptions which may cause our customers to be unable to make scheduled loan payments.

Currently, COVID-19 is continuing to spread through the United States and the world. The resulting concerns on the part of the U.S. and global populations have created the threat of a recession and reduced economic activity. Certain of our borrowers are in or have exposure to the various industries impacted by COVID-19 and/or are located in areas that are quarantined or under stay-at-home orders. A prolonged quarantine or stay-at-home order would have a negative adverse impact on these borrowers and their revenue streams, which consequently impacts their ability to meet their financial obligations and could result in loan defaults.

Further, our risks of timely loan repayment and the value of collateral supporting the loans are affected by the strength of our borrower’s business. Concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan payments. If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our loan portfolio, we could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover our exposure. The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and services, and the financial condition and credit risk of our customers. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation actions, such as foreclosure. In addition, we have unfunded commitments to extend credit to customers. During a challenging

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economic environment like now, our customers are more dependent on our credit commitments and increased borrowings under these commitments could adversely impact our liquidity.

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.

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.

We rely upon third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. Furthermore, the outbreak could negatively impact the ability of our employees and customers to engage in banking and other financial transactions in the geographic areas in which we operate and could create widespread issues for us. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 outbreak in our market areas. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective. We believe that the economic impact from COVID-19 could have an adverse impact on our business and could result in increased losses in our loan portfolio, all of which would impact our earnings and capital.

There are significant operational risks associated with modified work programs in response to the COVID-19 pandemic and governmental and regulatory responses thereto.

We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, we have modified our business practices with over 60% of our employees working remotely from their homes to have our operations uninterrupted as much as possible. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk. These cyber risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers.

Moreover, we rely on many third parties in our business operations, including appraisers of real property collateral, vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and local and federal government agencies, offices, and courthouses. In light of the developing measures responding to the pandemic, many of these entities may limit the availability and access of their services. If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.

Our net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19 and governmental and regulatory responses thereto.

In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent and expects to maintain this target range until it is confident the economy is on track to achieve its maximum employment and price stability goals, citing concerns about the impact of COVID-19 on markets and stress in the energy sector. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, consolidated financial condition or consolidated results of operations.

MARKET RISKS

Difficult economic and market conditions may adversely affect our industry.

Our financial performance, and the ability of borrowers to pay interest on, and repay the principal of, outstanding loans and the value of the collateral securing those loans is highly dependent upon the business and economic conditions in

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the markets in which we operate and in the United States as a whole. Economic pressures on consumers and businesses may adversely affect our business, consolidated financial condition, consolidated results of operations, and stock price. In particular, our banking operations are concentrated primarily in Southern California. Deterioration of economic conditions in Southern California could impair the ability of our borrowers to service their loans, decrease the level and duration of deposits by customers, and erode the value of loan collateral. These conditions could increase the amount of our non-performing assets and have an adverse effect on our efforts to collect our non-performing loans or otherwise liquidate our non-performing assets (including other real estate owned) on terms favorable to us, if at all. These conditions could also cause a decline in demand for our products and services, a lack of growth, or a decrease in deposits, any of which may cause us to incur losses, adversely affect our capital, and hurt our business.

We have a niche in the hospitality industry which has been materially affected by the ongoing COVID-19 pandemic.

At December 31, 2020, our total loan commitments to the hospitality industry was $241.2 million, of which $212.3 million was outstanding, representing 11.2% of total loans including loans held for sale, and loans held for investment net of discount and deferred fees. We originated $25.8 million hospitality PPP loans which are fully guaranteed by the SBA. We also originated four loans to the hospitality industry under the Main Street Lending Program in a principal amount totaling $14.4 million and sold 95% participation interests totaling $13.7 million to the SPV reducing the Company's net exposure to $700 thousand at December 31, 2020. The effects of the COVID-19 pandemic on the hospitality business segment are unprecedented with global demand for lodging, food and travel drastically reduced and, for many borrowers in lodging, occupancy levels reaching historic lows. As a result, revenues of our borrowers heavily involved in this industry segment have declined significantly and this trend may continue which could adversely affect the ability of our borrowers within the hospitality industry to make payments on their loans when due, impair the value of the collateral securing their loans to us, and/or reduce demand from this industry segment for our products and services, any of which individually, or in the aggregate, may have a material adverse effect on our consolidated financial condition and consolidated results of operations.

Our business is subject to interest rate risk, and fluctuations in interest rates which could reduce our net interest income and adversely affect our business.

A substantial portion of our income is derived from the differential, or “spread,” between the interest earned on loans, investment securities, and other interest-earning assets, and the interest paid on deposits, borrowings, and other interest-bearing liabilities. The interest rate risk inherent in our lending, investing, and deposit-taking activities is a material market risk to us and our business. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by fluctuations in interest rates. The magnitude and duration of changes in interest rates, events over which we have no control, may have an adverse effect on net interest income. Prepayment and early withdrawal levels, which are also impacted by the decreases in interest rates, can materially affect our assets and liabilities. On the contrary, increases in interest rates may adversely affect the ability of our floating rate borrowers to meet their higher payment obligations, which could in turn lead to an increase in non-performing assets and net charge-offs.

Generally, the interest rates on our interest-earning assets and interest-bearing liabilities do not change at the same rate, to the same extent, or on the same basis. Even assets and liabilities with similar maturities or periods of re-pricing may react in different degrees to changes in market interest rates. We seek to minimize the adverse effects of changes in interest rates by structuring our asset-liability composition to obtain the maximum spread. We use interest rate sensitivity analysis and a simulation model to assist us in managing asset-liability composition. However, such management tools have inherent limitations that may impair their effectiveness.

The replacement of LIBOR could adversely affect our revenue or expenses and the value of those assets or obligations.

LIBOR and certain other “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be predicted. 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. While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, in May 2018 a group of selected large banks, the Alternative Reference Rate Committee or ARRC, and the Federal Reserve Bank of New York started to publish the Secured Overnight Finance Rate, or SOFR, as an alternative to LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, given the depth and robustness of the U.S. Treasury repurchase market. Furthermore, the Bank of England has commenced publication of a reformed Sterling Overnight Index Average or SONIA, comprised of a broader set of overnight Sterling money market transactions, as of April 23, 2018. The SONIA has been recommended as the alternative to Sterling LIBOR by the Working Group on Sterling Risk-Free Reference Rates. At this time, it is impossible to predict whether SOFR and SONIA will become accepted alternatives to LIBOR.

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The market transition away from LIBOR to an alternative reference rate, including SOFR or SONIA, is complex and could have a range of adverse effects on our business, consolidated financial condition, and consolidated results of operations. In particular, any such transition could:

•adversely affect the interest rates paid or received on, and the revenue and expenses associated with, our floating rate obligations, loans, deposits, derivatives, and other financial instruments tied to LIBOR rates, or other securities or financial arrangements given LIBOR’s role in determining market interest rates globally

•adversely affect the value of our floating rate obligations, loans, deposits, and other financial instruments tied to LIBOR rates, or other securities or financial arrangements given LIBOR’s role in determining market interest rates globally

•prompt inquiries or other actions from regulators in respect to our preparation and readiness for the replacement of LIBOR with an alternative reference rate

•result in disputes, litigation, or other actions with counterparties regarding the interpretation and enforceability of certain fallback language in LIBOR-based securities

•require the transition to or development of appropriate systems and analytics to effectively transition our risk management processes from LIBOR-based products to those based on the applicable alternative pricing benchmark, such as SOFR or reformed SONIA

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 we do not have a material amount of LIBOR-based products and our 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.

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

While overall the U.S. economy has experienced a prolonged low interest rate environment, the Southern California real estate market has recovered from what had been a substantial decline during the prior recession. On December 31, 2020, 37.7% and 10.5% of our total loans held for investment, net, were comprised of commercial real estate and construction loans, respectively. Of the commercial real estate loans, 29.1% was non-owner-occupied. Because a significant portion of our loans are secured by real estate, any new downturn in the real estate market could materially and adversely affect our business. Our ability to recover on defaulted loans by selling the real estate collateral would then be diminished and we would likely experience greater exposure to risk of loss on loans.

GENERAL BUSINESS RISKS

Our clients could move their money to alternative investments causing us to lose a lower cost source of funding.

Demand deposits can decrease when clients perceive alternative investments as providing a better risk/return tradeoff. Technology and other changes have made it more convenient for bank customers to transfer funds into alternative investments or other deposit accounts offered by other out-of-area financial institutions or non-bank service providers. When clients move money out of Bank demand deposits, particularly noninterest-bearing deposits, we lose a relatively low cost source of funds, increasing our funding costs and reducing our net interest income.

Several rating agencies publish unsolicited ratings of the financial performance and relative financial health of many banks, including our Bank, based on publicly available data. As these ratings are publicly available, a decline in our ratings may result in deposit outflows or the inability of our Bank to raise deposits in the secondary market as broker-dealers and depositors may use such ratings in deciding where to deposit their funds.

Changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition.

From time to time, the Financial Accounting Standards Board (FASB) and SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our consolidated financial condition and consolidated results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in us restating prior period financial statements.

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In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) ("ASU 2016-13") also known as CECL. CECL will result in earlier recognition of credit losses and requires consideration of not only past and current events but also reasonable and supportable forecasts that affect collectability. As a “smaller reporting company,” we will be required to comply with the new standard on January 1, 2023. The Company is considering early adoption of ASU 2016-13. In December 2018, the regulatory agencies approved a final rule that provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. CECL implementation poses operational risk, including the failure to properly transition internal processes or systems, which could lead to errors, financial misstatements, or operational losses. The Company

has not yet determined the potential impact of the adoption of ASU 2016-13 to the consolidated financial statements.

We have liquidity risk.

Liquidity risk is the risk that we will have insufficient cash or access to cash to satisfy current and future financial obligations, including demands for loans and deposit withdrawals, funding operating costs, and for other corporate purposes. An inability to raise funds through deposits, borrowings, the sale of loans, and other sources could have a material adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us. Our ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. We mitigate liquidity risk by establishing and accessing lines of credit with various financial institutions and having back-up access to the brokered deposit markets. Results of operations could be affected if we were unable to satisfy current or future financial obligations. Please refer to Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.

Our controls and procedures could fail or be circumvented.

Our Management regularly reviews and updates our internal controls, disclosure controls, procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, but not absolute, assurances of the effectiveness of these systems and controls, and that the objectives of these controls have been met. Any failure or circumvention of our controls and procedures, and any failure to comply with regulations related to controls and procedures could adversely affect our business, and consolidated financial condition and consolidated results of operations.

The occurrence of fraudulent activity, breaches of our information security or cybersecurity-related incidents could have a material adverse effect on our business, consolidated financial condition or consolidated results of operations.

As a financial institution, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation, or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Information security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by us or our clients, denial or degradation of service attacks, and malware or other cyber-attacks. In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. We have also experienced an increase in malicious attempts, although, to our knowledge, none of these attempts have resulted in any material loss. Moreover, in recent periods, several large corporations, including financial institutions and retail companies, have suffered major data breaches, in some cases exposing not only confidential and proprietary corporate information, but also sensitive financial and other personal information of their customers and employees and subjecting them to potential fraudulent activity. Some of our clients may have been affected by these breaches, which increase their risks of identity theft, credit card fraud and other fraudulent activity that could involve their accounts with us.

Information pertaining to us and our clients is maintained, and transactions are executed, on our networks and systems, and certain of our third-party partners, such as our internet-based services to our clients, including mobile and online banking services either directly or through an arrangement with a service bureau or third-party or reporting systems. The secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are essential to protect us and our clients against fraud and security breaches, and to maintain our clients’ confidence. Breaches of information security also may occur, and in infrequent cases have occurred, through intentional or unintentional acts by those having access to our systems or our clients’ or counterparties’ confidential information, including employees.

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Furthermore, our cardholders use their debit and commercial credit cards to make purchases from third parties or through third-party processing services. As such, we are subject to risk from data breaches of such third party’s information systems or their payment processors. Such a data security breach could compromise our account information. We may suffer losses associated with such fraudulent transactions, as well as for other costs related to data security breaches.

In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third-party technologies (including browsers and operating systems), or other developments could result in a compromise or breach of the technology, processes, and controls that we use to prevent fraudulent transactions and to protect data about us, our clients, and underlying transactions, as well as the technology used by our clients to access our systems. Although we have developed, and continue to invest in, systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, our inability to anticipate, or failure to adequately mitigate, breaches of security could result in: losses to us or our clients; our loss of business and/or clients; damage to our reputation; the incurrence of additional expenses; disruption to our business; our inability to grow our online services or other businesses; additional regulatory scrutiny or penalties; or our exposure to civil litigation and possible financial liability-any of which could have a material adverse effect on our business, consolidated financial condition, and consolidated results of operations.

More generally, publicized information concerning security and cyber-related problems could inhibit the use or growth of electronic or web-based applications or solutions as a means of conducting commercial transactions. Such publicity may also cause damage to our reputation as a financial institution. As a result, our business, consolidated financial condition, and consolidated results of operations could be adversely affected.

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.

We offer various internet-based services to our clients, including mobile and online banking services either directly or through an arrangement with a service bureau or third party. The secure transmission of confidential information over the Internet is essential to maintain our clients’ confidence in our mobile and online services. In certain cases, we are responsible for protecting customers’ proprietary information as well as their accounts with us. We have security measures and processes in place to defend against these cybersecurity risks but these cyber-attacks are rapidly evolving (including computer viruses, malicious code, phishing or other information security breaches), and we may not be able to anticipate or prevent all such attacks, which could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our customers’ confidential, proprietary and other information. Advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of the technology we use to protect client transaction data. In addition, individuals, groups or sovereign countries may seek to intentionally disrupt our online banking services or compromise the confidentiality of customer information with criminal intent. Although we have developed systems and processes that are designed to recognize and assist in preventing security breaches (and periodically test our security), failure to protect against or mitigate breaches of security could adversely affect our ability to offer and grow our technology-driven products and services, constitute a breach of privacy or other laws, result in costly litigation and loss of customer relationships, negatively impact our reputation, and could have an adverse effect on our business, consolidated financial condition, and consolidated results of operations. The Company holds various insurance policies including cybersecurity insurance, however we may not be insured against all types of losses as a result of breaches and insurance coverage may be inadequate to cover all losses resulting from breaches of security. We may also incur substantial increases in costs in an effort to minimize or mitigate cyber security risks and to respond to cyber incidents.

Managing reputational risk is important to attracting and maintaining customers, investors, and employees.

Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable, illegal, or fraudulent activities of our customers. We have policies and procedures in place that seek to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors, and employees, costly litigation, a decline in revenues, and increased governmental regulation.

We rely on communications, information, operating, and financial control systems technology from third-party service providers.

We rely heavily on third-party service providers for much of our communications, information, operating, and financial control systems technology, including customer relationship management, internet banking, website, general ledger, deposit, loan servicing, and wire origination systems. Any failure, interruption, or breach in security of these systems could

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result in failures or interruptions in our customer relationship management, internet banking, website, general ledger, deposit, loan servicing, and/or wire origination systems. We cannot assure you that such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. We may not be insured against all types of losses as a result of third-party failures and insurance coverage may be inadequate to cover all losses resulting from system failures or other disruptions. If any of our third-party service providers experience financial, operational, or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to locate alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Any of these circumstances could have a material adverse effect on our business, consolidated financial condition, consolidated results of operations, and cash flows.

Additionally, the regulatory agencies expect financial institutions to be responsible for all aspects of our vendors’ performance, including aspects which they delegate to third parties. Disruptions or failures in the physical infrastructure or operating systems that support our businesses and clients, or cyber-attacks or security breaches of the networks, systems, or devices that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our consolidated financial condition and consolidated results of operations.

Our ability to attract and retain qualified employees is critical to our success.

Our employees are our most important resource. Competition for senior executives and skilled personnel in the banking industry is intense, which means the cost of hiring, incentivizing and retaining skilled personnel may continue to increase. We endeavor to attract talented and diverse new employees and retain and motivate our existing employees. Our senior management team has significant industry experience, and their knowledge and relationships would be difficult to replace. In addition, we continue to recruit qualified individuals to succeed existing key personnel to ensure the growth and successful operation of our business. If for any reason we are unable to continue to attract or retain qualified employees, our performance, including our competitive position, could be materially and adversely affected. In addition, to attract and retain personnel with appropriate skills and knowledge to support our business, we may offer a variety of benefits, which could reduce our earnings or have a material adverse effect on our business, consolidated financial condition or consolidated results of operations.

CREDIT RISKS

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

When we lend money or commit to lend money, we incur credit risk or the risk of loss if borrowers do not repay their loans or other credit obligations. The performance of these loan portfolios significantly affects our financial results and condition. If the current economic environment were to deteriorate, more customers may have difficulty in repaying their credit obligations, which could result in a higher level of loan losses and allowance for loan losses ("ALLL"). We reserve for loan losses by establishing reserves through a charge to earnings. The amount of these reserves is based on our assessment of loan losses inherent in the loan portfolios including unfunded credit commitments. The process for determining the amount of the ALLL, and the reserve for unfunded credit commitments is critical to our financial results and condition. It requires difficult, subjective, and complex judgments about the environment, including analysis of economic or market conditions that might impair the ability of our borrowers to repay their loans.

