UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K10-K/A
Amendment No. 1
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x☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20182020
or
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| ☐ | 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)
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| California | | | | 82-2711227 |
| (State or Other Jurisdiction of | | | | (I.R.S. Employer |
| Incorporation or Organization) | | | | Identification Number) |
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California | | | | 82-2711227 |
(State or Other Jurisdiction of | | | | (I.R.S. Employer |
Incorporation or Organization) | | | | Identification Number) |
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17785 Center Court Drive N,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:
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock,Shares, no par value | TheFCBP | 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 x☒
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 x☒
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 x☒ 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 x☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
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:
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| Large accelerated filer | ☐ | Accelerated Filer | ☐☒ |
| Non-accelerated filer | ☐ | Smaller reporting company | x☒ |
| Emerging Growth Company | x☒ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant 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 publicvalue 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 at whichof the common equity was last soldstock of $16.38 as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2018)2020) as quoted onreported by the NASDAQ Stock Market of $30.56 per share was $175,155,648. This value is estimated solely for purposes of this cover page.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 13, 2019,April 9, 2021, the Registrant had 11,641,02011,824,407 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement relatingNone.
Explanatory Note
First Choice Bancorp (the “Company”) is filing this Amendment Number 1 on Form 10-K/A (“Form 10-K/A”) to Registrant’s 2019amend its Annual Meeting of Shareholders, which will be filed within 120 days ofReport on Form 10-K for the fiscal year ended December 31, 2018, scheduled to be held2020 (“Original Form 10-K”), as filed with the Securities and Exchange Commission (“SEC”) on June 11, 2019, are incorporated by reference in thisMarch 15, 2021. This Form 10-K in response to10-K/A amends Part III, Items 10 11, 12, 13 andthrough 14 of the Original Form 10-K to include information previously omitted from the Original Form 10-K in reliance on General Instruction G(3) to Form 10-K. General Instruction G(3) to Form 10-K provides that information required by Part III of Form 10-K may be incorporated by reference from a definitive proxy statement which involves the election of directors, if such definitive proxy statement is filed with the SEC not later than 120 days after the end of the Company’s most recently completed fiscal year. The Company does not anticipate that its definitive proxy statement for the 2021 annual meeting of shareholders will be filed within the 120-day period. Accordingly, Part III of the Original Form 10-K is hereby amended as set forth below.
In addition, this Form 10-K/A amends the Original Form10-K to correct an error in the number of shares of the Company’s common stock outstanding as of March 1, 2021. The Original Form 10-K indicated that there were 11,821,987 shares outstanding as of March 1, 2021. The correct number of shares outstanding as of March 1, 2021 is 11,820,707.
In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is filing new certifications of its principal executive officer and principal financial officer, pursuant to Rule 13a-14(a) of the Exchange Act, as exhibits to this Form 10-K/A under Item 15 of Part IV hereof.
Except as set forth herein, this Form 10-K/A does not reflect events occurring after the filing of the Original Form 10-K with the SEC on March 15, 2021. Except as described above, no other changes have been made to the Original Form
10-K and this Form 10-K/A does not amend, update or change the financial statements or any other items or disclosures in the Original Form 10-K.
As used in this Amendment No. 1, unless the context suggests otherwise, the words “the Company”, “First Choice Bancorp”,“we”, “our”, and “us”, refer to First Choice Bancorp and its consolidated subsidiaries. References to the “Bank”
refer to First Choice Bank and PCB Real Estate Holdings, LLC on a consolidated basis, unless we indicate otherwise.
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Item 1. | | |
Item 1A. | | |
Item 1B. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II. | | |
Item 5. | | |
Item 6. | | |
Item 7. | | |
Item 7A. | | |
Item 8. | | |
Item 9. | | |
Item 9A. | | |
Item 9B.PART III. | | |
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PART III. | |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
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| PART IV. | |
| Item 15. | | |
Item 16. | | |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In this Annual Report on Form 10-K,PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Company’s bylaws currently provide that the term “Bancorp”authorized number of directors may be no less than seven and "holding company" refersno more than thirteen, with the exact number of directors to First Choice Bancorp onbe fixed by resolution of the Board of Directors. The number of directors is currently fixed at eight (8). Directors of the Company serve one-year terms. None of the directors or executive officers were selected pursuant to any arrangement or understanding, other than with the directors and executive officers of the Company, acting within their capacities as such. The Company knows of no family relationships between the Directors and Executive Officers of the Company, nor do any of the Directors or Executive Officers of the Company serve as directors of any other company which has a stand-alone basis, and the term “Bank” refers to Bancorp's wholly owned subsidiary, First Choice Bank. The terms “Company,” “we,” “us,” and “our” referclass of securities registered under, or which is subject to the Bancorp andperiodic reporting requirements of the Bank collectively. The statements in this report include forward looking statementsExchange Act or any investment company registered under the Investment Company Act of 1940.
Pursuant to Nasdaq Stock Market LLC (“Nasdaq”) Listing Rules, the Board has made an affirmative determination that the following directors are “independent” within in the meaning of the applicable provisionssuch rules: James H. Gray, Peter H. Hui, Fred D. Jensen, Luis Maizel, Pravin C. Pranav, Lynn McKenzie-Tallerico and Phillip T. Thong.These directors comprise a majority of the Private Securities Litigation Reform actCompany’s Board of 1995 regarding management’s beliefs, projectionsDirectors and, assumptions concerning future resultsas such, pursuant to Nasdaq Listing Rules and events. We intend such forward-looking statements to be covered by the safe Harbor provision for forward looking statements in these provisions. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including statements about anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, growth plans, acquisition and divestiture opportunities, business prospects, strategic alternatives, business strategies, financial expectation, regulatory and competitive outlook, investment and expenditure plans, financing needs and availability, and other similar forecasts and statements of expectation and statements of assumptions underlying anyRule 10A-3 of the foregoing. These statements are often, but not always, made through the useSecurities Exchange Act of 1934 (the "Exchange Act"), a majority of 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 other comparable words of a future or forward-looking nature are intended to identify these forward-looking statements. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict and subject to change based on factors which are, in many instances, beyond our control. Although we believe that the expectations reflected in these forward-looking statements are reasonable asmembers of the date made, actual results, performance or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements.Board is “independent” as so defined.
The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:table lists the names and certain information as of April 9, 2021 regarding the Company’s directors.
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| Name and Office Held | | Age | | Company Director Since | | Bank Director Since |
Robert M. Franko, Director, President, CEO and CFO(1) | | 73 | | 2017 | | 2013 |
James H. Gray, Director(1) | | 83 | | 2017 | | 2014 |
Peter H. Hui, Chairman of the Board(1) | | 68 | | 2017 | | 2005 |
Fred D. Jensen, Director(1) | | 83 | | 2017 | | 2014 |
Luis Maizel, Director(2) | | 70 | | 2018 | | N/A |
Pravin C. Pranav, Director(1) | | 68 | | 2017 | | 2005 |
Lynn McKenzie-Tallerico, Director(3) | | 63 | | 2020 | | 2020 |
Phillip T. Thong, Vice Chairman of the Board(1) | | 65 | | 2017 | | 2005 |
the ability to achieve expected revenue growth and/or expense savings following a merger or acquisition;
customer acceptance of our products(1) Directors Franko, Gray, Hui, Jensen, Pranav and services and efforts by competitor institutions to lure away such customers;
possible business disruption or difficulty retaining key managers and employees;
U.S. and international business and economic conditions generally and in the financial services industry, nationally and within our current and future geographic market areas;
economic, market, operational, liquidity, credit and interest rate risks associated with our business;
lack of seasoning in our loan portfolio;
credit risks of lending activities and deteriorating asset or credit quality and higher loan charge-offs;
possible additional provisions for loan losses and charge-offs;
extensive laws and regulations and supervision applicable to our business, including potential supervisory action by bank supervisory authorities;
increased costs of compliance and other risks associated with changes in regulation;
higher capital requirements from the implementationThong became directors of the Basel III capital standards;
compliance with the Bank Secrecy Act and other money laundering statutes and regulations;
potential goodwill impairment;
liquidity risk;
fluctuations in interest rates;
risks associated with acquisitions and the expansion of our business into new markets;
inflation and deflation;
real estate market conditions and the value of real estate collateral;
successful management of reputational risk;
natural disasters and geopolitical events;
our ability to achieve organic loan and deposit growth and the composition of such growth;
increased competition in the financial services industry, nationally, regionally or locally;
our ability to maintain our historical earnings trends;
our ability to raise additional capital to implement our business plan and the resulting dilution of interests of holders of our common stock;
material weaknesses in our internal control over financial reporting;
systems failures or interruptions involving our information technology and telecommunications systems or third-party servicers;
our ability to adapt our systems to expanding use of technology in banking;
risk management processes and strategies;
market disruption and volatility;
fluctuations in the Company’s stock price;
restrictions on dividends and other distributions by laws and regulations and by our regulators and our capital structure;
issuance of preferred stock;
the composition of our management team and our ability to attract and retain key personnel;
the fiscal position of the U.S. federal government and the soundness of other financial institutions;
our ability to monitor our lending relationships;
the composition of our loan portfolio, including the identity of our borrowers and the concentration of loans in real estate-related industries and in our specialized industries;
the amount of nonperforming and classified assets we hold;
time and effort necessary to resolve nonperforming assets;
our ability to identify potential candidates for, consummate, and achieve synergies resulting from, potential future acquisitions;
environmental liability associated with our lending activities;
the geographic concentration of our markets in California and the southwest United States;
the commencement and outcome of litigation and other legal proceedings against us or to which we may become subject;
the impact of recent and future legislative, regulatory and accounting changes, including changes in banking, securities and tax laws and regulations and their application by our regulators;
requirements to remediate adverse examination findings;
changes in the scope and cost of FDIC deposit insurance premiums;
the obligations associated with being a public company;
certain provisions in our charter and bylaws that may affect the acquisition of the Company;
our modeling estimates related to changes in the interest rate environment;
our ability to achieve the cost savings and efficienciesCompany in connection with branch closures;
our estimates as to our expected operational leverage and the expected additional loan capacity of our relationship managers; and
our success at managing the risks involved in the foregoing items.
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 in particular), the Company’s other reports filed with the Securities and Exchange Commission (the “SEC”) and other filings the Company makes with the SEC from time to time. Actual results in any future period may also vary from the past results discussed in this report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements, which speak to the date of this report. We have no intention and undertake no obligation to update any forward-looking statement or to publicly announce any revision of any forward-looking statement to reflect future developments or events, except as required by law.
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 (the "Bank"), a California state-chartered commercial bank. On December 21, 2017, the Bank received requisite shareholder and regulatory approval necessary for the Bank to reorganize into the holding company form of ownership pursuant to which First Choice Bank became a wholly-owned subsidiary of First Choice Bancorp. When we refer to "Bancorp" or the "holding company", we are referring First Choice Bancorp, the parent company, on a stand-alone basis. When we refer to "we," "us," "our," or the "Company", we are referring to First Choice Bancorp and the Bank collectively. We are regulated as a bank holding company byreorganization of the Bank in 2017.
(2) Director Maizel is a former director of Pacific Commerce Bancorp and its wholly-owned subsidiary, Pacific Commerce Bank, and joined the Company’s Board of Governors ofDirectors in connection with and effective following the Federal Reserve System (“Federal Reserve”) andclosing the Bank is regulated by the California Department of Business Oversight ("DBO") and the Federal Reserve.
Our principal place of business is currently located at 17785 Center Court 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 Capital Market under the trading symbol of “FCBP” on May 1, 2018.
Acquisition and Expansion
We completed theCompany’s acquisition of Pacific Commerce Bancorp ("PCB"in 2018.
(3) Director McKenzie-Tallerico was appointed to the Company Board of Directors effective as of January 1, 2020 to replace Maria Salinas who resigned from the Board at the end of 2019.
We believe that all of our directors’ respective educational background and business experience give them the qualifications and skills necessary to serve as directors of the Company. The following is a brief description of each director’s business experience during at least the past five (5) years:
Robert M. Franko.Mr. Franko has served as First Choice Bank’s President, Chief Executive Officer (“CEO”) on July 31, 2018.and a Director of First Choice Bank since November 2013 and First Choice since inception in September 2017 and Chief Financial Officer (“CFO”) of First Choice since May 2020. Mr. Franko brings a wealth of knowledge and experience to First Choice and First Choice Bank, including becoming in 2003 the founder, President, Chief Executive Officer and a director of Beach Business Bank, Manhattan Beach, California, where he created The acquisition has been accounted for usingDoctors Bank® division to provide banking services to physicians and dentists nationwide. Mr. Franko negotiated the sale of Beach Business Bank to First PacTrust Bancorp in 2012, where he thereafter executed the acquisition method of accounting and, accordingly, the operating results of PCB have been included in the consolidated financial statements from August 1, 2018. See also Note 2. Business Combinations to the Consolidated Financial Statements in Part II, Item 8. Financial Statements and Supplementary Data, in this Annual Report.
Business of the $700 million Private Bank
The Bank was incorporated under the laws of the State of California in 2013, and where he managed two banks as Chief Executive Officer, with total assets exceeding $3.5 billion with more than 1,000 employees. Mr. Franko has over 25 years of banking experience and previously held several positions in senior management and on boards of directors of commercial banks including City National Bank, Beverly Hills, California (2002-2003); Senior Vice President, Personal Trust and Investments Division, Generations Trust Bank, N.A., Long Beach, California (1999-2002); President and CEO and Executive Vice President of First National Bank of San Diego, Imperial Bancorp, and other financial institutions. Mr. Franko is a member of the Board of Directors of The Independent BankersBank (“TIB”) in Farmers Branch Texas, which is an upstream correspondent bank for First Choice Bank. TIB has made a $25 million revolving line of credit to First Choice Bancorp.
James H. Gray. Mr. Gray has served as a Director of First Choice Bank since March 2005,2014, and as Director of First Choice since inception in September 2017. He has been extensively involved in the banking industry for over 40 years. In 1974, Mr. Gray was co-founder of Harbor Bank headquartered in Long Beach, California, and he served as Chairman of the Board and CEO from 1976 until the sale of Harbor Bank to City National Bank in early 1998. In 1999, Mr. Gray founded Generations Trust Bank and served as Chairman until its business was sold to Union Bank in 2002. In June 2004, Mr. Gray was a founding Director and Co-Chairman of Beach Business Bank in Manhattan Beach, California, until it was sold to First PacTrust Bancorp in 2012. Mr. Gray was also President of the California Bankers Association from 1985 to 1986 and was a member of the Board of Directors of the American Bankers Association from 1991 to 1996. In addition, Mr. Gray was also one of the founding members of the FDIC’s National Community Bank Advisory Committee, serving from 2009 to 2012. Mr. Gray is licensed byan active member of the DBO,Long Beach community, as founding Chairman of the Aquarium of the Pacific, a past President of both the Chamber of Commerce and commenced banking operationsthe Port of Long Beach Board of Harbor Commissioners, and Chairman of the United Way. Mr. Gray has served as an elected member of the Board of Education in Long Beach and as a Trustee for the Long Beach Community College district, as well as a Trustee for the California State University system from 1990 to 1999.
Peter H. Hui. Mr. Hui founded First Choice Bank and has served as Chairman since inception in August 2005, and Chairman of First Choice since inception in September 2017. He has been President of Hospitality Unlimited Investments, Inc. since 1986. He also is an accomplished hotel and real estate broker, previously in the city of Cerritos and currently in Las Vegas. He has 33 years of experience in the hospitality business as owner, developer, management company, operator, or general manager with Hilton, Holiday Inn, Ramada Inn, and Quality Inn, among others. He was also previously a partner in Petra Pacific Insurance Service Inc. As a member of the Directors’ Loan Committee, Mr. Hui brings valuable insight to understanding credit, not just in the hospitality industry, but also in the other businesses where he has operated, such as insurance and non-profit lending. Mr. Hui has also been prolific in bringing deposit relationships to the Bank to provide liquidity. As a member of the Compensation, Nominating and Corporate Governance Committee, he brings his years of management experience to bear on selecting high quality candidates for the Board and management. Mr. Hui attained his BA degree from Southwest State University in Marshall, Minnesota and also graduated from UCLA’s Executive Program in Los Angeles, California. Mr. Hui is also licensed as a real estate broker, is a former instructor on Hotel Management at California state-charteredPoly University in Pomona, California, and is a former member of the Ramada Franchise Counsel and the Rotary Club.
Fred Jensen. Mr. Jensen has served as a Director of First Choice Bank since May 2014, and as a Director of First Choice since inception in September 2017. Mr. Jensenhas been extensively involved in the banking industry for over 40 years. In 2005, Mr. Jensen was a Director and Audit Committee Chairman and Member of Loan Committee of Beach Business Bank in Manhattan Beach, California until it was sold to First PacTrust Bancorp in 2012, after which he served as Director and Audit Committee Chairman and Member of Loan Committee until 2013. He previously held several positions in senior management and on boards of directors of commercial bank headquartered in Cerritos,banks including Security Pacific Bank, Los Angeles County, California. On October 1, 2018, the(1999-2005), First Bank satisfied the requirementsand Trust, Irvine (Formerly Queen City Bank) (1995-1999), Aktiv Bank Holding Bank, Long Beach, (1982-1992), National Bank of Long Beach, Long Beach (1980-1992), American City Bank, Los Angeles (1971-1979), and Union Bank (1966-1971). Mr. Jensen has also served asDirector of California Bankers Insurance Services; Chairman of Bank Group California; Director of the Federal Reserve Bank of San Francisco, Los Angeles Branch from 1987-1993; and became a state member bankPresident of the Federal Reserve System and purchased the required stockCalifornia Bankers Association in 1992. Mr. Jensen is an active member of the Federal ReserveLong Beach community, as President and Director of Long Beach Area Certified Development Corporation, Director of the Aquarium of the Pacific, as well as Trustee for both the Long Beach Memorial Medical Center Foundation, and Boys and Girls Clubs of Long Beach. Mr. Jensen also previously served as a member of the Advisory Board of the California State University Long Beach, School of Business Administration.
Luis Maizel.Mr. Maizel has served as a Director of First Choice Bancorp since August 2018. Mr. Maizel has also served as the President of Maizel Enterprises, Inc., since 1984, Director of LLJ Ventures LLC since 2019, and is Vice Chair of the Board of Trustees of the University of San Diego, where he also chairs the Investment Committee. He is a co-founder and Senior Manager of the Investment Strategy Group at LM Capital Group, LLC, also serving as President of LM Capital Management since 1989 and LM Advisors Inc. since 1984. He has been investing in the global fixed income market for over thirty years. He previously served as Vice President of Finance for Grupoventas, S.A., as well as President of both Industrias Kuick, S.A., and Blount Agroindustrias, S.A., manufacturers of agribusiness equipment. Mr. Maizel previously served as a Director of United PanAmerican Financial Corporation, a Nasdaq-listed company; Pacific Commerce Bancorp and Bank; and Vibra Bank. Accordingly,He has also served as a board member of the United States Board of Directors of Nacional Financiera (NAFIN- Mexico's National Development Company), Wells Fargo San Diego Community Board, and several nonprofit organizations, and was previously a Faculty Member at the Harvard Business School. He earned his Bachelors of Science degree in Mechanical Engineering from the National University of Mexico, Masters of Science degree in Industrial Engineering from National University of Mexico, and Master of Business Administration from Harvard Business School, where he graduated as a Baker Scholar, the school's highest academic honor.
Pravin C. Pranav. Mr. Pranav is a founding member of First Choice Bank, having served as a Director since inception in August 2005, and as a Director of First Choice since inception in September 2017. Mr. Pranavwas admitted as an Associate of the Institute of Chartered Accountants of England and Wales in 1978, a program which requires in-depth training, as well as successful completion of rigorous examinations in financial management, auditing, business strategy and taxation. He subsequently moved to Zambia, Africa, where he joined his family trading enterprise. Mr. Pranav came to the United States in 1988 and in 1992, he founded Abacus Payroll Services, having served as its President for almost 30 years.
Lynn McKenzie-Tallerico. Ms. McKenzie-Tallerico has served as Director of First Choice Bank since September 2020, and as a Director of First Choice since January 2020.Ms. McKenzie-Tallerico has over 40 years of experience in the banking industry. She served as National Lead Advisory Partner for Regional and Community Banks for KPMG LLP, helping to coordinate all advisory services to one of KPMG’s largest industry segments, including strategy and financial results. She also led the Internal Audit Risk and Compliance practice for the Pacific Southwest Region and served as lead Advisory Partner for the Phoenix, Arizona office. Prior to joining KPMG in 1996, Ms. McKenzie-Tallerico worked at a major regional bank for 15 years, gaining experience in lending, bank operations, financial operations, risk management and internal controls. Ms. McKenzie-Tallerico currently serves on the board of CASA Los Angeles where she is a member of the Executive Committee and Chair of the Audit and Risk Committee. CASA Los Angeles is a local non-profit that advocates on behalf of children who have experienced abuse and/or neglect. Ms. McKenzie-Tallerico previously served as a board member of the UCLA Iris Cantor Executive Women’s Health Center. Ms. McKenzie-Tallerico has a Master of Business Administration degree with a focus on Finance from the University of Texas at Austin, and a Bachelor of Arts degree in Economics from the University of California, Irvine. She is a licensed CPA in the State of California and a member of the American Institute of Certified Public Accounts, or AICPA.
Phillip T. Thong. Mr. Thong is a founding member of First Choice Bank, having served as Vice Chairman since inception in August 2005, and as Vice Chairman of First Choice since inception in September 2017. Mr. Thong is a Certified Public Accountant / Business Advisor, currently Managing Partner of his own firm, Phillip T Thong CPA, and has over 30 years of related experience including private and public accounting, management consulting, mergers & acquisitions, and other such areas. He previously was a Founding Partner of Thong, Yu, Wong & Lee, LLP, from 1982 until 2017. Mr. Thong currently is a member of the Advisory Board of the Cambodian American Chamber of Commerce and Cambodia Town Inc. and has been a Director for Solexar Energy Int't Inc. since 2013. He is a member of American Institute of Certified Public Accountants and California Society of Certified Public Accountants. Formerly, Mr. Thong was a board member of the Indonesia Business Society and a member of the advisor board of the Senate Select Committee on Small Business Enterprises. Mr. Thong previously served as a member of the Board of Directors and Chairman of the Audit Committee at International Bank of California. Mr. Thong holds a BS degree in Accounting from West Coast University in Los Angeles, California and a Master’s in Business Administration from Cal State Polytechnic in Pomona, California.
Our Compensation, Nominating and Corporate Governance Committee currently consists of directors Pranav (Co-Chairperson), Thong (Co-Chairperson) and Hui. Our Audit Committee currently consists of directors Gray, Jensen, Pranav, McKenzie-Tallerico, and Thong (Chairperson).
Information about our Executive Officers
The following sets forth the names and certain information as of December 31, 2020 with respect to the Executive Officers of the Company and/or the Bank (except for Mr. Franko who is subject to periodic examinationalso a director and supervision bywhose information is included above):
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| Name | | Age | | Position | | Principal Occupation for Past 10 Years | | Year First Appointed |
| Khoi D. Dang | | 47 | | EVP, General Counsel, First Choice Bancorp and First Choice Bank | | Lawyer/Banker | | 2019 |
| Gene May | | 69 | | EVP, Chief Credit Officer, First Choice Bank | | Banker | | 2011 |
| Yolanda Su | | 58 | | EVP, Chief Operations Administrator, First Choice Bank | | Banker | | 2005 |
Khoi D. Dang.Mr. Dang has served as Executive Vice President and General Counsel of the DBOCompany and the Federal ReserveBank since March 2019.Prior to joining the Company in this role, Mr. Dang was a partner attorney at Duane Morris, LLP from 2017 through 2019.Prior to this, Mr. Dang was a partner attorney at the banking law firm of Horgan, Rosen, Beckham & Coren, LLP from 2011 through 2017, and an associate with this firm from 2006 through 2011.During his legal career, Mr. Dang has served as outside general counsel to regional and community banks throughout California, advising banks and their holding companies (including the Company and the Bank) on such matters as general corporate, corporate governance, regulatory compliance (e.g., state and federal lending and banking laws and regulations), corporate finance and corporate securities (e.g., ’33 and ’34 Act compliance); private and public mergers and acquisitions and general business operations.
Mr. Dang is a graduate of Santa Clara University Law School (Juris Doctorate, 2002), the University of California, San Diego (Masters in International Affairs, 1999) and the University of California, Los Angeles (Bachelor of Arts, 1996).
Gene May. Mr. May has served as the Bank's primary regulators. In addition, the Bank's deposits are insured under the Federal Deposit Insurance Act byExecutive Vice President and Chief Credit Officer of First Choice Bank since November 2011. His professional experience began with a 6 ½ year term with the Federal Deposit Insurance Corporation ("FDIC")in the Division of Bank Liquidation beginning in 1975. Mr. May has almost 40 years of experience in the banking industry, specializing in consumer and commercial lending, and has held numerous management positions, most recently with Torrey Pines Bank, Pacific Western Bank, and First Pacific Bancorp. Mr. May obtained his BS degree in Accounting from Stephen F. Austin State University, Texas.
Yolanda Su.Ms. Su has served as the Executive Vice President and Chief Operations Administrator of First Choice Bank since it commenced operations in August 2005. From July 2003 until August 2005, Ms. Su worked at organizing First Choice Bank, while also performing internal auditing services for M.P. Romano Associates on a contractual basis. From 1991 until 2003, Ms. Su was with First Continental Bank, where she served as Senior Vice President and Cashier during her last five years at that bank. Ms. Su has over 25 years of experience in operations department, operations compliance, human resources, and information systems. Ms. Su attained her BS degree in Business Management from the College of Holy Spirit in Manila, Philippines.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to the Company during and with respect to its 2020 fiscal year, no director or executive officer failed to file, on a timely basis, reports required during or with respect to 2020 by Section 16(a) of the Exchange Act.
CORPORATE GOVERNANCE PRINCIPLES AND BOARD MATTERS
Corporate Governance Guidelines
We are committed to having sound corporate governance principles, which are essential to running our business efficiently and maintaining our integrity in the marketplace. Our Board of Directors has adopted Corporate Governance Guidelines that set forth the framework within which our Board of Directors, assisted by the committees of our Board of Directors, directs the affairs of our combined organization. The Corporate Governance Guidelines address, among other things, the composition and functions of our Board of Directors, director independence, compensation of directors, management succession and review, committees of our Board of Directors and selection of new directors. Our Corporate Governance Guidelines are available on our website at www.firstchoicebankca.com under “Investor Relations” and the "Corporate Governance" tabs.
Director Qualifications: We believe that our directors should have the highest professional and personal ethics and values. They should have broad experience at the policy-making level in business, government or banking. They should be committed to enhancing shareholder value and should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience. Their service on boards of other companies should be limited to a number that permits them, given their individual circumstances, to perform responsibly all director duties. Each director must represent the interests of all shareholders. When considering potential director candidates, our Board of Directors also considers the candidate’s character, judgment, diversity, skill-sets, specific business background and global or international experience in the context of our needs and those of the Board of Directors.
Director Independence: Because our common stock is listed on the Nasdaq Global Select Market, we are required to comply with the rules of Nasdaq with respect to the independence of directors who serve on our Board of Directors and its committees. Under the rules of Nasdaq, independent directors must comprise a majority of our Board of Directors. The rules of Nasdaq, as well as those of the SEC, also impose several other requirements with respect to the independence of our directors.As noted above, the Board has made an affirmative determination that a majority of our current Board of Directors qualify as being “independent” within the meaning of the Nasdaq Listing Rules and Rule 10A-3 of the Exchange Act.
Board Leadership Structure: Our Board selects the Company's CEO and Chairman of the Board in the manner that it determines to be in the best interests of the Company's shareholders. The Board has determined that having an independent director serve as Chairman of the Board is in the best interest of the Company's shareholders at this time. Our Board believes that this structure ensures a greater role for the independent directors in the oversight of the Company and active participation of the independent directors in setting Board and Committee agendas and establishing priorities and procedures. Further, this
structure permits the Chief Executive Officer to focus on the Company's and the Bank's strategic matters and the management of their day-to-day operations.
The Bank, as a separate and distinct entity from the Company, has a separate Board of Directors. The Bank’s Board is comprised of 10 directors who are as follows: Roshan H. Bhakta, Robert M. Franko, Max Freifeld, Peter H. Hui, James H. Gray, Fred D. Jensen, Thomas Iino, Lynn McKenzie-Tallerico, Pravin C. Pranav and Phillip T. Thong. The Bank’s Board of Directors meets monthly, with individual Bank Board committees meeting more frequently as necessary.
Code of Ethics.Our Board of Directors has adopted a code of ethics that applies to all of our directors and employees, including our NEOs.The code provides fundamental ethical principles that are reasonably designed to deter wrongdoing and to promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; full, fair, accurate, timely and understandable disclosure in the periodic reports required to be filed by the Company; compliance with applicable governmental laws, rules and regulations; prompt internal reporting to the appropriate persons identified in the code of violations of the code; and accountability for adherence to the code. Our Code of Ethics is available on our website at www.firstchoicebankca.com, under “Investor Relations” and the “Corporate Governance” tabs. We expect that any amendments to the code, or any waivers of its requirements, will be disclosed on our website, as well as any other means required by Nasdaq Stock Market rules.
Compensation, Nominating and Corporate Governance (“CNG”) Committee Interlocks and Insider Participation.None of the members of our CNG Committee are also officers or employees of the Company and/or Bank. In addition, none of our executive officers serves or has served as a member of the CNG Committee or other board committee performing equivalent functions of any entity that has one or more executive officers serving as one of our directors or on our CNG Committee.
Risk Management and Oversight.Our Board of Directors oversees our risk management process, which is a company-wide approach to risk management that is carried out by our management. Our full Board of Directors determines the appropriate risk for us generally, assesses the specific risks faced by us, and reviews the steps taken by management to manage those risks. While our full Board of Directors maintains the ultimate oversight responsibility for the risk management process, its committees oversee risk within their particular area of concern. In particular, our CNG Committee is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements, and the incentives created by the compensation awards it administers. In addition, recognizing the potential impact our operations may have on our environment and the communities we serve, our CNG Committee is also responsible for overseeing our balance of financial and operational priorities with environmental, social and governance issues affecting our communities pursuant to the guidelines outlined in our Environmental, Social and Corporate Governance Policy in order to manage our reputational risks associated therewith.Our Audit Committee is responsible for overseeing the management of risks associated with related party transactions.Our Directors Loan Committee is primarily responsible for credit and other risks arising in connection with our lending activities, which includes overseeing management committees that also address these risks. Our Asset/Liability Committee monitors our interest rate risk, with the goal of structuring our asset-liability composition to maximize net interest income while minimizing the adverse impact of changes in interest rates on net interest income and capital. Our Board of Directors monitors capital adequacy in relation to risk. Pursuant to our Board of Directors’ instruction, management regularly reports on applicable risks to the relevant committee or the full board, as appropriate, with additional review or reporting on risks conducted as needed or as requested by our Board of Directors and its committees.
Shareholder Communications with the Board. Shareholders wishing to communicate with the board of directors as
a whole, or with an individual director, may do so by e-mail from the Bank’s or the Company’s website, www.firstchoicebankca.com or by writing to the following address:
First Choice Bancorp
17785 Center Court Drive, Suite 750
Cerritos, CA 90703
Attention:Corporate Secretary
Any communications directed to the Corporate Secretary will be forwarded to the entire Board of Directors, unless the Chairman of the board reasonably believes communication with the entire Board of Directors is not appropriate or necessary or unless the communication is addressed solely to a specific committee or to an individual director.
Committees of the Board of Directors
During 2020, the Company’s Board of Directors held four (4) regular meetings and three (3) special meetings. All of the directors of the Company who served in 2020 attended at least 75% of the aggregate of (i) the total number of the
Company Board meetings which they were eligible to attend, and (ii) the total number of meetings held by all committees of the Board of Directors of the Company on which they served during 2020 and which they were eligible to attend.
In addition to meeting as a group to review the consolidated business, certain members of the Company’s Board of Directors also devote their time and talents to the following standing committees:
| | | | | | | | | | | | | | | | | | | | | | |
| Name | | Audit
Committee | | Compensation, Nominating and Corporate Governance Committee | | Director's Loan Committee | | |
| Robert M. Franko | | | | | | √ | | |
| James H. Gray | | √ | | | | √* | | |
| Peter H. Hui | | | | √ | | √ | | |
| Fred D. Jensen | | √ | | | | √ | | |
| Luis Maizel | | | | | | | | |
| Pravin C. Pranav | | √ | | √* | | | | |
| Lynn McKenzie-Tallerico | | √ | | | | √ | | |
| Phillip T. Thong | | √* | | √* | | √ | | |
*Denotes Chairperson. Both of Pravin C. Pranav and Phillip T. Thong are Co-Chairmen of the Compensation, Nominating and Corporate Governance Committee.
Audit Committee. The Audit Committee operates under a written charter, adopted by the Board of Directors, which is available on our website at www.firstchoicebankca.com under “Investor Relations” and the “Corporate Governance” tabs. The Audit Committee is a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. Each of the members of the Audit Committee is independent within the meaning of the rules and regulations of Nasdaq.
The purpose of the Audit Committee is to oversee and monitor (i) the integrity of our consolidated financial statements and the Company’s systems of internal accounting and financial controls; (ii) our compliance with applicable legal and regulatory requirements; (iii) our independent auditor qualifications and independence; and (iv) the performance of our third-party internal audit function and independent auditors. The Board of Directors has determined that Mr. Phillip Thong is an “audit committee financial expert” within the meaning of the rules and regulations of the SEC.(Please refer to Mr. Phillip Thong’s relevant experiences and background under his bio under the section “Information about our Directors”).
The Audit Committee has the sole authority to appoint or replace the Company’s independent auditors (including oversight of audit partner rotation). The Audit Committee is also directly responsible for the compensation and oversight of the work of the Company’s independent auditors. Our independent auditors report directly to the Audit Committee. Among other things, the Audit Committee reviews and discusses with management and the independent auditors our independent certified audits; reviews and discusses with management and the independent auditors our quarterly and annual financial statements; reviews the adequacy and effectiveness of our disclosure controls and procedures; approves all auditing and permitted non-auditing services performed by our independent auditors; reviews significant findings by our bank regulators and management’s response thereto; establishes procedures to anonymously and confidentially handle complaints we receive regarding auditing matters and accounting and internal accounting controls; and handles the confidential, anonymous submission to it by our employees of concerns regarding questions relating to accounting or auditing matters. The Audit Committee also has authority to retain independent legal, accounting and other advisors as the Audit Committee deems necessary or appropriate to carry out its duties.
During 2020, the Audit Committee held four (4) regular meetings and seven (7) special meeting(s).
Compensation, Nominating and Corporate Governance Committee ("CNG"). Our CNG committee currently consists of directors Pranav (Co-Chairperson), Thong (Co-Chairperson) and Hui.Our Board of Directors has evaluated the independence of the members of our CNG Committee and has affirmatively determined that all directors are “independent” under Nasdaq rules.The CNG Committee held four (4) regular meetings and four (4) special meeting(s) during 2020.
Our CNG Committee has adopted a written charter, which sets forth the committee’s duties and responsibilities. The current charter of the CNG Committee is available on our website at www.firstchoicebankca.com under “Investor Relations” and the “Corporate Governance” tabs.
The Board of Directors believes it is important for the CNG Committee to be composed entirely of non-employee directors who qualify as “independent” under the rules of the SEC and Nasdaq. Accordingly, the Board of Directors has determined that each of the members of the CNG Committee meets both the SEC’s and Nasdaq’s definitions of independence for purposes of service on the Company’s CNG Committee. The CNG Committee oversees actions relating to hiring, termination, salary and promotions; reviews and approves the personnel budget, benefit programs, incentive programs including stock options, bonuses, and related items; and verifies that management follows proper procedures to recognize adverse trends in turnover and to maintain adequate staffing levels. Further, the CNG Committee is responsible for the oversight of the executive compensation policy of the Company and reviews individual compensation packages of executive officers and all employee compensation plans generally to ensure that the compensation plans offered do not lead executive officers and employees to take unnecessary and excessive risks that could threaten the value of the Company while at the same time allow the Company to recruit and maintain experienced, talented bankers.
Our CNG Committee is responsible for discharging our Board of Directors’ responsibilities relating to the corporate governance of our organization. Among other things, the CNG Committee has responsibility for:
•recommending persons to be selected by our Board of Directors as nominees for election as directors or to fill any vacancies on the Company’s or the Bank’s Board of Directors;
•monitoring the functioning of our standing committees and recommending any changes, including the creation or elimination of any committee; developing, reviewing and monitoring compliance with our corporate governance guidelines;
•reviewing annually the composition of our Board of Directors as a whole and making recommendations; and
•handling such other matters that are specifically delegated to the Compensation, Nominating and Corporate Governance Committee by our Board of Directors from time to time.
Other specific duties and responsibilities of our CNG Committee include: retaining and terminating any outside search firm to identify director candidates; receiving communications from shareholders regarding any matters of concern regarding corporate governance matters; recommending to the Board the appropriate directors to serve on each of the Boards of Directors of the Company and the Bank and their respective committees; and reviewing and reassessing the adequacy of its Charter and its own performance on an annual basis. The procedures for nominating directors (including the process for shareholders' nomination of directors), other than by the Board of Directors itself, are set forth in the Company’s bylaws and reprinted in the Notice of Annual Meeting of Shareholders.
Directors' Loan Committee. The Directors’ Loan Committee is a committee consisting of independent directors Gray (Chairperson), Bhakta, Freifeld, Hui, Iino, McKenzie-Tallerico, Jensen and Thong, and certain Bank Officers including the Bank's President and CEO, Mr. Robert Franko; the Bank's EVP and Chief Credit Officer, Mr. Gene May; and the Bank's Executive Vice President and Deputy Chief Credit Officer, Mr. Michael Martin. The Directors' Loan Committee met twelve (12) times in 2020. The Directors' Loan Committee is responsible for establishing loan policies, approving certain credit facilities, setting credit approval limits and reviewing the Bank's loan portfolios and adequacy of the allowance for loan losses.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE
We are committed to excellence in our environmental, social and governance (“ESG”) practices, with our CNG Committee assuming primary oversight of our efforts in ESG matters. We continually assess our practices to ensure we are meeting or exceeding industry standards, as well as seeking opportunities to enhance the communities in which we operate through corporate giving, employee volunteering, workforce development, participating in the political and public policy process, and environmental sustainability programs. For 2020, our efforts have resulted in the following:
• Recognized on the American Banker's Best Banks to Work For list for three consecutive years
• Showcased in the Western Bankers Association's social impact awareness campaign for our community service mission
• Awarded the Bank Enterprise Award for ten (10) years in a row by the U.S. Department of the Treasury's Community Development Financial Institution (CDFI) Fund
We recognize that understanding our efforts to improve ESG practices is increasingly important to our shareholders, customers and employees and have included some highlights below to share our ongoing commitments in these areas.
Our Commitment to Anti-Corruption Compliance
As a financial institution, our reputation for integrity is central to the success of our business. By acting with integrity, we earn the respect and trust of our clients, shareholders, communities, and regulators. We strive to maintain that trust by promoting a corporate culture that encourages ethical business practices and compliance with applicable law in locations where we conduct business. With these values in mind, we have a zero tolerance for bribery and corruption. All employees are required to act in accordance with the Code of Ethics and Standards of Personal Conduct Policy (“Code of Ethics”) which prohibits the offering or giving anything of benefit (including any type of gift, gratuity, favor, service, loan, legacy, fee or compensation, or anything of monetary value) from anyone with the intent to be influenced or rewarded in connection with any business or transaction with our Company (including to any customers of the bank, or any public bank examiner). Our clients, shareholders, communities, and regulators continue to have faith in our Company because we have prudent lending and practices. Our staff are prohibited from engaging in any lending practice that is not solely based on a borrower’s creditworthiness and business relationship with the Company or representing or exercising authority on behalf of the Company in matters of credit recommendations for themselves, members of the staff’s family, or any individual or organization to which the staff member or his/her immediate family is indebted to or has a financial interest in. Additionally, in addition to adhering to strict compliance with all applicable federal and state political campaign laws, our employees are prohibited from making any direct or indirect contribution of funds or other property of the Company in connection with the election of a candidate for any political office or position. Our commitment to our reputation for integrity and ethical lending is transparent in our business practices. We keep accurate books, records, and accounts that relate to transactions of the bank, our clients, suppliers, and other partners. Our employees are encouraged to report any perceived unethical, immoral, or illegal business conducts through an anonymous reporting process. For any such reporting, the Company adheres to a strict non-retaliation policy. We engage in regular due diligence and oversight of our processes and procedures, with regular and annual review, including providing training and awareness to our employees on an annual basis. We value the trust that has been placed in our Company and therefore, any violation of the Code of Ethics may result in disciplinary action, including dismissal from employment. We complete due diligence screening for all of our suppliers, borrowers, and customers through our anti-money laundering program and “Know Your Customer” protocols.
Our Commitment to Human Rights
We understand that as a leading provider of financial services to the community, particularly to the smaller ethnic communities that we service, we must pursue corporate activities in a manner that is in harmony with societal expectations and protect human rights. We are committed to respecting the human rights of our employees through our Human Rights Policy, our Environmental, Social and Governance Policy, and our internal employment policies and practices, including providing a safe and healthy work environment for our employees, respecting their freedom of association, protecting the personal information of our employees and providing our employees with benefits which include health and family care. We also recognize that it is the responsibility of each client and supplier to define their own respective issues relating to human rights. However, in our client relationships, we seek to incorporate respect for human rights and demonstrate a commitment to fundamental principles of human rights through our own behavior. We also seek to engage with suppliers whose values and business principles are consistent with our own. Through our procurement process, our suppliers are to adhere to the Supplier Code of Conduct in respect to human rights of their employees and communities in which they operate.
Our Community Service Mission
As a relationship-focused community bank, we take our responsibility of being an accountable corporate citizen seriously. Core to this corporate ideology is the goal of giving back to our communities, through both active and direct community service and corporate giving.
We host an annual charity golf tournament to raise money for local charities. Although we made the difficult decision in 2020 to cancel our annual golf tournament due to COVID-19, we continued our efforts to raise donations online and were able to raise substantial contributions, with the amounts matched by the Much is Given Foundation, for a total of $60,000, all of which was distributed to 18 non-profit organizations (2020 recipients- Asian Pacific Community Fund, Blind Children’s Learning Center, C5 Los Angeles, Caterina's Club, Central City Neighborhood Partners, East West Players, The Entrepreneur Educational Center Inc., Food Finders, Haven Neighborhood Services, Joy Youth Services, Kitchens For Good, Milal- The American Wheat Mission, National Asian American Coalition, Orange County Community Housing Corporation, Pomona Valley Habitat for Humanity, Saddleback Church Anaheim Food Pantry, The Jacobs & Cushman San Diego Food Bank, and Weingart East Los Angeles YMCA).
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, such as the Jacobs & Cushman San Diego Food Bank, helping to sort, inspect and package donated food items from stores and local food drives for community members in need; the Ron Finley Project’s Annual Da FUNction Community Fun Fest, providing financial literacy through the LA Saves campaign, a program that seeks to motivate and encourage low- to moderate-income individuals and families to save money; and Junior Achievement of Southern California, offering financial literacy education for students in financially underserved areas within our community. We have also collaborated with the City of Los Angeles to provide financial education to the city’s residents. In addition, our enduring partnerships with Neighborhood Housing Services of Los Angeles County, Burbank Housing Corporation, San Gabriel Valley Habitat for Humanity, Habitat for Humanity - Pomona Valley, Orange County Community Housing Corporation and Joy Youth Services provide housing-related support, both directly and indirectly, in some of the most underserved areas in Southern California.
In addition to charitable donations and promoting civic participation through local volunteering, we provide scholarships to students from low-income families in the greater Los Angeles and Orange County areas, including students who volunteer with Milal Mission, a nonprofit organization in Santa Fe Springs dedicated to serving individuals with mental and/or physical disabilities and their families and local graduating high school students who are economically disadvantaged and have demonstrated academic excellence.
Socially Conscious Lending
As an SBA-designated “Preferred Lender,” we support local entrepreneurs by providing financial solutions to help them start, build and grow their businesses. Included among these entrepreneurs and businesses are “micro” businesses that often times are unable to source non-predatory financial assistance elsewhere. That is why we started the First Choice Bank Microloan program in 2018 and, since its inception, we have collaborated with many community-based organizations that support low-income and distressed communities to offer specially-designed financial products and solutions for these “micro” businesses and local entrepreneurs – including landscapers, small marketing/advertising companies, cosmetic sellers and other home-based businesses. While our Microloan program offers small, unsecured loans at below-market interest rates with no credit-score requirements, the non-profit organizations we collaborate with provide financial education and technical and business assistance to our borrowers. As of December 31, 2020, we have originated 93 micro loans through partnerships with the Pacific Asian Consortium in Employment (PACE), Impact Southern California CDC, Entrepreneur Educational Center, Inc., and National Asian American Coalition (NAAC), with 43 loans originated to businesses during the pandemic to provide much-needed assistance. In addition, we were recently highlighted in the FDIC publication “Investing in the Future of Mission-Driven Banks” for our Microloan Program and the much-needed support it provides to small and micro-businesses in our local communities.
We are also has examination authority over the Bank.
The Bankcommitted to direct investments in our communities, having invested a total of $2.0 million in Clearinghouse Community Development Financial Institution (“Clearinghouse CDFI”) in 2020. Clearinghouse CDFI is a full-service, commercial bank offeringdirect lender financing projects serving low-income and disadvantaged communities, including those in Southern California through its mission to provide economic opportunities and improves the quality of life for lower-income individuals and communities through innovative and affordable financing that is unavailable in the conventional market. Recognizing that the COVID-19 pandemic has had a broad rangedisproportionate impact on low-income and disadvantaged communities and the non-profit and community organizations that serve these communities, we sought to increase our investment in Clearinghouse CDFI from the initial $500,000 by $1.5 million in 2020 for an aggregate investment of retail$2.0 million at December 31, 2020. We made the additional investment in order to address the immediate needs and commercial banking productslong-term challenges for those communities most impacted by the COVID-19 pandemic and assist those who need help the most. Our investment in Clearinghouse CDFI attests to our continued commitment to benefit low-income, distressed, and communities of color facing hardships by helping Clearinghouse CDFI to continue to finance small businesses, community facilities, affordable housing, and other projects that create jobs and services in these underserved areas.
As a result of these efforts and other targeted lending programs that we have or participate in, our banking regulators have recognized us with the highest possible Community Reinvestment Act (“CRA”) rating – “Outstanding” during our most recent Community Reinvestment Act (“CRA”) examination by the Federal Reserve Bank of San Francisco (“FRB”) in 2019. This regulatory exam reviewed how we meet the credit needs of our communities, including low- and moderate-income (“LMI”) neighborhoods.
Environmental Sustainability
We strive to individuals, familiescontribute to global efforts to achieve environmental sustainability. In 2014, we relocated our headquarters location to a LEED (Leadership in Energy and businessesEnvironmental Design)-certified building, which was designed and built using strategies aimed at improving performance across all the metrics that matter most - energy savings, water
efficiency, CO2 emissions reduction, improved indoor environmental quality, and stewardship of resources and sensitivity to their impacts. In 2012, the building was awarded LEED certification by the U.S. Green Building Council and awarded an Energy Star label that same year for its operating efficiency. We have also put into place several green initiatives across all our locations over the last few years, including offering separate recycle bins for employees to dispose of their empty cans and bottles; distributing re-usable mugs, water bottles, soup/salad bowls and lunch totes to each of our employees for ongoing use; implementing several paperless technologies, including electronic options for document signings, filing and communication (i.e., email and e-fax), all of which have reduced the amount of paper we use. For example, through our use of DocuSign, a secure electronic signature software, DocuSign estimates that, during 2020 alone, we have preserved over 150,165 pounds of wood; 442,152 gallons of water; 352,470 pounds of carbon; and 24,402 pounds of waste, all of which have also contributed to a significant reduction in harmful green gas emissions. We also offer an electronic version of our Bank’s newsletter for our customers who also want to “go green” (FCB Newsletters). For the paper we do need to use, we engage a shredding service that offers secure recycling. We have also recently employed new audio and video conference technologies to allow our eleven locations throughout Southern California. Our market area is broadly defined as the seven Southern California Counties, composed of Los Angeles, Orange, San Diego, Ventura, Riverside, San Bernardino and Imperial Counties of California, with particular focus on Los Angeles, Orange and San Diego Counties. We operate eleven branches located incounties to “meet” without the cities of Alhambra, Anaheim, Carlsbad, Cerritos, Chula Vista, Downtown Los Angeles, Pasadena, Rowland Heights, San Diego and West Los Angeles, California, and one loan production office located in Manhattan Beach, California. We also maintain the brand name ProAmérica.harmful greenhouse gas emissions that accompany driving between locations.
We have received regulatory approvalIn addition to discontinue twoimplementing more environmentally-friendly practices within each of our branches: (i) our Little Tokyo branch located at 420 East Third Street, Suite 100, Los Angeles, California 90013, which will be consolidated with our 6thlocations, we offer and Figueroa branch, located at 888 W. 6th Street, Suite 200, Los Angeles, California 90017, and (ii) our San Diego branch located at 12730 High Bluff Drive, Suite 100, San Diego, California 92130, which will be consolidated with our Carlsbad branch located at 5857 Owens Avenue, Suite 106, Carlsbad, California 92008, and convertingpromote the San Diego branch to a loan center. The branch closings, consolidations and conversion are intended to become effective at the close of business on May 17, 2019.
We focus on offering banking products and services designed for 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 need the personalized and responsive service of a local bank with accessible, top-level decision makers who know the individual community. We target these potential customers who prefer to have a relationship with an institution where decisions are made locally and its employees know them and their business personally. Our deposit products consist primarily of demand, money market, and certificates of deposit. Our lending products consist primarily of construction and land development loans, commercial real estate loans, commercial and industrial loans, U.S. Small Business Administration ("SBA"Association's (“SBA”) loans,504 green loan program, which provides financing to small businesses looking to grow and consumer loans. expand their operations through replacing or retrofitting existing facilities to include technologies that reduce energy consumption or by upgrading existing equipment and processes to utilize renewable energy sources (solar, wind, turbine, thermal) or renewable fuel producers (biodiesel, ethanol).
Diversity, Equity and Inclusion
We also provide treasury management services, on-line banking, commercial credit cards (offered underbelieve that diversity encourages innovation and problem-solving, and our team's differences give us a private labeling arrangement with a correspondent bank) and other primarily business-oriented products.
competitive advantage. Our missiongoal is to increase economic opportunityfoster a culture in which those differences are valued and promote community development investments, job creation, business development, affordable housing, financial literacy and philanthropic support for the under-served populations in economically distressed communities in the arearespected. We are proud of our operationscultural- and to generally serve the business needs of those doing business in Southern California. Whilegender-diverse workforce, with a majority of the membersour 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 boardworkforce and 43% of our executive management team are made up of women. In 2018 and 2020, we appointed female directors 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 members of a minority community,our best asset, and investing in our people will help them and the Company to grow and thrive.
Responses to the Coronavirus (COVID-19) Impact
As the Novel Coronavirus disease (COVID-19) continues to impact communities across the country and the broader economy, we are committedmaking the health and well-being of our employees, customers and the communities we serve our top priority. To ensure the safety and well-being of our employees during COVID-19, we have invested in technology and products that allow for the majority of our employees to servingtelecommute and work from home. We conduct all communitiesof our business meetings, including our 2020 annual shareholder’s meeting, virtually so that there are effective social distancing measures in place to prevent the spread of COVID-19. For employees who are in the office, we have implemented safety measures in the work location that comply with recommendations by the Centers for Disease Control and Prevention and other government entities, including providing personal protective equipment (e.g., masks, hand sanitizer, gloves, etc.) to all of our employees, as well as installing protective shields at teller desks in our Southern California market area.branches and implementing enhanced cleaning and sanitizing practices at all locations. To enhance safety measures and for effective contact tracing efforts, before employees and visitors can gain access to our facilities, they are required to “check-in” through an automated kiosk and complete a screening questionnaire to help us verify that employees and visitors are not at risk of having COVID-19 and compromising the health and safety of our employees. We provide supportare also taking steps to respond to the communitiesneeds of individual and business customers directly affected, while continuing to execute our own business continuity plans under challenging conditions. In this regard, we leveraged our political contacts to campaign for fundamental changes to existing bank regulations and accounting standards to permit banks to restructure loans, including providing temporary deferments of both interest and principal, without
triggering “Troubled Debt Restructuring” standards or characterizing these loans as non-performing assets. As these changes came into effect, we instituted a program that provided a three-month deferment for all qualifying loans so long as the loans were not thirty-days past due at the time of the deferment. In addition, we serveare actively participating in the form of financial grants and service hoursSmall Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) to many local non-profit organizations.
Since its formationprovide temporary loans to qualifying small businesses so that they can retain their employees through this difficult period. Furthermore, last year, we participated in 2005, the Bank has operatedMain Street Lending Program (“Main Street Program”) as a minority depository institution (“MDI”), which is definedadministered by the FDIC and the Federal Reserve as any depository institution where 51% or moreBank of the stock is owned by minority individuals. We started as a bank focused on providing quality banking and opportunities for first generation Asian immigrants to the United States and we have two branches in the San Gabriel community, which is predominately an Asian-
American community. Over time, we have expanded from serving our founding communities to serving the broader communities prevalent in Southern California, a diverse mixture of many ethnic groups. During 2018, we acquired PCB, a community bank that shared our values, goals, culture and mission. PCB was originally organized by members of the Japanese-American community in Southern California. Over time, PCB expanded its operations by acquiring Vibra Bank in Chula Vista, California, and ProAmerica Bank in downtown Los Angeles, both of which have long histories of serving the Mexican-American and Hispanic-American population in Southern California. We expect the addition of PCB will increase our ability to reach minority and under-served communities, especially in downtown Los Angeles and San Diego markets.
