UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June~~September 30, 2020

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

For the transition period from __________ to __________

Commission File Number 001-38476

(Exact Name of Registrant as Specified in its Charter)

California

82-2711227

(State or Other Jurisdiction of

(I.R.S. Employer

Incorporation or Organization)

Identification Number)

17785 Center Court Drive N, Suite 750

Cerritos, CA

90703

(Address of principal executive offices)

(Zip Code)

562-345-9092

(Registrants telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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


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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large Accelerated Filer ☐			Accelerated Filer: ☒
Non-accelerated Filer: ☐


Smaller Reporting Company: ☒
			Emerging growth company ☒

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

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

~~Securities registered pursuant to Section 12(b)~~Indicate the number of shares outstanding of each of the ~~Act:~~

issuer’s classes of common stock, as of the latest practicable date:


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

There were ~~11,697,429~~11,706,130 shares of common stock outstanding as of ~~August 1,~~November 2, 2020.

FIRST CHOICE BANCORP AND SUBSIDIARY

FORM 10-Q

~~June~~September 30, 2020

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION			4

ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	4

	Condensed Consolidated Balance Sheets (Unaudited)	4
	Condensed Consolidated Statements of Income (Unaudited)	5
	Condensed Consolidated Statements of Comprehensive Income (Unaudited)	67
	Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)	78
	Condensed Consolidated Statements of Cash Flows (Unaudited)	910
	Notes to Condensed Consolidated Financial Statements (Unaudited)	1011

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	3841

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	7175

ITEM 4.	CONTROLS AND PROCEDURES	7377

PART II. OTHER INFORMATION			7377

ITEM 1.	LEGAL PROCEEDINGS	7377

ITEM 1A.	RISK FACTORS	7377

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	7579

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	7679

ITEM 4.	MINE SAFETY RULES	7679

ITEM 5.	OTHER INFORMATION	7679

ITEM 6.	EXHIBITS	7780

First Choice Bancorp and Subsidiary

Condensed Consolidated Balance Sheets

(unaudited)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements


		June 30, 2020 (unaudited)		December 31, 2019			September 30, 2020 (unaudited)			December 31, 2019 (audited)
ASSETS	ASSETS	(dollars in thousands, except share data)							ASSETS	(dollars in thousands, except share data)
Cash and due from banks	Cash and due from banks	$	20,954	$	27,359	Cash and due from banks	$	23,611		$	27,359
Interest-bearing deposits at other banks	Interest-bearing deposits at other banks	196,875		134,442		Interest-bearing deposits at other banks	157,925			134,442

Total cash and cash equivalents	Total cash and cash equivalents	217,829		161,801		Total cash and cash equivalents	181,536			161,801
Securities available-for-sale, at fair value	Securities available-for-sale, at fair value	36,783		26,653		Securities available-for-sale, at fair value	37,999			26,653
Securities held-to-maturity, at cost	Securities held-to-maturity, at cost	1,691		5,056		Securities held-to-maturity, at cost	1,680			5,056
Equity securities, at fair value	Equity securities, at fair value	2,782		2,694		Equity securities, at fair value	2,792			2,694
Restricted stock investments, at cost	Restricted stock investments, at cost	12,999		12,986		Restricted stock investments, at cost	12,999			12,986
Loans held for sale, at lower of cost or fair value	Loans held for sale, at lower of cost or fair value	20,326		7,659		Loans held for sale, at lower of cost or fair value	36,474			7,659
Loans held for investment	Loans held for investment	1,831,619		1,374,675		Loans held for investment	1,884,930			1,374,675

Allowance for loan losses	Allowance for loan losses	(17,822)		(13,522)		Allowance for loan losses	(18,734)			(13,522)
Loans held for investment, net	Loans held for investment, net	1,813,797		1,361,153		Loans held for investment, net	1,866,196			1,361,153
Accrued interest receivable	Accrued interest receivable	13,809		5,451		Accrued interest receivable	11,500			5,451
Premises and equipment	Premises and equipment	2,551		1,542		Premises and equipment	2,341			1,542

Servicing asset	Servicing asset	2,516		3,202		Servicing asset	2,368			3,202
Deferred taxes, net	Deferred taxes, net	5,829		6,163		Deferred taxes, net	6,095			6,163
Goodwill	Goodwill	73,425		73,425		Goodwill	73,425			73,425
Core deposit intangible	Core deposit intangible	5,342		5,728		Core deposit intangible	5,149			5,728
Foreclosed assets, net		602		—

Other assets	Other assets	13,322		16,811		Other assets	15,788			16,811
TOTAL ASSETS	TOTAL ASSETS	$	2,223,603	$	1,690,324	TOTAL ASSETS	$	2,256,342		$	1,690,324
LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY					LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:	Deposits:					Deposits:
Noninterest-bearing demand	Noninterest-bearing demand	$	789,770	$	626,569	Noninterest-bearing demand	$	736,118		$	626,569
Money market, interest checking and savings	Money market, interest checking and savings	620,719		514,366		Money market, interest checking and savings	649,613			514,366
Time deposits	Time deposits	194,508		172,758		Time deposits	174,181			172,758
Total deposits	Total deposits	1,604,997		1,313,693		Total deposits	1,559,912			1,313,693
Borrowings	Borrowings	150,000		90,000		Borrowings	150,000			90,000

Paycheck Protection Program Liquidity Facility	Paycheck Protection Program Liquidity Facility	179,125		—		Paycheck Protection Program Liquidity Facility	253,140			0
Senior secured notes	Senior secured notes	6,500		9,600		Senior secured notes	4,400			9,600

Accrued interest payable and other liabilities	Accrued interest payable and other liabilities	16,032		15,226		Accrued interest payable and other liabilities	16,419			15,226
Total liabilities	Total liabilities	1,956,654		1,428,519		Total liabilities	1,983,871			1,428,519
Commitments and contingencies - Note 10	Commitments and contingencies - Note 10					Commitments and contingencies - Note 10
Shareholders’ equity:	Shareholders’ equity:					Shareholders’ equity:
Preferred stock 100,000,000 shares authorized, 0ne outstanding	Preferred stock 100,000,000 shares authorized, 0ne outstanding	—		—		Preferred stock 100,000,000 shares authorized, 0ne outstanding	0			0
Common stock no par value; 100,000,000 shares authorized; issued and outstanding: 11,697,766 at June 30, 2020 and 11,635,531 at December 31, 2019		217,420		216,398
Common stock no par value; 100,000,000 shares authorized; issued and outstanding: 11,705,878 at September 30, 2020 and 11,635,531 at December 31, 2019						Common stock no par value; 100,000,000 shares authorized; issued and outstanding: 11,705,878 at September 30, 2020 and 11,635,531 at December 31, 2019	217,680			216,398
Additional paid-in capital	Additional paid-in capital	2,538		3,493		Additional paid-in capital	2,838			3,493
Retained earnings	Retained earnings	46,352		41,920		Retained earnings	51,308			41,920
Accumulated other comprehensive income (loss), net	Accumulated other comprehensive income (loss), net	639		(6)		Accumulated other comprehensive income (loss), net	645			(6)
Total shareholders’ equity	Total shareholders’ equity	266,949		261,805		Total shareholders’ equity	272,471			261,805
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,223,603	$	1,690,324	TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,256,342		$	1,690,324

See accompanying notes to condensed consolidated financial statements.

First Choice Bancorp and Subsidiary

Condensed Consolidated Statements of Income

(unaudited)


		Three Months Ended												Six Months Ended June 30,					Three Months Ended				Nine Months Ended September 30,
		June 30, 2020		March 31, 2020		June 30, 2019		2020		2019			September 30, 2020		June 30, 2020		September 30, 2019		2020		2019
		(dollars in thousands, except share and per share data)																			(dollars in thousands, except share and per share data)
INTEREST and DIVIDEND INCOME	INTEREST and DIVIDEND INCOME											INTEREST and DIVIDEND INCOME
Interest and fees on loans	Interest and fees on loans	$	21,348	$	20,780	$	21,344	$	42,128	$	42,260	Interest and fees on loans	$	22,671	$	21,348	$	23,206	$	64,799	$	65,466
Interest on investment securities	Interest on investment securities	225		218		215		443		451		Interest on investment securities	180		225		208		623		659
Interest on deposits in other financial institutions	Interest on deposits in other financial institutions	92		501		454		593		899		Interest on deposits in other financial institutions	103		92		701		696		1,600
Dividends on restricted stock investments	Dividends on restricted stock investments	179		245		206		424		448		Dividends on restricted stock investments	200		179		228		624		676
Total interest and dividend income	Total interest and dividend income	21,844		21,744		22,219		43,588		44,058		Total interest and dividend income	23,154		21,844		24,343		66,742		68,401
INTEREST EXPENSE	INTEREST EXPENSE											INTEREST EXPENSE
Interest on savings, interest checking and money market accounts	Interest on savings, interest checking and money market accounts	318		1,109		1,254		1,427		2,493		Interest on savings, interest checking and money market accounts	382		318		1,283		1,809		3,776
Interest on time deposits	Interest on time deposits	856		995		1,463		1,851		2,468		Interest on time deposits	588		856		1,605		2,439		4,073
Interest on borrowings	Interest on borrowings	197		376		484		573		714		Interest on borrowings	207		197		253		780		967
Interest on Paycheck Protection Program Liquidity Facility	Interest on Paycheck Protection Program Liquidity Facility	112		—		—		112		—		Interest on Paycheck Protection Program Liquidity Facility	212		112		0		324		0
Interest on senior secured notes	Interest on senior secured notes	57		91		182		148		355		Interest on senior secured notes	39		57		176		187		531
Total interest expense	Total interest expense	1,540		2,571		3,383		4,111		6,030		Total interest expense	1,428		1,540		3,317		5,539		9,347
Net interest income	Net interest income	20,304		19,173		18,836		39,477		38,028		Net interest income	21,726		20,304		21,026		61,203		59,054
Provision for loan losses	Provision for loan losses	2,100		2,700		550		4,800		900		Provision for loan losses	1,000		2,100		700		5,800		1,600
Net interest income after provision for loan losses	Net interest income after provision for loan losses	18,204		16,473		18,286		34,677		37,128		Net interest income after provision for loan losses	20,726		18,204		20,326		55,403		57,454
NONINTEREST INCOME	NONINTEREST INCOME											NONINTEREST INCOME
Gain on sale of loans	Gain on sale of loans	—		377		1,271		377		2,199		Gain on sale of loans	990		0		528		1,367		2,727
Service charges and fees on deposit accounts	Service charges and fees on deposit accounts	447		555		564		1,002		1,104		Service charges and fees on deposit accounts	495		447		475		1,497		1,579
Net servicing (costs) fees		(9)		224		287		215		521
Net servicing fees (expense)												Net servicing fees (expense)	228		(9)		242		443		763
Other income	Other income	617		259		200		876		620		Other income	230		617		428		1,106		1,048
Total noninterest income	Total noninterest income	1,055		1,415		2,322		2,470		4,444		Total noninterest income	1,943		1,055		1,673		4,413		6,117
NONINTEREST EXPENSE	NONINTEREST EXPENSE											NONINTEREST EXPENSE
Salaries and employee benefits	Salaries and employee benefits	6,386		7,230		6,857		13,616		13,080		Salaries and employee benefits	7,126		6,386		6,472		20,742		19,552
Occupancy and equipment	Occupancy and equipment	1,108		1,063		987		2,171		2,416		Occupancy and equipment	1,137		1,108		1,097		3,308		3,513
Data processing	Data processing	874		807		639		1,681		1,243		Data processing	955		874		718		2,636		1,961
Professional fees	Professional fees	450		471		426		921		845		Professional fees	492		450		392		1,413		1,237

Office, postage and telecommunications	Office, postage and telecommunications	289		258		255		547		527		Office, postage and telecommunications	274		289		253		821		780
Deposit insurance and regulatory assessments	Deposit insurance and regulatory assessments	198		61		120		259		315		Deposit insurance and regulatory assessments	386		198		30		645		345
Loan related	Loan related	226		275		71		501		285		Loan related	59		226		244		560		529
Customer service related	Customer service related	328		372		273		700		750		Customer service related	81		328		437		781		1,187

Amortization of core deposit intangible	Amortization of core deposit intangible	193		193		197		386		393		Amortization of core deposit intangible	193		193		197		579		590
Other expenses	Other expenses	1,048		789		780		1,837		1,451		Other expenses	825		1,048		811		2,662		2,262
Total noninterest expense	Total noninterest expense	11,100		11,519		10,605		22,619		21,305		Total noninterest expense	11,528		11,100		10,651		34,147		31,956
Income before taxes	Income before taxes	8,159		6,369		10,003		14,528		20,267		Income before taxes	11,141		8,159		11,348		25,669		31,615
Income taxes	Income taxes	2,429		1,823		3,192		4,252		6,448		Income taxes	3,260		2,429		3,277		7,512		9,725
Net income	Net income	$	5,730	$	4,546	$	6,811	$	10,276	$	13,819	Net income	$	7,881	$	5,730	$	8,071	$	18,157	$	21,890
Net income per share:	Net income per share:											Net income per share:
Basic	Basic	$	0.49	$	0.39	$	0.58	$	0.88	$	1.18	Basic	$	0.67	$	0.49	$	0.69	$	1.55	$	1.87
Diluted	Diluted	$	0.49	$	0.39	$	0.58	$	0.88	$	1.17	Diluted	$	0.67	$	0.49	$	0.68	$	1.55	$	1.85
Weighted-average common shares outstanding:	Weighted-average common shares outstanding:											Weighted-average common shares outstanding:
Basic	Basic	11,564,965		11,558,039		11,581,889		11,561,486		11,616,223		Basic	11,573,138		11,564,965		11,584,955		11,565,398		11,605,687
Diluted	Diluted	11,606,280		11,632,050		11,675,057		11,619,149		11,741,910		Diluted	11,612,270		11,606,280		11,659,146		11,616,839		11,714,020

First Choice Bancorp and Subsidiary

Condensed Consolidated Statements of Income

(unaudited)

See accompanying notes to condensed consolidated financial statements.

First Choice Bancorp and Subsidiary

Condensed Consolidated Statements of Comprehensive Income

(unaudited)


		Three Months Ended											Six Months Ended June 30,							Three Months Ended				Nine Months Ended September 30,
		June 30, 2020		March 31, 2020		June 30, 2019		2020		2019				September 30, 2020		June 30, 2020		September 30, 2019		2020		2019
		(dollars in thousands)																				(dollars in thousands)
Net income	Net income	$	5,730	$	4,546	$	6,811	$	10,276	$	13,819	Net income		$	7,881	$	5,730	$	8,071	$	18,157	$	21,890
Other comprehensive income:	Other comprehensive income:											Other comprehensive income:
Unrealized gain (loss) on investment securities:
Unrealized gain on investment securities:												Unrealized gain on investment securities:
Change in net unrealized gain on available-for-sale securities	Change in net unrealized gain on available-for-sale securities	389		527		534		916		872		Change in net unrealized gain on available-for-sale securities		8		389		177		924		1,050
Income tax expense:	Income tax expense:											Income tax expense:
Change in net unrealized gain on available-for-sale securities	Change in net unrealized gain on available-for-sale securities	(115)		(156)		(159)		(271)		(258)		Change in net unrealized gain on available-for-sale securities		(2)		(115)		(52)		(273)		(311)
Total other comprehensive income	Total other comprehensive income	274		371		375		645		614		Total other comprehensive income		6		274		125		651		739
Total comprehensive net income	Total comprehensive net income	$	6,004	$	4,917	$	7,186	$	10,921	$	14,433	Total comprehensive net income		$	7,887	$	6,004	$	8,196	$	18,808	$	22,629

See accompanying notes to condensed consolidated financial statements.

~~First Choice Bancorp and Subsidiary~~

~~Condensed Consolidated Statement of Shareholders’ Equity~~

~~(unaudited)~~

Common Stock
Number
of
Shares Amount Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss), net Total
(dollars in thousands, except share and per share data)
Three Months Ended June 30, 2020
Balance at March 31, 2020 11,662,603 $ 217,219 $ 2,178 $ 43,545 $ 365 $ 263,307
Net income — — — 5,730 — 5,730
Stock-based compensation — — 518 — — 518
Cash dividends ($0.25 per share) — — — (2,923) — (2,923)
Exercise of stock options 7,032 112 (48) — — 64
Issuance of restricted shares, net of forfeiture 29,916 — — — — —
Vesting of restricted shares — 110 (110) — — —
Repurchase of shares from restricted shares vesting (1,785) (21) — — — (21)
Common stock repurchased under stock repurchase program — — — — — —
Other comprehensive income, net of taxes — — — — 274 274
Balance at June 30, 2020 11,697,766 $ 217,420 $ 2,538 $ 46,352 $ 639 $ 266,949
Three Months Ended June 30, 2019
Balance at March 31, 2019 11,650,020 $ 216,265 $ 3,713 $ 28,617 $ (460) $ 248,135
Net income — — — 6,811 — 6,811
Stock-based compensation — — 564 3 — 567
Cash dividends ($0.20 per share) — — — (2,345) — (2,345)
Exercise of stock options 85,271 2,400 (1,547) — — 853
Issuance of restricted shares, net of forfeiture 15,101 — — — — —
Vesting of restricted shares — 139 (139) — — —
Repurchase of shares from restricted shares vesting (127) — (3) — — (3)
Common stock repurchased under stock repurchase program (12,824) (272) — — — (272)
Other comprehensive income, net of taxes — — — — 375 375
Balance at June 30, 2019 11,737,441 $ 218,532 $ 2,588 $ 33,086 $ (85) $ 254,121

~~See accompanying notes to condensed consolidated financial statements~~

First Choice Bancorp and Subsidiary

Condensed Consolidated Statement of Shareholders’ Equity

(unaudited)


			Common Stock												Common Stock
			Number of Shares	Amount		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss), net		Total			Number of Shares	Amount		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss), net		Total
		(dollars in thousands, except share and per share data)																								(dollars in thousands, except share and per share data)
Six Months Ended June 30, 2020
Balance at December 31, 2019			11,635,531	$	216,398	$	3,493	$	41,920	$	(6)	$	261,805
Three Months Ended September 30, 2020														Three Months Ended September 30, 2020
Balance at June 30, 2020														Balance at June 30, 2020	11,697,766	$	217,420	$	2,538	$	46,352	$	639	$	266,949

Net income	Net income		—	—		—		10,276		—		10,276		Net income	—	—		—		7,881		—		7,881

Stock-based compensation	Stock-based compensation		—	—		999		3		—		1,002		Stock-based compensation	—	—		525		—		—		525
Cash dividends ($0.50 per share)			—	—		—		(5,847)		—		(5,847)
Cash dividends ($0.25 per share)														Cash dividends ($0.25 per share)	—	—		—		(2,925)		—		(2,925)
Exercise of stock options	Exercise of stock options		8,962	165		(80)		—		—		85		Exercise of stock options	8,686	237		(195)		—		—		42
Issuance of restricted shares, net of forfeiture	Issuance of restricted shares, net of forfeiture		98,951	—		—		—		—		—		Issuance of restricted shares, net of forfeiture	(140)	—		—		—		—		—
Vesting of restricted shares	Vesting of restricted shares		—	1,874		(1,874)		—		—		—		Vesting of restricted shares	—	30		(30)		—		—		0
Repurchase of shares from restricted shares vesting	Repurchase of shares from restricted shares vesting		(7,267)	(159)		—		—		—		(159)		Repurchase of shares from restricted shares vesting	(434)	(7)		—		—		—		(7)
Common stock repurchased under stock repurchase program			(38,411)	(858)		—		—		—		(858)

Other comprehensive income, net of taxes	Other comprehensive income, net of taxes		—	—		—		—		645		645		Other comprehensive income, net of taxes	—	—		—		—		6		6
Balance at June 30, 2020			11,697,766	$	217,420	$	2,538	$	46,352	$	639	$	266,949
Balance at September 30, 2020														Balance at September 30, 2020	11,705,878	$	217,680	$	2,838	$	51,308	$	645	$	272,471

Six Months Ended June 30, 2019
Balance at December 31, 2018			11,726,074	$	217,514	$	7,269	$	23,985	$	(699)	$	248,069
Three Months Ended September 30, 2019														Three Months Ended September 30, 2019
Balance at June 30, 2019														Balance at June 30, 2019	11,737,441	$	218,532	$	2,588	$	33,086	$	(85)	$	254,121

Net income	Net income		—	—		—		13,819		—		13,819		Net income	—	—		—		8,071		—		8,071

Stock-based compensation	Stock-based compensation		—	—		966		3		—		969		Stock-based compensation	—	—		527		0		—		527
Cash dividends ($0.40 per share)			—	—		—		(4,721)		—		(4,721)
Cash dividends ($0.20 per share)														Cash dividends ($0.20 per share)	—	—		—		(2,292)		—		(2,292)
Exercise of stock options	Exercise of stock options		241,737	6,811		(4,252)		—		—		2,559		Exercise of stock options	2,512	52		(23)		—		—		29
Issuance of restricted shares, net of forfeiture	Issuance of restricted shares, net of forfeiture		103,408	—		—		—		—		—		Issuance of restricted shares, net of forfeiture	129	—		—		—		—		—
Vesting of restricted shares	Vesting of restricted shares		—	1,287		(1,287)		—		—		—		Vesting of restricted shares	—	119		(119)		—		—		0
Repurchase of shares from restricted shares vesting			(5,008)	—		(108)		—		—		(108)

Common stock repurchased under stock repurchase program	Common stock repurchased under stock repurchase program		(328,770)	(7,080)		—		—		—		(7,080)		Common stock repurchased under stock repurchase program	(87,500)	(1,911)		—		—		—		(1,911)
Other comprehensive income, net of taxes	Other comprehensive income, net of taxes		—	—		—		—		614		614		Other comprehensive income, net of taxes	—	—		—		—		125		125
Balance at June 30, 2019			11,737,441	$	218,532	$	2,588	$	33,086	$	(85)	$	254,121
Balance at September 30, 2019														Balance at September 30, 2019	11,652,582	$	216,792	$	2,973	$	38,865	$	40	$	258,670

See accompanying notes to condensed consolidated financial statements

First Choice Bancorp and Subsidiary

Condensed Consolidated Statement of Shareholders’ Equity

(unaudited)


	Common Stock
			Number of Shares	Amount		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss), net		Total
		(dollars in thousands, except share and per share data)
Nine Months Ended September 30, 2020
Balance at December 31, 2019			11,635,531	$	216,398	$	3,493	$	41,920	$	(6)	$	261,805

Net income			—	—		—		18,157		—		18,157

Stock-based compensation			—	—		1,524		3		—		1,527
Cash dividends ($0.75 per share)			—	—		—		(8,772)		—		(8,772)
Exercise of stock options			17,648	402		(275)		—		—		127
Issuance of restricted shares, net of forfeiture			98,811	—		—		—		—		—
Vesting of restricted shares			—	1,904		(1,904)		—		—		0
Repurchase of shares from restricted shares vesting			(7,701)	(166)		—		—		—		(166)
Common stock repurchased under stock repurchase program			(38,411)	(858)		—		—		—		(858)
Other comprehensive income, net of taxes			—	—		—		—		651		651
Balance at September 30, 2020			11,705,878	$	217,680	$	2,838	$	51,308	$	645	$	272,471

Nine Months Ended September 30, 2019
Balance at December 31, 2018			11,726,074	$	217,514	$	7,269	$	23,985	$	(699)	$	248,069

Net income			—	—		—		21,890		—		21,890

Stock-based compensation			—	—		1,493		3		—		1,496
Cash dividends ($0.60 per share)			—	—		—		(7,013)		—		(7,013)
Exercise of stock options			244,249	6,863		(4,275)		—		—		2,588
Issuance of restricted shares, net of forfeiture			103,537	—		—		—		—		—
Vesting of restricted shares			—	1,406		(1,406)		—		—		0
Repurchase of shares from restricted shares vesting			(5,008)	—		(108)		—		—		(108)
Common stock repurchased under stock repurchase program			(416,270)	(8,991)		—		—		—		(8,991)
Other comprehensive income, net of taxes			—	—		—		—		739		739
Balance at September 30, 2019			11,652,582	$	216,792	$	2,973	$	38,865	$	40	$	258,670

See accompanying notes to condensed consolidated financial statements

First Choice Bancorp and Subsidiary

Condensed Consolidated Statements of Cash Flows

(unaudited)


		For the Six Months Ended June 30,								For the Nine Months Ended September 30,
		2020		2019			2020			2019
OPERATING ACTIVITIES	OPERATING ACTIVITIES	(dollars in thousands)							OPERATING ACTIVITIES	(dollars in thousands)
Net income	Net income	$	10,276	$	13,819	Net income	$	18,157		$	21,890
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	909		812		Depreciation and amortization	1,375			1,231
Amortization of premiums of investment securities	Amortization of premiums of investment securities	89		84		Amortization of premiums of investment securities	170			129
Amortization of servicing asset	Amortization of servicing asset	754		417		Amortization of servicing asset	1,013			699
Provision for loan losses	Provision for loan losses	4,800		900		Provision for loan losses	5,800			1,600
Provision for losses - unfunded commitments	Provision for losses - unfunded commitments	300		—		Provision for losses - unfunded commitments	300			0
Gain on sale of loans	Gain on sale of loans	(377)		(2,199)		Gain on sale of loans	(1,367)			(2,727)

Impairment charges of fixed assets and right-of-use assets	Impairment charges of fixed assets and right-of-use assets	—		400		Impairment charges of fixed assets and right-of-use assets	0			400
Loans originated for sale	Loans originated for sale	(15,134)		(19,839)		Loans originated for sale	(103,084)			(28,626)
Proceeds from loans originated for sale	Proceeds from loans originated for sale	3,783		37,141		Proceeds from loans originated for sale	76,715			47,364
Accretion of net discounts and deferred loan fees, net	Accretion of net discounts and deferred loan fees, net	(3,226)		(2,528)		Accretion of net discounts and deferred loan fees, net	(6,039)			(5,304)
Change in fair value of equity securities	Change in fair value of equity securities	(54)		(74)		Change in fair value of equity securities	(48)			(88)
Deferred income taxes	Deferred income taxes	63		1,783		Deferred income taxes	(205)			1,958
Stock-based compensation	Stock-based compensation	1,002		969		Stock-based compensation	1,527			1,496
Appreciation of Bank Owned Life Insurance	Appreciation of Bank Owned Life Insurance	(55)		(53)		Appreciation of Bank Owned Life Insurance	(83)			(80)
Net (decrease) increase in other items, net		(4,540)		(2,679)
Net decrease in other items, net						Net decrease in other items, net	(4,029)			(796)
Net cash (used in) provided by operating activities	Net cash (used in) provided by operating activities	(1,410)		28,953		Net cash (used in) provided by operating activities	(9,798)			39,146
INVESTING ACTIVITIES	INVESTING ACTIVITIES					INVESTING ACTIVITIES

Proceeds from maturities and paydown of securities available-for-sale	Proceeds from maturities and paydown of securities available-for-sale	3,670		1,786		Proceeds from maturities and paydown of securities available-for-sale	7,398			3,132
Proceeds from maturities and paydown of securities held-to-maturity	Proceeds from maturities and paydown of securities held-to-maturity	3,369		235		Proceeds from maturities and paydown of securities held-to-maturity	3,379			244
Purchase of securities available-for-sale	Purchase of securities available-for-sale	(12,978)		—		Purchase of securities available-for-sale	(17,993)			0

Net increase in loans held-for-investment	Net increase in loans held-for-investment	(455,674)		(78,629)		Net increase in loans held-for-investment	(505,907)			(61,428)
Purchase of restricted stock investments	Purchase of restricted stock investments	(13)		(72)		Purchase of restricted stock investments	(13)			(115)
Purchase of equity and qualified CRA investments	Purchase of equity and qualified CRA investments	(403)		(185)		Purchase of equity and qualified CRA investments	(675)			(388)
Proceeds from disposal of premises and equipment	Proceeds from disposal of premises and equipment	31		—		Proceeds from disposal of premises and equipment	31			0

Purchases of premises and equipment	Purchases of premises and equipment	(1,114)		(403)		Purchases of premises and equipment	(1,177)			(679)
Net cash used in investing activities	Net cash used in investing activities	(463,112)		(77,268)		Net cash used in investing activities	(514,957)			(59,234)
FINANCING ACTIVITIES	FINANCING ACTIVITIES					FINANCING ACTIVITIES
Net increase in deposits	Net increase in deposits	291,304		3,540		Net increase in deposits	246,219			87,199
Net increase in short-term borrowings	Net increase in short-term borrowings	60,000		60,002		Net increase in short-term borrowings	60,000			(104,998)
Proceeds from long-term borrowings	Proceeds from long-term borrowings	—		30,000		Proceeds from long-term borrowings	0			30,000
Proceeds from Paycheck Protection Program Liquidity Facility	Proceeds from Paycheck Protection Program Liquidity Facility	179,125		—		Proceeds from Paycheck Protection Program Liquidity Facility	253,140			0
(Decrease) increase in senior secured notes	(Decrease) increase in senior secured notes	(3,100)		4,350		(Decrease) increase in senior secured notes	(5,200)			4,650
Cash dividends paid	Cash dividends paid	(5,847)		(4,721)		Cash dividends paid	(8,772)			(7,013)
Repurchase of shares	Repurchase of shares	(1,017)		(7,188)		Repurchase of shares	(1,024)			(9,099)
Proceeds from exercise of stock options	Proceeds from exercise of stock options	85		2,559		Proceeds from exercise of stock options	127			2,588
Net cash provided by financing activities	Net cash provided by financing activities	520,550		88,542		Net cash provided by financing activities	544,490			3,327
Net increase in cash and cash equivalents	Net increase in cash and cash equivalents	56,028		40,227		Net increase in cash and cash equivalents	19,735			(16,761)
Cash and cash equivalents, beginning of period	Cash and cash equivalents, beginning of period	161,801		197,376		Cash and cash equivalents, beginning of period	161,801			197,376
Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	217,829	$	237,603	Cash and cash equivalents, end of period	$	181,536		$	180,615

Supplemental Disclosures of Cash Flow Information:	Supplemental Disclosures of Cash Flow Information:					Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:	Cash paid during the period for:					Cash paid during the period for:
Interest paid	Interest paid	$	4,041	$	5,848	Interest paid	$	5,325		$	9,173
Taxes paid	Taxes paid	$	783	$	5,461	Taxes paid	$	6,372		$	8,013
Noncash investing and financing activities:	Noncash investing and financing activities:					Noncash investing and financing activities:
Transfers of loans to (from) held for investment from (to) held for sale	Transfers of loans to (from) held for investment from (to) held for sale	$	933	$	4,434	Transfers of loans to (from) held for investment from (to) held for sale	$	933		$	(51)
Transfers of loans to foreclosed assets	Transfers of loans to foreclosed assets	$	602	$	—	Transfers of loans to foreclosed assets	$	602		$	0
Servicing rights asset recognized	Servicing rights asset recognized	$	68	$	713	Servicing rights asset recognized	$	179		$	883

Initial recognition of operating lease right-of-use assets	Initial recognition of operating lease right-of-use assets	$	—	$	6,022	Initial recognition of operating lease right-of-use assets	$	0		$	6,022
Initial recognition of operating lease liabilities	Initial recognition of operating lease liabilities	$	—	$	6,141	Initial recognition of operating lease liabilities	$	0		$	6,141

See accompanying notes to condensed consolidated financial statements.

910

First Choice Bancorp and Subsidiary

Notes to Condensed Consolidated Financial Statements

(unaudited)

NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

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

Headquartered in Cerritos, California, the Bank is a community-based financial institution that serves commercial and consumer clients in diverse communities. The Bank specializes in loans to small- to medium-sized businesses and private banking clients, commercial and industrial loans, and commercial real estate loans with a specialization in providing financial solutions for the hospitality industry. The Bank is a Preferred Small Business Administration (“SBA”) Lender. The Bank conducts business through 9 full-service branches and 2 loan production offices located in Los Angeles, Orange and San Diego Counties. Effective May 17, 2019, the Little Tokyo branch was closed and consolidated with the 6th and Figueroa branch located in downtown Los Angeles and the San Diego branch operations were consolidated into the Carlsbad branch. The San Diego location remains as a loan production office.

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

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

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of First Choice Bancorp, and its wholly-owned subsidiary, First Choice Bank, and the Bank's wholly-owned subsidiary, PCB Real Estate Holdings, LLC, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for ~~the~~ interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary to a fair presentation of the results for the interim periods presented have been included. Unaudited interim results for the ~~six~~nine months ended ~~June~~September 30, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020. These unaudited interim period condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements as of and for the years ended December 31, 2019 and 2018, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC"). The December 31, 2019 condensed consolidated balance sheet presented herein has been derived from the audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC.

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

Use of Estimates in the Preparation of Consolidated Financial Statements

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and

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

Accounting Policies

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

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

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

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

In addition, ~~our banking regulators and other financial regulators issued a~~the joint interagency statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” on March 22, 2020 and revised April 7, 2020, that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. Pursuant to the interagency statement, loan modifications that do not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. Specifically, the agencies confirmed with the staff of the Financial Accounting Standards Board (FASB) that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief are not TDRs under GAAP. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payments that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Appropriate allowances for loan and lease losses are expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual.