Our Management might underestimate the loan losses inherent in our portfolios and have loan losses in excess of the amount reserved. We might increase the ALLL and reserve for unfunded commitments because of changing economic conditions, including falling home prices or higher unemployment, or other factors such as changes in borrower’s behavior or changing protections in credit agreements. As an example, borrowers may “strategically default,” or discontinue making payments on their real estate-secured loans if the value of the real estate is less than what they owe, even if they are still financially able to make the payments. We believe that both the ALLL and the reserve for unfunded commitments are adequate to cover incurred credit losses inherent in the loan portfolio and unfunded credit commitments at December 31, 2020; however, there is no assurance that they will be sufficient to cover future loan losses, especially if the commercial real estate market and employment conditions experience a decline. In the event of significant deterioration in economic conditions, we may be required to increase reserves in future periods, which would reduce earnings. For more information, refer to Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Potential Problem Loans.

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

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We maintain an ALLL on loans, which is a reserve established through a provision for loan losses charged to expense, that represents Management’s best estimate of risk of losses within the existing portfolio of loans. The level of the allowance reflects Management’s continuing evaluation of industry concentrations; specific credit risks; historical loan loss experience; current loan portfolio quality; present economic, political, and regulatory conditions, and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the ALLL inherently involves a high degree of subjectivity and requires our Management to make significant estimates of current credit risks and future trends, all of which may undergo material changes.

Deterioration in economic conditions and pandemic events such as COVID-19 affecting our borrowers and collateral, new information regarding existing loans, identification of problem loans and other factors, both within and outside of our control, may require an increase in the ALLL. In addition, bank regulatory agencies periodically review our ALLL and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of our Management. In addition, if charge-offs in future periods exceed the ALLL, we will need additional provisions to increase the ALLL. Any increases in the ALLL will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our consolidated financial condition and consolidated results of operations. Please refer to Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Allowance for Loan Losses for further discussion related to our process for determining the appropriate level of the ALLL.

We may suffer losses in our loan portfolio despite our underwriting practices.

We mitigate the risks inherent in our loan portfolio by adhering to sound and proven underwriting practices, managed by experienced and knowledgeable credit professionals. These practices include analysis of a borrower’s prior credit history, financial statements, tax returns, cash flow projections, valuations of collateral based on reports of independent appraisers, and verifications of liquid assets. Although we believe that our underwriting criteria is appropriate for the various kinds of loans we make, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in our ALLL.

Severe weather, natural disasters, or other climate change-related matters could significantly affect our business especially for loans secured by commercial real estate.

Our primary market is located in an earthquake-prone zone in Southern California, which is also subject to other weather or disasters, such as severe wildfire, earthquakes, drought, or flood. These events could unexpectedly interrupt our business operations. Climate-related physical changes and hazards (e.g. properties in coastal areas have higher risk of rising sea level and erosions or damages to the properties (e.g. tsunamis, landslides, floods, etc.) could also pose credit risks for us. A number of factors can affect credit losses, including the extent of damage to the collateral, the extent of damage not covered by insurance, the extent to which unemployment and other economic conditions caused by the natural disaster adversely affect the ability of borrowers to repay their loans, and the cost of collection and foreclosure to us. Lastly, there could be increased insurance premiums and deductibles, or a decrease in the availability of coverage, due to severe weather-related losses. The ultimate outcome on our business of a natural disaster, whether or not caused by climate change, is difficult to predict.

Our concentration in loans secured by commercial real estate (including owner-occupied nonresidential properties, other nonresidential properties, construction, land development and other land, and multifamily residential properties) has increased from 441% of total risk-based capital at December 31, 2019 to 456% of total risk-based capital at December 31, 2020. While our risk management practices are designed to closely monitor these loans as well as the market conditions, and analyze the impact of various stress scenarios on these loans, it is possible that an adverse change in the Southern California commercial real estate market could result in loan losses or the need to increase reserves or capital costs which could have a negative impact on consolidated financial condition and consolidated results of operations, capital, prospects, or reputation.

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.

We originate non-owner occupied commercial real estate loans for individuals and businesses for various purposes, which are secured by commercial properties. Repayment of these loans is often dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes in the economy or local market conditions.

Non-owner occupied commercial real estate loans also expose us to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be sold as easily as residential real estate,

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are not fully amortized with large balloon payments upon maturity, and have a longer holding period for the collateral in a foreclosure proceeding. Accordingly, if we make any errors in judgment in the collectability of our non-owner occupied commercial real estate loans, any resulting charge-offs may be larger on a per loan basis. As of December 31, 2020, our non-owner occupied commercial real estate loans totaled $550.8 million or 29.1% of our total loans held for investment, net of discounts.

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.

The risks inherent in real estate construction loans may adversely affect our business, consolidated financial condition, and consolidated results of operations. Such risks include, among other things, (i) the possibility that contractors may fail to complete, or complete on an untimely basis, construction of the relevant properties; (ii) substantial cost overruns in excess of original estimates and financing are incurred; (iii) market deterioration occurs during construction; and (iv) a lack of permanent take-out financing arises. Loans secured by such properties also involve additional risk because they have no operating history. The costs may exceed a project's realizable value in a declining real estate market and such properties may not be sold or leased so as to generate the cash flow anticipated by the borrower. Real estate construction loans, including land development loans, comprised approximately 10.5% of our total loans held for investment, net of discounts, as of December 31, 2020.

Because of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated or market values or rental rates decline, we may have inadequate security for the repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project prior to or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it. A general decline in real estate sales and prices across the United States or locally in the relevant real estate market, a decline in demand for commercial real estate loans, economic weakness, high rates of unemployment, and reduced availability of mortgage credit, are some of the factors that can adversely affect the borrowers’ ability to repay their obligations to us and the value of our security interest in collateral, and thereby adversely affect our business, consolidated financial condition, and consolidated results of operations.

Supervisory guidance on commercial real estate concentrations could restrict our activities and impose financial requirements or limits on the conduct of our business.

The Federal Regulatory Agencies have issued guidance on sound risk management practices for concentrations in commercial real estate lending intended to help ensure that institutions pursuing a significant commercial real estate lending strategy remain healthy and profitable while continuing to serve the credit needs of their communities. There have been concerns about commercial real estate lending and underwriting expressed by the agencies along with historical concerns that rising commercial real estate loan concentrations may expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in commercial real estate markets. Existing guidance reinforces and enhances existing regulations and guidelines for safe and sound real estate lending by providing supervisory criteria, including numerical indicators to assist in identifying institutions with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny. The guidance does not limit banks’ commercial real estate lending, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. Our lending and risk management practices will be taken into account in supervisory evaluation of capital adequacy. The regulatory definition of a commercial real estate concentration excludes owner-occupied commercial real estate loans, but includes unsecured commercial and industrial loans for the purpose of real estate that are not secured by real estate. As of December 31, 2020, our commercial real estate concentration exceeded the regulatory guideline (as defined by the federal bank regulators) of 300% of total risk-based capital and exceeded 50% growth of our commercial real estate related loans over the past 36 months due primarily to the PCB acquisition. Our internal policy is to limit our commercial real estate concentration to 350% of total risk-based capital. Our commercial real estate concentration, as defined by regulatory guidance, was 308% of total risk-based capital at December 31, 2020, as compared to 314% at December 31, 2019. In addition, the federal bank regulators established a guideline of 100% of total risk-based capital for loans secured by commercial real estate construction and land development loans. Our internal policy is to limit these loans to 150% of total risk-based capital. At December 31, 2020 and 2019, total loans secured by commercial real estate under construction and land development represented 94% and 125% of total risk-based capital. If our risk management

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practices with regard to this portion of our portfolio are found to be deficient, it could result in increased reserves and capital costs or a need to reduce this type of lending which could negatively impact earnings.

Repayment of our commercial and industrial loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may not be sufficient to repay the loan in the event of default.

We make our commercial and industrial loans primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Collateral securing commercial and industrial loans are generally the working assets of a business that fluctuate in value, may depreciate over time, and could be difficult to appraise. As of December 31, 2020, our commercial and industrial loans totaled $388.8 million, or 20.5% of our total loans held for investment, net of discounts.

REGULATORY AND LEGAL RISKS

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 are or may become involved from time to time in information-gathering requests, reviews, investigations, and proceedings (both formal and informal) by governmental regulatory agencies and law enforcement authorities, as well as self-regulatory agencies, regarding our customers and businesses, as well as our sales practices, data security, product offerings, compensation practices, and other compliance issues. In addition, the complexity of the federal and state regulatory and enforcement regimes in the U.S. means that a single event or topic may give rise to numerous and overlapping investigations and regulatory proceedings which may result in material adverse consequences. These potential consequences include without limitation, adverse judgments, settlements, fines, penalties, injunctions or other actions, amendments and/or restatements of our SEC filings and/or financial statements, as applicable, and/or determinations of material weaknesses in our disclosure controls and procedures. In addition, responding to information-gathering requests, reviews, investigations, and proceedings, regardless of the ultimate outcome of the matter, could be time-consuming and expensive.