An MDI is eligible to receive training, technical assistance and review, and assistance regarding the implementation of proposed new deposit taking and lending programs, as well as with respect to the adoption of applicable policies and procedures governing such programs. The MDI designation has been historically beneficial to us, as the FDIC has reviewed and assisted with the implementation of our deposit and lending programs, and we continue to use the MDI program for technical assistance. Due to our growth and size, and following our conversion to a member bank on October 1, 2018, we anticipate that the Federal Reserve will provide technical assistance reviewing our existing and proposed lending and deposit programs. Accordingly, we believe any change in our MDI designation will not adversely affect our financial condition, results of operations or business because we have already benefited greatly from our MDI designation and anticipate leveraging those historic benefits into any new deposit and lending programs we may develop.
In addition, since 2010, our Bank was certified as a Community Development Financial Institution (“CDFI”). A CDFI certification is the U.S. Department of the Treasury’s recognition of specialized financial institutions serving low-income communities. We are qualified to apply for technical assistance and financial assistance awards, as well as training provided by the CDFI Fund. Since 2011, we have received 7 consecutive Business Enterprise Awards totaling an aggregate of $2.6 million from the CDFI Fund for our continuing efforts to increase the lending and service activities within the economically distressed communities that we serve. We have invested the proceeds from the Business Enterprise Awards primarily in loans to small businesses in our local communities including SBA loans and micro-loans, a programBoston, to provide startup funds to entrepreneurs starting small businesses.
Strategy
Our strategic objective is to continue growing as a premier community-based commercial bank, focused on offering business-oriented products, financial solutions, and relationship banking services to customers located throughout the Southern California area, principally Los Angeles, Orange County, and San Diego counties. We offer a wide variety of deposit, loan and other financial servicesloans to small- and medium-sized businesses impacted by COVID-19 that may not have qualified for the SBA PPP program. During the program’s duration, we funded a total of 32 Main Street Program loans and, out of 178 banks who participated in the Main Street Program, we ranked 3rd in California and 20th in the nation in funding loans that were essential to the survival of businesses during COVID-19. Additionally, we provided emergency donations totaling $10,000 to several non-profit organizations in Los Angeles, Orange, and San Diego counties helping to business ownersfight hunger during the growing COVID-19 pandemic. The five charitable organizations, each receiving a $2,000 donation, include Food Finders (www.foodfinders.org) and entrepreneurs,Project Angel Food (www.angelfood.org) in Los Angeles County; Second Harvest Food Bank (www.feedoc.org) and Caterina’s Club (https://caterinasclub.org) in Orange County; and Kitchens For Good (https://kitchensforgood.org/) in San Diego County. We continue to find opportunities to make a difference for our clients and the communities impacted by COVID-19.
DIRECTOR COMPENSATION
The CNG Committee evaluates the director compensation and recommends to the professional community,Board compensation for non-employee directors and the Board approves the director compensation for each fiscal year. The Company reimburses its directors for reasonable travel, food, accommodation and other business-related expenses incurred in relation to their service on the Board and committees.
During 2020, compensation payable to our directors included (a) a quarterly cash retainer of $3,000; (b) $2,000 for each Company Board meeting attended in person or via phone; (c) $700 for each Bank Board meeting attended in person or via phone; and (d) $1,000 per committee meeting attended in person or via phone. In addition, the Chairman of the Board received an additional $1,000 per Board meeting and each committee chairperson received an additional $500 per committee meeting. In addition to cash compensation, each of the directors (other than Mr. Franko, our President, CEO and CFO), received shares of restricted stock in such amounts relative to the other directors in proportion to the cash compensation paid to the other directors during 2020.An aggregate of 17,512 shares of restricted stock were awarded in February 2020 to the Company’s and the Bank’s Directors with a one-year vesting term for service during 2019. The aggregate grant date fair value of such awards totaled $440 thousand based on the closing price of the Company’s common stock of $25.10 per share on the grant date of February 4, 2020.
The following table sets forth the compensation to each of our non-employee directors for services during 2020. Mr. Franko who served as a director during 2020 received no additional compensation for his service as a director.
| | | | | | | | | | | | | | | | | | | | |
| Name | | Fees Earned or Paid in Cash | | Stock Awards (1) | | Total |
| James H. Gray | | $ | 56,800 | | | $ | 57,800 | | | $ | 114,600 | |
| Peter H. Hui | | 52,000 | | | 52,900 | | | 104,900 | |
| Fred D. Jensen | | 50,800 | | | 51,680 | | | 102,480 | |
| Luis Maizel | | 27,000 | | | 27,480 | | | 54,480 | |
| Pravin C. Pranav | | 48,800 | | | 49,660 | | | 98,460 | |
| Lynn McKenzie-Tallerico | | 42,800 | | | 43,560 | | | 86,360 | |
| Phillip T. Thong | | 64,800 | | | 65,940 | | | 130,740 | |
(1) Amounts shown are based on the market value of the underlying stock on the date of grant. Generally, equity compensation to our Directors for services in a particular year are paid in February of the immediately following year. Stock awards indicated in this column include restricted stock grants to the Directors in February 2021 for their service in 2020.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis (“CD&A”) explains our executive compensation program for our named executive officers (“NEOs”) listed below. The CD&A also describes the process followed by the CNG Committee for making pay decisions, as well as its rationale for specific decisions related to 2020.
The following table sets forth the names, age, and position as of April 9, 2021 of the Company's NEOs. None of the executive officers were selected pursuant to any arrangement or understanding other than with the directors and executive officers of the Company acting within their capacities as such.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Age | | Position | | Principal Occupation for Past 10 Years | | Year First Appointed |
| Robert M. Franko | | 73 | | President and CEO, First Choice Bancorp and First Choice Bank; CFO, First Choice Bancorp | | Banker | | 2013 |
| Khoi D. Dang | | 47 | | EVP, General Counsel, First Choice Bancorp and First Choice Bank | | Lawyer/Banker | | 2019 |
| Gene May | | 69 | | EVP, Chief Credit Officer, First Choice Bank | | Banker | | 2011 |
| Yolanda Su | | 58 | | EVP, Chief Operations Administrator, First Choice Bank | | Banker | | 2005 |
Executive Summary
Summary and Corporate Governance
The CNG Committee is composed entirely of independent directors and is responsible for reviewing and approving the Company’s overall compensation programs, plans and awards, including attorneys, certified public accountants, financial advisorsapproving salaries, awarding bonuses and healthcare providersgranting stock-based compensation to the NEOs and for formulating, implementing and administering the Company’s short-term and long-term incentive plans and other stock or stock-based plans. The CNG Committee establishes the factors and criteria upon which compensation to the NEOs is based and how such compensation relates to the Company’s performance, general compensation policies, competitive realities and regulatory requirements. The CNG Committee also provides recommendations regarding director compensation programs. The CNG Committee also reviews the Company’s compensation plans for risk.
2020 Financial Highlights
•Net income of $29.0 million, up 4.0% over 2019
•Diluted EPS of $2.47 per share, up 4.7% over 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 totaling $1.00 per share
2020 Executive Compensation Highlights
As part of our commitment to continuously evaluate and improve the design of our executive compensation program with a view toward further aligning compensation with performance, in the third quarter of 2019, in consultation with our compensation consultant, the CNG Committee made fundamental modifications to the compensation structure for our NEOs with the following primary objectives:
•Strengthen the alignment of executive pay with our business and leadership strategies
•Retain the key executive talent necessary to build on our past success and execute on our strategic objectives for the future,
•Emphasize alignment of pay and performance through the use of prospective, measurable performance goals
•Balance the need to encourage short-term profitability with the imperative to deliver long-term, sustainable results
•Remain appropriately competitive as the Company continues to increase shareholder value through organic growth and execution of other selective growth opportunities
These modifications were effective for the 2020 year and resulted in all incentive compensation for that year being performance based. Specific actions and changes are discussed below.
Compensation Peer Group: In light of the scale and complexity of the Company following the Pacific Commerce Bank acquisition in 2018 and recent organic growth, and to high-net worth individuals. Our value propositionbetter inform the CNG Committee’s deliberations and decisions regarding our executive compensation program for 2020, the CNG Committee worked with its independent consultant to develop a new compensation peer group.
Adoption of Management Incentive Plan ("MIP"): On February 20, 2020, the Company's CNG Committee adopted the management incentive plan which is designed to provide a premier business banking experience through relationship banking, depthdeliver both cash and equity-based incentives contingent on the achievement of expertise, resourcespre-established performance goals which the CNG Committee believed would drive superior long-term performance for the Company and products while maintaining disciplined credit underwriting standardsimprove the alignment of executive pay with performance. Under the management incentive plan, more than 50% of Mr. Franko’s target total direct compensation for 2020 was performance based. For the other NEOs, more than 50% of target total direct compensation was directly tied to the achievement of pre-established goals.
Summary of Executive Compensation Practices
For 2020, our executive compensation program includes the following practices and continuing our focus on our operational efficiency. We focus on originating high-quality loanspolicies, which we believe promote sound compensation governance and growing our deposit base through our relationship-based business lending. We pride ourselves on being “Firstare in Speed, Service and Solutions.” Our objective is to serve most segments of the business community within our market area. The key componentsbest interests of our strategyshareholders:
| | | | | | | | | | | | | | |
| What we do | | | What we don't do |
| √ | Pay for performance and allocate individual awards based on actual results and how results were achieved | | × | No employment arrangements that provide for guaranteed salary increases, non-performance based bonuses or equity compensation for executive officers |
| √ | Restricted stock awards that are aligned with the long-term creation of shareholder value | | × | No severance benefits to our executive officer exceeding three times base salary and bonus
|
| √ | Clawback features are incorporated into our executive employment agreements | | × | No excise tax gross-ups in any executive arrangements |
| √ | Use of multiple performance measure and caps on potential incentive payments | | × | No repricing, buyout or exchange of underwater stock options |
| √ | Annual risk assessment of executive incentive compensation programs | | × | No excessive perquisites |
Compensation Philosophy
Our compensation programs are designed, among other things, to emphasize the link between compensation and business planperformance, taking into account competitive compensation levels in similar banks and in the markets where we compete for continued successtalent, as well as performance by the executive, their particular skills, background and future growthexpertise. The policies and underlying philosophy governing our compensation programs include the following:
customer service, including•Aligning pay with performance. We provide a high levelcompetitive salary to our NEO’s based, in part, on market competitive salary levels of personal servicesimilar positions at peer banks, combined with incentive opportunities that create “leveraged” compensation, providing the opportunity for market to above-market total compensation for outstanding company and responsiveness;individual performance. A meaningful portion of annual executive compensation is related to factors that can affect our financial performance, and is designed to incentivize and reward performance that is expected to drive shareholder value.
relationship banking by experts in their fields including private banking, commercial banking,
•Creating shareholder value through incentive opportunities. The CNG Committee believes that our long-term success and real estate;
banking and financial service products for businesses, professionals and high net worth individuals, including products and services similar to those offered by larger banks;
leveraging our existing infrastructure with improvements in technology and processes to gain efficiencies to support a larger volume of business;
an experienced management team with roots in our market areas; and
strong community commitment.
We believe that the investments in experienced relationship management will establish an infrastructure to support our future.
Marketing Strategy
To fulfill our mission, we target the marketing of our products and services toward the small- to middle-market segments of the business community. The small- to middle- business market, generally defined as companies with revenues of less than $50 million, is our primary commercial banking target market. At December 31, 2018, our capital allowed us to
provide unsecured lending (defined as a loan not secured by a first deed of trust on real estate or cash collateral) and secured lending (defined as a loan secured by a first deed of trust on real estate or cash collateral) to a single obligor up to a maximum of $29 million and $48 million, respectively. However, we generally limit our lending commitments to a lower level, currently set at $15 million (the “house limit”), unless the relationship is specifically approved by our Directors’ Loan Committee. Our relationship managers, directors and executive officers are uniquely qualified to support its marketing plan, having deep roots in many of the communities within our target market.
Our directors and officers are actively involved in local community groups and service organizations. Accordingly, our marketing strategy anticipates our ability to respond quickly to customer needs and changes in the market place. Because we are locally owned and operated, with a management team and board of directors charged with monitoring the financial needs of our communities, 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 the retention of 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 state of the art remote deposit 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 offer a diversified mix of business loans primarily encompassing the following loan products: (i) construction and land development loans; (ii) real estate loans for owner occupied and non-owner occupied commercial property ("CRE"); (iii) commercial and industrial ("C&I") loans; (iv) SBA loans, guaranteed in part by the U.S. Government and (v) consumer loans. We occasionally offer lines of credit, secured by a lien on real estate owned by our clients, which may include the primary personal residence of our clients; 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 a history of successful track records who typically have worked with our employees here or at other banks and have a good record of repayment. Although we do not typically engage in residential mortgage lending, we may acquire, from time to time, for our own investment single family residential loans from other mortgage loan originators.
Construction and Land Development Loans. We originate and underwrite interim land and construction loans for commercial and speculative residential purposes. 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. We do not engage in any tract construction lending. Land and construction loans are generally limited to experienced and financially supportive sponsorship, 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 a loan-to-cost ratios and loan-to-value ratios based on an "as completed appraisal". The project financed must be supported by current appraisals and other relevant information. These loans are typically Prime-based and have maturities of less than 36 months. Our loan-to-cost policy limits are typically 70% and loan-to-value limits are typically less than 65% based upon an as-completed basis for construction. The following table presents the components of our construction and land development portfolio as of December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | |
| | | December 31, 2018 | | December 31, 2017 |
| | | Amount | | % of Total | | Amount | | % of Total |
| | | (in thousands) | | (in thousands) |
| Residential construction (single family 1-4 units) | | $ | 95,906 |
| | 52.07 | % | | $ | 65,944 |
| | 57.13 | % |
| Commercial real estate construction | | 68,173 |
| | 37.02 | % | | 30,903 |
| | 26.77 | % |
| Land acquisition & development | | 20,098 |
| | 10.91 | % | | 18,580 |
| | 16.10 | % |
| Total construction and land development loans | | $ | 184,177 |
| | 100.00 | % | | $ | 115,427 |
| | 100.00 | % |
Real Estate Loans - Residential. From time to time we purchase residential real estate loans within our market place that have been originated by unaffiliated third parties. We take a comprehensive and conservative approach to mortgage underwriting. These loans are carefully selected and also audited by third parties for compliance with all applicable mortgage regulations. The typical loan is a five-year hybrid adjustable mortgage with a current start rate in the range of 4% to 7%, which re-prices after five years to the one-year LIBOR plus a specified margin. As of as December 31, 2018, our residential real estate portfolio had an average loan-to-value of the portfolio of 51%. At December 31, 2018 and 2017, we had $57.4 million and $63.4 million of single-family residential real estate loans, representing 4.6% and 8.5% of our total loans held for investment portfolio. There were no non-performing single-family residential real estate loans as of December 31, 2018 and 2017.
Commercial Real Estate Loans. We originate and underwrite commercial property and occasionally multi-family loans, principally within our service areas. These loans are originated by 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 of 75% and minimum debt service requirements. 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 restaurants), mixed-use residential and commercial, retail centers, commercial land and multi-family properties.
At December 31, 2018 and 2017, CRE loans totaled $581.2 million and $304.6 million, representing 46.5% and 41.0% of our total loans held for investment portfolio. This includes $401.7 million and $251.8 million of CRE loans secured by non-owner occupied properties and $179.5 million and $52.8 million of CRE loans secured by owner occupied properties at December 31, 2018 and 2017. There were no non-performing CRE loans as of December 31, 2018 and 2017.
Commercial and Industrial Loans. As of December 31, 2018 and 2017, commercial and industrial loans amounted to $281.7 million and $169.2 million, representing 22.5% and 22.8% of our total loans held for investment portfolio and are generally made to businesses located in the Southern California region and surrounding communities whose borrowing needs are generally $10.0 million or less. We have non-performing loans of $89 thousand and $634 thousand as of December 31, 2018 and 2017. Our commercial and industrial loans may be secured (meaning secured by a first lien deed of trust on real estate) or unsecured (meaning not secured by a first lien deed of trust on real estate, although usually secured by a perfected commercial lien on non-real estate assets, such as accounts receivable and inventory). The 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.
We also make loans that provide funding for executive retirement benefit programs. These loans are frequently secured to at least 90% and often well above that level by cash equivalent collateral, typically the cash surrenderconsistently increase shareholder value also known as CSV, of one or more life insurance policies. We manage these loans individually against our current house limit of $15 million and legal lending limit of 15% of total risk-based capital. Our Board of Directors also receives quarterly reports of the level of concentration of any single insurance company’s CSV as collateral. 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 a reduction in the advance rate of the loan to a lower loan to value.
Small Business Administration (SBA) Loans. We are designated as a Preferred Lender under the SBA Preferred Lender Program. We offer both SBA 7(a) loans, generally at variable rates, and SBA 504 loans, generally with an initial fixed rate term of 5 to 7 years. We originate SBA 7(a) loans with the intention of selling the guaranteed portions as soon as the loan is fully funded and the guaranteed portion may be sold. Most SBA 7(a) loans have a 75% guarantee, although the guaranteed amount can vary from 50% or less to as much as 90%. While the SBA 504 loans are not guaranteed by the SBA (there is a junior lien loan that is guaranteed by the SBA and funded separately by the SBA), SBA 504 loans typically have a low loan-to-value ratio of 65% or less, and there is usually a relatively liquid secondary market where these loans can be sold. Our SBA loans are typically made to small-sized manufacturing companies, wholesalers and retailers, hotels/motels, restaurants and other service businesses for the purpose of purchasing real estate, refinancing real estate, and meeting working capital or business expansion needs. SBA loans can have any maturity 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, as well as personal guarantees. We generally sell the guaranteed portion of the SBA 7(a) and 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, as separately discussed. The following table presents the components of our SBA portfolio by program at December 31, 2018 and 2017:
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| | | | | | | | | | | | | | |
| | | December 31, 2018 | | December 31, 2017 |
| | | Amount | | % of Total | | Amount | | % of Total |
| | | (in thousands) | | (in thousands) |
| SBA 504 | | $ | 46,303 |
| | 31.61 | % | | $ | 36,020 |
| | 40.61 | % |
| SBA 7(a) | | 100,159 |
| | 68.39 | % | | 52,668 |
| | 59.39 | % |
| Total SBA loans | | $ | 146,462 |
| | 100.00 | % | | $ | 88,688 |
| | 100.00 | % |
At December 31, 2018, our SBA portfolio totaled $146.5 million of which $30.2 million is guaranteed by the SBA and $116.2 million is unguaranteed. Of the $116.2 million unguaranteed SBA portfolio, $31.6 million is secured by industrial/warehouse properties; $22.7 million by hospitality; $47.0 million by other real estate types, and $15.0 million is unsecured or secured by business assets. At December 31, 2017, our SBA portfolio totaled $88.7 million of which
$10.9 million is guaranteed by the SBA and $77.8 million is unguaranteed. Of the $77.8 million unguaranteed SBA portfolio,
$27.8 million is secured by industrial/warehouse properties; $24.4 million by hospitality; $20.9 million by other real estate types, and $4.8 million is unsecured or secured by business assets. Non-performing SBA loans total $1.6 million and
$1.1 million at December 31, 2018 and 2017.
Consumer Loans. We do not make a practice of offering personal loans. When offered to relationship clients, these personal loans may be unsecured (meaning not secured by a first lien deed of trust on real estate), but typically they would be secured by collateral, including deposit accounts or cash-equivalent assets, such as the cash surrender value of a life insurance policy.
Deposit Products
As a full-service commercial bank, we focus deposit generation on transactional accounts, encompassing noninterest-bearing demand, interest-bearing demand, and money market accounts. We also offer time certificates of deposit and savings accounts. We market deposits by offering the convenience of state of the art “online banking,” “remote deposit capture” product, and mobile banking technology, which allows check deposits to be deposited from a mobile device. We also offer customers “e-statements” which allows customers to receive statements electronically, which is more convenient and secure, in addition to reducing paper and being environmentally-friendly. To assist in our marketing efforts, we hire seasoned business development officers and focus on generating noninterest-bearing demand deposits.
Ourits ability to gather deposits, particularly low-cost core deposits, is an important aspect of our business franchise and a significant driver of franchise value as a cost efficient and stable source of funding are important to support our growth. We understand that local branding and customer loyalty are essential for business success. We have successfully generated non-maturity deposits to individual and business customers in our market area to reduce reliance on time deposits. At December 31, 2018, we had total deposits of $1.25 billion, including noninterest-bearing demand deposits of
$546.7 million, or 44% of total deposits. This compares to $772.7 million of total deposits, including $235.6 million of noninterest-bearing demand deposits, or 30% of total deposits, at December 31, 2017. Our total deposit cost at December 31, 2018 was 0.82%; this compares to a total deposit cost of 0.77% at December 31, 2017.
As of December 31, 2018, our 10 largest deposit relationships totaled $315.5 million, or 25% of total deposits; this compares to $230.3 million, or 30% of total deposits, at December 31, 2017. In addition, deposit relationships with aggregate balances over $2 million, including our 10 largest depositors, total $584.9 million, represent 47% of total deposits, and relate to 69 clients at December 31, 2018.
For customers requiring full FDIC insurance on certificates of deposit in excess of $250,000, we occasionally offer the CDARS® program which allows us to place the time certificates of deposit with other participating banks to maximize the customers’ FDIC insurance. In December 2018, the FDIC issued a final rule, indicating that under Section 202 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, well-capitalized and well-rated institutions are not required to treat reciprocal deposits as brokered deposits up to the lesser of 20% of its total liabilities or $5 billion. As of December 31, 2018, our reciprocal CDARS® deposits totaled $21.7 million, representing 1.6% of total liabilities.
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
protection against decreasing deposit cost if there is a fall in the market interest rates. Short term brokered deposits may be used based on market conditions and other considerations, for example when the cost of such funds is lower than other wholesale funding sources. Total brokered time deposits as of December 31, 2018 and 2017 were $53.4 million and $52.6 million, representing 4.3% and 6.8% of total deposits.
With a satisfactory rating under the Community Reinvestment Act, also known as CRA, we are qualified to participate in the Time Deposit Program administered by the California State Treasurer. By accessing these stable funds through the Time Deposit Program, we can provide financial services and lending products to local businesses in the communities we serve to stimulate local economies. At December 31, 2018, time deposits from the State of California totaled $35.1 million. Such deposits are included in our aforementioned 10 largest deposits. In connection with our participation in this program, the Bank purchased $38.5 million in letters of credit issued by FHLB as collateral at December 31, 2018.
Treasury Management Services. We offer treasury management products to our customers which are designed to provide a high level of specialized support to the operations of business customers. This is especially important for customers such as 1031 Exchange companies, property management companies, developers, attorneys, accountants, manufacturers and real estate contractors that have specialized deposit service needs. Treasury management has four basic functions: deposit handling, funds concentration, funds disbursement and information reporting. The treasury management services we offer include automatic transfer (sweep) of funds between accounts or lines of credit, automated clearing house services (e.g., direct deposit, direct debit and electronic cash concentration and disbursement), lockbox, zero balance accounts, current and prior day transaction reporting, bank statement retrieval, reconciliation services, fraud prevention tools and account analysis. We emphasize responsive, courteous customer service and we send fully-trained staff to our customers’ businesses to set-up their services, so they may fully benefit from the treasury management services we offer.
Online Banking. We are committed to technology and e-commerce in its broadest terms and as it directly applies to financial service providers. To best serve our customers’ needs, we offer complete banking services online. Although our customers are always able to discuss specific banking needs with a knowledgeable service representative available in our offices, we offer our customers the option to conduct banking activities from our secure website – www.firstchoicebankca.com. Our website is designed to be user-friendly and expedites customer transactions. There are multiple types of online banking services for consumer, small business and for commercial customers. All online banking systems allow our customers the ability to conveniently access their accounts 7-days-a-week, 24-hours-a-day to obtain loan information and complete many common transactions including electronic bill pay, data download, transfer funds, reorder checks, view images of the front and back of canceled checks, view deposits, view their account statements, change addresses and issue stop payment requests. The commercial online banking product provides additional treasury management features, which allow customers to set up varied levels of security and assign access to a number of employees, with different levels of access/security for each person. Commercial online customers can view their accounts online, transfer funds from one of their accounts to another, 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/or all of their issued checks daily and then provides them with the ability to pay or reject any item.
We are sensitive to the privacy and security concerns of our customers, especially where internet banking is concerned. Accordingly, we have put in place various procedures designed to maintain appropriate security levels. The vendors who support our internet banking platform work with us to enhance the security of these services. Our responsibility to our customers is to select appropriate hardware and software in the context of the right vendor relationships to provide the best assurance we can to our customers that, subject to applicable law, we can protect their privacy and finances.
Mobile Banking. We offer mobile banking service to consumer and business customers. The 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. For the convenience of and to better serve our customers, we offer qualified commercial customers a state of the art remote deposit capture (“RDC”) product that allows businesses to process check deposits on a daily basis from the convenience of their location. We believe RDC, as well as the other customer convenience services that we offer, allows us to offer a marketable, different and competitive package of services to our business customers. At December 31, 2018, we had approximately 242 customers utilizing RDC.
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 (“ATM’s”) using their Visa® EMV Debit Cards;
bank-by-mail, courier services, commercial cash vault services, domestic and international wires, credit cards and international services. We reimburse customers for surcharges for any transactions conducted on another bank’s ATM’s.
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 Small Business Administration 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 skilled executives, particularly retaining and incentivizing those currently in place who have proven their value. Our compensation strategy encourages equity-based compensation to align the interests of our senior managementshareholders and experienced relationship managers.our executives, as well as performance incentive awards that are designed to reward performance that we expect will result in increased shareholder value.
Legal Proceedings
In the normal course of business, we are named or threatened•Attracting and retaining highly-experienced executives. We strive to employ exceptional performers with experience not typically found in peer community banks. We expect our executives to be named as a defendant in various lawsuits. Management, following consultation with legal counsel, does not expectresponsible for the ultimate dispositiondevelopment and success of any orthe organization, client development and shareholder relationships. Our executives may also hold multiple positions and responsibilities, which increases their value to the Company and may make comparisons to peers less meaningful.
•Mitigating risk. We use a combination of these mattersshort-term and long-term compensation. The latter is impacted by our performance and mitigates the benefit to have a material adverse effect on our business. However, givenexecutives from exposing us to short-term risks, as the nature, scope and complexityvalue of the extensive legal and regulatory landscape applicable tolong-term compensation, particularly equity grants, is substantially impacted by our business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security and anti-money laundering and anti-terrorism laws), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk.long-term performance.
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 modifiedOur philosophy is supported by the Jumpstart Our Business Startups Actfollowing principle elements of 2012 (the “JOBS Act”). An emerging growth company may take advantage of reduced reporting requirements and is relieved of 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 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 aboutpay in our executive compensation arrangements;program:
| | | | | | | | | | | | | | |
| Pay Element | | Form | | Purpose |
| Base Salary | | Cash
(Fixed) | | Provide a competitive level of pay that reflects the executive’s experience, role and responsibilities |
| Management Incentive Plan | | Cash and Equity
(Variable) | | Annual reward achievement of corporate performance goals for the most recently-completed fiscal year; equity has one-year vesting period |
| Long-Term Incentives | | Equity
(Variable) | | Drive financial performance that links to shareholder value creation and longer-term business strategies |
NEOs are also eligible for other benefits, including salary continuation benefits and a qualified 401(k) Plan that provides participants with the opportunity to defer a portion of their compensation, up to tax code limitations, and may entitle NEOs, along with all of our employees, to receive a company matching contribution. Modest ancillary benefits are also provided to executives by the Company. See below for more information.
we are not required to give our shareholders non-binding advisory votes on
The Decision-Making Process
The Role of the CNG Committee. The CNG Committee oversees the executive compensation or golden parachute arrangements.
We have elected to take advantageprogram for our NEOs and evaluates the performance of the reduced disclosure requirements relatingNEOs. The CNG Committee works with its independent consultant and management to examine the effectiveness of the Company’s executive compensation program throughout the year. The CNG Committee reviews and evaluates the numberapproved performance goals and objectives of yearsthe Company’s executive compensation plans, the NEO’s individual performance goals, market competitive data, trends, and best practices, provided to the CNG Committee by our internal human resources department or by the Company’s outside independent compensation consultant. The CNG Committee will review and evaluate all such information and will make recommendations to the Board of financial information presented,Directors concerning the NEO’s compensation level based on this evaluation.
Details of the CNG Committee’s authority and responsibilities are specified in the future weCNG Committee’s charter, which may take advantagebe accessed at our website, https://www.firstchoicebankca.com/ and clicking “Investor Relations.”
The CNG Committee makes recommendations to the Board regarding the structure of any orincentive-based compensation plans and equity-based plans. Operating within the plans approved by the Board, the CNG Committee makes all of thesefinal compensation and equity award decisions regarding our NEOs.
exemptions for so long as we remain an emerging growth company. We will remain an emerging growth company until the earliest of (i) the endRole of the fiscal yearCEO. The CEO provides recommendations to the CNG Committee on compensation for NEOs other than himself. The CEO does not provide recommendations concerning his own compensation, nor is he present during which we have total annual gross revenues of $1.0 billion or more, (ii) the enddiscussions of the fiscal year followingCNG Committee about his compensation.
Use of Independent Consultants and Advisors. The CNG Committee engaged the fifth anniversaryservices of McLagan, a part of Aon plc (“McLagan”) as its outside independent compensation consultant in September 2019 to provide advisory guidance with respect to the 2020 compensation of our NEOs. McLagan advises the CNG Committee on a range of executive and director compensation matters including plan design, competitive market assessments, trends, and best practices. McLagan does not provide any other services to the Company. In its role as the compensation consultant to the CNG Committee, McLagan provided advice regarding:
•Long-term incentive considerations to help assure retention of key executives;
•Creation of the completionmanagement incentive plan;
•2020 cash and equity incentive plan performance goals;
•The selection of our initial public offering which would be December 31, 2023, (iii) the datepeer group used to assess the executive compensation program;
•The compensation of the CEO and other NEOs;
•General compensation program design;
•The design of a special, one-time equity grant for long-term NEOs designed to help assure retention of key executives;
•The impact of regulatory, tax, and legislative changes on which we have, during the previous three-year period, issued more than $1.0 billionCompany’s executive compensation program;
•Executive compensation trends and best practices; and
•The compensation practices of competitors.
During its engagement, McLagan met regularly with the CNG Committee in non-convertible debt, and (iv)executive session without management. McLagan may work directly with management on behalf of the date on which we are deemed to be a “large accelerated filer”CNG Committee, but this work is always under the Securities Exchange Actcontrol and supervision of 1934.the CNG Committee. After the CNG Committee’s review of applicable rules for independence, the CNG Committee concluded that the advice it receives from McLagan is objective and does not raise any conflict of interest.
In additionThe Role of Benchmarking and Market Data. The companies comprising the comparator peer group are reviewed and selected by the CNG Committee to ensure relevance, with data and recommendations provided to the relief described above,CNG Committee by McLagan. The companies comprising the JOBS Act provided an optional extended transition period for complying with new or revised accounting standards affecting public companies. We have irrevocably opted2020 peer group were selected based on the following considerations:
•Size Characteristics: Assets, operating revenue and market capitalization. Assets from $900 million to decline this 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$3.5 billion.
•Geography: Located in the future, will be subjectMountain Pacific Region (includes California, Idaho, Montana, Nevada, Oregon, Washington and Wyoming)
•Operations and Business Model: Commercial banks with reasonably similar loan mix and ratio of non-interest income to all new or revised accounting standards generally applicable to public companies.
Employees
At December 31, 2018, we had 177 full time equivalent ("FTE") employees.
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 availableoperating revenue 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.
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 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.
Regulation of the Company Generally
The Company is a legal entity separate and distinct fromCNG Committee approved the Bank and its other subsidiaries. As a bank holding company, the Company is regulated under the Bank Holding Company Actfollowing peer group of 1956 ("BHC Act"), and is subject to supervision, regulation and inspection by the Federal Reserve Board. The Company is also subject to certain provisions of the California Financial Code which are applicable to bank holding companies. In addition, the Company is under the jurisdiction of the SEC and is subject to the disclosure and regulatory requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934, each administered by the SEC. The Company’s common stock is listed on the NASDAQ with “FCBP” as its trading symbol, and the Company is subject to the rules of NASDAQ for listed companies.
The Company is a bank holding company within the meaning of the BHC Act and is registered as such with the Federal Reserve Board. A bank 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. A bank holding company that also qualifies as and elects to become a “financial holding company” may engage in a broader range of activities that are financial in nature or complementary to a financial activity (as determined by the Federal Reserve or Treasury regulations), such as securities underwriting and dealing, insurance underwriting and agency, and making merchant
banking investments. The Company has not elected to become a financial holding company but may do so at some point in the future if deemed appropriate in view of opportunities or circumstances at the time.
The BHC Act requires the prior approval of the FRB for the direct or indirect acquisition of more than five percent 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 Company and the Bank also require the prior approval of the DBO pursuant to the California Financial Code.
The 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 and limitations 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.
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 FDIC and to state regulation by the DBO. The Bank is also subject to certain regulations of the Federal Reserve Board.
Capital Adequacy Requirements. The Company and the Bank are subject to the regulations of the Federal Reserve Board governing capital adequacy. This agency has adopted risk-based capital guidelines to provide a systematic analytical framework that imposes regulatory capital requirements based on differences in risk profiles among banking organizations, considers off-balance sheet exposures in evaluating capital adequacy, and minimizes disincentives to holding liquid, low-risk assets. Capital levels, as measured by these standards, are also used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions.benchmarking NEO compensation and informing compensation decisions for 2020:
Pursuant
| | | | | | | | | | | |
| Preferred Bank | | Pacific Mercantile Bancorp |
| Farmers & Merchants Bancorp | | Bank of Commerce Holdings |
| Heritage Commerce Corp | | First Financial Northwest Inc. |
| RBB Bancorp | | First Northern Community Bancorp |
| Sierra Bancorp | | Provident Financial Holdings |
| Bank of Marin Bancorp | | Riverview Bancorp Inc. |
| PCB Bancorp | | Oak Valley Bancorp |
| FS Bancorp Inc. | | OP Bancorp |
| Central Valley Community Bancorp | | United Security Bancshares |
| BayCom Corp | | |
2020 Executive Compensation Program in Detail
As discussed above, the CNG Committee engaged McLagan in 2019 to review the compensation of the NEOs and provide the CNG Committee with an analysis of competitive pay practices for senior executives at the peer group companies listed above for purpose of designing the 2020 compensation programs for NEOs. The CNG Committee establishes base salaries, variable cash incentive awards, and long-term, equity-based incentive awards on a case-by-case basis for each NEO taking into account, among other things, individual and company performance, length of service, market data, advancement potential, recruiting needs, internal equity, retention requirements, succession planning and best compensation governance practices. While the CNG Committee used the McLagan analysis to help form its compensation decisions, it does not target individual compensation levels to specific market pay percentiles.
Base Salary: Base salary represents annual fixed compensation and is a standard element of compensation necessary to attract and retain executive leadership talent. The CNG Committee reviews and approves base salaries of our NEOs and sets the compensation of our Chief Executive Officer. In making base salary decisions, the CNG Committee considers the CEO’s recommendations for other NEOs other than himself, as well as each NEO’s position and level of responsibility within the Company, market data provided by internal human resources department, survey data from industry sources, and recommendations by McLagan. Salary levels are typically evaluated annually as part of our performance review process and upon a promotion or other change in job responsibility.The CNG Committee initially determined the appropriate annual base salary rate for each NEO as follows:
| | | | | | | | | | | | | | | | | | | | |
| Name | | 2019
Base Salary | | 2020
Base Salary | | Percent
Adjustment |
| Robert M. Franko | | $ | 472,500 | | | $ | 500,000 | | | 5.82 | % |
| Khoi D. Dang | | 280,000 | | | 289,870 | | | 3.53 | % |
| Gene May | | 231,525 | | | 241,944 | | | 4.50 | % |
| Yolanda Su | | 214,783 | | | 250,000 | | | 16.40 | % |
The percent adjustments to 2020 base salary compared to 2019 base salary are in line with the Company’s historical practice of adjusting base salaries between 3% and 5% for all employees, with the precise adjustment determined based on the previous year’s performance and the attainment of pre-determined goals and objectives. The percent adjustment for Mr. Dang was affected by the pro-ration of his base salary adjustment in 2020 due to him being with the Company since March 2019. Exceptions to historical salary adjustment levels are made if the CNG determines that even after giving effect to the adoptionmaximum historical year-over-year salary adjustment, the prospective base salary would not be competitive and/or not properly incentivize retention. As discussed above, in consultation with McLagan, the CNG Committee undertook a peer group analysis of final rules implementing the BaselCompany’s compensation practices in 2019 and, based upon that analysis and upon recommendation of McLagan, the committee determined that exceptions to this historical 3% to 5% base salary adjustment for Mr. Franko and Ms. Su were warranted to bring their base salary in line with the Company’s peer group. In particular, the CNG Committee on Banking Supervision’s capital guidelinesdetermined that the 16.40% salary adjustment for all U.S. banksMs. Su from 2019 to 2020 was warranted in order to provide Ms. Su with market competitive compensation, especially given her role, duties and bank holding companiesresponsibilities and in recognition for her long tenure with more than $500 million in assets, minimum regulatory requirements for both the quantity and quality of capital held by the Company (as a founder) and the Bank increased effective January 1, 2015. Furthermore,significant contributions she has made to the Company’s success during that time.
Management Incentive Plan. In February of 2019, the CNG Committee approved a capital class known as Common Equity Tier 1 ("CET1"2020 Management Incentive Plan (“2020 MIP”) capital, which provided a set of goals and metrics for annual incentive compensation to be paid to our NEOs for 2020 in the form of both cash incentives and equity incentives, and which was established in addition to Tier 1 capital and Tier 2 capital, and most financial institutions were given the option of a one-time electiondesigned to continue to exclude accumulated other comprehensivereflect the Company’s pay-for-performance culture, drive growth and profitability, and support our principles of safety and soundness.
Under the 2020 MIP, NEOs had opportunities to earn both cash incentive and equity incentive awards based on the achievement of pre-established performance goals determined by the CNG Committee. Although the aggregate of the annual incentive is split evenly (50% cash and 50% stock), the goals used by the CNG Committee to determine the precise amount of each type of annual incentive were different, with the cash incentive tied to operating results, including core deposit growth, net income, (“AOCI”) from regulatory capital. The Company has exercised its option to exclude AOCI from regulatory capital. The final rules also increased capital requirements for certain categories of assets, including higher-risk construction and real estate loans, certain past-due or nonaccrualnon-performing loans and certain exposures relatedefficiency ratio and the equity incentive tied to securitizations.the creation of shareholder value, including diluted earnings per common share (“Diluted EPS”) and return on average tangible common equity (“ROATCE”). The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual preferred stock) issued before May 19, 2010 for inclusionCNG Committee deemed this division in the Tieraggregate annual incentive and the metrics used to determine the payout of each type of incentive was appropriate to in order to properly incent our NEOs to drive superior operating results that would translate into the creation of shareholder value. Each NEO was assigned a target award level (expressed as a percentage of base salary) and range that defines their incentive opportunity. Actual award payouts were determined based on specific performance goals and ranged, as a percentage of the target award level, as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Cash Incentive (1) | | Equity Incentive (1)(2) |
| Name | | Threshold | | Target | | Maximum | | Threshold | | Target | | Maximum |
| Robert M. Franko | | 25.00 | % | | 50.00 | % | | 75.00 | % | | 25.00 | % | | 50.00 | % | | 75.00 | % |
| Khoi D. Dang | | 17.50 | % | | 35.00 | % | | 52.50 | % | | 17.50 | % | | 35.00 | % | | 52.50 | % |
| Gene May | | 17.50 | % | | 35.00 | % | | 52.50 | % | | 17.50 | % | | 35.00 | % | | 52.50 | % |
| Yolanda Su | | 17.50 | % | | 35.00 | % | | 52.50 | % | | 17.50 | % | | 35.00 | % | | 52.50 | % |
(1) Award opportunities were based on percentage of the annual base salary as of March 1, capital2020.
(2) Number of banking organizations with total consolidated assetsshares awarded to each of less than $15 billion at December 31, 2009, subject to a limitthe NEOs under the 2020 MIP are determined based upon the closing price of 25% of Tier 1 capital.
Common Equity Tier 1 capital includesthe Company's common stock additional paid-in capital,as of January 29, 2021.
The CNG Committee set the “Target” performance levels at or near the Board-approved 2020 budget for most of the performance categories. Threshold and retained earnings, lessMaximum levels were determined with the following: disallowed goodwillassistance of McLagan to ensure an appropriate level of rigor and intangibles, disallowed deferred tax assets,fairness and any insufficient additional capitaltaking into account relevant peer data. The achievement of these goals was to coverbe determined by the deductions. Tier 1 capital is generally definedCNG Committee based upon actual 2020 audited consolidated financial conditions and consolidated results of operations as reported by the Company. The following charts illustrate the Threshold, Target and Maximum incentive award levels for each metric, the weightings assigned to each metric used to determine the weighted percent of the overall 2020 target incentive opportunities achieved by that metric as well as the sum of core capital elements, less the following: goodwill and other intangible assets, accumulated other comprehensive income, disallowed deferred tax assets, and certain other deductions. The following items are defined as core capital elements: (i) common shareholders’ equity; (ii) qualifying non-cumulative perpetual preferred stock and related surplus (and, in the case of holding companies, senior perpetual preferred stock issuedactual results for 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Cash Incentive | | | | Actual | | Actual Performance |
| Name | | Threshold | | Target | | Maximum | | Weight | | Results | | as % of Target |
| | (dollars in thousands) |
| Core deposit growth | | $ | 65,440 | | | $ | 81,800 | | | $ | 89,980 | | | 25.00 | % | | $ | 260,241 | | | 318.1 | % |
| Net income | | $ | 20,440 | | | $ | 25,500 | | | $ | 28,050 | | | 25.00 | % | | $ | 28,951 | | | 113.5 | % |
Non-performing loans to total loans held for investment (1) | | 1.10 | % | | 1.00 | % | | 0.80 | % | | 25.00 | % | | 0.34 | % | | 166.0 | % |
Efficiency ratio (2) | | 60.50 | % | | 55.00 | % | | 49.50 | % | | 25.00 | % | | 49.78 | % | | 109.5 | % |
(1) Non-performing loans exclude Purchased Credit Impaired loans.
(2) Refer to the U.S. Treasury Department pursuant to the Troubled Asset Relief Program); (iii) minority interests in the equity accounts of consolidated subsidiaries; and (iv) “restricted” core capital elements (which include qualifying trust preferred securities) up to 25% of all core capital elements. Tier 2 capital includes the following supplemental capital elements: (i) allowance for loan and lease losses (but not more than 1.25% of an institution’s risk-weighted assets); (ii)
perpetual preferred stock and related surplus not qualifying as core capital; (iii) hybrid capital instruments, perpetual debt and mandatory convertible debt instruments; and, (iv) term subordinated debt and intermediate-term preferred stock and related surplus. The maximum amount of Tier 2 capital is capped at 100% of Tier 1 capital.
The final rules established a regulatory minimum of 4.5% for common equity Tier 1 capital to total risk weighted assets (“Common Equity Tier 1 RBC Ratio”), a minimum of 6.0% for Tier 1 capital to total risk weighted assets (“Tier 1 Risk-Based Capital Ratio” or “Tier 1 RBC Ratio”), a minimum of 8.0% for qualifying Tier 1 plus Tier 2 capital to total risk weighted assets (“Total Risk-Based Capital Ratio” or “Total RBC Ratio”), and a minimum of 4.0% for the Leverage Ratio, which is defined as Tier 1 capital to adjusted average assets (quarterly average assets less the disallowed capital items discussed above). In addition to the other minimum risk-based capital standards the final rules also require a Common Equity Tier 1 capital conservation buffer, which has been phased in over three years starting on January 1, 2016. The capital conservation buffer was 0.625% for 2016, 1.25% for 2017, 1.875% for 2018 and has been fully phased in to 2.5% of risk-weighted assets beginning on January 1, 2019. The buffer has effectively raised the minimum required Common Equity Tier 1 RBC Ratio to 7.0%, the Tier 1 RBC Ratio to 8.5%, and the Total RBC Ratio to 10.5%. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases, and on the payment of discretionary bonuses to executive management.
Based on our capital levels at December 31, 2018 and 2017, the Company and the Bank met all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis. For more information on the Company’s capital, see Part II, Item 7 - Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations - LiquidityNon-GAAP Financial Measures, of this Annual Report as filed with the SEC on March 15, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Equity Incentive | | | | Actual | | Actual Performance |
| Name | | Threshold | | Target | | Maximum | | Weight | | Performance | | as % of Target |
| Diluted EPS | | $ | 1.74 | | | $ | 2.18 | | | $ | 2.40 | | | 50.00 | % | | $ | 2.47 | | | 113.3 | % |
ROATCE (1) | | 10.92 | % | | 13.65 | % | | 15.02 | % | | 50.00 | % | | 15.10 | % | | 110.6 | % |
(1) Refer to Part II, Item 7 - Management's Discussion and Capital Resources. Risk-based capital ratio (“RBC”) requirementsAnalysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures, of this Annual Report filed with the SEC on March 15, 2021.
Based upon these determinations, the CNG Committee determine that the following payments of cash incentives and the award of equity incentives were earned by each of the NEOs under the 2020 MIP as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Cash Incentive (1) | | |
| Name | | Threshold | | Target | | Maximum | | Actual Payout |
| Robert M. Franko | | $ | 125,000 | | | $ | 250,000 | | | $ | 375,000 | | | $ | 373,409 | |
| Khoi D. Dang | | 50,727 | | | 101,455 | | | 152,182 | | | 151,536 | |
| Gene May | | 42,340 | | | 84,679 | | | 127,019 | | | 126,480 | |
| Yolanda Su | | 43,750 | | | 87,500 | | | 131,250 | | | 130,693 | |
(1) Award opportunities were based on percentage of the annual base salary as of March 1, 2020.
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| | Equity Incentive (1) | | |
| Name | | Threshold | | Target | | Maximum | | Actual Payout (2) |
| Robert M. Franko | | $ | 125,000 | | | $ | 250,000 | | | $ | 375,000 | | | $ | 381,500 | |
| Khoi D. Dang | | 50,727 | | | 101,455 | | | 152,182 | | | 154,160 | |
| Gene May | | 42,340 | | | 84,679 | | | 127,019 | | | 129,220 | |
| Yolanda Su | | 43,750 | | | 87,500 | | | 131,250 | | | 133,520 | |
(1) Award opportunities were based on percentage of the annual base salary as of March 1, 2020.
(2) Number of shares awarded to each of the NEOs under the 2020 MIP are discusseddetermined based upon the closing price of the Company's common stock of $19.66 on January 29, 2021. The equity incentive amount is based on the closing price of the Company's common stock of $20.00 on February 8, 2021, the grant date.
Long-Term Incentives. Annual incentives are intended to compensate our NEOs for short-term performance. From time to time, we also recommend the grant of long-term equity incentive awards which are intended to reward longer-term performance. We believe that long-term performance is achieved through an ownership culture that rewards performance by our NEOs through the use of equity incentives. Our equity incentive plans have been established to provide our employees, including our NEOs, with incentives to help align their interests with the interests of our shareholders.
When making equity-award decisions, the CNG Committee considers market data, the grant size and economic value, the forms of long-term equity compensation available to it under our existing plans and the status of previously granted awards. The amount of equity incentive compensation granted reflects the executives’ expected contributions to our future success. Future equity awards that we make to our NEOs will be driven by our sustained performance over time, our NEOs’ ability to impact our results that drive shareholder value, their level of responsibility, their ability to fill roles of increasing responsibility, and competitive equity award levels for similar positions in greater detailcomparable companies. Equity forms a key part of the overall compensation for each executive officer and is evaluated each year as part of the annual performance review process and incentive payout calculation.
For 2020, the amounts awarded to the NEOs are based on the CNG Committee’s subjective determination of what is appropriate to incentivize the executives. All equity awards granted to our employees, including NEOs, have been reflected in our consolidated financial statements, based upon the fair market value of the equity awards on the grant date, in accordance with applicable accounting standards.
The following table sets forth information relating to the long-term equity incentives awarded to our NEOs in 2020.
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| Name | | Grant Date | | Shares of Restricted Stock | | Time Based or Performance Based | | Vesting Period | | Grant Date Fair Value(1) |
| Robert M. Franko | | 5/12/2020 | | 19,456 | | Time Based | | 3 years | | $ | 250,010 | |
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(1) Amounts shown are based on the closing price of the Company's common stock of $12.85 on May 12, 2020, the grant date.
The CNG Committee determined that a one-time award of the above shares to Mr. Franko was appropriate to retain Mr. Franko and align Mr. Franko’s long-term holdings to industry standard to ensure the CEO’s long term incentive holdings were commensurate with the Company’s peer group. This one-time award provides the CEO with incentives to help align the CEO’s interests with the interests of our shareholders.
Other Benefits and Perquisites. Group insurance premiums, including, medical, disability, dental and vision, are paid for by the Company for NEOs and their families. These benefits are common in the following section.industry for similar positions. The
Prompt Corrective Action Provisions. Federal law requires each federal banking agencyCompany pays these insurance benefits for all other employees and employees may elect to take prompt corrective actionpay for the cost of insurance for their families. The Company has also established a contributory 401(k) defined contribution plan that allows eligible employees to resolvecontribute a portion of their income to a trust on a tax-favored basis. The Company matches participant contributions up to 4% of their eligible annual compensation. For more information on the problemsCompany’s 401(k) plan, please see “Narrative Disclosure Regarding Retirement Benefits and Change in Control Benefits - 401(k) Plan,” below.
For 2020, all of insured financial institutions,the NEO’s were provided with a $1,000 per month auto allowance. See “All Other Compensation” in the Summary Compensation Table below. The Company provides these perquisites to certain of its NEOs because these perquisites are offered by many of our peers and considered market competitive, and, therefore, the CNG Committee believes that providing these perquisites is necessary for their retention and for the recruitment of new executive officers.
Other Practices, Policies and Guidelines
Insider Trading and Tipping Policy. Our policy governing insider trading and tipping prohibits hedging transactions with respect to, and the pledging of, our securities, including sales, purchases, gifts (including charitable donations), exchanges or any interest or position relating to the future price of Company securities such as a put, call or short sale, by any of our directors, officers or other employees or their immediate family members (collectively “Covered Persons”), except where the such Covered Persons receives prior written approval from the Compliance Officer (as designated in the policy). A “hedge” is a transaction designed to offset or reduce the risk of a decline in market value or an equity security and can include, but is not limited to, those that fall below one or moreprepaid variable forward contracts, equity swaps, collars and exchange funds. This policy applies to any and all securities of the prescribed minimum capital ratios. The federal banking agenciesCompany, including its common stock, and any other type of securities that the Company may issue from time to time, such as preferred stock, debentures, warrants and exchange-traded options or other derivative securities. In 2020, the Compliance Officer did not approve any stock hedging or pledging transactions and none of our current executive officers 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 6%; Common Equity Tier 1 RBC Ratio of less than 4.5%;entered into any such hedging 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 werepledging transactions.
Clawback Policy. Our executive employment agreements contain a provision that, in the next lower capital category if, after noticeevent of a material restatement of our consolidated financial statements, allows the Board, based on available remedies, to seek recovery or forfeiture from any executive officer of the portion of incentive compensation that was received by or vested in the executive officer prior to the determination that a restatement was required and that would not have been earned had performance been measured on the opportunitybasis of the restated results where the Board reasonably determines that the executive engaged in knowing or intentional fraudulent or illegal conduct that materially contributed to the need for the restatement.
Compensation Risk Assessment. It is our belief that a hearing,material portion of our executives’ total compensation should be variable compensation, tied to the appropriate federal agency finds an unsafe or unsound condition or practice merits a downgrade, but no bankCompany’s financial performance. However, we strive to ensure that incentives do not result in actions that may be treated as “critically undercapitalized” unless its actual tangible equity to assets ratio warrants such treatment. Asconflict with the long-term interests of December 31, 2018 and 2017, both the Company, our shareholders and the Bank were deemed to be well capitalized for regulatory capital purposes.
At each successively lower capital category,our customers. The CNG Committee reviews 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 restorationevaluation of all of our 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 takencovered under the prompt corrective action provisions, insured banks may be subjectSound Incentive Compensation Policies for attributes that could cause excessive risk-taking or unethical sales practices. We concluded that our programs and practices do not encourage excessive risk-taking nor do they encourage unethical sales practices, potentially causing harm 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.
The Potential for Community Bank Capital Simplification. Community banks have long raised concerns with bank regulators about the regulatory burden, complexity, and costs associated with certain provisions of the Basel III Rule. In response, Congress provided a potential Basel III “off-ramp” for institutions, like the Company with totalor our customers.
consolidated assetsImpact of less than $10 billion. Section 201Accounting and Tax Treatments of the Regulatory Relief Act instructed the federal banking regulators to establish a single "Community Bank Leverage Ratio" (“CBLR”) of between 8 and 10%. On November 21, 2018, the agencies proposed setting the CBLR at 9% of tangible equity to total assets for a qualifying bank to be well-capitalized. Under the proposal, a community banking organization would be eligible to elect the new framework if it has less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%. The electing institution would not be required to calculate the existing risk-based and leverage capital requirements of the Basel III Rule and would not need to risk weight its assets for purposes of capital calculations.Executive Compensation
The Company is in the process of considering the CBLR proposal and will await the final regulation to determine whether it will elect the framework.
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).
Some aspects of Dodd-Frank are still subject to rulemaking, making it difficult to anticipate the ultimate financial impact on the Company, its customers or the financial services industry more generally. However, many provisions of Dodd-Frank are already affecting our operations and expenses, including but not limited to changes in FDIC assessments, the permitted payment of interest on demand deposits, and enhanced compliance requirements. Some of the rules and regulations promulgated or yet to be promulgated under Dodd-Frank will apply directly only to institutions much larger than ours, but could indirectly impact smaller banks, either due to competitive influences or because certain required practices for larger institutions may subsequently become expected “best practices” for smaller institutions. We could see continued attention and resources devoted by the Company to ensure compliance with the statutory and regulatory requirements engendered by Dodd-Frank.