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

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

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

Accounting Standards Adopted in 2020

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

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

Recent Accounting Guidance Not Yet Effective

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

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

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

1213

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

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

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

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

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

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

1314

NOTE 2. INVESTMENT SECURITIES

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


		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
June 30, 2020		(dollars in thousands)
September 30, 2020										September 30, 2020	(dollars in thousands)
Securities available-for-sale:	Securities available-for-sale:									Securities available-for-sale:
U.S. Government and agency securities	U.S. Government and agency securities	$	2,970	$	30	$	—	$	3,000	U.S. Government and agency securities	$	2,679	$	27	$	0	$	2,706
Mortgage-backed securities	Mortgage-backed securities	6,721		109		—		6,830		Mortgage-backed securities	6,040		117		0		6,157
Collateralized mortgage obligations	Collateralized mortgage obligations	18,302		381		(73)		18,610		Collateralized mortgage obligations	20,611		353		(56)		20,908
SBA pools	SBA pools	7,881		462		—		8,343		SBA pools	7,754		474		0		8,228
		$	35,874	$	982	$	(73)	$	36,783		$	37,084	$	971	$	(56)	$	37,999

Securities held-to-maturity:	Securities held-to-maturity:									Securities held-to-maturity:

Mortgage-backed securities	Mortgage-backed securities	$	1,691	$	118	$	—	$	1,809	Mortgage-backed securities	$	1,680	$	121	$	0	$	1,801
		$	1,691	$	118	$	—	$	1,809		$	1,680	$	121	$	0	$	1,801

December 31, 2019	December 31, 2019									December 31, 2019
Securities available-for-sale:	Securities available-for-sale:									Securities available-for-sale:
Mortgage-backed securities	Mortgage-backed securities	$	7,480	$	20	$	(69)	$	7,431	Mortgage-backed securities	$	7,480	$	20	$	(69)	$	7,431
Collateralized mortgage obligations	Collateralized mortgage obligations	10,571		52		(25)		10,598		Collateralized mortgage obligations	10,571		52		(25)		10,598
SBA pools	SBA pools	8,610		58		(44)		8,624		SBA pools	8,610		58		(44)		8,624

		$	26,661	$	130	$	(138)	$	26,653		$	26,661	$	130	$	(138)	$	26,653

Securities held-to-maturity:	Securities held-to-maturity:									Securities held-to-maturity:
U.S. Government and agency securities	U.S. Government and agency securities	$	3,342	$	9	$	—	$	3,351	U.S. Government and agency securities	$	3,342	$	9	$	0	$	3,351
Mortgage-backed securities	Mortgage-backed securities	1,714		27		(15)		1,726		Mortgage-backed securities	1,714		27		(15)		1,726
		$	5,056	$	36	$	(15)	$	5,077		$	5,056	$	36	$	(15)	$	5,077

The amortized cost and estimated fair value of all investment securities held-to-maturity and available-for-sale at ~~June~~September 30, 2020, by contractual maturities are shown below. Contractual maturities may differ from expected maturities because the obligors and/or issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


		Held to Maturity						Available for Sale							Held to Maturity				Available for Sale
		Amortized Cost		Fair Value		Amortized Cost		Fair Value			Amortized Cost		Fair Value		Amortized Cost		Fair Value
		(dollars in thousands)															(dollars in thousands)
Due in one year or less	Due in one year or less	$	—	$	—	$	—	$	—	Due in one year or less	$	0	$	0	$	0	$	0
Due after one year through five years	Due after one year through five years	—		—		—		—		Due after one year through five years	0		0		0		0
Due after five years through ten years	Due after five years through ten years	—		—		—		—		Due after five years through ten years	0		0		0		0
Due after ten years (1)	Due after ten years (1)	1,691		1,809		35,874		36,783		Due after ten years (1)	1,680		1,801		37,084		37,999

		$	1,691	$	1,809	$	35,874	$	36,783		$	1,680	$	1,801	$	37,084	$	37,999

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

At ~~June~~September 30, 2020 and December 31, 2019, there were no holdings of securities of any one issuer in an amount greater than 10% of our shareholders’ equity. There were 0$5.0 million in purchases of investment securities available-for-sale

and $295 thousand in calls of U.S. Government and agency securities available-for-sale during the three months ended September 30, 2020. There were no sales and maturities of any investment securities held-to-maturity during the three months ended September 30, 2020. There were no purchases, sales and maturities or calls of any investment securities available-for-sale or held-to-maturity during the three months ended June 30, 2020 and September 30, 2019. ~~There were $13.0~~

There were $18.0 million in purchases of investment securities available-for-sale, $295 thousand in calls of U.S. Government and agency securities available-for-sale and $3.4 million in calls of U.S. Government and agency securities held-to-maturity during the ~~three~~nine months ended ~~March 31, 2020 and six months ended June 30, 2020. There were 0 sales and maturities of any investment securities available-for-sale or held-to-maturity during the six months ended June~~September 30, 2020. There were 0 purchases, sales and maturities or calls of any investment securities available-for-sale or held-to-maturity during the ~~six~~nine months ended ~~June~~September 30, 2019. At ~~June~~September 30, 2020 securities held-to-maturity with a carrying amount of $1.7 million were pledged to the Federal Reserve Bank as discussed in Note 8 – Borrowing Arrangements.

As of ~~June~~September 30, 2020 and December 31, 2019, unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows:


		Less Than Twelve Months						Over Twelve Months								Total					Less Than Twelve Months				Over Twelve Months		Total
		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value			Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value
June 30, 2020		(dollars in thousands)
September 30, 2020														September 30, 2020	(dollars in thousands)
Securities available-for-sale:	Securities available-for-sale:													Securities available-for-sale:

Collateralized mortgage obligations	Collateralized mortgage obligations	(73)		5,315		—		—		(73)		5,315		Collateralized mortgage obligations	$	(56)	$	4,042	$	0	$	0	$	(56)	$	4,042

		$	(73)	$	5,315	$	—	$	—	$	(73)	$	5,315		$	(56)	$	4,042	$	0	$	0	$	(56)	$	4,042
Securities held-to-maturity:	Securities held-to-maturity:													Securities held-to-maturity:

Mortgage-backed securities	Mortgage-backed securities	—		—		—		—		—		—		Mortgage-backed securities	$	0	$	0	$	0	$	0	$	0	$	0
		$	—	$	—	$	—	$	—	$	—	$	—		$	0	$	0	$	0	$	0	$	0	$	0
December 31, 2019	December 31, 2019													December 31, 2019
Securities available-for-sale:	Securities available-for-sale:													Securities available-for-sale:
Mortgage-backed securities	Mortgage-backed securities	$	—	$	—	$	(69)	$	6,271	$	(69)	$	6,271	Mortgage-backed securities	$	0	$	0	$	(69)	$	6,271	$	(69)	$	6,271
Collateralized mortgage obligations	Collateralized mortgage obligations	(2)		1,342		(23)		1,288		(25)		2,630		Collateralized mortgage obligations	(2)		1,342		(23)		1,288		(25)		2,630
SBA pools	SBA pools	(44)		3,043		—		—		(44)		3,043		SBA pools	(44)		3,043		0		0		(44)		3,043

		$	(46)	$	4,385	$	(92)	$	7,559	$	(138)	$	11,944		$	(46)	$	4,385	$	(92)	$	7,559	$	(138)	$	11,944
Securities held-to-maturity:	Securities held-to-maturity:													Securities held-to-maturity:

Mortgage-backed securities	Mortgage-backed securities	—		—		(15)		790		(15)		790		Mortgage-backed securities	$	0	$	0	$	(15)	$	790	$	(15)	$	790
		$	—	$	—	$	(15)	$	790	$	(15)	$	790		$	0	$	0	$	(15)	$	790	$	(15)	$	790

At ~~June~~September 30, 2020, the Company had 2 investment securities available-for-sale in an unrealized loss position with total unrealized losses of ~~$73~~$56 thousand. Such unrealized losses on these investment securities have not been recognized into income. The Company does not believe these unrealized losses are other-than-temporary because the issuers’ bonds are above investment grade, the decline in fair value is largely due to changes in interest rates, and management does not intend to sell these securities nor is it more likely than not that management would be required to sell the securities prior to their anticipated recovery.

Equity Securities with a Readily Determinable Fair Value

At ~~June~~September 30, 2020 and December 31, 2019, equity securities with a readily determinable fair value of $2.8 million and $2.7 million were represented by a mutual fund investment consisting of high-quality debt securities and other debt instruments supporting domestic affordable housing and community development. The Company recognized net losses of $6 thousand, and net gains of $12 thousand ~~$42 thousand~~ and ~~$38~~$15 thousand related to changes in fair value during the three months ended September 30, 2020, June 30, 2020 ~~March 31, 2020~~ and ~~June~~September 30, 2019, respectively, all of which related to equity securities held during those periods. During the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, the Company recognized net gains of ~~$54~~$48 thousand and ~~$74~~$88 thousand related to changes in fair value.

Restricted Stock Investments

The Bank is a member of the FHLB system. Members are required to own FHLB stock of the greater of 1% of FHLB membership asset value or 2.7% of outstanding FHLB advances. At ~~June~~September 30, 2020 and December 31, 2019, the Bank owned $6.1 million of FHLB stock which is carried at cost. During the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, there were 0 required purchases of FHLB stock. The Company evaluated the carrying value of our FHLB stock investment at ~~June~~September 30,

2020 and determined that it was not impaired. This evaluation considered the long-term nature of the investment, the current financial and liquidity position of the FHLB, repurchase activity of excess stock by the FHLB at its carrying value, the return on the investment from recurring and special dividends, and our intent and ability to hold this investment for a period of time sufficient to recover our recorded investment.

As a member of the Federal Reserve Bank of San Francisco, the Bank owned $6.9 million of Federal Reserve stock, which is carried at cost, at ~~June~~September 30, 2020 and December 31, 2019. There were 0 required purchases of Federal Reserve stock during the three months ended ~~June~~September 30, 2020. The Company purchased $13 thousand of Federal Reserve stock during the ~~six~~nine months ended ~~June~~September 30, 2020. The Bank purchased ~~$60~~$43 thousand and ~~$72~~$117 thousand of Federal Reserve stock during the three and ~~six~~nine months ended ~~June~~September 30, 2019. The Company evaluated the carrying value of our Federal Reserve stock investment at ~~June~~September 30, 2020 and determined that it was not impaired. This evaluation considered the long-term nature of the investment, the current financial and liquidity position of the Federal Reserve, repurchase activity of excess stock by the Federal Reserve at its carrying value, the return on the investment from recurring dividends, and our intent and ability to hold this investment for a period of time sufficient to recover our recorded investment.

Other Equity Securities Without A Readily Determinable Fair Value

The Company also has equity securities in the form of capital stock invested in two different banker’s bank stocks (collectively "Other Bank Stocks") which totaled $1.0 million at ~~June~~September 30, 2020 and December 31, 2019 and are reported in other assets in the condensed consolidated balance sheets. During the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, the Company evaluated the carrying value of these equity securities and determined that they were not impaired, and 0 loss related to changes in the fair value of these equity securities was recognized.

The Company has an investment in Class A common stock of Clearinghouse Community Development Financial Institution ("CDFI") totaling $500 thousand at ~~June~~September 30, 2020 and December 31, 2019. Clearinghouse CDFI is a for-profit institution that is committed to provide economic opportunities and to improve the quality of life for low-income individuals and to improve the communities through innovative and affordable financing. The purpose of this investment, first and foremost, aligns with our mission statement as a community bank to help the underserved people in our communities, ~~as well as to achieve~~while achieving a satisfactory return on ~~capital, and to receive~~capital. Additionally, this investment provides the Bank with Community Reinvestment Act ("CRA") ~~lending~~investment credits. This equity security is recorded at cost and is included in other assets in the condensed consolidated balance sheets. During the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, the Company did not purchase additional securities. At ~~June~~September 30, 2020, the Company evaluated the carrying value of this equity security and determined that it was 0t impaired, and no loss was recognized related to changes in the fair value.

Qualified Affordable Housing Project Investments

The Company also has commitments and investments in ~~a partnership~~2 partnerships that ~~sponsors~~sponsor affordable housing projects utilizing the Low Income Housing Tax Credit ("LIHTC") pursuant to Section 42 of the Internal Revenue ~~Code in 2019. This investment is~~Code. These investments are recorded net of accumulated amortization, using the proportional amortization method. Under the proportional amortization method, the initial cost of the ~~investment~~investments is being amortized in proportion to the tax credits and other tax benefits received, and the amortization is ~~being~~ recognized as part of ~~the~~ income tax expense in the condensed consolidated statements of income. Total estimated tax credits allocated and proportional amortization expense recognized were ~~$26~~$22 thousand and ~~$12~~$21 thousand for the three months ended ~~June~~September 30, 2020. Total estimated tax credits allocated and proportional amortization expense recognized were ~~$44~~$65 thousand and ~~$33~~$54 thousand for the ~~six~~nine months ended ~~June~~September 30, 2020. At ~~June~~September 30, 2020 and December 31, 2019, the net LIHTC investment totaled ~~$555~~$687 thousand and $236 thousand. During the three and ~~six~~nine months ended ~~June~~September 30, 2020, the Company made capital contributions of ~~$325~~$153 thousand and ~~$351~~$504 thousand. There were 0$204 thousand in capital ~~contribution~~contributions during the three and ~~six~~nine months ended ~~June~~September 30, 2019. At ~~June~~September 30, 2020, the Company evaluated the carrying value of these securities and determined they were 0t impaired, and no loss was recognized related to changes in the fair value.

NOTE 3. LOANS

The Company's loan portfolio consists primarily of loans to borrowers within our principal market area of Los Angeles, ~~County,~~ Orange ~~County~~ and San Diego ~~County,~~Counties, California. Although the Company seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses, such as

hospitality businesses, are among the principal industries in the Company's market area and, as a result, the Company's loan and collateral portfolios are, to some degree, concentrated in those industries. The Company also originates SBA loans either for sale to institutional investors or to hold in the loan portfolio. Loans identified as held for sale are carried at the lower of their net carrying value or market value and separately designated as such in the condensed consolidated financial statements. A portion of the Company's revenues are from origination and servicing of loans guaranteed by the SBA under its various programs and sale of the guaranteed portions of the loans. Funding for these loans depends on annual appropriations by the U.S. Congress.

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

At loan origination, the ~~borrower does not apply for forgiveness within that 10 month period. The~~ Company was paid a processing fee from the SBA ranging from 1% to 5% based on the ~~size of the loan.~~loan size. At ~~June~~September 30, 2020, PPP loans, net of unearned fees of ~~$11.5~~$9.9 million, totaled ~~$389.2 million and the weighted average rate for the processing fee was 3.16%.~~$390.2 million. The unearned fees are being accreted to interest income based on the two-year contractual maturity. The SBA did not act on any PPP loan forgiveness applications in the third quarter of 2020 and, accordingly, no PPP loans were forgiven in the quarter. The SBA has commenced making determinations as to PPP forgiveness applications in the fourth quarter of 2020 and, the Company anticipates that the SBA ~~may forgive a significant number of PPP loans in the third~~will continue reviewing and ~~fourth quarters of 2020,~~making determinations with respect to forgiveness applications, at which point the recognition of fee income will be ~~accelerated into interest income.~~accelerated. On April 14, 2020, the Company was approved by the Federal Reserve to access its SBA Paycheck Protection Program Liquidity Facility ("PPPLF"). The PPPLF enables the Company to borrow funds through the Federal Reserve Discount Window to fund PPP loans. At ~~June~~September 30, 2020, the Company ~~pledged $173.7~~had $253.1 million ~~of PPP loans as eligible collateral~~in borrowings under the PPPLF ~~borrowing arrangement.~~with a fixed rate of 0.35% which were collateralized by PPP loans. See Note 8 –Borrowing Arrangements for additional information regarding the PPPLF.

The Company participates in the Main Street Lending Program to support lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. Under this program, the Company originates loans to borrowers meeting the terms and requirements of the program, including requirements as to eligibility, use of proceeds and priority, and sells a 95% participation interest in these loans to Main Street Facilities, LLC, a special purpose vehicle ("SPV") organized by the Federal Reserve to purchase the participation interest from eligible lenders, including the Bank. During the three months ended September 30, 2020, the Company originated Main Street loans totaling $69.8 million in principal and sold participation interest totaling $66.3 million to the Main Street SPV, resulting in a gain of $486 thousand.

As of ~~June~~September 30, 2020, the Company had pledged ~~$1.23~~$1.64 billion of loans with the FHLB under a blanket lien, of which ~~$834.4~~$860.3 million was considered as eligible collateral under this secured borrowing arrangement, and loans with an unpaid principal balance of ~~$212.8~~$203.1 million were pledged as collateral under a secured borrowing arrangement with the

Federal Reserve. See Note 8 –Borrowing Arrangements for additional information regarding the FHLB and Federal Reserve secured lines of credit.

The loans held for investment portfolio includes originated and acquired loans. The acquired loans includes: (i) loans that were not credit impaired on the date of acquisition ("Non-PCI"); and (ii) purchased credit impaired ("PCI") loans, which are defined as loans with evidence of credit deterioration since their originations and for which it is probable that collection of all contractually required payments are unlikely as of the acquisition date. The following table presents loans held for investment, net, by loan class at ~~June~~September 30, 2020 and December 31, 2019:


		June 30, 2020					December 31, 2019	September 30, 2020					December 31, 2019

		(dollars in thousands)								(dollars in thousands)
Construction and land development	Construction and land development		$	218,226	$	249,504	Construction and land development	$	215,109		$	249,504
Real estate:	Real estate:						Real estate:
Residential	Residential		39,145		43,736		Residential	30,067			43,736
Commercial real estate - owner occupied	Commercial real estate - owner occupied		162,508		171,595		Commercial real estate - owner occupied	159,603			171,595
Commercial real estate - non-owner occupied	Commercial real estate - non-owner occupied		502,693		423,823		Commercial real estate - non-owner occupied	528,201			423,823
Commercial and industrial	Commercial and industrial		335,411		309,011		Commercial and industrial	361,170			309,011
SBA loans ⁽¹⁾	SBA loans ⁽¹⁾		586,820		177,633		SBA loans (1)	602,407			177,633
Consumer	Consumer		34		430		Consumer	8			430
Loans held for investment, net of discounts⁽²⁾	Loans held for investment, net of discounts⁽²⁾		1,844,837		1,375,732		Loans held for investment, net of discounts (2)	1,896,565			1,375,732
Net deferred origination fees ⁽¹⁾	Net deferred origination fees ⁽¹⁾		(13,218)		(1,057)		Net deferred origination fees (1)	(11,635)			(1,057)
Loans held for investment	Loans held for investment		1,831,619		1,374,675		Loans held for investment	1,884,930			1,374,675
Allowance for loan losses⁽³⁾	Allowance for loan losses⁽³⁾		(17,822)		(13,522)		Allowance for loan losses⁽³⁾	(18,734)			(13,522)
Loans held for investment, net	Loans held for investment, net		$	1,813,797	$	1,361,153	Loans held for investment, net	$	1,866,196		$	1,361,153

(1) Includes PPP loans with total outstanding principal of ~~$400.7~~$400.1 million and net unearned fees of ~~$11.5~~$9.9 million at ~~June~~September 30, 2020.

(2) Loans held for investment, net of discounts includes the net carrying value of PCI loans of ~~$1.0 million~~$792 thousand and $1.1 million at ~~June~~September 30, 2020 and December 31, 2019.

~~(3) Includes $138 thousand of reserves for accrued interest receivable related to loans on deferment at June 30, 2020.~~

The following table presents the components of loans held for investment at ~~June~~September 30, 2020 and December 31, 2019:


		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019
		(dollars in thousands)							(dollars in thousands)
Gross loans⁽¹⁾	Gross loans⁽¹⁾	$	1,852,768	$	1,385,142	Gross loans(1)	$	1,904,019	$	1,385,142
Unamortized net discounts⁽²⁾	Unamortized net discounts⁽²⁾	(7,931)		(9,410)		Unamortized net discounts(2)	(7,454)		(9,410)
Net unamortized deferred origination fees⁽³⁾	Net unamortized deferred origination fees⁽³⁾	(13,218)		(1,057)		Net unamortized deferred origination fees(3)	(11,635)		(1,057)
Loans held for investment	Loans held for investment	$	1,831,619	$	1,374,675	Loans held for investment	$	1,884,930	$	1,374,675

(1) Gross loans include PPP loans of ~~$400.7~~$400.1 million at ~~June~~September 30, 2020 and the net carrying value of PCI loans of ~~$1.0 million~~$792 thousand and $1.1 million at ~~June~~September 30, 2020 and December 31, 2019.

(2) Unamortized net discounts include discounts related to the retained portion of SBA loans and Main Street loans and net discounts on acquired loans. At ~~June~~September 30, 2020, unamortized net discounts ~~totaled $7.9~~include $4.3 million ~~of which $4.8 million was~~ associated with loans acquired in the PCB acquisition and expected to be accreted into interest income over a weighted average life of ~~4.6~~4.1 years. At December 31, 2019, unamortized net discounts on acquired loans associated with the PCB acquisition totaled $6.0 million.

(3) Net unamortized deferred origination fees include ~~$11.5~~$9.9 million for PPP ~~loans.~~loans at September 30, 2020.

The following table presents a summary of the changes in the allowance for loan losses for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019:


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2020		2019		2020		2019
		(dollars in thousands)															(dollars in thousands)
Balance, beginning of period	Balance, beginning of period	$	16,218	$	11,426	$	13,522	$	11,056	Balance, beginning of period	$	17,822	$	12,053	$	13,522	$	11,056
Provision for loan losses ^{(1) (2)}		2,100		550		4,800		900
Provision for loan losses (1)										Provision for loan losses (1)	1,000		700		5,800		1,600
Charge-offs	Charge-offs	(550)		(122)		(578)		(124)		Charge-offs	(194)		(437)		(772)		(561)
Recoveries	Recoveries	54		199		78		221		Recoveries	106		24		184		245
Net (charge-offs) recoveries		(496)		77		(500)		97
Balance, end of period ^{(1) (2)}		$	17,822	$	12,053	$	17,822	$	12,053
Net charge-offs										Net charge-offs	(88)		(413)		(588)		(316)
Balance, end of period										Balance, end of period	$	18,734	$	12,340	$	18,734	$	12,340

(1) ~~Includes $138 thousand of reserves for accrued interest receivable related to loans on deferment for the three and six months ended June 30, 2020.~~

~~(2)~~ No provision for loan losses on PPP loans was recognized for the three and ~~six~~nine months ended at ~~June~~September 30, 2020 as these loans are 100% guaranteed by the SBA under the program.

The following tables present the activity in the allowance for loan losses, the composition of the period end allowance, and the loans evaluated for impairment by loan class for the three ~~and six~~ months ended September 30, 2020, June 30, 2020 and ~~2019:~~

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

~~(1)Includes $138 thousand of reserves for accrued interest receivable related to loans on deferment for the three~~September 30, 2019 and nine months ended ~~June~~September 30, ~~2020.~~2020 and 2019:


	Three Months Ended September 30, 2020
			Real Estate
	Construction and Land Development		Residential		Commercial - Owner Occupied		Commercial - Non-owner Occupied		Commercial and Industrial		SBA Loans		Consumer		Total
	(dollars in thousands)
Balance, June 30, 2020	$	2,470	$	361	$	1,365	$	5,347	$	5,607	$	2,672	$	0	$	17,822
Provision for (reversal of) loan losses	(100)		(86)		(85)		233		745		293		0		1,000
Charge-offs	0		0		0		0		(194)		0		0		(194)
Recoveries	0		0		0		0		106		0		0		106
Net charge-offs	0		0		0		0		(88)		0		0		(88)
Balance, September 30, 2020	$	2,370	$	275	$	1,280	$	5,580	$	6,264	$	2,965	$	0	$	18,734
Reserves:
Specific	$	0	$	0	$	0	$	165	$	0	$	377	$	0	$	542
General	2,370		275		1,280		5,415		6,264		2,588		0		18,192

	$	2,370	$	275	$	1,280	$	5,580	$	6,264	$	2,965	$	0	$	18,734
Loans evaluated for impairment:
Individually	$	0	$	259	$	1,312	$	6,286	$	183	$	5,271	$	0	$	13,311
Collectively	215,109		29,808		158,196		521,915		360,710		596,716		8		1,882,462
PCI loans	0		0		95		0		277		420		0		792
	$	215,109	$	30,067	$	159,603	$	528,201	$	361,170	$	602,407	$	8	$	1,896,565


	Nine Months Ended September 30, 2020
			Real Estate
	Construction and Land Development		Residential		Commercial - Owner Occupied		Commercial - Non-owner Occupied		Commercial and Industrial		SBA Loans		Consumer		Total
	(dollars in thousands)
Balance, December 31, 2019	$	2,350	$	292	$	918	$	3,074	$	4,145	$	2,741	$	2	$	13,522
Provision for (reversal of) loan losses	20		(17)		362		2,506		2,273		658		(2)		5,800
Charge-offs	0		0		0		0		(326)		(446)		0		(772)
Recoveries	0		0		0		0		172		12		0		184
Net charge-offs	0		0		0		0		(154)		(434)		0		(588)
Balance, September 30, 2020	$	2,370	$	275	$	1,280	$	5,580	$	6,264	$	2,965	$	0	$	18,734

1820

Six Months Ended June 30, 2020
Real Estate
Construction and Land Development Residential Commercial - Owner Occupied Commercial - Non-owner Occupied Commercial and Industrial SBA Loans Consumer Total
(dollars in thousands)
Balance, December 31, 2019 $ 2,350 $ 292 $ 918 $ 3,074 $ 4,145 $ 2,741 $ 2 $ 13,522
Provision for (reversal of) loan losses ⁽¹⁾
120 69 447 2,273 1,528 365 (2) 4,800
Charge-offs — — — — (132) (446) — (578)
Recoveries — — — — 66 12 — 78
Net charge-offs — — — — (66) (434) — (500)
Balance, 6/30/2020 ⁽¹⁾
$ 2,470 $ 361 $ 1,365 $ 5,347 $ 5,607 $ 2,672 $ — $ 17,822


	Three Months Ended June 30, 2020
			Real Estate
	Construction and Land Development		Residential		Commercial - Owner Occupied		Commercial - Non-owner Occupied		Commercial and Industrial		SBA Loans		Consumer		Total
	(dollars in thousands)
Balance, March 31, 2020	$	2,498	$	333	$	844	$	4,131	$	5,455	$	2,954	$	3	$	16,218
Provision for (reversal of) loan losses	(28)		28		521		1,216		223		143		(3)		2,100
Charge-offs	0		0		0		0		(125)		(425)		0		(550)
Recoveries	0		0		0		0		54		0		0		54
Net charge-offs	0		0		0		0		(71)		(425)		0		(496)
Balance, June 30, 2020	$	2,470	$	361	$	1,365	$	5,347	$	5,607	$	2,672	$	0	$	17,822
Reserves:
Specific	$	0	$	0	$	0	$	188	$	0	$	348	$	0	$	536
General	2,470		361		1,365		5,159		5,607		2,324		0		17,286
	$	2,470	$	361	$	1,365	$	5,347	$	5,607	$	2,672	$	0	$	17,822
Loans evaluated for impairment:
Individually	$	0	$	0	$	1,515	$	1,339	$	185	$	5,428	$	0	$	8,467
Collectively	218,226		39,145		160,890		501,354		334,751		580,959		34		1,835,359
PCI loans	0		0		103		0		475		433		0		1,011
	$	218,226	$	39,145	$	162,508	$	502,693	$	335,411	$	586,820	$	34	$	1,844,837

~~(1)Includes $138 thousand of reserves for accrued interest receivable related to loans on deferment for the six months ended June 30, 2020.~~



	Three Months Ended September 30, 2019
			Real Estate
	Construction and Land Development		Residential		Commercial - Owner Occupied		Commercial - Non-owner Occupied		Commercial and Industrial		SBA Loans		Consumer		Total
	(dollars in thousands)
Balance, June 30, 2019	$	1,892	$	379	$	905	$	2,587	$	4,502	$	1,788	$	0	$	12,053
Provision for (reversal of) loan losses	247		(47)		(107)		(179)		384		399		3		700
Charge-offs	0		0		0		0		(437)		0		0		(437)
Recoveries	0		0		0		0		24		0		0		24
Net charge-offs	0		0		0		0		(413)		0		0		(413)
Balance, September 30, 2019	$	2,139	$	332	$	798	$	2,408	$	4,473	$	2,187	$	3	$	12,340
Reserves:
Specific	$	0	$	0	$	0	$	0	$	0	$	624	$	0	$	624
General	2,139		332		798		2,408		4,473		1,563		3		11,716
	$	2,139	$	332	$	798	$	2,408	$	4,473	$	2,187	$	3	$	12,340
Loans evaluated for impairment:
Individually	$	0	$	0	$	0	$	0	$	730	$	7,002	$	0	$	7,732
Collectively	221,857		48,896		171,250		401,710		309,969		154,042		424		1,308,148
PCI loans	0		0		110		0		506		564		0		1,180
	$	221,857	$	48,896	$	171,360	$	401,710	$	311,205	$	161,608	$	424	$	1,317,060

Three Months Ended March 31, 2020
Real Estate
Construction and Land Development Residential Commercial - Owner Occupied Commercial - Non-owner Occupied Commercial and Industrial SBA Loans Consumer Total
(dollars in thousands)
Balance, December 31, 2019 $ 2,350 $ 292 $ 918 $ 3,074 $ 4,145 $ 2,741 $ 2 $ 13,522
Provision for (reversal of) loan losses 148 41 (74) 1,057 1,305 222 1 2,700
Charge-offs — — — — (7) (21) — (28)
Recoveries — — — — 12 12 — 24
Net recoveries (charge-offs) — — — — 5 (9) — (4)
Balance, March 31, 2020 $ 2,498 $ 333 $ 844 $ 4,131 $ 5,455 $ 2,954 $ 3 $ 16,218
Reserves:
Specific $ — $ — $ — $ 215 $ — $ 877 $ — $ 1,092
General 2,498 333 844 3,916 5,455 2,077 3 15,126
$ 2,498 $ 333 $ 844 $ 4,131 $ 5,455 $ 2,954 $ 3 $ 16,218
Loans evaluated for impairment:
Individually $ — $ — $ 1,560 $ 1,368 $ 187 $ 6,339 $ — $ 9,454
Collectively 233,607 42,904 146,851 475,104 349,460 180,542 450 1,428,918
PCI loans — — 106 — 443 526 — 1,075
$ 233,607 $ 42,904 $ 148,517 $ 476,472 $ 350,090 $ 187,407 $ 450 $ 1,439,447

Three Months Ended June 30, 2019
Real Estate
Construction and Land Development Residential Commercial - Owner Occupied Commercial - Non-owner Occupied Commercial and Industrial SBA Loans Consumer Total
(dollars in thousands)
Balance, March 31, 2019 $ 1,806 $ 402 $ 862 $ 2,508 $ 4,036 $ 1,812 $ — $ 11,426
Provision for (reversal of) loan losses 86 (23) 43 79 578 (213) — 550
Charge-offs — — — — (122) — — (122)
Recoveries — — — — 10 189 — 199
Net recoveries — — — — (112) 189 — 77
Balance, June 30, 2019 $ 1,892 $ 379 $ 905 $ 2,587 $ 4,502 $ 1,788 $ — $ 12,053
Reserves:
Specific $ — $ — $ — $ — $ — $ — $ — $ —
General 1,892 379 905 2,587 4,502 1,788 — 12,053
$ 1,892 $ 379 $ 905 $ 2,587 $ 4,502 $ 1,788 $ — $ 12,053

1921

Three Months Ended June 30, 2019
Real Estate
Construction and Land Development Residential Commercial - Owner Occupied Commercial - Non-owner Occupied Commercial and Industrial SBA Loans Consumer Total
(dollars in thousands)
Loans evaluated for impairment:
Individually $ — $ — $ — $ — $ 238 $ 3,161 $ — $ 3,399
Collectively 196,034 51,512 180,043 403,130 331,943 167,551 159 1,330,372
PCI loans — — 118 1,047 528 588 — 2,281
$ 196,034 $ 51,512 $ 180,161 $ 404,177 $ 332,709 $ 171,300 $ 159 $ 1,336,052


		Six Months Ended June 30, 2019																																Nine Months Ended September 30, 2019
				Real Estate																							Real Estate
		Construction and Land Development		Residential		Commercial - Owner Occupied		Commercial - Non-owner Occupied		Commercial and Industrial		SBA Loans		Consumer		Total			Construction and Land Development		Residential		Commercial - Owner Occupied		Commercial - Non-owner Occupied			Commercial and Industrial		SBA Loans		Consumer		Total
		(dollars in thousands)																																(dollars in thousands)
Balance, December 31, 2018	Balance, December 31, 2018	$	1,721	$	422	$	734	$	2,686	$	3,686	$	1,807	$	—	$	11,056	Balance, December 31, 2018	$	1,721	$	422	$	734	$	2,686		$	3,686	$	1,807	$	0	$	11,056
Provision for (reversal of) loan losses	Provision for (reversal of) loan losses	171		(43)		171		(99)		908		(208)		—		900		Provision for (reversal of) loan losses	418		(90)		64		(278)			1,292		191		3		1,600
Charge-offs	Charge-offs	—		—		—		—		(124)		—		—		(124)		Charge-offs	0		0		0		0			(561)		0		0		(561)
Recoveries	Recoveries	—		—		—		—		32		189		—		221		Recoveries	0		0		0		0			56		189		0		245
Net (charge-off) recoveries	Net (charge-off) recoveries	—		—		—		—		(92)		189		—		97		Net (charge-off) recoveries	0		0		0		0			(505)		189		0		(316)
Balance, June 30, 2019		$	1,892	$	379	$	905	$	2,587	$	4,502	$	1,788	$	—	$	12,053
Balance, September 30, 2019																		Balance, September 30, 2019	$	2,139	$	332	$	798	$	2,408		$	4,473	$	2,187	$	3	$	12,340

The Company categorizes loans by risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:

Pass - Loans classified as pass represent assets with a level of credit quality which contain no well-defined deficiency or weakness.