Like other financial institutions and companies, we are also subject to risk from potential employee misconduct, including non-compliance with policies and improper use or disclosure of confidential information. Substantial legal liability or significant regulatory or other enforcement action against our Company could materially adversely affect our business, consolidated financial condition, consolidated results of operations, and/or cause significant reputational harm to our business. The outcome of lawsuits and regulatory proceedings may be difficult to predict or estimate. Although we establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, we do not have accruals for all legal proceedings where we face a risk of loss. In addition, due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal proceedings, amounts accrued may not represent the ultimate loss from the legal proceedings in question. Thus, our ultimate losses may be higher, and possibly significantly so, than the amounts accrued for legal loss contingencies, which could adversely affect our results of operations.

The uncertain regulatory enforcement environment makes it difficult to estimate probable losses, which can lead to substantial disparities between legal reserves and actual settlements or penalties. For further information on specific legal and regulatory proceedings, please refer to Part I, Item 3 - Legal Proceedings.

Significant changes in banking laws or regulations and federal monetary policy could materially affect our business.

The banking industry is subject to extensive federal and state regulation, and significant new laws and regulations or changes in, or repeals of, existing laws and regulations, and the manner in which the changes are applied may cause results to differ materially. Also, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects our credit conditions, primarily through open market operations in U.S. government securities, the discount rate for member bank borrowing, and bank reserve requirements. A material change in these conditions would affect our results. For further discussion of the regulation of financial services, please refer to Part I, Item 1 - Business - Regulation and Supervision.

We may incur fines, penalties, and other negative consequences from regulatory violations, which are possibly even for inadvertent or unintentional violations.

We maintain systems and procedures designed to ensure that we comply with applicable laws and regulations, but there can be no assurance that these will be effective. We may incur fines, penalties, and other negative consequences from

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regulatory violations. We may suffer other negative consequences resulting from findings of noncompliance with laws and regulations, which may also damage our reputation, and this in turn might materially affect our business and results of operations.

For example, the Bank Secrecy Act of 1970, the USA PATRIOT Act of 2001, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. In addition, the Community Reinvestment Act, or CRA, imposes upon the Company a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of our entire community, and requires our federal banking regulators to evaluate the Company’s record in meeting the credit needs of our communities, including low- and moderate-income neighborhoods, and to take that record into account in their evaluation of certain regulatory applications, such as applications for mergers, consolidations and acquisitions or the Company’s engagement in certain activities pursuant to the Gramm-Leach-Bliley Act (the “GLB”). An unsatisfactory rating may be the basis for denying such application. Accordingly, a determination that our policies, procedures and systems are deficient under the Bank Secrecy Act of 1970 or our record of meeting the credit needs of our entire community, including low and moderate income neighborhoods, is less than satisfactory could materially limit our ability to, or otherwise prevent us from, engaging in any expansion activities or any other activities contemplated in our strategic plan. Further, some legal/regulatory frameworks provide for the imposition of fines or penalties for noncompliance even though the noncompliance was inadvertent or unintentional, and even though systems and procedures designed to ensure compliance were in place at the time.

We are subject to privacy and data protection laws and regulations as well as contractual privacy and data protection obligations. Our failure to comply with these or any future laws, regulations, or obligations could subject us to sanctions and damages, and could harm our reputation and business.

We are subject to a variety of laws and regulations, including regulation by various federal government agencies and state and local agencies. We collect personally identifiable information and other data from our current and prospective customers in the course of offering and/or providing financial products, services, and our employees. Self-regulatory obligations, other industry standards, policies, and other legal obligations may apply to our collection, distribution, use, security, or storage of personally identifiable information or other data relating to individuals. These obligations may be interpreted and applied in an inconsistent manner from one jurisdiction to another and may conflict with one another, other regulatory requirements, or our internal practices. Any failure or perceived failure by us to comply with privacy or security laws, policies, industry standards, or legal obligations-or any security incident resulting in the unauthorized access to, or acquisition, release, or transfer of, personally identifiable information or other data relating to our customers, employees, and others may result in governmental enforcement actions, litigation, fines, and penalties or adverse publicity that could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business.

We expect there will continue to be new proposed laws, regulations, and industry standards concerning privacy, data protection, and information security. We cannot yet determine the impact such future laws, regulations, and standards may have on our business. In particular, California’s recently enacted privacy laws, the California Consumer Privacy Act and the California Privacy Rights Act, give consumers significant rights over the use of their personal information and provides a private right of action for security breaches. Any new laws, regulations, other legal obligations or industry standards, or any changed interpretation of existing laws, regulations, or other standards may require us to incur additional costs and restrict our business operations, especially since different jurisdictions may have enacted different laws with varying compliance obligations.

Liabilities from environmental regulations could materially and adversely affect our business and consolidated financial condition.

In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. The Bank may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of any contaminated site, we may be subject to common law claims by third parties based on damages, and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, consolidated financial condition, consolidated results of operations, and liquidity could be materially and adversely affected.

STRATEGY RISKS

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We have a continuing need to adapt to technological changes.

The banking industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. The effective use of technology allows us to potentially serve our customers better, increase our operating efficiency by reducing operating costs, provide a wider range of products and services to our customers, and potentially attract new customers. Our future success will partially depend upon our ability to successfully leverage technology to provide products and services that will satisfy our customers’ demands for convenience, as well as to create additional operating efficiencies while still maintaining appropriate fraud and cyber-security controls. Our larger competitors already have existing infrastructures or substantially greater resources to invest in technological improvements. We generally arrange for such services through service bureau arrangements or other arrangements with third parties.

SBA lending is subject to government funding, which can be limited or uncertain.

The Bank engages in SBA lending through programs designed by the federal government to assist the small business community in obtaining financing from financial institutions that are given government guarantees as an incentive to make the loans. SBA lending is subject to federal legislation that can affect the availability and funding of the program. From time to time, this dependence on legislative funding causes limitations and uncertainties with regard to the continued funding of such programs, which could potentially have an adverse financial impact on our business.

We compete against larger banks and other institutions.

We face substantial competition for deposits and loans in our marketplace. Competition for deposits primarily comes from other commercial banks, savings institutions, thrift and loan associations, money market and mutual funds, and other investment alternatives. Competition for loans comes from other commercial banks, savings institutions, mortgage banking firms, thrift and loan associations, and other financial intermediaries. Our larger competitors, by virtue of their larger capital resources, have substantially greater lending limits than we have. They also provide certain services for their customers, including trust, wealth management, and international banking, which we only are able to offer indirectly through our correspondent relationships. In addition, they have greater resources and are able to offer longer maturities and on occasion, lower rates on fixed rate loans as well as more aggressive underwriting.

RISKS RELATED TO OUR STOCK

We are an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act and, for as long as we continue to be an emerging growth company, we may choose to take advantage of certain exemptions from various reporting requirements applicable to other public companies including, but not limited to: not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act; reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and exemptions from the requirements to hold a nonbinding advisory vote on executive compensation and to obtain shareholder approval of any golden parachute payments not previously approved. To the extent we take advantage of any of these reduced reporting burdens in this Annual Report and future filings, the information that we provide our security holders may be different than you might get from other public companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

There is a risk that we may be dropped from inclusion in the Russell 2000 Index which could result in a decline in the price of our stock.

Although we are currently included in the Russell 2000® Index, there is a risk that we could be dropped from inclusion when the list of public companies included in the Russell 2000® Index is reconstituted in May 2021 which could result in a decline in demand for our common stock and, accordingly, the trading price of our common stock following such event. Investment banks have estimated that the market capitalization cutoff for the Russell 2000 index would be increased to roughly $245 million from about $95 million due to recent strong small-cap performance, special purpose acquisition company, or SPAC, activity, strong IPO activity and the depressed mergers and acquisitions environment in 2020. Our market capitalization fluctuates based on the market price of our common stock and, between March 1, 2021 and March 12, 2021, our market capitalization fluctuated between a low of $245 million and a high of $288 million based on the lowest closing price of $20.72 per share and the highest closing price of $24.33 per share during this period.

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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.

Accounting policies and processes are fundamental to how we record and report our consolidated financial condition and consolidated results of operations. Some of these policies require use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Several of our accounting policies are critical because they require Management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Pursuant to U.S. GAAP, we are required to make certain assumptions and estimates in preparing our consolidated financial statements, including the allowance for loan losses, valuation of acquired loans, the valuation of goodwill and core deposit intangible and the valuation of deferred tax assets, among other items. If assumptions or estimates underlying our consolidated financial statements are incorrect, we may experience material losses.

Management has identified certain accounting policies as being critical because they require Management’s judgment to ascertain the valuations of assets, liabilities, and contingencies. Because of the uncertainty surrounding our judgments and the estimates pertaining to these matters, we cannot guarantee that we will not be required to adjust our accounting policies or consolidated financial statements. Please refer to Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Summary of Critical Accounting Policies and Note 1 - Summary of Significant Accounting Policies to the Consolidated Financial Statements in Item 8 Financial Statements and Supplementary Data, of this Annual Report.