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, see “-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. The Company believes these reforms are favorable to its operations, but the true impact remains difficult to predict until rulemaking is complete and the reforms are fully implemented.
Tax Cuts and Jobs Act. On December 22, 2017, theConsiderations. The Tax Cuts and Jobs Act, (the “Act”)which was signed into law. The Act makesenacted on December 22, 2017, made significant changes that impact corporate taxation, including the reductionto Section 162(m) of the maximum federal income tax rateInternal Revenue code (“Section 162(m)”). Section 162(m) denies a deduction to any publicly held corporation to the extent it pays compensation in excess of $1 million to the following covered individuals for corporations from 35% to 21%a taxable year: our chief executive officer, chief financial officer, and changes or limitations tothree other most highly compensated named executive officers. Previously, certain tax deductions. The reduced tax rate has had a
favorable impact on our tax expense beginning in 2018, and our effective income tax rate dropped to 29.8% in 2018 from 52.4% in 2017. The tax rate reduction also resulted an adjustment to our deferred tax assets to reflect their value to us at the lower federal tax ratekinds of 21%, with such revaluation required in the period in which the legislation was enacted. As of December 31, 2018, we completed the accountingcompensation, including qualified performance-based compensation, were disregarded for the enactment of this comprehensive tax legislation. In accordance with SEC Staff Accounting Bulletin No. 118 ("SAB 118"), we performed an initial assessment and reasonably estimated the effectspurposes of the Act by recording a provisional income tax expense of $1.8 million for the year ended December 31, 2017. As required by SAB 118, we continueddeduction limitation. In late 2017, Code Section 162(m) was amended to evaluate and re-measure the impact of the Act on deferred tax amounts that existed at December 31, 2017 as new information concerning those deferred tax amounts became available during 2018. As a result, we recorded an income tax benefit of $226 thousand for the year ended December 31, 2018. Net deferred tax assets totaled $8.7 million and $4.5 million at December 31, 2018 and 2017.
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. For institutions like the Bank that are not considered large and highly complex banking organizations, assessments are now based on examination ratings and financial ratios. The total base assessment rates currently range from 1.5 basis points to 30 basis points. At least semi-annually, the FDIC updates its loss and income projections for the Deposit Insurance Fund ("DIF") and, if needed, increases or decreases the assessment rates, following notice and comment on proposed rulemaking. The assessment base against which an FDIC-insured institution’s deposit insurance premiums paid to the DIF has been calculated since effectiveness of the Dodd-Frank Act based on its average consolidated total assets less its average tangible equity. This method shifted the burden of deposit insurance premiums toward those large depository institutions that rely on funding sources other than U.S. deposits.
The reserve ratio is the FDIC insurance fund balance divided by estimated insured deposits. The Dodd-Frank Act altered the minimum reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to FDIC-insured institutions when the reserve ratio exceeds certain thresholds. The reserve ratio reached 1.36% as of September 30, 2018 (most recent available), exceeding the statutory required minimum reserve ratio of 1.35%. The FDIC will provide 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 contribute to growth in the reserve ratio between 1.15% and 1.35%. The FDIC will apply the credits each quarter that the reserve ratio is at least 1.38% to offset the regular deposit insurance assessments of institutions with credits. The Bank is expecting to receive an assessment credit from the FDIC in 2019.
FICO Assessments. In addition to paying basic deposit insurance assessments, FDIC-insured institutions must pay FICO assessments. FICO is a mixed-ownership governmental corporation chartered by the former Federal Home Loan Bank Board pursuant to the Competitive Equality Banking Act of 1987 to function as a financing vehicle for the recapitalization of the former Federal Savings and Loan Insurance Corporation. FICO issued 30-year noncallable bonds of approximately
$8.1 billion that mature in 2018 through 2019. FICO’s authority to issue bonds ended on December 12, 1991. Since 1996, federal legislation has required that all FDIC-insured institutions pay assessments to cover interest payments on FICO’s outstanding obligations. The Bank paid $26 thousand in FICO assessments in 2018.
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 a “satisfactory” rating in its most recent CRA evaluation.
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”), effective January 1, 2020. The CCPA gives “consumers” (defined as natural persons who are California residents) four basic rights in relation to their personal information:
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1. | 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; |
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2. | 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 not to have their personal information sold absent their, or their parent’s, opt-in); |
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3. | the right to have a business delete their personal information, with some exceptions; and |
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4. | the right to receive equal service and pricing from a business, even if they exercise their privacy rights under the CCPA. |
The CCPA can be enforced by the California Attorney General, subject to a thirty-day cure period. The civil penalty for intentional violations of the CCPA is up to $7,500 per violation.
The CCPA also provides a private right of action that allows consumers to seek, either individually or as a class, statutory or actual damages and injunctive and other relief, if their sensitive personal information (more narrowly defined than under the rest of the CCPA) is subject to unauthorized access and exfiltration, theft or disclosure as a result of a business’s failure to implement and maintain required reasonable security procedures. Statutory damages can be between $100 and $750 per California resident per incident, or actual damages, whichever is greater.
In September 2018, California adopted amendments to the CCPA. In particular, the bill clarifieseliminate the exemption for personal informationperformance-based compensation, other than for certain grandfathered arrangements in place as of November 2, 2017 and became effective as of December 2018.
While the CNG Committee believes that tax deductibility of compensation is an important consideration, the ultimate goal of the CNG Committee is to provide compensation that is regulated underin the Financial Modernization Act and adds an exemption for personal information regulated under the California Financial Information Privacy Act. These two statutes also regulate the privacy of consumer financial information.
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 scopebest interests 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 integratedCompany 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 requiredits shareholders. Therefore, to maintain flexibility to compensate our executives in a manner designed to promote long-term corporate goals and objectives, the privacyCNG Committee annually reviews and determines the granting of its customers’ non-public, personal information. Such privacy requirements direct financial institutions to: (i) provide notice to customers regarding privacy policiesbase salary, incentive, compensation, and practices; (ii) inform customers regardinglong-term compensation for the conditions under which their non-public personal informationCEO, CFO, and other NEOs that 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 Bank continues to be subject to numerous other federalthe deductions limitations of Section 162(m). Interpretations of and state consumer protectionchanges in applicable tax 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,regulations, as well as state usury laws and laws regarding unfair and deceptive acts and practices. These and other laws require disclosures includingfactors beyond the costCommittees control, also can affect the deductibility of credit and termscompensation. While the tax impact of deposit accounts, provide substantive consumer rights, prohibit discriminationany compensation arrangement is one factor considered by the Committee, that impact is evaluated in credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices, restrict the Company’s ability to raise interest rates and otherwise subject the 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 changes in risks to customers or to the safety and soundnesslight of the financial institution or creditor from identity theft.Committees overall compensation philosophy and objectives. The Bank maintainsCommittee will consider the deductibility of executive compensation, while retaining the discretion it deems necessary to compensate officers in a program to meet the requirements of the FACT Actmanner commensurate with performance and the Bank believes it is currently in compliance with these requirements.
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Act”), together with Dodd-Frank, relaxed prior interstate branching restrictions under federal law by permitting, subject to regulatory approval, state and federally chartered commercial banks to establish branches in states where the laws permit banks chartered in such states to establish branches. The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area. Federal banking agency regulations prohibit banks from using their interstate branches primarilycompetitive environment for deposit production and the federal banking agencies have implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition. Dodd-Frank effectively eliminated the prohibition under California law against interstate branching through de novo establishment of California branches. Interstate branches are subject to certain laws of the states in which they are located. The Bank presently does not have any interstate branches.
USA Patriot Act of 2001. The impact of the USA Patriot Act of 2001 (the “Patriot Act”) on financial institutions of all kinds has been significant and wide ranging. The Patriot Act 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.
Incentive Compensation. In June 2010, the FRB 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. The Company believes that itexecutive talent were doing so is in compliance with the regulatory guidance on incentive compensation policies.
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 with the intention of enhancing their independence from management, and include extensive additional disclosure, corporate governance and other related rules.
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 commercial real estate (“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 Bank believes that the guidelines are applicable to it, as it has a relatively high concentration in CRE loans. The Bank and its Board of Directors have discussed the guidelines and believe that the Bank’s underwriting policies, 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 or Bank 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 businessbest interests of the Company orand its shareholders.
Accounting Considerations. Accounting considerations play an important role in the Bank would be affected thereby.
ITEM 1A. RISK FACTORS
We describe below the material risks that management believes affect or could affect us. Understanding these risks is important to understanding any statement in this Annual Report and to evaluating an investment in our common stock.
An investment in a financial institution such as First Choice Bancorp involves significant risks. These risks derive primarily from the financial institutions industry, the naturedesign of the way financial institutions operate, andCompany’s executive compensation programs since the national economy, generally, and, more specifically, from our operations, financial condition, local economy, competition and similar factors.
Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and uncertainties, together with all other information included or incorporated by reference in this Annual Report, including ourCompany's consolidated financial statements and related notes, before you make any decision regarding an investment in our common stock. You should also consider the information set forth above under “CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS.” The risks described below are not the only risks facing our business. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs, our business, financial condition and results of operations could be impaired. This Annual Report is qualified in its entirety by these risk factors.
Our future success is based in large part on the accuracy of our assumptions about and inherent in our business, marketing and growth strategies for the Company, as well as our ability to identify and implement strategies to address the risks identified herein. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could significantly decline, and you could lose some or all of your investment.
Our business is adversely affected by unfavorable economic and market conditions.
U.S. economic conditions affect our operating results generally, and the ability of borrowers to pay interest on and repay the principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent upon the business and economic conditions in the markets in which
we operate and in the United States as a whole. Such factors include the level and volatility of short-term and long-term interest rates, inflation, deflation, home prices, unemployment and under-employment levels, bankruptcies, household income, consumer spending, fluctuations in both debt and equity capital markets and currencies, liquidity of the global financial markets, availability and cost of capital and credit, investor sentiment and confidence in financial markets, and sustainability of economic growth. The deterioration of any of these conditions could adversely affect our consumer and commercial businesses, including credit quality concerns related to repayment ability and collateral protection as well as reduced demand for the products and services we offer, our securities, our level of charge-offs and provision for credit losses, the carrying value of our deferred tax assets, our capital levels and liquidity, and our results of operations. In recent years there has been gradual improvement in the U.S. economy as evidenced by a rebound in the housing market, lower unemployment and higher equities markets; however, economic growth has been uneven, and opinions vary on the strength and direction of the economy. Uncertainties also have arisen regarding the potential for a reversal or renegotiation of international trade agreements and the overall effects of recent comprehensive tax reform under the administration of U.S. President Donald J. Trump, and the impact such actions and other policies of the administration may have on economic and market conditions. In addition, concerns about the performance of international economies, especially in Europe and emerging markets, and economic conditions in Asia, particularly the economies of China and Taiwan, can impact the economy and financial markets here in the United States. These economic pressures on consumers and businesses may continue to adversely affect our business, financial condition, results of operations and stock price.
The United States economy has been in a slow-paced nine-year expansion since the Great Recession ended in 2009. This current expansion has been longer than most U.S. expansionary periods in recent history, increasing the probability of a near-term U.S. economic recession. An economic recession adversely affects our operating results because we experience higher loan and lease charge-offs and higher operating costs. Global economic conditions also affect our operating results because global economic conditions directly influence the U.S. economic conditions. Various market conditions also affect our operating results. Real estate market conditions directly affect performance of our loans secured by real estate. Debt markets affect the availability of credit which impacts the rates and terms at which we offer loans and leases. Stock market downturns affect businesses’ ability to raise capital and invest in business expansion. Stock market downturns often signal broader economic deterioration and/or a downward trend in business earnings which adversely affects businesses’ ability to service their debts.
In particular, we may face the following risks in connection with the events described above. An economic recession or a downturn in various markets could have one or more of the following adverse effects on our business:
a decrease in the credit quality of our borrowers and the demand for our loans and leases and other products and services offered by us;
a decrease in our deposit balances due to overall reductions in the accounts of customers;
a decrease in the value of our investment securities and loans;
an increase in the level of nonperforming and classified loans;
an increase in provisions for loan losses and loan charge-offs;
an increase in adverse asset values and an overall material adverse effect on the quality of our loan portfolio;
a decrease in net interest income derived from our lending and deposit gathering activities;
a decrease in our stock price;
an increase in our operating expenses associated with attending to the effects of the above-listed circumstances;
a decrease in real estate values or a general decrease in capital available to finance real estate transactions could have a negative impact on borrowers’ ability to pay off their loans at maturity;
the banking industry remains heavily regulated despite the adoption of the Economic Growth, Regulatory Relief and Consumer Protection Act in May 2018, and changes by Congress or federal regulatory agencies to the banking and financial institution regulatory regime and heightened legal standards and regulatory requirements may continue to be adopted in the future. Compliance with such regulations may increase our costs and limit our ability to pursue business opportunities; and
the process we use to estimate losses inherent in our credit exposure requires difficult, subjective, and complex judgments, including qualitative factors that pertain to economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. The level of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates which may, in turn, impact the reliability of the process.
Our business is subject to interest rate risk, and variations in interest rates may materially and adversely affect our financial performance.
Changes in the interest rate environment may affect our earnings and net interest income. It is expected that we will continue to realize income from the differential or “spread” between the interest earned on loans, securities and other interest-
earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities. Interest rates are sensitive to many factors that are beyond our control, including competition, federal economic monetary and fiscal policies, and general economic conditions, such changesin market interest rates could affect (i) loan volume, (ii) fair value of our securities portfolio, (iii) loan yields, (iv) funding sources, and (v) funding costs.
The Federal Reserve's decision to raise short-term interest rates may increase our loan yield, it may adversely affect the ability of certain borrowers with variable-rate loans to pay the interest on and principal of their obligations. This could result in additional delinquencies or charge-offs and negatively impact our results of operations. Following an increase in interest rates, our ability to maintain a positive net interest spread is dependent on our ability to increase our loan offering rates, replace loan maturities with new originations, minimize increases on our deposit rates, and maintain an acceptable level and mix of funding. We cannot provide assurances that we will be able to increase our loan offering rates and continue to originate loans due to the competitive landscape in which we operate. Additionally, we cannot provide assurances that we can minimize the increases in our deposit rates while maintaining an acceptable level and mix of deposits. Finally, we cannot provide any assurances that we can maintain our current levels of noninterest-bearing deposits as customers may seek higher-yielding products with the continued increase in deposit rates.
Accordingly, any substantial, unexpected, prolonged change in market interest rates could materially and adversely affect our net interest spread, net interest margin, cost of funding sources, asset quality, loan origination volume, liquidity, and overall profitability.
We face strong competition from financial services companies and other companies that offer banking services, which could harm our business.
Our operations consist of offering banking services to generate both interest and noninterest income. Many of our competitors offer the same, or a wider variety of, banking and related financial services within our market areas. These competitors include national banks, regional banks and other community banks. We also face competition from many other types of financial institutions, including savings and loan institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In addition, a number of out-of-state financial intermediaries have opened loan production offices or otherwise solicit deposits in our market areas. Additionally, we face growing competition from so-called “online businesses” with few or no physical locations, including online banks, lenders and consumer and commercial lending platforms, as well as automated retirement and investment service providers. Increased competition in our markets may result in reduced loans, deposits and commissions and brokers’ fees, as well as reduced net interest margin and profitability. Ultimately, we may not be able to compete successfully against current and future competitors. If we are unable to attract and retain banking customers, we may be unable to continue to grow our business, and our financial condition and results of operations may be adversely affected.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted and could adversely affect our business, financial condition and results of operations.
A failure in or breach of our operations, security systems or infrastructure, or those of third parties, could disrupt our businesses, and adversely impact our financial condition, results of operations, cash flows, and liquidity, as well as cause reputational harm.
The potential for operational risk exposure exists throughout our organization and from our interactions with third parties. Our operations, security systems and infrastructure, including our computer systems, network infrastructure, data management and internal processes, as well as those of third parties, are integral to our performance. In addition, we rely on our employees and third parties in our ongoing operations, who may, as a result of human error or malfeasance or failure or
breach of third-party systems or infrastructure, expose us to risk. We have taken measures to implement backup systems and safeguards to support our operations, security systems and infrastructure, but our ability to conduct business may be adversely affected by any significant disruptions to us or to the third parties with whom we interact. In addition, our ability to implement backup systems and other safeguards with respect to third-party systems is more limited than with respect to our own systems. Our financial, accounting, data processing, backup or other operating or security systems, and infrastructure may fail to operate properly or may become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control which could adversely affect our ability to process these transactions or provide certain services. There could be electrical, telecommunications or other major physical infrastructure outages, natural disasters such as earthquakes, tornadoes, hurricanes, floods, wildfires, disease pandemics, or events arising from local or larger scale political or social matters, including terrorist acts. We continuously update these systems to support our operations and growth, and this entails significant costs and creates risks associated with implementing new systems and integrating them with existing ones. Operational risk exposures could adversely impact our results of operations, financial condition, cash flows, and liquidity, and may result in loss of confidence, significant litigation exposure and harm to our reputation.
A cyber-attack, information or security breach, or a technology failure of ours or of a third-party could adversely affect our ability to conduct our business or manage our exposure to risk, result in the disclosure or misuse of confidential or proprietary information, increase our costs to maintain and update our operations, security systems or infrastructure, and adversely impact our financial condition, results of operations, and liquidity, as well as cause reputational harm.
We offer various internet-based services to its clients, including online banking services. The secure transmission of confidential information over the internet is essential in maintaining our clients’ confidence in our online services. In addition, our business is highly dependent on the security and safety of our infrastructure, computer and data management systems, as well as those of third parties with whom we interact. Cyber security risks for financial institutions have significantly increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunication technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, nation-states and other external parties. Our business relies on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in our computers, data management systems and networks, and in the computers, data management systems and networks of third parties. We rely heavily on digital technologies, computers, databases and email systems, software and networks. Notwithstanding our defensive systems and processes that are designed to prevent security breaches and periodically test our security, there is no assurance that all of our security measures will be effective, especially as the threat from cyber-attacks is continuous and severe, attacks are becoming more sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. Failure to mitigate breaches of security could result in violations of applicable privacy laws, reputational damage, regulatory fines, litigation exposure, and increased security compliance costs, all of which could adversely affect our ability to offer and grow our online services and, in turn, have an adverse effect on our business, financial condition, and results of operations. We have not experienced any known attacks on our information technology systems that have resulted in any material system failure, incident or security breach to date. However, a cyber-attack, information or security breach or a technology failure of ours or of a third-party could adversely affect our financial condition, results of operations, and liquidity, as well as cause reputational harm.
Failure to keep pace with technological change could adversely affect our business.
The financial services industry experiences continuous technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will safely and effectively satisfy customer demands, while at the same time create additional efficiencies in our operations. Many of our competitors, however, have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. In addition, we depend on internal and outsourced technology to support all aspects of our business operations. Interruption or failure of these systems creates a risk of business loss as a result of adverse customer experiences and possible diminishing of our reputation, damage claims or civil fines. Failure to successfully keep pace with technological change affecting the financial services industry or to successfully convert to a new core processing system could have a material adverse impact on our business, financial condition, results of operations, and reputation.
Our concentration of loans to privately owned small- and medium-sized companies and our concentration of lending to particular market sectors and industries could expose us to greater lending risk if the privately owned small- or medium-sized company, market sector or industry were to experience economic difficulties or changes in the regulatory environment.
Our portfolio consists primarily of real estate and commercial loans to small- and medium-sized privately owned businesses in a limited number of industries throughout Southern California, with the largest concentrations in Los Angeles, Orange, San Bernardino, and San Diego counties, where we have our branches and loan production offices. Loans made to these types of clients entail higher risks than loans and leases made to larger, publicly owned firms that are able to access a broader array of credit sources and thus more easily weather an economic downturn.
Most of our real property collateral is located in Southern California. In the past, there has been a significant decline in real estate values in many parts of California, including certain parts of our service area. If the area were to experience such declines in value again, the collateral for our loans may provide less security than when the loans were originated. A decline in values could have an adverse impact on us by limiting repayment of defaulted loans through the sale of commercial and residential real estate collateral and by a likely increase in the number of defaulted loans to the extent that the financial condition of our borrowers is adversely affected by such a decline in values. The adverse effects of the foregoing matters upon our real estate portfolio could necessitate a material increase in our provision for loan losses.
If any particular industry or market sector were to experience economic difficulties, especially if those economic difficulties were to occur in the counties where our loans are concentrated, the overall timing and amount of collections on our loans to clients operating in those industries and in that geography may differ from what we expected, which could have a material adverse impact on our business, financial condition or results of operations.
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 affect adversely our business, financial condition and 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 15% of our total loan portfolio as of December 31, 2018.
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, financial condition and results of operations.
Nonperforming assets take significant time to resolve and adversely affect our financial condition, results of operations and could result in further losses in the future.
As of December 31, 2018, our nonperforming assets, excluding PCI loans, are defined as nonperforming loans (defined as accruing loans past due 90 days or more, non-accrual loans and nonperforming troubled-debt restructurings (“TDRs”)) plus real estate acquired through foreclosure, totaled $1.7 million, or 0.14% of our gross loans held for investment portfolio, or 0.11% of total assets. We did not have any other real estate owned ("OREO) at December 31, 2018. In addition, we had $484 thousand in accruing loans that were 30-89 days delinquent at December 31, 2018.
Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on nonaccrual loans, thereby adversely affecting our net income and returns on assets and equity, as well as increasing our loan administration costs and adversely affecting our efficiency ratio. When we take collateral in foreclosure and similar
proceedings, we are required to mark the collateral to its then-fair market value, which may result in a loss. These nonperforming loans and OREO also increase our risk profile and the level of capital our regulators believe is appropriate for us to maintain in light of such risks. The resolution of nonperforming assets requires significant time commitments from management and can be detrimental to the performance of their other responsibilities. If we experience increases in nonperforming assets, our net interest income may be negatively impacted and our loan administration costs could increase, which could adversely affect our business, financial condition and results of operations.
If we do not effectively manage our credit risk, we may experience increased levels of delinquencies, nonperforming loans and charge-offs, which could require increases in our provision for loan losses.
There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt and risks resulting from changes in economic and market conditions. We cannot guarantee that our credit underwriting and monitoring procedures will reduce these credit risks, and they cannot be expected to completely eliminate our credit risks. If the overall economic climate in the United States, generally, or our market areas, specifically, declines, our borrowers may experience difficulties in repaying their loans, and the level of nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for loan losses, which would cause our net income, return on equity and capital to decrease.
Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio.
We establish our allowance for loan losses and maintain it at a level that management considers adequate to absorb probable loan losses based on an analysis of our portfolio and market environment. The allowance for loan losses represents our estimate of probable losses in the portfolio at each balance sheet date and is based upon relevant information available to us. The allowance contains provisions for probable losses that have been identified relating to specific borrowing relationships, as well as probable losses inherentprepared in the loan portfolio and credit undertakings that are not specifically identified. Additions to the allowance for loan losses, which are charged to earnings through the provision for loan losses, are determined based on a variety of factors, including an analysis of the loan portfolio, historical loss experience and an evaluation of current economic conditions in our market areas. The actual amount of loan losses is affected by changes in economic, operating and other conditions within our markets, which may be beyond our control, and such losses may exceed current estimates. Any deterioration in the real estate market generally and in the commercial real estate and residential building segments in particular could result in additional loan charge-offs and provisions for loan losses in the future, which could have a material adverse effect on our financial condition, net income and capital.
As of December 31, 2018, our allowance for loan losses as a percentage of total loans was 0.88% and as a percentage of total nonperforming loans was 642.0%. Although management believes that the allowance for loan losses, as well as the unamortized fair value discount of loans acquired, is adequate to absorb losses on any existing loans that may become uncollectible, we may be required to take additional provisions for loan losses in the future to further supplement the allowance for loan losses, either due to management’s decision to do so or because our banking regulators require us to do so. Our bank regulatory agencies will periodically review our allowance for loan losses and the value attributed to nonaccrual loans or to real estate acquired through foreclosure and may require us to adjust our determination of the value for these items. These adjustments may adversely affect our business, financial condition and results of operations.
The current expected credit loss standard established by the Financial Accounting Standards Board will require significant data requirements and changes to methodologies.
In the aftermath of the Great Recession that ended in 2009, the Financial Accounting Standards Board ("FASB") reviewed how banks estimate losses in their allowance for loan losses calculation, and it issued the final Current Expected Credit Loss, or CECL, standard on June 16, 2016. Currently, the impairment model used by financial institutions is based on incurred losses, and loans are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. This model will be replaced by the CECL model that will become effective for us for the fiscal year beginning after December 15, 2019 in which financial institutions will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan. The CECL model will materially impact how we determine our allowance for loan losses and may require us to significantly increase our allowance for loan losses. Furthermore, we may experience more fluctuations in our allowance for loan and lease losses, which may be significant. There can be no assurance that we will not be required to increase our allowance for loan losses as a result of the implementation of CECL. If we were required to materially increase our allowance for loan and lease losses, it may negatively impact our financial condition and results of operations. We are currently evaluating the new guidance and expect it to have an impact on our statements of operations and financial condition, the significance of which is
not yet known. We expect the CECL model will require us to recognize a one–time cumulative adjustment to our allowance for loan and lease losses on January 1, 2020 in order to fully transition from the incurred loss model to the CECL.
Deposit are an important source of funds for our continued growth and profitability.
Our business strategy calls for continued growth. Our ability to continue to grow depends in part on our ability to successfully attract deposits to fund loan growth. Core deposits are a low cost and stable source of funding and a significant source of funds for our lending activities. Our inability to retain or attract such funds could adversely affect our liquidity. If we are forced to seek other sources of funds, such as additional brokered deposits or borrowings from the FHLB, the interest expense associatedaccordance with these other funding sources may be higher than the rates we are currently paying on our deposits, which would adversely impact our financial condition, liquidity and results of operations.
Our deposit portfolio includes significant concentrations and a large percentage of our deposits are attributable to a relatively small number of clients.
As a commercial bank, we provide services to a number of clients whose deposit levels vary considerably and have a significant amount of seasonality. At December 31, 2018, approximately 47% of our total deposits, or $584.9 million, related to 69 clients who maintained balances in excess of $2 million each. This includes our ten largest depositor relationships which accounted for approximately 25% of our total deposits and our single largest depositor relationship which accounted for 8% of our deposits at December 31, 2018. These deposits can and do fluctuate substantially. The loss of any combination of these depositors, or a significant decline in the deposit balances due to ordinary course fluctuations related to these customers’ businesses, would adversely affect our liquidity and require us to raise deposit rates to attract new deposits, purchase federal funds or borrow funds on a short-term basis to replace such deposits. Depending on the interest rate environment and competitive factors, low cost deposits may need to be replaced with higher cost funding, resulting in a decrease in net interest income and net income. While these events could have a material impact on our results, we expect, in the ordinary course of business, that these deposits will fluctuate and believe we are capable of mitigating this risk, as well as the risk of losing one of these depositors, through additional liquidity, and business generation in the future. However, should a significant number of these customers leave us, it could have a material adverse impact on our business, financial condition, and results of operations.
We are subject to liquidity risk, and a failure to maintain sufficient liquidity could adversely affect our financial condition and results of operations.
Effective liquidity management is essential for the operation of our business. Although we have implemented strategies to maintain sufficient and diverse sources of funding to accommodate planned, as well as unanticipated changes in assets, liabilities, and off-balance sheet commitments under various economic conditions, an inability to raise funds through deposits, borrowings, the sale of investment securities 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 disruption, a decrease in the borrowing capacity assigned to our pledged assets by our secured creditors, 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 generally as a result of conditions faced by banking organizations in the domestic and worldwide credit markets.
We are subject to capital adequacy standards, and a failure to meet these standards could adversely affect our financial condition.
The U.S. federal bank regulators have jointly adopted new capital requirements on banks and bank holding companies as required by the Dodd-Frank Act, which became effective on January 1, 2015, incorporate the elements of Basel Committee’s Basel III accords and have the effect of raising our capital requirements and imposing new capital requirements beyond those previously required. Increased regulatory capital requirements (and the associated compliance costs) whether due to the adoption of new laws and regulations, changes in existing laws and regulations, or more expansive or aggressive interpretations of existing laws and regulations, may require us to raise additional capital, or impact our ability to pay dividends or pay compensation to our executives, which could have a material and adverse effect on our business, financial condition, results of operations and the value of our common stock. If we do not meet minimum capital requirements, we will be subject to prompt corrective action by federal bank regulatory agencies. Prompt corrective action can include progressively more restrictive constraints on operations, management and capital distributions. For additional discussion regarding our capital requirements, please refer to Item 1. Business - Regulation and Supervision - Capital Adequacy Requirements.
The price of our common stock may be volatile or may decline.
The trading price of our common stock may fluctuate as a result of a number of factors, many of which are outside of our control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations could adversely affect the market price of our common stock. Among the factors that could affect our stock price are:
actual or anticipated quarterly fluctuations in our periodic operating results and financial condition;
changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;
failure to meet analysts’ revenue or earnings estimates;
cyber security breaches;
speculation in the press or investment community;
strategic actions by us or our competitors, such as acquisitions or restructurings;
actions by institutional stockholders;
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;
proposed or adopted regulatory changes or developments;
anticipated or pending investigations, proceedings or litigation that involve or affect us; or
domestic and international economic factors unrelated to our performance.
The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility during the past several years and the future performance of the stock market is inherently uncertain. As a result, the stock market generally and the market price and trading volume of our common stock specifically may be volatile. The trading price of our common stock will depend on many factors, which may change from time to time, including, without limitation, our financial condition, performance, creditworthiness and prospects, and future sales of our equity or equity-related securities. A significant decline in our stock price could result in the potential impairment of goodwill, substantial losses for individual stockholders and could lead to costly and disruptive securities litigation.
The primary source of the holding company's liquidity from which, among other things, we pay dividends will be the receipt of dividends from the Bank and a credit line secured by a lien on 100% of the Bank's common stock.
The holding company is a legal entity separate and distinct from the Bank. The availability of dividends from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors, that the Federal Reserve, the FDIC and/or the DBO could assert that payment of dividends or other payments is an unsafe or unsound practice. In the event the Bank is unable to pay dividends to the holding company, it is likely that, in turn, there would be insufficient capital or cash to make any cash distributions to our shareholders in the form of cash dividends or share repurchases and we may have difficulty meeting other financial obligations, including payments in respect of any outstanding indebtedness or subordinated debentures, if any at the time. Although at December 31, 2018, the Bank had retained earnings of $24.1 million, we can provide no assurances that the Bank’s future operating results would not reduce the Bank’s retained earnings or regulatory required capital ratios to a level that would be insufficient to pay dividends to the holding company or would otherwise require prior regulatory approval to do so. The inability of the Bank to pay dividends to the holding company could have a material adverse effect on our business, financial condition, results of operations, and market price of our common stock.
In order to provide additional liquidity and flexibility for us to operate, we have arranged a $25 million advancing line of credit from a correspondent bank. That line of credit is secured by 100% of the Bank's common stock. The line of credit also has covenants which must be met before we can make further advances. Failure to meet these covenants could have a material adverse effect on our business, financial condition, and results of operations.
We may reduce or discontinue the payment of dividends on common stock.
Our stockholders are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so and may reduce or eliminate our common stock dividend in the future. Our ability to pay dividends to our stockholders is subject to the restrictions set forth in California law and by the Federal Reserve. As a “small bank holding company” under applicable Federal Reserve regulations, we are prohibited from paying cash dividends at any time that our debt to equity ratio is greater than 1.0:1 and until such time as our debt to equity ratio is equal to or less than 1.0:1 and the
Bank is well-capitalized. In addition, we may be restricted by applicable laws or regulations or actions taken by our regulators, now or in the future, from paying dividends to our stockholders. We cannot provide assurance that we will continue paying dividends on our common stock at current levels or at all. A reduction or discontinuance of dividends on our common stock could have a material adverse effect on our business, financial condition, results of operations, and market price of our common stock.
Anti-takeover provisions could negatively impact our shareholders.
Provisions of our charter and bylaws and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our stockholders. The combination of these provisions effectively inhibits a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of our common stock. These provisions could also discourage proxy contests and make it more difficult for holders of our common stock to elect directors other than the candidates nominated by our Board of Directors.
Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance structure, financial condition or results of operations.
The Dodd-Frank Act provided for sweeping regulatory changes and the establishment of strengthened capital and liquidity requirements for banks and bank holding companies, including minimum leverage and risk-based capital requirements no less than the strictest requirements in effect for depository institutions as of the date of enactment; the requirement that bank holding companies serve as a source of financial strength for their depository institution subsidiaries; enhanced regulation of financial markets, including the derivative and securitization markets, and the elimination of certain proprietary trading activities by banks; additional corporate governance and executive compensation requirements; enhanced financial institution safety and soundness regulations; revisions in FDIC insurance assessment fees; the implementation of the qualified mortgage and ability-to-repay rules for mortgage loans; and the establishment of new regulatory bodies, such as the CFPB and the Financial Services Oversight Counsel, to identify emerging systemic risks and improve interagency cooperation. Although legislation has been introduced to reduce regulatory requirements, including the Tax Act described above and the regulatory relief act described below, compliance with the Dodd-Frank Act and its implementing regulations has and will continue to result in additional operating and compliance costs that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
In addition, other new proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the bank and non-bank financial services industries and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied. Certain aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities, require more oversight or change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations to comply and could have an adverse effect on our business, financial condition and results of operations.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The Bank Secrecy Act, the USA Patriot Act and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and to file reports such as suspicious activity reports and currency transaction reports. We are required to comply with these and other anti-money laundering requirements. The federal banking agencies and Financial Crimes Enforcement Network are authorized to impose significant civil money penalties for violations of those requirements and have recently engaged in coordinated enforcement efforts against banks and other financial services providers with the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including any future acquisition plans.
Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations, growth prospects and reputation.
We may become subject to supervisory action by bank supervisory authorities that could have a material adverse effect on our business, financial condition, results of operations, and the value of our common stock.
Under federal and state laws and regulations pertaining to the safety and soundness of financial institutions, the Federal Reserve has authority over the Bancorp and the Bank, and in addition the DBO and FDIC have authority over the Bank. All of these respective regulatory authorities may compel or restrict certain actions if the Bancorp or the Bank should violate any laws or regulations, if their capital should fall below adequate capital standards as a result of operating losses, or if these regulators otherwise determine that the Bancorp or the Bank engaged in unsafe or unsound practices, including failure to exercise proper risk oversight over the many areas of the Bancorp’s and the Bank’s operations. These regulators also have authority over the Bancorp’s and the Bank’s compliance with various statutes and consumer protection and other regulations. Among other matters, the corrective actions that may be required of the Bancorp or the Bank following the occurrence of any of the foregoing may include, but are not limited to, requiring the Bancorp and/or the Bank to enter into informal or formal enforcement orders, including board resolutions, memoranda of understanding, written agreements, supervisory letters, commitment letters, and consent or cease and desist orders to take corrective action and refrain from unsafe and unsound practices; removing officers and directors; assessing civil monetary penalties; and taking possession of, closing and liquidating the Bank. If we are unable to meet the requirements of any corrective actions, we could become subject to supervisory action. The terms of any such supervisory action could have a material and adverse effect on our business, financial condition, results of operations and the value of our common stock.
We are subject to the CRA, fair lending and other laws and regulations, and our failure to comply with these laws and regulations could lead to material penalties.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending and other requirements on financial institutions. The U.S. Department of Justice and other federal agencies, including the FDIC and CFPB, are responsible for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA, fair lending and other compliance laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. The costs of defending, and any adverse outcome from, any such challenge could damage our reputation or could have a material adverse effect on our business, financial condition or 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, financial condition or results of operations.
Although we have non-solicitation agreements with certain of our executive officers, which limits the ability of such executives to solicit our customers and employees if they leave our employment, our ability to enforce such agreements may not fully mitigate the injury to our business from the breach of such agreements, as such employees could leave us and immediately begin soliciting our customers. In addition, the departure of any of our personnel who are not subject to enforceable non-competition agreements could have a material adverse impact on our business, financial conditions, results of operations and growth prospects.
We may incur significant losses as a result of ineffective risk management processes and strategies.
We are exposed to many types of operational risks, including liquidity risk, credit risk, market risk, interest rate risk, legal and compliance risk, strategic risk, information security risk, and reputational risk. We are also reliant upon our employees, and our operations are subject to the risk of fraud, theft or malfeasance by our employees. We seek to monitor and control our risk exposure through a risk and control framework encompassing a variety of separate but complementary financial, credit, operational and compliance systems, and internal control and management review processes. However, these systems and review processes and the judgments that accompany their application may not be effective and, as a result, we
may not anticipate every economic and financial outcome in all market environments or the specifics and timing of such outcomes, particularly in the event of the kinds of dislocations in market conditions experienced during the recession, which highlight the limitations inherent in using historical data to manage risk. If those systems and review processes prove to be ineffective in identifying and managing risks, our business, financial condition, results of operations, the value of our common stock, and our reputation could be materially and adversely affected.
We have engaged in expansion through an acquisition and may consider additional acquisitions in the future, which could negatively affect our business and earnings.
We have engaged in expansion through an acquisition of PCB in 2018 and may consider other acquisitions in the future. There are risks associated with any such expansion. These risks include, among others, incorrectly assessing the asset quality of a bank acquired in a particular transaction, encountering greater than anticipated costs in integrating acquired businesses, facing resistance from customers or employees, and being unable to profitably deploy assets acquired in the transaction. To the extent we issue capital stock in connection with additional transactions, if any, these transactions and related stock issuances may have a dilutive effect on earnings per share and share ownership.
Our earnings, financial condition, and prospects after a merger or acquisition depend in part on our ability to successfully integrate the operations of the acquired company. We may be unable to integrate operations successfully or to achieve expected cost savings. Any cost savings which are realized may be offset by losses in revenues or other charges to earnings. As with any acquisition of financial institutions, there also may be business disruptions that cause us to lose customers or cause customers to remove their accounts from us and move their business to competing financial institutions.
In addition, our ability to grow may be limited if we cannot make acquisitions. We compete with other financial institutions with respect to proposed acquisitions. We cannot predict if or when we will be able to identify and attract acquisition candidates or make acquisitions on favorable terms.
We may experience goodwill impairment.
Goodwill is initially recorded at fair value and is not amortized but is reviewed at least annually or more frequently if events or changes in circumstances indicate that the carrying value may not be fully recoverable. If our estimates of goodwill fair value change, we may determine that impairment charges are necessary. Estimates of fair value are determined based on a complex model using cash flows and company comparisons. If management’s estimates of future cash flows are inaccurate, the fair value determined could be inaccurate and impairment may not be recognized in a timely manner. No assurance can be given that we will not record an impairment loss on goodwill in the future and any such impairment loss could have a material adverse affect on our business, financial condition, and results of operations.
We are subject to claims and litigation which could adversely affect our cash flows, financial condition and results of operations, or cause us significant reputational harm.
We and certain of our directors, officers and subsidiaries may be involved, from time to time, in reviews, investigations, litigation, and other proceedings pertaining to our business activities. If claims or legal actions, whether founded or unfounded, are not resolved in a favorable manner to us, they may result in significant financial liability. Although we establish accruals for legal matters when and as required by accounting principles generally accepted in the United States of America ("GAAP"). In addition, the Company is required to record and certain expensesdisclose the stock-based compensation in accordance with specific accounting standards. The CNG Committee considers the impact to the Company's consolidated statement of condition and liabilities in connection with such matters may be covered by insurance,consolidated results of operations when determining the amount of loss ultimately incurredequity compensation awards.
CompensationCommittee Report
The information contained in relationthis report shall not be deemed to those matters may be substantially higher than“soliciting material,” to be “filed” with the amounts accrued and/SEC, or insured. Substantial legal liability could adversely affect our business, financial condition, results of operations, and reputation.
Liabilities from environmental regulations could materially and adversely affect our business, financial condition, and results of operations.
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. We may be held liable to a governmental entityRegulation 14A or Regulation 14C (other than as provided in Item 407 of Regulation S-K) or to third parties for property damage, personal injury, investigationthe liabilities of Section 18 of the Securities Exchange Act of 1934, and clean-up costs incurredshall not be deemed to be incorporated by these partiesreference in connectionfuture filings with environmental contamination or may be requiredthe SEC except to investigate or clear up hazardous or toxic substances, or chemical releases atthe extent that the Company specifically incorporates it by reference into a property. The costs associated with investigation or remediation activities could be substantial. In addition, asdocument filed under the owner or former ownerSecurities Act 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, financial condition, and results of operations could be materially and adversely affected.
Severe weather, natural disasters, acts of war or terrorism or other adverse external events could harm our business.
Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant negative impact on our ability to conduct business. The nature and level of severe weather and/or natural disasters cannot be predicted and may be exacerbated by global climate change. Severe weather and natural disasters could harm our operations through interference with communications, including the interruption or loss of our computer systems, which could prevent or impede us from gathering deposits, originating loans and processing and controlling the flow of business, as well as through the destruction of facilities and our operational, financial and management information systems. California, in which our business is located and a substantial portion of our loan collateral is located, is susceptible to severe weather and natural disasters such as earthquakes, floods, droughts and wildfires. Additionally, the United States remains a target for potential acts of war or terrorism. Such severe weather, natural disasters, acts of war or terrorism or other adverse external events could negatively impact our business operations1933 or the stabilitySecurities Exchange Act of our deposit base, cause significant property damage, adversely impact1934.
The CNG Committee has reviewed and discussed the valuesCompensation Discussion and Analysis with management. Based on that review and those discussions, the Compensation, Nominating and Corporate Governance Committee recommended to the Board of collateral securing our loans and/or interrupt our borrowers’ abilities to conduct their businessDirectors that the Compensation Discussion and Analysis be included in a manner to support their debt obligations, which could result in lossesthis Report and increased provisions for loan losses. There is no assurance that our business continuity and disaster recovery program can adequately mitigate the risks of such business disruptions and interruptions.
We may be adversely affected by the soundness of other financial institutions.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, and other relationships. We have exposure to different industries and counterparties, and through transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, orProxy Statement for the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. These losses or defaults could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Additionally, if our competitors were extending credit on terms we found to pose excessive risks, or at interest rates which we believed did not warrant the credit exposure, we may not be able to maintain our business volume and could experience deteriorating financial performance.2021 Annual Shareholders Meeting.
Failure to maintain effective internal controls over financial reporting could have a material adverse effect on our business and stock price.
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| Date: April 23, 2021 | | Compensation, Nominating and Corporate Governance Committee |
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| | Pravin C. Pranav, Co-Chairman |
| | Phillip T. Thong, Co-Chairman |
| | Peter H. Hui, Chairman of the Board |
EXECUTIVE COMPENSATION
As a publican emerging growth company under the JOBS Act, we will be requiredhave opted to comply with the SEC’s rules implementing Sections 302scaled executive compensation disclosure applicable to “smaller reporting companies”. Under the scaled disclosure accommodations, the Company is allowed to limit reporting of executive compensation to the Company's principal executive officer and 404at least two other most highly compensated executive officers. Under the scaled disclosure accommodations, we have elected to disclose compensation information for our principal executive officer, and the next three most highly-paid executive officers (as the designation of the Sarbanes-Oxley Act,an "executive officer" has been determined by Board resolution) which will require managementare referred to certify financial and other information inas our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. In particular, we will be required to certify our compliance with Section 404 of the Sarbanes-Oxley Act beginning with our second annual report on Form 10-K“named executive officers.”
Summary Compensation Table
The following table sets forth, for the yearfiscal years ended December 31, 2020 and 2019, which will require uscompensation information for Robert M. Franko, the Company’s President, Chief Executive Officer and Chief Financial Officer, Khoi D. Dang, the Company's Executive Vice President and General Counsel, Gene May, the Company’s Executive Vice President and the Bank's Chief Credit Officer and Yolanda M. Su, the Company's Executive Vice President and the Bank's Chief Operations Administrator, all of whom constitute our Named Executive Officers, or NEOs.
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| Name | | Year | | Salary | | Bonus (1) | | Stock Awards (2)(3) | | All Other Compensation(4) | | Total |
| Robert M. Franko | | 2020 | | $ | 500,000 | | | $ | 373,409 | | | $ | 631,510 | | | $ | 41,270 | | | $ | 1,546,189 | |
| Director, President and CEO | | 2019 | | $ | 472,500 | | | $ | 239,558 | | | $ | 233,530 | | | $ | 31,805 | | | $ | 977,393 | |
| | | | | | | | | | | | |
| Khoi D. Dang | | 2020 | | $ | 289,870 | | | $ | 151,536 | | | $ | 154,160 | | | $ | 24,571 | | | $ | 620,137 | |
| EVP/General Counsel | | 2019 | | $ | 280,000 | | | $ | 70,000 | | | $ | 68,247 | | | $ | 12,313 | | | $ | 430,560 | |
| | | | | | | | | | | | |
| Gene May | | 2020 | | $ | 241,944 | | | $ | 126,480 | | | $ | 129,220 | | | $ | 26,917 | | | $ | 524,561 | |
| EVP/Chief Credit Officer | | 2019 | | $ | 231,525 | | | $ | 58,692 | | | $ | 57,228 | | | $ | 22,076 | | | $ | 369,521 | |
| | | | | | | | | | | | |
| Yolanda Su | | 2020 | | $ | 250,000 | | | $ | 130,693 | | | $ | 133,520 | | | $ | 38,790 | | | $ | 553,003 | |
| EVP/Chief Operations Administrator | | 2019 | | $ | 214,783 | | | $ | 70,782 | | | $ | 69,000 | | | $ | 34,090 | | | $ | 388,655 | |
(1)For 2020, represents cash incentives earned in 2020 and paid in February 2021.
(2)The dollar value of restricted stock awards represents the aggregate grant date fair value of awards granted for services in the applicable fiscal year as computed in accordance with FASB ASC Topic 718, disregarding for this purpose the estimate of forfeitures related to furnishservice-based vesting conditions. The terms of the 2005 and 2013 Plans are described below in "Equity Incentive Plans." Generally, equity compensation to our NEOs for services in a particular year are paid in February of the immediately following year. Stock awards indicated in this column include restricted stock grants to the NEOs in February 2021 for their service in 2020.
(3) Included in the 2020, a long-term incentive granted to Mr. Franko on May 12, 2020 vests at a rate of 33.33% annually, a report by managementcommencing on the effectivenessfirst anniversary of our internal controls over financial reporting. Although we are currentlygrant.
(4) Refer to "All Other Compensation" table on the following page:
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| All Other Compensation |
| Name | | Year | | 401(k) Match | | Life Insurance Premium | | Health Insurance Premium | | Car Allowance | | Total |
| Robert M. Franko | | 2020 | | $ | 11,400 | | | $ | 6,180 | | | $ | 14,690 | | | $ | 9,000 | | | $ | 41,270 | |
| | 2019 | | $ | 11,200 | | | $ | 6,180 | | | $ | 14,425 | | | $ | — | | | $ | 31,805 | |
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| Khoi D. Dang | | 2020 | | $ | 11,400 | | | $ | 450 | | | $ | 2,221 | | | $ | 10,500 | | | $ | 24,571 | |
| | 2019 | | $ | 6,053 | | | $ | 94 | | | $ | 1,666 | | | $ | 4,500 | | | $ | 12,313 | |
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| Gene May | | 2020 | | $ | 11,400 | | | $ | 3,810 | | | $ | 1,207 | | | $ | 10,500 | | | $ | 26,917 | |
| | 2019 | | $ | 11,200 | | | $ | 3,543 | | | $ | 1,333 | | | $ | 6,000 | | | $ | 22,076 | |
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| Yolanda Su | | 2020 | | $ | 11,400 | | | $ | 1,290 | | | $ | 15,600 | | | $ | 10,500 | | | $ | 38,790 | |
| | 2019 | | $ | 11,200 | | | $ | 1,290 | | | $ | 15,600 | | | $ | 6,000 | | | $ | 34,090 | |
Compensation Agreements and Arrangements with Named Executive Officers
Employment Agreements
Effective as of April 1, 2020, the Company and the Bank entered into an emerging growth company and have elected additional transitional relief availableemployment agreement with Mr. Franko for a three-year term pursuant to emerging growth companies, if we are unablewhich the Company has agreed to continueprovide Mr. Franko with an annual base salary of $500,000, subject to qualify as an emerging growth companyupward adjustment in the future or we are unablesole discretion of the Company’s Board of Directors. Under the terms of his employment agreement, Mr. Franko will also be provided with an automobile allowance of $1,000 per month to qualify as a smaller reporting company under applicable SEC rules, then our independent registered public accounting firmcover his automobile costs for all gasoline, oil, repairs, maintenance and insurance cost.In addition, the Company has agreed to provide Mr. Franko and his direct and immediate family with, and pay for, participation in medical, dental, vision, accident and health benefits, appropriate life and disability insurance.Under the terms of his employment agreement, Mr. Franko will be requiredeligible to reportparticipate in any pension or profit-sharing plan, deferred compensation plan, salary continuation plan, stock purchase plan, or similar benefit or retirement program, including the Company’s 401k Plan, as approved by the Board of Directors now or hereafter existing, to the extent that he is eligible under the provisions thereof and commensurate with his position in relationship to other participants. As of the date hereof, the Company only has a 401(k) Plan.If Mr. Franko is terminated without “cause” (as defined in his employment agreement) or Mr. Franko terminates his employment for “good reason” (as defined in his employment agreement), the Company has agreed to provide Mr. Franko with a severance benefit that includes (a) a lump sum payment equal to twenty-four (24) months of his then-current base salary and the average of the cash portion of his annual bonus over the three year period prior to termination; (b) continuation of group health, dental and vision benefits for a period of twenty-four (24) months following termination; and (c) immediate vesting of all then-unvested equity grants or awards. In the event Mr. Franko voluntarily resigns without good reason, then he would be entitled to payment of only those payment obligations that have accrued to him as of the date of his termination, including unpaid PTO, expense reimbursements, and any vested benefits and other amounts due to him under any plan, program or policy of the Company (collectively, the “accrued obligations”). In the event of Mr. Franko’s death or disability, he or his estate, as applicable, would be entitled to receive the accrued obligations and “average bonus” as calculated in accordance with his employment agreement and as prorated based on the effectivenessnumber of our internal control over financial reporting.
If we identify any material weaknessesdays elapsed in our internal control over financial reportingthe calendar year during which his employment is terminated. In the event Mr. Franko resigns for “good reason,” (as defined in his employment agreement), he would be entitled to receive the same benefits and payments as determined in the case of a termination without “cause,” as discussed above. In addition, in the event Mr. Franko’s employment is terminated without “cause” or are unableMr. Franko terminates his employment for “good reason” in connection with or following a “change in control” of the Company (as defined in his employment agreement), the Company has agreed to complyprovide Mr. Franko with such severance benefits as more particularly described in the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion assection entitled “Potential Payments to the effectivenessNamed Executive Officers Upon Termination or Change in Control,” below.
Effective as of our internal control over financial reporting once we are no longerApril 1, 2020, the Company and the Bank entered into an emerging growth company, investors, counterparties and customers may lose confidenceemployment agreement with Mr. Dang for a two-year term pursuant to which the Company has agreed to provide Mr. Dang with an annual base salary of $289,870, subject to upward adjustment in the accuracysole discretion of the Company’s Board of Directors. Under the terms of his employment agreement, Mr. Dang will also be provided with an automobile allowance of $1,000 per month to cover his automobile costs for all gasoline, oil, repairs, maintenance and completenessinsurance cost.In addition, the Company has agreed to provide Mr. Dang and his direct and immediate family with, and pay for, participation in medical, dental, vision, accident and health benefits, appropriate life and disability insurance.Under the terms of his employment agreement, Mr. Dang will be eligible to participate in any pension or profit-sharing plan, deferred compensation plan, salary continuation plan, stock purchase plan,
or similar benefit or retirement program, including the Company’s 401k Plan, as approved by the Board of Directors now or hereafter existing, to the extent that he is eligible under the provisions thereof and commensurate with his position in relationship to other participants. As of the date hereof, the Company only has a 401(k) Plan.If Mr. Dang is terminated without “cause” (as defined in his employment agreement) or Mr. Dang terminates his employment for “good reason” (as defined in his employment agreement), the Company has agreed to provide Mr. Dang with a severance benefit that includes (a) a lump sum payment equal to twelve (12) months of his then-current base salary and the average of the cash portion of his annual bonus over the three year period prior to termination; (b) continuation of group health, dental and vision benefits for a period of twelve (12) months following termination; and (c) immediate vesting of all then-unvested equity grants or awards. In the event Mr. Dang voluntarily resigns without good reason, then he would be entitled to payment of only those payment obligations that have accrued to him as of the date of his termination, including unpaid PTO, expense reimbursements, and accrued obligations. In the event of Mr. Dang’s death or disability, he or his estate, as applicable, would be entitled to receive the accrued obligations and “average bonus” as calculated in accordance with his employment agreement and as prorated based on the number of days elapsed in the calendar year during which his employment is terminated. In the event Mr. Dang resigns for “good reason,” (as defined in his employment agreement), he would be entitled to receive the same benefits and payments as determined in the case of a termination without “cause,” as discussed above. In addition, in the event Mr. Dang’s employment is terminated without “cause” or Mr. Dang terminates his employment for “good reason” in connection with or following a “change in control” of the Company (as defined in his employment agreement), the Company has agreed to provide Mr. Dang with such severance benefits as more particularly described in the section entitled “Potential Payments to the Named Executive Officers Upon Termination or Change in Control,” below.