Special Mention - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or

weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

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

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

2022

The following tables present loans held for investment, net of discounts by loan class and risk category, excluding PCI loans, as of ~~June~~September 30, 2020 and December 31, 2019:


		June 30, 2020															September 30, 2020
		Pass		Special Mention		Substandard ⁽¹⁾		Total			Pass		Special Mention		Substandard (1)		Total
		(dollars in thousands)															(dollars in thousands)
Construction and land development	Construction and land development	$	218,226	$	—	$	—	$	218,226	Construction and land development	$	215,109	$	0	$	0	$	215,109
Real estate:	Real estate:									Real estate:
Residential	Residential	39,145		—		—		39,145		Residential	29,808		0		259		30,067
Commercial real estate - owner occupied	Commercial real estate - owner occupied	160,890		—		1,515		162,405		Commercial real estate - owner occupied	158,072		0		1,436		159,508
Commercial real estate - non-owner occupied	Commercial real estate - non-owner occupied	500,644		—		2,049		502,693		Commercial real estate - non-owner occupied	521,212		0		6,989		528,201
Commercial and industrial	Commercial and industrial	333,816		—		1,120		334,936		Commercial and industrial	359,800		0		1,093		360,893
SBA loans	SBA loans	577,981		—		8,406		586,387		SBA loans	593,776		0		8,211		601,987
Consumer	Consumer	34		—		—		34		Consumer	8		0		0		8

		$	1,830,736	$	—	$	13,090	$	1,843,826		$	1,877,785	$	0	$	17,988	$	1,895,773

(1)At ~~June~~September 30, 2020, substandard loans included ~~$8.1~~$13.0 million of impaired loans. There were no loans classified as special mention, doubtful or loss at ~~June~~September 30, 2020.


		December 31, 2019															December 31, 2019
		Pass		Special Mention		Substandard⁽¹⁾		Total			Pass		Special Mention		Substandard (1)		Total
		(dollars in thousands)															(dollars in thousands)
Construction and land development	Construction and land development	$	249,504	$	—	$	—	$	249,504	Construction and land development	$	249,504	$	0	$	0	$	249,504
Real estate:	Real estate:									Real estate:
Residential	Residential	43,736		—		—		43,736		Residential	43,736		0		0		43,736
Commercial real estate - owner occupied	Commercial real estate - owner occupied	161,863		—		9,624		171,487		Commercial real estate - owner occupied	161,863		0		9,624		171,487
Commercial real estate - non-owner occupied	Commercial real estate - non-owner occupied	421,731		—		2,092		423,823		Commercial real estate - non-owner occupied	421,731		0		2,092		423,823
Commercial and industrial	Commercial and industrial	305,918		—		2,630		308,548		Commercial and industrial	305,918		0		2,630		308,548
SBA loans	SBA loans	166,820		—		10,260		177,080		SBA loans	166,820		0		10,260		177,080
Consumer	Consumer	430		—		—		430		Consumer	430		0		0		430
		$	1,350,002	$	—	$	24,606	$	1,374,608		$	1,350,002	$	0	$	24,606	$	1,374,608

(1)At December 31, 2019, substandard loans included $11.3 million of impaired loans. There were no loans classified as special mention, doubtful or loss at December 31, 2019.

The following tables present past due and nonaccrual loans, net of discounts by loan class, excluding PCI loans, at ~~June~~September 30, 2020 and December 31, 2019:


		June 30, 2020																September 30, 2020
		Still Accruing															Still Accruing
		30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due		Nonaccrual			30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due			Nonaccrual
		(dollars in thousands)																(dollars in thousands)
Construction and land development	Construction and land development	$	—	$	—	$	—	$	—	Construction and land development	$	0	$	0	$	0		$	0
Real estate:	Real estate:									Real estate:
Residential	Residential	—		—		267		—		Residential	0		0		0			259
Commercial real estate - owner occupied	Commercial real estate - owner occupied	—		—		—		1,515		Commercial real estate - owner occupied	0		0		0			1,312
Commercial real estate - non-owner occupied	Commercial real estate - non-owner occupied	—		—		—		1,339		Commercial real estate - non-owner occupied	0		0		0			6,286
Commercial and industrial	Commercial and industrial	4		2		—		186		Commercial and industrial	3		0		0			183
SBA loans	SBA loans	—		347		—		5,109		SBA loans	1,117		113		0			4,951
Consumer	Consumer	—		—		—		—		Consumer	0		0		0			0
Total	Total	$	4	$	349	$	267	$	8,149	Total	$	1,120	$	113	$	0		$	12,991

2123


		December 31, 2019																December 31, 2019
		Still Accruing															Still Accruing
		30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due		Nonaccrual			30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due			Nonaccrual
		(dollars in thousands)																(dollars in thousands)
Construction and land development	Construction and land development	$	—	$	—	$	—	$	—	Construction and land development	$	0	$	0	$	0		$	0
Real estate:	Real estate:									Real estate:
Residential	Residential	1,471		290		—		—		Residential	1,471		290		0			0
Commercial real estate - owner occupied	Commercial real estate - owner occupied	—		—		—		3,049		Commercial real estate - owner occupied	0		0		0			3,049
Commercial real estate - non-owner occupied	Commercial real estate - non-owner occupied	—		—		—		1,368		Commercial real estate - non-owner occupied	0		0		0			1,368
Commercial and industrial	Commercial and industrial	4		2		—		229		Commercial and industrial	4		2		0			229
SBA loans	SBA loans	—		—		—		6,619		SBA loans	0		0		0			6,619

Total	Total	$	1,475	$	292	$	—	$	11,265	Total	$	1,475	$	292	$	0		$	11,265

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Recorded investment represents unpaid principal balance, net of charge-offs, discounts, premiums and interest applied to principal on nonaccrual loans, if any.

The following tables present impaired loans, excluding PCI loans, by loan class at ~~June~~September 30, 2020 and December 31, 2019:


		June 30, 2020																			September 30, 2020
						Impaired Loans													Impaired Loans
		Unpaid Principal Balance		Recorded Investment(1)		Without Specific Reserve		With Specific Reserve		Related Allowance			Unpaid Principal Balance		Recorded Investment(1)		Without Specific Reserve		With Specific Reserve		Related Allowance
		(dollars in thousands)																			(dollars in thousands)

Real estate:	Real estate:											Real estate:
Residential	Residential	$	266	$	267	$	267	$	—	$	—	Residential	$	259	$	259	$	259	$	0	$	0
Commercial real estate - owner occupied	Commercial real estate - owner occupied	1,598		1,515		1,515		—		—		Commercial real estate - owner occupied	1,363		1,312		1,312		0		0
Commercial real estate - non-owner occupied	Commercial real estate - non-owner occupied	1,382		1,339		—		1,339		188		Commercial real estate - non-owner occupied	6,329		6,286		5,004		1,282		165
Commercial and industrial	Commercial and industrial	186		186		186		—		—		Commercial and industrial	183		183		183		0		0
SBA loans	SBA loans	5,755		5,428		3,803		1,625		348		SBA loans	5,598		5,271		3,718		1,553		377

Total	Total	$	9,187	$	8,735	$	5,771	$	2,964	$	536	Total	$	13,732	$	13,311	$	10,476	$	2,835	$	542

(1)Includes TDRs on accrual of ~~$319~~$320 thousand.


		December 31, 2019																			December 31, 2019
						Impaired Loans													Impaired Loans
		Unpaid Principal Balance		Recorded Investment(1)		Without Specific Reserve		With Specific Reserve		Related Allowance			Unpaid Principal Balance		Recorded Investment(1)		Without Specific Reserve		With Specific Reserve		Related Allowance
		(dollars in thousands)																			(dollars in thousands)

Real estate:	Real estate:											Real estate:

Commercial real estate - owner occupied	Commercial real estate - owner occupied	$	3,132	$	3,049	$	3,049	$	—	$	—	Commercial real estate - owner occupied	$	3,132	$	3,049	$	3,049	$	0	$	0
Commercial real estate - non-owner occupied	Commercial real estate - non-owner occupied	1,411		1,368		—		1,368		215		Commercial real estate - non-owner occupied	1,411		1,368		0		1,368		215
Commercial and industrial	Commercial and industrial	229		229		229		—		—		Commercial and industrial	229		229		229		0		0
SBA loans	SBA loans	7,344		6,940		4,750		2,190		939		SBA loans	7,344		6,940		4,750		2,190		939

Total	Total	$	12,116	$	11,586	$	8,028	$	3,558	$	1,154	Total	$	12,116	$	11,586	$	8,028	$	3,558	$	1,154

(1) Includes TDRs on accrual of $321 thousand.

2224

The following tables present the average recorded investment in impaired loans, excluding PCI loans, and related interest income recognized by loan class for the periods indicated:


		Three Months Ended																							Three Months Ended
		June 30, 2020						March 31, 2020								June 30, 2019					September 30, 2020				June 30, 2020		September 30, 2019
		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized			Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
		(dollars in thousands)																							(dollars in thousands)

Real estate:	Real estate:													Real estate:
Residential	Residential	$	133	$	3	$	—	$	—	$	—	$	—	Residential	$	263	$	0	$	133	$	3	$	0	$	0
Commercial real estate - owner occupied	Commercial real estate - owner occupied	1,550		—		2,607		—		—		—		Commercial real estate - owner occupied	1,413		0		1,550		0		0		0
Commercial real estate - non-owner occupied	Commercial real estate - non-owner occupied	1,361		—		1,368		—		—		—		Commercial real estate - non-owner occupied	3,813		0		1,361		0		0		0
Commercial and industrial	Commercial and industrial	185		—		193		—		88		—		Commercial and industrial	184		0		185		0		732		0
SBA loans	SBA loans	6,074		6		6,677		7		1,552		10		SBA loans	5,350		6		6,074		6		4,179		54

Total	Total	$	9,303	$	9	$	10,845	$	7	$	1,640	$	10	Total	$	11,023	$	6	$	9,303	$	9	$	4,911	$	54


		Six Months Ended June 30,															Nine Months Ended September 30,
		2020						2019							2020				2019
		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized			Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
		(dollars in thousands)															(dollars in thousands)

Real estate:	Real estate:									Real estate:
Residential	Residential	$	133	$	3	$	—	$	—	Residential	$	131	$	3	$	0	$	0
Commercial real estate - owner occupied	Commercial real estate - owner occupied	2,078		—		—		—		Commercial real estate - owner occupied	1,855		0		0		0
Commercial real estate - non-owner occupied	Commercial real estate - non-owner occupied	1,364		—		—		—		Commercial real estate - non-owner occupied	3,018		0		0		0
Commercial and industrial	Commercial and industrial	142		—		86		—		Commercial and industrial	188		0		304		0
SBA loans	SBA loans	6,188		13		1,730		17		SBA loans	6,030		19		2,563		71

Total	Total	$	9,905	$	16	$	1,816	$	17	Total	$	11,222	$	22	$	2,867	$	71

Loan modifications resulting in TDR status generally included one or a combination of the following concessions: extensions of the maturity date, principal payment deferments or signed forbearance agreements with a payment plan. During the three months ended September 30, 2020, June 30, 2020 ~~March 31, 2020~~ and ~~June~~September 30, 2019, there were no new loan modifications resulting in TDRs. During the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, there were no new loan modifications resulting in TDRs.

During the three months ended September 30, 2020, June 30, 2020 ~~March 31, 2020~~ and ~~June~~September 30, 2019, there was 1 loan in each period totaling ~~$85~~$81 thousand, $85 thousand and ~~$95~~$92 thousand modified as a TDR for which there was a payment default within twelve months following the modification. During the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, there was 1 loan in each period totaling ~~$85~~$81 thousand and ~~$95~~$92 thousand modified as a TDR for which there was a payment default within twelve months following the modification. A loan is considered to be in payment default once it is 90 days contractually past due under the modification.

COVID-Related Loan Deferments

At ~~June~~September 30, 2020, the Company had ~~520~~12 non-PPP loans totaling $37 million on payment deferral for COVID-19 related reasons, down from $626 million ~~which included $11 million~~at June 30, 2020. Over 97% of loans ~~held~~that were granted a deferral have resumed making regular, contractually agreed-upon payments or were paid off. As a part of the CARES Act, the SBA is paying six months of principal, interest and associated fees for ~~sale,~~borrowers with ~~a 90-day principal and/or interest deferral for COVID-related reasons. No~~current SBA 7(a) loans that were disbursed prior to September 27, 2020. At September 30, 2020, the Company had 193 SBA loans with balances totaling $73 million having payments made by the SBA under that SBA debt relief program. NaN deferred payment loan of $113 thousand was reported as past due, 2 loans ~~which met the~~

~~requirement~~totaling $5 million were reported as nonaccrual and NaN are reported as troubled debt restructurings ("TDRs") under Section 4013 of the CARES Act were reported as past due loans or troubled debt restructurings ("TDRs") as of June 30, 2020. The Company currently expects that the majority of these loans will resume payments in the third quarter of 2020. Total accrued interest receivable related to these loans on deferment was $10 million with a reserve of $138 thousand at June 30, 2020. Borrowers are contractually required to resume making full payments after the deferral period ends. The Company may grant additional 90-day deferments.Act.

Loans Held for Sale

At ~~June~~September 30, 2020 and December 31, 2019, loans held for sale consisted of SBA 7(a) loans and totaled ~~$20.3~~$36.5 million and $7.7 million. The Company accounts for loans held for sale at the lower of carrying value or fair value. The fair value of loans held for sale totaled ~~$21.9~~$39.3 million and $8.4 million at ~~June~~September 30, 2020 and December 31, 2019.

~~At June 30, 2020, loans held for sale with a net carrying value of $11.0 million were modified for a 90-day principal and interest deferment under the Section 4013 of the CARES Act.~~

NOTE 4. OTHER REAL ESTATE OWNED AND OTHER FORECLOSED ASSETS

Other real estate owned and other assets ("OREO") acquired by foreclosure or deed in lieu of foreclosure are recorded at fair value less estimated selling costs at the date of foreclosure. On an ongoing basis, properties are appraised as required by market conditions and applicable regulations. At ~~June~~September 30, 2020, there was 0 other real estate owned and other foreclosed assets. In the third quarter of 2020, the Company sold all of its foreclosed assets ~~totaled $602 thousand, and resulted in net~~at a gain of $2 thousand. There was a net gain on sale of the foreclosed assets and transfer of loan collateral to foreclosed assets of ~~$153~~$2 thousand and $155 thousand included in other income in the condensed consolidated statements of income for the three and ~~six~~nine months ended ~~June~~September 30, 2020. There were no provisions and reserves for OREO recorded for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019.

NOTE 5. TRANSFERS AND SERVICING OF FINANCIAL ASSETS

The Company sells loans in the secondary market and, for certain loans, retains the servicing responsibility. The loans serviced for others are accounted for as sales and, therefore, are not included in the accompanying condensed consolidated balance sheets. Loans serviced for others totaled ~~$263.5~~$327.4 million and $278.6 million at ~~June~~September 30, 2020 and December 31, 2019. This includes SBA loans serviced for others of ~~$195.5~~$196.6 million at ~~June~~September 30, 2020 and $214.8 million at December 31, 2019 for which there is a related servicing asset of ~~$2.5~~$2.4 million and $3.2 million. In addition, the loan servicing portfolio includes construction and land development loans, commercial real estate loans and commercial & industrial loans participated with various other institutions and Main Street SPV of ~~$68.0~~$130.8 million and $63.8 million at ~~June~~September 30, 2020 and December 31, 2019 for which there is no related servicing asset.

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

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

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(dollars in thousands)
Balance, beginning of period $ 2,988 $ 3,351 $ 3,202 $ 3,186
Additions — 337 68 713
Amortization (472) (206) (754) (417)
Balance, end of period $ 2,516 $ 3,482 $ 2,516 $ 3,482

2426


	Three Months Ended September 30,		Nine Months Ended September 30,
	2020		2019		2020		2019
	(dollars in thousands)
Balance, beginning of period	$	2,516	$	3,482	$	3,202	$	3,186
Additions	111		170		179		883
Amortization	(259)		(282)		(1,013)		(699)

Balance, end of period	$	2,368	$	3,370	$	2,368	$	3,370

The fair value of the servicing asset for SBA loans is measured quarterly and was ~~$2.8~~$3.1 million and $3.2 million as of ~~June~~September 30, 2020 and December 31, 2019. The significant assumptions used in the valuation of the SBA servicing asset at ~~June~~September 30, 2020 included discount rates, ranging from ~~6.1%~~0.7% to ~~44.7%~~49.4%, and a weighted average prepayment speed assumption of ~~21.4%~~21.5%.

The following table summarizes the estimated change in the value of servicing assets as of ~~June~~September 30, 2020 given hypothetical shifts in prepayments speeds and yield assumptions:


	Change in Assumption	Change in Estimated Fair Value
		(dollars in thousands)
Prepayment speeds	+10%	$	~~(163)~~(198)
Prepayment speeds	+20%	~~(310)~~(373)
Discount rate	+1%	~~(66)~~(81)
Discount rate	+2%	~~(129)~~(158)

During the three months ended ~~June~~September 30, 2020 ~~, there were 0 SBA loans sold.~~and 2019, SBA loans sold totaled ~~$16.4~~$6.2 million and $9.7 million resulting in total gains on sale of SBA loans of ~~$1.3 million during~~$504 thousand and $528 thousand. During the ~~three~~nine months ended ~~June 30, 2019. During the six months ended June~~September 30, 2020 and 2019, SBA loans sold totaled ~~$3.4~~$9.6 million and ~~$35.0 million. During the six months ended June 30, 2020 and 2019,~~$44.7 million resulting in total gains on ~~sales~~sale of SBA loans ~~were $377~~of $881 thousand and ~~$2.2~~$2.7 million.

Net servicing (costs) fees, a component of noninterest income, represent contractually specified servicing fees reported net of the servicing asset amortization. Net servicing ~~(costs)~~ fees totaled ~~$(9)~~$228 thousand and ~~$287~~$242 thousand for the three months ended ~~June~~September 30, 2020 and 2019 including contractually specified servicing fees of ~~$463~~$487 thousand and ~~$493~~$524 thousand, offset by the amortization indicated in the table above. Net servicing fees totaled ~~$215~~$443 thousand and ~~$521~~$763 thousand for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, including contractually specified servicing fees of ~~$969 thousand~~$1.5 million and ~~$938 thousand,~~$1.5 million, offset by the amortization indicated in the table above.

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

NOTE 6. GOODWILL AND INTANGIBLE ASSETS

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

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

Three Months Ended Six Months Ended June 30,
June 30, 2020 June 30, 2019 2020 2019
(dollars in thousands)
Core deposit intangible:
Gross balance, beginning of period $ 6,908 $ 6,908 $ 6,908 $ 6,908
Additions — — — —
Gross balance, end of period $ 6,908 $ 6,908 $ 6,908 $ 6,908
Accumulated amortization:
Balance, beginning of period (1,373) (528) (1,180) (332)
Amortization (193) (197) (386) (393)
Balance, end of period $ (1,566) $ (725) $ (1,566) $ (725)
Net core deposit intangible, end of period $ 5,342 $ 6,183 $ 5,342 $ 6,183


	Three Months Ended		Nine Months Ended September 30,
	September 30, 2020		September 30, 2019		2020		2019
	(dollars in thousands)
Core deposit intangible:
Gross balance, beginning of period	$	6,908	$	6,908	$	6,908	$	6,908
Additions	0		0		0		0
Gross balance, end of period	$	6,908	$	6,908	$	6,908	$	6,908
Accumulated amortization:
Balance, beginning of period	(1,566)		(725)		(1,180)		(332)
Amortization	(193)		(197)		(579)		(590)

Balance, end of period	$	(1,759)	$	(922)	$	(1,759)	$	(922)
Net core deposit intangible, end of period	$	5,149	$	5,986	$	5,149	$	5,986

The following table shows the estimated amortization expense for CDI during the next five fiscal years:


Year Ending December 31,	Year Ending December 31,	(dollars in thousands)		Year Ending December 31,	(dollars in thousands)
Remainder of 2020	Remainder of 2020	$	386	Remainder of 2020	$	193
2021	2021	753		2021	753
2022	2022	732		2022	732
2023	2023	707		2023	707
2024	2024	678		2024	678
Thereafter	Thereafter	2,086		Thereafter	2,086
		$	5,342		$	5,149

NOTE 7. DEPOSITS

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

Brokered non-maturity deposits totaled ~~$25.0~~$118.7 million and $48.1 million at ~~June~~September 30, 2020 and December 31, 2019. Brokered time deposits totaled ~~$115.5~~$101.3 million and $50.4 million at ~~June~~September 30, 2020 and December 31, 2019.

Time deposits that exceeded the FDIC insurance limit of $250,000 amounted to ~~$37.9~~$30.6 million and $61.7 million as of ~~June~~September 30, 2020 and December 31, 2019. The Company participates in a state public deposits program that allows it to receive deposits from the state or from political subdivisions within the state in amounts that would not be covered by the FDIC. This program provides a stable source of funding to the Company. Total collateralized deposits, including the deposits of State of California and other public agencies, were ~~$60.4~~$46.5 million at ~~June~~September 30, 2020 and were collateralized by letters of credit issued by the FHLB under the Bank's secured line of credit with the FHLB. See Note 8 –Borrowing Arrangements for additional information regarding the FHLB secured line of credit.

NOTE 8. BORROWING ARRANGEMENTS

Federal Home Loan Bank Secured Line of Credit

At ~~June~~September 30, 2020, the Bank had a secured line of credit of ~~$424.3~~$407.1 million from the FHLB, of which ~~$203.3~~$186.1 million was available. This secured borrowing arrangement is collateralized under ~~the~~a blanket lien and is subject to the Bank providing adequate collateral and continued compliance with the Advances and Security Agreement and other eligibility requirements established by the FHLB. At ~~June~~September 30, 2020, the Bank had pledged ~~$1.23~~$1.64 billion of loans under athe blanket lien, including PPP loans, of which ~~$834.4~~$860.3 million was considered as eligible collateral. PPP loans are not considered eligible collateral under this borrowing agreement.

At ~~June~~September 30, 2020, the Bank also participated in the FHLB San Francisco's new Recovery Advance loan program for $10 million at 0 percent interest ~~at June 30, 2020~~ with maturity dates in November 2020 and May 2021. The following table shows the interest rates and maturity dates of FHLB advances at periods indicated:


		June 30, 2020										December 31, 2019									September 30, 2020				December 31, 2019
		Balance		Rate		Maturity Date	Balance		Rate			Maturity Date		Balance		Rate		Maturity Date	Balance		Rate			Maturity Date
Advances:	Advances:	(dollars in thousands)																				Advances:		(dollars in thousands)

Recovery advance	Recovery advance	$	5,000	—	%	11/19/2020	$	—	—	%		—	Recovery advance	$	5,000	0	%	11/19/2020	$	—	—		%	—
Recovery advance	Recovery advance	5,000		—	%	5/19/2021	—		—	%		—	Recovery advance	5,000		0	%	5/19/2021	—		—		%	—
Term and fixed-rate advance	Term and fixed-rate advance	50,000		0.19	%	8/27/2020	60,000		1.72	%		3/20/2020	Term and fixed-rate advance	30,000		0.22	%	11/27/2020	60,000		1.72		%	3/20/2020
Term and fixed-rate advance	Term and fixed-rate advance	30,000		0.22	%	11/27/2020	—		—	%		—	Term and fixed-rate advance	50,000		0.19	%	2/26/2021	—		—		%	—
Term and fixed-rate advance	Term and fixed-rate advance	30,000		0.25	%	5/26/2021	—		—	%		—	Term and fixed-rate advance	30,000		0.25	%	5/26/2021	—		—		%	—
Term and fixed-rate advance	Term and fixed-rate advance	30,000		1.93	%	6/11/2021	30,000		1.93	%	6/11/2021		Term and fixed-rate advance	30,000		1.93	%	6/11/2021	30,000		1.93		%	6/11/2021
		$	150,000	0.54	%		$	90,000	1.79	%				$	150,000	0.54	%		$	90,000	1.79		%

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

The average outstanding balance of total FHLB borrowings was ~~$145.4~~$152.7 million and ~~$75.9~~$48.3 million with an average interest rate of 0.54% and ~~2.50%~~2.08% for the three months ended ~~June~~September 30, 2020 and 2019. The average balance of total FHLB borrowings was ~~$117.6~~$129.4 million and ~~$55.6~~$53.1 million with an average interest rate of ~~0.98%~~0.80% and ~~2.53%~~2.39% for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019.

Federal Reserve Bank Secured Line of Credit

At ~~June~~September 30, 2020, the Bank had a secured line of credit of ~~$127.0~~$138.2 million from the Federal Reserve Bank. During the third quarter of 2019, the Bank expanded the existing secured borrowing capacity with the Federal Reserve through the Borrower-in-Custody ("BIC") program. At ~~June~~September 30, 2020, the Bank had pledged qualifying loans with an unpaid principal balance of ~~$212.8~~$203.1 million and securities held-to-maturity with a carrying value of $1.7 million as collateral for this line. Borrowings under this BIC program are overnight advances with interest chargeable at Federal Reserve discount window ("Primary Credit") borrowing rate. There were 0 borrowings under this credit facility at or during the three and ~~six~~nine months ended ~~June~~September 30, 2020 and there were no0 borrowings at December 31, 2019.

Paycheck Protection Program Liquidity Facility

On April 14, 2020, the Bank was approved by the Federal Reserve to access its SBA Paycheck Protection Program Liquidity Facility ("PPPLF") through the discount window. The PPPLF enables the Company to fund PPP loans without taking on additional liquidity or funding risks by providing non-recourse loans collateralized by the PPP loans. Borrowings under the PPPLF have a fixed-rate of 0.35%, with a term that matches the underlying loans pledged of two years. ~~The~~At September 30, 2020, the Bank ~~pledged $173.7~~had $253.1 million ~~of PPP loans as eligible collateral~~in borrowings under the PPPLF ~~borrowing arrangement at June 30, 2020.~~ which were collateralized by PPP loans.

The average outstanding borrowings were ~~$128.0~~$240.6 million and ~~$63.8~~$123.1 million during the three and ~~six~~nine months ended ~~June~~September 30, 2020.

Federal Funds Unsecured Lines of Credit

The Bank has established unsecured overnight borrowing arrangements for an aggregate amount of $125.0 million, subject to availability, with 5 of its correspondent banks. In general, interest rates on these lines approximate the federal funds target rate. There were 0 borrowings under these credit facilities at or during the three and ~~six~~nine months ended ~~June~~September 30, 2020 and there were 0 borrowings at December 31, ~~2019. The average outstanding borrowings were $1.5 million and $1.3 million with an average interest rate of 2.7% for the three and six months ended June 30,~~ 2019.

Senior Secured Notes

The holding company has a senior secured revolving line of credit for $25 million, which matures on March 22, 2022. At ~~June~~September 30, 2020, the outstanding balance under this secured line of credit totaled ~~$6.5~~$4.4 million with a floating interest rate equal to Wall Street Journal Prime, or 3.25%. At December 31, 2019, the outstanding balance totaled $9.6 million with an interest rate of 5.00%. The average outstanding borrowings under this facility totaled ~~$6.8~~$4.6 million and ~~$12.4~~$12.3 million with an average interest rate of ~~3.39%~~3.36% and ~~5.89%~~5.69% for the three months ended ~~June~~September 30, 2020 and 2019, respectively. The average outstanding borrowings under this facility totaled ~~$7.4~~$6.5 million and $12.2 million with an average interest rate of ~~4.03%~~3.87% and ~~5.89%~~5.82% for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019. At ~~June~~September 30, 2020, the Company was in compliance with all loan covenants on the facility and the remaining available credit was ~~$18.5~~$20.6 million. One of our executives is also a member of the lending bank's board of directors.

NOTE 9. INCOME TAXES

The Company accounts for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the amounts for financial reporting purposes and tax basis of its assets and liabilities. Deferred tax assets

decreased by approximately ~~$334~~$68 thousand during the ~~six~~nine months ended ~~June~~September 30, 2020 as a result of changes to temporary ~~differences.~~differences and the reversal of interest accrued related to unrecognized tax benefits. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary. Based on this analysis, management has determined that a valuation allowance for deferred tax assets was not required at ~~June~~September 30, 2020.

For the three months ended ~~June~~September 30, 2020 and 2019, income tax expense was ~~$2.4~~$3.3 million and ~~$3.2 million, resulting in an effective income tax rate of 29.8% and 31.9%. For the six months ended June 30, 2020 and 2019, income tax expense was $4.3 million and $6.4~~$3.3 million, resulting in an effective income tax rate of 29.3% and ~~31.8%~~28.9%. For the nine months ended September 30, 2020 and 2019, income tax expense was $7.5 million and $9.7 million, resulting in an effective income tax rate of 29.3% and 30.8%. Our effective tax

rate ~~is close to~~varies from the statutory rate of 29.6% during the three and ~~six~~nine months ended ~~June~~September 30, 2020 and ~~higher than the statutory rate during the three and six months ended June~~September 30, 2019 due to the tax effect of stock-based compensation.

The Company is subject to federal income and California franchise tax. At ~~June~~September 30, 2020, the federal statute of limitations for the assessment of income tax is closed for all tax years up to and including 2015. The California statute of limitations for the assessment of franchise tax is closed for all years up to and including 2014. The Company is currently not under examination in any taxing jurisdiction.

~~The total amount~~There were 0 unrecognized tax benefits at September 30, 2020 due to the expiration of the statute of limitations for the assessment of taxes. There were $113 thousand of unrecognized tax benefits ~~was $113 thousand~~ at ~~June 30, 2020 and~~ December 31, 2019, primarily comprised of unrecognized tax benefits from tax positions taken in prior years. The total amount of tax benefits that, if recognized, would favorably impact the effective tax rate was $0 at ~~June~~September 30, 2020 and December 31, 2019. ~~We expect the total amount of~~

There were 0 interest and penalties related to unrecognized tax benefits ~~to decrease by $113 thousand within the next six months due to the expiration of the statute of limitations for the assessment of taxes.~~

in income tax expense at September 30, 2020. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense, and had

accrued ~~$23 thousand and~~ $19 thousand of interest at ~~June 30, 2020 and~~ December 31, ~~2019, respectively. No~~2019. NaN amounts for penalties were accrued at ~~June~~September 30, 2020 and December 31, 2019.

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

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

NOTE 10. COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of our customers. These financial commitments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk not recognized in the condensed consolidated financial statements.

The Company's exposure to loan loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as the Company does for loans reflected in our condensed consolidated financial statements.

As of ~~June~~September 30, 2020 and December 31, 2019, the Company had the following outstanding financial commitments whose contractual amounts represent credit risk:


		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019
		(dollars in thousands)							(dollars in thousands)
Commitments to extend credit	Commitments to extend credit	$	386,509	$	376,879	Commitments to extend credit	$	383,666	$	376,879
Standby letters of credit	Standby letters of credit	6,905		7,616		Standby letters of credit	7,210		7,616
Commitments to contribute capital to low income housing projects	Commitments to contribute capital to low income housing projects	1,387		1,738		Commitments to contribute capital to low income housing projects	2,234		1,738
Commitments to contribute capital to other CRA equity investments	Commitments to contribute capital to other CRA equity investments	185		236		Commitments to contribute capital to other CRA equity investments	61		236
Total	Total	$	394,986	$	386,469	Total	$	393,171	$	386,469

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management’s credit evaluation of the customer. The majority of the commitments to extend credit and standby letters of credit are secured by real estate. The Company did not recognize any provision ~~for unfunded loan commitments was $300 thousand for the three and six months ended June 30, 2020. There were 0 provisions~~ for unfunded loan commitments for the three ~~and six~~ months ended ~~June~~September 30, 2020 and 2019. The provision for unfunded loan commitments is included in "other expense" in the condensed consolidated statements of income and was $300 thousand for the nine months ended September 30, 2020; there was 0 provision for unfunded loan commitments recognized for the nine months ended September 30, 2019. The reserve for unfunded commitments was $1.5 million and $1.2 million at ~~June~~September 30, 2020 and December 31, 2019. The reserve for unfunded commitments is included in "other liabilities" in our condensed consolidated balance sheets.

The Company committed to invest in ~~a partnership~~2 partnerships that sponsors affordable housing projects utilizing the Low Income Housing Tax Credit ("LIHTC") pursuant to Section 42 of the Internal Revenue Code. The purpose of this investment is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing projects, and to assist in achieving goals associated with the Community Reinvestment Act ("CRA"). Capital contributions are called for up to an amount specified in the partnership agreement. In addition, the Company invested in other CRA investments such as the

Small Business Investment Company ("SBIC") program. At ~~June~~September 30, 2020 and December 31, 2019, the Company had unfunded commitments to contribute capital to LIHTC investments and other CRA investments totaling ~~$1.6~~$2.3 million and $2.0 million.

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

NOTE 11. RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company may provide loans to certain executive officers and directors and the companies with which they are associated. There were no related party loans for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019. Deposits from certain officers and directors and the companies with which they are associated totaled ~~$28.2~~$26.0 million and $35.0 million at ~~June~~September 30, 2020 and December 31, 2019.