The price of our common stock may be volatile or may decline.

The stock market and, in particular, the market for financial institution stocks, may experience significant volatility based on its history. The trading price of the shares of our common stock and the value of our other securities will depend on many factors, which may change from time to time, including, without limitation, our consolidated financial condition, performance, creditworthiness and prospects, future sales of our equity or equity related securities, and other factors identified in the “Forward-Looking Statements.” A significant decline in our stock price could result in substantial losses for individual shareholders and could lead to costly and disruptive securities litigation. Among the factors that could affect our stock price, certain of which are beyond our control, are:

•actual or anticipated quarterly fluctuations in our consolidated financial condition and consolidated results of operations;

•publication of research reports and recommendations by financial analysts;

•failure to meet analysts’ revenue or earnings estimates;

•failure to continue our common stock repurchase program or payment of dividends;

•speculation in the press or investment community;

•strategic actions by us or our competitors, such as acquisitions or restructurings actions by institutional shareholders;

•fluctuations in the stock price and operating results of our competitors;

•general market conditions and, in particular, developments related to market conditions for the financial services industry;

•political events, elections, or changes in government or administration;

•proposed or adopted regulatory changes or developments;

•anticipated or pending investigations, proceedings, or litigation that involve or affect us

•deletion from a well-known index; and

•domestic and international economic factors unrelated to our performance.

There are various regulatory restrictions on the ability of the Bank to pay dividends or make other payments to our holding company, in particular, federal and state banking laws regulate the amount of dividends that may be paid by the bank without prior approval.

The Dodd-Frank Act requires federal banking agencies to establish more stringent risk-based capital guidelines and leverage limits applicable to banks and bank holding companies. The final Basel III capital standards issued in 2013 by the Federal Reserve provide that distributions (including dividend payments and redemptions) on additional Tier 1 capital instruments may only be paid out of net income, retained earnings, or surplus related to other additional Tier 1 capital instruments. The final Basel III capital standards also introduced a new capital conservation buffer on top of the minimum risk-based capital ratios. Failure to maintain a capital conservation buffer above certain levels will result in restrictions on our ability to repurchase shares of our common stock, make dividend payments, redemptions, or other capital distributions. These

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requirements, and any other new regulations or capital distribution constraints, could adversely affect the ability of our Bank to pay dividends to our holding company and, in turn, affect our holding company’s ability to pay dividends on or repurchase our common stock. In addition, the Federal Reserve may also, as a supervisory matter, otherwise limit our holding company’s ability to pay dividends on our common stock.

We elected into the CBLR, framework, beginning with our regulatory report filed for the first quarter of 2020. Under the CBLR framework, if the Bank maintains a leverage ratio of greater than 9%, it will be considered to have satisfied the generally applicable risk-based and leverage capital requirements of the capital rules of its federal bank regulator 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. Even though the Bank meets the above-stated criteria, its federal banking regulators have reserved the authority to disallow the use of the CBLR framework 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 2020, 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.

The Bank’s failure to maintain the minimum leverage ratio under the CBLR framework will result in our Bank having to comply with the generally applicable capital rules, including the capital conservation buffer requirements thereof at which time, the failure to maintain this capital conservation buffer above certain levels will result in restrictions on our ability to make dividend payments and repurchases of our common stock.

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

Payment of stock or cash dividends on our common stock depends on a multitude of factors, including but not limited to: (a) our holding company may not have sufficient earnings since our primary source of income, the payment of dividends to it by our Bank, is subject to federal and state laws that limit the ability of our Bank to pay dividends; (b) Federal Reserve policy requires bank holding companies to pay cash dividends on common stock only out of net income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and consolidated financial condition; or (c) our Board of Directors may determine that, even though funds are available for dividend payments, retaining the funds for internal uses, such as expansion of our operations, is a better strategy. If we fail to pay dividends, capital appreciation, if any, of our common stock may be the sole opportunity for gains on an investment in our common stock. In addition, in the event our Bank becomes unable to pay dividends to our holding company, our holding company may not be able to service our debt, pay our other obligations, continue repurchasing our common stock or pay dividends on our common stock. Accordingly, our holding company’s inability to receive dividends from our Bank could also have a material adverse effect on our business, consolidated financial condition, consolidated results of operations, and the value of our common stock.

Our stock trading volume may not provide adequate liquidity for investors.

Although shares of our common stock are listed for trading on The Nasdaq Capital Market, the average daily trading volume in the common stock varies and may be less than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity, and orderliness depends on the presence in the marketplace of a sufficient number of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the daily average trading volume of our common stock, significant sales of the common stock in a brief period of time,-or the expectation of these sales-could cause a decline in the price of our common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

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Our principal executive offices are located in Cerritos, California. We lease all of our facilities and believe that if necessary, we could secure suitable alternative facilities on similar terms without materially adversely affecting operations. The following table provides certain information regarding the purpose and physical location of our offices at March 1, 2021.

Office	Address
Principal Executive Office	17785 Center Court Drive N., Suite 750, Cerritos, CA 90703
Branches:
Cerritos	12845 Towne Center Drive, Cerritos, CA 90703
Alhambra	407 W. Valley Blvd., Suite 1, Alhambra, CA 91803
Anaheim	2401 E. Katella Ave., Suite 125, Anaheim, CA 92806
Carlsbad	5857 Owens Ave., Suite 106 Carlsbad, CA 92008
Los Angeles - 6th & Figueroa	888 W. 6th Street, Suite 550, Los Angeles, CA 90017
West Los Angeles	11300 West Olympic Blvd., Suite 100, Los Angeles, CA 90064
Chula Vista	530 Broadway, Chula Vista, CA 91910
Pasadena	918 E. Green Street, Suite 100, Pasadena, CA 91106
Loan production offices:
Manhattan Beach	2321 Rosecrans Ave., El Segundo, CA 90245
San Diego	12730 High Bluff Drive, Suite 100, San Diego, CA 92130

For information regarding our lease commitments, refer to Note 7 - Leases to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data, of this Annual Report.

ITEM 3. LEGAL PROCEEDINGS

    We are 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 we have a number of unresolved claims pending. In addition, as part of the ordinary course of business, we are parties 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, we believe that damages, if any, and other amounts relating to pending matters are not likely to be material to our consolidated financial position or results of operations, except as described above. Reserves are established for these various matters of litigation, when appropriate under ASC Topic 450 Contingencies, based in part upon the advice of legal counsel.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

    Our common stock began trading on the Nasdaq Capital Market under the symbol “FCBP” on May 1, 2018. Prior to that, our common stock was traded on the OTCQX® Best Market (“OTCQX”) under the symbol "FCBP".

Holders

    As of March 1, 2021, we had 448 holders of record of our common stock based on the records of our transfer agent, and the closing price of our common stock was $20.72 per share.  The number of holders of record does not represent the actual number of beneficial owners of our common stock because securities dealers and others frequently hold shares in “street name” for the benefit of individual owners who have the right to vote shares.

Dividends

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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 an increasing 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. The payment of dividends on our common stock in 2020 and the legal and regulatory limitations on our ability to pay dividends on our common stock and the ability of the Bank to pay dividends to the holding company is discussed in more detail at Part I, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Dividends.

Securities authorized for issuance under equity compensation plans

The information required by Item 201(d) of Regulation S-K with respect to securities authorized for issuance under equity compensation plans is incorporated by reference from the information set forth under the caption “Securities Authorized for Issuance Under Equity Compensation Plans” contained in our 2021 Proxy Statement expected to be filed with the SEC within 120 days after the Company’s fiscal year ended December 31, 2020. Such information is incorporated herein by reference.”

For information regarding securities outstanding and available under our 2013 Omnibus Stock Incentive Plan (“2013 Plan”), which is our active equity compensation plan, refer to Note 14 - Stock-Based Compensation to the Consolidated Financial Statements in Item 8 Financial Statements and Supplementary Data, of this Annual Report.

Unregistered Sales of Equity Securities

    None.

Issuer Purchases of Equity Securities

    The following table presents information relating to our repurchase of shares of common stock in the fourth quarter of 2020:

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 (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs (2)
October 1 – 31, 2020	548	$	13.58	—	695,489
November 1 – 30, 2020	10	$	16.53	—	695,489
December 1 – 31, 2020	16	$	18.07	—	695,489
Total	574	$	13.76	—

(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, our Board 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, although we are not obligated to repurchase any particular number of shares under this program. On March 17, 2020, our Board suspended the stock repurchase program.

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ITEM 6. SELECTED FINANCIAL DATA

    The following consolidated selected financial data is derived from the Company’s audited consolidated financial statements as of and for the three years ended December 31, 2020. This information should be read in conjunction with our audited consolidated financial statements and accompanying notes included in Item 8 - Financial Statements and Supplementary Data, and Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report.