Effective as of April 1, 2020, the Company and the Bank entered into an employment agreement with Mr. May for a two-year term pursuant to which the Bank has agreed to provide Mr. May with an annual base salary of $241,944, subject to upward adjustment in the sole discretion of the Bank’s Board of Directors. Under the terms of his employment agreement, Mr. May will also be provided with an automobile allowance of $1,000 per month to cover his automobile costs for all gasoline, oil, repairs, maintenance and insurance cost. In addition, the Company has agreed to provide Mr. May and his direct and immediate family with, and pay for, participation in medical, dental, vision, accident and health benefits, appropriate life and disability insurance.Under the terms of his employment agreement, Mr. May will be eligible to participate in any pension or profit-sharing plan, deferred compensation plan, salary continuation plan, stock purchase plan, or similar benefit or retirement program, including the Company’s 401k Plan, as approved by the Board of Directors now or hereafter existing, to the extent that he is eligible under the provisions thereof and commensurate with his position in relationship to other participants. As of the date hereof, the Company only has a 401(k) Plan.If Mr. May is terminated without “cause” (as defined in his employment agreement) or Mr. May terminates his employment for “good reason” (as defined in his employment agreement), the Company has agreed to provide Mr. May with a severance benefit that includes (a) a lump sum payment equal to twelve (12) months of his then-current base salary and the average of the cash portion of his annual bonus over the three year period prior to termination; (b) continuation of group health, dental and vision benefits for a period of twelve (12) months following termination; and (c) immediate vesting of all then-unvested equity grants or awards. In the event Mr. May voluntarily resigns without good reason, then he would be entitled to payment of only those payment obligations that have accrued to him as of the date of his termination, including unpaid PTO, expense reimbursements, and accrued obligations. In the event of Mr. May’s death or disability, he or his estate, as applicable, would be entitled to receive the accrued obligations and “average bonus” as calculated in accordance with his employment agreement and as prorated based on the number of days elapsed in the calendar year during which his employment is terminated. In the event Mr. May resigns for “good reason,” (as defined in his employment agreement), he would be entitled to receive the same benefits and payments as determined in the case of a termination without “cause,” as discussed above. In addition, in the event Mr. May’s employment is terminated without “cause” or Mr. May terminates his employment for “good reason” in connection with or following a “change in control” of the Bank (as defined in his employment agreement), the Company has agreed to provide Mr. May with such severance benefits as more particularly described in the section entitled “Potential Payments to the Named Executive Officers Upon Termination or Change in Control,” below.
Effective as of April 1, 2020, the Company and the Bank entered into an employment agreement with Ms. Su for a two-year term pursuant to which the Bank has agreed to provide Ms. Su with an annual base salary of $250,000, subject to upward adjustment in the sole discretion of the Bank’s Board of Directors. Under the terms of her employment agreement, Ms. Su will also be provided with an automobile allowance of $1,000 per month to cover her automobile costs for all gasoline, oil, repairs, maintenance and insurance cost. In addition, the Company has agreed to provide Ms. Su and her direct and immediate family with, and pay for, participation in medical, dental, vision, accident and health benefits, appropriate life and disability insurance. Under the terms of her employment agreement, Ms. Su will be eligible to participate in any pension or profit-sharing plan, deferred compensation plan, salary continuation plan, stock purchase plan, or similar benefit or retirement program, including the Company’s 401k Plan, as approved by the Board of Directors now or hereafter existing, to the extent that he is eligible under the provisions thereof and commensurate with her position in relationship to other participants. As of the date hereof, the Company only has a 401(k) Plan.If Ms. Su is terminated without “cause” (as defined in her employment agreement) or Ms. Su terminates her employment for “good reason” (as defined in her employment agreement), the Bank has agreed to provide Ms. Su with a severance benefit that includes (a) a lump sum payment equal to twelve (12) months of her then-current base salary and the average of the cash portion of her annual bonus over the three year
period prior to termination; (b) continuation of group health, dental and vision benefits for a period of twelve (12) months following termination; and (c) immediate vesting of all then-unvested equity grants or awards. In the event Mr. Su voluntarily resigns without good reason, then she would be entitled to payment of only those payment obligations that have accrued to her as of the date of his termination, including unpaid PTO, expense reimbursements, and accrued obligations. In the event of Mr. Su’s death or disability, she or her estate, as applicable, would be entitled to receive the accrued obligations and “average bonus” as calculated in accordance with her employment agreement and as prorated based on the number of days elapsed in the calendar year during which her employment is terminated. In the event Ms. Su resigns for “good reason,” (as defined in his employment agreement), she would be entitled to receive the same benefits and payments as determined in the case of a termination without “cause,” as discussed above. In addition, in the event Ms. Su’s employment is terminated without “cause” or Ms. Su terminates her employment for “good reason” in connection with or following a “change in control” of the Company (as defined in her employment agreement), the Company has agreed to provide Ms. Su with such severance benefits as more particularly described in the section entitled “Potential Payments to the Named Executive Officers Upon Termination or Change in Control,” below.
Clawback Policy
Our executive employment agreements contain a provision that, in the event of a material restatement of our consolidated financial statements, allows the Board, based on available remedies, to seek recovery or forfeiture from any executive officer of the portion of incentive compensation that was received by or vested in the executive officer prior to the determination that a restatement was required and reports; our liquidity, accessthat would not have been earned had performance been measured on the basis of the restated results where the Board reasonably determines that the executive engaged in knowing or intentional fraudulent or illegal conduct that materially contributed to capital markets and perceptionsthe need for the restatement.
Potential Payments to the Named Executive Officers Upon Termination or Change in Control
Under the terms of our creditworthiness couldtheir respective employment agreements as described above, if, after the occurrence of a “change in control” of the Company and/or the Bank (as that term is defined in their respective employment agreements), a NEO is terminated other than for “cause,” the NEO terminates his or her employment with the Company or the surviving company for “good reason” (as defined in his or her employment agreement) or the NEO is not retained by the Company or the surviving company following a change in control, then the NEO will be adversely affected;entitled to certain severance benefits as outlined in the NEOs employment agreement with the Company, including (a) a cash payment equal to a multiple, as disclosed in the table below, of the sum of their then current base salary and the market priceaverage cash bonus over the immediately preceding three years; (b) continuation of our common stock could decline. In addition, we could becomegroup health, dental and vision benefits for certain period ranging from eighteen (18) months to twenty-four (24) months; and (c) immediate vesting of all then-unvested equity grants or awards.
Under the terms of these employment agreements, if the payments to a NEO, together with any other payments which a NEO has the right to receive from the Company would constitute a “parachute payment” under the Internal Revenue Code Section 280G, the payments pursuant to this agreement then the aggregate of these payments will be reduced so that the maximum amount of these payments (after reduction) will be one dollar ($1.00) less than the amount that would cause the aggregate of these payments to be subject to investigationsthe excise tax imposed by section 4999 of the Internal Revenue Code (or nondeductible by the stock exchange on which our securities are listed,Company under Internal Revenue Code Section 280G) or any interest or penalties with respect to such excise tax. However, the SEC,aggregate of these payments will only be reduced to the extent the after-tax value of amounts received by the NEO after application of the above reduction would exceed the after-tax value of the aggregate of these payments without application of such reduction.
The provision of all severance benefits, including severance benefits payable in connection with a change in control of the Company is contingent upon the NEO executing a general release in favor of the Company and the Bank, is subject to the prior receipt of any necessary regulatory approvals, including the approval or the non-objection of the FDIC to the severance payment, and is subject to recovery by the Company and/or the Bank if the Board of Governors ofdetermines that the Federal Reserve System,NEO has committed, is substantially responsible for, or has violated, the FDIC, the DBOrespective acts or other regulatory authorities, which could require additional financial and management resources. These events could have an adverse effect on our business, financial condition and results of operations.
We are an “emerging growth company,” and the reduced regulatory and reporting requirements applicable to emerging growth companies may make our common stock less attractive to investors.
We are an “emerging growth company,” asomissions, conditions or offenses described in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of reduced regulatory and reporting requirements that are otherwise generally12 CFR §359.4(a)(4).
applicable to public companies. These include, without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced financial reporting requirements, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments. The JOBS Act also permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. However, we have irrevocably “opted out” of this provision, and we will comply with new or revised accounting standards to the same extent that compliance is required for non-emerging growth companies.
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. Investors may find our common stock less attractive if we rely on the exemptions, which may result in a less active trading market and increased volatility in our stock price.
Changes in accounting standards could materially impact our consolidated financial statements.
From time to time, the FASB or SEC, may change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. Such changes may result in us being subject to new or changing accounting and reporting standards. In addition, the bodiesCompany’s 2013 Omnibus Stock Incentive Plan (the “2013 Plan”) provides that interpretunless otherwise provided in an award agreement, upon the accounting standards (such as banking regulatorsoccurrence of a change in control of the Company (as defined in the 2013 Plan or outside auditors) maythe individual award agreements), all outstanding stock options and unvested restricted stock awards held by a participant will become fully exercisable and all stock awards or cash incentive awards held by a participant will become fully earned and vested. In the event an award constitutes “deferred compensation” for purposes of Section 409A of the Revenue Code, and the settlement or distribution of benefits under such award are triggered by a change their interpretationsin control, such settlement or positions on how these standards shoulddistribution will be applied. These changes may be beyond oursubject to the change in control can be hard to predict and can materially impact how we record and report our financial condition and resultsalso constituting a “change in control event” under Section 409A of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard differently, also retrospectively, in each case resulting in our needing to revise or restate prior period consolidated financial statements.the Revenue Code.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our principal executive offices are located in Cerritos, California, and are leased by First Choice Bank. We lease all of our facilities and believe that if necessary, we could secure suitable alternative facilities on similar terms without adversely affecting operations. In January 2019, the Company's loan production office located in Temecula was discontinued. The following table provides certain information regarding the purpose and physical locationpotential payments to our NEOs assuming a Change of our offices at JanuaryControl occurred as of December 31, 2019.2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Change in Control Multiple of Salary and 3-Year Average Bonus | | Continuation of Benefits (No. of Months) | | Dollar Value of Unvested Shares as of December 31, 2020(1) | | Potential Payments to the NEOs Upon Termination or Change in Control as of December 31, 2020(2) |
| Robert M. Franko | | 2.99x | | 24 | | $ | 531,772 | | | $ | 3,305,765 | |
| Khoi D. Dang | | 1.5x | | 18 | | $ | 198,194 | | | $ | 884,485 | |
| Gene May | | 1.5x | | 18 | | $ | 42,157 | | | $ | 614,802 | |
| Yolanda Su | | 1.5x | | 18 | | $ | 50,829 | | | $ | 720,815 | |
|
| | | |
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 | |
Rowland Heights | | 17458 E. Colima Road, Rowland Heights, CA 91748 | |
Anaheim | | 2401 E. Katella Ave., Suite 125, Anaheim, CA 92806 | |
Carlsbad (1)
| | 5857 Owens Ave., Suite 106 Carlsbad, CA 92008 | |
Los Angeles - Little Tokyo (2)
| | 420 East Third Street, Suite 100, Los Angeles, CA 90013 | |
Los Angeles - 6th & Figueroa (2)
| | 888 W. 6th Street, Suite 200, Los Angeles, CA 90017 | |
West Los Angeles | | 11300 West Olympic Blvd., Suite 100, Los Angeles, CA 90064 | |
San Diego (1)
| | 12730 High Bluff Drive, Suite 100, San Diego, CA 92130 | |
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 | |
(1) Received regulatory approval to discontinue the San Diego branch and convert this to a loan production office only. The San Diego branch will be consolidated with the Carlsbad branch effective at the close of business Based on May 17, 2019.
(2) Received regulatory approval to discontinue the Los Angeles - Little Tokyo branch, which will be consolidated with Los Angeles - 6th & Figueroa branch effective at the close of business on May 17, 2019.
For information regarding our lease commitments, refer to Note 5 - Premises and Equipment to the Consolidated Financial Statements included in Part II, Item 8 - Financial Statements and Supplementary Data, of this Annual Report.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company is a party or to which the property of the Company is subject.
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 (NASDAQ) 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 13, 2019, the Company had 390 common stock shareholders of record based on the records of our transfer agent, and the closing price of the Company's common stock of $18.49 on the December 31, 2020. Unvested Shares include shares awarded pursuant to the Management Incentive Plan which generally vest on the first anniversary of the grant date and shares awarded as long-term equity compensation which are designed to align the long-term interest of the NEO with the Company’s shareholders and promote retention and which shares vest over multiple years. Please refer to the section entitled “2020 Executive Compensation Program in Detail” in the Compensation Discussion and Analysis.
(2) Amounts indicated net potential payments after clawback and exclude the dollar value of the continuation of benefits for the period(s) specified in the table for the applicable NEO. No NEO has the clawback payment.
Outstanding Equity Awards at 2020 Fiscal Year-End
The following table sets forth information concerning outstanding stock options and unvested restricted stock held by each of the NEOs at December 31, 2020 on an award-by-award basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Number of Underlying Unexercised Options - Exercisable (1) | | Number of Underlying Unexercised Options - Unexercisable | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options | | Option Exercise Price | | Number of Shares of Units of Stock That Have Not Vested | | Market Value of Shares of Units of Stock That Have Not Vested(6) |
| Robert M. Franko | | 32,448(1) | | — | | — | | $ | 11.33 | | | 28,760(2) | | $ | 531,772 | |
| Khoi D. Dang | | — | | — | | — | | n/a | | 10,719(3) | | 198,194 | |
| Gene May | | 21,632(4) | | — | | — | | $ | 7.86 | | | 2,280(5) | | 42,157 | |
| Yolanda Su | | — | | — | | — | | n/a | | 2,749(5) | | 50,829 | |
(1) Options were issued under the Company's 2013 Omnibus Stock Incentive Plan.
(2) Includes 9,304 shares of unvested restricted stock granted on February 4, 2020 and fully vested on February 4, 2021 and 19,456 shares of unvested restricted stock granted on May 12, 2020 vest at a rate of 33.33% annually, commencing on the first anniversary of grant.
(3) Includes 2,719 shares of unvested restricted stock granted on February 4, 2020 and fully vested on February 4, 2021 and 8,000 shares of unvested restricted stock granted on April 1, 2019 vest at a rate of 20% annually, commencing on the first anniversary of grant.
(4) Options were issued under the Company's 2005 Omnibus Stock Incentive Plan.
(5) Restricted stock granted on February 4, 2020 and fully vested on February 4, 2021.
(6) Based on the closing price of the Company's common stock of $18.49 on December 31, 2020.
Equity Incentive Plans
The 2005 Stock Option Plan
The Bank previously adopted the 2005 Stock Option Plan (the “2005 Plan”) which was subsequently approved and ratified by the Bank’s shareholders at the Bank’s 2005 Annual Meeting of Shareholders. The 2005 Plan expired in 2015 and, accordingly, no further shares are authorized for issuance under the 2005 Plan. In connection with the holding company reorganization of the Bank in December 2017, all then-outstanding stock options issued under the 2005 Plan were converted to stock options exercisable for the Company’s common stock was $22.22 per share. Thestock. At December 31, 2020, the number of holdersshares to be issued upon the exercise of record does not representoutstanding options granted pursuant to the actual2005 Plan was 21,632 shares.
The 2013 Omnibus Stock Incentive Plan
The 2013 Omnibus Stock Incentive Plan, or 2013 Plan was approved by the Bank’s shareholders on May 9, 2013 and, in connection with the holding company reorganization of the Bank in December 2017, the 2013 Plan was converted to an equity plan of the Company and all then-outstanding stock options and restricted stock awards issued under the 2013 Plan were converted to stock options exercisable for, and restricted stock awards for, the Company’s common stock. The 2013 Plan was designed to ensure continued availability of equity awards that will assist the Company in attracting and retaining competent managerial personnel and rewarding key employees, directors and consultants for high levels of performance. Under the 2013 Plan, directors, officers, employees and consultants may be granted options, stock appreciation rights,
restricted stock awards, deferred stock awards and performance units. The 2013 Plan also allows for performance objectives upon which awards may be conditioned.
The maximum number of beneficial ownersshares as to which stock awards may be granted under the 2013 Plan is currently 1,590,620 shares pursuant to an amendment to the 2013 Plan approved and ratified by the Company’s shareholders in June 2020 to increase the number of shares reserved for issuance thereunder by 200,000 shares. At December 31, 2020, the number of shares to be issued upon exercise of outstanding options granted or the number of shares of vested and unvested restricted stock awarded pursuant to the 2013 Plan was 244,060 shares, and the number of shares of Common Stock remaining available for future issuance under the 2013 Plan was 401,528 shares.
The following summary of the 2013 Plan:
Administration. The 2013 Plan is administered by the CNG Committee. Subject to the terms of the 2013 Plan, the CNG Committee determines which employees and consultants receive awards under the 2013 Plan, the dates of grant, the number and types of awards to be granted, the exercise or purchase price of each award, and the terms and conditions of the awards, including the period of their exercisability and vesting and the fair market value applicable to a stock award.
In addition, the CNG Committee has the authority to determine whether any award may be settled in cash, shares of our common stock, becauseother securities dealersor other awards or property. The CNG Committee has the authority to interpret the 2013 Plan and others frequently holdmay adopt any administrative rules, regulations, procedures and guidelines governing the 2013 Plan or any awards granted under the 2013 Plan as it deems to be appropriate. The CNG Committee may also delegate any of its powers, responsibilities or duties to any person who is not a member of the CNG Committee or any administrative group within the Company. Our Board of Directors may also grant awards or administer the 2013 Plan.
Shares Available for Awards. The total number of shares available under the 2013 Plan is 1,590,620 shares. The shares of common stock subject to grant under the 2013 Plan may be made available from authorized and unissued shares, treasury shares or shares purchased on the open market. To the extent that any award is forfeited, or any stock option or stock appreciation right (“SAR”) terminates, expires or lapses without being exercised, or any award is settled for cash, the shares of Common stock subject to such awards not delivered as a result thereof will again be available for awards under the 2013 Plan. If the exercise price of any stock option and/or the tax withholding obligations relating to any award are satisfied by delivering shares of common stock (by either actual delivery or by attestation), only the number of shares of common stock issued net of the shares of Common stock delivered or attested, will be deemed to be granted for purposes of the share limits under the 2013 Plan.
The 2013 Plan provides that in “street name”the event of certain extraordinary corporate transactions or events affecting us, the CNG Committee or our Board of Directors will make such substitutions or adjustments as it deems appropriate and equitable to (1) the aggregate number and kind of shares or other securities reserved for issuance and delivery under the 2013 Plan, (2) the various maximum limitations set forth in the 2013 Plan, (3) the number and kind of shares or other securities subject to outstanding awards, and (4) the exercise price of outstanding options and SARs. In the case of corporate transactions such as a merger or consolidation, such adjustments may include the cancellation of outstanding awards in exchange for cash or other property or the substitution of other property for the benefitshares subject to outstanding awards.
The aggregate number of shares of our common stock that may be granted to any employee during a fiscal year in the form of awards (other than stock options and SARs) that comply with Section 162(m) of the Code, may not exceed 100,000 shares. The maximum number of shares of our common stock that may be granted to any single individual owners whoduring a fiscal year in the form of stock options may not exceed 100,000 shares. The maximum number of shares of our common stock that may be granted to any single individual during a fiscal year in the form of SARs may not exceed 100,000 shares.
Although the Company has the authority under the 2013 Plan to grant stock options and/or SARs, to date the Company has not issued SARs. The Company may in the future determine to grant SARs and/or options.
Awards. The 2013 Plan provides for the grant of nonqualified and incentive stock options, stock appreciation rights, or SARs, restricted stock awards, restricted stock units, and other awards that may be settled in, or based upon the value of, our common stock.
Stock Options and SARs. Stock options granted under the 2013 Plan may either be incentive stock options, which are intended to qualify for favorable treatment to the recipient under U.S. federal tax law, or nonqualified stock options, which do not qualify for this favorable tax treatment. SARs granted under the 2013 Plan may either be “tandem SARs,” which are granted in conjunction with a stock option, or “free-standing SARs,” which are not granted in tandem with a stock option.
Each grant of stock options or SARs under the 2013 Plan will be evidenced by an award agreement that specifies the exercise price, the duration of the award, the number of shares to which the award pertains and such additional limitations, terms and conditions as the CNG Committee may determine, including, in the case of stock options, whether the options are intended to be incentive stock options or nonqualified stock options. The 2013 Plan provides that the exercise price of stock options and SARs will be determined by the CNG Committee, but may not be less than 100% of the fair market value of the stock underlying the stock options or SARs on the date of grant. Award holders may pay the exercise price in cash or, if set forth in an applicable award agreement, in common stock (valued at its fair market value on the date of exercise), by “cashless exercise” through a broker, or by withholding shares otherwise receivable on exercise. The term of stock options and SARs will be determined by the CNG Committee, but may not exceed ten years from the date of grant. The CNG Committee will determine the vesting and exercise schedule and other terms of stock options and SARs, and the extent to which they will be exercisable after the award holder’s service with the Company terminates.
Restricted Stock. Restricted stock may be granted under the 2013 Plan with such restrictions as the CNG Committee may designate. The CNG Committee may provide at the time of grant that the vesting of restricted stock will be contingent upon the achievement of applicable performance goals and/or continued service.
Except for these restrictions and any others imposed under the 2013 Plan or by the CNG Committee, upon the grant of restricted stock under the 2013 Plan, the recipient will have rights of a stockholder with respect to the restricted stock, including the right to vote shares.the restricted stock; however, whether and to what extent the recipient will be entitled to receive cash or stock dividends paid, either currently or on a deferred basis, will be set forth in the award agreement.
Securities authorizedRestricted Stock Units. The CNG Committee may grant restricted stock units payable in cash or shares of common stock, conditioned upon continued service and/or the attainment of performance goals (as described below) determined by the CNG Committee. We are not required to set aside a fund for issuancethe payment of any restricted stock units and the award agreement for restricted stock units will specify whether, to what extent and on what terms and conditions the applicable participant will be entitled to receive dividend equivalents with respect to the restricted stock units.
Other Stock-Based Awards. The CNG Committee may grant unrestricted shares of our common stock, or other awards denominated in our common stock, alone or in tandem with other awards, in such amounts and subject to such terms and conditions as the CNG Committee determines from time to time in its sole discretion as, or in payment of, a bonus, or to provide incentives or recognize special achievements or contributions.
Dividend Equivalents. Dividend equivalent rights entitle the grantee to receive amounts equal to all or any of the ordinary cash dividends that are paid on the shares underlying a grant while the grant is outstanding. Dividend equivalent rights may be paid in cash, in shares of our common stock or in another form. The CNG Committee determines whether dividend equivalent rights will be conditioned upon the vesting or payment of the grant to which they relate and the other terms and conditions of the grant.
Other Stock-Based or Cash-Based Awards. Under the 2013 Plan, the CNG Committee may grant other types of equity-based, equity-related or cash-based awards subject to such terms and conditions that the CNG Committee may determine. Such awards may include the grant or offer for sale of unrestricted shares of our common stock, performance share awards, and performance units settled in cash.
Other Performance Awards. Under the 2013 Plan, the CNG Committee may provide that the grant, vesting or settlement of an award granted under the 2013 Plan is subject to the attainment of one or more performance goals. The CNG Committee has the authority to establish any performance objectives to be achieved during the applicable performance period when granting performance awards.
Termination of Employment. The impact of a termination of employment on an outstanding award granted under the 2013 Plan, if any, will be set forth in the applicable award agreement.
Treatment of Outstanding Equity Awards following a Change in Control. The 2013 Plan provides that, unless otherwise set forth in an award agreement, in the event of a change in control (as defined in the 2013 Plan), (i) any stock option or SAR will become fully exercisable and vested, (ii) the restrictions on any restricted stock will lapse and the shares will vest and become transferable, (iii) all restricted stock units will be considered earned and payable in full and any restrictions will lapse, and (iv) any performance-based awards will be deemed earned and payable in full, with the applicable performance goals to be deemed achieved at the greater of target or actual performance through the date of the change in control. The CNG Committee may also make additional adjustments and/or settlements of outstanding equity awards as it deems appropriate and consistent with the purposes of the 2013 Plan.
A “change in control” is generally deemed to occur under the 2013 Plan upon:
(a) The acquisition in a transaction or series of transactions by any person of beneficial ownership of thirty percent (30%) or more of the combined voting power of the then outstanding shares of common stock of the Company; provided, however, the following acquisitions will not constitute a Change in Control: (A) any acquisition by the Company; (B) any acquisition of common stock of the Company by an underwriter holding securities of the Company in connection with a public offering thereof; and (C) any acquisition by any person pursuant to a transaction which complies with subsections (c) (i), (ii) and (iii), below;
(b) Individuals who, as of date of the an award agreement are members of the Board (the “Incumbent Board”), cease for any reason to constitute at least a majority of the members of the Board; provided, however, that if the election, or nomination for election by the Company’s common shareholders, of any new director was approved by a vote of at least two- thirds of the Incumbent Board, such new director will, for purposes of the 2013 Plan, be considered as a member of the Incumbent Board; provided further, however, that no individual will be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened “Election Contest” (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board (a “Proxy Contest”) including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest;
(c) Consummation, following shareholder approval, of a reorganization, merger, or consolidation of the Company and/or its subsidiaries, or a sale or other disposition (whether by sale, taxable or non-taxable exchange, formation of a joint venture or otherwise) of fifty percent (50%) or more of the assets of the Company and/or its subsidiaries (each a “business combination”), unless, in each case, immediately following such business combination, (i) all or substantially all of the individuals and entities who were beneficial owners of shares of the common stock of the Company immediately prior to such business combination beneficially own, directly or indirectly, more than fifty percent (50%) of the combined voting power of the then outstanding shares of the entity resulting from the business combination or any direct or indirect parent corporation thereof (including, without limitation, an entity which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one (1) or more subsidiaries)(the “Successor Entity”); (ii) no person (excluding any Successor entity or any employee benefit plan or related trust, of the Company or such Successor Entity) owns, directly or indirectly, thirty percent (30%) or more of the combined voting power of the then outstanding shares of common stock of the Successor Entity, except to the extent that such ownership existed prior to such business combination; and (iii) at least a majority of the members of the Board of Directors of the entity resulting from such business combination or any direct or indirect parent corporation thereof were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such business combination; or
(d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company, except pursuant to a business combination that complies with subsections (c)(i), (ii), and (iii) above.
Amendment and Termination. The 2013 Plan may be amended, altered, suspended, discontinued or terminated by our Board of Directors, but no amendment, alteration, suspension, discontinuation or termination may be made if it would materially impair the rights of a participant (or his or her beneficiary) without the participant’s (or beneficiary’s) consent, except for any such amendment required to comply with law. The 2013 Plan may not be amended without stockholder approval to the extent such approval is required to comply with applicable law or the listing standards of the applicable exchange.
New Plan Benefits. Awards under the 2013 Plan are made at the discretion of the CNG Committee. Therefore, the benefits or amounts that will be received by or allocated to each NEO, all current executive officers as a group, all directors who are not executive officers as a group, and all employees who are not executive officers as a group, under the 2013 Plan if the Amendment is approved by stockholders are not presently determinable.
Federal Income Tax Consequences Relating to Awards Granted pursuant to the 2013 Plan. The following discussion summarizes certain federal income tax consequences of awards under the 2013 Plan. This discussion is based on current laws in effect on the date of this Report, which are subject to change (possibly retroactively). The summary does not purport to cover federal employment tax or other federal tax consequences that may be associated with the 2013 Plan, nor does it cover state, local or non-U.S. tax consequences. The tax treatment of participants in the 2013 Plan may vary depending on each participant’s particular situation and may, therefore, be subject to special rules not discussed below. Participants are advised to consult with a tax advisor concerning the specific tax consequences of participating in the 2013 Plan.
In general, a participant realizes no taxable income upon the grant or exercise of an incentive stock option (“ISO”). However, the exercise of an ISO may result in an alternative minimum tax liability to the participant. With certain exceptions, a disposition of shares purchased under an ISO within two years from the date of grant or within one year after exercise produces ordinary income to the participant (and a deduction for us) equal to the value of the shares at the time of exercise less the exercise price. Any additional gain recognized in the disposition is treated as a capital gain for which we are not
entitled to a deduction. If the participant does not dispose of the shares until after the expiration of these one- and two-year holding periods, any gain or loss recognized upon a subsequent sale is treated as a long-term capital gain or loss for which we are not entitled to a deduction.
Nonqualified Stock Options
In general, in the case of a nonqualified stock option, the participant has no taxable income at the time of grant but realizes ordinary income in connection with exercise of the option in an amount equal to the excess (at the time of exercise) of the fair market value of the shares acquired upon exercise over the exercise price. A corresponding deduction is available to us. Any gain or loss recognized upon a subsequent sale or exchange of the shares is treated as capital gain or loss for which we are not entitled to a deduction.
Restricted Stock
Unless a participant makes an election to accelerate recognition of the income to the date of grant as described below, the participant will not recognize income, and the Company will not be allowed a tax deduction, at the time a restricted stock award is granted. When the restrictions lapse, the participant will recognize ordinary income equal to the fair market value of the common stock as of that date, less any amount paid for the stock, and the Company will be allowed a corresponding tax deduction at that time. If the participant files an election under Section 83(b) of the Code within 30 days after the date of grant of the restricted stock, the participant will recognize ordinary income as of the date of grant equal to the fair market value of the common stock as of that date, less any amount the participant paid for the common stock, and the Company will be allowed a corresponding tax deduction at that time. Any future appreciation in the common stock will be taxable to the participant at capital gains rates. However, if the restricted stock award is later forfeited, the participant will not be able to recover the tax previously paid pursuant to his Section 83(b) election.
Restricted Stock Units
A participant does not recognize income, and the Company will not be allowed a tax deduction, at the time a restricted stock unit is granted. When the restricted stock units vest and are settled for cash or stock, the participant generally will be required to recognize as ordinary income an amount equal to the fair market value of the shares, or the amount of cash, delivered. Any gain or loss recognized upon a subsequent sale or exchange of the stock (if settled in stock) is treated as capital gain or loss for which the Company is not entitled to a deduction.
Section 162(m) of the Internal Revenue Code.
Under Section 162(m) of the Internal Revenue Code, or Revenue Code, the deduction for a publicly held corporation for otherwise deductible compensation plansto a “covered employee” (the chief executive officer, the chief financial officer and the next three most highly compensated executive officers is limited to $1 million per year. Prior to 2018, there were two exceptions to the deduction limit - the exception for performance-based pay (including stock options) and the exception for commission-based pay. However, the Tax Cuts and Jobs Act of 2017, signed into law on December 22, 2017, repealed these exceptions, placing an effective cap on the amount a company can deduct for executive compensation at $1 million-dollars for a company’s CEO, CFO, and the next three most highly paid executives.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information as of April 9, 2021, concerning beneficial ownership of our Common Stock (i) by persons (other than depositories) known by us to own five percent (5%) or more of our outstanding Common Stock, (ii) by each of our directors or nominees, (iii) by each of our executive officers and the executive officers of the Bank, and (iv) by all current directors and executive officers of the Company and/or the Bank as a group. The table should be read with the understanding that more than one (1) person may be the beneficial owner or possess certain attributes of beneficial ownership with respect to the same securities.
Management is not aware of any change in control of the Company that has occurred since January 1, 2020, or any arrangement that may, at a subsequent date, result in a change in control of the Company, except that on April 26, 2021, the Company and the Bank entered into a definitive merger agreement with Enterprise Financial Services Corp ("EFSC") and its wholly-owned bank subsidiary Enterprise Bank & Trust (“EB&T”) pursuant to which EFSC will acquire, in an all-stock merger, the Company. Under the terms of the merger agreement, the Company will merge with and into EFSC, and the Bank will subsequently merge with and into EB&T. On a pro forma consolidated basis, the combined company would have approximately $12.7 billion in consolidated total assets as of March 31, 2021. Entry into the merger agreement was announced in a press release on April 26, 2021 and in a Current Report on Form 8-K filed by the Company with the SEC that same day.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Title | | Number of Shares of Common Stock Beneficially Owned(1)(2) | | Number of Shares of Common Stock Subject to Vested Stock Options(1) | | Percent of Class(1)(2)(3) |
| Khoi D. Dang | | EVP/General Counsel | | 23,502 | | (4) | | — | | | 0.20 | % |
| Robert M. Franko | | Director, President, CEO and CFO | | 89,986 | | (5) | | 32,448 | | | 1.03 | % |
| James H. Gray | | Director | | 44,779 | | (6) | | — | | | 0.38 | % |
| Peter H. Hui | | Chairman | | 829,174 | | (7) | | — | | | 7.01 | % |
| Fred D. Jensen | | Director | | 14,481 | | (8) | | 5,408 | | | 0.17 | % |
| Luis Maizel | | Director | | 42,403 | | (9) | | 7,977 | | | 0.43 | % |
| Gene May | | EVP/Chief Credit Officer | | 16,803 | | (10) | | 21,632 | | | 0.32 | % |
| Pravin C. Pranav | | Director | | 194,603 | | (11) | | — | | | 1.65 | % |
| Lynn McKenzie-Tallerico | | Director | | 4,178 | | (12) | | — | | | 0.04 | % |
| Yolanda Su | | EVP/Chief Operations Administrator | | 57,194 | | (13) | | — | | | 0.48 | % |
| Phillip T. Thong | | Director | | 139,804 | | (14) | | — | | | 1.18 | % |
| All Directors and Executive Officers as a Group (11 in number) | | 1,456,907 | | (15) | | 67,465 | | | 12.82 | % |
| | | | | | | | | |
| Principal Shareholders Owning 5% of More | | | | | | | |
| Banc Funds | | | | 650,905 | | (16) | | — | | | 5.50 | % |
| BlackRock, Inc. | | | | 634,398 | | (17) | | — | | | 5.37 | % |
(1) For purpose of this table, "beneficial ownership" is determined in accordance with Rule 13d-3 under the Exchange Act, pursuant to which a person or group of persons is deemed to have "beneficial ownership" of any shares of Common Stock that such person has the right to acquire within 60 days of April 9, 2021. This would include stock options that are vested as of that date and stock options that will vest within 60 days of April 9, 2021.
(2) Includes unvested shares of restricted stock granted under the Company's 2013 Omnibus Stock Incentive Plan. Under the terms of this Plan, holders of shares restricted stock have the power to vote such shares during the restricted period and, therefore, the holders of such shares are deemed to "beneficially own" these shares within Rule 13d-3 under the Exchange Act as of April 9, 2021, despite these shares being subject to forfeiture until they vest.
(3) For purposes of this table, "percent of class" is based on 11,824,407 shares of Common Stock of the Company issued and outstanding as of April 9, 2021, including 183,764 shares of unvested restricted stock awarded under the Company's 2013 Omnibus Stock Incentive Plan. For purposes of computing the percentage of outstanding shares of Common Stock held by each person or group of persons named above, any shares which such person or persons has the right to acquire within 60 days of April 9, 2021 are deemed to be outstanding for such person or persons, but are not deemed to be outstanding for the purposes of computing the percentage ownership of any other person. The amounts in the table are as of April 9, 2021.
(4) Includes 15,816 shares of unvested restricted stock, and 3,470 shares held in an IRA account for his benefits.
(5) Includes 42,746 shares of unvested restricted stock, 35,832 shares held in a trust of which he is trustee and has voting rights with respect to these shares, and 11,408 shares held in an IRA account for his benefits.
(6) Includes 2,890 shares of unvested restricted stock, 8,977 shares held in a trust of which he is trustee and has voting rights with respect to these shares, 15,480 shares held in a ROTH-IRA account for his benefits, and 1,647 shares held in an IRA account for his benefits.
(7) Includes 2,645 shares of unvested restricted stock, and 101,396 shares held in his wife's name and in her IRA account.
(8) Includes 2,584 shares of unvested restricted stock, and 889 shares held in a trust of which he is trustee and has voting rights.
(9) Includes 1,374 shares of unvested restricted stock, 29,657 shares held in a trust of which he is trustee and has voting rights with respect to these shares, and 9,612 shares held in an IRA account for his benefits.
(10) Includes 7,515 shares of unvested restricted stock, and 7,611 shares held in an IRA account for his benefits.
(11) Includes 2,483 shares of unvested restricted stock, 127,907 shares held in a trust of which he is trustee and has voting rights with respect to these shares, and 42,350 shares held by Abacus Payroll Services where he is the president and has voting rights.
(12) Includes 2,178 shares of unvested restricted stock.
(13) Includes 8,784 shares of unvested restricted stock.
(14) Includes 3,297 shares of unvested restricted stock, 87,868 shares held in a trust of which he is trustee and has voting rights with respect to these shares, and 46,071 shares held in a retirement plan over which he has voting rights.
(15) Includes an aggregate of 92,312 shares of unvested restricted stock that the respective holders have the power to vote as described in footnote (2) to this table.
(16) Based on Schedule 13GA jointly filed on December 31, 2020 by Banc Fund VIII L.P., an Illinois Limited Partnership, Banc Fund IX L.P., an Illinois Limited Partnership, Banc Fund X L.P., an Illinois Limited Partnership.
(17) Based on Schedule 13G filed on December 31, 2020 by BlackRock, Inc.
The following table provides information at December 31, 20182020 with respect to securities outstanding and available under our 2013 Omnibus Stock Incentive Plan (“2013 Plan”), which is our onlyactive equity compensation plan:
| | | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options and Awards
(a) | | Weighted-Average Exercise Price of Outstanding Options and Awards
(b) | | Number of Securities Remaining Available for Future Issuance (Excluding Securities Reflected in Column (a))
(c) | Plan Category | (a)
Number of Securities to be Issued Upon Exercise of Outstanding Options and Awards | | (b)
Weighted-Average Exercise Price of Outstanding Options and Awards | | (c)
Number of Securities Remaining Available for Future Issuance (Excluding Securities Reflected in Column (a))
|
| Equity compensation plans approved by security holders (1) | 467,332 |
| | $ | 10.44 |
| | 923,288 |
| |
| Equity compensation plans approved by security holders | | Equity compensation plans approved by security holders | | | | | 401,528 | |
| Stock Options | | Stock Options | 119,162 | | | $ | 10.50 | | |
| Restricted Shares | | Restricted Shares | 124,898 | | | — | | |
| | | 244,060 | | | $ | 5.13 | | | 401,528 | |
| Equity compensation plans not approved by security holders | — |
| | $ | — |
| | — |
| Equity compensation plans not approved by security holders | — | | | $ | — | | | — | |
| Total | 467,332 |
| | $ | 10.44 |
| | 923,288 |
| Total | 244,060 | | | $ | 5.13 | | | 401,528 | |
(1) Amount includes 84,120 shares of nonvested restricted shares with a zero exercise price as of December 31, 2018.
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 2018:
|
| | | | | | | | | | | | |
| Period | (a) Total number of shares (or units) purchased | | (b) Average price paid per share (or unit) | | (c) Total number of shares (or units) purchased as part of publicly announced plans or programs(1) | | (d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs |
| October 1 – 31, 2018 | — |
| | $ | — |
| | — |
| | N/A |
|
| November 1 – 30, 2018 | — |
| | $ | — |
| | — |
| | — |
|
| December 1 – 31, 2018 | 36,283 |
| | $ | 21.82 |
| | 36,283 |
| | 1,163,717 |
|
| Total | 36,283 |
| | $ | 21.82 |
| | 36,283 |
| | |
| |
(1) | An authorized stock repurchase plan providing for the repurchase of up to 1.2 million shares of the Company’s outstanding common stock, or approximately 10% of its then outstanding shares, was publicly announced on December 3, 2018. The repurchase program does not obligate the Company to purchase any particular number of shares. |
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated selected financial data is derived from the Company’s audited consolidated financial statements at and for the three years ended December 31, 2018. This information should be read in connection 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, |
| | 2018 | | 2017 | | 2016
(restated(1)) |
| | (dollars in thousands, except share data) |
| Results of Operations: | | | | | |
| Interest income | $ | 64,377 |
| | $ | 40,819 |
| | $ | 37,511 |
|
| Interest expense | 8,710 |
| | 6,041 |
| | 6,047 |
|
| Net interest income | 55,667 |
| | 34,778 |
| | 31,464 |
|
| Provision for loan losses | 1,520 |
| | 642 |
| | 1,740 |
|
| Net interest income after provision for loan losses | 54,147 |
| | 34,136 |
| | 29,724 |
|
| Noninterest income | 3,610 |
| | 5,061 |
| | 4,406 |
|
| Noninterest expense | 36,192 |
| | 23,754 |
| | 19,913 |
|
| Net income before taxes | 21,565 |
| | 15,443 |
| | 14,217 |
|
| Income taxes | 6,435 |
| | 8,089 |
| | 5,868 |
|
| Net income | $ | 15,130 |
| | $ | 7,354 |
| | $ | 8,349 |
|
| | | | | | |
| Per Common Share Data: | | | | | |
Basic earnings per common share 2 | $ | 1.66 |
| | $ | 1.02 |
| | $ | 1.19 |
|
Diluted earnings per common share 2 | $ | 1.64 |
| | $ | 1.02 |
| | $ | 1.18 |
|
| Cash dividends declared per common share | $ | 0.80 |
| | $ | 0.80 |
| | $ | — |
|
| Stock dividends declared per common share | — | % | | — | % | | 4.00 | % |
| Book value per common share outstanding | $ | 21.16 |
| | $ | 14.56 |
| | $ | 14.41 |
|
Tangible book value per common share outstanding 3 | $ | 14.33 |
| | $ | 14.56 |
| | $ | 14.41 |
|
|
| | | | | | | | | | | |
| Shares outstanding at period end | 11,726,074 |
| | 7,260,119 |
| | 7,112,954 |
|
| Weighted average shares outstanding - Basic | 9,015,203 |
| | 7,102,683 |
| | 7,006,214 |
|
| Weighted average shares outstanding - Diluted | 9,143,242 |
| | 7,138,404 |
| | 7,079,613 |
|
| | | | | | |
| Balance Sheet Data: | | | | | |
| Investment securities, available-for-sale | $ | 29,543 |
| | $ | 32,460 |
| | $ | 35,790 |
|
| Investment securities, held-to-maturity | 5,322 |
| | 5,300 |
| | 5,675 |
|
| Loans held for sale | 28,022 |
| | 10,599 |
| | 8,260 |
|
| Loans held for investment | 1,250,981 |
| | 741,713 |
| | 696,085 |
|
| Loans held for investment, net | 1,239,925 |
| | 731,216 |
| | 684,486 |
|
| Total assets | 1,622,501 |
| | 903,795 |
| | 862,691 |
|
| Noninterest-bearing deposits | 546,713 |
| | 235,584 |
| | 150,764 |
|
| Total deposits | 1,252,339 |
| | 772,679 |
| | 756,561 |
|
| Short-term borrowings | 104,998 |
| | 20,000 |
| | — |
|
| Senior secured notes | 8,450 |
| | 350 |
| | — |
|
| Total shareholders’ equity | 248,069 |
| | 105,694 |
| | 102,507 |
|
| | | | | | |
| Performance Metrics: | | | | | |
| Return on average assets | 1.28 | % | | 0.83 | % | | 1.02 | % |
| Return on average equity | 9.09 | % | | 6.96 | % | | 8.57 | % |
Return on tangible equity 3 | 11.38 | % | | 6.96 | % | | 8.57 | % |
| Yield on average earning assets | 5.70 | % | | 4.66 | % | | 4.63 | % |
| Cost of interest-bearing liabilities | 1.32 | % | | 1.05 | % | | 0.99 | % |
| Net interest margin | 4.93 | % | | 3.97 | % | | 3.88 | % |
| Dividend payout ratio | 50.13 | % | | 78.35 | % | | — | % |
| Equity to assets ratio | 15.29 | % | | 11.69 | % | | 11.88 | % |
| Loans to deposits ratio | 99.89 | % | | 95.99 | % | | 92.01 | % |
Efficiency ratio 3 | 61.06 | % | | 59.62 | % | | 55.51 | % |
|
| | | | | | | | | | | |
| | December 31, |
| | 2018 | | 2017 | | 2016
(restated(1)) |
| | (dollars in thousands) |
| Credit Quality: | | | | | |
Loans 30-89 days past due 4 | $ | 484 |
| | $ | 1,090 |
| | $ | 504 |
|
Loans 30-89 days past due 4 to total loans held for investment | 0.04 | % | | 0.15 | % | | 0.07 | % |
Non-performing loans 4 | $ | 1,722 |
| | $ | 1,761 |
| | $ | 3,269 |
|
Non-performing loans 4 to total loans held for investment | 0.14 | % | | 0.24 | % | | 0.47 | % |
Non-performing assets 4 | $ | 1,722 |
| | $ | 1,761 |
| | $ | 3,269 |
|
Non-performing assets 4 to total assets | 0.11 | % | | 0.19 | % | | 0.38 | % |
| Allowance for loan losses | $ | 11,056 |
| | $ | 10,497 |
| | $ | 11,599 |
|
| Allowance for loan losses to total loans held for investment | 0.88 | % | | 1.42 | % | | 1.67 | % |
Allowance for loan losses to non-performing loans 4 | 642.0 | % | | 596.1 | % | | 354.8 | % |
| Net charge-offs | $ | 961 |
| | $ | 1,744 |
| | $ | 1,556 |
|
| Net charge-offs to average loans | 0.10 | % | | 0.24 | % | | 0.23 | % |
| | | | | | |
| Regulatory Capital Ratios (First Choice Bank): | | | | | |
| Tier 1 leverage ratio | 12.03 | % | | 11.75 | % | | 12.55 | % |
| Common equity Tier 1 capital | 13.26 | % | | 13.46 | % | | 14.24 | % |
| Tier 1 risk-based capital ratio | 13.26 | % | | 13.46 | % | | 14.24 | % |
| Total risk-based capital ratio | 14.18 | % | | 14.72 | % | | 15.50 | % |
| |
(1) | On February 5, 2018, the Company announced that the Audit Committee of the Board of Directors of the Company, after consultation with management and its independent registered accounting firm, determined that the Company’s consolidated financial statements for the fiscal year ended December 31, 2016, were not in compliance with generally accepted accounting principles and would be restated. The decision to restate these consolidated financial statements was based on the Company’s conclusion that it had been overly conservative in its earnings calculations, primarily as a result of the complex accounting treatment for the Company’s equity compensation plan. The Company had provided accruals for expenses in years 2014, 2015 and 2016 in anticipation of incurring certain expenses, which for a number of different reasons were never incurred. The result of the restatement was the Company earned approximately $1.06 million more in after-tax net income than was reported in the consolidated financial statements for the years ended December 31, 2014 through 2016. |
| |
(2) | 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. |
| |
(3) | 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. |
| |
(4) | Amount excludes Purchased Credit Impaired ("PCI") loans. |
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, 2018 and 2017, and our consolidated results of operations for the two years ended December 31, 2018. Our consolidated financial statements and the supplemental financial data appearing elsewhere in this Annual Report should be read in conjunction with this discussion and analysis.
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 (the "Bank"), a California state chartered commercial bank. On December 21, 2017, the Bank received requisite shareholder and regulatory approval necessary for the Bank to reorganize
into the holding company form of ownership pursuant to which First Choice Bank became a wholly-owned subsidiary of First Choice Bancorp. When we refer to "Bancorp" or the "holding company", we are referring First Choice Bancorp, the parent company, on a stand-alone basis. When we refer to "we," "us," "our," or the "Company", we are referring to First Choice Bancorp and Bank collectively. 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 Business Oversight ("DBO") and the Federal Reserve.
The Bank was incorporated under the laws of the State of California in March 2005, is licensed by the DBO, and commenced banking operations in August 2005, as a California state-chartered commercial bank headquartered in Cerritos, Los Angeles County, California. On October 1, 2018, the Bank satisfied the requirements of the Federal Reserve Bank and became a state member bank of the Federal Reserve System and purchased the required stock of the Federal Reserve Bank. Accordingly, the Bank is subject to periodic examination and supervision by the DBO and the Federal Reserve as the Bank's primary 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 FDIC also has examination authority over the Bank.
Recent Developments
Common Stock registered with Nasdaq Capital Market and added to the Russell 3000® Index and the Russell 2000® Index
We registered and issued outstanding shares of common stock with the Nasdaq Capital Market and on May 1,
2018, our shares commenced trading under our existing ticker symbol “FCBP”. The Company was added to the Russell 3000® Index and the Russell 2000® Index when Russell investments reconstituted its comprehensive set of U.S. and global equity indexes after the market closed on June 22, 2018.
Merger with Pacific Commerce Bancorp
We completed the previously announced acquisition of Pacific Commerce Bancorp ("PCB") on July 31, 2018 following receipt of all necessary regulatory and shareholder approvals. We had entered into an Agreement and Plan of Reorganization and Merger, dated February 23, 2018 (the "Merger Agreement"), by which PCB would be merged with and into First Choice Bancorp, and PCB’s bank subsidiary, Pacific Commerce Bank, would be merged with and into First Choice Bancorp’s bank subsidiary, First Choice Bank (collectively, the “Merger”). The Merger was an all stock transaction valued at approximately $133.3 million, or $13.69 per share, based on a closing price of our common stock of $28.70 as of July 31, 2018.
At the effective time of the Merger, each share of PCB common stock was converted into the right to receive 0.47689 shares (referred to as the "final exchange ratio") of Company common stock, with cash paid in lieu of any fractional shares. The final exchange ratio of the stock-to-stock transaction was higher than the ratio of 0.46531 announced at the time of the acquisition, as the ratio was subject to certain adjustments as previously described in the joint proxy statement. The higher exchange ratio was primarily due to adjustments resulting from an increase in PCB’s capital from the exercise of stock options, lower than budgeted transaction costs and higher than projected net income during the first six months of 2018.
In the aggregate, we issued 4,386,816 shares of our common stock in exchange for all of the outstanding shares of PCB common stock. In addition, we issued 420,393, in the aggregate, in replacement vested stock options with a fair value of $7.4 million to PCB directors, officers and employees. The PCB directors, officers and employees that did not continue to work with us had the option to receive either a rollover stock option or cash equal to the value of their PCB stock option, and after such elections were made, 278,096 rollover stock options were issued and exercisable into shares of our common stock, and no cash was issued. For the remaining PCB directors, officers and employees that continued to work with us, their stock options were converted into rollover stock options exercisable into 142,297 shares of our common stock.
PCB was headquartered in Los Angeles, California, with $544.7 million in total assets, $414.9 million in gross loans and $474.8 million in total deposits as of July 31, 2018. Pacific Commerce Bank had six full-service branches in Los Angeles and San Diego Counties, including its operating division, ProAmérica Bank, in Downtown Los Angeles. The Merger provides us with the opportunity to further serve our existing customers and to expand our footprint in Southern California to the Mexican border. We retained the brand name ProAmérica.
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. Refer to Note 2 - Business
Combination to the Consolidated Financial Statements included in Item 8 - Financial Statements and Supplementary Data, of this Annual Report.
Member of Federal Reserve
On October 1, 2018, First Choice Bank became a member and a stockholder of the Federal Reserve Bank and purchased $6.7 million of Federal Reserve Bank stock.
Stock Repurchase Plan
On December 3, 2018, we announced an authorized stock repurchase plan, providing for the repurchase of up to 1.2 million shares of the Company’s outstanding common stock, or approximately 10% of its then outstanding shares, which we refer to as the "repurchase plan". We repurchased 36,283 shares of Company common stock at an average price of $21.82 during 2018 and 1,163,717 shares of Company common stock remained available for repurchase under the repurchase plan at December 31, 2018. The repurchase plan permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18 of the SEC. The repurchase plan may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of tentative investment opportunities, liquidity, and other factors deemed appropriate. These factors may also affect the timing and amount of share repurchases. The repurchase plan does not obligate the Company to purchase any particular number of shares.
Financial Highlights
Financial Performance
Net income increased $7.8 million to $15.1 million or $1.64 per diluted share for 2018 compared to $7.4 million or $1.02 per diluted share for 2017. The increase in net income was driven mostly by the PCB acquisition which was completed on July 31, 2018. The after-tax merger, integration and public company registration expenses of $4.0 million reduced diluted earnings per share by $0.44 for 2018. Net income for 2017 included an income tax write-down adjustment of $1.8 million, related to the decline in value of the net deferred tax assets to reflect the reduction in the federal corporate tax rate as a result of the Tax Cuts and Jobs Act ("Tax Act") that was enacted into law on December 22, 2017; this write-down reduced diluted earnings per share by $0.25 for 2017.
Return on average assets and return on average equity was 1.28% and 9.09% for 2018 compared to 0.83% and 6.96% for 2017. The after-tax merger, integration and public company registration expenses lowered the return on average assets and return on average equity by 34 basis points and 242 basis points for 2018. The income tax write down adjustment lowered the return on average assets and return on average equity by 21 basis points and 172 basis points for 2017. Return on average tangible equity was 11.38% for 2018 compared to 6.96% for 2017. The after-tax merger, integration and public company registration expenses lowered the return on average tangible equity by 303 basis points for 2018. Refer to - Non-GAAP Financial Measures sectionin this MD&A.
Net interest margin increased 96 basis points to 4.93% for 2018 from 3.97% for 2017. The 2018 net interest margin benefited from higher market rates on new loan production and loan repricing, higher accelerated accretion of net discounts due to early loan payoffs, and additional scheduled accretion income from the net purchase accounting discounts on acquired PCB loans. The accelerated discount accretion due to early payoffs and prepayment penalties expanded the net interest margin by 14 basis points for 2018. The scheduled accretion income from the net purchase accounting discounts on the acquired loans also contributed 16 basis points to the 2018 net interest margin.
The average cost of funds was 86 basis points for 2018 compared to 78 basis points for 2017. The higher cost of funds was attributed to an overall increase in market rates, partially offset by the more favorable mix of deposits added in the PCB acquisition. Average noninterest-bearing deposits represented 35.9% of average total deposits for 2018 compared to 26.5% for 2017.
Our operating efficiency ratio was 61.1% in 2018 compared with 59.6% in 2017. Excluding the impact of the merger, integration and public company registration costs incurred in 2018, our operating efficiency ratio was 52.0% in 2018 compared with 59.6% in 2017. Refer to - Non-GAAP Financial Measuressectionin this MD&A.