The holding company has a $25.0 million senior secured facility and a $20.0 million federal funds unsecured line of credit (refer to Note 8 - Borrowing Arrangements) with a correspondent bank in which one of the Company's executives is also a member of the correspondent bank’s Board of Directors. At ~~June~~September 30, 2020 and December 31, 2019, the outstanding balance of the senior secured facility was ~~$6.5~~$4.4 million and $9.6 million. There were 0 borrowings under the unsecured line of credit at ~~June~~September 30, 2020 and December 31, 2019. The Company maintains a correspondent deposit relationship with the correspondent bank, and had deposits of ~~$2.5~~$2.2 million and $1.4 million at ~~June~~September 30, 2020 and December 31, 2019. The Company has invested in stock of the correspondent bank which totaled $102 thousand at ~~June~~September 30, 2020 and December 31,

2019. In addition, the Company has loan participation agreements where the Company may participate out a portion of loans to the correspondent bank. The total participated loan balance was ~~$22.9~~$20.0 million and $16.3 million at ~~June~~September 30, 2020 and December 31, 2019.

NOTE 12. STOCK-BASED COMPENSATION PLANS

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

The Company recognized stock-based compensation expense of ~~$518~~$525 thousand and ~~$567~~$527 thousand for the three months ended ~~June~~September 30, 2020 and 2019. For the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, the Company recognized stock-based compensation expense of ~~$1.0~~$1.5 million ~~and $969 thousand.~~for both periods.

A summary of activity in our outstanding stock options during the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 is as follows:


		Three Months Ended June 30,											Three Months Ended September 30,
		2020				2019						2020			2019
		Shares	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price			Shares	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
Outstanding, beginning of period	Outstanding, beginning of period	134,171	$	10.16	226,360	$	10.11	Outstanding, beginning of period	131,424	$	10.33	141,089	$	10.18

Exercised	Exercised	(7,032)	9.18		(85,271)	10.00		Exercised	(8,686)	4.86		(2,512)	11.60
Granted	Granted	5,000	14.42		—	—		Granted	0	0		0	0
Forfeited	Forfeited	(715)	17.83		—	—		Forfeited	(3,576)	18.04		0	0
Outstanding, end of period	Outstanding, end of period	131,424	$	10.33	141,089	$	10.18	Outstanding, end of period	119,162	$	10.50	138,577	$	10.16
Options exercisable	Options exercisable	126,424	$	10.17	141,089	$	10.18	Options exercisable	114,162	$	10.33	138,577	$	10.16


		Six Months Ended June 30,																							Nine Months Ended September 30,
		2020										2019												2020			2019
		Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value		Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value			Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value		Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
		(dollars in thousands, except share and per share data)																							(dollars in thousands, except share and per share data)
Outstanding, beginning of period	Outstanding, beginning of period	137,531	$	10.20				383,212	$	10.44				Outstanding, beginning of period	137,531	$	10.20				383,212	$	10.44

Exercised	Exercised	(8,962)	9.51					(241,737)	10.58					Exercised	(17,648)	7.22					(244,249)	10.60
Granted	Granted	5,000	14.42					—	—					Granted	5,000	14.42					0	0
Forfeited	Forfeited	(2,145)	14.40					(386)	12.94					Forfeited	(5,721)	16.67					(386)	12.94
Outstanding, end of period	Outstanding, end of period	131,424	$	10.33	3.5 years	$	808	141,089	$	10.18	4.4 years	$	1,772	Outstanding, end of period	119,162	$	10.50	3.5 years	$	359	138,577	$	10.16	4.2 years	$	1,547
Options exercisable	Options exercisable	126,424	$	10.17	3.2 years	$	798	141,089	$	10.18	4.4 years	$	1,772	Options exercisable	114,162	$	10.33	3.3 years	$	359	138,577	$	10.16	4.2 years	$	1,547

As of ~~June~~September 30, 2020, there was ~~$11~~$10 thousand unrecognized compensation cost related to the outstanding stock options. The intrinsic value of options exercised during the three months ended ~~June~~September 30, 2020 and 2019 was approximately ~~$34~~$83 thousand and ~~$1.0 million.~~$25 thousand. The intrinsic value of options exercised during the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 was approximately ~~$62~~$145 thousand and $2.7 million.

A summary of activity for outstanding restricted shares for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 is as follows:


		Three Months Ended June 30,											Three Months Ended September 30,
		2020				2019						2020			2019
		Shares	Weighted Average Grant-Date Fair Value		Shares	Weighted Average Grant-Date Fair Value			Shares	Weighted Average Grant-Date Fair Value		Shares	Weighted Average Grant-Date Fair Value
Nonvested, beginning of period	Nonvested, beginning of period	103,666	$	24.30	119,226	$	23.10	Nonvested, beginning of period	128,661	$	21.79	128,053	$	22.91
Granted	Granted	30,156	13.26		21,413	21.50		Granted	100	16.27		972	22.56
Vested	Vested	(4,921)	22.35		(6,274)	22.38		Vested	(1,146)	25.24		(4,537)	26.41
Forfeited	Forfeited	(240)	21.53		(6,312)	22.21		Forfeited	(240)	23.36		(843)	21.43
Nonvested, end of period	Nonvested, end of period	128,661	$	21.79	128,053	$	22.91	Nonvested, end of period	127,375	$	21.75	123,645	$	22.79

Six Months Ended June 30,
2020 2019
Shares Weighted Average
Grant-Date
Fair Value Shares Weighted Average
Grant-Date
Fair Value
Nonvested, beginning of period 113,635 $ 22.50 84,120 $ 23.90
Granted 102,267 21.62 110,233 22.19
Vested (83,925) 22.33 (59,475) 23.09
Forfeited (3,316) 27.36 (6,825) 21.88
Nonvested, end of period 128,661 $ 21.79 128,053 $ 22.91


	Nine Months Ended September 30,
	2020			2019
	Shares	Weighted Average Grant-Date Fair Value		Shares	Weighted Average Grant-Date Fair Value
Nonvested, beginning of period	113,635	$	22.50	84,120	$	23.90
Granted	102,367	21.62		111,205	22.19
Vested	(85,071)	22.37		(64,012)	23.32
Forfeited	(3,556)	27.09		(7,668)	21.83
Nonvested, end of period	127,375	$	21.75	123,645	$	22.79

As of ~~June~~September 30, 2020, there was approximately ~~$2.0~~$1.4 million of total unrecognized compensation cost related to the restricted shares that will be recognized over the weighted-average period of 1.9 years. The value of restricted shares that vested was approximately ~~$110~~$29 thousand and ~~$172~~$120 thousand during the three months ended ~~June~~September 30, 2020 and 2019. The value of restricted shares that vested was approximately $1.9 million and ~~$1.4~~$1.5 million for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019.

NOTE 13. EARNINGS PER SHARE

Earnings per share (“EPS”) ~~are~~is computed on a basic and diluted basis. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Basic shares outstanding exclude unvested shares of restricted stock and stock options. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that shares in our earnings. The Company's unvested grants of restricted stock contain non-forfeitable rights to dividends, which are required to be treated as participating securities and included in the computation of earnings per share.

The following is a reconciliation of net income and shares outstanding used in the computation of basic and diluted EPS:


		Three Months Ended												Six Months Ended June 30,					Three Months Ended					Nine Months Ended September 30,
		June 30, 2020		March 31, 2020		June 30, 2019		2020		2019			September 30, 2020		June 30, 2020		September 30, 2019		2020			2019
Numerator for basic earnings per share:	Numerator for basic earnings per share:	(dollars in thousands, except share and per share data)																			Numerator for basic earnings per share:	(dollars in thousands, except share and per share data)
Net income	Net income	$	5,730	$	4,546	$	6,811	$	10,276	$	13,819	Net income	$	7,881	$	5,730	$	8,071	$	18,157		$	21,890
Less: dividends and net income allocated to participating securities	Less: dividends and net income allocated to participating securities	(60)		(39)		(76)		(99)		(137)		Less: dividends and net income allocated to participating securities	(86)		(60)		(86)		(182)			(222)
Net income available to common shareholders	Net income available to common shareholders	$	5,670	$	4,507	$	6,735	$	10,177	$	13,682	Net income available to common shareholders	$	7,795	$	5,670	$	7,985	$	17,975		$	21,668

Denominator for basic earnings per share:	Denominator for basic earnings per share:											Denominator for basic earnings per share:
Basic weighted average common shares outstanding during the period	Basic weighted average common shares outstanding during the period	11,564,965		11,558,039		11,581,889		11,561,486		11,616,223		Basic weighted average common shares outstanding during the period	11,573,138		11,564,965		11,584,955		11,565,398			11,605,687

Denominator for diluted earnings per share:	Denominator for diluted earnings per share:											Denominator for diluted earnings per share:
Basic weighted average common shares outstanding during the period	Basic weighted average common shares outstanding during the period	11,564,965		11,558,039		11,581,889		11,561,486		11,616,223		Basic weighted average common shares outstanding during the period	11,573,138		11,564,965		11,584,955		11,565,398			11,605,687
Net effect of dilutive stock options	Net effect of dilutive stock options	41,315		74,011		93,168		57,663		125,687		Net effect of dilutive stock options	39,132		41,315		74,191		51,441			108,333
Diluted weighted average common shares	Diluted weighted average common shares	11,606,280		11,632,050		11,675,057		11,619,149		11,741,910		Diluted weighted average common shares	11,612,270		11,606,280		11,659,146		11,616,839			11,714,020

Net income per common share:	Net income per common share:											Net income per common share:
Basic	Basic	$	0.49	$	0.39	$	0.58	$	0.88	$	1.18	Basic	$	0.67	$	0.49	$	0.69	$	1.55		$	1.87
Diluted	Diluted	$	0.49	$	0.39	$	0.58	$	0.88	$	1.17	Diluted	$	0.67	$	0.49	$	0.68	$	1.55		$	1.85

NOTE 14. FAIR VALUE MEASUREMENTS

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

Fair value of financial instruments

Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial

instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a significant

effect on fair value estimates and have not been considered in many of the estimates. The methods and assumptions used to

estimate the fair value of certain financial instruments are described below:

Cash and ~~Cash Equivalents~~Due from Banks. The carrying amounts of cash and short-term instruments approximate fair values

because of the liquidity of these instruments.

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

nature of these deposits.

Loans. The fair value of loans, which is based on an exit price notion, is generally determined using an income based approach based on discounted cash flow analysis. This approach utilizes the contractual maturity of the loans and

market indications of interest rates, prepayment speeds, defaults and credit risk in determining fair value. For impaired loans,

an asset-based approach is applied to determine the estimated fair values of the underlying collateral. This approach utilizes

the estimated net sales proceeds to determine the fair value of the loans when deemed appropriate. The implied sales

proceeds value provides a better indication of value than using an income-based approach as these loans are not performing

or exhibit strong signs indicative of non-performance.

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

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

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

Servicing Asset. The fair value of servicing assets is based, in part, by third-party valuations that project estimated

future cash inflows that include servicing fees and outflows that include market rates for costs of servicing.

Deposits. The fair values disclosed for demand deposits, including interest and non-interest demand accounts,

savings, and certain types of money market accounts are, by definition based on carrying value. Fair value for fixed-rate

certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered

on certificates to a schedule of aggregate expected monthly maturities on time deposits. Early withdrawal of fixed-rate

certificates of deposit is not expected to be significant.

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

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

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

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

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

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


			June 30, 2020						December 31, 2019									September 30, 2020				December 31, 2019
		Fair Value Hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value			Fair Value Hierarchy	Carrying Amount		Fair Value			Carrying Amount		Fair Value
Financial Assets:	Financial Assets:		(dollars in thousands)														Financial Assets:			(dollars in thousands)
Cash and cash equivalents	Cash and cash equivalents	Level 1	$	217,829	$	217,829	$	161,801	$	161,801	Cash and cash equivalents	Level 1	$	181,536	$	181,536		$	161,801	$	161,801
Securities available-for-sale	Securities available-for-sale	Level 2	36,783		36,783		26,653		26,653		Securities available-for-sale	Level 2	37,999		37,999			26,653		26,653
Securities held-to-maturity	Securities held-to-maturity	Level 2	1,691		1,809		5,056		5,077		Securities held-to-maturity	Level 2	1,680		1,801			5,056		5,077
Equity securities											Equity securities	Level 1	2,792		2,792			2,694		2,694
Loans held for sale											Loans held for sale	Level 2	36,474		39,271			7,659		8,420
Loan held for investment, net											Loan held for investment, net	Level 3	1,866,196		1,906,039			1,361,153		1,393,282
Restricted stock investments, at cost											Restricted stock investments, at cost	Level 2	12,999		12,999			12,986		12,986
Servicing asset											Servicing asset	Level 3	2,368		3,063			3,202		3,246
Accrued interest receivable											Accrued interest receivable	Level 2	11,500		11,500			5,451		5,451

Financial Liabilities:											Financial Liabilities:
Deposits											Deposits	Level 2	$	1,559,912	$	1,561,061		$	1,313,693	$	1,316,287
Borrowings											Borrowings	Level 2	150,000		150,336			90,000		91,029
PPP Liquidity Facility											PPP Liquidity Facility	Level 2	253,140		253,245			0		0
Senior secured notes											Senior secured notes	Level 2	4,400		4,400			9,600		9,600
Accrued interest payable											Accrued interest payable	Level 2	418		418			203		203

3336

Equity securities Level 1 2,782 2,782 2,694 2,694
Loans held for sale Level 2 20,326 21,859 7,659 8,420
Loan held for investment, net Level 3 1,813,797 1,860,925 1,361,153 1,393,282
Restricted stock investments, at cost Level 2 12,999 12,999 12,986 12,986
Servicing asset Level 3 2,516 2,756 3,202 3,246
Accrued interest receivable Level 2 13,809 13,809 5,451 5,451
Financial Liabilities:
Deposits Level 2 $ 1,604,997 $ 1,606,651 $ 1,313,693 $ 1,316,287
Borrowings Level 2 150,000 150,409 90,000 91,029
PPP Liquidity Facility Level 2 179,125 179,101 — —
Senior secured notes Level 2 6,500 6,500 9,600 9,600
Accrued interest payable Level 2 274 274 203 203

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 ~~June~~September 30, 2020 and December 31, 2019:


		Recurring Fair Value Measurements													Recurring Fair Value Measurements
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
June 30, 2020:		(dollars in thousands)
September 30, 2020:										September 30, 2020:	(dollars in thousands)
Securities available-for-sale:	Securities available-for-sale:									Securities available-for-sale:
U.S. Government and agency securities	U.S. Government and agency securities	$	—	$	3,000	$	—	$	3,000	U.S. Government and agency securities	$	0	$	2,706	$	0	$	2,706
Mortgage-backed securities	Mortgage-backed securities	—		6,830		—		6,830		Mortgage-backed securities	0		6,157		0		6,157
Collateralized mortgage obligations	Collateralized mortgage obligations	—		18,610		—		18,610		Collateralized mortgage obligations	0		20,908		0		20,908
SBA Pools	SBA Pools	—		8,343		—		8,343		SBA Pools	0		8,228		0		8,228
Securities available-for-sale	Securities available-for-sale	$	—	$	36,783	$	—	$	36,783	Securities available-for-sale	$	0	$	37,999	$	0	$	37,999

Equity securities:	Equity securities:									Equity securities:
Mutual fund investment	Mutual fund investment	$	2,782	$	—	$	—	$	2,782	Mutual fund investment	$	2,792	$	0	$	0	$	2,792

December 31, 2019:	December 31, 2019:									December 31, 2019:
Securities available-for-sale:	Securities available-for-sale:									Securities available-for-sale:
Mortgage-backed securities	Mortgage-backed securities	$	—	$	7,431	$	—	$	7,431	Mortgage-backed securities	$	0	$	7,431	$	0	$	7,431
Collateralized mortgage obligations	Collateralized mortgage obligations	—		10,598		—		10,598		Collateralized mortgage obligations	0		10,598		0		10,598
SBA Pools	SBA Pools	—		8,624		—		8,624		SBA Pools	0		8,624		0		8,624
Securities available-for-sale	Securities available-for-sale	$	—	$	26,653	$	—	$	26,653	Securities available-for-sale	$	0	$	26,653	$	0	$	26,653

Equity securities:	Equity securities:									Equity securities:
Mutual fund investment	Mutual fund investment	$	2,694	$	—	$	—	$	2,694	Mutual fund investment	$	2,694	$	0	$	0	$	2,694

Nonrecurring fair value measurements

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

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

Nonrecurring Fair Value Measurements
Level 1 Level 2 Level 3 Total
June 30, 2020: (dollars in thousands)
Impaired loans $ — $ — $ 2,428 $ 2,428
Other real estate owned and others (OREO) — — 602 602
December 31, 2019:
Impaired loans $ — $ — $ 3,558 $ 3,558
Other real estate owned and others (OREO) — — — —


	Nonrecurring Fair Value Measurements
	Level 1		Level 2		Level 3		Total
September 30, 2020:	(dollars in thousands)
Impaired loans	$	0	$	0	$	2,293	$	2,293


December 31, 2019:
Impaired loans	$	0	$	0	$	3,558	$	3,558

The majority of the impaired loans are considered collateral-dependent loans or are supported by a SBA guaranty. The collateral-dependent impaired loans were written down to the fair value of their underlying collateral less costs to sell of ~~$2.4~~$2.3 million and $3.6 million at ~~June~~September 30, 2020 and December 31, 2019, by establishing specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans. The Company generally utilized selling costs of 10% of appraised values for nonrecurring fair value measurements related to collateral-dependent impaired loans during the three and ~~six~~nine months ended ~~June~~September 30, 2020. The fair value adjustments (which include charge-offs, net of recoveries and changes in specific reserves) resulted in ~~gains of $59~~$93 thousand in losses and ~~$118~~ $25

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

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

NOTE 15. REVENUE RECOGNITION

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

The following is a summary of our noninterest income in-scope and not in-scope of Topic 606:

Three Months Ended Six Months Ended June 30,
June 30, 2020 June 30, 2019 2020 2019
(dollars in thousands)
Noninterest income, in-scope:
Service charges and fees on deposit accounts $ 447 $ 564 $ 1,002 $ 1,104
Other income 182 45 223 87
Total noninterest income, in-scope 629 609 1,225 1,191


		Three Months Ended						Six Months Ended June 30,							Three Months Ended				Nine Months Ended September 30,
		June 30, 2020		June 30, 2019		2020		2019			September 30, 2020		September 30, 2019		2020		2019
											(dollars in thousands)
Noninterest income, in-scope:										Noninterest income, in-scope:
Service charges and fees on deposit accounts										Service charges and fees on deposit accounts	$	495	$	475	$	1,497	$	1,579
Other income										Other income	45		46		268		133
Total noninterest income, in-scope										Total noninterest income, in-scope	540		521		1,765		1,712
Noninterest income, not in-scope:	Noninterest income, not in-scope:									Noninterest income, not in-scope:
Gain on sale of loans	Gain on sale of loans	—		1,271		377		2,199		Gain on sale of loans	990		528		1,367		2,727
Net servicing (costs) fees		(9)		287		215		521
Net servicing fees										Net servicing fees	228		242		443		763

Other income	Other income	435		155		653		533		Other income	185		382		838		915
Total noninterest income, not in-scope	Total noninterest income, not in-scope	426		1,713		1,245		3,253		Total noninterest income, not in-scope	1,403		1,152		2,648		4,405
Total noninterest income	Total noninterest income	$	1,055	$	2,322	$	2,470	$	4,444	Total noninterest income	$	1,943	$	1,673	$	4,413	$	6,117

NOTE 16. EQUITY

Dividends

During the three months ended ~~June~~September 30, 2020 and 2019, total quarterly cash dividends declared were $0.25 and $0.20 per share and total cash dividends paid were $2.9 million and $2.3 million. During the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, total quarterly cash dividends declared were ~~$0.50~~$0.75 and ~~$0.40~~$0.60 per share and total cash dividends paid were ~~$5.8~~$8.8 million and ~~$4.7~~$7.0 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, or approximately 10%, of our then outstanding shares (the "repurchase plan"). The repurchase plan permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18. The repurchase plan may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of tentative investment opportunities, liquidity, and other factors management deems appropriate. These factors may also affect the timing and amount of share repurchases. The repurchase plan does not obligate us to purchase any particular number of shares.

On March 17, 2020, the Company suspended the stock repurchase plan to allow the Company to preserve capital and provide additional liquidity during the COVID-19 pandemic to meet the credit needs of the Company’s customers, as well as support small businesses and the local economies served by the Company through the Bank's lending and other important services.plan. There were no0 repurchases of common stock during the three months ended ~~June~~September 30, 2020, compared to ~~12,824~~87,500 shares of the Company's common stock repurchased at an average price of ~~$21.30~~$21.84 per share and a total cost of ~~$272 thousand~~$1.9 million during the three months ended ~~June~~September 30, 2019. During the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, the Company repurchased 38,411 and ~~328,770~~416,270 shares of the Company's common stock at an average price of $22.34 and ~~$21.54~~$21.60 and a total cost of $858 thousand and ~~$7.1~~$9.0 million. Since the plan was announced, the Company has repurchased a total of 504,511 shares at an average price of $21.70 per share. The remaining number of shares authorized to be repurchased under this plan iswas 695,489 shares at ~~June~~September 30, 2020.

NOTE 17. REGULATORY CAPITAL

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

At ~~June~~September 30, 2020, the Company qualified for treatment under the Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) and, therefore, is not subject to consolidated capital rules at the bank holding company level. The Bank has also opted into the Community Bank Leverage Ratio ("CBLR") framework, beginning with the Call Report filed for the first quarter of 2020. At ~~June~~September 30, 2020, the Bank's CBLR ratio was ~~10.31%~~10.29% which exceeded all regulatory capital requirements under the CBLR framework and the Bank was considered to be ‘‘well-capitalized.’’

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

•A leverage ratio of greater than 9%;

•Total consolidated assets of less than $10 billion;

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

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

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

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

NOTE 18. SUBSEQUENT EVENTS

On ~~August 6,~~November 5, 2020, the Company declared a $0.25 cash dividend payable on ~~September 3,~~December 28, 2020 to shareholders of

record as of ~~August 20,~~December 14, 2020.

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

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

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

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

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

•Compression of our net interest margin.

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

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

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

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

Overview

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

Recent Developments

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

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

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

•On May 7, 2020, California Governor Gavin Newsom began modifying the "stay at home" order and released updated industry guidance including retail, manufacturing and logistics to begin reopening with modifications that reduce risk and establish a safer environment for workers and customers.

•~~On June 30, 2020, Governor Gavin Newsom issued an executive order extending authorization for local governments to halt evictions for renters impacted by the COVID-19 pandemic, through September 30.~~

The ongoing COVID-19 ~~national health emergency~~pandemic has caused serious disruptions in the U.S. economy and financial markets, and ~~has had an adverse effect on our business, financial condition and results of operations.Entire~~entire industries within our loan portfolio, such as hospitality and restaurants, have been impacted due to quarantines and

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

~~The CARES Act provides for economic relief including, but not limited to, the following:~~

•Section 4013 of the CARES Act, entitled "Temporary Relief From Troubled Debt Restructurings," provides banks with the option to suspend the accounting requirements within ASC 310-40 for loan modifications related

to COVID-19 that would otherwise qualify as TDRs. Modifications of loans eligible under Section 4013 must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020.

•The initial $349 billion Paycheck Protection Program ("PPP") was supplemented in late April 2020 with additional funding of $310 billion. On June 5, 2020, the PPP Flexibility Act (the "new Act") was signed into law, and made significant changes to the PPP to provide additional relief for small businesses. The new Act increased flexibility for small businesses that have been unable to rehire employees due to lack of employee availability, or have been unable to operate as normal due to COVID-19 related restrictions. It extended the period that businesses have to use PPP funds to qualify for loan forgiveness to 24 weeks, up from 8 weeks under the original rules. The new Act also relaxed the requirements that loan recipients must adhere to in order to qualify for loan forgiveness. In addition, the new Act extended the payment deferral period for PPP loans until the date when the amount of loan forgiveness is determined and remitted to the lender. For PPP recipients who do not apply for forgiveness, the loan deferral period is 10 months after the applicable forgiveness period ends.

•On April 9, 2020, the Federal Reserves also announced the Main Street Lending Program, in which the Federal Reserve will purchase 95% of loans made to small and medium-sized business and non-profits. These Main Street loans are full-recourse loans and are not forgivable. Under section 4003(d)(3) of the CARES Act, the principal amount of a Main Street loan cannot be reduced through loan forgiveness.

•~~Foreclosure moratorium for a 60-day period beginning March 18, 2020, foreclosures and related sales or evictions on federally-backed mortgage loans are prohibited.~~

•~~Temporary moratorium on eviction filings for renters in multifamily properties with federal backed multifamily mortgage loans or certain housing programs.~~

•~~On July 4, 2020 the deadline for PPP loan applications was extended to August 8, 2020. We do not plan to originate any additional PPP loans for the remainder of 2020.~~

After the CARES Act was signed into law, the banking agencies issued a Revised Statement to encourage banks to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19.The requirements of the Revised Statement differ slightly from the CARES Act Section 4013, and may be applied if a loan modification is not eligible under Section 4013 or the bank elects not to account for loan modifications under section 4013.The criteria under the Revised Statement are: the borrower must be current at the time that the modification program is implemented, the modification is short term (e.g., six months), and management shall use judgement to determine if the modification is related to COVID-19.~~We have implemented a loan deferral program meeting the eligibility requirements of Section 4013 of the CARES Act. See "Payment Deferral Program" below.~~

COVID-19 Updates for the ~~Second~~Third Quarter of 2020:

Continued Support for Employees, Clients, and Communities.

•All branches re-opened in July

•~~Several~~ with appropriate safety ~~measures have been implemented at all open locations for the health and safety of employees and clients.~~precautions in place. Implemented measures include: germ guards, social distancing markers, PPE (masks, gloves and hand sanitizer), daily enhanced cleaning with CDC recommended disinfectants, limited same time client entry and reduced lobby hours

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

•$~~60,000~~80,000 in donations to over 3031 non-profits organizations within our footprint ~~where~~that serve communities ~~served are~~ disproportionately impacted by COVID-19 and the economic distress of this pandemic

Governmental Credit Assistance Programs

•
~~Approved as an “Eligible Lender” for~~

In response to the market volatility and instability resulting from the pandemic, the federal government passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in March 2020 which authorized certain government sponsored credit programs, including the Paycheck Protection Program ("PPP") and the Main Street Lending ~~Program~~

~~Payment Deferral~~ Program. ~~At June 30, 2020,~~The loan programs and the ~~Company had 520 loans totaling $626 million with a 90-day principal and/or interest deferral for COVID-related reasons. No deferred payment loans which met the requirement under Section~~

~~4013 of the CARES Act were reported as past due loans or troubled debt restructurings ("TDRs"). The Company currently expects that the majority of~~Company's participation in these loans have or will resume payments in the third quarter of 2020. Total accrued interest receivable related to these loans on deferment was $10 million with a reserve of $138 thousand at June 30, 2020. Borrowersprograms are contractually required to resume making full payments after the deferral period ends. We may grant additional 90-day deferments. As of July 16, 2020, 232 loans with a net carrying value of $397 million at June 30, 2020, or 63% of total loan balance, resumed making payments or paid off, and only four loans totaling $11 million were granted an additional 90-day deferment. The remainder is expected to resume payments as scheduled. The following table shows the composition of the payment deferral program at June 30, 2020:

Total loan
balance ⁽¹⁾
% of total loan balance
# of loan deferments ⁽²⁾
Loan balance on deferments ⁽¹⁾
% of category balance
(dollars in millions)
Construction and land development $ 217 12 % 18 $ 53 24 %
Commercial real estate 664 36 % 179 324 49 %
Commercial and industrial 335 18 % 105 108 32 %
SBA loans ⁽²⁾
597 32 % 213 133 22 %
Others 39 2 % 5 8 21 %
$ 1,852 100 % 520 $ 626 34 %

~~(1) Loan balances include loans held for sale, and total loans held for investment net of discounts and deferred fees at June 30, 2020.~~

~~(2) SBA loans include $20 million loans held for sale, of which $11 million was on deferment.~~

~~The following table shows the payment deferral program by stressed industries at June 30, 2020:~~

Total loan
balance ⁽¹⁾
% of total loan balance
Loan balance on deferments ⁽¹⁾
% of category balance
(dollars in millions)
Arts, entertainment, and recreation $ 41 2 % $ 22 54 %
Car washes 31 2 % 21 68 %
Gas station 34 2 % 10 29 %
Hospitality 212 11 % 100 47 %
Restaurant 92 5 % 34 37 %
$ 410 22 % $ 187 46 %

~~(1) Loan balances include loans held for sale, and total loans held for investment net of discounts and deferred fees based on industry NAICS code.~~discussed below:

Paycheck Protection Program.~~In the second quarter of~~On March 27, 2020, the ~~Company participated~~CARES Act was signed into law authorizing the U.S. Small Business Administration (the “SBA”) to guarantee an aggregate of up to $349 billion in forgivable small business loans in order to assist small businesses nationwide adversely impacted by the COVID-19 pandemic. On April 24, 2020, the Paycheck Protection Program ~~administrated by~~and Health Care Enhancement Act was signed into law providing an additional $310 billion in funding and authority for the ~~SBA, in assisting its borrowers with additional liquidity.~~PPP. On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) was signed into law which changed key provisions of the PPP, including provisions relating to the maturity of PPP loans, the deferral of PPP loan payments, and the forgiveness of PPP loans. Under the Flexibility Act, the maturity date for PPP loans funded before June 5, 2020 remained at two years from funding while the maturity date for PPP loans funded after June 5, 2020 was five years from funding. In addition, the Flexibility Act, increased the period during which PPP loan proceeds are ~~100% guaranteed by~~to be used for purposes that would qualify the ~~SBA~~loan for forgiveness (the “covered period”) from 8 weeks to 24 weeks, for PPP loans made prior to June 5, 2020, and ~~carry a fixed rate~~set the covered period for loans made after June 5, 2020 at 24 weeks from funding. Under the Flexibility Act, PPP borrowers are not required to make any payments of ~~1.00% with a two-year contractual maturity, if not forgiven.Payments are deferred until either~~principal or interest on their PPP loan before the date on which ~~the~~ SBA remits the ~~amount of~~loan forgiveness ~~proceeds~~amount to the ~~lender or~~Company (or notifies the Company that no loan forgiveness is allowed) and, although PPP borrowers may submit an application for loan forgiveness at any time prior to the maturity date, ~~that is~~if PPP borrowers do not submit a loan forgiveness application within 10 months after the ~~last day~~end of ~~the~~their covered period, ifsuch borrowers will be required to begin paying principal and interest after that period. At origination, the ~~borrower does not apply for forgiveness within that 10 month period. The~~ Company was paid a processing fee ranging from 1% to 5% based on the size of the PPP loan. All PPP loans were funded prior to June 5, 2020 and, accordingly, unless forgiven prior to October 5, 2021, it is possible that repayment of principal and interest on these PPP loans will be deferred through October 2021.

At ~~June~~September 30, 2020, PPP loans, net of unearned fees of ~~$11.5~~$9.9 million, totaled ~~$389.2 million and the weighted average rate for the processing fee was 3.16%.~~$390.2 million. The unearned fees have been received from the SBA and are being accreted to interest income based on the two-year contractual maturity. The SBA did not act on any PPP loan forgiveness applications in the third quarter of 2020 and, accordingly, no PPP loans were forgiven in the quarter. The SBA has commenced making determinations as to PPP forgiveness applications in the fourth quarter of 2020 and, the Company anticipates that the SBA ~~may forgive a significant number of PPP loans in the third~~will continue reviewing and ~~fourth quarters of 2020,~~making determinations with respect to forgiveness applications, at which point the recognition of fee income will be accelerated. ~~No PPP loans were forgiven as of June 30, 2020 pending the issuance of regulatory guidelines. The following table shows the total outstanding principal balance by tiers at June 30, 2020:~~

Balance Tier # of Loans Gross Balance Weighted average fee Net Fees Net Balance
(dollars in millions)
<$350K 1,617 $ 137 4.69 % $ 6 $ 131
>$350K & <$2MM 247 185 2.95 % 5 180
>$2MM 22 79 1.00 % 1 78
1,886 $ 401 3.16 % $ 12 $ 389

~~The following table presents the total PPP loan balance, net of unearned fees, by industry at June 30, 2020:~~

NAICS Industry # of Loans Net Balance % of Total
(dollars in millions)
Arts, Entertainment, Recreation 48 $ 15 4%
Car Washes 22 2 1%
Construction 96 40 10%
Finance and Insurance 63 9 2%
Gas Station 40 3 1%
Health 250 42 11%
Hospitality 123 32 8%
Income Producing Real Estate 165 21 5%
Manufacturing 102 38 10%
Professional 250 41 11%
Restaurant 206 51 13%
Retail Trade 152 20 5%
Transportation 55 12 3%
Others 314 63 16%
1,886 $ 389 100%

PPP Liquidity Facility. On April 14, 2020, the Company was approved by the Federal Reserve to access its SBA Paycheck Protection Program Liquidity Facility ("PPPLF").The PPPLF enables the Company to borrow funds through the Federal Reserve Discount Window to fund PPP ~~loans without taking on additional liquidity or funding risks by providing non-recourse loans collateralized by the PPP~~ loans. ~~Borrowings under the PPPLF have a fixed-rate of 0.35%, with a term that matches the underlying loans pledged of two years.~~At ~~June~~September 30, 2020, the Company ~~borrowed $179.1~~had $253.1 million in borrowings under the PPPLF with a fixed-rate of 0.35% which were collateralized by PPP loans.