	As of and for the Year Ended December 31,
	2020			2019			2018
	(dollars in thousands, except share data)
Results of Operations:
Interest and dividend income	$	91,615		$	90,354		$	64,377
Interest expense	6,879			12,092			8,710
Net interest income	84,736			78,262			55,667
Provision for loan losses	5,900			2,800			1,520
Net interest income after provision for loan losses	78,836			75,462			54,147
Noninterest income	8,607			7,700			3,610
Noninterest expense	46,468			43,240			36,192
Net income before taxes	40,975			39,922			21,565
Income taxes	12,024			12,074			6,435
Net income	$	28,951		$	27,848		$	15,130
Per Common Share Data:
Basic earnings per common share 1	$	2.48		$	2.38		$	1.66
Diluted earnings per common share 1	$	2.47		$	2.36		$	1.64
Cash dividends declared per common share	$	1.00		$	0.85		$	0.80
Book value per common share outstanding	$	23.98		$	22.50		$	21.16
Tangible book value per common share outstanding 2	$	17.29		$	15.70		$	14.33
Shares outstanding at period end	11,705,684			11,635,531			11,726,074
Weighted average shares outstanding - Basic	11,569,128			11,586,651			9,015,203
Weighted average shares outstanding - Diluted	11,617,780			11,687,089			9,143,242
Balance Sheet Data:
Investment securities, available-for-sale	$	42,027		$	26,653		$	29,543
Investment securities, held-to-maturity	1,358			5,056			5,322
Loans held for sale	9,932			7,659			28,022
Loans held for investment	1,880,777			1,374,675			1,250,981
Loans held for investment, net	1,861,610			1,361,153			1,239,925
Total assets	2,283,115			1,690,324			1,622,501
Noninterest-bearing deposits	820,711			626,569			546,713
Total deposits	1,634,158			1,313,693			1,252,339
Borrowings	145,000			90,000			104,998
Paycheck Protection Program Liquidity Facility	204,719			—			—
Senior secured notes	2,000			9,600			8,450
Total shareholders’ equity	280,741			261,805			248,069
Performance Metrics:
Return on average assets	1.38		%	1.74		%	1.28		%
Return on average equity	10.70		%	10.93		%	9.09		%

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	As of and for the Year Ended December 31,
	2020		2019		2018
	(dollars in thousands, except share data)
Return on tangible equity 2	15.10	%	15.90	%	11.38	%
Yield on average earning assets	4.64	%	6.05	%	5.70	%
Cost of interest-bearing liabilities	0.64	%	1.61	%	1.32	%
Net interest margin	4.28	%	5.24	%	4.93	%
Dividend payout ratio	40.41	%	35.65	%	50.13	%
Equity to assets ratio	12.30	%	15.49	%	15.29	%
Loans3 to deposits ratio	115.09	%	104.64	%	99.89	%
Efficiency ratio 2	49.78	%	50.30	%	61.06	%

	December 31,
	2020			2019			2018
	(dollars in thousands)
Credit Quality:
Loans 30-89 days past due 4	$	54		$	1,767		$	484
Loans 30-89 days past due 4 to total loans held for investment	—		%	0.13		%	0.04		%
Non-performing loans 4	$	6,446		$	11,265		$	1,722
Non-performing loans 4 to total loans held for investment	0.34		%	0.82		%	0.14		%
Non-performing assets 4	$	6,446		$	11,265		$	1,722
Non-performing assets 4 to total assets	0.28		%	0.67		%	0.11		%
Allowance for loan losses	$	19,167		$	13,522		$	11,056
Allowance for loan losses to total loans held for investment	1.02		%	0.98		%	0.88		%
Allowance for loan losses as a percentage of total loans held for investment excluding PPP loans	1.23		%	0.98		%	0.88		%
Allowance for loan losses to non-performing loans 4	297.3		%	120.0		%	642.0		%
Net charge-offs	$	255		$	334		$	961
Net charge-offs to average loans	0.01		%	0.03		%	0.10		%
Regulatory Capital Ratios (First Choice Bank):
Community Bank Leverage Ratio 5	10.28		%	—		%	—		%
Tier 1 leverage ratio	N/A			12.01		%	12.03		%
Common equity Tier 1 capital	N/A			13.04		%	13.26		%
Tier 1 risk-based capital ratio	N/A			13.04		%	13.26		%
Total risk-based capital ratio	N/A			14.03		%	14.18		%

(1)Basic and diluted earnings per share are based on the two-class method; net income available to common shareholders excludes dividends and earnings allocated to participating securities.

(2)Refer to Non-GAAP Financial Measures in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Annual Report.

(3)Amount includes PPP loans.

(4)Amount excludes Purchased Credit Impaired ("PCI") loans.

(5)The Bank opted into the CBLR framework, beginning with the Call Report filed for March 31, 2020.

ITEM 7. 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 consolidated financial condition at December 31, 2020 and 2019, and our consolidated results of operations for the two years ended December 31, 2020. Our consolidated financial statements and the supplemental financial data appearing elsewhere in this Annual Report should be read in conjunction with this MD&A.

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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 in 2018. 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 standalone 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.

    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 eight full-service branches and two loan production offices located in Los Angeles, Orange and San Diego Counties.

Effective January 29, 2021, the Rowland Heights branch was sold to a third party financial institution who acquired certain branch assets and assumed certain branch liabilities, including deposit liabilities and the Company’s obligations under the Rowland Heights branch lease. No loans were sold as part of this transaction. As of the date of sale, the Rowland Heights branch had total deposits of $22 million.

    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”).

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 businesses of our clients. As of the date of this filing, significant uncertainty continues to exist

concerning the magnitude of the impact, the duration of the COVID-19 pandemic and the efficacy of vaccines and other treatment options. 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 consolidated financial condition and consolidated results of operations, see Part 1, Item 1A - Risk Factors in this Annual Report. 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 to the Consolidated Financial Statements included in Item 8 Financial Statements and Supplementary Data, of this Annual Report.

Key Events and Updates Related to COVID-19:

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 travel restrictions and other industries we serve are experiencing or likely to experience similar disruptions and economic

hardships as the COVID-19 pandemic persists.

Continued Support for Employees, Clients, and Communities.

• At December 31, 2020, all branches were fully re-opened with appropriate safety precautions in place. Safety and precautionary measures we have implemented 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, or furloughs

• $120,000 in donations to over 50 non-profit organizations within our footprint that serve communities

disproportionately impacted by COVID-19 and the economic distress of this pandemic

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Governmental Credit Assistance Programs

In response to the market volatility and instability resulting from the pandemic, the federal government passed 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 SBA to guarantee an aggregate of up to $349 billion in forgivable PPP loans to assist small businesses nationwide adversely impacted by the COVID-19 pandemic. On April 24, 2020, the PPP and Health Care Enhancement Act was signed into law and provided an additional $310 billion in funding and authority for the PPP. On June 5, 2020, the PPP Flexibility Act of 2020 (the “Flexibility Act”) was signed into law which changed key provisions of the PPP, including provisions relating to contractual maturity, the deferral of loan payments, and the forgiveness of such 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. The Flexibility Act also increased the period during which PPP loan proceeds may be used for purposes that qualify the loan for forgiveness (the “covered period”) to 24 weeks. Under the Flexibility Act, borrowers are not required to make any payments of principal or interest before the date on which the SBA remits the loan forgiveness amount to the Bank (or notifies the Bank that no loan forgiveness is allowed). Interest continues to accrue during the PPP payment deferral period. Although PPP borrowers may submit an application for forgiveness at any time prior to the maturity date, if a forgiveness application is not submitted within 10 months after the end of the covered period, such borrowers will be required to begin paying principal and interest after that period.

On December 27, 2020, the President signed into law economic stimulus legislation titled the “Consolidated Appropriations Act” that included the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “HHSB Act”). Among other things, the HHSB Act renewed the PPP, allocating $284.45 billion for both new first time PPP loans under the existing PPP and the expansion of existing PPP loans for certain qualified, existing PPP borrowers ("PPP Round 3"), and a new simplified forgiveness procedure for PPP loans of $150,000 or less.

At origination, we are paid a processing fee by the SBA ranging from 1% to 5% based on the size of the PPP loan. All PPP loans originated in 2020 were funded prior to June 5, 2020 and, accordingly, have a two-year contractual maturity. Unless these loans are forgiven by the SBA 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 December 31, 2020, PPP loans, net of deferred fees of $6.6 million, totaled $320.1 million. The deferred fees

are accreted to interest income based on the contractual maturity and are accelerated to interest income upon forgiveness or payoff. The SBA began approving forgiveness applications in the fourth quarter of 2020. At December 31, 2020, approximately $73 million of PPP loans were forgiven by the SBA or repaid by the borrowers, and net deferred fees related to these loans of $1.8 million were accelerated to income as a result of forgiveness or borrower repayments.