Total consolidated assets increased $718.7 million to $1.62 billion at December 31, 2018 from $903.8 million at December 31, 2017. The increase is due primarily to the PCB acquisition, which added $536.5 million total assets, including $399.8 million in loans and $73.4 million of goodwill at the date of acquisition. Total loans held for
investment increased $509.3 million to $1.25 billion at December 31, 2018 from $741.7 million at December 31, 2017 due to organic growth of $109.4 million and the loans acquired in the PCB acquisition. Average loans during 2018 increased $245.6 million, or 33.2%, compared to 2017.
Total consolidated liabilities increased $576.3 million to $1.37 billion at December 31, 2018 from $798.1 million at December 31, 2017. The increase is due to the PCB acquisition, which added $476.6 million total liabilities, including $474.9 million in deposits at the date of acquisition. Total deposits increased $479.7 million to $1.25 billion at December 31, 2018 from $772.7 million at December 31, 2017 due mostly to the deposits acquired in the PCB acquisition. Noninterest-bearing demand deposits totaled $546.7 million, or 43.8% of total deposits at December 31, 2018, compared to $235.6 million, or 30.4% of total deposits at December 31, 2017. Total borrowings increased $93.1 million to $113.4 million at December 31, 2018 compared to $20.4 million at December 31, 2017. The increase in borrowings was a result of loan portfolio growth.
Total consolidated equity increased $142.4 million to $248.1 million at December 31, 2018 from $105.7 million at December 31, 2017. The increase is due primarily to the all-stock purchase consideration of $133.3 million for the PCB acquisition.
Credit Quality
Non-performing assets decreased to $1.7 million, or 0.11% of total assets, at December 31, 2018 from $1.8 million, or 0.19% of total assets, at December 31, 2017. Non-performing loans were $1.7 million, or 0.14% of loans held for investment, at December 31, 2018; this compares to $1.8 million, or 0.24% of loans held for investment, at December 31, 2017.
Capital & Growth Strategy
We build, preserve and manage our capital to be ‘well-capitalized’ as defined in the regulations, to support strategic organic and acquired balance sheet growth, to provide returns to our shareholders in the form of dividends and share repurchases, and to manage balance sheet risk generally. The Company and the Bank remain well-capitalized with favorable capital ratios. At December 31, 2018, the Bank had a total risk-based capital ratio of 14.18% and a Tier 1 common to risk weighted assets ratio of 13.26%; this compares to a total risk-based capital ratio of 14.72% and a Tier 1 common to risk weighted assets ratio of 13.46% at December 31, 2017.
At December 31, 2018, our tangible book value per share was $14.33 compared to $14.56 at December 31, 2017. Refer to - Non-GAAP Financial Measures sectionin this MD&A for additional information.
During 2018 we increased shareholders' equity $142.4 million due to net income of $15.1 million, the issuance of approximately 4.4 million shares of Company common stock with a value of $133.3 million to acquire PCB, and the exercise of rollover stock options and vesting of restricted stock of $2.7 million, offset by cash dividends of $7.6 million and Company common stock repurchases of $1.1 million.
The holding company also maintains a $25.0 million secured line of credit to provide cash flow flexibility in support of our capital management and growth initiatives. This secured line of credit was increased from $10 million to $25.0 million during 2018 to reflect the Company’s larger size after the PCB acquisition. We had $8.5 million of the senior secured notes outstanding at December 31, 2018.
Primary Factors We Use to Evaluate Our Business
As a financial institution, we manage and evaluate various aspects of both our consolidated results of operations and our consolidated financial condition. 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 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
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.
Impact of Acquisition on Earnings
The comparability of our financial information is affected by the acquisition of PCB. We completed the acquisition on July 31, 2018. This acquisition has been accounted for using the acquisition method of accounting and, accordingly, PCB’s operating results have been included in the consolidated financial statements for periods beginning after July 31, 2018.
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 received 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 which are not predictable.
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 expenses; (g) loan related expenses; (h) customer service related expenses; (i) merger, integration and public company registration expenses; (j) amortization of core deposit intangible; and (k) 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 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 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, we have regularly increased our capital through equity issuances and net income and we 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
This following tables present non-GAAP financial measures for: (1) efficiency ratio, (2) adjusted efficiency ratio, (3) adjusted net income, (4) adjusted return on average assets, (5) adjusted return on average equity, (6) return on average tangible equity, (7) adjusted return on average tangible equity, (8) tangible equity to asset ratio, and (9) tangible book value per share. The Company believes the presentation of certain non-GAAP financial measures assists investors in evaluating our financial results. These non-GAAP financial measures are used by management, the Board and investors on a regular basis, in addition to our GAAP results, to facilitate the assessment of our financial performance. These non-GAAP financial measures complement our GAAP reporting and are presented below to provide investors and others 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. However, we believe the non-GAAP information shown below provides useful information to investors to assess our consolidated financial condition and consolidated results of operations. In particular, the use of return on average tangible equity, tangible equity to asset ratio, and tangible book value per share is prevalent among banking regulators, investors and analysts. 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, |
| | 2018 | | 2017 |
Efficiency Ratio (non-GAAP) | (dollars in thousands) |
| Noninterest expense (numerator) | $ | 36,192 |
| | $ | 23,754 |
|
| Less: Merger, integration and public company registration costs | 5,385 |
| | — |
|
| Adjusted noninterest expense (numerator) | $ | 30,807 |
| | $ | 23,754 |
|
| | | | |
| Net interest income (denominator) | $ | 55,667 |
| | $ | 34,778 |
|
| Plus: Noninterest income | 3,610 |
| | 5,061 |
|
| Total net interest income and noninterest income (denominator) | $ | 59,277 |
| | $ | 39,839 |
|
| | | | |
Efficiency ratio (non-GAAP) | 61.1 | % | | 59.6 | % |
Adjusted efficiency Ratio (non-GAAP) | 52.0 | % | | 59.6 | % |
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
Return on Average Assets, Equity, Tangible Equity
| (dollars in thousands) |
| Net earnings | $ | 15,130 |
| | $ | 7,354 |
|
| Add: After-tax merger, integration and public company registration costs | 4,029 |
| | — |
|
| Adjusted net income (non-GAAP) | $ | 19,159 |
| | $ | 7,354 |
|
Average assets
| 1,184,309 |
| | 884,430 |
|
| Average shareholders’ equity | 166,474 |
| | 105,632 |
|
| Less: Average intangible assets | 33,575 |
| | — |
|
| Average tangible equity (non-GAAP) | $ | 132,899 |
| | $ | 105,632 |
|
| | | | |
Return on average assets
| 1.28 | % | | 0.83 | % |
Adjusted return on average assets (non-GAAP)
| 1.62 | % | | 0.83 | % |
| Return on average equity | 9.09 | % | | 6.96 | % |
Adjusted return on average equity (non-GAAP)
| 11.51 | % | | 6.96 | % |
| Return on average tangible equity (non-GAAP) | 11.38 | % | | 6.96 | % |
Adjusted return on average tangible equity (non-GAAP)
| 14.42 | % | | 6.96 | % |
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Tangible Common Equity Ratio/Tangible Book Value Per Share | (dollars in thousands) |
| Shareholders’ equity | $ | 248,069 |
| | $ | 105,694 |
|
| Less: Intangible assets | 80,001 |
| | — |
|
| Tangible equity (non-GAAP) | $ | 168,068 |
| | $ | 105,694 |
|
| | | | |
| Total assets | $ | 1,622,501 |
| | $ | 903,795 |
|
| Less: Intangible assets | 80,001 |
| | — |
|
| Tangible assets (non-GAAP) | $ | 1,542,500 |
| | $ | 903,795 |
|
| | | | |
| Equity to asset ratio | 15.29 | % | | 11.69 | % |
| Tangible equity to asset ratio (non-GAAP) | 10.90 | % | | 11.69 | % |
| | | | |
| Book value per share | $ | 21.16 |
| | $ | 14.56 |
|
| Tangible book value per share (non-GAAP) | $ | 14.33 |
| | $ | 14.56 |
|
| Shares outstanding | 11,726,074 |
| | 7,260,119 |
|
Comparison of Operating Results
General
Net income was $15.1 million for the year ended December 31, 2018 compared to $7.4 million for the year ended December 31, 2017. The $7.8 million increase in net income was due to higher net interest income of $20.9 million and lower income taxes of $1.7 million partially offset by lower noninterest income of $1.5 million, higher provision for loan losses of $878 thousand, and higher noninterest expense of $12.4 million for the year ended December 31, 2018 compared to the same 2017 period. The increase in net interest income was a result of higher average loan balances, relating to both the PCB acquisition and organic loan growth, and increased yields on loans. Noninterest income decreased due to lower SBA loan sale activity and related gains, partially offset by higher service charges and fees on deposits accounts. Noninterest expense increased due to higher merger, integration and public company registration expenses and higher overhead expenses from the impact of including PCB's operations since the date of acquisition. Net income was also positively impacted by the lower federal income tax rates from the passage of the Tax Act in December 2017.
Diluted earnings per share was $1.64 for the year ended December 31, 2018 compared to $1.02 for the year ended December 31, 2017. Net income for the year ended December 31, 2018 included after-tax merger, integration and public company registration expenses of $4.0 million or $0.44 per diluted share; there were no similar costs for the year ended December 31, 2017. Net income for the year ended of December 31, 2017 included a $1.8 million income tax write-down adjustment related to the decline in value of the Company's deferred tax assets to reflect the reduction in the federal corporate tax rate as a result of the Tax Act that was enacted into law on December 22, 2017; this write-down reduced diluted earnings per share by $0.25 for the year of 2017.
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 stockholders’ 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, |
| | 2018 | | 2017 | | 2016 |
| | Average
Balance | | Interest
Income / Expense | | Yield / Cost | | Average
Balance | | Interest
Income / Expense | | Yield / Cost | | Average
Balance | | Interest
Income / Expense | | Yield / Cost |
| Interest-earning assets: | (in thousands) |
| Loans (1) | $ | 985,513 |
| | $ | 61,075 |
| | 6.20 | % | | $ | 739,935 |
| | $ | 38,624 |
| | 5.22 | % | | $ | 673,635 |
| | $ | 35,739 |
| | 5.31 | % |
| Investment securities | 37,642 |
| | 922 |
| | 2.45 | % | | 42,456 |
| | 959 |
| | 2.26 | % | | 38,096 |
| | 788 |
| | 2.07 | % |
| Deposits in other financial institutions | 98,353 |
| | 1,847 |
| | 1.88 | % | | 87,087 |
| | 935 |
| | 1.07 | % | | 89,649 |
| | 488 |
| | 0.54 | % |
| Federal funds sold/resale agreements | 1,258 |
| | 25 |
| | 1.99 | % | | 2,221 |
| | 35 |
| | 1.57 | % | | 5,838 |
| | 76 |
| | 1.3 | % |
| Restricted stock investments and Other Bank Stocks | 7,043 |
| | 508 |
| | 7.21 | % | | 3,881 |
| | 266 |
| | 6.86 | % | | 3,599 |
| | 420 |
| | 11.67 | % |
| Total interest-earning assets | 1,129,809 |
| | 64,377 |
| | 5.70 | % | | 875,580 |
| | 40,819 |
| | 4.66 | % | | 810,817 |
| | 37,511 |
| | 4.63 | % |
| | | | | | | | | | | | | | | | | | |
| Noninterest-earning assets | 54,500 |
| | | | | | 8,850 |
| | | | | | 6,538 |
| | | | |
| Total assets | $ | 1,184,309 |
| | | | | | $ | 884,430 |
| | | | | | $ | 817,355 |
| | | | |
| | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | |
| Interest checking | $ | 153,403 |
| | $ | 1,679 |
| | 1.09 | % | | $ | 243,568 |
| | $ | 2,631 |
| | 1.08 | % | | $ | 263,584 |
| | $ | 2,889 |
| | 1.10 | % |
| Money market accounts | 196,871 |
| | 2,275 |
| | 1.16 | % | | 73,734 |
| | 483 |
| | 0.66 | % | | 103,526 |
| | 336 |
| | 0.32 | % |
| Savings accounts | 51,254 |
| | 410 |
| | 0.80 | % | | 85,315 |
| | 797 |
| | 0.93 | % | | 88,790 |
| | 842 |
| | 0.95 | % |
| Time deposits | 229,640 |
| | 3,686 |
| | 1.61 | % | | 151,731 |
| | 1,890 |
| | 1.25 | % | | 132,175 |
| | 1,840 |
| | 1.39 | % |
| Total interest-bearing deposits | 631,168 |
| | 8,050 |
| | 1.28 | % | | 554,348 |
| | 5,801 |
| | 1.05 | % | | 588,075 |
| | 5,907 |
| | 1.00 | % |
| Short term and other borrowings | 23,176 |
| | 412 |
| | 1.78 | % | | 20,475 |
| | 239 |
| | 1.16 | % | | 19,924 |
| | 140 |
| | 0.70 | % |
| Senior secured notes | 4,544 |
| | 248 |
| | 5.46 | % | | 3 |
| | 1 |
| | — | % | | — |
| | — |
| | — | % |
| Total interest-bearing liabilities | 658,888 |
| | 8,710 |
| | 1.32 | % | | 574,826 |
| | 6,041 |
| | 1.05 | % | | 607,999 |
| | 6,047 |
| | 0.99 | % |
| | | | | | | | | | | | | | | | | | |
| Noninterest-bearing liabilities: | | | | | | | | | | | | | | | | | |
| Demand deposits | 353,157 |
| | | | | | 199,766 |
| | | | | | 107,056 |
| | | | |
| Other liabilities | 5,790 |
| | | | | | 4,206 |
| | | | | | 4,903 |
| | | | |
| Shareholders’ equity | 166,474 |
| | | | | | 105,632 |
| | | | | | 97,397 |
| | | | |
| | | | | | | | | | | | | | | | | | |
| Total liabilities and shareholders' equity | $ | 1,184,309 |
| | | | | | $ | 884,430 |
| | | | | | $ | 817,355 |
| | | | |
| | | | | | | | | | | | | | | | | | |
| Net interest spread | | | $ | 55,667 |
| | 4.38 | % | | | | $ | 34,778 |
| | 3.61 | % | | | | $ | 31,464 |
| | 3.64 | % |
| Net interest margin | | | | | 4.93 | % | | | | | | 3.97 | % | | | | | | 3.88 | % |
| | | | | | | | | | | | | | | | | | |
| Total deposits | $ | 984,325 |
| | $ | 8,050 |
| | 0.82 | % | | $ | 754,114 |
| | $ | 5,801 |
| | 0.77 | % | | $ | 695,131 |
| | $ | 5,907 |
| | 0.85 | % |
| Total funding sources | $ | 1,012,045 |
| | $ | 8,710 |
| | 0.86 | % | | $ | 774,592 |
| | $ | 6,041 |
| | 0.78 | % | | $ | 715,055 |
| | $ | 6,047 |
| | 0.85 | % |
| |
(1) | Average loans include net discounts and deferred costs. Interest income on loans includes $469 thousand, $439 thousand and $1.1 million related to the accretion of net deferred loans fees and $4.0 million, $(293) thousand and $821 thousand related to accretion (amortization) of discounts (premiums) for the years ended December 31, 2018, 2017 and 2016. |
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 noted periods, 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 times the prior period rate, and rate variances are equal to the increase or decrease in the average rate times 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, |
| | 2018 vs. 2017 | | 2017 vs. 2016 |
| | Change Attributable to | | | | Change Attributable to | | |
| | Volume | | Rate | | Total Change | | Volume | | Rate | | Total Change |
| Interest income: | (in thousands) |
| Interest and fees on loans | $ | 14,340 |
| | $ | 8,111 |
| | $ | 22,451 |
| | $ | 2,556 |
| | $ | 329 |
| | $ | 2,885 |
|
| Interest on investment securities | (107 | ) | | 70 |
| | (37 | ) | | 94 |
| | 77 |
| | 171 |
|
| Dividends on restricted stock investments and Other Bank Stocks | 227 |
| | 15 |
| | 242 |
| | 31 |
| | (185 | ) | | (154 | ) |
| Interest on deposits in financial institutions | 115 |
| | 787 |
| | 902 |
| | (68 | ) | | 474 |
| | 406 |
|
| Change in interest income | 14,575 |
| | 8,983 |
| | 23,558 |
| | 2,613 |
| | 695 |
| | 3,308 |
|
| | | | | | | | | | | | |
| Interest expense: | | | | | | | | | | | |
| Savings, interest checking and money market accounts | (45 | ) | | 498 |
| | 453 |
| | (367 | ) | | 211 |
| | (156 | ) |
| Time deposits | 1,127 |
| | 669 |
| | 1,796 |
| | 292 |
| | (242 | ) | | 50 |
|
| Borrowings | 287 |
| | 133 |
| | 420 |
| | 5 |
| | 95 |
| | 100 |
|
| Change in interest expense | 1,369 |
| | 1,300 |
| | 2,669 |
| | (70 | ) | | 64 |
| | (6 | ) |
| | | | | | | |
| |
| |
|
| Change in net interest income | $ | 13,206 |
| | $ | 7,683 |
| | $ | 20,889 |
| | $ | 2,683 |
| | $ | 631 |
| | $ | 3,314 |
|
Net interest income was $55.7 million during 2018, an increase of $20.9 million from $34.8 million during 2017 due to higher interest income of $23.6 million partially offset by higher interest expense of $2.7 million. Our net interest margin increased 96 basis points to 4.93% for the year ended December 31, 2018 compared to 3.97% for the same 2017 period. The increase in net interest margin was driven by higher market rates on new loan production and loan repricing, higher accelerated accretion of discounts due to early loan payoffs, and additional accretion income from purchase accounting discounts on acquired PCB loans. For the year ended December 31, 2018, interest income included accelerated discount accretion due to early payoffs of loans and prepayment penalties of $1.5 million, which expanded the net interest margin by 14 basis points, compared to $179 thousand for the same 2017 period. In addition, scheduled accretion income from purchase accounting discounts on the acquired loans contributed $1.8 million, or 16 basis points to net interest margin during 2018; there was no similar accretion income for the 2017 period.
Average interest-earning assets were $1.13 billion during 2018 compared to $875.6 million during 2017. The average yield on interest-earning assets was 5.70% during 2018 compared to 4.66% during 2017. Average loan balances were $985.5 million during 2018 compared to $739.9 million during 2017. The increase in our average loan balance was attributable to organic loan portfolio growth coupled with the impact of $399.8 million in net loans acquired in the PCB acquisition. Our loan yield was 6.20% during 2018 compared to 5.22% for 2017. The discount accretion from acquired loans and accelerated discount accretion due to early loan payoffs increased our loan yield 34 basis points during 2018.
Average funding sources totaled $1.01 billion during 2018 compared to $774.6 million during 2017. Average interest-bearing liabilities were $658.9 million during 2018 compared to $574.8 million during 2017 and our cost of interest-bearing liabilities increased 27 basis points to 1.32% during 2018. Our average cost of funds was 86 basis points during 2018 compared to 78 basis points during 2017. Our average cost of funds increased as overall market interest rates have risen while at the same time we benefited from the more favorable mix of deposits added in the PCB acquisition. Average noninterest-bearing deposits totaled $353.2 million and represented 35.9% of average total deposits during 2018 compared to $199.8 million and 26.5% of total average deposits during 2017. Average short-term borrowings increased $2.7 million during 2018 as we used short-term borrowings to supplement deposit balances used to fund our loan portfolio growth. Average senior secured notes increased $4.5 million during 2018 as we used the funds for cash dividends, share repurchases, operational costs, and merger, integration and public company registration costs.
Provision for Loan Losses
We maintain an allowance for loan losses, which we also refer to as the allowance, at a level we believe is adequate to absorb probable incurred credit losses. The allowance for loan losses is estimated using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. At December 31, 2018, the allowance for loan losses was $11.1 million, or 0.88% of loans held for investment compared to $10.5 million, or 1.42% of loans held for investment at December 31, 2017. The increase in the
allowance at December 31, 2018 primarily results from $1.5 million in provision for loan losses, partially offset by $961 thousand in net charge-offs of previously identified problem loans. The decrease in the allowance for loan losses as a percentage of loans held for investment as of December 31, 2018 as compared to December 31, 2017 primarily relates to the $399.8 million of loans acquired from PCB that were recorded at fair market value without a corresponding allowance for loan losses. The net carrying value of loans acquired through the acquisition of PCB includes a remaining net discount of $9.5 million as of December 31, 2018, which represents 75 basis points of total gross loans.
The provision for loan losses totaled $1.5 million for the year ended December 31, 2018 compared to $642 thousand for the year ended December 31, 2017. The change in provision for loan losses was primarily the result of organic loan growth.
Noninterest Income
The following table shows the components of noninterest income between periods:
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
| Gain on sale of loans | $ | 1,505 |
| | $ | 3,596 |
|
| Service charges and fees on deposit accounts | 1,241 |
| | 329 |
|
| Net servicing fees | 509 |
| | 701 |
|
| Other income | 355 |
| | 435 |
|
| Total noninterest income | $ | 3,610 |
| | $ | 5,061 |
|
Noninterest income decreased $1.5 million to $3.6 million for the year ended December 31, 2018 compared to $5.1 million for the year ended December 31, 2017 primarily due to lower gain on sale of loans which was partially offset by higher services charges and fees on deposit accounts during the year. The increase in services charges and fees on deposit accounts was due to the impact of the PCB acquisition.
Gain on the sale of loans decreased $2.1 million for the year ended December 31, 2018 compared to the 2017 period due to a decline in the average premium percentage and a lower amount of loans sold. We sold 31 SBA loans with a net carrying value of $25.0 million at an average premium percentage of 6.0%, resulting in a gain of $1.5 million for the year ended December 31, 2018. This compares to 40 SBA loans sold with a net carrying value of $43.3 million at an average premium percentage of 7.8%, resulting in a gain of $3.4 million and whole loan sales of $30.0 million for a gain of $207 thousand for the 2017 period.
Services charges and fees on deposit accounts increased $912 thousand to $1.2 million for the year ended December 31, 2018 from $329 thousand for the comparable 2017 period. The increase is attributed to a higher volume of transaction-based accounts and account balances as a result of the PCB acquisition; average demand deposit account balances increased to $353.2 million for the year ended December 31, 2018 from $199.8 million for the same 2017 period. Additionally,we continue to build new customer relationships that are taking advantage of our treasury management services.
The decrease in net servicing fees was due to higher amortization expense of our servicing assets offset by higher servicing fee income. Our SBA loan servicing portfolio averaged $164.2 million during 2018 compared to $132.9 million for 2017. The increase in our SBA loan servicing portfolio primarily related to the acquisition of PCB which contributed
$73.8 million to the portfolio of serviced SBA loans on the date of acquisition. During the years ended December 31, 2018 and 2017 contractually-specified servicing fees were $1.5 million and $1.2 million. Offsetting these servicing fees was amortization of the servicing assets of $1.0 million and $487 thousand for the years ended December 31, 2018 and 2017. The increase in amortization of the servicing asset was due to amortizing the servicing asset acquired in the PCB acquisition and higher amortization related to early loan pay-offs of $636 thousand for the year ended December 31, 2018 compared to $190 thousand for 2017.
Noninterest Expense
The following table shows the components of noninterest expense between periods:
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
| Salaries and employee benefits | $ | 18,077 |
| | $ | 14,560 |
|
| Occupancy and equipment | 3,049 |
| | 2,084 |
|
| Data processing | 2,293 |
| | 1,491 |
|
| Professional fees | 1,598 |
| | 972 |
|
| Office, postage and telecommunications | 938 |
| | 720 |
|
| Deposit insurance and regulatory assessments | 460 |
| | 467 |
|
| Loan related | 483 |
| | 345 |
|
| Customer service related | 865 |
| | 618 |
|
| Merger, integration and public company registration costs | 5,385 |
| | — |
|
| Amortization of core deposit intangible | 332 |
| | — |
|
| Other expenses | 2,712 |
| | 2,497 |
|
| Total noninterest expense | $ | 36,192 |
| | $ | 23,754 |
|
Noninterest expense for the year ended December 31, 2018 was $36.2 million, an increase of $12.4 million from $23.8 million for the year ended December 31, 2017. The increase was primarily attributable to the impact of the acquired PCB operations and merger, integration and public company registration costs of $5.4 million. Excluding merger, integration and public company registration costs, noninterest expense increased $7.1 million to $30.8 million for the year ended December 31, 2018 compared to $23.8 million for the comparable period in 2017; the increase in most overhead expense categories is due to including PCB's operations since the date of acquisition.
Salaries and employee benefits increased $3.5 million to $18.1 million for the year ended December 31, 2018 from $14.6 million for the year ended December 31, 2017. The increase is primarily attributable to the growth in headcount due to the PCB acquisition. During the year ended December 31, 2018, we had an average of 136 full time equivalent ("FTE") employees compared to an average of 102 FTE employees for 2017.
Occupancy and equipment costs increased $965 thousand to $3.0 million for the year ended December 31, 2018. The increase in occupancy and equipment costs was primarily due to the additional occupancy costs associated with the six branches added in the PCB acquisition.
Data processing increased $802 thousand to $2.3 million for the year ended December 31, 2018. The increase in data processing primarily relates to increases in transaction volume from both organic growth and the PCB acquisition, strengthening automation and delivering risk mitigation solutions to improve our customers’ banking experience.
Professional fees increased $626 thousand to $1.6 million for the year ended months ended December 31, 2018. The increase in professional fees primarily relates to increases in legal, consulting and audit fees for enhancements of policies, procedures and internal controls as we transitioned to a publicly-traded company.
Merger, integration and public company registration costs totaled $5.4 million for the year ended December 31, 2018; there were no similar costs in 2017. The merger, integration and public company registration costs included
$1.8 million in severance costs, $768 thousand in professional fees, $2.5 million in system integration costs, and $414 thousand in other expenses.
In connection with the PCB acquisition, we recognized a core deposit intangible (CDI) of $6.9 million. Amortization of CDI was $332 thousand for the year ended December 31, 2018; there was no similar expense for the year ended December 31, 2017.
Income Taxes
Income tax expense was $6.4 million and $8.1 million for the years ended December 31, 2018 and 2017. The effective tax rate for the year ended December 31, 2018 was 29.8% compared to 52.4% for the year ended December 31, 2017. The reduction in our effective tax rate was primarily attributable to the impact of the Tax Act, which was signed into legislation in December 2017. The Tax Act substantially amended the Internal Revenue Code and reduced the corporate
Federal income tax rate from 35% to 21% beginning in 2018. Tax expense for the year ended December 31, 2017 included a $1.8 million write down adjustment related to the decline in value of our deferred tax assets due to the Tax Act. Excluding the deferred tax assets write down adjustment, our effective tax rate for 2017 would have been 40.6%.
Comparison of Financial Condition
General
Total assets at December 31, 2018 were $1.62 billion, an increase of $718.7 million, or 79.5%, from $903.8 million at December 31, 2017. This increase is primarily due to the $508.7 million increase in loans held for investment, net to $1.24 billion at December 31, 2018 from $731.2 million at December 31, 2017. The completion of our acquisition of PCB during the third quarter of 2018 increased assets by $536.5 million on the acquisition date.
Total liabilities at December 31, 2018 were $1.37 billion, an increase of $576.3 million, from $798.1 million at December 31, 2017. The completion of our acquisition of PCB during the third quarter of 2018 increased liabilities by $476.6 million on the acquisition date, primarily consisting of deposit balances. Total deposits increased $479.7 million to $1.25 billion at December 31, 2018. Other short-term borrowings increased $85.0 million to $105 million at December 31, 2018. Additionally, senior secured notes increased $8.1 million to $8.5 million at December 31, 2018; we used the funds for cash dividends, share repurchases, operational costs, and merger, integration and public company registration costs.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash and due from banks, interest-bearing deposits at other banks with original maturities of less than 90 days, federal funds sold and securities purchased under agreements to resell. Cash and cash equivalents totaled $197.4 million at December 31, 2018, an increase of $94.2 million from December 31, 2017. The increase in cash and cash equivalents during 2018 was primarily attributable to cash balances acquired from the PCB, which totaled $111.0 million at the date of acquisition.
Investment Securities
The following table presents the carrying values of investment securities available-for-sale and held-to-maturity as of the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 | | December 31, 2016 |
| | Fair Value | | Percentage of Total | | Fair
Value | | Percentage of Total | | Fair
Value | | Percentage of Total |
| Securities available-for-sale: | (in thousands) |
| Mortgage-backed securities | $ | 8,844 |
| | 29.9 | % | | $ | 8,496 |
| | 26.2 | % | | $ | 11,646 |
| | 32.6 | % |
| Collateralized mortgage obligations | 11,461 |
| | 38.8 | % | | 13,659 |
| | 42.1 | % | | 14,298 |
| | 39.9 | % |
| SBA pools | 9,238 |
| | 31.3 | % | | 10,305 |
| | 31.7 | % | | 8,828 |
| | 24.7 | % |
Mutual fund and equity securities (1) | — |
| | — | % | | — |
| | — | % | | 1,018 |
| | 2.8 | % |
| | $ | 29,543 |
|
| 100.0 | % | | $ | 32,460 |
|
| 100.0 | % | | $ | 35,790 |
| | 100.0 | % |
| | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 | | December 31, 2016 |
| | Amortized Cost | | Percentage of Total | | Amortized Cost | | Percentage of Total | | Amortized Cost | | Percentage of Total |
| Securities held-to-maturity: | (in thousands) |
| U.S. Government and agency securities | $ | 3,340 |
| | 62.8 | % | | $ | 3,273 |
| | 61.8 | % | | $ | 3,260 |
| | 57.4 | % |
| Mortgage-backed securities | 1,982 |
| | 37.2 | % | | 2,027 |
| | 38.2 | % | | 2,415 |
| | 42.6 | % |
| | $ | 5,322 |
|
| 100.0 | % | | $ | 5,300 |
|
| 100.0 | % | | $ | 5,675 |
| | 100.0 | % |
(1) With the adoption of ASU 2016-01 on January 1, 2018, equity securities with a readily determinable fair values are measured at fair value at the end of each reporting period and reported separately from securities available-for-sale. The reclassification was retroactively applied to 2017 financial statements to conform to the 2018 presentation.
The following table presents the contractual maturities and the weighted average yield of investment securities available-for-sale and held-to-maturity by investment category as of December 31, 2018: |
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | One Year or Less | | After One Year Through Five Years | | After Five Years Through Ten Years | | After Ten Years (1) | | Total |
| Securities available-for-sale: | (in thousands) |
| Mortgage-backed securities | $ | — |
| | $ | — |
| | $ | — |
| | $ | 8,844 |
| | $ | 8,844 |
|
| Collateralized mortgage obligations | — |
| | — |
| | — |
| | 11,461 |
| | 11,461 |
|
| SBA pools | — |
| | — |
| | — |
| | 9,238 |
| | 9,238 |
|
| | $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 29,543 |
|
| $ | 29,543 |
|
| Weighted average yield: | | | | | | | | | |
| Mortgage-backed securities | — | % | | — | % | | — | % | | 2.68 | % | | 2.68 | % |
| Collateralized mortgage obligations | — | % | | — | % | | — | % | | 2.39 | % | | 2.39 | % |
| SBA pools | — | % | | — | % | | — | % | | 2.51 | % | | 2.51 | % |
| | — | % | | — | % | | — | % | | 2.51 | % | | 2.51 | % |
| |
(1) | Mortgage-backed securities, collateralized mortgage obligations and SBA pools do not have a single stated maturity date and therefore have been included in the "Due after ten years" category. |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | One Year or Less | | After One Year Through Five Years | | After Five Years Through Ten Years | | After Ten Years (1) | | Total |
| Securities held-to-maturity: | (in thousands) |
| U.S. Government and agency securities | $ | — |
| | $ | 3,340 |
| | $ | — |
| | $ | — |
| | $ | 3,340 |
|
| Mortgage-backed securities | — |
| | — |
| | — |
| | 1,982 |
| | 1,982 |
|
| | $ | — |
|
| $ | 3,340 |
|
| $ | — |
|
| $ | 1,982 |
|
| $ | 5,322 |
|
| Weighted average yield: | | | | | | | | | |
| U.S. Government and agency securities | — | % | | 2.05 | % | | — | % | | — | % | | 2.05 | % |
| Mortgage-backed securities | — | % | | — | % | | — | % | | 2.81 | % | | 2.81 | % |
| | — | % | | 2.05 | % | | — | % | | 2.81 | % | | 2.33 | % |
| |
(1) | Mortgage-backed securities do not have a single stated maturity date and therefore have been included in the "Due after ten years" category. |
At December 31, 2018, no issuer represented 10% or more of the Company’s shareholders’ equity. At December 31, 2018, securities held-to-maturity with a carrying amount of $5.3 million were pledged to the Federal Reserve Bank as collateral for a $4.9 million line of credit. There were no borrowings under this line of credit for the year ended December 31, 2018.
Loans
Loans are the single largest contributor to our net income. At December 31, 2018, loans held for investment, net totaled $1.24 billion. It is our goal to continue to grow the balance sheet through the origination and acquisition of loans. This effort will serve to maximize our yield on earning assets. We continue to manage our loan portfolio in accordance with what we believe are conservative and proper loan underwriting policies. Every effort is made to minimize credit risk, while tailoring loans to meet the needs of our target market. Continued balanced growth is anticipated over the coming years. The following table shows the composition of our loan portfolio as of the dates indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 | | December 31, 2016 | | December 31, 2015 | | December 31, 2014 |
| | Amount | Percentage
of
Total | | Amount | Percentage
of
Total | | Amount | Percentage
of
Total | | Amount | Percentage
of
Total | | Amount | Percentage
of
Total |
| | (in thousands) |
| Construction and land development | $ | 184,177 |
| 14.7 | % | | $ | 115,427 |
| 15.6 | % | | $ | 110,696 |
| 15.9 | % | | $ | 119,157 |
| 18.1 | % | | $ | 55,663 |
| 11.0 | % |
| Real estate: | | | | | | | | | | | | | | |
| Residential | 57,443 |
| 4.6 | % | | 63,415 |
| 8.5 | % | | 85,709 |
| 12.3 | % | | 45,478 |
| 6.9 | % | | 62,460 |
| 12.3 | % |
| Commercial real estate - owner occupied | 179,494 |
| 14.3 | % | | 52,753 |
| 7.1 | % | | 53,761 |
| 7.7 | % | | 61,983 |
| 9.4 | % | | 36,316 |
| 7.2 | % |
| Commercial real estate - non-owner occupied | 401,665 |
| 32.2 | % | | 251,821 |
| 33.9 | % | | 194,720 |
| 28.1 | % | | 226,657 |
| 34.6 | % | | 180,281 |
| 35.5 | % |
| Commercial and industrial | 281,718 |
| 22.5 | % | | 169,183 |
| 22.8 | % | | 161,666 |
| 23.2 | % | | 123,461 |
| 18.8 | % | | 110,024 |
| 21.7 | % |
| SBA loans | 146,462 |
| 11.7 | % | | 88,688 |
| 12.0 | % | | 81,021 |
| 11.6 | % | | 80,035 |
| 12.2 | % | | 62,601 |
| 12.3 | % |
| Consumer | 159 |
| — | % | | 826 |
| 0.1 | % | | 8,325 |
| 1.2 | % | | — |
| — | % | | — |
| — | % |
| Loans held for investment, net of discounts (1) | $ | 1,251,118 |
| 100.0 | % |
| $ | 742,113 |
| 100.0 | % | | $ | 695,898 |
| 100.0 | % | | $ | 656,771 |
| 100.0 | % | | $ | 507,345 |
| 100.0 | % |
| Net deferred origination fees | (137 | ) | | | (400 | ) | | | 187 |
| | | (614 | ) | | | (787 | ) | |
| Loans held for investment | 1,250,981 |
| | | 741,713 |
| | | 696,085 |
| | | 656,157 |
| | | 506,558 |
| |
| Allowance for loan losses | (11,056 | ) | | | (10,497 | ) | | | (11,599 | ) | | | (11,415 | ) | | | (8,501 | ) | |
| Loans held for investment, net | $ | 1,239,925 |
| | | $ | 731,216 |
| | | $ | 684,486 |
| | | $ | 644,742 |
| | | $ | 498,057 |
| |
| |
(1) | Loans held for investment, net of discounts includes purchased credit impaired loans of $2.6 million as of December 31, 2018. There were no purchased credit impaired loans as of December 31, 2017, 2016, 2015 and 2014. |
During the year ended December 31, 2018, loans held for investment, net increased $508.7 million to $1.24 billion compared to $731.2 million at December 31, 2017. The changes in our total loan portfolio are primarily attributable to the $399.8 million of loans acquired from PCB at acquisition date. Below is a discussion of the changes in our principal loan categories:
Construction and land development loans. We provide construction financing for one to four-unit residences and commercial development projects, especially medical office buildings, and land loans for projects in the development process, prior to receiving a building permit. We also provide financing for purchase, refinance, or construction of owner-occupied and non-owner occupied commercial real estate properties.
Construction and land development loans increased $68.8 million or 59.6% to $184.2 million at December 31, 2018 from $115.4 million at December 31, 2017. Demand for financing in this area continues to rise. The growth in our construction and land development portfolio also included $15.5 million in loans acquired from PCB at acquisition date. At December 31, 2018 and 2017, construction and land development loans comprised 14.7%, and 15.6% of our total loans held for investment, net of discounts.
Real estate loans - residential.Residential loans include loans originated or purchased within the marketplace from unaffiliated third parties. Residential real estate loans decreased $6.0 million or 9.4% to $57.4 million from $63.4 million at December 31, 2017. At December 31, 2018 and 2017, residential real estate loans represented 4.6% and 8.5% of our total loans held for investment, net of discounts. During the year of 2018, we continued to see prepayments within the portfolio and a shift in originations towards higher yielding commercial real estate and commercial and industrial loans. The residential loans acquired from PCB at acquisition date was $11.3 million.
Commercial real estate loans. We provide financing for the purchase or refinance of owner-occupied and non-owner-occupied commercial real estate. These loans are typically secured by first mortgages. Commercial real estate loans, including both owner-occupied and non-owner-occupied, increased $276.6 million or 90.8% to $581.2 million from $304.6 million at December 31, 2017. The changes in commercial real estate loans during 2018 are primarily attributable to the $252.4 million in commercial real estate loans acquired from PCB at acquisition date, which included $123.0 million of owner-occupied loans and $129.3 million in non-owner-occupied loans.
Our single largest concentration of CRE loans is to hospitality owners, which comprised 13.8% and 26.1% of total commercial real estate loans at December 31, 2018 and December 31, 2017. Some of the members of our Board of Directors are active in the hospitality sector and are therefore able to provide referrals for financing on hotel properties. There are no loans to any of our board members, nor to members of their immediate families, but often to other hotel owners referred to us
by these directors. We carefully manage this concentration and the levels of hospitality loans measured against our total risk-based capital are reported to our Board of Directors monthly.
Commercial and industrial loans. Commercial lending activity is directed principally toward businesses whose demand for funds falls within our legal lending limit. Our primary business focus is companies which are manufacturers, wholesalers, distributors, services companies and professionals. Our typical customers are businesses whose annual revenue is between $1 million to $50 million. These loans include lines of credit, term loans, equipment financing, letters of credit, and working capital loans. We make loans to borrowers secured by accounts receivable and inventory managed against a borrowing base. Commercial and industrial loans often carry larger loan balances and can involve a greater degree of financial and credit risks. Any significant failure to pay on time by our customers would impact our earnings. The increased financial and credit risk associated with these types of loans is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of the loan balances, the effects of general economic conditions on the underlying businesses, and the increased difficulty of evaluating and monitoring these types of loans.
At December 31, 2018, commercial and industrial loans totaled $281.7 million, an increase of $112.5 million or 66.5% from $169.2 million at December 31, 2017. The increase in commercial and industrial loans during 2018 is due to the $74.7 million in commercial and industrial loans acquired from PCB at acquisition date and, to a lesser extent, overall increases in our lending activity during year. At December 31, 2018 and 2017, commercial and industrial loans comprised 22.5% and 22.8% of our total loans held for investment, net of discounts.
We also make loans that provide funding for executive retirement benefit programs. These loans are frequently secured to at least 90% and often well above that level by cash equivalent collateral; typically, the cash surrender value, also known as CSV, of one or more life insurance policies. These loans represent our largest concentration within the commercial and industrial loan portfolio. We manage these loans individually against our current house limit of $15 million and legal lending limit of 15% of total risk-based capital. 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 either pledge additional collateral, substitute the policy from another insurer, and/or reduce the outstanding loan balance to meet the loan-to-CSV ratio requirement. These loans totaled $36.8 million and $32.8 million at December 31, 2018 and December 31, 2017. At December 31, 2018 and December 31, 2017, the ratio of aggregate unpaid principal balance to aggregate CSV for this portfolio totaled 98.3% and 88.1%.
Small Business Administration (SBA) loans. We offer small business loans through the SBA’s 7(a) program. We originate and service, as well as sell the guaranteed portion of these loans. The SBA’s 7(a) program provides up to a 75% guaranty for loans greater than $150,000. For loans $150,000 or less, the program provides up to an 85% guaranty. The maximum 7(a) loan amount is $5 million. 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. At December 31, 2018, SBA 7(a) loans totaled $100.2 million, an increase of $47.5 million or 90.2% from $52.7 million at December 31, 2017. The SBA 504 program consists of real estate backed commercial mortgages where the Company has the first mortgage and the SBA has the second mortgage on the property. Generally, we have a less than 65 percent loan to value ratio on SBA 504 program loans at origination. At December 31, 2018, SBA 504 loans totaled $46.3 million, an increase of $10.3 million or 28.5% from $36.0 million at December 31, 2017. In the PCB acquisition, we gained $45.9 million in total SBA loans as of the acquisition date.
We typically retain the entire SBA 504 loans we originate and sell in the secondary market the SBA-guaranteed portion of the SBA (7a) loans (generally 75% of the principal balance) we originate. During the years ended December 31, 2018 and 2017, we originated $48.0 million and $59.3 million, of SBA 7(a) loans and $20.2 million and $27.1 million of SBA 504 loans. We sold $25.0 million and $35.3 million of SBA 7(a) loans and zero and $7.9 million of SBA 504 loans for the years ended December 31, 2018 and 2017.
As of December 31, 2018, our SBA portfolio totaled $146.5 million, of which $30.2 million is guaranteed by the SBA and $116.2 million is unguaranteed. Of the $116.2 million unguaranteed SBA portfolio, $31.6 million is secured by industrial/warehouse properties; $22.7 million is secured by hospitality properties; and $47.0 million is secured by other real estate types. As of December 31, 2017, our SBA portfolio totaled $88.7 million of which $10.9 million is guaranteed by the SBA and $77.8 million is unguaranteed. Of the $77.8 million unguaranteed SBA portfolio, $27.8 million is secured by industrial/warehouse properties; $24.4 million is secured by hospitality properties; and $20.9 million is secured by other real estate types.
Loan Maturities. The following table presents the contractual maturities and the distribution between fixed and adjustable interest rates for loans held for investment at December 31, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Within One Year | After One Year Through Five Years | After Five Years | |
| | Fixed | | Adjustable Rate | | Fixed | | Adjustable Rate | | Fixed | | Adjustable Rate | | Total |
| | (in thousands) |
| Construction and land development | $ | — |
| | $ | 117,831 |
| | $ | 1,524 |
| | $ | 48,448 |
| | $ | — |
| | $ | 16,374 |
| | $ | 184,177 |
|
| Real estate: | | | | | | | | | | | | |
|
| Residential | — |
| | 899 |
| | 39 |
| | 2,631 |
| | 2,501 |
| | 51,373 |
| | 57,443 |
|
| Commercial real estate - owner occupied | 9,842 |
| | 7,086 |
| | 19,370 |
| | 39,510 |
| | 13,898 |
| | 89,656 |
| | 179,362 |
|
| Commercial real estate - non-owner occupied | 31,480 |
| | 35,555 |
| | 67,254 |
| | 93,438 |
| | 11,848 |
| | 161,015 |
| | 400,590 |
|
| Commercial and industrial | 3,366 |
| | 58,708 |
| | 26,362 |
| | 99,032 |
| | 11,222 |
| | 82,431 |
| | 281,121 |
|
| SBA loans | — |
| | 9,195 |
| | 2,270 |
| | 17,970 |
| | 8,937 |
| | 107,250 |
| | 145,622 |
|
| Consumer & other | — |
| | — |
| | — |
| | 159 |
| | — |
| | — |
| | 159 |
|
| Loans | 44,688 |
| | 229,274 |
| | 116,819 |
| | 301,188 |
| | 48,406 |
| | 508,099 |
| | 1,248,474 |
|
| PCI Loans | 10 |
| | | | 1,713 |
| | 180 |
| | | | 741 |
| | 2,644 |
|
| Total | $ | 44,698 |
|
| $ | 229,274 |
|
| $ | 118,532 |
|
| $ | 301,368 |
|
| $ | 48,406 |
|
| $ | 508,840 |
|
| $ | 1,251,118 |
|
Commercial Real Estate Concentration. Under a 2006 Interagency Guidance issued by the federal banking regulatory agencies, a limitation of 300% of total risk-based capital was established for commercial real estate loans, including multi-family and non-farm nonresidential property and loans for construction and land development. In addition, a limitation of 100% of total risk-based capital was established for construction and land development loans. An institution exceeding the thresholds should have heightened risk management practices appropriate to the degree of commercial real estate loan concentration risk of these loans in their portfolios and consistent with the Interagency Guidance.
The Board of Directors has approved pre-established concentration levels (as a percentage of capital) for various loan types based on our business plan and historical loss experience. On a monthly basis, management provides a loan concentration report to the Board with information relating to concentrations. Management’s review of possible concentrations includes an assessment of loans to multiple borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. In addition, we stress test our CRE portfolios periodically as part of our risk management practices. We believe we are in compliance with the Interagency Guidance, because we have heightened risk management practices for our commercial real estate portfolio, including our construction and land development loans.
As of December 31, 2018 and 2017, loans secured by non-owner occupied commercial real estate represented 309% of our total risk-based capital (as defined by the federal bank regulators). Our internal policy is to limit total non-owner occupied commercial real estate loans to 350% of total risk-based capital. In addition, as of December 31, 2018 and 2017, total loans secured by commercial real estate under construction and land development represented 108% and 99% of our total risk-based capital. Our internal policy is to limit loans secured by commercial real estate construction and land development to 150% of total risk-based capital. Historically, we have managed loan concentrations by selling participations in, or whole loan sales of, certain loans, primarily commercial real estate and construction and land development loan production.
In addition, as of December 31, 2018 and 2017, total unpaid principal balance of hospitality loans represented approximately 61.2% and 97.1% of our total risk-based capital. We have historically provided loans to borrowers in the hospitality industry. Our internal guidance is to limit hospitality industry commitments to 150% of total risk-based capital, and we attempt to meet this guidance by participating certain hospitality loans to other lenders. At December 31, 2018 and 2017, total commitments to fund hospitality loans represented approximately 64.0% and 103.0% of our total risk-based capital.
Most of our real property collateral is located within Southern California. In the past, particularly in the recession of 2007-2009, there has been a significant decline in real estate values in many parts of California, including certain parts of our service areas. If this were to happen again, the collateral for our loans may provide less security than when the loans were originated. A decline in real estate values could have an adverse impact on us by limiting repayment of defaulted loans through sale of commercial and residential real estate collateral and by a likely increase in the number of defaulted loans to the extent that the financial condition of our borrowers is adversely affected by such a decline in real estate values. The adverse effects of the foregoing matters upon our real estate portfolio could necessitate a material increase in our provision for loan losses.
The repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate or commercial project. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired. This cash flow shortage may result in the failure to make loan payments. In such cases, we may be
compelled to modify the terms of the loan. In addition, the nature of these loans is such that they are generally less predictable and more difficult to evaluate and monitor. As a result, repayment of these loans may, to a greater extent than residential loans, be subject to adverse conditions in the real estate market or economy.
Problem Loans. Loans are considered delinquent when principal or interest payments are past due 30 days or more; delinquent loans may remain on accrual status between 30 days and 89 days past due. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income.
We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. We use the following definitions for risk ratings:
Pass - Loans classified as pass represent assets with a level of credit quality which contain no well-defined deficiency or weakness.
Special Mention - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable and improbable.
Loss - Loans classified loss are considered uncollectible and of such little value that their continuance as loans is not warranted.
The following tables present the recorded investment balances of potential problem loans, excluding PCI loans, classified as special mention or substandard, at December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | | | Real Estate | | | | | | | | |
| | Construction and land development | | Residential | | Commercial real estate - owner occupied | | Commercial real estate - non-owner occupied | | Commercial and industrial | | SBA loans | | Consumer | | Total |
| | (in thousands) |
| Special Mention | $ | — |
| | $ | — |
| | $ | 4,857 |
| | $ | 1,133 |
| | $ | 8,341 |
| | $ | 6,065 |
| | $ | — |
| | $ | 20,396 |
|
| Substandard (1) | — |
| | — |
| | — |
| | — |
| | 3,140 |
| | 1,817 |
| | — |
| | 4,957 |
|
| Total | $ | — |
|
| $ | — |
|
| $ | 4,857 |
|
| $ | 1,133 |
|
| $ | 11,481 |
|
| $ | 7,882 |
|
| $ | — |
|
| $ | 25,353 |
|
| |
(1) | At December 31, 2018, substandard loans include $1.7 million of impaired loans. The Company had no loans classified as doubtful or loss at December 31, 2018. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | | | Real Estate | | | | | | | | |
| | Construction and land development | | Residential | | Commercial real estate - owner occupied | | Commercial real estate - non-owner occupied | | Commercial and industrial | | SBA loans | | Consumer | | Total |
| | (in thousands) |
| Special Mention | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6,871 |
| | $ | 4,014 |
| | $ | — |
| | $ | 10,885 |
|
| Substandard (1) | — |
| | — |
| | — |
| | — |
| | 634 |
| | 1,347 |
| | — |
| | 1,981 |
|
| Total | $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 7,505 |
|
| $ | 5,361 |
|
| $ | — |
|
| $ | 12,866 |
|
| |
(1) | At December 31, 2017, substandard loans include $1.8 million of impaired loans. The Company had no loans classified as doubtful or loss at December 31, 2017. |
Nonperforming Assets. Nonperforming assets, excluding PCI loans, are defined as nonperforming loans (defined as accruing loans past due 90 days or more, non-accrual loans and non-accrual troubled-debt restructurings (“TDRs”)) plus real estate acquired through foreclosure. The table below reflects the composition of non-performing assets at the periods indicated:
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (in thousands) |
| Accruing loans past due 90 days or more | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Non-accrual | 1,128 |
| | — |
| | 683 |
| | 226 |
| | — |
|
| Troubled debt restructurings on non-accrual | 594 |
| | 1,761 |
| | 2,586 |
| | 3,610 |
| | — |
|
| Total nonperforming loans | $ | 1,722 |
| | $ | 1,761 |
| | $ | 3,269 |
| | $ | 3,836 |
| | $ | — |
|
| Foreclosed assets | — |
| | — |
| | — |
| | — |
| | — |
|
| Total nonperforming assets | $ | 1,722 |
| | $ | 1,761 |
| | $ | 3,269 |
| | $ | 3,836 |
| | $ | — |
|
| Troubled debt restructurings - on accrual | $ | 327 |
| | $ | — |
| | $ | — |
| | $ | 389 |
| | $ | — |
|
| | | | | | | | | | |
| Nonperforming loans as a percentage of gross loans | 0.14 | % | | 0.24 | % | | 0.47 | % | | 0.58 | % | | — | % |
| Nonperforming assets as a percentage of total assets | 0.11 | % | | 0.19 | % | | 0.38 | % | | 0.47 | % | | — | % |
At December 31, 2018, one TDR with a recorded investment balance of $95 thousand was not performing in accordance with its restructured terms. At December 31, 2017, all TDRs were performing in accordance with their restructured terms.
The following table shows our nonperforming loans among our different asset categories as of the dates indicated. Nonperforming loans, excluding PCI loans, include nonaccrual loans, loans past due 90 days or more and still accruing interest, and non-accrual TDRs. The balances of nonperforming loans reflect our net investment in these assets.
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Nonperforming loans: | (in thousands) |
| Commercial and industrial | $ | 89 |
| | $ | 634 |
|
| SBA loans | 1,633 |
| | 1,127 |
|
| Total nonperforming loans (1) | $ | 1,722 |
| | $ | 1,761 |
|
(1) There were no purchased credit impaired loans on nonaccrual at December 31, 2018.
Troubled Debt Restructurings. At December 31, 2018 and 2017, the Company had approximately $922 thousand and $1.8 million in recorded investment in loans identified as TDRs and had allocated approximately zero and $504 thousand as specific reserves for these loans. The Company has not committed to lend any additional amounts to customers with outstanding loans that are classified as TDR’s as of December 31, 2018.
As of December 31, 2018 and 2017, loan modifications resulting in TDR status generally included one or a combination of the following: extensions of the maturity date, principal payment deferments or signed forbearance agreement
with a payment plan. During the year ended December 31, 2018 there were no new loan modifications resulting in TDRs. During the year ended December 31, 2017, there were four new loan modifications resulting in TDRs.
Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the un-collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Amounts are charged-off when available information confirms that specific loans or portions thereof, are uncollectible. This methodology for determining charge-offs is consistently applied to each loan portfolio segment.
The Company determines a separate allowance for each loan portfolio segment. The allowance consists of specific and general reserves. Specific reserves relate to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value and the probability of collecting all amounts when due. Measurement of impairment is based on the expected future cash flows of an impaired loan, which are to be discounted at the loan’s effective interest rate, or measured by reference to an observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan. We select the measurement method on a loan-by-loan basis except that collateral-dependent loans for which foreclosure is probable are measured at the fair value of the collateral.
General reserves cover non-impaired loans and are based on historical loss rates for each portfolio segment or peer group historical data, adjusted for the effects of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience. Qualitative factors include consideration of the following: changes in lending policies and procedures; changes in economic conditions; changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for collateral-dependent loans; concentrations of credit; and the effect of other external factors such as competition and legal and regulatory requirements.