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

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

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

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


	At September 30, 2020							At June 30, 2020
	Total loan balance (1)		# of loan deferments (2)	Loan balance on deferments (2)		% of category balance (3)		Total loan balance (1)		# of loan deferments (2)	Loan balance on deferments (2)		% of category balance (3)
	(dollars in millions)
Construction and land development	$	214	2	$	15	7	%	$	217	18	$	53	24	%
Commercial real estate	687		4	11		2	%	664		179	324		49	%
Commercial and industrial	360		—	—		—	%	335		105	108		32	%
SBA loans (4)	630		2	8		1	%	597		213	133		22	%
Others	30		4	3		10	%	39		5	8		21	%
	$	1,921	12	$	37	2	%	$	1,852	520	$	626	34	%

(1) Loan balances include loans held for sale, and total loans held for investment net of discounts and deferred fees at September 30, 2020 and June 30, 2020 .

(2) # of loan deferments and loan balance on deferments reflect loans with active payment deferrals as of September 30, 2020 and June 30, 2020.

(3) Percentage of category balance is calculated based on total loans including loans held for sale, and total loans held for investment net of discounts and deferred fees at September 30, 2020 and June 30, 2020.

(4) Under the CARES Act, SBA loan monthly principal and interest payments are being paid by the SBA for 6 months after the deferment period. At September 30, 2020, the SBA is making monthly loan payments on 193 SBA loans with total outstanding loan balances of $73 million.

Impacts from COVID-19:

The ongoing COVID-19 global ~~and national health emergency~~pandemic has caused significant disruption in the international and United States economies and financial markets and has had an adverse effect on our business, financial condition and results of operations. In response to the COVID-19 pandemic, the state government of California has taken preventative or protective actions which have resulted in significant adverse effects for many different types of businesses, including, among others, those in the travel, hospitality and food and beverage industries, and have resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which we operate. Because we have not recently experienced a comparable crisis which resulted in, among other things, the complete cessation of operations for entire industries in our portfolio, our ability to be predictive is uncertain. In addition, the magnitude, duration and speed of the global pandemic is uncertain. As a consequence, we cannot estimate the impact on our business, financial condition or near- or longer-term financial or operational results with reasonable certainty. ~~In light of this uncertainty and the resulting imprecision in our estimation, we are disclosing potentially material items of which we are aware at July 16, 2020.~~

Net interest income and net interest margin. The Federal Reserve’s 150 basis point reduction in interest rates in March 2020 negatively impacted our net interest income and net interest margin ~~during~~for the ~~second quarter of~~nine months ended September 30, 2020, and ~~will~~ put further pressure on the net interest margin for the remainder of 2020. We have proactively worked to lower interest expense by lowering deposit rates and taking advantage of lower interest rate borrowing facilities. Participation in the PPP had a significant impact on our asset mix and net interest income infor the ~~second quarter of~~nine months ended September 30, 2020 and will continue to impact both asset mix and net interest income for the remainder of 2020. These loans contributed ~~$1.9~~$2.6 million and $4.5 million to interest income for the ~~second quarter of~~three and nine months ended September 30, 2020. The weighted average loan yield for PPP loans was ~~2.64%,~~2.66% and 2.65% which lowered the total loan yield by 4654 basis points and 39 basis points for the ~~second quarter of 2020.~~three and nine months ended September 30, 2020, respectively. We anticipate the accelerated unearned fee income as PPP loans payoff or are forgiven will partially offset the decrease in interest income due to the lower interest rates.

Provision for loan losses. The provision for loan losses in the first and second quarter of 2020 was negatively impacted by an increase in qualitative factors related to COVID-19 and macro-economic conditions, in addition to loan growth. While the economy gradually reopened during the second ~~quarter~~and third quarters of 2020, the Governor of California has since implemented further restrictions and the timing of an economic recovery remains uncertain. The assumptions underlying the COVID-19 related qualitative factors included (a) uncertain and volatile macroeconomic conditions caused by the pandemic; (b) ~~the high~~a stabilized unemployment rate; and (c) the loan deferment program and Main Street Lending program. Approximately $1.4 million of the second quarter provision was driven by an increase in these qualitative factors. In addition, a reserve of $138 thousand for accrued interest receivable related to loans on deferment was recognized in the second quarter of 2020. No provision for loan losses on PPP loans was recognized in ~~the second quarter of~~ 2020 as the SBA guarantees 100% of loans funded under the programs.

Loans to the hospitality industry. At ~~June~~September 30, 2020, our total loan commitments to the hospitality industry was ~~$235~~$244 million, of which ~~$212~~$225 million was outstanding, representing ~~11.4%~~11.7% of total loans including loans held for sale, and loans held for investment net of discount and deferred fees. The total outstanding balance consisted of ~~$93~~$107 million CRE, ~~$11~~$12 million C&I, ~~$48~~$38 million Construction and Land and ~~$60~~$68 million SBA, of which $32 million were SBA PPP. At ~~June~~September 30, 2020, non-accrual loans totaled ~~$85~~$81 thousand. As of ~~June~~September 30, 2020, ~~the total~~only one loan was on deferment with outstanding balance of ~~loans on deferment was $100~~$10.6 million. As of July 16, 2020, a balance of $86 million of loans on deferment resumed regular payment, and there were no loans to the hospitality industry granted an additional 90-day deferment. The remainder is expected to resume payments as scheduled.

Loans to the restaurant industry. At ~~June~~September 30, 2020, our total loan commitments to the restaurant industry was ~~$95~~$98 million, of which ~~$92~~$93 million was outstanding, representing ~~5.0%~~4.8% of total loans including loans held for sale, and loans held for investment net of discount and deferred fees. The total outstanding balance consisted of $7 million CRE, ~~$16~~$15 million C&I, ~~$69~~$71 million SBA, of which $51 million were SBA PPP. At ~~June~~September 30, 2020, non-accrual loans totaled $2 million, and no loans were downgraded during the ~~2nd~~third quarter of 2020. As of ~~June~~September 30, 2020, ~~the total~~only one loan was on deferment with outstanding balance of ~~restaurant loans on deferment was $34~~$8.3 million. As of July 16 2020, a balance of $17 million of loans on deferment resumed regular payment, and one SBA 504 loan of $8 million was granted an additional 90-day deferral. The remainder is expected to resume payments as scheduled.

Capital and liquidity. The Bank opted into the CBLR framework in the first quarter of 2020 and, because the Bank's CBLR was ~~10.31%~~10.29% as of ~~June~~September 30, 2020, we exceeded the reduced regulatory minimum required of 8%, and were considered "well-capitalized" at ~~June~~September 30, 2020. The Bank's primary and secondary liquidity sources were over $900 million at ~~June~~September 30, 2020.

Highlights for the ~~Second~~Third Quarter of 2020:

•Net income of ~~$5.7~~$7.9 million, up ~~26.0%~~37.5% over ~~Q1'20~~Q2'20

•Diluted earnings per common share of ~~$0.49,~~$0.67, up ~~25.6%~~36.7% over ~~Q1'20~~Q2'20

•Pre-tax pre-provision income was $12.1 million, up 18.3% from Q2'20

•Net interest margin of ~~4.12% and cost~~4.05%, down 7 bps from Q2'20

•Cost of funds of ~~0.34%~~0.29%, down 5 bps from Q2'20, due to active balance sheet management

•Return on average assets and average equity of ~~1.09%~~1.39% and ~~8.59%~~11.57%

•Efficiency ratio of 48.7%

•Provision for loan ~~losses~~loss expense of ~~$2.1~~$1.0 million, ~~including approximately $1.4~~down $1.1 million ~~related to the impact of COVID-19~~

•~~Provision for unfunded loan commitments of $300 thousand~~from Q2'20

•Total loans held for investment increased ~~$393.6~~$53.3 million, ~~including $389.2 million, net of unearned fees, of~~

~~Paycheck Protection Program ("PPP") loans,~~ up ~~27.4%~~2.9% over ~~Q1'20~~Q2'20

•Noninterest-bearing demand deposits ~~grew $162.0~~were $736.1 million, ~~up 25.8% over Q1'20 and represent 49.2%~~representing 47.2% of total deposits

~~deposits~~•Tangible book value per share of $16.56, up $0.47 per share from Q2'20

•Community bank leverage ratio ~~("CBLR") of 10.31%~~was 10.29% at ~~June~~September 30, 2020

•Quarterly cash dividend of $0.25 per share

Financial Highlights


		At or for the Three Months Ended																At or for the Six Months Ended June 30,							At or for the Three Months Ended				At or for the Nine Months Ended September 30,
		June 30, 2020			March 31, 2020			June 30, 2019			2020			2019					September 30, 2020		June 30, 2020		September 30, 2019		2020		2019
		(dollars in thousands, except per share amounts)																									(dollars in thousands, except per share amounts)
Results of Operations	Results of Operations																Results of Operations
Total interest and dividend income	Total interest and dividend income	$	21,844		$	21,744		$	22,219		$	43,588		$	44,058		Total interest and dividend income		$	23,154	$	21,844	$	24,343	$	66,742	$	68,401
Total interest expense	Total interest expense	1,540			2,571			3,383			4,111			6,030			Total interest expense		1,428		1,540		3,317		5,539		9,347
Net interest income	Net interest income	20,304			19,173			18,836			39,477			38,028			Net interest income		21,726		20,304		21,026		61,203		59,054
Total noninterest income	Total noninterest income	1,055			1,415			2,322			2,470			4,444			Total noninterest income		1,943		1,055		1,673		4,413		6,117
Total net interest income and noninterest income	Total net interest income and noninterest income	21,359			20,588			21,158			41,947			42,472			Total net interest income and noninterest income		23,669		21,359		22,699		65,616		65,171
Total noninterest expense	Total noninterest expense	11,100			11,519			10,605			22,619			21,305			Total noninterest expense		11,528		11,100		10,651		34,147		31,956
Pre-tax pre-provision income (1)	Pre-tax pre-provision income (1)	10,259			9,069			10,553			19,328			21,167			Pre-tax pre-provision income (1)		12,141		10,259		12,048		31,469		33,215
Provision for loan losses	Provision for loan losses	2,100			2,700			550			4,800			900			Provision for loan losses		1,000		2,100		700		5,800		1,600
Income before taxes	Income before taxes	8,159			6,369			10,003			14,528			20,267			Income before taxes		11,141		8,159		11,348		25,669		31,615
Income taxes	Income taxes	2,429			1,823			3,192			4,252			6,448			Income taxes		3,260		2,429		3,277		7,512		9,725
NET INCOME	NET INCOME	$	5,730		$	4,546		$	6,811		$	10,276		$	13,819		NET INCOME		$	7,881	$	5,730	$	8,071	$	18,157	$	21,890

Performance Ratios
Net income per share-diluted		$	0.49		$	0.39		$	0.58		$	0.88		$	1.17
Return on average assets		1.09		%	1.06		%	1.73		%	1.08		%	1.80		%
Return on average equity		8.59		%	6.90		%	10.86		%	7.75		%	11.15		%
Return on average tangible common equity (1)		12.18		%	9.84		%	15.89		%	11.02		%	16.38		%
Net interest margin		4.12		%	4.78		%	5.14		%	4.42		%	5.32		%
Average loan yield		4.94		%	5.95		%	6.42		%	5.39		%	6.52		%
Cost of deposits		0.31		%	0.63		%	0.89		%	0.46		%	0.82		%
Cost of funds		0.34		%	0.72		%	1.03		%	0.51		%	0.94		%
Efficiency ratio (1)		52.0		%	56.0		%	50.1		%	53.9		%	50.2		%


	At or for the Three Months Ended									At or for the Nine Months Ended September 30,
	September 30, 2020			June 30, 2020			September 30, 2019			2020			2019
	(dollars in thousands, except per share amounts)
Performance Ratios
Net income per share-diluted	$	0.67		$	0.49		$	0.68		$	1.55		$	1.85
Return on average assets	1.39		%	1.09		%	1.98		%	1.19		%	1.86		%
Return on average equity	11.57		%	8.59		%	12.45		%	9.05		%	11.60		%
Return on average tangible common equity (1)	16.31		%	12.18		%	18.03		%	12.83		%	16.95		%
Net interest margin	4.05		%	4.12		%	5.52		%	4.28		%	5.39		%
Average loan yield	4.77		%	4.94		%	6.93		%	5.15		%	6.66		%
Cost of deposits	0.25		%	0.31		%	0.89		%	0.38		%	0.84		%
Cost of funds	0.29		%	0.34		%	0.98		%	0.42		%	0.95		%
Efficiency ratio (1)	48.7		%	52.0		%	46.9		%	52.0		%	49.0		%

(1) Non-GAAP measure. See – Non-GAAP Financial Measures in this MD&A.

Financial Performance

June 30, 2020 March 31, 2020 December 31, 2019
(dollars in thousands, except per share amounts)
Financial Conditions
Total assets $ 2,223,603 $ 1,775,662 $ 1,690,324
Loans held for investment 1,831,619 1,438,055 1,374,675
Noninterest-bearing deposits 789,770 627,793 626,569
Total deposits 1,604,997 1,351,040 1,313,693
Shareholders’ equity 266,949 263,307 261,805
Key Ratios
Noninterest-bearing deposits to total deposits 49.2 % 46.5 % 47.7 %
Equity to assets ratio 12.01 % 14.83 % 15.49 %
Tangible common equity to tangible asset ratio (1) 8.77 % 10.87 % 11.34 %
Book value per share $ 22.82 $ 22.58 $ 22.50
Tangible book value per share (1) $ 16.09 $ 15.81 $ 15.70


									September 30, 2020			June 30, 2020			December 31, 2019
									(dollars in thousands, except per share amounts)
Financial Conditions								Financial Conditions
Total assets								Total assets	$	2,256,342		$	2,223,603		$	1,690,324
Loans held for investment								Loans held for investment	1,884,930			1,831,619			1,374,675
Noninterest-bearing deposits								Noninterest-bearing deposits	736,118			789,770			626,569
Total deposits								Total deposits	1,559,912			1,604,997			1,313,693
Shareholders’ equity								Shareholders’ equity	272,471			266,949			261,805

Key Ratios								Key Ratios
Noninterest-bearing deposits to total deposits								Noninterest-bearing deposits to total deposits	47.2		%	49.2		%	47.7		%
Equity to assets ratio								Equity to assets ratio	12.08		%	12.01		%	15.49		%
Tangible common equity to tangible asset ratio (1)								Tangible common equity to tangible asset ratio (1)	8.90		%	8.77		%	11.34		%
Book value per share								Book value per share	$	23.28		$	22.82		$	22.50
Tangible book value per share (1)								Tangible book value per share (1)	$	16.56		$	16.09		$	15.70
Credit Quality	Credit Quality							Credit Quality
Nonperforming loans as a percentage of total assets	Nonperforming loans as a percentage of total assets	0.41	%	0.51	%	0.67	%	Nonperforming loans as a percentage of total assets	0.58		%	0.41		%	0.67		%
Allowance for loan losses as a percentage of total loans held for investment	Allowance for loan losses as a percentage of total loans held for investment	0.97	%	1.13	%	0.98	%	Allowance for loan losses as a percentage of total loans held for investment	0.99		%	0.97		%	0.98		%
Allowance for loan losses as a percentage of total loans held for investment without PPP loans	Allowance for loan losses as a percentage of total loans held for investment without PPP loans	1.24	%	1.13	%	0.98	%	Allowance for loan losses as a percentage of total loans held for investment without PPP loans	1.25		%	1.24		%	0.98		%

(1) Non-GAAP measure. See - Non-GAAP Financial Measures in this MD&A.

Non-GAAP Financial Measures

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

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

Three Months Ended Six Months Ended June 30,
June 30, 2020 March 31, 2020 June 30, 2019 2020 2019
(dollars in thousands)
Efficiency Ratio
Noninterest expense (numerator) $ 11,100 $ 11,519 $ 10,605 $ 22,619 $ 21,305
Net interest income 20,304 19,173 18,836 $ 39,477 $ 38,028
Plus: Noninterest income 1,055 1,415 2,322 2,470 4,444
Total net interest income and noninterest income (denominator) $ 21,359 $ 20,588 $ 21,158 $ 41,947 $ 42,472
Efficiency ratio ⁽¹⁾
52.0 % 56.0 % 50.1 % 53.9 % 50.2 %
Pre-tax pre-provision income
Net interest income $ 20,304 $ 19,173 $ 18,836 $ 39,477 $ 38,028
Noninterest income 1,055 1,415 2,322 2,470 4,444
Total net interest income and noninterest income 21,359 20,588 21,158 41,947 42,472
Less: Noninterest expense 11,100 11,519 10,605 22,619 21,305
Pre-tax pre-provision income ⁽¹⁾
$ 10,259 $ 9,069 $ 10,553 $ 19,328 $ 21,167
Return on Average Assets, Equity, and Tangible Equity
Net income $ 5,730 $ 4,546 $ 6,811 $ 10,276 $ 13,819
Average assets $ 2,109,208 $ 1,727,401 $ 1,579,740 $ 1,918,305 $ 1,551,658
Average shareholders’ equity 268,168 264,869 251,662 266,518 249,924
Less: Average intangible assets 78,901 79,083 79,731 78,985 79,829
Average tangible common equity ⁽¹⁾
$ 189,267 $ 185,786 $ 171,931 $ 187,533 $ 170,095
Return on average assets 1.09 % 1.06 % 1.73 % 1.08 % 1.80 %
Return on average equity 8.59 % 6.90 % 10.86 % 7.75 % 11.15 %
Return on average tangible common equity ⁽¹⁾
12.18 % 9.84 % 15.89 % 11.02 % 16.38 %

~~(1) Non-GAAP measure.~~

June 30, 2020 March 31, 2020 December 31, 2019
Tangible Common Equity Ratio/Tangible Book Value Per Share (dollars in thousands, except share and per share data)
Shareholders’ equity $ 266,949 $ 263,307 $ 261,805
Less: Intangible assets 78,767 78,960 79,153
Tangible common equity ⁽¹⁾
$ 188,182 $ 184,347 $ 182,652
Total assets $ 2,223,603 $ 1,775,662 $ 1,690,324
Less: Intangible assets 78,767 78,960 79,153
Tangible assets ⁽¹⁾
$ 2,144,836 $ 1,696,702 $ 1,611,171
Equity to asset ratio 12.01 % 14.83 % 15.49 %
Tangible common equity to tangible asset ratio ⁽¹⁾
8.77 % 10.87 % 11.34 %
Book value per share $ 22.82 $ 22.58 $ 22.50 ��
Tangible book value per share ⁽¹⁾
$ 16.09 $ 15.81 $ 15.70
Shares outstanding 11,697,766 11,662,603 11,635,531


	Three Months Ended									Nine Months Ended September 30,
	September 30, 2020			June 30, 2020			September 30, 2019			2020			2019
	(dollars in thousands)
Efficiency Ratio
Noninterest expense (numerator)	$	11,528		$	11,100		$	10,651		$	34,147		$	31,956


Net interest income	21,726			20,304			21,026			61,203			59,054
Plus: Noninterest income	1,943			1,055			1,673			4,413			6,117
Total net interest income and noninterest income (denominator)	$	23,669		$	21,359		$	22,699		$	65,616		$	65,171
Efficiency ratio (1)	48.7		%	52.0		%	46.9		%	52.0		%	49.0		%


Pre-tax pre-provision income
Net interest income	$	21,726		$	20,304		$	21,026		$	61,203		$	59,054
Noninterest income	1,943			1,055			1,673			4,413			6,117
Total net interest income and noninterest income	23,669			21,359			22,699			65,616			65,171
Less: Noninterest expense	11,528			11,100			10,651			34,147			31,956
Pre-tax pre-provision income (1)	$	12,141		$	10,259		$	12,048		$	31,469		$	33,215

Return on Average Assets, Equity, and Tangible Equity
Net income	$	7,881		$	5,730		$	8,071		$	18,157		$	21,890



Average assets	$	2,254,461		$	2,109,208		$	1,620,804		$	2,031,175		$	1,574,960
Average shareholders’ equity	270,903			268,168			257,158			267,990			252,362
Less: Average intangible assets	78,696			78,901			79,535			78,888			79,730
Average tangible common equity (1)	$	192,207		$	189,267		$	177,623		$	189,102		$	172,632

Return on average assets	1.39		%	1.09		%	1.98		%	1.19		%	1.86		%

Return on average equity	11.57		%	8.59		%	12.45		%	9.05		%	11.60		%

Return on average tangible common equity (1)	16.31		%	12.18		%	18.03		%	12.83		%	16.95		%

(1) Non-GAAP measure.


	September 30, 2020			June 30, 2020			December 31, 2019
Tangible Common Equity Ratio/Tangible Book Value Per Share	(dollars in thousands, except share and per share data)
Shareholders’ equity	$	272,471		$	266,949		$	261,805
Less: Intangible assets	78,574			78,767			79,153
Tangible common equity (1)	$	193,897		$	188,182		$	182,652

Total assets	$	2,256,342		$	2,223,603		$	1,690,324
Less: Intangible assets	78,574			78,767			79,153
Tangible assets (1)	$	2,177,768		$	2,144,836		$	1,611,171
Equity to asset ratio	12.08		%	12.01		%	15.49		%
Tangible common equity to tangible asset ratio (1)	8.90		%	8.77		%	11.34		%
Book value per share	$	23.28		$	22.82		$	22.50
Tangible book value per share (1)	$	16.56		$	16.09		$	15.70

September 30, 2020

June 30,
2020

December 31, 2019

Tangible Common Equity Ratio/Tangible Book Value Per Share

(dollars in thousands, except share and per share data)

Shares outstanding

11,705,878

11,697,766

11,635,531

(1) Non-GAAP measure.

4649

Results of Operations

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

Net Interest Income

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


		Three Months Ended																																				Three Months Ended
		June 30, 2020										March 31, 2020												June 30, 2019									September 30, 2020							June 30, 2020	September 30, 2019
		Average Balance		Interest Income / Expense		Yield / Cost		Average Balance		Interest Income / Expense		Yield / Cost		Average Balance		Interest Income / Expense		Yield / Cost			Average Balance		Interest Income / Expense		Yield / Cost		Average Balance		Interest Income / Expense		Yield / Cost		Average Balance		Interest Income / Expense			Yield / Cost
Interest-earning assets:	Interest-earning assets:	(dollars in thousands)																																			Interest-earning assets:	(dollars in thousands)
Loans ^{(1) (2)}	Loans ^{(1) (2)}	$	1,738,172	$	21,348	4.94	%	$	1,404,652	$	20,780	5.95	%	$	1,334,188	$	21,344	6.42	%	Loans (1) (2)	$	1,892,450	$	22,671	4.77	%	$	1,738,172	$	21,348	4.94	%	$	1,328,088	$	23,206		6.93	%
Investment securities	Investment securities	42,553		225		2.13	%	36,200		218		2.42	%	36,337		215		2.37	%	Investment securities	43,154		180		1.66	%	42,553		225		2.13	%	35,651		208			2.31	%
Deposits at other financial institutions	Deposits at other financial institutions	186,741		92		0.20	%	157,743		501		1.28	%	83,183		442		2.13	%	Deposits at other financial institutions	184,606		103		0.22	%	186,741		92		0.20	%	134,557		701			2.07	%
Federal funds sold/resale agreements		—		—		—	%	—		—		—	%	2,018		12		2.39	%

Restricted stock investments and other bank stocks	Restricted stock investments and other bank stocks	14,534		179		4.95	%	14,524		245		6.78	%	13,932		206		5.93	%	Restricted stock investments and other bank stocks	14,534		200		5.47	%	14,534		179		4.95	%	13,988		228			6.47	%
Total interest-earning assets	Total interest-earning assets	1,982,000		21,844		4.43	%	1,613,119		21,744		5.42	%	1,469,658		22,219		6.06	%	Total interest-earning assets	2,134,744		23,154		4.31	%	1,982,000		21,844		4.43	%	1,512,284		24,343			6.39	%

Noninterest-earning assets	Noninterest-earning assets	127,208						114,282						110,082						Noninterest-earning assets	119,717						127,208						108,520

Total assets	Total assets	$	2,109,208					$	1,727,401					$	1,579,740					Total assets	$	2,254,461					$	2,109,208					$	1,620,804

Interest-bearing liabilities:	Interest-bearing liabilities:																			Interest-bearing liabilities:
Interest checking	Interest checking	$	251,398	$	101	0.16	%	$	156,407	$	262	0.67	%	$	111,116	$	298	1.08	%	Interest checking	$	279,945	$	111	0.16	%	$	251,398	$	101	0.16	%	$	116,107	$	337		1.15	%
Money market accounts	Money market accounts	298,040		207		0.28	%	318,465		798		1.01	%	271,067		900		1.33	%	Money market accounts	338,970		260		0.31	%	298,040		207		0.28	%	267,493		890			1.32	%
Savings accounts	Savings accounts	30,104		10		0.13	%	28,264		49		0.70	%	28,825		56		0.78	%	Savings accounts	31,639		11		0.14	%	30,104		10		0.13	%	29,070		56			0.76	%
Time deposits	Time deposits	91,051		292		1.29	%	117,567		490		1.68	%	150,601		674		1.80	%	Time deposits	81,837		201		0.98	%	91,051		292		1.29	%	147,568		676			1.82	%
Brokered time deposits	Brokered time deposits	90,349		564		2.51	%	92,844		505		2.19	%	128,555		789		2.46	%	Brokered time deposits	107,347		387		1.43	%	90,349		564		2.51	%	138,682		929			2.66	%
Total interest-bearing deposits	Total interest-bearing deposits	760,942		1,174		0.62	%	713,547		2,104		1.19	%	690,164		2,717		1.58	%	Total interest-bearing deposits	839,738		970		0.46	%	760,942		1,174		0.62	%	698,920		2,888			1.64	%
Borrowings	Borrowings	145,440		197		0.54	%	92,143		376		1.64	%	77,442		484		2.51	%	Borrowings	152,762		207		0.54	%	145,440		197		0.54	%	48,263		253			2.08	%
Paycheck Protection Program Liquidity Facility	Paycheck Protection Program Liquidity Facility	127,962		112		0.35	%	—		—		—	%	—		—		—	%	Paycheck Protection Program Liquidity Facility	240,602		212		0.35	%	127,962		112		0.35	%	—		—			—	%
Senior secured notes	Senior secured notes	6,754		57		3.39	%	8,022		91		4.56	%	12,398		182		5.89	%	Senior secured notes	4,620		39		3.36	%	6,754		57		3.39	%	12,267		176			5.69	%

Total interest-bearing liabilities	Total interest-bearing liabilities	1,041,098		1,540		0.59	%	813,712		2,571		1.27	%	780,004		3,383		1.74	%	Total interest-bearing liabilities	1,237,722		1,428		0.46	%	1,041,098		1,540		0.59	%	759,450		3,317			1.73	%

Noninterest-bearing liabilities:	Noninterest-bearing liabilities:																			Noninterest-bearing liabilities:
Demand deposits	Demand deposits	783,258						631,809						534,192						Demand deposits	730,306						783,258						590,212
Other liabilities	Other liabilities	16,684						17,011						13,882						Other liabilities	15,530						16,684						13,984
Shareholders’ equity	Shareholders’ equity	268,168						264,869						251,662						Shareholders’ equity	270,903						268,168						257,158

Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	2,109,208					$	1,727,401					$	1,579,740					Total liabilities and shareholders' equity	$	2,254,461					$	2,109,208					$	1,620,804

Net interest spread	Net interest spread			$	20,304	3.84	%			$	19,173	4.15	%			$	18,836	4.32	%	Net interest spread			$	21,726	3.85	%			$	20,304	3.84	%			$	21,026		4.66	%
Net interest margin	Net interest margin					4.12	%					4.78	%					5.14	%	Net interest margin					4.05	%					4.12	%						5.52	%

Total deposits	Total deposits	$	1,544,200	$	1,174	0.31	%	$	1,345,356	$	2,104	0.63	%	$	1,224,356	$	2,717	0.89	%	Total deposits	$	1,570,044	$	970	0.25	%	$	1,544,200	$	1,174	0.31	%	$	1,289,132	$	2,888		0.89	%
Total funding sources	Total funding sources	$	1,824,356	$	1,540	0.34	%	$	1,445,521	$	2,571	0.72	%	$	1,314,196	$	3,383	1.03	%	Total funding sources	$	1,968,028	$	1,428	0.29	%	$	1,824,356	$	1,540	0.34	%	$	1,349,662	$	3,317		0.98	%

(1) Average loans include net discounts, ~~and~~ net deferred loan fees and ~~costs.~~costs and non-performing loans.

(2) Interest income on loans includes $1.7 million, $1.3 million ~~$292 thousand~~ and ~~$236~~$254 thousand related to the accretion of net deferred loan fees for the quarters ended September 30, 2020, June 30, 2020 ~~March 31, 2020~~ and ~~June~~September 30, 2019. ~~Interest~~In addition, interest income also includes $835 thousand, $421 thousand, ~~$624 thousand,~~ and ~~$642 thousand~~$2.2 million related to discount accretion on loans acquired in a business combination, including the interest recognized on the payoff of PCI loans, for the quarters ended September 30, 2020, June 30, 2020 ~~March 31, 2020~~ and ~~June~~September 30, 2019.


		Six Months Ended June 30,																								Nine Months Ended September 30,
		2020										2019											2020					2019
		Average Balance		Interest Income / Expense		Yield / Cost		Average Balance		Interest Income / Expense		Yield / Cost			Average Balance		Interest Income / Expense		Yield / Cost		Average Balance		Interest Income / Expense			Yield / Cost
Interest-earning assets:	Interest-earning assets:	(dollars in thousands)																							Interest-earning assets:	(dollars in thousands)
Loans ^{(1) (2)}	Loans ^{(1) (2)}	$	1,571,412	$	42,128	5.39	%	$	1,307,613	$	42,260	6.52	%	Loans (1) (2)	$	1,679,206	$	64,799	5.15	%	$	1,314,513	$	65,466		6.66	%
Investment securities	Investment securities	39,377		443		2.26	%	36,714		451		2.48	%	Investment securities	40,645		623		2.05	%	36,355		659			2.42	%
Deposits at other financial institutions	Deposits at other financial institutions	172,242		593		0.69	%	81,998		869		2.14	%	Deposits at other financial institutions	176,393		696		0.53	%	99,711		1,570			2.11	%
Federal funds sold/resale agreements	Federal funds sold/resale agreements	—		—		—	%	2,506		30		2.41	%	Federal funds sold/resale agreements	—		—		—	%	1,662		30			2.41	%
Restricted stock investments and other bank stocks	Restricted stock investments and other bank stocks	14,529		424		5.87	%	13,912		448		6.49	%	Restricted stock investments and other bank stocks	14,531		624		5.74	%	13,937		676			6.48	%
Total interest-earning assets	Total interest-earning assets	1,797,560		43,588		4.88	%	1,442,743		44,058		6.16	%	Total interest-earning assets	1,910,775		66,742		4.67	%	1,466,178		68,401			6.24	%

Noninterest-earning assets	Noninterest-earning assets	120,745						108,915						Noninterest-earning assets	120,400						108,782

Total assets	Total assets	$	1,918,305					$	1,551,658					Total assets	$	2,031,175					$	1,574,960

Interest-bearing liabilities:	Interest-bearing liabilities:													Interest-bearing liabilities:
Interest checking	Interest checking	$	203,903	$	363	0.36	%	$	114,978	$	607	1.06	%	Interest checking	$	229,436	$	473	0.28	%	$	115,358	$	944		1.09	%
Money market accounts	Money market accounts	308,253		1,005		0.66	%	271,521		1,768		1.31	%	Money market accounts	318,567		1,267		0.53	%	270,163		2,658			1.32	%
Savings accounts	Savings accounts	29,184		59		0.41	%	31,575		118		0.75	%	Savings accounts	30,008		69		0.31	%	30,731		174			0.76	%
Time deposits	Time deposits	104,309		782		1.51	%	160,429		1,404		1.76	%	Time deposits	96,764		983		1.36	%	156,095		2,080			1.78	%
Brokered time deposits	Brokered time deposits	91,596		1,069		2.35	%	94,814		1,064		2.26	%	Brokered time deposits	96,885		1,456		2.01	%	109,598		1,993			2.43	%
Total interest-bearing deposits	Total interest-bearing deposits	737,245		3,278		0.89	%	673,317		4,961		1.49	%	Total interest-bearing deposits	771,660		4,248		0.74	%	681,945		7,849			1.54	%
Borrowings	Borrowings	118,956		573		0.97	%	56,897		714		2.53	%	Borrowings	130,344		780		0.80	%	53,987		967			2.39	%
Paycheck Protection Program Liquidity Facility	Paycheck Protection Program Liquidity Facility	63,816		112		0.35	%	—		—		—	%	Paycheck Protection Program Liquidity Facility	123,138		324		0.35	%	—		—			—	%
Senior secured notes	Senior secured notes	7,388		148		4.03	%	12,151		355		5.89	%	Senior secured notes	6,458		187		3.87	%	12,190		531			5.82	%

Total interest-bearing liabilities	Total interest-bearing liabilities	927,405		4,111		0.89	%	742,365		6,030		1.64	%	Total interest-bearing liabilities	1,031,600		5,539		0.72	%	748,122		9,347			1.67	%

Noninterest-bearing liabilities:	Noninterest-bearing liabilities:													Noninterest-bearing liabilities:
Demand deposits	Demand deposits	707,534						547,954						Demand deposits	715,180						562,195
Other liabilities	Other liabilities	16,848						11,415						Other liabilities	16,405						12,281
Shareholders’ equity	Shareholders’ equity	266,518						249,924						Shareholders’ equity	267,990						252,362

Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	1,918,305					$	1,551,658					Total liabilities and shareholders' equity	$	2,031,175					$	1,574,960

Net interest spread	Net interest spread			$	39,477	3.99	%			$	38,028	4.52	%	Net interest spread			$	61,203	3.95	%			$	59,054		4.57	%
Net interest margin	Net interest margin					4.42	%					5.32	%	Net interest margin					4.28	%						5.39	%

Total deposits	Total deposits	$	1,444,779	$	3,278	0.46	%	$	1,221,271	$	4,961	0.82	%	Total deposits	$	1,486,840	$	4,248	0.38	%	$	1,244,140	$	7,849		0.84	%
Total funding sources	Total funding sources	$	1,634,939	$	4,111	0.51	%	$	1,290,319	$	6,030	0.94	%	Total funding sources	$	1,746,780	$	5,539	0.42	%	$	1,310,317	$	9,347		0.95	%

(1) Average loans include net discounts, ~~and~~ net deferred loan fees and ~~costs.~~costs and non-performing loans.