In January 2021, we began participating in the new PPP Round 3 and originating both First Draw and Second Draw loans. The maximum loan amount for First Draw borrowers is $10 million and is $2 million for the Second Draw borrowers. Unless extended, PPP Round 3 is scheduled to expire on March 31, 2021. Like the 2020 PPP, loans originated in PPP Round 3 are fully guaranteed by the SBA and are subject to potential forgiveness by the SBA.

PPP Liquidity Facility. On April 14, 2020, we were approved by the Federal Reserve to access its SBA Paycheck

Protection Program Liquidity Facility ("PPPLF"). The PPPLF enables us to borrow funds through the Federal Reserve Discount Window to fund PPP loans. At December 31, 2020, we had $204.7 million in borrowings under the PPPLF with a fixed-rate of 0.35% which were collateralized by PPP loans.

Main Street Lending Program. On April 9, 2020, the Federal Reserve established the Main Street Lending Program in order 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. Under the Main Street Program, we originated loans to qualifying borrowers and then sold 95% participation interest to the SPV, organized by the Federal Reserve to purchase these interests, while we retained the remaining 5% of the loans as well as servicing rights. Loans originated under the program have a five-year repayment term, an interest rate of 3-month 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% of principal 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. The program expired on January 8, 2021.

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During the year ended December 31, 2020, we originated 32 loans under the Main Street Lending Program totaling $172.2 million in principal and sold participation interests totaling $163.6 million to the SPV, resulting in a gain on sale of $1.1 million. The SPV pays us a servicing fee of 0.25% per annum of the total participation interest. We 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.

SBA Debt Relief Program. As a part of the CARES Act, the SBA has agreed to pay up to six months of principal, interest and associated fees for borrowers with current SBA 7(a) loans that were disbursed prior to September 27, 2020. The program has resumed and the SBA has agreed to pay for an additional three months of principal and interest payments, capped at $9,000 per borrower per month beginning February 2021. For borrowers considered to be underserved or hard-hit by the pandemic, the SBA has agreed to pay an additional five months of principal and interest payments until September 2021.

Payment Deferral Program

Throughout 2020, we granted over 520 loans totaling $629 million a 90-day payment deferral for COVID-19 related reasons. At December 31, 2020, over 99% of loans that were granted a deferral under this program have resumed making regular, contractually agreed-upon payments or were paid off and three non-PPP loans totaling $3.3 million remained on payment deferral, of which $2.8 million were reported as non-accrual and none are reported as TDRs under Section 4013 of the CARES Act. The table below shows the number and balances of loans on payment deferral at the periods indicated:

	# of Loans on Payment Deferral	Loan Balance on Payment Deferral ($ in millions)
June 30, 2020	520	$	626
September 30, 2020	12	37
December 31, 2020	3	3

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 continues to have an adverse effect on our business, consolidated financial condition and consolidated 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, consolidated financial condition or near- or longer-term financial or consolidated results of operations 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 year ended December 31, 2020, and put further pressure on our net interest margin during 2020. We have proactively worked to lower interest expense by lowering deposit rates, increasing our noninterest-bearing deposits as a percentage of total deposits 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 year ended December 31, 2020 and will continue to impact both asset mix and net interest income for the year 2021. These loans contributed $8.7 million of interest income, of which $1.8 million related to accelerated net deferred fee income from loan forgiveness for the year ended December 31, 2020. The weighted average loan yield for PPP loans was 3.34% which lowered the total loan yield by 33 basis points for the year ended December 31, 2020. We anticipate the accelerated deferred fee income as PPP loans payoff or are forgiven will partially offset the decrease in net interest margin from lower PPP interest rates.

Provision for loan losses. The provision for loan losses during 2020 was negatively impacted by an increase in qualitative factors related to COVID-19 and macro-economic conditions, in addition to loan growth. With the extension of stay-at-home orders and an increase in reported COVID-19 cases in the fourth quarter of 2020, the timing of an economic recovery

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continues to remain uncertain. Accordingly, the assumptions underlying the COVID-19 related qualitative factors we analyzed in determining the adequacy of the allowance for loan losses included (a) uncertain and volatile macroeconomic conditions caused by the pandemic; (b) a high unemployment rate; and (c) the additional government stimulus package signed into law in December of 2020. 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 December 31, 2020, our total loan commitments to the hospitality industry was $241.2

million, of which $212.3 million was outstanding, representing 11.2% 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 $118.4 million CRE, $10.6

million C&I, $28.5 million construction and land and $54.8 million SBA, of which $25.8 million were SBA PPP loans which are fully guaranteed by the SBA. We originated four hospitality loans under the Main Street Lending Program totaling $14.4 million in principal and sold 95% participation interests totaling $13.7 million to the SPV reducing the Company's net exposure to $700 thousand at December 31, 2020. At December 31, 2020, non-accrual hospitality loans totaled $82 thousand. At December 31, 2020, there were no loans on deferment.

Loans to the restaurant industry. At December 31, 2020, our total loan commitments to the restaurant industry was $89.3

million, of which $84.5 million was outstanding, representing 4.5% of total loans including loans held for sale, and loans held

for investment net of discounts and deferred fees. The total outstanding balance consisted of $7.1 million CRE, $14.1 million

C&I, $63.3 million SBA, of which $45.4 million were SBA PPP loans which are fully guaranteed by the SBA. We originated three restaurant-related loans under the Main Street Lending Program totaling $5.8 million in principal and sold 95% participation interest totaling $5.5 million to the SPV reducing the Company's net exposure to $300 thousand at December 31, 2020. At December 31, 2020, non-accrual restaurant-related loans totaled $151.0 thousand. At December 31, 2020, there were no loans on deferment.

Capital and liquidity. The Bank opted into the CBLR framework in the first quarter of 2020 and, because the Bank's CBLR

was 10.28% as of December 31, 2020, we exceeded the reduced regulatory minimum requirement of 8%, and were considered "well-capitalized" at December 31, 2020. The Bank's primary and secondary liquidity sources were over $784 million at December 31, 2020.

Full Year Highlights

•     Net income of $29.0 million, up 4.0% over 2019

•     Diluted EPS of $2.47 per share, up 4.7% over 2019

•     Pre-tax pre-provision income of $46.9 million, up 9.7% from 2019

•     Net interest margin of 4.28%, down 96 bps from 2019

•     Cost of funds of 0.38%, down 53 bps from 2019

•     Return on average assets of 1.38%, compared to 1.74% in 2019

•     Return on average equity of 10.70%, compared to 10.93% in 2019

•     Efficiency ratio of 49.8%, compared to 50.3% in 2019

•Provision for loan loss expense of $5.9 million, up $3.1 million from 2019 due primarily to COVID-19 and organic loan growth

•     Total loans held for investment excluding PPP loans increased $186.0 million, an increase of 13.5% over 2019

• Noninterest-bearing demand deposits increased $194.1 million, up 31.0% over 2019

•     Cash dividends paid of $1.00 per share

Primary Factors We Use to Evaluate Our Business

As a financial institution, we manage and evaluate various aspects of both our consolidated financial condition and consolidated results of operations. We evaluate the comparative levels and trends of the line items in our consolidated balance sheets and consolidated income statements and various financial ratios that are commonly used in our industry. We analyze these financial trends and ratios against our own historical performance, our budgeted performance and the consolidated financial condition and performance of comparable financial institutions in our region.

Segment Information

We provide a broad range of financial services to individuals and companies through our branch network. Those services include a wide range of deposit and lending products for businesses and individuals. While our chief decision makers monitor

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the revenue streams of our various product and service offerings, we manage our operations and review our financial performance on a company-wide basis. Accordingly, we consider all of our operations to be aggregated into one reportable operating segment.

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, noninterest income and noninterest expense.

Net Interest Income

    Net interest income represents interest income less interest expense. We generate interest income from interest and fees (net of costs amortized over the expected life of the loans) plus the accretion of net discounts on interest-earning assets, including loans and investment securities and dividends on restricted stock investments. We incur interest expense from interest paid on interest-bearing liabilities, including interest-bearing deposits and borrowings. Net interest income has been the most significant contributor to our revenues and net income. To evaluate net interest income, we measure and monitor: (a) yields and accretable net discount on our loans and other interest-earning assets; (b) the costs of our deposits and other funding sources; and (c) our net interest margin. Net interest margin is calculated as the annualized net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

    Changes in market interest rates, the slope of the yield curve, and interest we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period.

Noninterest Income

    Noninterest income consists of, among other things: (a) gain on sale of loans; (b) service charges and fees on deposit accounts; (c) net servicing fees; and (d) other noninterest income. Gain on sale of loans includes origination fees, capitalized servicing rights and other related income. Net loan servicing fees are collected as payments are received for loans in the servicing portfolio and offset by the amortization expense of the related servicing asset; this revenue stream is impacted by loan prepayments.

Noninterest Expense

    Noninterest expense includes: (a) salaries and employee benefits; (b) occupancy and equipment; (c) data processing; (d) professional fees; (e) office, postage and telecommunication; (f) deposit insurance and regulatory assessments; (g) loan related expenses; (h) customer service related expenses; (i) amortization of core deposit intangible; and (j) other general and administrative expenses. 