Portfolio segments identified by the Company include construction and land development, residential and commercial real estate, commercial and industrial, SBA loans, and consumer loans. Relevant risk characteristics for these portfolio segments generally include debt service coverage, loan-to-value ratios, collateral type, borrower financial performance, credit scores, and debt-to-income ratios for consumer loans.
In addition, the evaluation of the appropriate allowance for loan losses on purchased non-impaired loans in the various loan segments considers credit discounts recorded as a part of the initial determination of the fair value of the loans. For these loans, no allowance for loan losses is recorded at the acquisition date. Credit discounts representing the principal losses expected over the life of the loans are a component of the initial fair value. Subsequent to the acquisition date, the methods utilized to estimate the required allowance for loan losses for these loans is similar to our originated loans; however, the Company records a provision for loan losses only when the required allowance exceeds any remaining credit discounts.
The evaluation of the appropriate allowance for loan losses for purchased credit-impaired loans in the various loan segments considers the expected cash flows to be collected from the borrower. These loans are initially recorded at fair value and, therefore, no allowance for loan losses is recorded at the acquisition date. Subsequent to the acquisition date, the expected cash flows of purchased loans are subject to evaluation. Decreases in expected cash flows are recognized by recording an allowance for loan losses with the related provision for loan losses. If the expected cash flows on the purchased loans increase, a previously recorded impairment allowance can be reversed. Increases in expected cash flows of purchased loans, when there are no reversals of previous impairment allowances, are recognized over the remaining life of the loans.
At December 31, 2018, given the composition of our loan portfolio, as well as the unamortized fair value discount of loans acquired, the ALLL was considered adequate to cover probable incurred losses inherent in the loan portfolio. Should any of the factors considered by management in evaluating the appropriate level of the ALLL change, the Company’s estimate of probable incurred loan losses could also change, which could affect the level of future provisions for loan losses.
The table below presents a summary of activity in our allowance for loan losses for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (in thousands) |
| Balance, beginning of period | $ | 10,497 |
| | $ | 11,599 |
| | $ | 11,415 |
| | $ | 8,501 |
| | $ | 5,749 |
|
| Charge-offs: | | | | | | | | | |
| Commercial and industrial | 539 |
| | 1,386 |
| | 1,556 |
| | 31 |
| | — |
|
| SBA loans | 610 |
| | 459 |
| | — |
| | 174 |
| | — |
|
| | 1,149 |
| | 1,845 |
| | 1,556 |
| | 205 |
| | — |
|
| Recoveries: | | | | | | | | | |
| Construction and land development | — |
| | — |
| | — |
| | — |
| | 7 |
|
| Commercial and industrial | 188 |
| | 56 |
| | — |
| | — |
| | — |
|
| SBA loans | — |
| | 45 |
| | — |
| | — |
| | — |
|
| | 188 |
| | 101 |
| | — |
| | — |
| | 7 |
|
| Net charge-offs (recoveries) | 961 |
| | 1,744 |
| | 1,556 |
| | 205 |
| | (7 | ) |
| Provision for loan losses | 1,520 |
| | 642 |
| | 1,740 |
| | 3,119 |
| | 2,745 |
|
| Balance, end of period | $ | 11,056 |
| | $ | 10,497 |
| | $ | 11,599 |
| | $ | 11,415 |
| | $ | 8,501 |
|
| | | | | | | | | | |
| Loans held for investment | $ | 1,250,981 |
| | $ | 741,713 |
| | $ | 696,085 |
| | $ | 656,157 |
| | $ | 506,558 |
|
| Average loans held for investment | $ | 985,513 |
| | $ | 739,935 |
| | $ | 673,635 |
| | $ | 597,093 |
| | $ | 415,478 |
|
| Allowance for loan losses as a percentage of loans held for investment | 0.88 | % | | 1.42 | % | | 1.67 | % | | 1.74 | % | | 1.68 | % |
| Ratio of net charge-offs to average loans held for investment | 0.10 | % | | 0.24 | % | | 0.23 | % | | 0.03 | % | | — | % |
The following table shows the allocation of the allowance for loan losses by loan type at the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | December 31, 2017 | December 31, 2016 | December 31, 2015 | December 31, 2014 |
| | Allowance for Loan Losses | % of Loans in Each Category to Total Loans | Allowance for Loan Losses | % of Loans in Each Category to Total Loans | Allowance for Loan Losses | % of Loans in Each Category to Total Loans | Allowance for Loan Losses | % of Loans in Each Category to Total Loans | Allowance for Loan Losses | % of Loans in Each Category to Total Loans |
| | (in thousands) |
| Construction and land development | $ | 1,721 |
| 14.7 | % | $ | 1,597 |
| 15.6 | % | $ | 1,827 |
| 15.9 | % | $ | 2,491 |
| 18.1 | % | $ | 953 |
| 11.0 | % |
| Real estate: | | | | | | | | | | |
| Residential | 422 |
| 4.6 | % | 375 |
| 8.5 | % | 924 |
| 12.3 | % | 589 |
| 6.9 | % | 1,069 |
| 12.3 | % |
| Commercial real estate - owner occupied | 734 |
| 14.3 | % | 655 |
| 7.1 | % | 618 |
| 7.7 | % | 746 |
| 9.4 | % | 606 |
| 7.2 | % |
| Commercial real estate - non-owner occupied | 2,686 |
| 32.2 | % | 3,136 |
| 33.9 | % | 2,501 |
| 28.1 | % | 3,142 |
| 34.6 | % | 2,997 |
| 35.5 | % |
| Commercial and industrial | 3,686 |
| 22.5 | % | 3,232 |
| 22.8 | % | 3,541 |
| 23.2 | % | 2,171 |
| 18.8 | % | 1,852 |
| 21.7 | % |
| SBA loans | 1,807 |
| 11.7 | % | 1,494 |
| 12.0 | % | 2,086 |
| 11.6 | % | 2,276 |
| 12.2 | % | 1,024 |
| 12.3 | % |
| Consumer | — |
| — | % | 8 |
| 0.1 | % | 102 |
| 1.2 | % | — |
| — | % | — |
| — | % |
| | $ | 11,056 |
| 100.0 | % | $ | 10,497 |
| 100.0 | % | $ | 11,599 |
| 100.0 | % | $ | 11,415 |
| 100.0 | % | $ | 8,501 |
| 100.0 | % |
PCI Loans.The following table summarizes the changes in the carrying amount and accretable yield of PCI loans for the period from July 31, 2018 (acquisition date) through December 31, 2018:
|
| | | | | | | |
| | Carrying Amount | | Accretable Yield |
| | (in thousands) |
| Balance, December 31, 2017 | $ | — |
| | $ | — |
|
| Loans acquired | 3,053 |
| | 2,111 |
|
| Accretion | 219 |
| | (219 | ) |
| Payments received | (565 | ) | | — |
|
| Increase in expected cash flows, net | (63 | ) | | 181 |
|
| Provision for loan losses | — |
| | — |
|
| Balance, December 31, 2018 | $ | 2,644 |
| | $ | 2,073 |
|
Loan Held for Sale. Loans held for sale typically consist of the guaranteed portion of SBA 7(a) loans that are originated and intended for sale in the secondary market and may also include commercial real estate loans and SBA 504 loans. Loans held for sale are carried at the lower of carrying value or estimated market value. At December 31, 2018, loans held for sale were $28.0 million an increase of $17.4 million from $10.6 million at December 31, 2017. The increase in loans held for sale during the year ended December 31, 2018 was primarily attributable to the origination of $45.2 million in loans, offset by the sale of loans with an aggregate carrying value of $25.0 million. At December 31, 2018 and 2017, loans held for sale consisted entirely of SBA 7(a) loans. At December 31, 2018 and 2017, the fair value of loans held for sale totaled $29.2 million and $11.5 million.
Servicing Asset and Loan Servicing Portfolio.The Company sells loans in the secondary market and, for certain loans retains the servicing responsibility. The loans serviced for others are accounted for as sales and are therefore not included in the accompanying consolidated balance sheets. The total loans serviced for others totaled $288.2 million and $222.0 million at December 31, 2018 and 2017. The loan servicing portfolio includes SBA loans serviced for others of $198.4 million and $140.4 million for which there is a related servicing asset of $3.2 million and $2.6 million at December 31, 2018 and 2017. Consideration for each SBA loan sale includes the cash received and a related servicing asset. The Company receives servicing fees ranging from 0.25% to 1.00% for the services provided over the life of the loan; the servicing asset is based on the estimated fair value of these future cash flows to be collected. The risks inherent in SBA servicing asset relates primarily to changes in prepayments that result from shifts in interest rates and a reduction in the estimated future cash flows. The servicing asset activity includes additions from loan sales with servicing retained and acquired servicing rights and reductions from amortization as the serviced loans are repaid and servicing fees are earned. Servicing rights with a fair value of
$1.1 million, at acquisition date, were acquired in the PCB acquisition. Refer to Note 2 - Business Combination to the Consolidated Financial Statements included in Item 8 Financial Statements and Supplementary Data, of this Annual Report.
In addition, the loan servicing portfolio includes construction and land development loans, commercial real estate loans and commercial & industrial loans participated out to various other institutions of $89.8 million and $81.6 million for which there is no related servicing asset at December 31, 2018 and 2017.
Goodwill and Other Intangible Assets
As a result of the PCB acquisition, we recorded goodwill and a core deposit intangible ("CDI"), which total $73.4 million and $6.6 million at December 31, 2018. Due to volatility in the stock market during December 2018, including a 19.9% reduction in the Company's closing stock price from the date PCB was acquired to December 31, 2018, we evaluated goodwill for impairment and concluded there was no impairment as of year-end.
Deposits
The following table presents the ending balance and percentage of deposits as of the dates indicated:
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 | | December 31, 2016 |
| | Amount | | Percentage of Total | | Amount | | Percentage of Total | | Amount | | Percentage of Total |
| | (in thousands) |
| Noninterest-bearing demand | $ | 546,713 |
| | 43.8 | % | | $ | 235,584 |
| | 30.4 | % | | $ | 150,764 |
| | 19.9 | % |
| Interest-bearing deposits: | | | | | | | | | | | |
| Interest checking | 129,884 |
| | 10.4 | % | | 200,587 |
| | 26.0 | % | | 265,381 |
| | 35.1 | % |
| Money market | 296,085 |
| | 23.6 | % | | 95,598 |
| | 12.4 | % | | 92,309 |
| | 12.2 | % |
| Savings | 39,154 |
| | 3.1 | % | | 76,514 |
| | 9.9 | % | | 89,828 |
| | 11.9 | % |
| Time deposits | 187,121 |
| | 14.9 | % | | 111,758 |
| | 14.5 | % | | 122,807 |
| | 16.2 | % |
| Brokered time deposits | 53,382 |
| | 4.3 | % | | 52,638 |
| | 6.8 | % | | 35,472 |
| | 4.7 | % |
| | $ | 1,252,339 |
| | 100.1 | % | | $ | 772,679 |
| | 100.0 | % | | $ | 756,561 |
| | 100.0 | % |
Total deposits increased $479.7 million to $1.25 billion at December 31, 2018 from $772.7 million at December 31, 2017. The increase in deposits was primarily a result of $474.9 million in deposits acquired in the PCB acquisition; the acquired deposits included noninterest-bearing demand deposits of $273.6 million, or 57.6% of total acquired deposits, and money market deposits of $120.4 million, or 25.4% of the total acquired deposits. The deposit portfolio received as part of the PCB acquisition positively impacted our deposit mix resulting in a higher percentage of noninterest-bearing demand deposits. At December 31, 2018, noninterest-bearing deposits represented 43.8% of total deposits compared to 30.4% at December 31, 2017.
The Company qualifies to participate in a state public deposits program that allows it to receive deposits from the state or from political subdivisions within the state in amounts that would not be covered by FDIC. This program provides a stable source of funding to the Company. As of December 31, 2018, total deposits from the State of California and other public agencies totaled $59.6 million and are collateralized by letters of credit issued by the FHLB under the Bank's secured line of credit with the FHLB. Refer to Note 8 - Deposits and Note 9 - Borrowing Arrangements to the Consolidated Financial Statements included in Item 8 Financial Statements and Supplementary Data, of this Annual Report.
At December 31, 2018, the $53.4 million in callable brokered deposits had a weighted average maturity of 1.9 years, however all such deposits are available to be called. The Bank has an option to call and repay such deposits if rates for newly issued deposits should be lower, or if the Bank no longer has a need for this funding. At December 31, 2018 and 2017, the weighted average yield on brokered deposits was 1.61% and 1.32%.
The Company’s ten largest depositor relationships accounted for approximately 25.2% and 29.8% of total deposits at December 31, 2018 and 2017.
The following table shows time deposits greater than $250,000 by time remaining until maturity at December 31, 2018:
|
| | | |
| | December 31, 2018 |
| | (in thousands) |
| Three months or less | $ | 35,835 |
|
| Over three months through six months | 31,269 |
|
| Over six months through twelve months | 32,162 |
|
| Over twelve months | 10,097 |
|
| | $ | 109,363 |
|
Borrowings
The following table presents the components of borrowings as of the periods indicated:
|
| | | | | | | |
| | December 31,
2018 | | December 31,
2017 |
| | (in thousands) |
| FHLB Advances | $ | 90,000 |
| | $ | 20,000 |
|
| Federal funds purchased | 14,998 |
| | — |
|
| Short-term borrowings | $ | 104,998 |
| | $ | 20,000 |
|
| | | | |
| Senior secured notes | $ | 8,450 |
| | $ | 350 |
|
Short-term borrowings. In addition to deposits, we use short-term borrowings, such as FHLB advances and Federal fund purchases, as a source of funds to meet the daily liquidity needs of our customers. Short-term borrowings increased to $105.0 million at December 31, 2018 from $20.0 million at December 31, 2017.
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | (in thousands) |
| FHLB Advances: | | | | | |
| Average amount outstanding during the period | $ | 23,148 |
| | $ | 20,429 |
| | $ | 19,852 |
|
| Maximum month-ending amount outstanding during the period | $ | 104,998 |
| | $ | 60,000 |
| | $ | 43,000 |
|
| Balance, end of period | $ | 104,998 |
| | $ | 20,000 |
| | $ | — |
|
| Interest rate, end of period | 2.57 | % | | 1.41 | % | | — | % |
| Weighted average interest rate during the period | 1.77 | % | | 1.16 | % | | 0.67 | % |
Federal Home Loan Bank Secured Line of Credit. At December 31, 2018, the Bank has a secured line of credit of $396.8 from the FHLB. This secured borrowing arrangement is subject to the Bank providing adequate collateral and continued compliance with the Advances and Security Agreement and other eligibility requirements established by the FHLB. At December 31, 2018, the Bank had pledged as collateral certain qualifying loans with an unpaid principal balance of
$868.4 million under this borrowing agreement. Overnight borrowings outstanding under this arrangement were $90.0 million and $20.0 million with an interest rate of 2.56% and 1.41% at December 31, 2018 and 2017. The average balance of short-term borrowings was $23.2 million and $20.5 million for the years ended December 31, 2018 and 2017.
In addition, at December 31, 2018, the Bank used another $90.2 million of its secured FHLB borrowing capacity by having the FHLB issue (i) letters of credit to meet collateral requirements for deposits from the State of California and other public agencies and (ii) standby letters of credit as credit enhancement to guarantee the performance of customers to third parties. At December 31, 2018, the remaining secured line of credit available from the FHLB totaled $216.7 million.
Unsecured Borrowings. The Bank has established unsecured overnight borrowing arrangements for an aggregate amount of $77.0 million, subject to availability, with five of its primary correspondent banks. In general, interest rates on these unsecured lines of credit approximate the federal funds target rate. Overnight borrowings under these credit facilities were $15.0 million and zero at December 31, 2018 and 2017. For the year ended December 31, 2018, average borrowings totaled $441 thousand with an average interest rate was 2.43%.
Federal Reserve Bank Secured Line of Credit. At December 31, 2018, the Bank has a total secured line of credit of $4.9 million with the Federal Reserve Bank. At December 31, 2018, the Bank had pledged securities held-to-maturity with a carrying value of $5.3 million as collateral for this line. There were no borrowings under this arrangement at or during the years ended December 31, 2018 and 2017.
Senior Secured Notes. At December 31, 2018, the holding company has a senior secured line of credit for $25 million. The available credit under this secured borrowing facility increased from $10.0 million to $25.0 million effective July 31, 2018. This facility is secured by 100% of the common stock of the Bank and bears interest, due quarterly, at a rate of U.S. Prime rate plus 0.25% and matures on December 22, 2019 (“Maturity Date”). In addition, the terms include a look-back fee equal to sum of (i) 0.25% of the portion of the loan not requested and drawn between December 22, 2017 (“Note Date”) and December 22, 2018 (“Anniversary Date”) and (ii) 0.25% of the portion of the loan not requested and drawn between the Anniversary Date and Maturity Date. Further, the terms of the loan agreement were amended to require the Bank to maintain minimum capital ratios, a minimum return on average assets, and certain other covenants, all of which became effective no later than December 31, 2018, including (i) leverage ratio greater than or equal to 9.0%, (ii) tier 1 capital ratio greater than or
equal to 10.5% and $143.0 million, (iii) total capital ratio greater than or equal to 11.5%, (iv) CET1 capital ratio greater than or equal to 11.5%, (v) return on average assets, excluding one-time expense related to the merger with PCB, greater than or equal to 0.85%, (vi) classified assets to Tier 1 capital plus the allowance for loan losses of less than or equal to 35.0%, (vii) certain defined liquidity ratios of at least 25% and (viii) specific concentration levels for commercial real estate and construction and land development loans. In the event of default, the lender has the option to declare all outstanding balances as immediately due. One of the Company's executives is also a member of the lending bank's board of directors.
At December 31, 2018, the outstanding balance under the facility totaled $8.5 million with an interest rate of 5.75%. At December 31, 2017, the outstanding balance under the facility totaled $350 thousand with an interest rate of 4.75%. The average borrowings totaled $4.5 million with an average interest rate of 5.46% for the year ended December 31, 2018. At December 31, 2018, the Company was in compliance with all loan covenants on the facility.
Shareholders’ Equity
Total shareholders’ equity increased $142.4 million, or 134.7%, to $248.1 million at December 31, 2018 from $105.7 million at December 31, 2017. The increase in shareholders' equity is primarily due to the PCB acquisition with total purchase consideration of $133.3 million and the issuance of 4,386,816 shares of common stock and 420,393 rollover options. Refer to Note 2 - Business Combinationto the Consolidated Financial Statements included in Item 8 Financial Statements and Supplementary Data, for additional information related to the acquisition. Shareholders’ equity also increased by $15.1 million in net earnings, $1.7 million of share-based compensation and $1.1 million of stock option exercises, partially offset by $7.6 million in cash dividends, and $792 thousand in stock repurchases during 2018.
Liquidity and Capital Resources
Liquidity is the ability to raise funds on a timely basis at an acceptable cost in order to meet cash needs. Adequate liquidity is necessary to handle fluctuations in deposit levels, to provide for client credit needs, and to take advantage of investment opportunities as they are presented in the market place. We believe we currently have the ability to generate sufficient liquidity from our operating activities to meet our funding requirements. As a result of our growth, we may need to acquire additional liquidity to fund our activities in the future.
Holding Company Liquidity
As a bank holding company, we currently have no significant assets other than our equity interest in First Choice Bank. Our primary sources of liquidity at the holding company include dividends from the Bank, cash on hand at the holding company, which was approximately $173 thousand at December 31, 2018, a $25.0 million secured line of credit of which $16.6 million is available at December 31, 2018, and our ability to raise capital, issue subordinated debt, and secure other outside borrowings. Our ability to declare dividends to shareholders depends upon cash on hand, availability on our secured line of credit and dividends from the Bank. Dividends from the Bank to the holding company depends upon the Bank's earnings, financial position, regulatory standing, the ability to meet current and anticipated regulatory capital requirements, and other factors deemed relevant by our Board of Directors. Refer to the Regulatory Capital in this MD&A for dividend limitations at both the holding company and the Bank.
Our ability to pay dividends is also limited by state law. California law allows a California corporation to pay dividends if the company’s retained earnings equal at least the amount of the proposed dividend. If a California corporation does not have sufficient retained earnings available for the proposed dividend, it may still pay a dividend to its shareholders if immediately after the dividend the value of the company’s assets would equal or exceed the sum of its total liabilities.
Consolidated Company Liquidity
Our liquidity ratio is defined as the liquid assets (cash and due from banks, fed funds and repos, interest-bearing deposits, other investments with a remaining maturity of one year or less, available-for-sale and equity securities, held-to-maturity securities and loans held for sale) divided by total assets. Using this definition at December 31, 2018, our liquidity ratio was 16%. Our current policy requires that we maintain a liquidity ratio of at least 15% measured monthly.
Our objective is to ensure adequate liquidity at all times by maintaining liquid assets and by being able to raise deposits. Having too little liquidity can present difficulties in meeting commitments to fund loans or honor deposit withdrawals. Having too much liquidity can result in lower income because liquid assets generally yield less than long-term assets. A proper balance is the goal of management and the Board of Directors, as administered by various policies and guidelines.
Net cash provided by operating activities for the years ended December 31, 2018 and 2017 was
$342 thousand and $11.5 million. Net interest income and noninterest expense are the primary components of cash provided by operations.
Net cash provided by (used in) investment activities for the years ended December 31, 2018 and 2017 was
$3.6 million and $(49.2) million. During the year ended December 31, 2018, the primary components of cash flows provided by investing activities was the $111.0 million in cash acquired as part of the PCB acquisition, partially offset by a net increase in loans, which totaled $103.8 million, and purchase of restricted stock investments of $6.9 million. During the year ended December 31, 2017, the primary driver of cash flows used in investing activities was purchases of securities available for sale of $8.5 million, purchases of loans of $14.8 million and a net increase in loans of $34.4 million.
Net cash provided by financing activities for the years ended December 31, 2018 and 2017 was $90.3 million and $30.8 million. For the year ended December 31, 2018, cash provided by financing activities primarily results from a
$4.7 million increase in deposits, a $85.0 million increase in short-term borrowings, a $8.1 million increase in senior secured notes, and $1.1 million in proceeds from stock option exercises, partially offset by $7.6 million in cash dividends paid and $1.1 million in stock repurchases. For the year ended December 31, 2017, cash provided by financing activities primarily came from a $16.1 million increase in deposits and a $20.0 million increase in short-term borrowings, offset by $5.8 million in cash dividends paid.
Additional sources of liquidity available to us at December 31, 2018 include $216.7 million in secured borrowing capacity with the FHLB, $4.9 million in borrowing capacity at the discount window with the Federal Reserve Bank, and unsecured lines of credit with correspondent banks with a remaining borrowing capacity of $62.0 million.
We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate liquidity levels. We expect to maintain adequate liquidity levels through profitability, loan payoffs, securities repayments and maturities, and continued deposit gathering activities. We also have in place various borrowing mechanisms for both short-term and long-term liquidity needs.
Stock Repurchase Plan
On December 3, 2018, the Company announced a stock repurchase plan, providing for the repurchase of up to
1.2 million shares of the Company’s outstanding common stock, or approximately 10% of its then outstanding shares (the "repurchase plan"). The repurchase plan permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18 of the SEC. The repurchase plan may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of tentative investment opportunities, liquidity, and other factors deemed appropriate. These factors may also affect the timing and amount of share repurchases. The repurchase plan does not obligate the Company to purchase any particular number of shares.
During the fourth quarter of 2018, the Company repurchased 36,283 shares at an average price of $21.82 under the repurchase plan. The remaining number of shares authorized to be repurchased under this plan was 1,163,717 shares at December 31, 2018.
Contractual Obligations
The following table summarizes aggregated information about our outstanding contractual obligations and other long-term liabilities as of December 31, 2018.
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | Less Than One Year | | One to Three Years | | Three to Five Years | | After Five Years |
| | (in thousands) |
| Deposits without a stated maturity | $ | 1,011,836 |
| | $ | 1,011,836 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Time deposits (1) | 240,503 |
| | 180,839 |
| | 44,906 |
| | 14,758 |
| | — |
|
| Short term borrowings | 104,998 |
| | 104,998 |
| | — |
| | — |
| | — |
|
| Senior secured notes | 8,450 |
| | 8,450 |
| | — |
| | — |
| | — |
|
| Operating lease obligations | 6,437 |
| | 2,199 |
| | 3,126 |
| | 1,112 |
| | — |
|
| | $ | 1,372,224 |
| | $ | 1,308,322 |
| | $ | 48,032 |
| | $ | 15,870 |
| | $ | — |
|
(1) Includes $53.4 million of callable brokered deposits report based on their contractual maturity dates.
Off-Balance-Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. These transactions generally take the form of loan commitments, unused lines of credit and standby letters of credit.
At December 31, 2018, we had unused loan commitments of $376.1 million and standby letters of credit of
$4.0 million. At December 31, 2017, we had unused loan commitments of $237.4 million and standby letters of credit of
$1.0 million.
As of December 31, 2018, the Company had in place $90.2 million in letters of credit from the FHLB to meet collateral requirements for deposits from the State of California and other public agencies, along with standby letters of credit issued by the FHLB as credit enhancement to guarantee the performance of customers to third parties.
Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
In July 2013, the federal bank regulatory agencies approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks, “Basel III rules”. The new rules became effective on January 1, 2015, with certain of the requirements phased-in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by January 1, 2019. The capital conservation buffer during 2018 was 1.875%. The net unrealized gain or loss on investment securities available-for-sale securities is not included in computing regulatory capital.
Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 and CET1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). We believe, as of December 31, 2018, that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2018, the most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification that management believes have changed the Bank’s category). To be categorized as well-capitalized, the Bank must maintain minimum ratios as set forth in the table below.
The following table also sets forth the actual capital ratios for the Bank:
|
| | | | | | | | | | | | | | |
| | | | Minimum Capital Required |
| First Choice Bank | Actual | | For Capital Adequacy Purposes | | Capital Conservation Buffer Phase-In (1) | | For Well Capitalized Requirement | | Capital Conservation Buffer Fully Phased-In |
| December 31, 2018: | |
| Total Capital (to risk-weighted assets) | 14.18 | % | | 8.00 | % | | 9.875 | % | | 10.00 | % | | 10.50 | % |
| Tier 1 Capital (to risk-weighted assets) | 13.26 | % | | 6.00 | % | | 7.875 | % | | 8.00 | % | | 8.50 | % |
| CET1 Capital (to risk-weighted assets) | 13.26 | % | | 4.50 | % | | 6.375 | % | | 6.50 | % | | 7.00 | % |
| Tier 1 Capital (to average assets) | 12.03 | % | | 4.00 | % | | 4.000 | % | | 5.00 | % | | 4.00 | % |
| | | | | | | | | | |
| December 31, 2017: | | | | | | | | | |
| Total Capital (to risk-weighted assets) | 14.72 | % | | 8.00 | % | | 9.250 | % | | 10.00 | % | | 10.50 | % |
| Tier 1 Capital (to risk-weighted assets) | 13.46 | % | | 6.00 | % | | 7.250 | % | | 8.00 | % | | 8.50 | % |
| CET1 Capital (to risk-weighted assets) | 13.46 | % | | 4.50 | % | | 5.750 | % | | 6.50 | % | | 7.00 | % |
| Tier 1 Capital (to average assets) | 11.75 | % | | 4.00 | % | | 4.000 | % | | 5.00 | % | | 4.00 | % |
| |
(1) | Ratios for December 31, 2018 reflect the minimum required plus capital conservation buffer phase-in for 2018; ratios for December 31, 2017 reflect the minimum required plus capital conservation buffer phase-in for 2017. The capital conservation buffer increases by 0.625% each year through 2019. |
Dividends
Our general dividend policy is to pay cash dividends within the range of typical peer payout ratios, provided that such payments do not adversely affect our financial condition and are not overly restrictive to our growth capacity. While we have paid a consistent level of quarterly cash dividends since the first quarter of 2017, no assurance can be given that our financial performance in any given year will justify the continued payment of a certain level of cash dividend, or any cash dividend at all. The primary source of funds for the holding company is dividends from the Bank, as well as availability under our $25 million secured line of credit.
The following table sets forth per share dividend amounts declared for the periods indicated:
|
| | | | | | | |
| | Year Ended December 31, |
| Dividends declared: | 2018 | | 2017 |
| Fourth quarter | $ | 0.20 |
| | $ | 0.20 |
|
| Third quarter | $ | 0.20 |
| | $ | 0.20 |
|
| Second quarter | $ | 0.20 |
| | $ | 0.20 |
|
| First quarter | $ | 0.20 |
| | $ | 0.20 |
|
Under the California Financial Code, the Bank is permitted to pay a dividend in the following circumstances: (i) without the consent of either the California Department of Business Oversight ("DBO") or the Bank's shareholders, in an amount not exceeding the lesser of (a) the retained earnings of the Bank; or (b) the net income of the Bank for its last three fiscal years, less the amount of any distributions made during the prior period; (ii) with the prior approval of the DBO, in an amount not exceeding the greatest of: (a) the retained earnings of the Bank; (b) the net income of the Bank for its last fiscal year; or (c) the net income for the Bank for its current fiscal year; and (iii) with the prior approval of the DBO and the Bank's shareholders in connection with a reduction of its contributed capital. In addition, under the Basel III Rule, institutions that seek to pay dividends must maintain 2.5% in Common Equity Tier 1 attributable to the capital conservation buffer, which was phased in over a three-year period that began on January 1, 2016.
The Federal Reserve Bank limits the amount of dividends that bank holding companies may pay on common stock to income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. It is also the Federal Reserve’s policy that bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to its banking subsidiaries. Additionally, in consideration of the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend.
Summary of Critical Accounting Policies
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the statements of financial position and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates.
A description of selected critical accounting policies that are of particular significance to us include:
Business Combinations
Business combinations are accounted for using the purchase accounting method. Under the purchase accounting method, the Company measures the identifiable assets acquired, including identifiable intangible assets, and liabilities assumed in a business combination at fair value on acquisition date. Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.
Goodwill and other identifiable intangible assets will be tested for impairment no less than annually each year or when circumstances arise indicating impairment may have occurred. We expect our annual impairment measurement date to occur in the fourth quarter in each fiscal year. In determining whether impairment has occurred, we consider a number of factors including, but not limited to, operating results, business plans, economic projections, anticipated future cash flows, and current market data. Any impairment identified as part of this testing is recognized in the accompanying consolidated statements of income. There was no impairment recognized related to goodwill or other identifiable intangible assets for the year ended December 31, 2018.
Core deposit intangible ("CDI") is a measure of the value of depositor relationships resulting from the acquisition of PCB. CDI is amortized on an accelerated method over an estimated useful life of approximately 10 years.
The Company accounts for merger-related costs, which may include advisory, legal, accounting, valuation, and other professional or consulting fees, as expenses in the periods in which the costs are incurred and the services are received.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance when we believe available information confirms that specific loans, or portions thereof, are uncollectible. This methodology for determining charge-offs is consistently applied to each segment. Subsequent recoveries, if any, are credited to the allowance.
We determine a separate allowance for each portfolio segment. The allowance consists of specific and general reserves. Specific reserves relate to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value and the probability of collecting all amounts when due. Measurement of impairment is based on the expected future cash flows of an impaired loan, which are to be discounted at the loan’s effective interest rate, or measured by reference to an observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan. We select the measurement method on a loan-by-loan basis except that collateral-dependent loans for which foreclosure is probable are measured at the fair value of the collateral.
We recognize interest income on impaired loans based on its existing methods of recognizing interest income on nonaccrual loans. Loans, for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired with measurement of impairment as described above.
If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.
General reserves cover non-impaired loans and are based on historical loss rates for each portfolio segment, adjusted for the effects of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience. Qualitative factors include consideration of the following: changes in lending policies and procedures; changes in economic conditions; changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for collateral-dependent loans; concentrations of credit; and the effect of other external factors such as competition and legal and regulatory requirements.
Portfolio segments identified by us include construction and land development, real estate, commercial and industrial, and consumer loans. Relevant risk characteristics for these portfolio segments generally include debt service coverage, loan-to-value ratios and financial performance on non-consumer loans and credit scores, debt-to-income, collateral type and loan-to-value ratios for consumer loans.
Loan Sales and Servicing of Financial Assets
We originate SBA loans and sell the guaranteed portions in the secondary market. Servicing rights are recognized separately when they are acquired through sale of loans. Servicing rights are initially recorded at fair value with the income statement effect recorded in gain on sale of loans. Fair value is based on a valuation model that calculates the present value of estimated future cash flows from the servicing assets. The valuation model uses assumptions that market participants would use in estimating cash flows from servicing assets, such as the cost to service, discount rates and prepayment speeds. We compare the valuation model inputs and results to published industry data in order to validate the model results and assumptions. Servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. For purposes of measuring impairment, we have identified each servicing asset with the underlying loan being serviced. A valuation allowance is recorded where the fair value is below the carrying amount of the asset. If we later determine that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase in income. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayments speeds and changes in the discount rates.
Deferred Income Taxes
Deferred income taxes are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period that includes the enactment date. A valuation allowance is established to reduce the deferred tax asset to the level at which it is “more likely than not” that the tax asset or benefits will be realized.
We have adopted guidance issued by the Financial Accounting Standards Board (“FASB”) that clarifies the accounting for uncertainty in tax positions taken or expected to be taken on a tax return and provides that the tax effects from an uncertain tax position can be recognized in the consolidated financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. Income tax positions must meet a more likely than not recognition threshold to be recognized. For tax positions not meeting the more likely than not recognition threshold, no tax benefit is recorded. The Company recognizes interest and / or penalties related to income tax matters in income tax expense.
Refer to Note 10 - Income Taxes to the Consolidated Financial Statements included in Item 8 Financial Statements and Supplementary Data, of this Annual Report.
Fair Value Measurements
The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates.
Recent Accounting Guidance Not Yet Effective
The impact that recently issued accounting standards will have on our consolidated financial statements is contained in Note 1 - Basis of Presentation and Summary of Significant Accounting Policies to the Consolidated Financial Statements included in Item 8 Financial Statements and Supplementary Data, of this Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. Our primary market risk is interest rate risk, which is the risk of loss of net interest income or net interest margin resulting from changes in market interest rates.
Interest Rate Risk
Interest rate risk results from the following risks:
Repricing risk - timing differences in the repricing and maturity of interest-earning assets and interest-bearing liabilities;
Option risk -changes in the expected maturities of assets and liabilities, such as borrowers’ ability to prepay loans at any time and depositors’ ability to redeem certificates of deposit before maturity;
Yield curve risk - changes in the yield curve where interest rates increase or decrease in a nonparallel fashion; and
Basis risk - changes in spread relationships between different yield curves, such as U.S. Treasuries, U.S. Prime Rate and London Interbank Offered Rate.
Since our earnings are primarily dependent on our ability to generate net interest income, we focus on actively monitoring and managing the effects of adverse changes in interest rates on our net interest income. Management of our interest rate risk is overseen by our Asset Liability Committee (“ALCO”). ALCO ensures that we are following the appropriate and current regulatory guidance in the formulation and implementation of our interest rate risk program. Our Board of Directors review the results of our interest rate risk modeling quarterly to ensure that we have appropriately measured our interest rate risk, mitigated our exposures appropriately and any residual risk is acceptable. In addition to our annual review of this policy, our Board of Directors explicitly reviews the interest rate risk policy limits at least annually.
Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.
Our balance sheet is considered “asset sensitive” when an increase in short-term interest rates is expected to expand our net interest margin, as rates earned on our interest-earning assets reprice higher at a pace faster than rates paid on our interest-bearing liabilities. Conversely, our balance sheet is considered “liability sensitive” when an increase in short-term interest rates is expected to compress our net interest margin, as rates paid on our interest-bearing liabilities reprice higher at a pace faster than rates earned on our interest-earning assets. At December 31, 2018, we were "asset sensitive".
In order to model and evaluate interest rate risk, we use two approaches: Net Interest Income at Risk ("NII at Risk"), and Economic Value of Equity ("EVE"). Under NII at Risk, the impact on net interest income from changes in interest rates on interest-earning assets and interest-bearing liabilities is modeled utilizing various assumptions for assets, liabilities, and derivatives. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.
The following table presents the projected changes in NII at risk and EVE that would occur upon an immediate change in interest rates based on independent analysis, but without giving effect to any steps that management might take to counteract that change as of December 31, 2018:
|
| | | | | | | | | | | | | |
| | NII at Risk | | EVE |
| | Adjusted Net Interest Income | | Percentage Change from Base Case | | Market Value | | Percentage of Change from Base Case |
| Interest rate scenario | (dollars in thousands) |
| Up 300 basis points | $ | 91,496 |
| | 19.2 | % | | $ | 339,362 |
| | 5.6 | % |
| Up 200 basis points | $ | 86,623 |
| | 12.9 | % | | $ | 334,061 |
| | 4.0 | % |
| Up 100 basis points | $ | 81,750 |
| | 6.5 | % | | $ | 328,421 |
| | 2.2 | % |
| Base | $ | 76,729 |
| | — |
| | $ | 321,237 |
| | — |
|
| Down 100 basis points | $ | 71,836 |
| | (6.4 | )% | | $ | 312,653 |
| | (2.7 | )% |
| Down 200 basis points | $ | 69,054 |
| | (10.0 | )% | | $ | 307,390 |
| | (4.3 | )% |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
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CONSOLIDATED FINANCIAL STATEMENTS | |
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| |
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders of
First Choice Bancorp and Subsidiary
Cerritos, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of First Choice Bancorp and Subsidiary (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash flows for the years ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Vavrinek, Trine, Day & Co., LLP
We have served as the Company’s auditor since 2014.
Laguna Hills, California
March 25, 2019
First Choice Bancorp and Subsidiary
Consolidated Balance Sheets
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| ASSETS | (in thousands, except share data) |
| Cash and due from banks | $ | 17,874 |
| | $ | 5,405 |
|
| Interest-bearing deposits at other banks | 176,502 |
| | 97,727 |
|
| Federal funds sold | 3,000 |
| | — |
|
| Total cash and cash equivalents | 197,376 |
| | 103,132 |
|
| Securities available-for-sale, at fair value | 29,543 |
| | 32,460 |
|
| Securities held-to-maturity, at cost | 5,322 |
| | 5,300 |
|
| Equity securities, at fair value | 2,538 |
| | 2,542 |
|
| Restricted stock investments, at cost | 12,855 |
| | 3,640 |
|
| Loans held for sale, at lower of cost or fair value | 28,022 |
| | 10,599 |
|
| Loans held for investment | 1,250,981 |
| | 741,713 |
|
| Allowance for loan losses | (11,056 | ) | | (10,497 | ) |
| Loans held for investment, net | 1,239,925 |
| | 731,216 |
|
| Accrued interest receivable | 5,069 |
| | 3,108 |
|
| Premises and equipment | 1,973 |
| | 1,035 |
|
| Servicing asset | 3,186 |
| | 2,618 |
|
| Deferred taxes, net | 8,666 |
| | 4,495 |
|
| Goodwill | 73,425 |
| | — |
|
| Core deposit intangible | 6,576 |
| | — |
|
| Other assets | 8,025 |
| | 3,650 |
|
| TOTAL ASSETS | $ | 1,622,501 |
|
| $ | 903,795 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| Deposits: | | | |
| Noninterest-bearing demand | $ | 546,713 |
| | $ | 235,584 |
|
| Money market, interest checking and savings | 465,123 |
| | 372,699 |
|
| Time deposits | 240,503 |
| | 164,396 |
|
| Total deposits | 1,252,339 |
| | 772,679 |
|
| Short-term borrowings | 104,998 |
| | 20,000 |
|
| Senior secured notes | 8,450 |
| | 350 |
|
| Accrued interest payable and other liabilities | 8,645 |
| | 5,072 |
|
| Total liabilities | 1,374,432 |
| | 798,101 |
|
| Commitments and contingencies - Notes 5 and 11 |
|
| |
|
|
| Shareholders’ equity: | | | |
| Preferred stock 100,000,000 shares authorized, none outstanding | — |
| | — |
|
| Common stock no par value; 100,000,000 shares authorized; issued and outstanding: 11,726,074 at December 31, 2018 and 7,260,119 at December 31, 2017 | 217,514 |
| | 87,837 |
|
| Additional paid-in capital | 7,269 |
| | 1,940 |
|
| Retained earnings | 23,985 |
| | 16,459 |
|
Accumulated other comprehensive loss - net | (699 | ) | | (542 | ) |
| Total shareholders’ equity | 248,069 |
|
| 105,694 |
|
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 1,622,501 |
|
| $ | 903,795 |
|
See accompanying notes to consolidated financial statements.
First Choice Bancorp and Subsidiary
Consolidated Statements of Income
|
| | | | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 |
| | | (in thousands, except share and per share data) |
| INTEREST INCOME | | | | |
| Interest and fees on loans | | $ | 61,075 |
| | $ | 38,624 |
|
| Interest on investment securities | | 922 |
| | 959 |
|
| Interest on deposits in other financial institutions | | 1,872 |
| | 970 |
|
| Dividends on restricted stock investments | | 508 |
| | 266 |
|
| Total interest income | | 64,377 |
| | 40,819 |
|
| INTEREST EXPENSE | | | | |
| Interest on savings, interest checking and money market accounts | | 4,364 |
| | 3,911 |
|
| Interest on time deposits | | 3,686 |
| | 1,890 |
|
| Interest on borrowings | | 660 |
| | 240 |
|
| Total interest expense | | 8,710 |
| | 6,041 |
|
| Net interest income | | 55,667 |
| | 34,778 |
|
| Provision for loan losses | | 1,520 |
| | 642 |
|
| Net interest income after provision for loan losses | | 54,147 |
| | 34,136 |
|
| NONINTEREST INCOME | | | | |
| Gain on sale of loans | | 1,505 |
| | 3,596 |
|
| Service charges and fees on deposit accounts | | 1,241 |
| | 329 |
|
| Net servicing fees | | 509 |
| | 701 |
|
| Other income | | 355 |
| | 435 |
|
| Total noninterest income | | 3,610 |
| | 5,061 |
|
| NONINTEREST EXPENSE | | | | |
| Salaries and employee benefits | | 18,077 |
| | 14,560 |
|
| Occupancy and equipment | | 3,049 |
| | 2,084 |
|
| Data processing | | 2,293 |
| | 1,491 |
|
| Professional fees | | 1,598 |
| | 972 |
|
| Office, postage and telecommunications | | 938 |
| | 720 |
|
| Deposit insurance and regulatory assessments | | 460 |
| | 467 |
|
| Loan related | | 483 |
| | 345 |
|
| Customer service related | | 865 |
| | 618 |
|
| Merger, integration and public company registration costs | | 5,385 |
| | — |
|
| Amortization of core deposit intangible | | 332 |
| | — |
|
| Other expenses | | 2,712 |
| | 2,497 |
|
| Total noninterest expense | | 36,192 |
| | 23,754 |
|
| Income before taxes | | 21,565 |
| | 15,443 |
|
| Income taxes | | 6,435 |
| | 8,089 |
|
| Net income | | $ | 15,130 |
| | $ | 7,354 |
|
| Net income per share: | | | | |
| Basic | | $ | 1.66 |
| | $ | 1.02 |
|
| Diluted | | $ | 1.64 |
| | $ | 1.02 |
|
| Weighted-average common shares outstanding: | | | | |
| Basic | | 9,015,203 |
| | 7,102,683 |
|
| Diluted | | 9,143,242 |
| | 7,138,404 |
|
See accompanying notes to consolidated financial statements.
First Choice Bancorp and Subsidiary
Consolidated Statements of Comprehensive Income
|
| | | | | | | | |
| | | Year ended December 31, |
| | | 2018 | | 2017 |
| Net income | | $ | 15,130 |
| | $ | 7,354 |
|
| Other comprehensive loss: | | | | |
| Unrealized loss on investment securities: | | | | |
| Change in net unrealized loss on available-for-sale securities | | (258 | ) | | (28 | ) |
| Related income taxes: | | | | |
| Income tax benefit related to net unrealized holding losses | | 77 |
| | 12 |
|
| Total other comprehensive loss | | (181 | ) |
| (16 | ) |
| Total comprehensive net income | | $ | 14,949 |
|
| $ | 7,338 |
|
See accompanying notes to consolidated financial statements.
First Choice Bancorp and Subsidiary
Consolidated Statement of Shareholders’ Equity
Year Ended December 31, 2018
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | Common Stock | | | | | | | | |
| | Number of
Shares | | Amount | | Number of
Shares | | Amount | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
| | (in thousands, except share and per share data) |
| Balance at December 31, 2016 | — |
| | $ | — |
| | 7,112,954 |
| | $ | 87,177 |
| | $ | 989 |
| | $ | 14,778 |
| | $ | (437 | ) | | $ | 102,507 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 7,354 |
| | — |
| | 7,354 |
|
| Cash dividends ($0.80 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | (5,762 | ) | | — |
| | (5,762 | ) |
| Stock-based compensation | — |
| | — |
| | — |
| | — |
| | 1,524 |
| | — |
| | — |
| | 1,524 |
|
| Issuance of restricted shares, net | — |
| | — |
| | 123,441 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Vesting of restricted shares | — |
| | — |
| | — |
| | 325 |
| | (325 | ) | | — |
| | — |
| | — |
|
| Repurchase of shares in settlement of restricted stocks | — |
| | — |
| | (7,643 | ) | | — |
| | (170 | ) | | — |
| | — |
| | (170 | ) |
| Exercise of stock options, net | — |
| | — |
| | 31,367 |
| | 335 |
| | (78 | ) | | — |
| | — |
| | 257 |
|
| Change in Federal tax rate - unrealized holding losses on investment securities, available-for-sale | — |
| | — |
| | — |
| | — |
| | — |
| | 89 |
| | (89 | ) | | — |
|
| Other comprehensive loss, net of taxes | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (16 | ) | | (16 | ) |
| Balance at December 31, 2017 | — |
| | $ | — |
| | 7,260,119 |
| | $ | 87,837 |
| | $ | 1,940 |
| | $ | 16,459 |
| | $ | (542 | ) | | $ | 105,694 |
|
| | | | | | | | | | | | | | | | |
| Cumulative effects of changes in accounting principles (1) | — |
| | — |
| | — |
| | — |
| | — |
| | (24 | ) | | 24 |
| | — |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 15,130 |
| | — |
| | 15,130 |
|
| Stock and fair value of replacement awards issued in connection with business combination | — |
| | — |
| | 4,386,816 |
| | 125,902 |
| | 7,371 |
| | — |
| | — |
| | 133,273 |
|
| Cash dividends ($0.80 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | (7,584 | ) | | — |
| | (7,584 | ) |
| Stock-based compensation | — |
| | — |
| | — |
| | — |
| | 1,705 |
| | 4 |
| | — |
| | 1,709 |
|
| Exercise of stock options, net | — |
| | — |
| | 103,159 |
| | 2,939 |
| | (1,811 | ) | | | | | | 1,128 |
|
| Issuance of restricted shares, net | — |
| | — |
| | 24,682 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Vesting of restricted shares | — |
| | — |
| | — |
| | 1,628 |
| | (1,628 | ) | | — |
| | — |
| | — |
|
| Repurchase of shares in settlement of restricted stocks | — |
| | — |
| | (12,419 | ) | | — |
| | (308 | ) | | — |
| | — |
| | (308 | ) |
| Common stock repurchased under authorized stock repurchase program | — |
| | — |
| | (36,283 | ) | | (792 | ) | | — |
| | — |
| | — |
| | (792 | ) |
| Other comprehensive loss, net of taxes | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (181 | ) | | (181 | ) |
| Balance at December 31, 2018 | — |
| | $ | — |
| | 11,726,074 |
| | $ | 217,514 |
| | $ | 7,269 |
| | $ | 23,985 |
| | $ | (699 | ) | | $ | 248,069 |
|
(1) Impact due to adoption on January 1, 2018 of ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities".
See accompanying notes to consolidated financial statements.
First Choice Bancorp and Subsidiary
Consolidated Statements of Cash Flows
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| OPERATING ACTIVITIES | (in thousands) |
| Net income | $ | 15,130 |
| | $ | 7,354 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 916 |
| | 526 |
|
| Amortization of premiums of investment securities | 191 |
| | 297 |
|
| Amortization of servicing asset | 1,032 |
| | 487 |
|
| Provision for loan losses | 1,520 |
| | 642 |
|
| Provision for losses - unfunded commitments | 53 |
| | 563 |
|
| Gain on sale of loans | (1,505 | ) | | (3,596 | ) |
| Loss on disposal of fixed assets | 8 |
| | 2 |
|
| Loans originated for sale | (45,157 | ) | | (75,656 | ) |
| Proceeds from loans originated for sale | 26,484 |
| | 77,460 |
|
| (Accretion) amortization of net discounts and deferred loan fees, net | (4,429 | ) | | 529 |
|
| Change in fair value of equity securities | 120 |
| | — |
|
| Deferred income taxes | 201 |
| | 383 |
|
| (Increase) decrease in impact of change in Federal tax rate on deferred taxes assets | (226 | ) | | 1,816 |
|
| Stock-based compensation | 1,709 |
| | 1,524 |
|
| Appreciation of Bank Owned Life Insurance | (46 | ) | | — |
|
| Decrease (increase) in other items, net | 4,341 |
| | (849 | ) |
| Net cash provided by operating activities | 342 |
| | 11,482 |
|
| INVESTING ACTIVITIES | | | |
| Cash acquired in business combination | 111,035 |
| | — |
|
| Proceeds from maturities and paydown of securities available-for-sale | 4,099 |
| | 4,548 |
|
| Proceeds from maturities and paydown of securities held-to-maturity | 39 |
| | 367 |
|
| Purchase of securities available-for-sale | (2,929 | ) | | (8,476 | ) |
| Proceeds from sale of securities available-for-sale | 1,237 |
| | 4,399 |
|
| Purchases of loans | — |
| | (14,800 | ) |
| Net increase in loans | (103,769 | ) | | (34,389 | ) |
| Purchase of FRB and FHLB stock | (6,946 | ) | | (169 | ) |
| Proceeds from redemption of FRB stock | 1,879 |
| | — |
|
| Purchase of equity investment | (209 | ) | | (127 | ) |
| Proceeds from disposal of premises and equipment | 6 |
| | 1 |
|
| Purchases of premises and equipment | (817 | ) | | (528 | ) |
| Net cash provided by (used in) investing activities | 3,625 |
| | (49,174 | ) |
| FINANCING ACTIVITIES | | | |
| Net increase in deposits | 4,735 |
| | 16,118 |
|
| Net increase in short-term borrowings | 84,998 |
| | 20,000 |
|
| Increase in senior secured notes | 8,100 |
| | 350 |
|
| Cash dividends paid | (7,584 | ) | | (5,762 | ) |
| Repurchase of shares | (1,100 | ) | | (170 | ) |
| Proceeds from exercise of stock options | 1,128 |
| | 257 |
|
| Net cash provided by financing activities | 90,277 |
| | 30,793 |
|
| Increase (decrease) in cash and cash equivalents | 94,244 |
|
| (6,899 | ) |
| Cash and cash equivalents, beginning of period | 103,132 |
| | 110,031 |
|
| Cash and cash equivalents, end of period | $ | 197,376 |
|
| $ | 103,132 |
|
| | | | |
| Supplemental Disclosures of Cash Flow Information: | | | |
| Cash paid during the period for: | | | |
| Interest paid | $ | 8,657 |
| | $ | 5,998 |
|
| Taxes paid | $ | 4,100 |
| | $ | 6,560 |
|
| Noncash investing and financing activities: | | | |
| Transfers of loans to (from) held for investment from (to) held for sale | $ | 2,708 |
| | $ | (11,563 | ) |
| Servicing rights asset recognized | $ | 546 |
| | $ | 843 |
|
| Transfer of securities available-for-sale to equity securities | $ | 2,540 |
| | $ | — |
|
| Issuance of common stock for acquisition, including stock option consideration | $ | 133,273 |
| | $ | — |
|
See accompanying notes to consolidated financial statements.
First Choice Bancorp and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
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 (the "Bank"), a California state-chartered commercial bank. On December 21, 2017, the Bank received requisite shareholder and regulatory approval necessary for the Bank to reorganize into the holding company form of ownership pursuant to which First Choice Bank became a wholly-owned subsidiary of First Choice Bancorp. When we refer to "Bancorp" or the "holding company", we are referring First Choice Bancorp, the parent company, on a stand-alone basis. When we refer to "we," "us," or the "Company", we are referring to First Choice Bancorp together with the Bank on a consolidated basis.
The Bank was incorporated under the laws of the State of California in March 2005 and commenced banking operations in August 2005. The Company is organized as a single operating segment, the Bank, operating with eleven full-service branches in Alhambra, Anaheim, Carlsbad, Cerritos, Chula Vista, two downtown Los Angeles locations, Pasadena, Rowland Heights, San Diego and West Los Angeles, California. The Bank also maintains the brand name ProAmérica as a result of the PCB acquisition. The Bank’s primary source of revenue is providing loans and deposit products to customers, who are predominately small and middle-market businesses and individuals within its principal market area which is defined as the seven Southern California Counties of Los Angeles, Orange, San Diego, Ventura, Riverside, San Bernardino and Imperial.
The Company completed the acquisition of Pacific Commerce Bancorp ("PCB") on July 31, 2018. 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. Refer to Note 2. Business Combination, for more information about the PCB acquisition.
On October 1, 2018, First Choice Bank satisfied the requirements of the Federal Reserve Bank and became a state member bank of the Federal Reserve System and purchased the required stock of the Federal Reserve Bank.
On December 3, 2018, the Company's announced a stock repurchase plan providing for the repurchase of up to 1.2 million shares of the Company’s outstanding common stock, or approximately 10% of its then outstanding shares. The Company repurchased 36,283 shares at an average price of $21.82 in 2018. The remaining number of shares authorized to be repurchased under this plan is 1,163,717 shares at December 31, 2018.