(2) Interest income on loans includes $~~1.6~~3.3 million and $~~467~~721 thousand related to the accretion of net deferred loan fees for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019. In addition, interest income includes $~~1.0~~1.9 million and $~~1.6~~3.8 million of discount accretion on loans acquired in a business combination, including the interest recognized on the payoff of PCI loans, for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019.

4851

Rate/Volume Analysis

The volume and interest rate variance tables below set forth the dollar difference in interest earned for each major category of interest-earning assets and interest-bearing liabilities for the periods indicated, and the amount of such change attributable to changes in average balances (volume) or in average interest rates (rate). Volume variances are equal to the increase or decrease in the average balance multiplied by the prior period rate, and rate variances are equal to the increase or decrease in the average rate multiplied by the prior period average balance. Variances attributable to both rate and volume changes are allocated proportionately based on the amounts of the individual rate and volume changes.


		Three Months Ended																																	Three Months Ended
		June 30, 2020 vs. March 31, 2020												June 30, 2020 vs. June 30, 2019																	September 30, 2020 vs. June 30, 2020									September 30, 2020 vs. September 30, 2019
		Change Attributable to						Total Change			Change Attributable to					Total Change								Change Attributable to							Total Change				Change Attributable to					Total Change
		Volume		Rate						Volume			Rate							Volume			Rate			Total Change							Rate				Total Change
Interest income:	Interest income:	(dollars in thousands)																														Interest income:	(dollars in thousands)
Interest and fees on loans	Interest and fees on loans	$	4,446	$	(3,878)	$	568	$	5,578		$	(5,574)		$	4		Interest and fees on loans	$	2,024		$	(701)		$	1,323				$	8,011			$	(8,546)				$	(535)
Interest on investment securities	Interest on investment securities	32		(25)		7		37			(27)			10			Interest on investment securities	3			(48)			(45)			37				(65)				(28)
Interest on deposits at other financial institutions	Interest on deposits at other financial institutions	78		(487)		(409)		253			(615)			(362)			Interest on deposits at other financial institutions	(1)			12			11			192				(790)				(598)
Dividends on restricted stock investments and other bank stocks	Dividends on restricted stock investments and other bank stocks	—		(66)		(66)		8			(35)			(27)			Dividends on restricted stock investments and other bank stocks	—			21			21			8				(36)				(28)
Change in interest income	Change in interest income	4,556		(4,456)		100		5,876			(6,251)			(375)			Change in interest income	2,026			(716)			1,310			8,248				(9,437)				(1,189)
Interest expense:	Interest expense:																Interest expense:
Savings, interest checking and money market accounts	Savings, interest checking and money market accounts	72		(863)		(791)		288			(1,224)			(936)			Savings, interest checking and money market accounts	27			37			64			356				(1,257)				(901)
Time deposits	Time deposits	(112)		(27)		(139)		(465)			(142)			(607)			Time deposits	69			(337)			(268)			(411)				(606)				(1,017)
Borrowings	Borrowings	157		(336)		(179)		249			(535)			(286)			Borrowings	11			(1)			10			243				(289)				(46)
Paycheck Protection Program Liquidity Facility	Paycheck Protection Program Liquidity Facility	112		—		112		112			—			112			Paycheck Protection Program Liquidity Facility	100			—			100			212				—				212
Senior secured notes	Senior secured notes	(13)		(21)		(34)		(65)			(61)			(126)			Senior secured notes	(18)			—			(18)			(83)				(54)				(137)
Change in interest expense	Change in interest expense	216		(1,247)		(1,031)		119			(1,962)			(1,843)			Change in interest expense	189			(301)			(112)			317				(2,206)				(1,889)
Change in net interest income	Change in net interest income	$	4,340	$	(3,209)	$	1,131	$	5,757		$	(4,289)		$	1,468		Change in net interest income	$	1,837		$	(415)		$	1,422		$	7,931			$	(7,231)			$	700

Six Months Ended June 30,
2020 vs. 2019
Change Attributable to Total Change
Volume Rate
Interest income: (dollars in thousands)
Interest and fees on loans $ 7,834 $ (7,966) $ (132)
Interest on investment securities 15 (23) (8)
Interest on deposits at other financial institutions 545 (851) (306)
Dividends on restricted stock investments and other bank stocks 20 (44) (24)
Change in interest income 8,414 (8,884) (470)
Interest expense:
Savings, interest checking and money market accounts 504 (1,570) (1,066)
Time deposits (476) (141) (617)
Borrowings 465 (605) (140)
Paycheck Protection Program Liquidity Facility 112 — 112
Senior secured notes (115) (93) (208)
Change in interest expense 490 (2,409) (1,919)
Change in net interest income $ 7,924 $ (6,475) $ 1,449


	Nine Months Ended September 30,
	2020 vs. 2019
	Change Attributable to				Total Change
	Volume		Rate
Interest income:	(dollars in thousands)
Interest and fees on loans	$	15,987	$	(16,654)	$	(667)
Interest on investment securities	39		(75)		(36)
Interest on deposits at other financial institutions	752		(1,626)		(874)
Interest on Federal funds sold/resale agreements	(15)		(15)		(30)
Dividends on restricted stock investments and other bank stocks	28		(80)		(52)
Change in interest income	16,791		(18,450)		(1,659)
Interest expense:
Savings, interest checking and money market accounts	867		(2,834)		(1,967)
Time deposits	(893)		(741)		(1,634)
Borrowings	739		(926)		(187)
Paycheck Protection Program Liquidity Facility	324		—		324
Senior secured notes	(201)		(143)		(344)
Change in interest expense	836		(4,644)		(3,808)
Change in net interest income	$	15,955	$	(13,806)	$	2,149

4952

~~Second~~Third Quarter of 2020 Compared to ~~First~~Second Quarter of 2020

Net interest income for the ~~second~~third quarter of 2020 totaled ~~$20.3~~$21.7 million, an increase of ~~$1.1~~$1.4 million from the ~~first~~second quarter of 2020 due to ~~slightly~~ higher interest income of ~~$100 thousand,~~$1.3 million, coupled with lower interest expense of ~~$1.0 million.~~$112 thousand. The increase in net interest income was due primarily to ~~interest income and fees recognized for PPP~~higher discount accretion from loans ~~and reductions~~acquired in ~~the costs of interest-bearing deposits and borrowings. The decrease in loan yields and cost of funds for the second quarter of 2020 reflected the~~a business combination, full quarter impact of ~~the 150 basis point reduction in the target Federal Funds rate at the end~~interest income from PPP loans, strong organic loan growth, and lower cost of ~~March 2020.~~interest-bearing time deposits. Average loans increased by ~~$333.5~~$154.3 million ~~of which $287.3 million was~~ from organic loan growth and PPP loans ~~net of earned fees, funded~~ in the second quarter of 2020. PPP loans carry a fixed rate of 1.0% with a two-year contractual maturity, and the weighted average rate for the processing fee is 3.16%. These loans contributed $1.9 million to interest income for the secondthird quarter of 2020. The decrease in interest expense for the ~~second~~third quarter of 2020 was due primarily to ~~lower market interest rates~~a higher run-off of high cost time deposits and the Company's proactive strategy to lower the cost of interest-bearing customer deposits ~~replace high rate brokered deposits and take advantage of the lower cost of borrowings~~ and wholesale ~~funding facilities.~~brokered CDs. Interest expense on interest-bearing deposits

decreased ~~$930~~$204 thousand, ~~coupled with a decrease~~partially offset by an increase of ~~$101~~$92 thousand on total

borrowings. Interest expense on the PPP Liquidity Facility ("PPPLF") was $212 thousand for the third quarter of 2020,

compared to $112 thousand ~~for~~in the second quarter of ~~2020.~~2020 due to higher average borrowings.

Net interest margin for the ~~second~~third quarter of 2020 decreased 667 basis points to ~~4.12%~~4.05% from ~~4.78%~~4.12% for the ~~first~~second quarter of 2020. The decrease in the net interest margin was due primarily to a ~~101~~17 basis point decrease in loan yields (including fees and discounts), partially offset by a ~~change in the interest-earning asset mix, and a 38~~5 basis point decrease in total funding costs. The decrease in loan yields were partially offset by higher accelerated discount accretion in the third quarter of 2020. The discount accretion from loans acquired in a business combination of $835 thousand contributed 16 basis points to the net interest margin in the third quarter of 2020 compared to $421 thousand and 9 basis points in the second quarter of 2020.

The decrease in the interest-earning assets yield and loan yield were driven by the lower market interest rates and the ~~lower-yielding~~lower yielding PPP loans. The yield on loans decreased to ~~4.94%~~4.77% for the ~~second~~third quarter of 2020, compared to ~~5.95%~~4.94% for the ~~first~~second quarter of 2020. The weighted average loan yield for PPP loans was ~~2.64%~~2.66%, which lowered the total loan yield by 54 basis points for the third quarter of 2020, compared to 46 basis points for the second quarter of 2020.

The cost of funds decreased to ~~0.34%~~0.29% for the ~~second~~third quarter of 2020, compared to ~~0.72%~~0.34% for the ~~first~~second quarter of 2020, due primarily to lower market interest rates, runoff of higher cost time deposits and ~~a change~~active balance sheet management. Average noninterest-bearing demand deposits decreased $53.0 million to $730.3 million and represented 46.5% of total average deposits for the third quarter of 2020, compared to $783.3 million, or 50.7% of total average deposits, for the second quarter of 2020. The decrease in ~~the funding mix with a higher percentage of~~ average noninterest-bearing demand deposits ~~and a higher percentage~~was primarily due to our customers' use of ~~average~~funds during the third quarter of 2020 from the new deposit accounts opened for PPP loans in the second quarter of 2020. The total ~~borrowings.~~cost of deposits decreased 6 basis points to 0.25% for the third quarter of 2020, compared to 0.31% for the second quarter of 2020. Average borrowings increased ~~$53.3~~$7.3 million to ~~$145.4~~$152.8 million, coupled with an increase of ~~$128.0~~$112.6 million ~~from the~~in average PPPLF outstanding with an average rate of 0.35% to support the PPP loans funded. The average cost of total borrowings ~~decreased 110 basis points to~~remained relatively flat at 0.54% for the ~~second quarter of 2020, compared to 1.64% for the first~~third quarter of 2020. Average senior secured notes decreased ~~$1.3~~$2.1 million to ~~$6.8~~$4.6 million and the average cost of such borrowings decreased ~~117~~3 basis points to ~~3.39%. Average noninterest-bearing demand deposits increased $151.4 million to $783.3 million and represented 50.7% of total average deposits~~3.36% for the ~~second~~third quarter of 2020, compared to $631.8 million, or 47.0% of total average deposits, for the first quarter of 2020. The increase in average noninterest-bearing demand deposits was primarily due to new accounts opened for PPP loans with an average balance of $116 million for the second quarter of 2020. The total cost of deposits decreased 32 basis points to 0.31% for the second quarter of 2020, compared to 0.63% for the first quarter of 2020.2020..

The discount accretion from loans acquired in a business combination of $421 thousand contributed 9 basis points to the net interest margin in the second quarter of 2020 compared to $624 thousand and 16 basis points in the first quarter of 2020.

~~Second~~Third Quarter of 2020 Compared to ~~Second~~Third Quarter of 2019

Net interest income increased ~~$1.5 million~~$700 thousand to ~~$20.3~~$21.7 million for the ~~second~~third quarter of 2020 when compared to the same quarter of 2019 primarily due to a ~~slight~~ decrease of interest ~~income~~expense of ~~$375 thousand,~~$1.9 million, partially offset by lower interest ~~expense~~income of ~~$1.8~~$1.2 million. The increase in net interest income was due ~~primarily~~ to a number of factors, including but not limited to the following: (i) lower market interest ~~income~~rates partially offset by higher average loans and ~~fees recognized for organic loan growth~~other interest-earning assets; (ii) higher noninterest-bearing demand deposits in relationship to total deposits; and ~~PPP loans funded in the second quarter of 2020, and reductions in the~~(iii) lower costs ofon interest-bearing ~~deposits and borrowings.~~liabilities. The decrease in loan yields, yields on other interest-earning assets and cost of funds for the ~~second~~third quarter of 2020 primarily related to the ~~150 basis point~~ reduction in the target Federal ~~Funds~~Fund rate ~~at the end of~~starting in July 2019 and through March 2020. Average loans increased by ~~$404.0~~$564.4 million, of which ~~$287.3~~$389.6 million was from PPP loans, net of earned fees, funded in ~~the second quarter of~~ 2020, contributing an increase in interest income of ~~$5.6~~$8.0 million, partially offset by a decrease of ~~$221 thousand~~$1.3 million in discount accretion on loans acquired in a business combination, and lower market interest rates in the ~~second~~third quarter of 2020. The decrease in interest expense for the ~~second~~third quarter of 2020 was due primarily to lower market interest rates and our proactive strategy to lower the cost of interest-bearing customer deposits, ~~coupled with a decrease~~partially offset by an increase in borrowing costs from higher average borrowings to support organic loan growth and PPP loan fundings. Interest expense on interest-bearing deposits decreased ~~$1.5~~$1.9 million, coupled

with a decrease of ~~$412~~$183 thousand on borrowings and senior secured notes, partially offset by an increase of ~~$112~~$212 thousand on PPPLF.

Our net interest margin decreased ~~102~~147 basis points to ~~4.12%~~4.05% for the ~~second~~third quarter of 2020 compared to ~~5.14%~~5.52% for the same quarter of 2019. The decrease in the net interest margin was due primarily to a ~~148~~216 basis point decrease in loan yields (including fees and discounts), partially offset by a change in the interest-earning asset mix and a 69 basis point decrease in funding costs. The net interest margin compression was driven by lower market interest rates resulting from the ~~Federal Reserve's 225 basis point reduction in the~~ target Federal ~~Funds~~Fund rate reduction after the second quarter of ~~2019.~~2019 through March 2020. The average effective federal funds target rate was ~~0.06%~~0.09% for the ~~second~~third quarter of 2020 compared to ~~2.40%~~2.20% for the same quarter of 2019. The average yield on interest-earning assets decreased ~~163~~208 basis points to ~~4.43%~~4.31% for the ~~second~~third quarter of 2020 compared to ~~6.06%~~6.39% for the same quarter of 2019 due mostly to lower loan ~~yields.~~yields and yields on deposits at other financial institutions. Our loan yield decreased ~~148~~216 basis points to ~~4.94%~~4.77% for the ~~second~~third quarter of 2020 compared to ~~6.42%~~6.93% for the same quarter of 2019, was driven by lower market interest rates, lower-yielding PPP loans, and lower discount accretion from loans acquired in a business combination. Our yields on deposits at other financial institutions decreased 185 basis points to 0.22% for the third quarter of 2020 compared to 2.07% for the same quarter of 2019 was driven primarily by the lower market interest rates.

The discount accretion related to loans acquired in a business combination, including the interest income recognized on the payoff of PCI loans, of ~~$421~~$835 thousand contributed 916 basis points to the net interest margin in the ~~second~~third quarter of 2020 compared to ~~$642 thousand~~$2.2 million and 1857 basis points in the same quarter of 2019.

Our average cost of funds decreased 69 basis points to ~~0.34%~~0.29% for the ~~second~~third quarter of 2020 compared to ~~1.03%~~0.98% for the same quarter of 2019 due to a lower market interest rates and a change in the funding mix with a higher percentage of average noninterest-bearing demand deposits, and a higher percentage of average total ~~borrowings.~~borrowings and PPPLF. Average noninterest-bearing deposits totaled ~~$783.3~~$730.3 million and represented ~~50.7%~~46.5% of average total deposits for the ~~second~~third quarter of 2020 compared to ~~$534.2~~$590.2 million and ~~43.6%~~45.8% of average total deposits for the same quarter of 2019. Average interest-bearing liabilities were ~~$1.04~~$1.24 billion during the ~~second~~third quarter of 2020 compared to ~~$780.0~~$759.5 million for the same quarter of 2019. Our cost of interest-bearing liabilities decreased ~~115~~127 basis points to ~~0.59%~~0.46% compared to ~~1.74%~~1.73% for the same quarter of 2019. The average borrowings increased ~~$68.0~~$104.5 million to ~~$145.4~~$152.8 million, coupled with an increase of ~~$128.0~~$240.6 million in average PPPLF. The average cost of borrowings decreased ~~197~~154 basis points to 0.54%, partially offset by 35 basis points increase from the PPPLF. Average senior secured notes balance decreased ~~$5.6~~$7.6 million to ~~$6.8~~$4.6 million for the ~~second~~third quarter of 2020 compared to ~~$12.4~~$12.3 million for the same quarter of 2019 and the average cost of such borrowings decreased ~~250~~233 basis points to ~~3.39%~~3.36%.

~~Six~~Nine Months Ended ~~June~~September 30, 2020 Compared to ~~Six~~Nine Months Ended ~~June~~September 30, 2019

Net interest income increased ~~$1.4~~$2.1 million to ~~$39.5~~$61.2 million for the ~~six~~nine months ended ~~June~~September 30, 2020 when compared to ~~$38.0~~$59.1 million for the ~~six~~nine months ended ~~June~~September 30, 2019 due to ~~a slight decrease of interest income of $470 thousand, offset by a~~ lower interest expense of ~~$1.9~~$3.8 million, offset by lower interest income of $1.7 million. The increase in net interest income was due primarily to a number of factors (i) higher average loans and other ~~interest earning~~interest-earning assets offset by lower market interest rates, (ii) higher noninterest-bearing demand deposits in relationship to total deposits, and (iii) lower costs on interest-bearing liabilities. Average loans increased by ~~$263.8~~$364.7 million contributing an increase in interest income of ~~$7.8~~$16.0 million, partially offset by a decrease in discount accretion on loans acquired in a business combination, and lower market interest rates in the ~~six~~nine months ended ~~June~~September 30, 2020, as compared to the ~~six~~nine months ended ~~June~~September 30, 2019. PPP loans averaged ~~$143.6~~$226.2 million and contributed ~~$1.9~~$4.5 million to interest income for the ~~six~~nine months ended ~~June~~September 30, 2020. The decrease in interest expense for the ~~six~~nine months ended ~~June~~September 30, 2020 was due primarily to lower market interest rates, ~~coupled with a decrease in funding costs, partially offset by higher~~and lower average ~~borrowings to support organic loan growth~~time deposits and ~~PPP loan fundings.~~senior secured notes. Interest expense on interest-bearing deposits decreased ~~$1.7~~$3.6 million, coupled with a decrease of ~~$348~~$531 thousand on borrowings and senior secured notes, offset by an increase of ~~$112~~$324 thousand on PPPLF.

Our net interest margin decreased 90111 basis points to ~~4.42%~~4.28% for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to ~~5.32%~~5.39% for the ~~six~~nine months ended ~~June~~September 30, 2019. The decrease in the net interest margin was due primarily to a ~~128~~157 basis point decrease in interest-earnings asset yields, of which loan yields (including fees and discounts) decreased ~~113~~151 basis points, partially offset by a change in the interest-earning asset mix, and a 4353 basis points decrease in funding costs. The net interest margin compression was driven by lower market interest rates resulting from the reduction in the target Federal Funds rate. The average effective federal funds target rate was ~~0.64%~~0.45% for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to ~~2.40%~~2.33% for the same 2019 period. The average yield on interest-earning assets decreased to ~~4.88%~~4.67% for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to ~~6.16%~~6.24% for the same 2019 period resulting from lower market interest rates. Our loan yield decreased to ~~5.39%~~5.15% for the nine months ended September 30, 2020 compared to 6.66%

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~~for the six months ended June 30, 2020 compared to 6.52%~~ for the same 2019 period, driven by lower market interest rates, lower-yielding PPP loans, and lower discount accretion from loans acquired in a business combination.

The discount accretion related to loans acquired in a business combination, including the interest income recognized on the payoff of PCI loans, of ~~$1.0~~$1.9 million contributed 1213 basis points to the net interest margin for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to ~~$1.6~~$3.8 million and 2234 basis points for the ~~six~~nine months ended ~~June~~September 30, 2019.

Our average cost of funds decreased 4353 basis points to ~~0.51%~~0.42% for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to ~~0.94%~~0.95% for the ~~six~~nine months ended ~~June~~September 30, 2019 due to a lower market interest rates and a change in the funding mix with a higher percentage of average noninterest-bearing demand deposits, and a higher percentage of average total borrowings. Average noninterest-bearing deposits totaled ~~$707.5~~$715.2 million and represented ~~49.0%~~48.1% of average total deposits for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to ~~$548.0~~$562.2 million and ~~44.9%~~45.2% of average total deposits for the same 2019 period. Average interest-bearing liabilities were ~~$927.4 million~~$1.03 billion for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to ~~$742.4~~$748.1 million for the same 2019 period. Our cost of interest-bearing liabilities decreased 7595 basis points to ~~0.89%~~0.72% compared to ~~1.64%~~1.67% for the same 2019 period. Our average borrowings increased ~~$62.1~~$76.4 million to ~~$119.0~~$130.3 million, coupled with an increase of ~~$63.8~~$123.1 million from the average PPPLF. The average cost of borrowings decreased ~~156~~159 basis points to ~~0.97%.~~0.80%, offset by 35 basis points increase from the PPPLF. Average senior secured notes balance decreased ~~$4.8~~$5.7 million to ~~$7.4~~$6.5 million for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to $12.2 million for the same 2019 period.

Provision for Loan Losses

The provision for loan losses for the third quarter of 2020 was $1.0 million, compared to $2.1 million for the second quarter of 2020 ~~was $2.1 million, compared to $2.7 million for the first quarter of 2020~~ and ~~$550~~$700 thousand for the ~~second~~third quarter of 2019. The provision for loan losses for the ~~six~~nine months ended ~~June~~September 30, 2020 was ~~$4.8~~$5.8 million, an increase of ~~$3.9~~$4.2 million compared to the ~~six~~nine months ended ~~June~~September 30, 2019. The increase in the provision for loan losses for the three ~~and six~~ months ended ~~June~~September 30, 2020 over the comparable periods in the prior year was primarily related to an increase in qualitative loss factors related to COVID-19 and loan growth. Approximately $1.4 million and $3.3 million of provision for the second quarter of 2020 and the ~~six~~comparable period in 2019 was primarily related to organic growth in the loan portfolio. The provision for loan losses for the nine months ended ~~June~~September 30, 2020 was ~~driven mostly~~also impacted by an increase in qualitative factors relating to the COVID-19 pandemic and macro-economic conditions. The assumptions underlying the COVID-19 related qualitative factors included (a) uncertain and volatile macroeconomic conditions caused by the pandemic; (b) the high unemployment rate; and (c) the loan deferment ~~program.~~program and Main Street Lending Program. Loans held for investment, excluding PPP loans, increased to ~~$1.44~~$1.49 billion at ~~June~~September 30, 2020 as compared to ~~$1.37~~$1.32 billion at ~~June~~September 30, 2019. No provision for loan losses on PPP loans was recognized infor the ~~second quarter of~~nine months ended September 30, 2020 as the SBA guarantees 100% of loans funded under the program.

Noninterest Income

The following table shows the components of noninterest income for the periods indicated:


		Three Months Ended												Six Months Ended June 30,					Three Months Ended				Nine Months Ended September 30,
		June 30, 2020		March 31, 2020		June 30, 2019		2020		2019			September 30, 2020		June 30, 2020		September 30, 2019		2020		2019
		(dollars in thousands)																			(dollars in thousands)
Gain on sale of loans	Gain on sale of loans	$	—	$	377	$	1,271	$	377	$	2,199	Gain on sale of loans	$	990	$	—	$	528	$	1,367	$	2,727
Service charges and fees on deposit accounts	Service charges and fees on deposit accounts	447		555		564		1,002		1,104		Service charges and fees on deposit accounts	495		447		475		1,497		1,579
Net servicing (costs) fees		(9)		224		287		215		521
Net servicing fees (costs)												Net servicing fees (costs)	228		(9)		242		443		763
Other income	Other income	617		259		200		876		620		Other income	230		617		428		1,106		1,048
Total noninterest income	Total noninterest income	$	1,055	$	1,415	$	2,322	$	2,470	$	4,444	Total noninterest income	$	1,943	$	1,055	$	1,673	$	4,413	$	6,117

~~Second~~Third Quarter of 2020 Compared to ~~First~~Second Quarter of 2020

Noninterest income for the ~~second~~third quarter of 2020 was ~~$1.1~~$1.9 million, ~~a decrease~~an increase of ~~$360~~$888 thousand from ~~$1.4~~$1.1 million for the ~~first~~second quarter of 2020 due primarily to ~~lower~~higher gains on loan sales of ~~$377~~$990 thousand and ~~lower~~higher net servicing fees of ~~$233~~$237 thousand, partially offset by lower other income of $387 thousand. SBA loans sold during the third quarter of 2020

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~~thousand, partially offset by higher other income of $358 thousand. There were no loans sold during the second quarter of 2020, compared to $3.4~~totaled $6.2 million resulting in ~~loans sold and~~ a gain on sale of ~~$377 thousand~~$504 thousand. Gains on loan sales for the third quarter of 2020 also included the sale of 95% of the principal balance of Main Street loans resulting in gains of $486 thousand. There were no gains on loan sales in the ~~first~~second quarter of 2020.

The ~~$233~~$237 thousand ~~decrease~~increase in net servicing fees was due primarily to ~~higher~~lower amortization of servicing asset from early loan pay-offs which totaled $68 thousand for the third quarter of 2020 compared to $277 thousand for the second quarter of ~~2020 compared to $69~~2020. Other income decreased $387 thousand for the ~~first quarter of 2020. Other income was $617 thousand for the second~~third quarter of 2020 ~~compared~~due to ~~$259~~$153 thousand ~~for the first quarter~~gain on sale of ~~2020. Gains, included in other income, on transfer of loan collateral to~~ foreclosed assets of $153 thousand were recognized for the second quarter of 2020. There was no similar income in the first quarter of 2020. Other income for the second quarter of 2020 also included a Bank Enterprise Award ofand $233 thousand ~~from the U.S.Treasury’s~~ Community Development Financial Institutions Fund to recognize the Bank for providing small business loans or commercial real estate development loans to businesses located in distressed communities. There was no similar income in the first quarter of 2020.

~~Second Quarter of 2020 Compared to Second Quarter of 2019~~

Noninterest income decreased $1.3 million to $1.1 million for the second quarter of 2020 compared to $2.3 million for the same quarter of 2019 due primarily to lower gain on sale of loans and lower net servicing fees, partially offset by higher other income. The $1.3 million decrease in gain on sale of loans for the second quarter of 2020 compared to the same quarter of 2019 is due to a lower volume of loans sold. There were no loans sold during the second quarter of 2020, compared to $16.4 million in loans sold, resulting in a gain of $1.3 million for the second quarter of 2019.

Net servicing fees decreased $296 thousand due to slightly lower contractual servicing fees and higher amortization expense of the related servicing asset in the second quarter of 2020. Our SBA loan servicing portfolio averaged $201.5 million for the second quarter of 2020 ~~compared to $210.6 million for~~ ~~the same quarter of 2019~~. ~~During the second quarter of 2020 and 2019, contractually-specified servicing fees were $463 thousand and $493 thousand, offset by the~~ ~~amortization of the servicing asset of~~ ~~$472 thousand and~~ ~~$206 thousand.~~ ~~The increase in amortization of the servicing asset was due to a higher level of early loan pay-offs in the current quarter as compared to the same quarter of~~ ~~2019. Amortization expense related to early loan pay-offs totaled $277 thousand for the~~ ~~second quarter of 2020 compared to $69 thousand~~ ~~for the~~ ~~same quarter of 2019.~~

Other income was $617 thousand for the second quarter of 2020 compared to $200 thousand for the same quarter of 2019. The increase of $417 thousand primarily related to gains on transfer of loan collateral to foreclosed assets of $153 thousand and a CDFI Bank Enterprise Award ~~("BEA"~~(“CDFI BEA”) ~~of $233 thousand~~ recognized in the second quarter of 2020. There was no similar income in the ~~second~~third quarter of ~~2019.~~2020.

~~Six~~Third Quarter of 2020 Compared to Third Quarter of 2019

Noninterest income increased $270 thousand to $1.9 million for the third quarter of 2020 compared to $1.7 million for the same quarter of 2019 due primarily to higher gain on sale of loans, partially offset by lower other income. The $462 thousand increase in gain on sale of loans for the third quarter of 2020 compared to the same quarter of 2019 was due primarily to the sale of 95% of the principal balance of Main Street loans resulting in gains of $486 thousand.

Other income was $230 thousand for the third quarter of 2020 compared to $428 thousand for the same quarter of 2019. The decrease of $198 thousand primarily related to CDFI BEA of $233 thousand recognized in the third quarter of 2019. There was no similar income in the third quarter of 2020.

Nine Months Ended ~~June~~September 30, 2020 Compared to ~~Six~~Nine Months Ended ~~June~~September 30, 2019

Noninterest income decreased $~~2.0~~1.7 million to $~~2.5~~4.4 million for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to $~~4.4~~6.1 million for the same period of 2019 due primarily to lower gain on sale of loans and lower net servicing ~~fees, partially offset by higher other income.~~fees. The $~~1.8~~1.4 million decrease in gain on sale of loans for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to the same period of 2019 is due to a lower volume of SBA loans sold, offset by the gain from the Main Street loans sold. Loans sold during the ~~six~~nine months ended ~~June~~September 30, 2020 totaled $~~3.4~~75.2 million, of which $65.6 million related to the 95% of the principal balance of Main Street loans, resulting in a gain on sale of ~~$377 thousand,~~$1.4 million, compared to ~~$35.0~~$44.7 million inof SBA loans sold, resulting in a gain on sale of ~~$2.2 million.~~$2.7 million for the same period of 2019.

Net servicing fees decreased due to ~~a slightly higher contractual servicing fees, offset by~~ higher amortization expense of the related servicing asset in the ~~six~~nine months ended ~~June~~September 30, 2020. Our SBA loan servicing portfolio averaged $~~208.1~~203.4 million for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to ~~$204.2~~$206.4 million for the same period of 2019. During the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, contractually-specified servicing fees were $~~969 thousand~~1.5 million and $~~938 thousand~~1.5 million, offset by the amortization of the servicing asset of ~~$754 thousand~~$1.0 million and $~~417~~699 thousand. The increase in amortization of the servicing asset was due to the ~~higher portfolio of serviced loans, coupled with a~~ higher level of early loan pay-offs in the current period. Amortization expense related to early loan pay-offs totaled ~~$346~~$414 thousand for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to $~~161~~307 thousand for the same period of 2019.

~~Other income was~~ ~~$876 thousand~~ ~~for the six months ended June 30, 2020 compared to~~ ~~$620 thousand~~ ~~for the same period of 2019. The increase of~~ ~~$256 thousand~~ ~~primarily related to gains on transfer of loan collateral to foreclosed assets of~~

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~~$153 thousand and higher rental income of $165 thousand for a sublease in the six months ended June 30, 2020 as compared to the same period of 2019.~~

Noninterest Expense

The following table shows the components of noninterest expense for the periods indicated:


		Three Months Ended																	Six Months Ended June 30,								Three Months Ended						Nine Months Ended September 30,
		June 30, 2020			March 31, 2020			June 30, 2019			2020			2019				September 30, 2020			June 30, 2020			September 30, 2019			2020			2019
		(dollars in thousands)																												(dollars in thousands)
Salaries and employee benefits	Salaries and employee benefits	$	6,386		$	7,230		$	6,857		$	13,616		$	13,080		Salaries and employee benefits	$	7,126		$	6,386		$	6,472		$	20,742		$	19,552
Occupancy and equipment	Occupancy and equipment	1,108			1,063			987			2,171			2,416			Occupancy and equipment	1,137			1,108			1,097			3,308			3,513
Data processing	Data processing	874			807			639			1,681			1,243			Data processing	955			874			718			2,636			1,961
Professional fees	Professional fees	450			471			426			921			845			Professional fees	492			450			392			1,413			1,237
Office, postage and telecommunications	Office, postage and telecommunications	289			258			255			547			527			Office, postage and telecommunications	274			289			253			821			780
Deposit insurance and regulatory assessments	Deposit insurance and regulatory assessments	198			61			120			259			315			Deposit insurance and regulatory assessments	386			198			30			645			345
Loan related	Loan related	226			275			71			501			285			Loan related	59			226			244			560			529
Customer service related	Customer service related	328			372			273			700			750			Customer service related	81			328			437			781			1,187

Amortization of core deposit intangible	Amortization of core deposit intangible	193			193			197			386			393			Amortization of core deposit intangible	193			193			197			579			590
Other expenses	Other expenses	1,048			789			780			1,837			1,451			Other expenses	825			1,048			811			2,662			2,262
Total noninterest expense	Total noninterest expense	$	11,100		$	11,519		$	10,605		$	22,619		$	21,305		Total noninterest expense	$	11,528		$	11,100		$	10,651		$	34,147		$	31,956
Efficiency ratio⁽¹⁾	Efficiency ratio⁽¹⁾	52.0		%	56.0		%	50.1		%	53.9		%	50.2		%	Efficiency ratio (1)	48.7		%	52.0		%	46.9		%	52.0		%	49.0		%

(1) Non-GAAP measure. See - Non-GAAP Financial Measures in this MD&A.