Financial Condition

    The primary factors we use to evaluate and manage our consolidated financial condition are asset levels, liquidity, capital and asset quality.

Asset Levels

    We manage our asset levels based upon forecasted loan originations and estimated loan sales to ensure we have both the necessary liquidity and capital to fund asset growth while exceeding the required regulatory capital ratios. We evaluate our funding needs by forecasting loan originations and sales of loans.

Liquidity

    We manage our liquidity based upon factors that include the amount of our custodial and brokered deposits as a percentage of total assets and deposits, the level of diversification of our funding sources, the allocation and amount of our deposits among deposit types, the short-term funding sources used to fund assets, the amount of non-deposit funding used to fund assets, the availability of unused funding sources, off-balance sheet obligations, the availability of assets to be readily converted into cash without a material loss on the investment, the amount of cash and cash equivalent securities we hold, the

42

repricing characteristics and maturities of our assets when compared to the repricing characteristics of our liabilities and other factors.

Capital

     We manage our regulatory capital based upon factors that include: (a) the level of capital and our overall consolidated financial condition; (b) the trend and volume of problem assets; (c) the level and quality of earnings; (d) the risk exposures and level of reserves in our consolidated balance sheets; and (e) other factors. In addition, our capital has increased as the result of our net income and, when approved by our Board and issued, equity compensation. We also return capital to our shareholders through dividends and share repurchases.

Asset Quality

    We manage the diversification and quality of our assets based upon factors that include the level, distribution, severity and trend of problem, classified, delinquent, nonaccrual, nonperforming and restructured assets, the adequacy of our allowance for loan losses, the diversification and quality of loan and investment portfolios, the extent of counterparty risks, credit risk concentrations and other factors.

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 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.

	Year Ended December 31,
	2020			2019
Efficiency Ratio	(dollars in thousands)
Noninterest expense (numerator)	$	46,468		$	43,240
Net interest income (denominator)	84,736			78,262
Plus: Noninterest income	8,607			7,700
Total net interest income and noninterest income (denominator)	$	93,343		$	85,962
Efficiency ratio (1)	49.8		%	50.3		%
Pre-tax Pre-provision Income
Net interest income	$	84,736		$	78,262
Noninterest income	8,607			7,700
Total net interest income and noninterest income	93,343			85,962
Less: Noninterest expense	46,468			43,240
Pre-tax pre-provision income (1)	$	46,875		$	42,722

(1) Non-GAAP measure.

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	Year Ended December 31,
	2020			2019
Return on Average Assets, Equity, Tangible Common Equity	(dollars in thousands)
Net income	$	28,951		$	27,848
Average assets	2,095,784			1,603,600
Average shareholders’ equity	270,521			254,770
Less: Average intangible assets	78,790			79,631
Average tangible equity (1)	$	191,731		$	175,139
Return on average assets	1.38		%	1.74		%
Return on average equity	10.70		%	10.93		%
Return on average tangible common equity (1)	15.10		%	15.90		%

(1) Non-GAAP measure.

	December 31,
	2020			2019
Tangible Common Equity Ratio/Tangible Book Value Per Share	(dollars in thousands)
Shareholders’ equity	$	280,741		$	261,805
Less: Intangible assets	78,381			79,153
Tangible common equity (1)	$	202,360		$	182,652
Total assets	$	2,283,115		$	1,690,324
Less: Intangible assets	78,381			79,153
Tangible assets (1)	$	2,204,734		$	1,611,171
Equity to asset ratio	12.30		%	15.49		%
Tangible common equity to tangible asset ratio (1)	9.18		%	11.34		%
Book value per share	$	23.98		$	22.50
Tangible book value per share (1)	$	17.29		$	15.70
Shares outstanding	11,705,684			11,635,531

(1) Non-GAAP measure.

Comparison of Operating Results

General

Net income was $29.0 million or $2.47 diluted earnings per share for the year ended December 31, 2020 compared to $27.8 million or $2.36 diluted earnings per share for the year ended December 31, 2019. The $1.1 million increase in net income was due to higher net interest income of $6.5 million, noninterest income of $907 thousand and lower income taxes of $50 thousand, partially offset by increases in the provision for loan losses of $3.1 million, and noninterest expense of $3.2 million for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase in net interest income was a result of higher average loan balances, relating to both PPP loans and organic loan growth, interest income and fees recognized for PPP loan forgiveness and reductions in the costs of interest-bearing deposits and borrowings. Noninterest income increased due to higher gains related to loan sales from Main Street loans, coupled with higher other income. Noninterest expense increased due primarily to higher salaries and employee benefits, data processing expenses, FDIC assessment fees, and other expenses, partially offset by lower occupancy and equipment expenses and customer service related expenses.

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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 table summarizes 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:

	Year Ended December 31,
	2020						2019						2018
	Average Balance		Interest Income / Expense		Average Yield / Cost		Average Balance		Interest Income / Expense		Average Yield / Cost		Average Balance		Interest Income / Expense		Average Yield / Cost
Interest-earning assets:	(dollars in thousands)
Loans (1)	$	1,731,049	$	89,210	5.15	%	$	1,317,345	$	86,207	6.54	%	$	985,513	$	61,075	6.20	%
Investment securities	42,064		777		1.85	%	35,883		853		2.38	%	37,642		922		2.45	%
Deposits in other financial institutions	188,345		825		0.44	%	124,506		2,375		1.91	%	98,353		1,847		1.88	%
Federal funds sold/resale agreements	—		—		—	%	1,243		30		2.41	%	1,258		25		1.99	%
Restricted stock investments and other bank stocks	14,663		803		5.48	%	13,973		889		6.36	%	7,043		508		7.21	%
Total interest-earning assets	1,976,121		91,615		4.64	%	1,492,950		90,354		6.05	%	1,129,809		64,377		5.70	%
Noninterest-earning assets	119,663						110,650						54,500
Total assets	$	2,095,784					$	1,603,600					$	1,184,309
Interest-bearing liabilities:
Interest checking	$	241,275	$	592	0.25	%	$	120,494	$	1,268	1.05	%	$	153,403	$	1,679	1.09	%
Money market accounts	318,216		1,481		0.47	%	278,075		3,498		1.26	%	196,871		2,275		1.16	%
Savings accounts	30,674		80		0.26	%	30,608		232		0.76	%	51,254		410		0.80	%
Time deposits	92,242		1,117		1.21	%	149,921		2,647		1.77	%	176,761		2,912		1.65	%
Brokered time deposits	97,102		1,877		1.93	%	107,958		2,626		2.43	%	52,879		774		1.46	%
Total interest-bearing deposits	779,509		5,147		0.66	%	687,056		10,271		1.49	%	631,168		8,050		1.28	%
Borrowings	134,696		985		0.73	%	49,914		1,143		2.29	%	23,176		412		1.78	%
Paycheck Protection Program Liquidity Facility	153,679		540		0.35	%	—		—		—	%	—		—		—	%
Senior secured notes	5,401		207		3.83	%	11,933		678		5.68	%	4,544		248		5.46	%
Total interest-bearing liabilities	1,073,285		6,879		0.64	%	748,903		12,092		1.61	%	658,888		8,710		1.32	%
Noninterest-bearing liabilities:
Demand deposits	735,129						586,508						353,157
Other liabilities	16,849						13,419						5,790
Shareholders’ equity	270,521						254,770						166,474
Total liabilities and shareholders' equity	$	2,095,784					$	1,603,600					$	1,184,309
Net interest spread			$	84,736	4.00	%			$	78,262	4.44	%			$	55,667	4.38	%
Net interest margin					4.28	%					5.24	%					4.93	%
Total deposits	$	1,514,638	$	5,147	0.34	%	$	1,273,564	$	10,271	0.81	%	$	984,325	$	8,050	0.82	%
Total funding sources	$	1,808,414	$	6,879	0.38	%	$	1,335,411	$	12,092	0.91	%	$	1,012,045	$	8,710	0.86	%

(1)Average loans include net discounts and net deferred loan fees and costs. Interest income on loans includes the accretion of net deferred loan fees of $6.7 million, of which $1.8 million related to the accelerated accretion of deferred fee income from PPP loan forgiveness for the year ended December 31, 2020. For the years ended December 31, 2019 and 2018, the accretion of net deferred loan fees were $958 thousand and $469 thousand; there was no accelerated accretion of deferred fee income from PPP loan forgiveness. In addition, interest income includes $2.2 million, $4.6 million and $2.2 million of discount accretion on loans acquired in a business combination, including the interest recognized on the payoff of PCI loans, for the years ended December 31, 2020, 2019 and 2018, respectively.

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Rate/Volume Analysis

    The volume and interest rate variances table below sets forth the dollar difference in interest earned and paid 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 changes in average interest (rates). 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.

Year Ended December 31,