Subsequent Events
The Company has evaluated subsequent events for recognition and disclosure through March 25, 2019, which is the date the consolidated financial statements were available to be issued.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiary, First Choice Bank, a California state-chartered bank, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
All significant intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the December 31, 2017 consolidated financial statements to conform to the 2018 presentation. These reclassifications included: (i) a $695 thousand decrease in "Gross loans held for investment" which were previously reported "Net discount of purchased loans", which resulted in no impact on "Loans held for investment, net"; (ii) $812 thousand of equipment expense previously reported separately is now included in occupancy and equipment expenses; (iii) $311 thousand of stock-based compensation expense for directors' restricted shares and stock options previously reported in salaries and employee benefits expense is now included in other expenses; and (iv) in connection with the adoption of ASU 2016-01, $2.5 million was reclassified from "Securities available-for-sale" to "Equity securities" (Refer to Accounting Standards Adopted in 2018 below). The reclassifications had no effect on prior year net income or shareholders' equity.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change are the determination of the allowance for loan losses, the valuation of acquired loans, the valuation of goodwill and separately identifiable intangible assets associated with mergers and acquisitions, and the valuation of deferred tax assets.
Accounting Standards Adopted in 2018
ASU 2014-09, Revenue from Contracts with Customers and all related amendments (collectively, "Topic 606"), effective January 1, 2018, implements a common revenue standard that clarifies the principles for recognizing revenue and requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted Topic 606 on January 1, 2018 using the modified retrospective approach applied to all contracts in place at that date. The adoption did not have a material impact on the Company’s consolidated financial statements as the largest portions of its revenue, interest and fees on loans and gain on sales of loans, are specifically excluded from the scope of the guidance. See Note 18 - Revenue Recognition for a summary of revenue from contracts with customers.
ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), effective January 1, 2018, changed how entities account for equity investments that do not result in consolidation and are not accounted for under the equity method of accounting. Entities are required to measure these investments at fair value at the end of each reporting period and recognize changes in fair value in net income. A practicability measurement exception is available for equity investments that do not have readily determinable fair values. The exception requires a company to adjust the carrying amount for impairment and observable price changes in orderly transactions for the identical or a similar investment of the same issuer; any impairment is to be recorded prospectively through earnings with related disclosures to be made. This guidance also changes certain presentation and disclosure requirements for financial instruments. The requirement to classify equity investments into different categories such as "available-for-sale" has been eliminated. Public business entities are required to use the exit price when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes. Upon adoption on January 1, 2018, we recognized a net $24 thousand reclassification from accumulated other comprehensive income to retained earnings relating to equity securities with a readily determinable fair value. The equity securities with a readily determinable fair value in the prior period have been reclassified on the consolidated balance sheet to conform to the current period presentation. The equity investments without a readily determinable fair value that qualify for the measurement exception include investments in other bank stocks, which total $1.0 million and $293 thousand at December 31, 2018 and 2017 and are reported in other assets. ASU 2016-01 is not applicable to FHLB and FRB stock investment. The adoption of ASU 2016-01 may result in more earnings volatility as changes in fair value of certain equity investments will now be recorded in the statement of earnings as opposed to AOCI.
ASU 2016-15, Statement of Cash Flows (Topic 230), effective January 1, 2018, clarifies and provides guidance on several cash receipt and cash payment classification issues, including debt prepayment and extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.
ASU 2016-18, Statement of Cash Flows (Topic 230), effective January 1, 2018, requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Upon adoption, the Company applied the retrospective transition method to each period presented. As the Company does not present restricted cash as a separate line in the consolidated balance sheet, there is no change to the presentation of cash on the statement of cash flows.
ASU 2018-4, Investments-Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273, effective March 2018,
incorporated into the Accounting Standards Codification recent SEC guidance issued in order to make the relevant interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The adoption of these amendments did not have a material effect on the Company's consolidated financial statements.
ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, effective March 2018, incorporated into the Accounting Standards Codification recent SEC guidance related to the income tax accounting implications of the Tax Cuts and Jobs Act. The adoption of these amendments did not have a material effect on the Company's consolidated financial statements.
ASU 2018-06, Codification Improvements to Topic 942, Depository and Lending-Income Taxes, effective May 2018, amended the guidance in Subtopic 942-740, Financial Services-Depository and Lending-Income Taxes, that is related to Circular 202 because that guidance has been rescinded by the Office of the Comptroller of the Currency and no longer is relevant. The adoption of these amendments did not have an impact on the Company’s consolidated financial statements.
ASU 2018-03, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, effective February 2018, provided targeted improvements to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Specifically, the amendments include clarifications related to: measurement elections, transition requirements, and adjustments associated with equity securities without readily determinable fair values; fair value measurement requirements for forward contracts and purchased options on equity securities; presentation requirements for hybrid financial liabilities for which the fair value option has been elected; and measurement requirements for liabilities denominated in a foreign currency for which the fair value option has been elected. The adoption of these amendments did not have a material impact on the Company's consolidated financial statements.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks, interest-bearing deposits at other banks with original maturities of less than 90 days, federal funds sold and securities purchased under agreements to resell. Generally, federal funds are sold for one-day periods.
Cash and Due from Banks
Banking regulations require that banks maintain a percentage of their deposits as reserves in cash or on deposit with the Federal Reserve Bank. These reserve requirements were zero at December 31, 2018 and 2017. The Company was in compliance with its reserve requirements as of December 31, 2018.
The Company maintains amounts due from other banks, which exceed federally insured limits. The Company has not experienced any losses in such accounts.
Investments and Equity Securities with Readily Determinable Fair Values
Investments held-to-maturity. Bonds, notes, and debentures are classified as held-to-maturity and reported at cost, adjusted for premiums and discounts, when management has the positive intent and ability to hold such investments to maturity. Premiums or discounts on held-to-maturity are amortized or accreted into interest income using the interest method.
Investments available-for-sale. Investments not classified as trading securities nor as held-to-maturity securities are classified as available-for-sale securities and recorded at fair value. Unrealized gains or losses on available-for-sale securities are excluded from net income and reported as an amount net of taxes as a separate component of accumulated other comprehensive income ("AOCI") included in shareholders’ equity. Premiums or discounts on available-for-sale securities are amortized or accreted into interest income using the interest method. Realized gains or losses on sales of available-for-sale securities are recorded using the specific identification method.
Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether (i) it has the intent to sell, or (ii) it is more likely than not that it will be required to sell the security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as an impairment charge to earnings.
Equity securities. With the adoption of ASU 2016-01 on January 1, 2018, equity investments with a readily determinable fair values are measured at fair value at the end of each reporting period and changes in fair value are recognized in net income as a component of "other noninterest income". Upon adoption of ASU 2016-01, the Company recorded a transition adjustment to reclassify $24 thousand in net unrealized losses from AOCI to retained earnings.
Restricted Stock Investments
Restricted stock investments are comprised of Federal Home Loan Bank ("FHLB") stock and Federal Reserve
Bank ("FRB") stock, and are required investments based on the level of the Bank's assets, capital and/or capital surplus.
FHLB and FRB stocks are carried at cost and periodically evaluated for impairment. There is no readily determinable fair value for these stocks as they have no quoted market value, they are a required investment and they are expected to be redeemed at par value. Both cash and stock dividends are reported as a component of interest income.
The Bank also has restricted securities in the form of capital stock invested in two different banker’s bank stocks (collectively "Other Bank Stocks"). Other Bank Stocks do not have a readily determinable fair value, and in accordance with ASU 2016-01, these restricted securities are measured under the practicability exception which allows those investments to be measured at cost less any impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Any impairment will be recorded prospectively through earnings, with related disclosures to be made. These restricted securities are included in other assets in the accompanying consolidated balance sheets.
Loan Held for Sale
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Gains and losses on the sale of loans are recognized pursuant to ASC 860, Transfers and Servicing. Interest income on these loans is accrued daily. Loan origination fees and costs are deferred and included in the cost basis of the loan held for sale. Gains or losses realized on the sales of loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the carrying value of the loans sold, adjusted for any retained servicing asset or liability. Gains and losses on sales of loans are included in noninterest income.
Loans
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs and deferred loan origination fees and costs, or unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield using the effective interest method or straight-line method over the contractual life of the loans or taken into interest income when the related loans are paid off or sold. Amortization of deferred loan origination fees and costs are discontinued when a loan is placed on nonaccrual status. Unamortized premiums or discounts on purchased loans are amortized or accreted to interest income using the effective interest method or straight-line method over the remaining period to contractual maturity. Interest income is recorded on an accrual basis in accordance with the terms of the respective loan. When a loan is placed on nonaccrual status, interest income is discontinued and all unpaid accrued interest is reversed against interest income.
Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is discontinued when principal or interest is past due 90 days based on the contractual terms of the loan or when, in the opinion of management, there is reasonable doubt as to collectability. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to all principal and interest.
Impaired loans.A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include loans on nonaccrual status and performing troubled debt restructured loans. Income from impaired loans is recognized on an accrual basis unless the loan is on nonaccrual status. Income from loans on nonaccrual status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectible. The Company measures impairment of a loan by using the estimated fair value of the collateral, less estimated costs to sell and other applicable costs, if the loan is collateral-dependent and the present value of the expected future cash flows discounted at the loan’s effective interest rate if the loan is not collateral-dependent. The
impairment amount on a collateral-dependent loan is charged-off, and the impairment amount on a loan that is not collateral-dependent is generally recorded as a specific reserve.
Troubled debt restructurings. A loan is classified as a troubled debt restructuring when the Company grants a concession to a borrower experiencing financial difficulties that it otherwise would not consider under our normal lending policies. These concessions may include a reduction of the interest rate, principal or accrued interest, extension of the maturity date or other actions intended to minimize potential losses. All modifications of criticized loans are evaluated to determine whether such modifications are troubled debt restructurings as outlined under ASC Subtopic 310-40, Troubled Debt Restructurings by Creditors. Loans restructured with an interest rate equal to or greater than that of a new loan with comparable market risk at the time the loan is modified may be excluded from certain restructured loan disclosures in years subsequent to the restructuring if the loans are in compliance with their modified terms.
A loan that has been placed on nonaccrual status that is subsequently restructured will usually remain on nonaccrual status until the borrower is able to demonstrate repayment performance in compliance with the restructured terms for a sustained period of time, typically for six months. A restructured loan may return to accrual status sooner based on other significant events or mitigating circumstances. A loan that has not been placed on nonaccrual status may be restructured and such loan may remain on accrual status after such restructuring. In these circumstances, the borrower has made payments before and after the restructuring. Generally, this restructuring involves maturity extensions, a reduction in the loan interest rate and/or a change to interest-only payments for a period of time. The restructured loan is considered impaired despite the accrual status and a specific reserve is calculated based on the present value of expected cash flows discounted at the loan’s original effective interest rate or based on the fair value of the collateral if the loan is collateral-dependent.
Purchased Credit-impaired Loans
Purchased credit impaired loans (“PCI loans”) are accounted for in accordance with ASC Subtopic 310‑30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. A purchased loan is deemed to be credit impaired when there is evidence of credit deterioration since its origination and it is probable at the acquisition date that collection of all contractually required payments is unlikely. We apply PCI loan accounting when we acquire loans deemed to be impaired.
At the time of acquisition, we calculate the difference between the (i) contractual amount and timing of undiscounted principal and interest payments (the “contractual cash flows”) and (ii) the estimated amount and timing of undiscounted expected principal and interest payments (the “expected cash flows”). The difference between contractual cash flows and expected cash flows is the nonaccretable difference. The nonaccretable difference represents an estimate of the loss exposure of principal and interest related to the PCI loan portfolios. The nonaccretable difference is subject to change over time based on the performance of the PCI loans. The carrying value of PCI loans is reduced by principal and interest payments received and increased by the portion of the accretable yield recognized as interest income.
The excess of the expected cash flows at acquisition over the initial fair value of acquired impaired loans is referred to as the “accretable yield”. The accretable yield is recorded as interest income over the estimated life of the loans using the effective yield method if the timing and amount of the future cash flows is reasonably estimable. PCI loans that are contractually past due are still considered to be accruing and performing as long as there is an expectation that the estimated cash flows will be received. If the timing and amount of cash flows is uncertain, then cash payments received will be recognized as a reduction of the recorded investment.
The initial determination of fair value and the subsequent accounting for PCI loans is performed on an individual loan basis. Increases in expected cash flows over those previously estimated increase the accretable yield and are recognized as interest income prospectively. Decreases in the amount and changes in the timing of expected cash flows compared to those previously estimated decrease the accretable yield and usually result in a provision for loan losses and the establishment of an allowance for loan losses. As the accretable yield increases or decreases from changes in cash flow expectations, the offset is a decrease or increase to the nonaccretable difference. The accretable yield is measured at each financial reporting date based on information then currently available and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans.
Allowance for Loan Losses
The allowance for loan losses ("ALLL") is a valuation allowance for probable incurred credit losses inherent within the loan portfolio as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged-off and is reduced by charge-offs on loans. Loan charge-offs are recognized when management believes the collectability of the principal balance outstanding is unlikely. This methodology for determining charge-offs is consistently applied to each loan product. Management estimates the allowance balance required using past
loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
Loan products identified by the Company include construction and land development, residential and commercial real estate, commercial and industrial, SBA loans, and consumer loans. Relevant risk characteristics for these loan products generally include debt service coverage, loan-to-value ratios, collateral type, borrower financial performance, credit scores, and debt-to-income ratios. The Company determines a separate allowance for each loan product type. The allowance consists of specific and general reserves. Specific reserves relate to loans that are individually classified as impaired. General reserves cover non-impaired loans and are based on historical loss rates for each portfolio segment or peer group historical data, adjusted for the effects of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience. Qualitative factors include consideration of the following: changes in lending policies and procedures; changes in economic conditions; changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for collateral-dependent loans; concentrations of credit; and the effect of other external factors such as competition and legal and regulatory requirements.
Acquired loans are recorded at fair value on the date of acquisition with no carryover of the related allowance balance. The premium or discount estimated through the loan fair value calculation is recognized into interest income on an effective interest method or straight-line basis over the remaining contractual life of the loans. Additional credit deterioration on acquired loans, in excess of the original credit discount embedded in the fair value determination on the date of acquisition, will be recognized in the allowance through the provision for loan losses.
Reserve for Unfunded Commitments
A reserve for unfunded commitments is maintained at a level that, in the opinion of management, is sufficient to absorb probable losses associated with the Company’s commitment to extend credit and standby letters of credit. Management determines the appropriate reserve for unfunded commitments based upon reviews of credit evaluations, prior loss experience, expected future usage of unfunded commitments for the various loan types and other relevant factors. The reserve for unfunded commitments is based on estimates, and ultimate losses may vary from the current estimates. Provisions for unfunded commitment losses are added to the reserve for unfunded commitments, which is included in the Other Liabilities section of the consolidated balance sheets.
Other Real Estate Owned
Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at fair value at the date of foreclosure, establishing a new cost basis by a charge to the allowance for loan losses, if necessary. Other real estate owned is carried at the lower of the Company’s carrying value of the property or its fair value. Fair value is generally based on current appraisals less estimated selling costs. Any subsequent write-downs are charged against operating expenses and recognized as a valuation allowance. Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in other operating expenses.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives, which ranges from three to seven years for furniture and fixtures. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or the remaining lease term, whichever is shorter. Expenditures for betterments or major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as incurred.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the consolidated financial statements.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. In addition, for transfers of a portion of financial assets (for example, participations of loans receivable), the transfer must meet the definition of a “participating interest” in order to account for the transfer as a sale.
The Company accounts for transfers and servicing of financial assets by recognizing the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished.
Loan Sales and Servicing of Financial Assets
The Company originates SBA loans for sale in the secondary market. Servicing assets are recognized separately when they are acquired through sale of loans. Servicing rights are initially recorded at fair value with the income statement effect recorded in gain on sale of loans. Fair value is based on a valuation model that calculates the present value of estimated future cash flows from the servicing assets. The valuation model uses assumptions that market participants would use in estimating cash flows from servicing assets, such as the cost to service, discount rates and prepayment speeds. Servicing assets are subsequently measured using the amortization method which requires servicing assets to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
Servicing assets are evaluated for impairment by comparing their fair values to carrying amounts. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. For purposes of measuring impairment, the Company has identified each servicing asset with the underlying loan being serviced. A valuation allowance is recorded where the fair value is below the carrying amount of the asset. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase in income. The fair values of servicing assets are subject to significant fluctuations as a result of changes in estimated and actual prepayments speeds and changes in the discount rates.
Servicing fee income, which is reported on the consolidated income statement in net servicing fees, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and recorded as income when earned. The amortization of servicing rights and changes in the valuation allowance are netted against loan servicing income.
Business Combinations
Business combinations are accounted for using the purchase accounting method. Under the purchase accounting method, the Company measures the identifiable assets acquired, including identifiable intangible assets, and liabilities assumed in a business combination at fair value on acquisition date. Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.
The Company accounts for merger-related costs, which may include advisory, legal, accounting, valuation, and other professional or consulting fees, as expenses in the periods in which the costs are incurred and the services are received.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets acquired in a purchase business combination and determined to have indefinite useful lives are not amortized but tested for impairment no less than annually or when circumstances arise indicating impairment may have occurred. Goodwill is the only intangible asset with an indefinite life recorded in the Company’s consolidated balance sheets. The determination of whether impairment has occurred, includes the considerations of a number of factors including, but not limited to, operating results, business plans, economic projections, anticipated future cash flows, and current market data. Any impairment identified as part of this testing is recognized through a charge to net income. The Company expects its annual impairment measurement date to occur in the fourth quarter of each fiscal year. There was no impairment recognized related to goodwill for the year ended December 31, 2018.
Core deposit intangible ("CDI") is a measure of the value of depositor relationships resulting from whole bank acquisitions. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. CDI is amortized on an accelerated method over an estimated useful life of approximately 10 years.
Revenue from Contracts with Customers
In addition to lending and related activities, the Company offers various services to customers that generate revenue, certain of which are governed by ASC Topic 606 - Revenue from Contracts with Customers. The Company's services that fall within the scope of ASC Topic 606 are presented within noninterest income and include fees from its deposit customers for transaction-based activities, account maintenance charges, and overdraft services. Transaction-based fees, which include items such as ATM and ACH fees, overdraft and stop payment charges, are recognized at the time such transactions are executed and the service has been fulfilled by the Company. Account maintenance charges, which are primarily monthly fees, are earned over the course of the month, which represents the period through which the Company satisfies the performance obligation. Overdraft fees are recognized at the time the overdraft occurs. Fees are typically withdrawn from the customer's deposit account balance.
Advertising Costs
The Company expenses the costs of advertising in the year incurred.
Stock-Based Compensation
Compensation cost is measured for stock options and restricted stock awards issued to employees and directors, based on the fair value of these awards at the date of grant. A Black–Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. This cost is recognized over the period which an employee is required to provide services in exchange for the award, generally defined as the vesting period, on a straight-line basis. Upon the adoption of ASU 2016-09 on January 1, 2017, the Company elected to account for forfeitures of stock–based awards as they occur. Excess tax benefits and tax deficiencies relating to stock–based compensation are recorded as income tax expense or benefit in the income statement when incurred. Dividends are paid on nonvested restricted stock awards and are charged to equity. Dividends paid on forfeited nonvested restricted stock awards are charged to compensation expense.
Income Taxes
Deferred income taxes are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period that includes the enactment date. Additionally, the effect of a change in tax rates on amounts included in accumulated other comprehensive income are reclassified to retained earnings at the enactment date. A valuation allowance is established to reduce the deferred tax asset to the level at which it is “more likely than not” that the tax asset or benefits will be realized.
Uncertain tax positions taken or expected to be taken on a tax return can only be recognized if the position is more likely than not to be sustained on audit by the taxing authorities. Interest and penalties related to uncertain tax positions are recorded as part of income tax expense.
Earnings Per Share (“EPS”)
Basic and diluted EPS are calculated using the two-class method since the Company has issued share-based payment awards considered participating securities because they entitle holders the rights to dividends during the vesting term. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Basic EPS is computed by dividing net earnings allocated to common shareholders by the weighted-average number of common shares outstanding. Diluted EPS is computed by dividing net earnings allocated to common shareholders by the weighted-average number of common shares outstanding adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental common shares issuable upon exercise of outstanding stock options and non-vested restricted common shares using the treasury stock method.
Comprehensive Income
Changes in unrealized gains and losses on investment securities is the only component of accumulated other comprehensive income for the Company.
Financial Instruments
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received.
Risk and Uncertainties
In the normal course of its business, the Company encounters two significant types of risk: economic and regulatory. Economic risk is comprised of three components: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature and re-price at different speeds, or on a different basis, than its interest-bearing assets. Credit risk is the risk of default on loans that results from the borrower’s inability or unwillingness to make contractually required payments. Market risk results from changes in the value of assets and liabilities, which may impact, favorably or unfavorably, the realizability of those assets and liabilities.
The Company is subject to various government regulations which can change significantly from period to period. The Company also undergoes periodic examination by the regulatory agencies. This may subject its financial position to further changes with respect to asset valuation, amounts of required loss allowances, and operating restrictions as a result of the regulators’ judgments based upon information available to them at the time of their examination.
Fair Value Measurement
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Operating Segments
Management has determined that since generally all of the banking products and services offered by the Company are available in each branch of the Company, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Company branches and report them as a single operating segment.
Recent Accounting Guidance Not Yet Effective
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) and subsequent related ASU's in 2018. The new guidance establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. Entities will be required to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within the fiscal year. The Company has evaluated all of its known leases for compliance with the new lease accounting guidance and completed a review of its contractual arrangements for embedded leases. Management is currently validating the results of this review, including the
accumulated lease data necessary to apply the new guidance. The Company expects a gross-up of its consolidated balance sheets as a result of recognizing lease liabilities and right of use assets; the extent of such gross-up is under evaluation. Based upon current estimates, the Company expects to record both a right of use asset and a lease obligation ranging from $5.7 million to $6.0 million as of January 1, 2019. The estimated range of the right of use assets is expected to negatively impact total risk-based capital and tier 1 capital by approximately 5 to 6 basis points. Topic 842 will not materially impact our consolidated income statements and has no impact on cash flows.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) (“ASU 2016-13”). This guidance is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this guidance replace the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to credit loss estimates. This ASU will be effective for fiscal years beginning after December 15, 2019. Early adoption is available as of the fiscal year beginning after December 15, 2018. The Company is evaluating the provisions of the guidance and will closely monitor developments and additional guidance to determine the potential impact on the Company’s consolidated financial statements. Management is in the process of identifying the methodologies and the additional data requirements necessary to implement the guidance and has engaged an existing third-party service provider to assist in implementation.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the current goodwill impairment test. Step 2 currently measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). The primary objective of ASU 2018-13 is to improve the effectiveness of disclosures in the notes to financial statements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted. The adoption of ASU 2018-13 is not expected to significantly impact the Company's consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) ("ASU 2018-15"). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, although early adoption is permitted. ASU 2018-15 is not expected to significantly impact the Company's consolidated financial statements.
NOTE 2. BUSINESS COMBINATION
On February 26, 2018, we announced that we had entered into an Agreement and Plan of Reorganization and Merger, dated February 23, 2018 (the "merger agreement"), by which PCB would be merged with and into First Choice Bancorp and PCB’s bank subsidiary, Pacific Commerce Bank, would be merged with and into First Choice Bank (collectively, the “Merger”). Following receipt of all necessary regulatory and shareholder approvals, on July 31, 2018, we completed our acquisition of PCB. The Merger was an all-stock transaction valued at approximately $133.3 million, or $13.69 per share, based on a closing price of First Choice Bancorp's common stock of $28.70 on July 31, 2018.
At the effective time of the Merger, each share of PCB common stock was converted into the right to receive 0.47689 shares (referred to as the final exchange ratio) of our common stock, with cash paid in lieu of any fractional shares. The final exchange ratio was higher than the ratio of 0.46531 announced at the time of the acquisition, as the ratio was subject to certain adjustments as previously described in the joint proxy statement. The higher exchange ratio was primarily due to adjustments resulting from an increase in PCB’s capital from the exercise of stock options, PCB's lower than budgeted merger transaction costs and PCB's higher than projected net income during the first six months of 2018.
In the aggregate, we issued 4,386,816 shares of First Choice Bancorp's common stock in exchange for the outstanding shares of PCB common stock. In addition, we issued 420,393, in the aggregate, in replacement vested stock awards with a fair value of $7.4 million to PCB directors, officers and employees. The PCB directors, officers and employees that did not continue to work with the Company had the option to receive either a rollover stock option or cash equal to the value of their PCB stock option, and after such elections were made, 278,096 rollover stock options were issued and exercisable into shares of the Company's common stock, and no cash was issued. For the remaining PCB directors, officers and employees that continued to work with the Company, their stock options were converted into rollover stock options exercisable into 142,297 shares of the Company's common stock.
PCB was headquartered in Los Angeles, California, with $544.7 million in total assets, $414.9 million in gross loans and $474.8 million in total deposits as of July 31, 2018. PCB had six full-service branches in Los Angeles and San Diego Counties, including its operating division, ProAmérica Bank, in Downtown Los Angeles. The acquisition of PCB provides the Company with the opportunity to further serve our existing customers and to expand our footprint in Southern California to the Mexican border.
The following table represents the fair value of assets acquired and liabilities assumed of PCB, as of July 31, 2018, recorded using the acquisition method of accounting:
|
| | | |
| | Fair Value |
| | (in thousands) |
| Assets acquired: | |
| Cash and cash equivalents | $ | 111,035 |
|
| Loans held for investment, net | 399,822 |
|
| Investment in restricted stock, at cost | 4,148 |
|
| Premises and equipment | 719 |
|
| Servicing assets | 1,054 |
|
| Cash surrender value of bank-owned life insurance | 4,712 |
|
| Deferred taxes | 4,612 |
|
| Core deposit intangible | 6,908 |
|
| Accrued interest receivable and other assets | 3,487 |
|
| Total assets acquired | $ | 536,497 |
|
| | |
| Liabilities assumed: | |
| Deposits | $ | 474,925 |
|
| Accrued interest payable and other liabilities | 1,724 |
|
| Total liabilities assumed | 476,649 |
|
| Net assets acquired | $ | 59,848 |
|
| | |
| Purchase consideration: | |
| Fair value of shares of First Choice issued in the merger | $ | 125,902 |
|
| Fair value of equity awards exchanged | 7,371 |
|
| Total purchase consideration | 133,273 |
|
| Goodwill recognized | $ | 73,425 |
|
As the final PCB tax return has not yet been completed, initial accounting for taxes was incomplete as of December 31, 2018. These fair values are estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. These changes could differ materially from what is presented above.
Goodwill represents the excess of the purchase consideration over the fair value of the net assets acquired and was primarily attributable to the expected synergies and economies of scale expected from combining PCB's operations with the Company. Goodwill from the PCB acquisition is not deductible for U.S. income tax purposes.
The following table presents the amounts that comprise the fair value of loans acquired, excluding PCI loans, from PCB as of July 31, 2018:
|
| | | |
| | Loans |
| | (in thousands) |
| Contractual amounts receivable | $ | 507,720 |
|
| Contractual cash flows not expected to be collected | (8,520 | ) |
| Expected cash flows | 499,200 |
|
| Interest component of expected cash flows | (102,431 | ) |
| Fair value of loans acquired, excluding PCI loans | $ | 396,769 |
|
A component of total loans acquired from PCB were PCI loans. The following table presents the amounts that comprise the fair value of PCI loans as of July 31, 2018. (Refer to Note 4. Loans for additional information regarding PCI loans):
|
| | | |
| | PCI Loans |
| | (in thousands) |
| Contractually required payments receivable (principal and interest) | $ | 8,580 |
|
| Nonaccretable difference (contractual cash flows not expected to be collected) | (3,416 | ) |
| Expected cash flows | 5,164 |
|
| Accretable yield | (2,111 | ) |
| Fair value of PCI loans acquired | $ | 3,053 |
|
The following table presents the components of merger, integration and public company registration costs for the year ended December 31, 2018:
|
| | | |
| | (in thousands) |
| Severance | $ | 1,753 |
|
| Professional fees | 768 |
|
| Systems integration | 2,450 |
|
| Other | 414 |
|
| Total | $ | 5,385 |
|
The following table presents the total revenue and net income amounts related to PCB's operations included in the Company's consolidated statements of income from August 1, 2018 through December 31, 2018:
|
| | | |
| | (in thousands) |
| Net interest income and noninterest income | $ | 12,633 |
|
| Net income | $ | 4,517 |
|
Supplemental pro forma disclosures (unaudited)
The following supplemental pro forma information presents certain financial results for the years ended December 31, 2018 and 2017 as if the acquisition of PCB was effective as of January 1, 2017. The unaudited pro forma financial information included in the table below is based on various estimates and is presented for informational purposes only and does not indicate the financial condition or results of operations of the combined company that would have been achieved for the periods presented had the transactions been completed as of the date indicated or that may be achieved in the future.
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
| Net interest income and noninterest income | $ | 75,059 |
| | $ | 69,413 |
|
| Net income | $ | 21,927 |
| | $ | 13,786 |
|
| Net income per share: | | | |
| Basic | $ | 1.88 |
| | $ | 1.19 |
|
| Diluted | $ | 1.86 |
| | $ | 1.19 |
|
NOTE 3. INVESTMENT SECURITIES
Investment securities have been classified in the consolidated balance sheets according to management’s intent. The carrying amount of securities held-to-maturity and securities available-for-sale and their approximate fair values at December 31, 2018 and December 31, 2017 were as follows:
|
| | | | | | | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| December 31, 2018 | (in thousands) |
| Securities available-for-sale: | | | | | | | |
| Mortgage-backed securities | $ | 9,177 |
| | $ | — |
| | $ | (333 | ) | | $ | 8,844 |
|
| Collateralized mortgage obligations | 11,731 |
| | 2 |
| | (272 | ) | | 11,461 |
|
| SBA pools | 9,628 |
| | — |
| | (390 | ) | | 9,238 |
|
| | $ | 30,536 |
| | $ | 2 |
| | $ | (995 | ) | | $ | 29,543 |
|
| | | | | | | | |
| Securities held-to-maturity: | | | | | | | |
| U.S. Government and agency securities | $ | 3,340 |
| | $ | — |
| | $ | (122 | ) | | $ | 3,218 |
|
| Mortgage-backed securities | 1,982 |
| | — |
| | (105 | ) | | 1,877 |
|
| | $ | 5,322 |
|
| $ | — |
|
| $ | (227 | ) |
| $ | 5,095 |
|
| | | | | | | | |
| December 31, 2017 | | | | | | | |
| Securities available-for-sale: | | | | | | | |
| Mortgage-backed securities | $ | 8,698 |
| | $ | 4 |
| | $ | (206 | ) | | $ | 8,496 |
|
| Collateralized mortgage obligations | 13,872 |
| | 40 |
| | (253 | ) | | 13,659 |
|
| SBA pools | 10,559 |
| | — |
| | (254 | ) | | 10,305 |
|
| | $ | 33,129 |
|
| $ | 44 |
|
| $ | (713 | ) |
| $ | 32,460 |
|
| | | | | | | | |
| Securities held-to-maturity: | | | | | | | |
| U.S. Government and agency securities | $ | 3,273 |
| | $ | — |
| | $ | (18 | ) | | $ | 3,255 |
|
| Mortgage-backed securities | 2,027 |
| | — |
| | (53 | ) | | 1,974 |
|
| | $ | 5,300 |
|
| $ | — |
|
| $ | (71 | ) |
| $ | 5,229 |
|
The amortized cost and estimated fair value of all investment securities held-to-maturity and available-for-sale at December 31, 2018, by contractual maturities are shown below. Contractual maturities may differ from expected maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
| | | | | | | | | | | | | | | |
| | Held to Maturity | | Available for Sale |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | (in thousands) |
| Due in one year or less | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Due after one year through five years | 3,340 |
| | 3,218 |
| | — |
| | — |
|
| Due after five years through ten years | — |
| | — |
| | — |
| | — |
|
| Due after ten years (1) | 1,982 |
| | 1,877 |
| | 30,536 |
| | 29,543 |
|
| | $ | 5,322 |
|
| $ | 5,095 |
|
| $ | 30,536 |
|
| $ | 29,543 |
|
| |
(1) | Mortgage-backed securities, collateralized mortgage obligations and SBA pools do not have a single stated maturity date and therefore have been included in the "Due after ten years" category. |
At December 31, 2018, no issuers represented 10% or more of the Company’s shareholders’ equity at December 31, 2018. There was $1.2 million and $4.4 million in sales of investment securities available-for-sale with realized gains of $376 thousand and $110 thousand during the years ended December 31, 2018 and December 31, 2017. There were no maturities or calls of investment securities during the years ended December 31, 2018 and 2017.
At December 31, 2018, securities held-to-maturity with a carrying amount of $5.3 million were pledged to the Federal Reserve Bank as discussed in Note 9 – Borrowing Arrangements.
As of December 31, 2018 and December 31, 2017, unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than Twelve Months | | Twelve Months Or Longer | | Total |
| | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value |
| December 31, 2018 | (in thousands) |
| Securities available-for-sale: | | | | | | | | | | | |
| Mortgage-backed securities | $ | (20 | ) | | $ | 2,397 |
| | $ | (313 | ) | | $ | 6,447 |
| | $ | (333 | ) | | $ | 8,844 |
|
| Collateralized mortgage obligations | (3 | ) | | 1,127 |
| | (269 | ) | | 9,742 |
| | (272 | ) | | 10,869 |
|
| SBA pools | — |
| | — |
| | (390 | ) | | 9,238 |
| | (390 | ) | | 9,238 |
|
| | $ | (23 | ) |
| $ | 3,524 |
|
| $ | (972 | ) |
| $ | 25,427 |
| | $ | (995 | ) | | $ | 28,951 |
|
| Securities held-to-maturity: | | | | | | | | | | | |
| U.S. Government and agency securities | $ | — |
| | $ | — |
| | $ | (122 | ) | | $ | 3,218 |
| | $ | (122 | ) | | $ | 3,218 |
|
| Mortgage-backed securities | — |
| | — |
| | (105 | ) | | 1,877 |
| | (105 | ) | | 1,877 |
|
| | $ | — |
|
| $ | — |
|
| $ | (227 | ) |
| $ | 5,095 |
| | $ | (227 | ) | | $ | 5,095 |
|
| December 31, 2017 | | | | | | | | | | | |
| Securities available-for-sale: | | | | | | | | | | | |
| Mortgage-backed securities | $ | (1 | ) | | $ | 59 |
| | $ | (205 | ) | | $ | 7,639 |
| | $ | (206 | ) | | $ | 7,698 |
|
| Collateralized mortgage obligations | (74 | ) | | 4,329 |
| | (179 | ) | | 7,946 |
| | (253 | ) | | 12,275 |
|
| SBA pools | (20 | ) | | 3,858 |
| | (234 | ) | | 6,447 |
| | (254 | ) | | 10,305 |
|
| | $ | (95 | ) |
| $ | 8,246 |
|
| $ | (618 | ) |
| $ | 22,032 |
|
| $ | (713 | ) |
| $ | 30,278 |
|
| Securities held-to-maturity: | | | | | | | | | | | |
| U.S. Government and agency securities | $ | — |
| | $ | — |
| | $ | (18 | ) | | $ | 3,255 |
| | $ | (18 | ) | | $ | 3,255 |
|
| Mortgage-backed securities | (6 | ) | | 949 |
| | (47 | ) | | 1,025 |
| | (53 | ) | | 1,974 |
|
| | $ | (6 | ) |
| $ | 949 |
|
| $ | (65 | ) |
| $ | 4,280 |
|
| $ | (71 | ) |
| $ | 5,229 |
|
The Company does not believe these unrealized losses are other-than-temporary because the issuers’ bonds are above investment grade, management does not intend to sell and it is not more likely than not that management would be
required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates.
Equity Securities With A Readily Determinable Fair Value
At December 31, 2018, equity securities represent a mutual fund investment consisting of high quality debt securities and other debt instruments supporting domestic affordable housing and community development in the United States. There is a readily determinable market value available for this equity investment and therefore with the adoption of ASU No. 2016-01 on January 1, 2018, the Company recorded a transition adjustment to reclassify $24 thousand in the net unrealized losses from AOCI to retained earnings. In addition, the Company recognized gross losses of $74 thousand related to negative changes in fair value during 2018, all of which related to equity securities held at December 31, 2018. The fair value of equity securities was $2.5 million at December 31, 2018.
Restricted Stock and Other Bank Stock Investments
The Bank is a member of the FHLB system. Members are required to own FHLB stock of at least the greater of 1% of FHLB membership asset value or 2.7% of outstanding FHLB advances. At December 31, 2018 and 2017, the Bank owned $6.1 million and $3.6 million of FHLB stock, which is carried at cost. The Company received $2.3 million in FHLB stock previously owned by PCB in the PCB acquisition and purchased $226 thousand and $169 thousand of FHLB stock during the years ended December 31, 2018 and 2017. The Company evaluated the carrying value of its FHLB stock investment at December 31, 2018 and determined that it was not impaired. This evaluation considered the long-term nature of the investment, the current financial and liquidity position of the FHLB, repurchase activity of excess stock by the FHLB at its carrying value, the return on the investment from recurring and special dividends, and the Company’s intent and ability to hold this investment for a period of time sufficient to recover our recorded investment.
As a member of the Federal Reserve Bank of San Francisco ("FRB"), the Bank owned $6.7 million and zero of FRB stock, which is carried at cost, at December 31, 2018 and 2017. The Company purchased $6.7 million of FRB stock during the year ended December 31, 2018in conjunction with becoming a state member bank of FRB on October 1, 2018. The Company received and redeemed $1.9 million of FRB stock previously owned by PCB in the PCB acquisition. The Company evaluated the carrying value of its FRB stock investment at December 31, 2018 and determined that it was not impaired. This evaluation considered the long-term nature of the investment, the current financial and liquidity position of the FRB, repurchase activity of excess stock by the FRB at its carrying value, the return on the investment from recurring dividends, and the Company’s intent and ability to hold this investment for a period of time sufficient to recover our recorded investment.
Other Bank Stocks totaled $1.0 million and $293 thousand at December 31, 2018 and 2017 and are reported in other assets in the consolidated balance sheets. During the year ended December 31, 2018, the Company recognized $46 thousand in losses related to changes in the fair value of these equity securities.
NOTE 4. LOANS
The Company’s loan portfolio consists primarily of loans to borrowers within its principal market area including Los Angeles County, Orange County and San Diego County of California. Although the Company seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses, such as hospitality businesses, are among the principal industries in the Company’s market area and, as a result, the Company’s loan and collateral portfolios are, to some degree, concentrated in those industries.
The Company also originates SBA loans either for sale to institutional investors or for retention in the loan portfolio. Loans identified as held for sale are carried at the lower of carrying value or market value and separately designated as such in the consolidated financial statements. A portion of the Company’s revenues are from origination of loans guaranteed by the SBA under its various programs and sale of the guaranteed portions of the loans. Funding for these loans depends on annual appropriations by the U.S. Congress.
As of December 31, 2018, the Company had certain qualifying loans with an unpaid principal balance of
$868.4 million pledged as collateral under a secured borrowing arrangement with the FHLB. See Note 9 –Borrowing Arrangements for additional information regarding the FHLB secured line of credit.
The composition of the Company’s loan portfolio at December 31, 2018 and 2017 was as follows:
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 | | |
| | Loans | | PCI Loans | | Total | | December 31,
2017 |
| | (in thousands) |
| Construction and land development | $ | 184,177 |
| | $ | — |
| | $ | 184,177 |
| | $ | 115,427 |
|
| Real estate: | | | | | | | |
| Residential | 57,443 |
| | — |
| | 57,443 |
| | 63,415 |
|
| Commercial real estate - owner occupied | 179,362 |
| | 132 |
| | 179,494 |
| | 52,753 |
|
| Commercial real estate - non-owner occupied | 400,590 |
| | 1,075 |
| | 401,665 |
| | 251,821 |
|
| Commercial and industrial | 281,121 |
| | 597 |
| | 281,718 |
| | 169,183 |
|
| SBA loans | 145,622 |
| | 840 |
| | 146,462 |
| | 88,688 |
|
| Consumer | 159 |
| | — |
| | 159 |
| | 826 |
|
| Loans held for investment, net of discounts | 1,248,474 |
| | 2,644 |
| | 1,251,118 |
| | 742,113 |
|
| Net deferred origination fees | (137 | ) | | — |
| | (137 | ) | | (400 | ) |
| Loans held for investment | $ | 1,248,337 |
| | $ | 2,644 |
| | $ | 1,250,981 |
| | $ | 741,713 |
|
| Allowance for loan losses | (11,056 | ) | | — |
| | (11,056 | ) | | (10,497 | ) |
| Loans held for investment, net | $ | 1,237,281 |
| | $ | 2,644 |
| | $ | 1,239,925 |
| | $ | 731,216 |
|
Loans held for investment were comprised of the following components at December 31, 2018 and 2017:
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
Gross loans held for investment(1) | $ | 1,263,891 |
| | $ | 745,887 |
|
Unamortized net discounts(2) | (12,773 | ) | | (3,774 | ) |
| Net unamortized deferred origination fees | (137 | ) | | (400 | ) |
| Loans held for investment | $ | 1,250,981 |
| | $ | 741,713 |
|
| |
(1) | Gross loans held for investment include purchased credit impaired loans with a net carrying value of $2.6 million, or 0.21% of gross loans at December 31, 2018. |
| |
(2) | Unamortized net discounts include discounts related to the retained portion of SBA loans and net discounts on acquired loans. At December 31, 2018, net discounts related to acquired loans totaled $12.8 million of which $9.5 million was associated with loans acquired in the PCB acquisition and expected to be accreted into interest income over a weighted average life of 5.75 years. |
A summary of the changes in the allowance for loan losses for the years ended December 31, 2018 and 2017 follows:
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
| Balance, beginning of period | $ | 10,497 |
| | $ | 11,599 |
|
| Provision for loan losses | 1,520 |
| | 642 |
|
| Charge-offs | (1,149 | ) | | (1,845 | ) |
| Recoveries | 188 |
| | 101 |
|
| Net charge-offs | (961 | ) | | (1,744 | ) |
| Balance, end of period | $ | 11,056 |
| | $ | 10,497 |
|
The following table presents the activity in the allowance for loan losses for the years ended December 31, 2018 and 2017 by portfolio segment:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| | | | Real Estate | | | | | | | |
| | Construction and Land Development | | Residential | | Commercial - Owner Occupied | | Commercial - Non-owner Occupied | | Commercial and Industrial | | SBA Loans | | Consumer | | Total |
| | (in thousands) |
| Balance, December 31, 2017 | $ | 1,597 |
| | $ | 375 |
| | $ | 655 |
| | $ | 3,136 |
| | $ | 3,232 |
| | $ | 1,494 |
| | $ | 8 |
| | $ | 10,497 |
|
| Provision for (reversal of) loan losses | 124 |
| | 47 |
| | 79 |
| | (450 | ) | | 805 |
| | 923 |
| | (8 | ) | | 1,520 |
|
| Charge-offs | — |
| | — |
| | — |
| | — |
| | (539 | ) | | (610 | ) | | — |
| | (1,149 | ) |
| Recoveries | — |
| | — |
| | — |
| | — |
| | 188 |
| | — |
| | — |
| | 188 |
|
| Net charge-offs | — |
| | — |
| | — |
| | — |
| | (351 | ) | | (610 | ) | | — |
| | (961 | ) |
| Balance, December 31, 2018 | $ | 1,721 |
| | $ | 422 |
| | $ | 734 |
| | $ | 2,686 |
| | $ | 3,686 |
| | $ | 1,807 |
| | $ | — |
| | $ | 11,056 |
|
| Reserves: | | | | | | | | | | | | | | | |
| Specific | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| General | 1,721 |
| | 422 |
| | 734 |
| | 2,686 |
| | 3,686 |
| | 1,807 |
| | — |
| | 11,056 |
|
| | $ | 1,721 |
| | $ | 422 |
| | $ | 734 |
| | $ | 2,686 |
| | $ | 3,686 |
| | $ | 1,807 |
| | $ | — |
| | $ | 11,056 |
|
| Loans evaluated for impairment: | | | | | | | | | | | | | | | |
| Individually | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 89 |
| | $ | 1,960 |
| | $ | — |
| | $ | 2,049 |
|
| Collectively | 184,177 |
| | 57,443 |
| | 179,362 |
| | 400,590 |
| | 281,032 |
| | 143,662 |
| | 159 |
| | 1,246,425 |
|
| PCI | — |
| | — |
| | 132 |
| | 1,075 |
| | 597 |
| | 840 |
| | — |
| | 2,644 |
|
| | $ | 184,177 |
| | $ | 57,443 |
| | $ | 179,494 |
| | $ | 401,665 |
| | $ | 281,718 |
| | $ | 146,462 |
| | $ | 159 |
| | $ | 1,251,118 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | | | Real Estate | | | | | | | |
| | Construction and Land Development | | Residential | | Commercial - Owner Occupied | | Commercial - Non-owner Occupied | | Commercial and Industrial | | SBA Loans | | Consumer | | Total |
| | (in thousands) |
| Balance, December 31, 2016 | $ | 1,827 |
| | $ | 924 |
| | $ | 618 |
| | $ | 2,501 |
| | $ | 3,541 |
| | $ | 2,086 |
| | $ | 102 |
| | $ | 11,599 |
|
| Provision for (reversal of) loan losses | (230 | ) | | (549 | ) | | 37 |
| | 635 |
| | 1,021 |
| | (178 | ) | | (94 | ) | | 642 |
|
| Charge-offs | — |
| | — |
| | — |
| | — |
| | (1,386 | ) | | (459 | ) | | — |
| | (1,845 | ) |
| Recoveries | — |
| | — |
| | — |
| | — |
| | 56 |
| | 45 |
| | — |
| | 101 |
|
| Net charge-offs | — |
| | — |
| | — |
| | — |
| | (1,330 | ) | | (414 | ) | | — |
| | (1,744 | ) |
| Balance, December 31, 2017 | $ | 1,597 |
| | $ | 375 |
| | $ | 655 |
| | $ | 3,136 |
| | $ | 3,232 |
| | $ | 1,494 |
| | $ | 8 |
| | $ | 10,497 |
|
| Reserves: | | | | | | | | | | | | | | | |
| Specific | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 299 |
| | $ | 205 |
| | $ | — |
| | $ | 504 |
|
| General | 1,597 |
| | 375 |
| | 655 |
| | 3,136 |
| | 2,933 |
| | 1,289 |
| | 8 |
| | 9,993 |
|
| | $ | 1,597 |
| | $ | 375 |
| | $ | 655 |
| | $ | 3,136 |
| | $ | 3,232 |
| | $ | 1,494 |
| | $ | 8 |
| | $ | 10,497 |
|
| Loans evaluated for impairment: | | | | | | | | | | | | | | | |
| Individually | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 634 |
| | $ | 1,127 |
| | $ | — |
| | $ | 1,761 |
|
| Collectively | 115,427 |
| | 63,415 |
| | 52,753 |
| | 251,821 |
| | 168,549 |
| | 87,561 |
| | 826 |
| | 740,352 |
|
| | $ | 115,427 |
| | $ | 63,415 |
| | $ | 52,753 |
| | $ | 251,821 |
| | $ | 169,183 |
| | $ | 88,688 |
| | $ | 826 |
| | $ | 742,113 |
|
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:
Pass - Loans classified as pass represent assets with a level of credit quality which contain no well-defined deficiency or weakness.
Special Mention - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable and improbable.
Loss - Loans classified loss are considered uncollectible and of such little value that their continuance as loans is not warranted.
The risk category of loans held for investment, net of discounts by class of loans, excluding PCI loans, as of December 31, 2018 and 2017 was as follows:
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Pass | | Special Mention | | Substandard (1) | | Total |
| | (in thousands) |
| Construction and land development | $ | 184,177 |
| | $ | — |
| | $ | — |
| | $ | 184,177 |
|
| Real estate: | | | | | | |
|
| Residential | 57,443 |
| | — |
| | — |
| | 57,443 |
|
| Commercial real estate - owner occupied | 174,505 |
| | 4,857 |
| | — |
| | 179,362 |
|
| Commercial real estate - non-owner occupied | 399,457 |
| | 1,133 |
| | — |
| | 400,590 |
|
| Commercial and industrial | 269,640 |
| | 8,341 |
| | 3,140 |
| | 281,121 |
|
| SBA loans | 137,740 |
| | 6,065 |
| | 1,817 |
| | 145,622 |
|
| Consumer | 159 |
| | — |
| | — |
| | 159 |
|
| | $ | 1,223,121 |
|
| $ | 20,396 |
|
| $ | 4,957 |
|
| $ | 1,248,474 |
|
| |
(1) | At December 31, 2018, substandard loans included $1.7 million of impaired loans. |
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Pass | | Special Mention | | Substandard (1) | | Total |
| | (in thousands) |
| Construction and land development | $ | 115,427 |
| | $ | — |
| | $ | — |
| | $ | 115,427 |
|
| Real estate: | | | | | | |
|
| Residential | 63,415 |
| | — |
| | — |
| | 63,415 |
|
| Commercial real estate - owner occupied | 52,753 |
| | — |
| | — |
| | 52,753 |
|
| Commercial real estate - non-owner occupied | 251,821 |
| | — |
| | — |
| | 251,821 |
|
| Commercial and industrial | 161,678 |
| | 6,871 |
| | 634 |
| | 169,183 |
|
| SBA loans | 83,327 |
| | 4,014 |
| | 1,347 |
| | 88,688 |
|
| Consumer | 826 |
| | — |
| | — |
| | 826 |
|
| | $ | 729,247 |
| | $ | 10,885 |
| | $ | 1,981 |
| | $ | 742,113 |
|
| |
(1) | At December 31, 2017, substandard loans included $1.8 million of impaired loans. |
The following tables present past due and nonaccrual loans, net of discounts and excluding PCI loans, by loan class as of December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Still Accruing | |
| | 30-59 Days Past Due | | 60-89 Days Past Due | | Over 90 Days Past Due | | Nonaccrual |
| | (in thousands) |
| Real estate: | | | | | | | |
| Residential | $ | 480 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Commercial and industrial | 3 |
| | 1 |
| | — |
| | 89 |
|
| SBA loans | — |
| | — |
| | — |
| | 1,633 |
|
| Total | $ | 483 |
|
| $ | 1 |
|
| $ | — |
|
| $ | 1,722 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Still Accruing | |
| | 30-59 Days Past Due | | 60-89 Days Past Due | | Over 90 Days Past Due | | Nonaccrual |
| | (in thousands) |
| Real estate: | | | | | | | |
| Residential | $ | 1,090 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Commercial and industrial | — |
| | — |
| | — |
| | 634 |
|
| SBA loans | — |
| | — |
| | — |
| | 1,127 |
|
| Total | $ | 1,090 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,761 |
|
All PCI loans were on accrual status at December 31, 2018. Impaired loans, excluding PCI loans, presented by class of loans as of December 31, 2018 and 2017 were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | | | | | Impaired Loans | | |
| | Unpaid Principal Balance | | Recorded Investment(1) | | Without Specific Reserve | | With Specific Reserve | | Related Allowance |
| | (in thousands) |
| Commercial and industrial | $ | 178 |
| | $ | 89 |
| | $ | 89 |
| | $ | — |
| | $ | — |
|
| SBA loans | 2,964 |
| | 1,960 |
| | 1,960 |
| | — |
| | — |
|
| Total | $ | 3,142 |
|
| $ | 2,049 |
|
| $ | 2,049 |
|
| $ | — |
|
| $ | — |
|
| |
(1) | Recorded investment represents unpaid principal balance, net of charge-offs, discounts and interest applied to principal on nonaccrual loans, if any, and accruing TDRs. |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | | | | | Impaired Loans | | |
| | Unpaid Principal Balance | | Recorded Investment(1) | | Without Specific Reserve | | With Specific Reserve | | Related Allowance |
| | (in thousands) |
| Commercial and industrial | $ | 640 |
| | $ | 634 |
| | $ | 9 |
| | $ | 625 |
| | $ | 299 |
|
| SBA loans | 1,266 |
| | 1,127 |
| | 771 |
| | 356 |
| | 205 |
|
| Total | $ | 1,906 |
|
| $ | 1,761 |
|
| $ | 780 |
|
| $ | 981 |
|
| $ | 504 |
|
| |
(1) | Recorded investment represents unpaid principal balance, net of charge-offs, discounts and interest applied to principal on nonaccrual loans, if any. |
The average recorded investment in impaired loans, excluding PCI loans, and related interest income recognized for the years ended December 31, 2018 and 2017 were as follows:
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
| | (in thousands) |
| Commercial and industrial | $ | 201 |
| | $ | — |
| | $ | 1,164 |
| | $ | — |
|
| SBA loans | 1,582 |
| | 26 |
| | 1,272 |
| | — |
|
| Total | $ | 1,783 |
| | $ | 26 |
| | $ | 2,436 |
| | $ | — |
|
At December 31, 2018 and 2017, the Company had approximately $922 thousand and $1.8 million in recorded investment in loans identified as troubled debt restructurings (“TDR’s”) and had allocated zero and $504 thousand as specific reserves for these loans. The Company has not committed to lend any additional amounts to customers with outstanding loans that are classified as TDR’s as of December 31, 2018 and 2017.
Loan modifications resulting in TDR status generally included one or a combination of the following concessions: extensions of the maturity date, principal payment deferments or signed forbearance agreement with a payment plan. During the year ended December 31, 2018 there were no new loan modifications resulting in TDRs. During the year ended December 31, 2017, there were four new loan modifications resulting in TDRs.
During the year ended December 31, 2018, there was one loan totaling $95 thousand of recorded investment balance that was modified as a troubled debt restructuring for which there was a payment default within twelve months following the modification; there were none in 2017. A loan is considered to be in payment default once it is 90 days contractually past due under the modification.