~~Second~~Third Quarter of 2020 Compared to ~~First~~Second Quarter of 2020

Noninterest expense ~~decreased $419~~increased $428 thousand to $11.5 million for the third quarter of 2020 from $11.1 million for the second quarter of ~~2020 from $11.5 million for the first quarter of~~ 2020. This ~~decrease~~increase was due primarily to ~~lower~~higher salaries and employee benefit expenses, higher FDIC assessment fees, offset by lower loan related expenses, ~~and~~ lower customer service related expenses, ~~offset partially by higher data processing, FDIC assessment fees~~ and lower other expenses.

The ~~$844~~$740 thousand ~~decrease~~increase in salaries and employee benefits was due to ~~lower~~higher incentive accruals resulting from ~~a decrease~~an increase in organic loan production in the ~~second~~third quarter of ~~2020, higher deferred loan origination cost for~~2020. The $188 thousand increase in FDIC assessment fees was due primarily to the ~~PPP loans, and lower payroll taxes and employee benefits resulting from a seasonally higher first quarter.~~ organic growth in total assets during the third quarter of 2020.

The ~~$49~~$167 thousand decrease in loan related expenses was due primarily to a recovery of expenses in the ~~second~~third quarter of 2020 and lower expense incurred for PPP loans in the third quarter of 2020. The ~~$44~~$247 thousand decrease in customer service related expenses was due primarily to lower average demand deposits for certain deposit accounts during the ~~second~~third quarter of 2020.

The ~~$137 thousand increase in FDIC assessment fees was due to Small Bank Assessment Credits received in the first quarter of 2020 for which there are no further credits. The increase~~decrease in other expenses ~~related primarily to a $300 thousand increase in the~~resulted from no provision for unfunded loan commitments ~~resulting from an increase~~recognized in the third quarter of 2020 compared to a $300 thousand provision for unfunded loan commitments ~~and historical loss rates.~~in the second quarter of 2020. Total unfunded loan commitments decreased $2.5 million to $390.9 million at September 30, 2020 from $393.4 million at June 30, 2020.

The efficiency ratio remained favorable ~~at 52.0%~~and decreased to 48.7% in the ~~second~~third quarter of 2020, compared to ~~56.0%~~52.0% in the ~~first~~second quarter of 2020. The lower efficiency ratio in the ~~second~~third quarter of 2020 was driven by higher revenue including the ~~benefits of the PPP~~gains from SBA and Main Street loan ~~volume.~~sales.

~~Second~~Third Quarter of 2020 Compared to ~~Second~~Third Quarter of 2019

Noninterest expense for the ~~second~~third quarter of 2020 increased ~~$495~~$877 thousand to $11.5 million from ~~$10.6~~$10.7 million for the same quarter of 2019. The increase was due to higher ~~occupancy~~salaries and ~~equipment~~employee benefits expense, data processing expense, FDIC assessment fees, partially offset by loan related expense ~~partially offset by lower salaries~~ and ~~employee benefits~~customer service related expense.

The ~~$471~~$654 thousand ~~decrease~~increase in salaries and employee benefits was due mostly to ~~an increase in~~higher incentives from the loan growth, partially offset by increased deferred loan origination costs ~~for the PPP loans originated~~ during the ~~second~~third quarter of 2020.

The $121 thousand decrease in occupancy and equipment expense was due to higher depreciation expense for fixed assets and accrued expenses for asset retirement obligations in the second quarter of 2020. The $235$237 thousand increase in data processing expenses was due to increases in transaction volumes from ~~organic~~loans and deposit growth and enhancing automation such as online account opening solutions, coupled with higher software amortization of new and upgraded technology. The ~~$155~~$356 thousand increase in FDIC assessment fees was due primarily to the

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

The $185 thousand decrease in loan related expenses was due primarily to ~~expense incurred~~higher reimbursements for loan related expenses. The $356 thousand decrease in customer service related expenses was due primarily to lower average demand deposits for certain deposit accounts during the ~~roll-out of PPP loans in the second~~third quarter of 2020.

The efficiency ratio remained ~~stable~~strong at ~~52.0%~~48.7% in the ~~second~~third quarter of 2020, compared to ~~50.1%~~46.9% in the ~~second~~third quarter of 2019. The higher efficiency ratio in the ~~second~~third quarter of 2020 was driven by higher noninterest ~~expense.~~expense, partially offset by higher revenues.

~~Six~~Nine Months Ended ~~June~~September 30, 2020 Compared to ~~Six~~Nine Months Ended ~~June~~September 30, 2019

Noninterest expense for the ~~six~~nine months ended ~~June~~September 30, 2020 increased ~~$1.3~~$2.2 million to ~~$22.6~~$34.1 million from ~~$21.3~~$32.0 million for the ~~six~~nine months ended ~~June~~September 30, 2019. The increase was due to higher salaries and employee benefits, data processing, ~~loan related expense,~~FDIC assessment fees and other expenses, partially offset by lower occupancy and equipment expense and customer service related expense.

The ~~$536 thousand~~$1.2 million increase in salaries and employee benefits was due ~~mostly~~ to annual merit increases, higher overtime expense for the roll-out of PPP loans, higher incentives, partially offset by increased deferred loan origination costs for the ~~six~~nine months ended ~~June~~September 30, 2020. The ~~$438~~$675 thousand increase in data processing expenses was due to increases in transaction volumes from ~~organic~~production growth and enhancing automation such as online account opening solutions, coupled with higher software amortization of new and upgraded technology. The ~~$216~~$300 thousand increase in ~~loan related expense~~FDIC assessment fees was due primarily to ~~expense incurred for~~ the ~~roll-out~~organic growth in the total assets and the Small Bank Assessment Credits received from the FDIC in the third quarter of ~~PPP loans.~~2019. The ~~$386~~$400 thousand increase in other expense related primarily to a $300 thousand increase in the provision for unfunded loan commitments resulting from an increase in unfunded loan commitments and historical loss rates.

Occupancy and equipment expense decreased by ~~$245~~$205 thousand due primarily to a $400 thousand impairment charge in the ~~six~~nine months ended ~~June~~September 30, 2019 for the ~~anticipated~~ relocation and consolidation of branches in 2019. There was no impairment charge in 2020, partially offset by ~~$84~~$125 thousand accrued expenses for asset retirement obligations recognized in 2020. The $406 thousand decrease in customer service related expenses was due primarily to lower average demand deposits for certain deposit accounts during the nine months ended September 30, 2020.

The efficiency ratio remained ~~stable~~strong at ~~53.9%~~52.0% for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~50.2%~~49.0% for the ~~six~~nine months ended ~~June~~September 30, 2019. The higher efficiency ratio in the ~~six~~nine months ended ~~June~~September 30, 2020 was driven by higher noninterest ~~expense and lower revenues.~~expense.

Income Taxes

Income tax expense was $3.3 million, $2.4 million ~~$1.8 million~~ and ~~$3.2~~$3.3 million for the three months ended September 30, 2020, June 30, 2020 ~~March 31, 2020~~ and ~~June~~September 30, 2019. The effective tax rates were ~~29.8%~~29.3%, ~~28.6%~~29.8% and ~~31.9%~~28.9% for the three months ended September 30, 2020, June 30, 2020 ~~March 31, 2020~~ and ~~June~~September 30, 2019. For the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, income tax expense was ~~$4.3~~$7.5 million and ~~$6.4~~$9.7 million and the effective tax rates were 29.3% and ~~31.8%~~30.8%. The difference in our effective tax rate compared to the statutory rate of 29.5% for the respective reporting periods was primarily attributable to the impact of the vesting and exercise of equity awards combined with changes in the Company's stock price over time.

Financial Condition

Total assets increased ~~$447.9~~$32.7 million during the ~~second~~third quarter of 2020 to $2.26 billion at September 30, 2020 from $2.22 billion at June 30, ~~2020 from $1.78 billion at March 31,~~ 2020. This increase iswas due mostly to a ~~$44.3~~$1.2 million increase in ~~cash and cash equivalents,~~investment securities available-for sale, a ~~$6.7~~$16.1 million increase in loans held for sale, a ~~$393.6~~$53.3 million increase in loans held for investment ~~including PPP loans, net of unearned fees of $389.2~~and $2.5 million ~~an $8.1~~increase in other assets, partially offset by a $36.3 million ~~increase~~decrease in cash and cash equivalents, a $2.3 million decrease in accrued interest receivable primarily related to loans on a deferred payment program, a ~~$602~~$912 thousand ~~increase in net foreclosed assets, partially offset by a $2.2 million decrease in investment~~

~~securities, $1.6 million~~ increase in the allowance for loan losses and ~~$1.8 million~~a $602 thousand decrease in ~~other~~net foreclosed assets. Total liabilities increased ~~$444.3~~$27.2 million during the ~~second~~third quarter of 2020 to $1.98 billion at September 30, 2020 from $1.96 billion at June 30, ~~2020 from $1.51 billion at March 31,~~ 2020. This increase is was

due mostly to a ~~$254.0 million increase in total deposits, a $10.0 million increase in borrowings, a $179.1~~$74.0 million increase in PPPLF, ~~a $3.3 million increase in other liabilities,~~ partially offset by a $45.1 million decrease in total deposits and a decrease in senior secured notes of $2.1 million.

Since December 31, 2019, total assets have increased ~~$533.3~~$566.0 million due mostly to a ~~$456.9~~$510.3 million increase in loans held for investment, including PPP loans, net of unearned fees of ~~$389.2~~$390.2 million, to ~~$1.83~~$1.88 billion at ~~June~~September 30, 2020, or an annualized growth rate of ~~10%~~12% without PPP loans. In addition, cash and cash equivalents increased ~~$56.0~~$19.7 million, investment securities increased ~~$6.8~~$8.0 million, loans held for sale increased ~~$12.7~~$28.8 million, accrued interest receivable ~~increased$8.4~~increased $6.0 million primarily related to loans on a deferred payment program and PPP loans, and premises and equipment increased ~~$1.0 million and net foreclosed assets increased $602~~$799 thousand, partially offset by a ~~$4.3~~$5.2 million increase in allowance for loan losses, a ~~$686~~$834 thousand decrease in servicing asset, and a ~~$3.5~~$1.0 million decrease in other assets. Total liabilities at ~~June~~September 30, 2020 were ~~$1.96~~$1.98 billion, an increase of ~~$528.1~~$555.4 million, from $1.43 billion at December 31, 2019. Total deposits increased ~~$291.3~~$246.2 million, borrowings increased $60.0 million, PPPLF increased ~~$179.1~~$253.1 million, and other liabilities increased ~~$806 thousand,~~$1.2 million, partially offset by a decrease in senior secured notes of ~~$3.1 million~~

$5.2 million.

Cash and Cash Equivalents

Cash and cash equivalents are comprised of cash and due from banks, interest-bearing deposits at the Federal Reserve and other banks, with original maturities of less than 90 days. Cash and cash equivalents totaled ~~$217.8~~$181.5 million at September 30, 2020, a decrease of $36.3 million from June 30, 2020, and an increase of ~~$44.3 million from March 31, 2020 and $56.0~~$19.7 million from December 31, 2019. The decrease in cash and cash equivalents during the three months ended September 30, 2020 was primarily attributed to an increase in loans and decrease in deposits. The increase in cash and cash equivalents during the ~~three and six~~nine months ended ~~June~~September 30, 2020 was primarily attributable to ~~an increase~~increases in deposits, borrowings and PPPLF to fund the PPP loans and maintain appropriate on balance sheet ~~liquidity.~~

liquidity, partially offset by an increase in loans.

Investment Securities

The following table presents the ~~carrying~~fair values of investment securities available-for-sale and amortized cost of investment securities held-to-maturity as of the periods indicated:


		June 30, 2020						March 31, 2020								December 31, 2019					September 30, 2020					June 30, 2020		December 31, 2019
		Fair Value		Percentage of Total		Fair Value		Percentage of Total		Fair Value		Percentage of Total			Fair Value		Percentage of Total		Fair Value		Percentage of Total		Fair Value			Percentage of Total
Securities available-for-sale:	Securities available-for-sale:	(dollars in thousands)																							Securities available-for-sale:	(dollars in thousands)
U.S. Government and agency securities	U.S. Government and agency securities	$	3,000	8.2	%	$	2,998	7.7	%	$	—	—	%	U.S. Government and agency securities	$	2,706	7.1	%	$	3,000	8.2	%	$	—		—	%
Mortgage-backed securities	Mortgage-backed securities	6,830		18.6	%	$	7,299	18.8	%	7,431		27.9	%	Mortgage-backed securities	6,157		16.2	%	$	6,830	18.6	%	7,431			27.9	%
Collateralized mortgage obligations	Collateralized mortgage obligations	18,610		50.5	%	20,170		51.8	%	10,598		39.7	%	Collateralized mortgage obligations	20,908		55.0	%	18,610		50.5	%	10,598			39.7	%
SBA pools	SBA pools	8,343		22.7	%	8,457		21.7	%	8,624		32.4	%	SBA pools	8,228		21.7	%	8,343		22.7	%	8,624			32.4	%

		$	36,783	100.0	%	$	38,924	100.0	%	$	26,653	100.0	%		$	37,999	100.0	%	$	36,783	100.0	%	$	26,653		100.0	%

															September 30, 2020				June 30, 2020				December 31, 2019
															Amortized Cost		Percentage of Total		Amortized Cost		Percentage of Total		Amortized Cost			Percentage of Total
Securities held-to-maturity:	Securities held-to-maturity:																								Securities held-to-maturity:
U.S. Government and agency securities	U.S. Government and agency securities	$	—	—	%	$	—	—	%	$	3,342	66.1	%	U.S. Government and agency securities	$	—	—	%	$	—	—	%	$	3,342		66.1	%
Mortgage-backed securities	Mortgage-backed securities	1,691		100.0	%	1,702		100.0	%	1,714		33.9	%	Mortgage-backed securities	1,680		100.0	%	1,691		100.0	%	1,714			33.9	%
		$	1,691	100.0	%	$	1,702	100.0	%	$	5,056	100.0	%		$	1,680	100.0	%	$	1,691	100.0	%	$	5,056		100.0	%

5659

The following table presents the contractual maturities of investment securities available-for-sale and held-to-maturity as of ~~June~~September 30, 2020:


		June 30, 2020																													September 30, 2020
		One Year or Less			After One Year Through Five Years			After Five Years Through Ten Years			After Ten Years (1)			Total				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:	Securities available-for-sale:	(dollars in thousands)																												Securities available-for-sale:	(dollars in thousands)
U.S. Government and agency securities	U.S. Government and agency securities	$	—		$	—		$	—		$	3,000		$	3,000		U.S. Government and agency securities	$	—		$	—		$	—		$	2,706			$	2,706
Mortgage-backed securities	Mortgage-backed securities	—			—			—			6,830			6,830			Mortgage-backed securities	—			—			—			6,157				6,157
Collateralized mortgage obligations	Collateralized mortgage obligations	—			—			—			18,610			18,610			Collateralized mortgage obligations	—			—			—			20,908				20,908
SBA pools	SBA pools	—			—			—			8,343			8,343			SBA pools	—			—			—			8,228				8,228
		$	—		$	—		$	—		$	36,783		$	36,783			$	—		$	—		$	—		$	37,999			$	37,999
Weighted average yield:	Weighted average yield:																Weighted average yield:
U.S. Government and agency securities	U.S. Government and agency securities	—		%	—		%	—		%	2.13		%	2.13		%	U.S. Government and agency securities	—		%	—		%	—		%	2.13		%		2.13		%
Mortgage-backed securities	Mortgage-backed securities	—		%	—		%	—		%	2.10		%	2.10		%	Mortgage-backed securities	—		%	—		%	—		%	1.82		%		1.82		%
Collateralized mortgage obligations	Collateralized mortgage obligations	—		%	—		%	—		%	1.79		%	1.79		%	Collateralized mortgage obligations	—		%	—		%	—		%	1.30		%		1.30		%
SBA pools	SBA pools	—		%	—		%	—		%	2.43		%	2.43		%	SBA pools	—		%	—		%	—		%	2.43		%		2.43		%
		—		%	—		%	—		%	2.02		%	2.02		%		—		%	—		%	—		%	1.68		%		1.68		%

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


		June 30, 2020																													September 30, 2020
		One Year or Less			After One Year Through Five Years			After Five Years Through Ten Years			After Ten Years (1)			Total				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:	Securities held-to-maturity:	(dollars in thousands)																												Securities held-to-maturity:	(dollars in thousands)

Mortgage-backed securities	Mortgage-backed securities	$	—		$	—		$	—		$	1,691		$	1,691		Mortgage-backed securities	$	—		$	—		$	—		$	1,680			$	1,680
		$	—		$	—		$	—		$	1,691		$	1,691			$	—		$	—		$	—		$	1,680			$	1,680
Weighted average yield:	Weighted average yield:																Weighted average yield:

Mortgage-backed securities	Mortgage-backed securities	—		%	—		%	—		%	2.78		%	2.78		%	Mortgage-backed securities	—		%	—		%	—		%	2.78		%		2.78		%
		—		%	—		%	—		%	2.78		%	2.78		%		—		%	—		%	—		%	2.78		%		2.78		%

(1) Mortgage-backed securities do not have a single stated maturity date and, therefore, have been included in the "After Ten Years" category.

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

Loans

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

5760

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


		June 30, 2020						March 31, 2020						December 31, 2019					September 30, 2020				June 30, 2020				December 31, 2019
		Amount		Percentage of Total		Amount		Percentage of Total		Amount		Percentage of Total			Amount		Percentage of Total		Amount		Percentage of Total		Amount		Percentage of Total
		(dollars in thousands)																							(dollars in thousands)
Construction and land development	Construction and land development	$	218,226	11.8	%	$	233,607	16.2	%	$	249,504	18.1	%	Construction and land development	$	215,109	11.3	%	$	218,226	11.8	%	$	249,504	18.1	%
Real estate:	Real estate:													Real estate:
Residential	Residential	39,145		2.1	%	42,904		3.0	%	43,736		3.2	%	Residential	30,067		1.6	%	39,145		2.1	%	43,736		3.2	%
Commercial real estate - owner occupied	Commercial real estate - owner occupied	162,508		8.8	%	148,517		10.3	%	171,595		12.5	%	Commercial real estate - owner occupied	159,603		8.4	%	162,508		8.8	%	171,595		12.5	%
Commercial real estate - non-owner occupied	Commercial real estate - non-owner occupied	502,693		27.3	%	476,472		33.2	%	423,823		30.8	%	Commercial real estate - non-owner occupied	528,201		27.9	%	502,693		27.3	%	423,823		30.8	%
Commercial and industrial	Commercial and industrial	335,411		18.2	%	350,090		24.3	%	309,011		22.5	%	Commercial and industrial	361,170		19.0	%	335,411		18.2	%	309,011		22.5	%
SBA loans ⁽¹⁾	SBA loans ⁽¹⁾	586,820		31.8	%	187,407		13.0	%	177,633		12.9	%	SBA loans (1)	602,407		31.8	%	586,820		31.8	%	177,633		12.9	%
Consumer	Consumer	34		—	%	450		—	%	430		—	%	Consumer	8		—	%	34		—	%	430		—	%
Loans held for investment, net of discounts ⁽²⁾	Loans held for investment, net of discounts ⁽²⁾	$	1,844,837	100.0	%	$	1,439,447	100.0	%	$	1,375,732	100.0	%	Loans held for investment, net of discounts (2)	$	1,896,565	100.0	%	$	1,844,837	100.0	%	$	1,375,732	100.0	%
Net deferred origination fees ⁽³⁾	Net deferred origination fees ⁽³⁾	(13,218)				(1,392)				(1,057)				Net deferred origination fees (3)	(11,635)				(13,218)				(1,057)
Loans held for investment	Loans held for investment	1,831,619				1,438,055				1,374,675				Loans held for investment	1,884,930				1,831,619				1,374,675
Allowance for loan losses⁽⁴⁾	Allowance for loan losses⁽⁴⁾	(17,822)				(16,218)				(13,522)				Allowance for loan losses⁽⁴⁾	(18,734)				(17,822)				(13,522)
Loans held for investment, net	Loans held for investment, net	$	1,813,797			$	1,421,837			$	1,361,153			Loans held for investment, net	$	1,866,196			$	1,813,797			$	1,361,153

(1) SBA loans include PPP loans with total gross outstanding principal of $400.1 million and $400.7 million at September 30, 2020 and June 30, ~~2020~~.2020.

(2) Loans held for investment, net of discounts includes the net carrying value of PCI loans of $792 thousand, $1.0 ~~million, $1.1~~ million and $1.1 million at ~~June~~September 30, 2020, ~~March 31,~~June 30, 2020 and December 31, 2019.

(3) Net deferred origination fees include $9.9 million and $11.5 million for PPP loans at September 30, 2020 and June 30, ~~2020~~.

~~(4) Allowance for loan losses includes $138 thousand of reserves for accrued interest receivable related to loans on a deferred payment program at June 30, 2020~~.2020.

At ~~June~~September 30, 2020, loans held for investment totaled ~~$1.83~~$1.88 billion, an increase of ~~$393.6~~$53.3 million and ~~$456.9~~$510.3 million from ~~March 31,~~June 30, 2020 and December 31, 2019. During the ~~second~~third quarter of 2020 as compared to ~~March 31,~~June 30, 2020, construction and land development loans decreased ~~$15.4~~$3.1 million, commercial real estate loans ("CRE") increased ~~$40.2~~$22.6 million, commercial and industrial ("C&I") loans ~~decreased $14.7~~increased $25.8 million, SBA loans increased ~~$399.4~~$15.6 million, and residential loans decreased ~~$3.8~~$9.1 million.

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

The most significant categories in the loan portfolio are SBA, CRE (non-owner occupied) and commercial and industrial loans which represent 31.8%, ~~27.3%~~27.9% and ~~18.2%~~19.0% of total loans held for investment, net of discounts at ~~June~~September 30, 2020.

Being a preferred SBA lender, we participated in the PPP and ~~funded a total of 1,886 loans with~~had total gross loan outstanding balances of ~~$400.7~~$400.1 million, or ~~$389.2~~$390.2 million, net of unearned fees of ~~$11.5~~$9.9 million at ~~June~~September 30, 2020. Borrowers who use the funds from their PPP loans to maintain payroll and pay for certain eligible non-payroll expenses may have up to 100% of their loans forgiven by the SBA. ~~We expect a substantial majority of our~~The SBA has commenced making determinations as to PPP ~~borrowers will apply for and receive approval for loan~~ forgiveness applications in the ~~second half~~fourth quarter of ~~2020.~~2020 and, the Company anticipates that the SBA will continue reviewing and making determinations with respect to forgiveness applications, at which point the recognition of fee income will be accelerated. This expectation is subject to change due to borrower behavior, changing SBA requirements and processes relating to loan forgiveness and other relevant factors. Excluding the PPP loans, our SBA portfolio represents ~~12.9%~~13.5% of total loans held for investment, net of discounts at ~~June~~September 30, 2020. Please refer to the Recent Developments “COVID-19 Updates for the Third Quarter of 2020” section for pandemic impact relating to PPP loans.

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

Per the regulatory definition of commercial real estate, at ~~June~~September 30, 2020, ~~March 31,~~June 30, 2020 and December 31, 2019, our concentration of such loans represented ~~307%~~314%, ~~316%~~307% and 314% of our total risk-based capital and were below our internal policy limit of 350% of our total risk-based capital. In addition, at ~~June~~September 30, 2020, ~~March 31,~~June 30, 2020 and December 31, 2019, total loans secured by commercial real estate under construction and land development represented ~~94%~~89%, ~~102%~~94% and 125% of our total risk-based capital and were likewise below our internal policy of 150% of our total risk-based capital. Historically, we have managed loan concentrations by selling participations in, or whole loan sales of, certain loans, primarily commercial real estate and construction and land development loan production.

We have total loans to the hospitality industry (including construction, CRE, C&I and SBA loans) of ~~$213.4~~$220.1 million, ~~$181.6~~$213.4 million and $158.9 million at ~~June~~September 30, 2020, ~~March 31,~~June 30, 2020 and December 31, 2019. Some of the members of our

Board of Directors are active in the hospitality sector, and therefore, are able to provide insights into the operations of the hotel properties. There are no loans to any of our board members or to members of their immediate families, but often to other hotel owners referred to us by these directors. We carefully manage our concentration and the levels of hospitality loans are measured against our total risk-based capital and reported to our Board of Directors regularly. Our internal guidance is to limit CRE and construction hospitality industry commitments to 150% and 75% of total risk-based capital, respectively. At ~~June~~September 30, 2020, ~~March 31,~~June 30, 2020 and December 31, 2019, total commitments to fund CRE loans to the hospitality industry represented ~~62%~~73%, ~~57%~~62% and ~~57%~~50% of our total risk-based capital. Total commitments to fund construction loans to the hospitality industry were 15%, 28% ~~of our total risk-based capital at June 30, 2020,~~ and 36% of our total risk-based capital at ~~March 31,~~September 30, 2020, June 30, 2020 and December 31, 2019. Please refer to the Recent Developments ~~COVID-19~~“COVID-19 Updates for the Third Quarter of 2020” section for pandemic ~~impacts~~impact relating to hospitality loans.

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

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


		June 30, 2020		March 31, 2020		December 31, 2019			September 30, 2020		June 30, 2020		December 31, 2019
		(dollars in thousands)											(dollars in thousands)
SBA 7(a) ⁽¹⁾	SBA 7(a) ⁽¹⁾	$	490,732	$	97,436	$	100,103	SBA 7(a) (1)	$	494,146	$	490,732	$	100,103
SBA 504	SBA 504	96,088		89,971		$	77,530	SBA 504	108,261		96,088		$	77,530
Total	Total	$	586,820	$	187,407	$	177,633	Total	$	602,407	$	586,820	$	177,633

(1) SBA 7(a) includes PPP loans with total gross outstanding principal of $400.1 million and $400.7 million at September 30, 2020 and June 30, 2020.

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


		June 30, 2020		March 31, 2020		December 31, 2019			September 30, 2020		June 30, 2020		December 31, 2019
		(dollars in thousands)											(dollars in thousands)
Secured - industrial warehouse	Secured - industrial warehouse	$	41,008	$	30,612	$	23,364	Secured - industrial warehouse	$	43,361	$	41,008	$	23,364
Secured - hospitality	Secured - hospitality	24,175		24,744		24,858		Secured - hospitality	24,894		24,175		24,858
Secured - retail center/building	Secured - retail center/building	23,288		27,986		28,182		Secured - retail center/building	24,527		23,288		28,182
Secured - other real estate	Secured - other real estate	60,203		64,231		58,757		Secured - other real estate	71,083		60,203		58,757
Unsecured or secured by other business assets	Unsecured or secured by other business assets	11,868		11,800		11,921		Unsecured or secured by other business assets	13,528		11,868		11,921
Total unguaranteed portion	Total unguaranteed portion	160,542		159,373		147,082		Total unguaranteed portion	177,393		160,542		147,082
Guaranteed portion ⁽¹⁾	Guaranteed portion ⁽¹⁾	426,278		28,034		30,551		Guaranteed portion (1)	425,014		426,278		30,551
Total	Total	$	586,820	$	187,407	$	177,633	Total	$	602,407	$	586,820	$	177,633

(1) Guaranteed portion includes PPP loans with total gross outstanding principal of $400.1 million and $400.7 million as the SBA guarantees 100% of loans

funded under the program.at September 30, 2020 and June 30, 2020.

Loan Maturities

The following table presents the contractual maturities and the distribution between fixed and adjustable interest rates for loans held for investment at ~~June~~September 30, 2020:


		June 30, 2020																													September 30, 2020
		Within One Year								After One Year Through Five Years									After Five Years									Within One Year					After One Year Through Five Years	After Five Years
		Fixed		Adjustable Rate		Fixed		Adjustable Rate			Fixed		Adjustable Rate		Total			Fixed		Adjustable Rate		Fixed		Adjustable Rate		Fixed			Adjustable Rate		Total
		(dollars in thousands)																													(dollars in thousands)
Construction and land development	Construction and land development	$	4,064	$	104,203	$	11,493	$	65,066		$	4,058	$	29,342	$	218,226	Construction and land development	$	4,188	$	110,094	$	12,044	$	59,559	$	—		$	29,224	$	215,109
Real estate:	Real estate:																Real estate:
Residential	Residential	—		—		—		2,131			2,259		34,755		39,145		Residential	—		—		—		845		2,249			26,973		30,067
Commercial real estate - owner occupied	Commercial real estate - owner occupied	1,319		1,697		20,717		39,759			21,681		77,335		162,508		Commercial real estate - owner occupied	1,443		2,085		20,552		40,368		22,219			72,936		159,603
Commercial real estate - non-owner occupied	Commercial real estate - non-owner occupied	14,802		29,152		74,901		101,719			54,723		227,396		502,693		Commercial real estate - non-owner occupied	12,968		22,451		77,413		125,237		62,791			227,341		528,201
Commercial and industrial	Commercial and industrial	8,203		72,012		23,571		104,987			13,595		113,043		335,411		Commercial and industrial	7,075		86,878		21,860		106,274		24,209			114,874		361,170
SBA loans⁽¹⁾	SBA loans⁽¹⁾	—		11,843		403,447		11,693			7,949		151,888		586,820		SBA loans (1)	—		8,490		402,885		11,525		10,004			169,503		602,407
Consumer & other		34		—		—		—			—		—		34
Consumer																	Consumer	8		—		—		—		—			—		8
Total	Total	$	28,422	$	218,907	$	534,129	$	325,355		$	104,265	$	633,759	$	1,844,837	Total	$	25,682	$	229,998	$	534,754	$	343,808	$	121,472		$	640,851	$	1,896,565

(1) PPP loans with total gross outstanding principal of ~~$400.7~~$400.1 million are fixed-rate with two-year contractual maturity.

Potential Problem Loans

Loans are considered delinquent when principal or interest payments are past due 30 days or more; delinquent loans may remain on accrual status between 30 days and 89 days past due. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income.

Loan delinquencies (30-89 days past due) totaled $1.2 million, $353 thousand ~~$2.3 million~~ and $1.8 million at ~~June~~September 30, 2020, ~~March 31,~~June 30, 2020 and December 31, 2019. Deferred payment loans which met the requirement under Section 4013 of the CARES Act are not considered ~~past due or~~as TDRs and are accruing interest as of ~~June~~September 30, 2020.

The following tables present the recorded investment balances of substandard loans, excluding PCI loans, by loan class at ~~June~~September 30, 2020 and December 31, 2019:


		June 30, 2020																															September 30, 2020
				Real Estate																					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			Construction and land development		Residential		Commercial real estate - owner occupied		Commercial real estate - non-owner occupied		Commercial and industrial		SBA loans		Consumer		Total
		(dollars in thousands)																															(dollars in thousands)

Substandard ⁽¹⁾	Substandard ⁽¹⁾	$	—	$	—	$	1,515	$	2,049	$	1,120	$	8,406	$	—	$	13,090	Substandard (1)	$	—	$	259	$	1,436	$	6,989	$	1,093	$	8,211	$	—	$	17,988
Total	Total	$	—	$	—	$	1,515	$	2,049	$	1,120	$	8,406	$	—	$	13,090	Total	$	—	$	259	$	1,436	$	6,989	$	1,093	$	8,211	$	—	$	17,988


	December 31, 2019
			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
	(dollars in thousands)

Substandard (1)	$	—	$	—	$	9,624	$	2,092	$	2,630	$	10,260	$	—	$	24,606
Total	$	—	$	—	$	9,624	$	2,092	$	2,630	$	10,260	$	—	$	24,606

(1)At December 31, 2019, substandard loans included $11.3 million of impaired loans. There were no loans classified as special mention, doubtful or loss at December 31, 2019.

Since year end, the decrease in the substandard loans was due to $821 thousand from upgrades, $756 thousand in charge-offs and ~~$10.2~~$10.7 million in payoffs, and paydowns, offset by ~~two~~six loans ~~from one relationship~~ totaling ~~$225 thousand~~$5.6 million being downgraded to substandard.