PCI Loans
The following table summarizes the changes in the carrying amount and accretable yield of PCI loans, acquired as part of the PCB acquisition, for the year ended December 31, 2018. Refer to Note 2 - Business Combination for further information.
|
| | | | | | | |
| | Carrying Amount | | Accretable Yield |
| | (in thousands) |
| Balance, December 31, 2017 | $ | — |
| | $ | — |
|
| Loans acquired | 3,053 |
| | 2,111 |
|
| Accretion | 219 |
| | (219 | ) |
| Payments received | (565 | ) | | — |
|
| Increase in expected cash flows, net | (63 | ) | | 181 |
|
| Provision for loan losses | — |
| | — |
|
| Balance, December 31, 2018 | $ | 2,644 |
| | $ | 2,073 |
|
Loans Held for Sale
At December 31, 2018 and 2017, the Company had loans held for sale, consisting of SBA 7(a) loans totaling
$28.0 million and $10.6 million. At December 31, 2018 and 2017, the fair value of loans held for sale totaled $29.2 million and $11.5 million.
NOTE 5.PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31 follows:
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
| Leasehold improvements | $ | 1,987 |
| | $ | 1,258 |
|
| Furniture, fixtures, and equipment | 3,115 |
| | 2,541 |
|
| | 5,102 |
| | 3,799 |
|
| Less: Accumulated depreciation and amortization | (3,129 | ) | | (2,764 | ) |
| | $ | 1,973 |
| | $ | 1,035 |
|
The Company leases branches, administrative office facilities and loan production offices under non-cancellable operating lease arrangements that expire at various dates through 2023. These leases contain options, which enable the Company to renew the leases at fair rental value. In addition to minimum rentals, the leases have escalation clauses and provisions for additional payments to cover taxes, insurance and maintenance.
At December 31, 2018, the future minimum rental payments under these lease commitments are as follows:
|
| | | |
| | (in thousands) |
| 2019 | $ | 2,199 |
|
| 2020 | 1,811 |
|
| 2021 | 1,315 |
|
| 2022 | 988 |
|
| 2023 | 124 |
|
| Thereafter | — |
|
| Total | $ | 6,437 |
|
The minimum rental payments shown above are given for the existing lease obligations and are not a forecast of future rental expense.
Total rent expense, including common area costs, is included in occupancy and equipment expense and amounted to $1.6 million and $893 thousand for the years ended December 31, 2018 and 2017.
Depreciation expense totaled $584 thousand and $526 thousand for the years ended December 31, 2018 and 2017.
NOTE 6. TRANSFERS AND SERVICING OF FINANCIAL ASSETS
The Company sells loans in the secondary market and, for certain loans retains the servicing responsibility. The loans serviced for others are accounted for as sales and are therefore not included in the accompanying consolidated balance sheets. The total loans serviced for others totaled $288.2 million and $222.0 million at December 31, 2018 and 2017. This includes SBA loans serviced for others of $198.4 million at December 31, 2018 and $140.4 million at December 31, 2017 for which there is a related servicing asset of $3.2 million and $2.6 million, respectively. In addition, the loan servicing portfolio includes construction and land development loans, commercial real estate loans and commercial & industrial loans participated with various other institutions of $89.8 million and $81.6 million at December 31, 2018 and 2017 for which there is no related servicing assets.
Consideration for each SBA loan sale includes the cash received and a related servicing asset. The Company receives servicing fees ranging from 0.25% to 1.00% for the services provided over the life of the loan; the servicing asset is based on the estimated fair value of these future cash flows to be collected. The risks inherent in SBA servicing assets relates primarily to changes in prepayments that result from shifts in interest rates and a reduction in the estimated future cash flows.
The servicing asset activity includes additions from loan sales with servicing retained, acquired servicing rights and reductions from amortization as the serviced loans are repaid and servicing fees are earned. Servicing assets with a fair value of $1.1 million as of July 31, 2018 were purchased as part of the PCB acquisition and included in “Additions” in the table below. Refer to Note 2 - Business Combination for further information.
The SBA servicing asset activity is summarized for the periods indicated:
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
| Balance, beginning of period | $ | 2,618 |
| | $ | 2,262 |
|
| Additions | 1,600 |
| | 843 |
|
| Amortization | (1,032 | ) | | (487 | ) |
| Balance, end of period | $ | 3,186 |
| | $ | 2,618 |
|
The fair value of the servicing asset for SBA loans is measured at least quarterly and was $3.3 million and
$3.0 million as of December 31, 2018 and 2017. The significant assumptions used in the valuation of the SBA servicing asset at December 31, 2018 included discount rates, ranging from 10.3% to 26.2% and a weighted average prepayment speed assumption of 14.2%.
The following table summarizes the estimated change in the value of servicing assets as of December 31, 2018 given hypothetical shifts in prepayments speeds and yield assumptions:
|
| | | | | |
| | Change in Assumption | | Change in Estimated Fair Value |
| | | | (in thousands) |
| Prepayment speeds | +10% | | $ | (146 | ) |
| Prepayment speeds | +20% | | (281 | ) |
| Discount rate | +1% | | (93 | ) |
| Discount rate | +2% | | (180 | ) |
SBA loans (including SBA 7(a) and SBA 504 loans) sold during the years ended December 31, 2018 and 2017 totaled $25.0 million and $43.3 million. Total gains on sale of SBA loans were $1.5 million and $3.4 million for the years ended December 31, 2018 and 2017.
Net servicing fees, a component of noninterest income, represent contractually specified servicing fees reported net of the servicing asset amortization. Net servicing fees totaled $509 thousand and $701 thousand for the years ended December 31, 2018 and 2017, including contractually specified servicing fees of $1.5 million and $1.2 million, respectively, partially offset by the amortization indicated in the table above.
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
In connection with the acquisition of PCB, the Company recognized goodwill of $73.4 million and a core deposit intangible of $6.9 million. Refer to Note 2 - Business Combination for further information.
The following table presents the changes in the carrying amount of goodwill for the year ended December 31, 2018:
|
| | | |
| | (in thousands) |
| Balance, beginning of period | $ | — |
|
| Goodwill recognized | 73,425 |
|
| Balance, end of period | $ | 73,425 |
|
Goodwill is tested for impairment no less than annually or more frequently when circumstances arise indicating impairment may have occurred. Due to volatility in the stock market during December 2018, including a 19.9% reduction in the Company's closing stock price from the date PCB was acquired to December 31, 2018, the Company evaluated goodwill for impairment and concluded there was no impairment as of year-end.
The following table presents the changes in core deposit intangible for the year ended December 31, 2018:
|
| | | |
| | (in thousands) |
| Core deposit intangible: | |
| Balance, beginning of period | $ | — |
|
| Additions | 6,908 |
|
| Balance, end of period | 6,908 |
|
| Accumulated amortization: | |
| Balance, beginning of period | — |
|
| Amortization | (332 | ) |
| Balance, end of period | (332 | ) |
| Core deposit intangible, end of period | $ | 6,576 |
|
The following table shows the estimated amortization expense for CDI during the next five fiscal years: |
| | | |
| | (in thousands) |
| 2019 | $ | 786 |
|
| 2020 | 771 |
|
| 2021 | 753 |
|
| 2022 | 732 |
|
| 2023 | 707 |
|
| Thereafter | 2,827 |
|
| | $ | 6,576 |
|
NOTE 8. DEPOSITS
Deposits at December 31, 2018 and 2017 consisted of the following:
|
| | | | | | | | |
| | | December 31, |
| | | 2018 | | 2017 |
| | | (in thousands) |
| Noninterest-bearing demand | | $ | 546,713 |
| | $ | 235,584 |
|
| Money market, interest checking and savings | | 465,123 |
| | 372,699 |
|
| Time deposits | | 240,503 |
| | 164,396 |
|
| | | $ | 1,252,339 |
| | $ | 772,679 |
|
The Company’s ten largest depositor relationships represent approximately 25% and 30% of total deposits at December 31, 2018 and 2017.
Time deposits that exceeded the FDIC insurance limit of $250,000 amounted to $109.4 million and $81.1 million as of December 31, 2018 and 2017. The Company qualifies to participate in a state public deposits program that allows it to receive deposits from the state or from political subdivisions within the state in amounts that would not be covered by the FDIC. This program provides a stable source of funding to the Company. As of December 31, 2018, total deposits from the State of California and other public agencies totaled $59.6 million, and are collateralized by letters of credit issued by the FHLB under the Bank's secured line of credit with the FHLB. See Note 9 –Borrowing Arrangements for additional information regarding the FHLB secured line of credit.
At December 31, 2018, the scheduled maturities of time deposits are as follows:
|
| | | |
| | (in thousands) |
| 2019 | $ | 180,839 |
|
| 2020 | 25,243 |
|
| 2021 | 19,663 |
|
| 2022 | 10,580 |
|
| 2023 | 4,178 |
|
| Thereafter | — |
|
| Total | $ | 240,503 |
|
NOTE 9. BORROWING ARRANGEMENTS
Federal Home Loan Bank Secured Line of Credit
At December 31, 2018, the Bank has a secured line of credit of $396.8 from the FHLB. This secured borrowing arrangement is subject to the Bank providing adequate collateral and continued compliance with the Advances and Security Agreement and other eligibility requirements established by the FHLB. At December 31, 2018, the Bank had pledged as collateral certain qualifying loans with an unpaid principal balance of $868.4 million under this borrowing agreement. Overnight borrowings outstanding under this arrangement were $90.0 million and $20.0 million with an interest rate of 2.56% and 1.41% at December 31, 2018 and 2017. The average balance of short-term borrowings was $23.2 million and $20.5 million for the years ended December 31, 2018 and 2017.
In addition, at December 31, 2018, the Bank used another $90.2 million of its secured FHLB borrowing capacity by having the FHLB issue (i) letters of credit to meet collateral requirements for deposits from the State of California and other public agencies and (ii) standby letters of credit as credit enhancement to guarantee the performance of customers to third parties. At December 31, 2018, the remaining secured line of credit available from the FHLB totaled $216.7 million.
Federal Funds Unsecured Lines of Credit
The Bank has established unsecured overnight borrowing arrangements for an aggregate amount of $77.0 million, subject to availability, with five of its primary correspondent banks. In general, interest rates on these lines approximate the federal funds target rate. Overnight borrowings under these credit facilities were $15.0 million and zero at December 31, 2018 and 2017. For the year ended December 31, 2018, average borrowings totaled $441 thousand with an average interest rate was 2.43%.
Federal Reserve Bank Secured Line of Credit
At December 31, 2018, the Bank has a total secured line of credit of $4.9 million with the Federal Reserve Bank. At December 31, 2018, the Bank had pledged securities held-to-maturity with a carrying value of $5.3 million as collateral for this line. There were no borrowings under this arrangement at or during the years ended December 31, 2018 and 2017.
Senior Secured Notes
At December 31, 2018, the holding company has a senior secured line of credit for $25 million. The available credit under this secured borrowing facility increased from $10.0 million to $25.0 million effective July 31, 2018. This facility is secured by 100% of the common stock of the Bank and bears interest, due quarterly, at a rate of U.S. Prime rate plus 0.25% and matures on December 22, 2019 (“Maturity Date”). In addition, the terms include a look-back fee equal to sum of (i) 0.25% of the portion of the loan not requested and drawn between December 22, 2017 (“Note Date”) and December 22, 2018 (“Anniversary Date”) and (ii) 0.25% of the portion of the loan not requested and drawn between the Anniversary Date and Maturity Date. Further, the terms of the loan agreement were amended to require the Bank to maintain minimum capital ratios, a minimum return on average assets, and certain other covenants, all of which became effective no later than December 31, 2018, including (i) leverage ratio greater than or equal to 9.0%, (ii) tier 1 capital ratio greater than or equal to 10.5% and $143.0 million, (iii) total capital ratio greater than or equal to 11.5%, (iv) CET1 capital ratio greater than or equal to 11.5%, (v) return on average assets, excluding one-time expense related to the merger with PCB, greater than or equal to 0.85%, (vi) classified assets to Tier 1 capital plus the allowance for loan losses of less than or equal to 35.0%, (vii) certain defined liquidity ratios of at least 25% and (viii) specific concentration levels for commercial real estate and construction and land development loans. In the event of default, the lender has the option to declare all outstanding balances as immediately due. One of the Company's executives is also a member of the lending bank's board of directors.
At December 31, 2018, senior secured notes totaled $8.5 million with an interest rate of 5.75%. At December 31, 2017, the outstanding balance under the facility totaled $350 thousand with an interest rate of 4.75%. The average outstanding borrowings under this facility totaled $4.5 million with an average interest rate of 5.46% for the year ended December 31, 2018. At December 31, 2018, the Company was in compliance with all loan covenants on the facility.
NOTE 10. INCOME TAXES
The Company accounts for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the amounts for financial reporting purposes and tax basis of its assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary. Based on this analysis, management has determined that a valuation allowance for deferred tax assets was not required as of December 31, 2018 and 2017.
Income tax expense consists of the following:
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
| Currently income tax expense | |
| | |
|
| Federal | $ | 4,145 |
| | $ | 4,324 |
|
| State | 2,315 |
| | 1,566 |
|
| Total current income tax expense | $ | 6,460 |
| | $ | 5,890 |
|
| Deferred income tax expense/(benefit) | | | |
| Federal | $ | 102 |
| | $ | 313 |
|
| State | 99 |
| | 70 |
|
| Change in Federal tax rate | (226 | ) | | 1,816 |
|
| Total deferred income tax expense/(benefit) | $ | (25 | ) | | $ | 2,199 |
|
| | | | |
| Total income tax expense | $ | 6,435 |
| | $ | 8,089 |
|
The following is a summary of the components of the net deferred tax asset (liability) accounts at December 31, 2018 and 2017:
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
| Deferred tax assets: | |
| | |
|
| Allowance for loan losses due to tax limitations | $ | 2,935 |
| | $ | 3,103 |
|
| Organizational expenses | 251 |
| | 18 |
|
| State taxes | 569 |
| | 300 |
|
| Non-qualified stock options | 1,425 |
| | 3 |
|
| Restricted stock | 359 |
| | 551 |
|
| Accrued expenses | 540 |
| | 476 |
|
| Depreciation differences | 187 |
| | 90 |
|
| Unrecognized loss on AFS securities | 293 |
| | 228 |
|
| Fair value adjustment on acquired loans | 3,970 |
| | — |
|
| Net operating losses | 368 |
| | — |
|
| Other items | 957 |
| | 669 |
|
| Total deferred tax assets | $ | 11,854 |
| | $ | 5,438 |
|
| Deferred tax liabilities: | | | |
| Core deposit intangibles | $ | (1,944 | ) | | $ | — |
|
| Deferred loan costs | (1,008 | ) | | (842 | ) |
| Other items | (236 | ) | | (101 | ) |
| Total deferred tax liabilities | $ | (3,188 | ) | | $ | (943 | ) |
| Deferred taxes, net | $ | 8,666 |
| | $ | 4,495 |
|
A comparison of the federal statutory income tax rates to the Company’s effective income tax rates at December 31, 2018 and 2017 follows:
|
| | | | | | | | | | | | | |
| | 2018 | | 2017 |
| | Amount | | Rate | | Amount | | Rate |
| | (in thousands) |
| Statutory Federal tax | $ | 4,538 |
| | 21.0 | % | | $ | 5,251 |
| | 34.0 | % |
| State franchise tax, net of Federal benefit | 1,912 |
| | 8.9 | % | | 1,080 |
| | 7.0 | % |
| Change in Federal tax rate | (226 | ) | | (1.0 | )% | | 1,816 |
| | 11.8 | % |
| Nondeductible merger expenses | 168 |
| | 0.8 | % | | — |
| | — | % |
| Other items, net | 43 |
| | 0.1 | % | | (58 | ) | | (0.4 | )% |
| Actual tax expense | $ | 6,435 |
| | 29.8 | % | | $ | 8,089 |
| | 52.4 | % |
As of December 31, 2018, the Company completed the accounting for the enactment of the comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). In accordance with SEC Staff Accounting Bulletin No. 118 ("SAB 118"), the Company performed an initial assessment and reasonably estimated the effects of the Tax Act by recording a provisional income tax expense of $1.8 million for the year ended December 31, 2017. As required by SAB 118, the Company continued to evaluate and re-measure the impact of the Tax Act on deferred tax amounts that existed at December 31, 2017 as new information concerning those deferred tax amounts became available during 2018. As a result, the Company recorded an income tax benefit of $226 thousand for the year ended December 31, 2018.
For the years ended December 31, 2018 and 2017, income tax expense was $6.4 million and $8.1 million resulting in an effective income tax rate of 29.8% and 52.4%. The Company’s effective tax rate was favorably impacted during the year ended December 31, 2018 by the reduction of the federal income tax rate from 35% to 21% under the Tax Act, as well as the re-measurement of the impact of the Tax Act on deferred tax amounts that existed at December 31, 2017 as noted above.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets,
management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Based on the analysis, the Company has determined that a valuation allowance for deferred tax assets was not required as of December 31, 2018 and December 31, 2017.
Section 382 of the Internal Revenue Code imposes an annual limitation on a corporation’s ability to use any net
unrealized built in losses and other tax attributes, such as net operating loss and tax credit carryforwards, when it undergoes a 50% ownership change over a designated testing period not to exceed three years. As a result of the acquisition of PCB, the Company has federal and California Section 382 limited net operating loss carryforwards of approximately $1.2 million at December 31, 2018, which are scheduled to expire in 2034. The federal and California net operating loss carryforwards are subject to annual limitations of $720 thousand and $1.2 million. The Company expects to fully utilize the federal and California net operating loss carryforwards before they expire with the application of the Section 382 annual limitation.
The Company is subject to federal income and California franchise tax. As of December 31, 2018, the federal statute of limitations for the assessment of income tax is closed for all tax years up to and including 2014. The California statute of limitations for the assessment of franchise tax is closed for all years up to and including 2013. The Company is currently not under examination in any taxing jurisdiction.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2018 and 2017 is as follows:
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
| Balance at January 1, | $ | — |
| | $ | — |
|
| Additional based on tax positions related to prior years | 480 |
| | — |
|
| Balance at December 31, | $ | 480 |
| | $ | — |
|
The total amount of unrecognized tax benefit, that if recognized would have a favorable impact on the Company's effective tax rate, was $480 thousand at December 31, 2018 and $0 at December 31, 2017 and is comprised of unrecognized tax benefits from tax positions taken in prior years. The Company expects the total amount of unrecognized tax benefits to decrease by $367 thousand within the next twelve months due to the expiration of the statute of limitations for the assessment of taxes.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. The Company had accrued for $59 thousand and $0 of the interest and penalties at December 31, 2018 and 2017.
NOTE 11. COMMITMENTS
In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk not recognized in the consolidated financial statements.
The Company’s exposure to loan loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for loans reflected in the consolidated financial statements.
The following table set forth the commitments and letters of credit as of the periods indicated:
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
| Commitments to extend credit | $ | 376,140 |
| | $ | 237,371 |
|
| Standby letters of credit | 4,019 |
| | 996 |
|
| Total | $ | 380,159 |
| | $ | 238,367 |
|
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management’s credit evaluation of the customer. The majority of the Company’s commitments to extend credit and standby letters of credit are secured by real estate. The reserve for unfunded commitments was $1.4 million and $952 thousand at December 31, 2018 and 2017. The increase in commitments to extend credit and the reserve for unfunded commitments is due mostly to the PCB acquisition. In connection with the acquisition of PCB, the Company established a $370 thousand liability representing the fair value of a reserve for the acquired PCB unfunded commitments at the date of acquisition. Refer to Note 2 - Business Combination. The reserve for unfunded commitments is included in "other liabilities" in the consolidated balance sheets.
NOTE 12. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company may extend loans to certain executive officers and directors and the companies with which they are associated. The change in outstanding balances during the years end December 31, 2018 and 2017 is as follows:
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
| Balance, beginning of period | $ | 1,768 |
| | $ | 2,168 |
|
| Payments | (35 | ) | | (400 | ) |
Other changes(1) | (1,733 | ) | | — |
|
| Balance, end of period | $ | — |
| | $ | 1,768 |
|
| |
(1) | Amounts relate to one deceased director that is no longer considered a related party at December 31, 2018. |
Deposits from certain officers and directors and the companies with which they are associated held by the Company at December 31, 2018 and 2017 amounted to $33.2 million and $35.1 million.
The Company has a $25.0 million senior secured facility with another bank in which one of the executives of the Company is also a member of this bank’s board of directors. The outstanding balance of this facility was $8.5 million at December 31, 2018. See also Note 9 – Borrowing Arrangements.
NOTE 13. STOCK-BASED COMPENSATION
The Company’s 2013 Omnibus Stock Incentive Plan (“2013 Plan”) was approved by shareholders in May 2013. The 2013 Plan permits the granting of nonqualified and incentive stock options, stock appreciation rights (“SARs”), restricted shares, deferred shares, performance shares and performance unit awards. Under the terms of the 2013 Plan, officers and key employees may be granted both nonqualified and incentive stock options and directors and other consultants, who are not also an officer or employee, may only be granted nonqualified stock options. The 2013 Plan provides for the total number of awards of common stock that may be issued over the term of the plan not to exceed 1,390,620 shares, of which a maximum of 300,000 shares may be granted as incentive stock options. Stock options, SARs, performance share and unit awards are granted at a price no less than 100% of the fair market value of the stock on the date of grant. Options generally vest over a period of three to five years. The 2013 Plan provides for accelerated vesting if there is a change of control, as defined in the 2013 Plan. Stock options expire no later than ten years from the date of the grant. The 2013 Plan expires in 2023.
In connection with the Merger, the Company issued 420,393, in the aggregate, in replacement vested stock awards with a fair value of $7.4 million to PCB directors, officers and employees. The PCB directors, officers and employees that did not continue to work with the Company had the option to receive either a rollover stock option or cash equal to the value of their PCB stock option, and after such elections were made, 278,096 rollover stock options were issued and exercisable into shares of the Company's common stock, and no cash was issued. For the remaining PCB directors, officers and employees that continued to work with the Company, their stock options were converted into rollover stock options exercisable into 142,297 shares of the Company's common stock. The remaining term on the rollover stock options ranges from 1 month to 9 years. Refer to Note - 2 Business Combination for additional information.
The Company recognized stock-based compensation expense of $1.7 million and $1.5 million for the years ended December 31, 2018 and 2017.
A summary of activity in the Company’s outstanding stock options during the years ended December 31, 2018 and 2017 are as follows:
|
| | | | | | | | | | | | |
| | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| Year Ended December 31, 2018: | | | | | (in thousands) |
| Outstanding, beginning of period | 65,978 |
| | $ | 10.17 |
| | | | |
Rollover options(1) | 420,393 |
| | 10.60 |
| | | | |
| Exercised | (103,159 | ) | | 10.93 |
| | | | |
| Granted | — |
| | — |
| | | | |
| Forfeited/expired | — |
| | — |
| | | | |
| Outstanding, end of period | 383,212 |
| | $ | 10.44 |
| | 2.2 years | | $ | 4,660 |
|
| Option exercisable | 381,048 |
| | $ | 10.43 |
| | 2.2 years | | $ | 4,636 |
|
| | | | | | | | |
| Year Ended December 31, 2017: | | | | | | | |
| Outstanding, beginning of period | 98,858 |
| | $ | 9.50 |
| | | | |
| Exercised | (31,367 | ) | | 8.18 |
| | | | |
| Granted | — |
| | — |
| | | | |
| Forfeited/expired | (1,513 | ) | | 7.86 |
| | | | |
| Outstanding, end of period | 65,978 |
| | $ | 10.17 |
| | 5.2 years | | $ | 922 |
|
| Option exercisable | 55,162 |
| | $ | 9.94 |
| | 5.1 years | | $ | 782 |
|
| |
(1) | Amounts relate to rollover stock options issued to PCB directors, officers and employees in connection with the PCB acquisition and are exercisable into shares of the Company's common stock. |
The intrinsic value of options exercised during the years ended December 31, 2018 and 2017 was approximately $1.5 million and $348 thousand. For the years ended December 31, 2018 and 2017, cash proceeds from stock option exercises totaled $1.1 million and $257 thousand. The tax (expense)/benefit from stock option exercises was $(91) thousand and $40 thousand for the years ended December 31, 2018 and 2017.
A summary of the outstanding restricted shares activity for the years ended December 31, 2018 and 2017 is presented in the following table:
|
| | | | | | |
| | Shares | | Weighted Average Grant-Date Fair Value |
| Year Ended December 31, 2018: | |
| Nonvested, beginning of period | 142,553 |
| | $ | 20.28 |
|
| Granted | 31,873 |
| | 26.60 |
|
| Shares vested | (83,115 | ) | | 22.46 |
|
| Shares forfeited | (7,191 | ) | | 20.62 |
|
| Nonvested, end of period | 84,120 |
| | $ | 23.90 |
|
| | | | |
| Year Ended December 31, 2017: | | | |
| Nonvested, beginning of period | 58,581 |
| | $ | 14.10 |
|
| Granted | 126,440 |
| | 21.51 |
|
| Shares vested | (39,469 | ) | | 15.36 |
|
| Shares forfeited | (2,999 | ) | | 16.42 |
|
| Nonvested, end of period | 142,553 |
| | $ | 20.28 |
|
As of December 31, 2018, there was $649 thousand of total unrecognized compensation cost related to the restricted shares that will be recognized over the weighted-average period of 3.6 years. The value of restricted shares that vested was $2.1 million and $847 thousand during the years ended December 31, 2018 and 2017.
NOTE 14. EARNINGS PER SHARE
Earnings per share (“EPS”) is computed on a basic and diluted basis. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Basic shares outstanding exclude nonvested shares of restricted stock and stock options. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that shares in the earnings of the Company. The Company’s nonvested grants of restricted stock contain non-forfeitable rights to dividends, which are required to be treated as participating securities and included in the computation of earnings per share. The following is a reconciliation of net income and shares outstanding used in the computation of basic and diluted EPS:
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| Numerator for basic earnings per share: | (in thousands, except share data)
|
| Net earnings | $ | 15,130 |
| | $ | 7,354 |
|
| Less: dividends and earnings allocated to participating securities | (134 | ) | | (100 | ) |
| Net income available to common shareholders | $ | 14,996 |
| | $ | 7,254 |
|
| | | | |
| Denominator for basic earnings per share: | | | |
| Basic weighted average common shares outstanding during the period | 9,015,203 |
| | 7,102,683 |
|
| | | | |
| Denominator for diluted earnings per share: | | | |
| Basic weighted average common shares outstanding during the period | 9,015,203 |
| | 7,102,683 |
|
| Net effect of dilutive stock options | 128,039 |
| | 35,721 |
|
| Diluted weighted average common shares | 9,143,242 |
| | 7,138,404 |
|
| | | | |
| Net earnings per common share: | | | |
| Basic | $ | 1.66 |
| | $ | 1.02 |
|
| Diluted | $ | 1.64 |
| | $ | 1.02 |
|
NOTE 15.RETIREMENT SAVINGS PLAN
The Company has adopted a 401(k) profit sharing plan (the “401K Plan”) covering employees meeting certain eligibility requirements as to minimum age and a certain number of hours of employment. Employees may make voluntary contributions to the 401K Plan through payroll deductions on a pre-tax and/or post-tax basis. Employees may defer up to 96% of their annual compensation, not to exceed the maximum contribution dollar limit imposed by the Internal Revenue Code. The Company makes matching contributions under a prescribed formula set forth in the 401K Plan. A participant’s account under the plan, together with investment earnings thereon, is normally distributable, following retirement, death, disability, or other termination of employment, in a single lump-sum payment. The Company made contributions of
$401 thousand and $322 thousand during the years ended December 31, 2018 and 2017.
NOTE 16. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s and the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
In July 2013, the federal bank regulatory agencies approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks, “Basel III rules”. The new rules became effective on January 1,
2015, with certain requirements phased-in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. The capital conservation buffer was being phased in from 0.0% for 2015 to 2.50% by January 1, 2019. The capital conservation buffer required by Basel III was 1.875% during 2018. The Bank’s capital conservation buffer was 6.18% at December 31, 2018. The Company made an election in accordance with Basel III such that net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total, Tier 1 and CET1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).Management believes, as of December 31, 2018, that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2018 and 2017, the most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification that management believes have changed the Bank’s category). The following table sets forth the actual capital amounts and ratios for the Bank and the minimum ratio and amount of capital required to be categorized as well-capitalized and adequately capitalized as of the dates indicated:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Amount of Capital Required |
| | Actual | | For Capital Adequacy Purposes | | For Well Capitalized Requirement |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | (in thousands) |
| December 31, 2018 | | | | | | | | | | | |
| Total Capital (to Risk-Weighted Assets) | $ | 191,045 |
| | 14.18 | % | | $ | 107,801 |
| | 8.00 | % | | $ | 134,751 |
| | 10.00 | % |
| Tier 1 Capital (to Risk-Weighted Assets) | $ | 178,614 |
| | 13.26 | % | | $ | 80,851 |
| | 6.00 | % | | $ | 107,801 |
| | 8.00 | % |
| CET1 Capital (to Risk-Weighted Assets) | $ | 178,614 |
| | 13.26 | % | | $ | 60,638 |
| | 4.50 | % | | $ | 87,588 |
| | 6.50 | % |
| Tier 1 Capital (to Average Assets) | $ | 178,614 |
| | 12.03 | % | | $ | 62,546 |
| | 4.00 | % | | $ | 78,182 |
| | 5.00 | % |
| | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | |
| Total Capital (to Risk-Weighted Assets) | $ | 116,280 |
| | 14.72 | % | | $ | 63,216 |
| | 8.00 | % | | $ | 79,020 |
| | 10.00 | % |
| Tier 1 Capital (to Risk-Weighted Assets) | $ | 106,384 |
| | 13.46 | % | | $ | 47,412 |
| | 6.00 | % | | $ | 63,216 |
| | 8.00 | % |
| CET1 Capital (to Risk-Weighted Assets) | $ | 106,384 |
| | 13.46 | % | | $ | 35,559 |
| | 4.50 | % | | $ | 51,363 |
| | 6.50 | % |
| Tier 1 Capital (to Average Assets) | $ | 106,384 |
| | 11.75 | % | | $ | 36,201 |
| | 4.00 | % | | $ | 45,251 |
| | 5.00 | % |
The primary source of funds for the Company is dividends from the Bank. Under the California Financial Code, the Bank is permitted to pay a dividend in the following circumstances: (i) without the consent of either the California Department of Business Oversight ("DBO") or the Bank's shareholders, in an amount not exceeding the lesser of (a) the retained earnings of the Bank; or (b) the net income of the Bank for its last three fiscal years, less the amount of any distributions made during the prior period; (ii) with the prior approval of the DBO, in an amount not exceeding the greatest of: (a) the retained earnings of the Bank; (b) the net income of the Bank for its last fiscal year; or (c) the net income for the Bank for its current fiscal year; and (iii) with the prior approval of the DBO and the Bank's shareholders in connection with a reduction of its contributed capital.
The Federal Reserve Bank limits the amount of dividends that bank holding companies may pay on common stock to income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. It is also the Federal Reserve’s policy that bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to its banking subsidiaries. Additionally, in consideration of the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policies.
NOTE 17. FAIR VALUE MEASUREMENTS
The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged (using an exit price notion) in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates.
On January 1, 2018, the Company adopted ASU 2016-01 and ASU 2018-03 which requires the use of the exit price notion when measuring the fair values of financial instruments for disclosure purposes. Starting in the first quarter of 2018, we updated our methodology used to estimate fair values to conform to the new requirements.
The methods and assumptions used to estimate the fair value of certain financial instruments are described below:
Loans. The fair value of loans, which is based on an exit price notion, is generally determined using an income-based approach based on discounted cash flow analysis. This approach utilizes the contractual maturity of the loans and market indications of interest rates, prepayment speeds, defaults and credit risk in determining fair value. For impaired loans, an asset-based approach is applied to determine the estimated fair values of the underlying collateral. This approach utilizes the estimated net sales proceeds to determine the fair value of the loans when deemed appropriate. The implied sales proceeds value provides a better indication of value than using an income-based approach as these loans are not performing or exhibit strong signs indicative of non-performance.
Securities.The fair values of securities available-for-sale are determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).
Equity Securities With Readily Determinable Fair Values. The fair value of equity securities is based on quoted prices in active markets for identical assets to determine the fair value. If quoted prices are not available to determine fair value, the Company estimates the fair values by using independent pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.
Recurring fair value measurements
The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value on a recurring basis at December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | |
| | Recurring Fair Value Measurements | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| December 31, 2018: | (in thousands) |
| Securities available-for-sale: | | | | | | | |
| Mortgage-backed securities | $ | — |
| | $ | 8,844 |
| | $ | — |
| | $ | 8,844 |
|
| Collateralized mortgage obligations | — |
| | 11,461 |
| | — |
| | 11,461 |
|
| SBA Pools | — |
| | 9,238 |
| | — |
| | 9,238 |
|
| Securities available-for-sale | $ | — |
| | $ | 29,543 |
| | $ | — |
| | $ | 29,543 |
|
| | | | | | | | |
| Equity securities: | | | | | | | |
| Mutual fund investment | $ | 2,538 |
| | $ | — |
| | $ | — |
| | $ | 2,538 |
|
| | | | | | | | |
| December 31, 2017: | | | | | | | |
| Securities available-for-sale: | | | | | | | |
| Mortgage-backed securities | $ | — |
| | $ | 8,496 |
| | $ | — |
| | $ | 8,496 |
|
| Collateralized mortgage obligations | — |
| | 13,659 |
| | — |
| | 13,659 |
|
| SBA Pools | — |
| | 10,305 |
| | — |
| | 10,305 |
|
| Securities available-for-sale | $ | — |
| | $ | 32,460 |
| | $ | — |
| | $ | 32,460 |
|
| | | | | | | | |
| Equity securities: | | | | | | | |
| Mutual fund investment | $ | 2,542 |
| | $ | — |
| | $ | — |
| | $ | 2,542 |
|
Nonrecurring fair value measurements
The Company is required to measure certain assets and liabilities at estimated fair value from time to time. These fair value measurements typically result from the application of specific accounting pronouncements under GAAP. The fair value measurements are considered nonrecurring fair value measurements under FASB ASC 820-10. At December 31, 2018 and 2017 impaired loans subject to nonrecurring fair value measurements (Level 3) and resulting in net losses totaled
$0.7 millionand $1.0 million. Total nonrecurring losses recognized for impaired loans during the years ended December 31, 2018 and 2017 totaled $591 thousand and $614 thousand. The Company utilized discount rates ranging from 8% to 10% of appraised values for nonrecurring fair value measurements related to collateral-dependent impaired loans during the years ended December 31, 2018 and 2017. For nonrecurring fair value measurements related to non-collateral dependent impaired loans during the years ended December 31, 2018 and 2017 the entire balances were substantially charged off.
There were no transfers of financial assets between Levels 1, 2 and 3 for the years ended December 31, 2018 and 2017.
Fair value of financial instruments
The fair value hierarchy level and estimated fair value of significant financial instruments at December 31, 2018 and 2017 are presented in the table below:
|
| | | | | | | | | | | | | | | | | |
| | | | December 31, 2018 | | December 31, 2017 |
| | Fair Value Hierarchy | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value (1) |
| Financial Assets: | | | (in thousands) |
| Cash and cash equivalents | Level 1 | | $ | 197,376 |
| | $ | 197,376 |
| | $ | 103,132 |
| | $ | 103,132 |
|
| Securities available-for-sale | Level 2 | | 29,543 |
| | 29,543 |
| | 32,460 |
| | 32,460 |
|
| Securities held-to-maturity | Level 2 | | 5,322 |
| | 5,095 |
| | 5,300 |
| | 5,229 |
|
| Equity securities | Level 1 | | 2,538 |
| | 2,538 |
| | 2,542 |
| | 2,542 |
|
| Loans held for sale | Level 2 | | 28,022 |
| | 29,238 |
| | 10,599 |
| | 11,488 |
|
| Loan held for investment, net | Level 3 | | 1,239,925 |
| | 1,265,013 |
| | 731,216 |
| | 743,114 |
|
| Restricted stock investments, at cost | Level 2 | | 12,855 |
| | 12,855 |
| | 3,640 |
| | 3,640 |
|
| Servicing asset | Level 3 | | 3,186 |
| | 3,295 |
| | 2,618 |
| | 2,991 |
|
| Accrued interest receivable | Level 2 | | 5,069 |
| | 5,069 |
| | 3,108 |
| | 3,108 |
|
| | | | | | | | | | |
| Financial Liabilities: | | | | | | | | | |
| Deposits | Level 2 | | $ | 1,252,339 |
| | $ | 1,250,555 |
| | $ | 772,679 |
| | $ | 770,999 |
|
| Short-term borrowings | Level 2 | | 104,998 |
| | 104,998 |
| | 20,000 |
| | 20,000 |
|
| Senior secured notes | Level 2 | | 8,450 |
| | 8,450 |
| | 350 |
| | 350 |
|
| Accrued interest payable | Level 2 | | 366 |
| | 366 |
| | 114 |
| | 114 |
|
| |
(1) | December 31, 2017 estimated fair values are not based on exit price assumptions. |
NOTE 18. REVENUE RECOGNITION
The following is a summary of revenue from contracts with customers that are in-scope and not in-scope under Topic 606:
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
| Noninterest income, in-scope: | | | |
| Service charges and fees on deposit accounts | $ | 1,241 |
| | $ | 329 |
|
| Other income | 114 |
| | 273 |
|
| Total noninterest income, in-scope | 1,355 |
| | 602 |
|
| Noninterest income, not in-scope: | | | |
| Gain on sale of loans | 1,505 |
| | 3,596 |
|
| Net servicing fees | 509 |
| | 701 |
|
| Change in fair value of equity securities | (120 | ) | | — |
|
| Other income | 361 |
| | 162 |
|
| Total noninterest income, not in-scope | 2,255 |
| | 4,459 |
|
| Total noninterest income | $ | 3,610 |
| | $ | 5,061 |
|
NOTE 19.CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
On December 21, 2017, the Bank received requisite shareholder and regulatory approval necessary for the Bank to reorganize into the holding company form of ownership pursuant to which First Choice Bank became a wholly-owned subsidiary of First Choice Bancorp. Prior to the formation of the holding company, all cash activities were paid for by the Bank. Accordingly, such cash flows are not included in the parent company only condensed statement of cash flow.
The following tables present the parent company only condensed balance sheets as of December 31, 2018 and 2017 and the related condensed statements of operations and condensed statement of cash flows for the years ended December 31, 2018 and 2017.
Condensed Balance Sheets
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
| ASSETS | |
| | |
| Cash and cash equivalents | $ | 173 |
| | $ | 107 |
|
| Investment in bank subsidiary | 256,330 |
| | 105,888 |
|
| Taxes receivable | 36 |
| | 135 |
|
| Other assets | 43 |
| | — |
|
| TOTAL ASSETS | $ | 256,582 |
| | $ | 106,130 |
|
| | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| Accrued expenses | $ | 48 |
| | $ | 78 |
|
| Intercompany payable | 15 |
| | 8 |
|
| Senior secured notes | 8,450 |
| | 350 |
|
| Total liabilities | 8,513 |
| | 436 |
|
| | | | |
| Shareholders’ equity: | | | |
| Preferred stock | — |
| | — |
|
| Common stock | 217,514 |
| | 87,837 |
|
| Additional paid-in capital | 7,269 |
| | 1,940 |
|
| Retained earnings | 23,985 |
| | 16,459 |
|
| Accumulated other comprehensive loss | (699 | ) | | (542 | ) |
| Total shareholders’ equity | 248,069 |
| | 105,694 |
|
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 256,582 |
| | $ | 106,130 |
|
Condensed Statements of Income
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| | (in thousands)
|
| Income | $ | — |
| | $ | — |
|
| | | | |
| Expense: | | | |
| Interest expense | 248 |
| | 1 |
|
| Salaries and employee benefits | 208 |
| | — |
|
| Professional fees | 322 |
| | 121 |
|
| Data processing | 37 |
| | — |
|
| Organizational expenses | — |
| | 152 |
|
| Merger, integration and public company registration costs | 126 |
| | |
| Other expenses | 215 |
| | 55 |
|
| Total expense | $ | 1,156 |
| | $ | 329 |
|
| Loss before income taxes and equity in net income of bank subsidiary | (1,156 | ) | | (329 | ) |
| Income tax benefit | (306 | ) | | (135 | ) |
| Loss before equity in net income of bank subsidiary | $ | (850 | ) | | $ | (194 | ) |
| Equity in net income of Bank subsidiary | 15,980 |
| | 7,548 |
|
| Net income | $ | 15,130 |
| | $ | 7,354 |
|
Condensed Statements of Cash Flows
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| | (in thousands) |
| OPERATING ACTIVITIES | |
| | |
| Net income | $ | 15,130 |
| | $ | 7,354 |
|
| Adjustments to reconcile net income to net cash used in operating activities: | | | |
| Equity in net income of Bank subsidiary | (15,980 | ) | | (7,548 | ) |
| Changes in other asset and liabilities: | | | |
| Taxes receivable | 99 |
| | (135 | ) |
| Accrued expenses | (30 | ) | | 78 |
|
| Intercompany payable | 7 |
| | 8 |
|
| Other items, net | (29 | ) | | — |
|
| Net cash used in operating activities | (803 | ) | | (243 | ) |
| INVESTING ACTIVITIES | | | |
| Acquisition of business, net of cash acquired | 325 |
| | — |
|
| Net cash provided in investing activities | 325 |
| | — |
|
| FINANCING ACTIVITIES (1) | | | |
| Advances from senior secured notes | 8,100 |
| | 350 |
|
| Dividends paid | (7,584 | ) | | — |
|
| Repurchase of shares | (1,100 | ) | | — |
|
| Proceeds from exercise of stock options | 1,128 |
| | — |
|
| Net cash provided by financing activities | 544 |
| | 350 |
|
| Net change in cash and cash equivalents | 66 |
| | 107 |
|
| Cash and cash equivalents, beginning of period | 107 |
| | — |
|
| Cash and cash equivalents, end of period | $ | 173 |
| | $ | 107 |
|
| |
(1) | During 2017, the payment of dividends, repurchase of shares and proceeds from stock option exercises occurred at the Bank, prior to the formation of the holding company. The holding company was formed on December 21, 2017. |
NOTE 20.EQUITY
Dividends
Total quarterly cash dividends declared were $0.20 per share, aggregating to $0.80 per share for the years ended December 31, 2018 and 2017. Total cash dividends paid during the years ended December 31, 2018 and 2017 were $7.6 million and $5.8 million.
Stock Repurchase Plan
On December 3, 2018, the Company announced a stock repurchase plan, providing for the repurchase of up to 1.2 million shares of the Company’s outstanding common stock, or approximately 10% of its then outstanding shares (the "repurchase plan"). The repurchase plan permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18 of the SEC. The repurchase plan may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of tentative investment opportunities, liquidity, and other factors deemed appropriate. These factors may also affect the timing and amount of share repurchases. The repurchase plan does not obligate the Company to purchase any particular number of shares.
During the fourth quarter of 2018, the Company repurchased 36,283 shares at an average price of $21.82 under the repurchase plan. The remaining number of shares authorized to be repurchased under this plan is 1,163,717 shares at December 31, 2018.
NOTE 21. SUBSEQUENT EVENTS
On January 24, 2019, the Company declared a $0.20 cash dividend payable on February 21, 2019 to shareholders of record as of February 7, 2019.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) designed at a reasonable assurance level to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, in connection with the filing of this Quarterly Report on Form 10-K, our management, under the supervision and with the participation of our CEO and CFO, conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e). Based on that evaluation, the Company’s chief executive officer and chief financial officer concluded that, as December 31, 2018, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
There has been no changes in the Company’s disclosure controls and procedures during its fourth fiscal quarter of 2018 that have materially affected, or are reasonably likely to materially affect, these controls and procedures.
Management’s Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As of December 31, 2018, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, the Company assessed the effectiveness of its internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control - Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2018.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during its fourth fiscal quarter of 2018, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item with respect to our executive officers, directors, compliance with Section 16 of the Securities Exchange Act of 1934, the code of ethics, and certain corporate governance practices is incorporated herein by reference from the information set forth under the captions “Proposal 1-Election of Directors, Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance Principles and Board Matters” and “Committees of the Board of Directors” contained in our 2019 Proxy Statement expected to be filed with the SEC within 120 days after the end of the Company’s fiscal year ended December 31, 2018. Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item with respect to executive compensation is incorporated herein by reference from the information set forth under the captions “Proposal 1-Election of Directors-Director Compensation,” “—Summary Compensation Table,” “— General,” and “Potential Payments Upon Termination of Change of Control is contained in our 2019 Proxy Statement, expected to be filed with the SEC within 120 days after the end of the Company’s fiscal year ended December 31, 2018. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item with respect to security ownership of certain beneficial owners and management is incorporated by reference from the information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” contained in our 2019 Proxy Statement, expected to be filed with the SEC within 120 days after the end of the Company’s fiscal year ended December 31, 2018. Such information is incorporated herein by reference.
The information required by this item with respect to securities authorized for issuance under the Company’s equity compensation plans is included in Part II of this Annual Report on Form 10‑K under “Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
This information required by this itemCertain directors and executive officers of the Company, as well as the companies with respect to certain relationshipswhich such Directors are associated, are customers of and related partyhave had banking transactions and director independence is incorporated by reference from the information set forth under the caption “Certain Relationships and Related Party Transactions” contained in our 2019 Proxy Statement, expected to be filed with the SEC within 120 days afterBank in the endordinary course of business.The Bank expects to have such ordinary banking transactions with such persons in the Company’s fiscal year ended December 31, 2018. Such information is incorporated herein by reference.future. In the opinion of our management, all loans and commitments to lend included in such transactions were made in compliance with applicable laws, on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with other persons of similar creditworthiness and did not involve more than a normal risk of collectability or present other unfavorable features.Although the Bank does not have any limits on the aggregate amount it would be willing to lend to Directors and officers as a group, loans to individual Directors and officers must comply with the Bank’s internal lending policies and statutory lending limits.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
This information required by this item with respect to principal accounting fees and services is incorporated by reference fromEide Bailly audited our consolidated financial statements for the information set forth under the caption “Principal Accounting Fees and Services” contained in our 2019 Proxy Statement, expected to be filed with the SEC within 120 days after the end of the Company’s fiscal year ended December 31, 2018. Such information2020. The following table presents fees billed or to be billed for professional audit services rendered by Eide Bailly for the audits of our annual consolidated financial statements for 2020 and 2019 and for other services rendered by Eide Bailly. The aggregate fees billed by Eide Bailly for the fiscal years ended December 31, 2020 and 2019, were as follows:
| | | | | | | | | | | | | | |
| | 2020 | | 2019 |
Audit fees (1) | | $ | 400,000 | | | $ | 275,000 | |
| Audit-related fees | | | | — | |
| Tax fees | | | | — | |
| All other fees | | — | | | — | |
| Total | | $ | 400,000 | | | $ | 275,000 | |
(1) For 2020 and 2019, audit fees consist of professional services provided for the audit of the Company's annual consolidated financial statements and internal control over financial reporting including compliance with FDIC Improvement Act, review of the Company's quarterly financial statements in connection with the filing of current and periodic reports and related consultations.
Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Auditor
The Audit Committee’s policy is incorporatedto pre-approve all audit and non-audit services provided by the Company’s independent auditor. These services may include audit, audit-related, tax and other services. Pre-approval is generally provided for up to one year and is detailed as to a particular service or category of service. The independent auditor and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditor in accordance with the pre-approval and the fees for services performed to date. All services performed by Eide Bailly for which fees were billed to the Company during the years ended December 31, 2020 and 2019 as disclosed herein were approved by reference.the Audit Committee pursuant to the procedures outlined herein. All of the services of Eide Bailly in auditing the Company’s consolidated financial statements for the year ended December 31, 2020 were performed by Eide Bailly or its full-time, permanent employees.
PART IV
ITEM 15. EXHIBITS, FINANCIALS STATEMENTS SCHEDULES
Documents Filed as Part of this Annual Report
(a)(1) Financial Statements
See “Index to Consolidated Financial Statements” on page 68.
.
(a)(2) Financial Statement Schedules
Schedules have been omitted since they are not applicable, they are not required, or the information required to be set forth in the schedules is included in the Consolidated Financial Statements or Notes thereto.
(b) EXHIBITS
|
| | | | | | | |
| Exhibit No. | | Exhibit Description |
| 2.1 | | |
| 2.2 | | |
| 3.1 | | |
| 3.2 | | |
| 4.1 | | |
| 4.2 | | The other instruments defining the rights |
| 10.1 | | |
| 10.2 | | |
| 10.3 | | |
| 10.4 | | |
10.5 | | |
10.610.5 | | |
10.7 | | |
10.8 | | |
10.910.6 | | |
10.1010.7 | | |
10.1110.8 | | |
22.121.1 | | |
| 23.1 | | |
| 31.1 | | |
| 31.2 | | |
| 32.1 | | |
| 32.2 | | |
| Exhibit 101.INS | | XBRL Instance Document |
| Exhibit 101.SCH | | XBRL Taxonomy Extension Schema Document |
|
| | |
Exhibit No. | | Exhibit Description |
| Exhibit 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| Exhibit 101.DEF | | XBRL Taxonomy Extension Definitions Linkbase Document |
| Exhibit 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| Exhibit 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| |
1
| Filed as Exhibit 2.1 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference. |
| |
2
| Filed as Exhibit 2.2 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference. |
| |
3
| Filed as Exhibit 3.1 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference. |
| |
4
| Filed as Exhibit 3.2 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference. |
| |
5
| Filed as Exhibit 4.1 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference. |
| |
6
| Filed as Exhibit 10.1 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference. |
| |
7
| Filed as Exhibit 10.1 to the Form 10-Q filed with the SEC on November 14, 2018 and incorporated herein by reference. |
| |
8
| Filed as Exhibit 10.2 to the Form 10-Q filed with the SEC on November 14, 2018 and incorporated herein by reference. |
| |
9
| Filed as Exhibit 10.1 to the Form 8-K filed with the SEC on September 13, 2018 and incorporated herein by reference. |
| |
10
| Filed as Exhibit 10.3 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference. |
| |
11
| Filed as Exhibit 10.2 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference. |
| |
12
| Filed as Exhibit 10.4 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference. |
| |
13
| Filed as Exhibit 10.5 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference. |
| |
14
| Filed as Exhibit 10.1 to the Form 10-Q filed with the SEC on August 8, 2018 and incorporated herein by reference. |
| |
15
| Filed as Exhibit 10.6 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference. |
| |
16
| Filed as Exhibit 10.7 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference. |
1Filed as Exhibit 2.1 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference.
2Filed as Exhibit 2.2 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference.
ITEM 16. FORM 10-K SUMMARY
3Filed as Exhibit 3.1 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference.
None.4Filed as Exhibit 3.2 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference.
5Filed as Exhibit 4.1 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference.
6Filed as Exhibit 10.1 to the Form 8-K filed with the SEC on April 1, 2020 and incorporated herein by reference.
7Filed as Exhibit 10.2 to the Form 8-K filed with the SEC on April 1, 2020 and incorporated herein by reference.
8Filed as Exhibit 10.3 to the Form 8-K filed with the SEC on April 1, 2020 and incorporated herein by reference.
9Filed as Exhibit 10.4 to the Form 8-K filed with the SEC on April 1, 2020 and incorporated herein by reference.
10Filed as Exhibit 10.5 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference.
11Filed as Exhibit 10.6 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference.
12Filed as Exhibit 10.7 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference.
13Filed as Exhibit 10.8 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| | FIRST CHOICE BANCORP |
| | |
| Dated: April 27, 2021 | FIRST CHOICE BANCORP |
| | |
| Dated: March 25, 2019 | /s/ Robert M. Franko |
| | Robert M. Franko |
| | President and Chief Executive Officer |
| | (principal executive officer) |
| | |
| Dated: March 25, 2019April 27, 2021 | /s/ Lynn M. HopkinsDiana C. Hanson |
| | Lynn M. HopkinsDiana C. Hanson |
| | ExecutiveSenior Vice President and Chief FinancialAccounting Officer |
| | (principal financial officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
| | | | |
Signature | | Title | | Date |
| | | | |
/s/ Roshan H. Bhakta | | Director | | March 25, 2019 |
Roshan H. Bhakta | | | | |
| | | | |
/s/ Homer Wai Chan | | Director | | March 25, 2019 |
Homer Wai Chan | | | | |
| | | | |
/s/ Max Freifeld | | Director | | March 25, 2019 |
Max Freifeld | | | | |
| | | | |
| /s/ Robert M. Franko | | President, Chief Executive Officer and Director | | March 25, 2019April 27, 2021 |
| Robert M. Franko | | | | |
| | | | |
| /s/ James H. Gray | | Director | | March 25, 2019April 27, 2021 |
| James H. Gray | | | | |
| | | | |
| /s/ Peter H. Hui | | Chairman of the Board | | March 25, 2019April 27, 2021 |
| Peter H. Hui | | | | |
| | | | |
/s/ Thomas Iino | | Director | | March 25, 2019 |
Thomas Iino | | | | |
| | | | |
| /s/ Fred D. Jensen | | Director | | March 25, 2019April 27, 2021 |
| Fred D. Jensen | | | | |
| | | | |
| /s/ Luis Maizel | | Director | | March 25, 2019April 27, 2021 |
| Luis Maizel | | | | |
| | | | |
| /s/ Pravin C. Pranav | | Director | | March 25, 2019April 27, 2021 |
| Pravin C. Pranav | | | | |
| | | | |
/s/ Maria S. SalinasLynn McKenzie-Tallerico | | Director | | March 25, 2019April 27, 2021 |
Maria S. SalinasLynn McKenzie-Tallerico | | | | |
| | | | |
| /s/ Phillip T. Thong | | Vice Chairman of the Board | | March 25, 2019April 27, 2021 |
| Phillip T. Thong | | | | |