Nonperforming Assets

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


		June 30, 2020			March 31, 2020			December 31, 2019				September 30, 2020			June 30, 2020			December 31, 2019
		(dollars in thousands)																(dollars in thousands)
Accruing loans past due 90 days or more	Accruing loans past due 90 days or more	$	267		$	—		$	—		Accruing loans past due 90 days or more	$	—		$	267		$	—
Non-accrual	Non-accrual	7,999			8,984			11,107			Non-accrual	12,847			7,999			11,107
Troubled debt restructurings on non-accrual	Troubled debt restructurings on non-accrual	150			151			158			Troubled debt restructurings on non-accrual	144			150			158
Total nonperforming loans	Total nonperforming loans	8,416			9,135			11,265			Total nonperforming loans	12,991			8,416			11,265
Foreclosed assets	Foreclosed assets	602			—			—			Foreclosed assets	—			602			—
Total nonperforming assets	Total nonperforming assets	$	9,018		$	9,135		$	11,265		Total nonperforming assets	$	12,991		$	9,018		$	11,265
Troubled debt restructurings - on accrual	Troubled debt restructurings - on accrual	$	319		$	319		$	321		Troubled debt restructurings - on accrual	$	320		$	319		$	321

Nonperforming loans as a percentage of total loans held for investment	Nonperforming loans as a percentage of total loans held for investment	0.46		%	0.64		%	0.82		%	Nonperforming loans as a percentage of total loans held for investment	0.69		%	0.46		%	0.82		%
Nonperforming assets as a percentage of total assets	Nonperforming assets as a percentage of total assets	0.41		%	0.51		%	0.67		%	Nonperforming assets as a percentage of total assets	0.58		%	0.41		%	0.67		%

The following table shows our nonperforming loans by loan class as of the dates indicated:


		June 30, 2020		March 31, 2020		December 31, 2019			September 30, 2020		June 30, 2020		December 31, 2019
Nonperforming loans:	Nonperforming loans:	(dollars in thousands)										Nonperforming loans:	(dollars in thousands)
Construction and land development	Construction and land development	$	—	$	—	$	—	Construction and land development	$	—	$	—	$	—
Real estate:	Real estate:							Real estate:
Residential	Residential	267		—		—		Residential	259		267		—
Commercial real estate - owner occupied	Commercial real estate - owner occupied	$	1,515	$	1,560	$	3,049	Commercial real estate - owner occupied	1,312		1,515		3,049
Commercial real estate - non-owner occupied	Commercial real estate - non-owner occupied	1,339		1,368		1,368		Commercial real estate - non-owner occupied	6,286		1,339		1,368
Commercial and industrial	Commercial and industrial	186		187		229		Commercial and industrial	183		186		229
SBA loans	SBA loans	5,109		6,020		6,619		SBA loans	4,951		5,109		6,619

Total nonperforming loans (1)	Total nonperforming loans (1)	$	8,416	$	9,135	$	11,265	Total nonperforming loans (1)	$	12,991	$	8,416	$	11,265

(1) There were no purchased credit impaired loans on nonaccrual at ~~June~~September 30, 2020, ~~March 31,~~June 30, 2020 and December 31, 2019.

Since year end, the ~~decrease~~increase in nonperforming loans was due mostly to $756 thousand in charge-offs, ~~$2.6~~$3.0 million in payoffs and paydowns, offset by ~~two~~five loans ~~from one relationship~~ totaling ~~$225 thousand~~$5.5 million being downgraded to ~~substandard.~~nonaccrual. There were no loans over 90 days past due that were still accruing interest at September 30, 2020 and December 31, 2019. There was one loan over 90 days past due that was still accruing interest at June 30, 2020. ~~There were no loans over 90 days past due that were still accruing interest at March 31,2020 and December 31, 2019.~~

Troubled Debt Restructurings

At ~~June~~September 30, 2020 and December 31, 2019, the total recorded investment for loans identified as a TDR was approximately ~~$469~~$464 thousand and $479 thousand. There were no specific reserves allocated for these loans and we have not committed to lend any additional amounts to customers with outstanding loans that are classified as TDRs at ~~June~~September 30, 2020 and December 31, 2019. During the three and ~~six~~nine months ended ~~June~~September 30, 2020, there were no new loan modifications resulting in TDRs. Loan modifications resulting in TDR status generally included one or a combination of the following concessions: extensions of the maturity date, principal payment deferments or signed forbearance agreements with a payment plan.

During the three months ended September 30, 2020, June 30, 2020 ~~March 31, 2020~~ and ~~June~~September 30, 2019, there was one loan in each period totaling ~~$85~~$81 thousand, $85 thousand and ~~$95~~$92 thousand modified as a TDR for which there was a payment default within twelve months following the modification. During the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, there was one loan in each period totaling ~~$85~~$81 thousand and ~~$95~~$92 thousand modified as a TDR for which there was a payment default within twelve months following the modification. A loan is considered to be in payment default once it is 90 days contractually past due under the modification.

COVID Related Loan Deferments

At ~~June~~September 30, 2020, the Company had ~~520~~12 non-PPP loans totaling ~~$626~~$37 million ~~which included $11 million of loans held for sale, with a 90-day principal and/or interest~~on payment deferral for COVID-related ~~reasons. No~~reasons, down from $626 million at June 30, 2020. Over 97% of loans that were granted a deferral have resumed making regular, contractually agreed-upon payments or were paid off. One deferred payment loan of $113 thousand was reported as past due, two loans ~~which met the requirement~~totaling $5 million were reported as nonaccrual and none are reported as TDRs under Section 4013 of the CARES Act. As a part of the CARES Act, ~~were reported as past due loans or troubled debt restructurings ("TDRs") as~~the SBA is paying six months of ~~June~~loan payments for the Company’s SBA 7a borrowers. At September 30, 2020. The Company currently expects that the majority of these loans will resume payments in the third quarter of 2020. Total accrued interest receivable related to these loans on deferment was $10 million with an aforementioned reserve of $138 thousand at June 30, 2020. Borrowers are contractually required to resume making full payments after the deferral period ends. We may grant additional 90-day deferments. As of July 16, 2020, ~~232~~193 SBA loans with ~~a net carrying value of $397 million at June 30, 2020, or 63% of total loan balance, resumed making payments or paid off, and only four loans~~balances totaling ~~$11~~$73 million were ~~granted an additional 90-day deferment. The remainder is expected to resume~~having payments ~~as scheduled. Please refer to~~made by the ~~Recent Developments COVID-19 Updates section for pandemic impacts relating to Payment Deferral Program.~~SBA.

Allowance for Loan losses

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

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

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

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

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

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

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

At ~~June~~September 30, 2020, we evaluated and considered the impacts relating to COVID-19 and macro-economic conditions on our qualitative factors. The assumptions underlying these qualitative factors included (a) uncertain and volatile macro-economic conditions caused by the pandemic; (b) the ~~high~~stable unemployment rate; and (c) the loan deferment program and Main Street Lending program. No

provision for loan losses on PPP loans was recognized in ~~the second quarter of~~ 2020 as the SBA guarantees 100% of loans

funded under the program.

At ~~June~~September 30, 2020, the allowance for loan losses ~~including $138 thousand for accrued interest receivable related to loans on deferment,~~ was ~~$17.8~~$18.7 million, or ~~0.97%~~0.99% of loans held for investment, compared to $13.5 million, or 0.98% of loans held for investment at December 31, 2019. The allowance for loan losses as a percentage of total loans held for investment without PPP loans was ~~1.24%~~1.25% at ~~June~~September 30, 2020. At ~~June~~September 30, 2020, the net carrying value of acquired loans totaled ~~$187.3~~$173.8 million and included a remaining net discount of ~~$4.8~~$4.3 million. The discount is available to absorb losses on the acquired loans and represented ~~2.6%~~2.5% of the net carrying value of acquired loans and ~~0.26%~~0.22% of total gross loans held for investment.

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

Three Months Ended Six Months Ended June 30,
June 30, 2020 March 31, 2020 June 30, 2019 2020 2019
(dollars in thousands)
Balance, beginning of period $ 16,218 $ 13,522 $ 11,426 $ 13,522 $ 11,056
Charge-offs:
Commercial and industrial (125) (7) (122) (132) (124)
SBA loans (425) (21) — (446) —
Total charge-offs (550) (28) (122) (578) (124)
Recoveries:
Commercial and industrial 54 12 10 66 32
SBA loans — 12 189 12 189
Total recoveries 54 24 199 78 221
Net (charge-offs) recoveries (496) (4) 77 (500) 97
Provision for loan losses 2,100 2,700 550 4,800 900
Balance, end of period $ 17,822 $ 16.218 $ 12,053 $ 17,822 $ 12,053
16218000
Loans held for investment $ 1,831,619 $ 1,438,055 $ 1,336,015 $ 1,831,619 $ 1,336,015
Average loans $ 1,738,172 $ 1,404,652 $ 1,334,188 $ 1,571,412 $ 1,307,613


													Three Months Ended									Nine Months Ended September 30,
													September 30, 2020			June 30, 2020			September 30, 2019			2020			2019
													(dollars in thousands)
Balance, beginning of period												Balance, beginning of period	$	17,822		$	16,218		$	12,053		$	13,522		$	11,056
Charge-offs:												Charge-offs:

Commercial and industrial												Commercial and industrial	(194)			(125)			(437)			(326)			(561)
SBA loans												SBA loans	—			(425)			—			(446)			—

Total charge-offs												Total charge-offs	(194)			(550)			(437)			(772)			(561)
Recoveries:												Recoveries:

Commercial and industrial												Commercial and industrial	106			54			24			172			56
SBA loans												SBA loans	—			—			—			12			189

Total recoveries												Total recoveries	106			54			24			184			245
Net charge-offs												Net charge-offs	(88)			(496)			(413)			(588)			(316)
Provision for loan losses												Provision for loan losses	1,000			2,100			700			5,800			1,600
Balance, end of period												Balance, end of period	$	18,734		$	17,822		$	12,340		$	18,734		$	12,340
																16218000
Loans held for investment												Loans held for investment	$	1,884,930		$	1,831,619		$	1,316,620		$	1,884,930		$	1,316,620
Average loans												Average loans	$	1,892,450		$	1,738,172		$	1,328,088		$	1,679,206		$	1,314,513
Allowance for loan losses as a percentage of total loans held for investment	Allowance for loan losses as a percentage of total loans held for investment	0.97	%	1.13	%	0.90	%	0.97	%	0.90	%	Allowance for loan losses as a percentage of total loans held for investment	0.99		%	0.97		%	0.94		%	0.99		%	0.94		%
Allowance for loan losses as a percentage of total loans held for investment without PPP loans	Allowance for loan losses as a percentage of total loans held for investment without PPP loans	1.24	%	1.13	%	0.90	%	1.24	%	0.90	%	Allowance for loan losses as a percentage of total loans held for investment without PPP loans	1.25		%	1.24		%	0.94		%	1.25		%	0.94		%
Annualized net (charge-offs) recoveries to average loans		(0.11)	%	(0.001)	%	0.02	%	(0.06)	%	0.01	%
Annualized net charge-offs to average loans												Annualized net charge-offs to average loans	(0.02)		%	(0.11)		%	(0.12)		%	(0.05)		%	(0.03)		%

The following table shows the allocation of the allowance for loan losses by loan type as of the dates indicated:


		June 30, 2020						March 31, 2020								December 31, 2019					September 30, 2020				June 30, 2020		December 31, 2019
		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		Allowance for Loan Losses		% of Loans in Each Category to Total Loans
		(dollars in thousands)																							(dollars in thousands)
Construction and land development	Construction and land development	$	2,470	11.8	%	$	2,498	16.2	%	$	2,350	18.1	%	Construction and land development	$	2,370	11.3	%	$	2,470	11.8	%	$	2,350	18.1	%
Real estate:	Real estate:													Real estate:
Residential	Residential	361		2.1	%	333		3.0	%	292		3.2	%	Residential	275		1.6	%	361		2.1	%	292		3.2	%
Commercial real estate - owner occupied	Commercial real estate - owner occupied	1,365		8.8	%	844		10.3	%	918		12.5	%	Commercial real estate - owner occupied	1,280		8.4	%	1,365		8.8	%	918		12.5	%
Commercial real estate - non-owner occupied	Commercial real estate - non-owner occupied	5,347		27.3	%	4,131		33.2	%	3,074		30.8	%	Commercial real estate - non-owner occupied	5,580		27.9	%	5,347		27.3	%	3,074		30.8	%
Commercial and industrial	Commercial and industrial	5,607		18.2	%	5,455		24.3	%	4,145		22.5	%	Commercial and industrial	6,264		19.0	%	5,607		18.2	%	4,145		22.5	%
SBA loans	SBA loans	2,672		31.8	%	2,954		13	%	2,741		12.9	%	SBA loans	2,965		31.8	%	2,672		31.8	%	2,741		12.9	%
Consumer	Consumer	—		—	%	3		—	%	2		—	%	Consumer	—		—	%	—		—	%	2		—	%
		$	17,822	100.0	%	$	16,218	100.0	%	$	13,522	100.0	%		$	18,734	100.0	%	$	17,822	100.0	%	$	13,522	100.0	%

Loan Held for Sale

Loans held for sale typically consist of the guaranteed portion of SBA 7a loans and Main Street loans that are originated and intended for sale in the secondary market and to the Main Street SPV and may also include commercial real estate loans and SBA 504 loans. Loans held for sale are carried at the lower of carrying value or estimated market value. At ~~June~~September 30, 2020, loans held for sale were $36.5 million, an increase of $16.2 million from $20.3 million an

~~increase of $6.7 million from $13.6 million~~ at ~~March 31,~~June 30, 2020 and an increase of ~~$12.7~~$28.8 million from $7.7 million at December 31, 2019. The change in loans held for sale was due to the origination of ~~$6.7~~$87.9 million ~~in loans held for sale~~offset by SBA and ~~there were no SBA~~Main Street loan sales during the three months ended ~~June~~September 30, 2020. The change in loans held for sale was due to the origination of ~~the $15.1~~$103.1 million in loans held for sale, offset by the sale of loans with a carrying value of ~~$3.4~~$75.2 million during the ~~six~~nine months ended ~~June~~September 30, 2020. In addition, there were no loans held for investment transferred to loans held for sale during the three months ended ~~June~~September 30, 2020 and ~~$933~~$932 thousand of loans held for investment were transferred to loans held for sale during the ~~six~~nine months ended ~~June~~September 30, 2020. At ~~June~~September 30, 2020 and December 31, 2019, loans held for sale consisted entirely of SBA 7a loans and the fair value of loans held for sale totaled ~~$21.9~~$39.3 million and $8.4 million.

Servicing Asset and Loan Servicing Portfolio

Loans serviced for others totaled ~~$263.5~~$327.4 million and $278.6 million at ~~June~~September 30, 2020 and December 31, 2019. The loan servicing portfolio includes SBA loans serviced for others of ~~$195.5~~$196.6 million and $214.8 million for which there iswas a related servicing asset of ~~$2.5~~$2.4 million and $3.2 million at ~~June~~September 30, 2020 and December 31, 2019. The fair value of the servicing asset for SBA loans is measured quarterly and was ~~$2.8~~$3.1 million and $3.2 million as of ~~June~~September 30, 2020 and December 31, 2019. The significant assumptions used in the valuation of the SBA servicing asset at ~~June~~September 30, 2020 included discount rates, ranging from ~~6.1%~~0.7% to ~~44.7%~~49.4%, and a weighted average prepayment speed assumption of ~~21.4%~~21.5%.

In addition, the loan servicing portfolio includes construction and land development loans, commercial real estate loans and commercial & industrial loans participated out to other institutions of ~~$68.0~~$130.8 million and $63.8 million for which there is no related servicing asset at ~~June~~September 30, 2020 and December 31, 2019.

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

Goodwill and Other Intangible Assets

As a result of the PCB acquisition completed on July 31, 2018, we recorded goodwill and a core deposit intangible ("CDI"), which total $73.4 million and ~~$5.3~~$5.1 million at ~~June~~September 30, 2020. Due to the COVID-19 pandemic and the resulting volatility in our stock price during the first ~~six~~nine months of 2020, the Company evaluated goodwill for impairment at ~~June~~September 30, 2020 and tested for impairment by comparing an estimated fair value of the Company to our book value. The fair value was estimated using the following two tests: (i) ~~the~~ recent ~~deal price~~acquisition price-to-tangible book multiples were applied to the Company's tangible book value to compute the estimated fair value; and (ii) an “average price to last ~~twelve-month~~twelve month earnings” market ~~transaction~~ multiple was applied ~~to the~~to: (i) actual earnings and (ii) forecasted fiscal year 2020 earnings.Both tests resulted in the estimated fair value exceeding book value, and therefore, the Company did not recognize any impairment of goodwill for the three and ~~six~~nine months ended ~~June~~September 30, 2020.

For the three months ended September 30, 2020, June 30, 2020 ~~March 31, 2020~~ and ~~June~~September 30, 2019, we recognized CDI amortization of $193 thousand, $193 thousand and $197 thousand. For the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, we recognized CDI amortization of ~~$386~~$579 thousand and ~~$393~~$590 thousand.

Deposits

The following table presents the ending balance and percentage of deposits as of the periods indicated:


		June 30, 2020						March 31, 2020								December 31, 2019					September 30, 2020				June 30, 2020		December 31, 2019
		Amount		Percentage of Total		Amount		Percentage of Total		Amount		Percentage of Total			Amount		Percentage of Total		Amount		Percentage of Total		Amount		Percentage of Total
		(dollars in thousands)																							(dollars in thousands)
Noninterest-bearing demand	Noninterest-bearing demand	$	789,770	49.2	%	$	627,793	46.5	%	$	626,569	47.7	%	Noninterest-bearing demand	$	736,118	47.2	%	$	789,770	49.2	%	$	626,569	47.7	%
Interest-bearing deposits:	Interest-bearing deposits:													Interest-bearing deposits:
Interest checking⁽¹⁾	Interest checking⁽¹⁾	262,859		16.4	%	209,423		15.5	%	167,581		12.8	%	Interest checking (1)	272,052		17.4	%	262,859		16.4	%	167,581		12.8	%
Money market⁽²⁾	Money market⁽²⁾	326,744		20.4	%	287,405		21.3	%	319,694		24.2	%	Money market (2)	346,091		22.3	%	326,744		20.4	%	319,694		24.2	%
Savings	Savings	31,116		1.9	%	28,543		2.1	%	27,091		2.1	%	Savings	31,470		2.0	%	31,116		1.9	%	27,091		2.1	%
Retail time deposits	Retail time deposits	68,987		4.3	%	92,311		6.8	%	97,220		7.4	%	Retail time deposits	62,880		4.0	%	68,987		4.3	%	97,220		7.4	%
Wholesale time deposits	Wholesale time deposits	125,521		7.8	%	105,565		7.8	%	75,538		5.8	%	Wholesale time deposits	111,301		7.1	%	125,521		7.8	%	75,538		5.8	%
		$	1,604,997	100.0	%	$	1,351,040	100.0	%	$	1,313,693	100.0	%		$	1,559,912	100.0	%	$	1,604,997	100.0	%	$	1,313,693	100.0	%

(1) Included brokered deposits of $33.7 million, $3 thousand ~~$18.0 million~~ and $33.0 million at ~~June~~September 30, 2020, ~~March 31,~~June 30, 2020 and December 31, 2019.

(2) Included brokered deposits of $85.0 million, $25.0 million ~~at June 30, 2020~~ and $15.1 million at ~~March 31,~~September 30, 2020, June 30, 2020 and December 31, 2019.

During the three ~~and six~~ months ended ~~June~~September 30, 2020, total deposits ~~increased $254.0~~decreased $45.1 million from the prior quarter ~~and $291.3~~but increased $246.2 million from year end to $1.60 billion at ~~June~~September 30, 2020.

The decrease during three months ended September 30, 2020 was due primarily to ~~new~~a decrease in noninterest-bearing deposit accounts ~~opened for PPP loans,~~ and ~~strong core~~time deposit ~~growth. Noninterest-bearing~~accounts, partially offset by increases in interest-bearing nonmaturity deposits. At September 30, 2020, noninterest-bearing deposits totaled ~~$789.8~~$736.1 million, ~~an increase~~a decrease of ~~$162.0 million and $163.2~~$53.7 million in the ~~three~~third quarter of 2020, due primarily to the customers' use of PPP funds during the third quarter of 2020. Interest-bearing nonmaturity deposits increased $28.9 million due primarily to an increase in brokered deposits. Noninterest-bearing deposits were $736.1 million and ~~six months ended~~represented 47.2% of total deposits at September 30, 2020, compared to $789.8 million and 49.2% of total deposits at June 30, 2020. At September 30, 2020, time deposits totaled $174.2 million and decreased $20.3 million due to a decrease in higher rate customer time deposits which matured in the third quarter of 2020, coupled with a decrease in brokered time deposits. At September 30, 2020, wholesale time deposits totaled $111.3 million, of which $73.6 million are callable within six months, compared to $125.5 million at June 30, 2020.

Since year end, the increase in total deposits was due primarily to an increase in all deposit categories, except retail time deposits. Noninterest-bearing deposits increased $109.5 million during the nine months ended September 30, 2020. Approximately ~~$82.9~~$33.3 million of the increase was due to new deposit accounts for PPP loans at ~~June~~September 30, 2020. The remaining increase was due to core deposit growth. Interest-bearing nonmaturity deposits increased ~~$95.3~~$135.2 million ~~and $106.4 million in~~during the ~~three and six~~nine months ended ~~June~~September 30, 2020 primarily due to an increase in core deposits from the FDIC Insurance Program through Demand Deposit Marketplace ("DDM") ~~and~~, deposits from other financial ~~institutions.~~institutions and brokered money market deposits. Noninterest-bearing deposits were $736.1 million and represented 47.2% of total deposits at September 30, 2020, compared to $626.6 million and 47.7% of total deposits at December 31, 2019.

During ~~three~~the nine months ended ~~June~~September 30, 2020, time deposits had a slight ~~decrease of $3.4 million due primarily to a decrease in customer time deposits, offset by higher brokered time deposits. During the six months ended June 30, 2020, time deposits had an~~ increase of ~~$21.8~~$1.4 million due primarily to an increase in ~~brokered~~wholesale time deposits, ~~partially~~ offset by ~~a decrease of~~lower retail time deposits related to maturities that were not renewed at our current offer rates. At June 30, 2020, brokered time deposits totaled $115.5 million, of which $78.6 million are callable in six months, compared to $95.6 million at March 31, 2020 and $50.4 million at December 31, 2019. Noninterest-bearing deposits were $789.8 million and represented 49.2% of total deposits at June 30, 2020, compared to $627.8 million and 46.5% of total deposits at March 31, 2020 and $626.6 million and 47.7% of total deposits at December 31, 2019.

Wholesale time deposits includes brokered time deposits and collateralized time deposits from the State of California. ~~At June 30, 2020 brokered time deposits had a weighted average remaining maturity of 2.7 years.~~ Collateralized time deposits from the State of California totaled $10.0 million at ~~June~~September 30, 2020 and ~~March 31,~~June 30, 2020 and $25.1 million at December 31, 2019. These deposits are collateralized by letters of credit issued by the FHLB under the Bank's secured line of credit with the FHLB. Please refer to Note 7 - Deposits and Note 8 - Borrowing Arrangements to the ~~Condensed Consolidated Financial Statements.~~condensed consolidated financial statements. Our ten largest depositor relationships accounted for approximately ~~30%~~27% and 28% of total deposits at ~~June~~September 30, 2020 and December 31, 2019.

The following table shows time deposits greater than $250,000 by time remaining until maturity:


	~~June~~September 30, 2020
	(dollars in thousands)
Three months or less	$	~~21,015~~4,110
Over three months through six months	~~1,759~~15,545
Over six months through twelve months	~~7,762~~3,587
Over twelve months	~~7,342~~7,349
	$	~~37,878~~30,591

Borrowings

In addition to deposits, we use borrowings, including short-term and long-term FHLB advances, Federal Reserve

secured lines of credit, federal funds unsecured lines of credit, Paycheck Protection Program Liquidity Facility and floating rate senior secured notes, as secondary sources of funds to meet our liquidity needs. The following tables presents the components of borrowings as of the periods indicated:


		June 30, 2020			December 31, 2019				September 30, 2020				December 31, 2019
		(dollars in thousands)										(dollars in thousands)
Borrowings	Borrowings							Borrowings
FHLB advances - short term		$	120,000		$	60,000
FHLB advances - short term (1) (2)								FHLB advances - short term (1) (2)	$	120,000			$	60,000
FHLB advances - long term(1)	FHLB advances - long term(1)	30,000			30,000			FHLB advances - long term(1)	30,000				30,000
		$	150,000		$	90,000			$	150,000			$	90,000
Weighted-average interest rate, end of period	Weighted-average interest rate, end of period	0.54		%	1.79		%	Weighted-average interest rate, end of period	0.54		%		1.79		%

Paycheck Protection Program Liquidity Facility	Paycheck Protection Program Liquidity Facility	$	179,125		$	—		Paycheck Protection Program Liquidity Facility	$	253,140			$	—
Interest rate, end of period	Interest rate, end of period	0.35		%	—		%	Interest rate, end of period	0.35		%		—		%

Senior secured notes	Senior secured notes	$	6,500		$	9,600		Senior secured notes	$	4,400			$	9,600
Interest rate, end of period	Interest rate, end of period	3.25		%	5.00		%	Interest rate, end of period	3.25		%		5.00		%

(1) Based on original maturity date.

(2) Included $10 million of 0% interest borrowings under the FHLB San Francisco's new Recovery Advance loan program at September 30, 2020.

Federal Home Loan Bank Secured Line of Credit

At ~~June~~September 30, 2020, the Bank had a secured line of credit of ~~$424.3~~$407.1 million from the FHLB, of which ~~$203.3~~$186.1 million was available. This secured borrowing arrangement is collateralized under a blanket lien and is subject to the Bank providing adequate collateral and continued compliance with the Advances and Security Agreement and other eligibility requirements established by the FHLB. At ~~June~~September 30, 2020, the Bank had pledged ~~$1.23~~$1.64 billion of loans under a blanket lien, including PPP loans, of which ~~$834.4~~$860.3 million was considered as eligible collateral. PPP loans are not considered eligible collateral under this borrowing agreement. At ~~June~~September 30, 2020, the Bank also participated in the FHLB San Francisco's new Recovery Advance loan program for $10 million at zero percent interest ~~at June 30, 2020~~ with maturity dates in November 2020 and May 2021.

6670

The following table shows the interest rates and maturity dates of FHLB advances at periods indicated:


		June 30, 2020									December 31, 2019									September 30, 2020				December 31, 2019
		Balance		Rate		Maturity Date	Balance		Rate		Maturity Date		Balance		Rate		Maturity Date	Balance		Rate			Maturity Date
Advances:	Advances:	(dollars in thousands)																			Advances:		(dollars in thousands)

Recovery advance	Recovery advance	$	5,000	—	%	11/19/2020	$	—	—	%	—	Recovery advance	$	5,000	—	%	11/19/2020	$	—	—		%	—
Recovery advance	Recovery advance	5,000		—	%	5/19/2021	—		—	%	—	Recovery advance	5,000		—	%	5/19/2021	—		—		%	—
Term and fixed-rate advance	Term and fixed-rate advance	50,000		0.19	%	8/27/2020	60,000		1.72	%	3/20/2020	Term and fixed-rate advance	30,000		0.22	%	11/27/2020	60,000		1.72		%	3/20/2020
Term and fixed-rate advance	Term and fixed-rate advance	30,000		0.22	%	11/27/2020	—		—	%	—	Term and fixed-rate advance	50,000		0.19	%	2/26/2021	—		—		%	—
Term and fixed-rate advance	Term and fixed-rate advance	30,000		0.25	%	5/26/2021	—		—	%	—	Term and fixed-rate advance	30,000		0.25	%	5/26/2021	—		—		%	—
Term and fixed-rate advance	Term and fixed-rate advance	30,000		1.93	%	6/11/2021	30,000		1.93	%	6/11/2021	Term and fixed-rate advance	30,000		1.93	%	6/11/2021	30,000		1.93		%	6/11/2021
		$	150,000	0.54	%		$	90,000	1.79	%			$	150,000	0.54	%		$	90,000	1.79		%

Federal Reserve Bank Secured Line of Credit

At ~~June~~September 30, 2020, the Bank had a secured line of credit of ~~$127.0~~$138.2 million from the Federal Reserve Bank. During the third quarter of 2019, the Bank expanded the existing secured borrowing capacity with the Federal Reserve through the Borrower-in-Custody ("BIC") program. At ~~June~~September 30, 2020, the Bank had pledged qualifying loans with an unpaid principal balance of ~~$212.8~~$203.1 million and securities held-to-maturity with a carrying value of $1.7 million as collateral for this line. Borrowings under this BIC program are overnight advances with interest chargeable at Federal Reserve discount window ("Primary Credit") borrowing rate. There were no borrowings under this credit facility at or during the three and ~~six~~nine months ended ~~June~~September 30, 2020 and there were no borrowings at December 31, 2019.

Paycheck Protection Program Liquidity Facility

Federal Funds Unsecured Lines of Credit

The Bank has established unsecured overnight borrowing arrangements for an aggregate amount of $125.0 million, subject to availability, with five of its correspondent banks. In general, interest rates on these lines approximate the federal funds target rate. There were no borrowings under these credit facilities at or during the three and ~~six~~nine months ended ~~June~~September 30, 2020 and there were no borrowings at December 31, 2019. ~~The average outstanding borrowings were $1.5 million and $1.3 million with an average interest rate of 2.7% for the three and six months ended June 30, 2019.~~

Senior Secured Notes

an interest rate of 5.00%. The average outstanding borrowings under this facility totaled ~~$6.8~~$4.6 million and ~~$12.4~~$12.3 million with an average interest rate of ~~3.39%~~3.36% and ~~5.89%~~5.69% for the three months ended ~~June~~September 30, 2020 and 2019, respectively. The average outstanding borrowings under this facility totaled ~~$7.4~~$6.5 million and $12.2 million with an average interest rate of ~~4.03%~~3.87% and ~~5.89%~~5.82% for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019. At ~~June~~September 30, 2020, the Company was in compliance with all loan covenants on the facility and the remaining available credit was ~~$18.5~~$20.6 million. One of our executives is also a member of the lending bank's board of directors.

Shareholders’ Equity

Total shareholders’ equity increased ~~$5.1~~$10.7 million to ~~$266.9~~$272.5 million at ~~June~~September 30, 2020 from $261.8 million at December 31, 2019. The increase in shareholders' equity iswas primarily due to ~~$10.3~~$18.2 million in net earnings, ~~$1.0~~$1.5 million of share-based compensation, ~~$85~~$127 thousand of stock options exercised and ~~$645~~$651 thousand related to changes in the fair

value of investment securities, available-for-sale and the resulting impact on accumulated other comprehensive income,

partially offset by ~~$5.8~~$8.8 million in cash dividends, and $1.0 million in stock repurchases during the ~~six~~nine months ended ~~June~~September 30, 2020.

Liquidity and Capital Resources

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

Holding Company Liquidity

As a bank holding company, we currently have no significant assets other than our equity interest in the Bank. Our primary sources of liquidity at the holding company are dividends from the Bank, cash on hand at the holding company, which was approximately ~~$447~~$622 thousand at ~~June~~September 30, 2020, a $25.0 million secured line of credit of which ~~$18.5~~$20.6 million was available at ~~June~~September 30, 2020, and our ability to raise capital, issue subordinated debt, and secure other outside borrowings. The holding company's ability to declare and pay cash dividends to shareholders and repurchase our common stock depends upon cash on hand, availability on our senior secured revolving line of credit and dividends from the Bank. Dividends from the Bank to the holding company depend upon the Bank's earnings, financial position, regulatory standing, ability to meet current and anticipated regulatory capital requirements, and other factors deemed relevant by our Board of Directors. The Bank paid ~~$10~~$15 million in dividends to the holding company during the ~~six~~nine months ended ~~June~~September 30, 2020. Please refer to the section "— Regulatory Capital" for a discussion of dividend limitations at both the holding company and the Bank.

Consolidated Company Liquidity

Our liquidity ratio is defined as liquid assets (cash and due from banks, fed funds sold and repos, interest-bearing deposits in other banks, other investments with a remaining maturity of one year or less, available-for-sale and equity securities, unpledged held-to-maturity securities and fully funded loans held for sale) divided by total assets. At ~~June~~September 30, 2020, our liquidity ratio was ~~12.4%~~11.4%.

Our objective is to ensure adequate liquidity at all times by maintaining liquid assets, gathering deposits and

arranging for secondary sources of funding. Having too little liquidity can present difficulties in meeting commitments to

fund loans or honor deposit withdrawals. Having too much liquidity can result in lower income because highly liquid assets

are short-term in nature and generally yield less than long-term assets. A proper balance is the goal of management and the

Board of Directors, as administered by various policies and guidelines. Our policy targets a minimum daily liquidity ratio of 11.0%.

Additional sources of liquidity available to us at ~~June~~September 30, 2020 included ~~$203.3~~$186.1 million in remaining secured borrowing capacity with the FHLB, ~~$127.0~~$138.2 million in secured borrowing capacity with the Federal Reserve Bank through the Borrower-in-Custody Program ("BIC"), unsecured lines of credit with correspondent banks with a remaining borrowing

capacity of $125.0 million, and ~~$221.5~~$147.0 million in PPPLF borrowing capacity with the Federal Reserve Bank through the Discount Window.

Since ~~March~~December 31, ~~2020,~~2019, there was an increase in deposit balances due to the influx of funds from government stimulus, the PPP and other government actions. The Bank anticipates that these deposit balances will decline over time as the funds are used for intended business purposes; however, this deposit outflow should be partially offset as the associated PPP loans are forgiven and loan reimbursement is received.

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

Stock Repurchase Plan

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

The Company suspended the stock repurchase program on March 17, 2020. During the three months ended September 30, 2020 and June 30, 2020, there were no repurchases of common ~~stock, compared~~stock. The remaining number of shares authorized to ~~38,411~~be repurchased under this program was 695,489 shares ~~of common stock repurchased~~ at ~~an average price of $22.34 and a total cost of $858 thousand in the three months ended March 31,~~September 30, 2020. Since the ~~plan was announced,~~plan's inception, we have repurchased a total of 504,511 shares at an average price of $21.70 per share. The remaining number of shares authorized to be repurchased under this program was 695,489 shares at June 30, 2020. Suspending the stock repurchase program allows the Company to preserve capital and provide liquidity during the COVID-19 pandemic to meet the credit needs of the Company’s customers, as well as support small businesses and the local economies served by the Company through the Bank's lending and other important services.

Contractual Obligations

The following table summarizes aggregated information about our outstanding contractual obligations and other long-term liabilities, excluding interest payments, at ~~June~~September 30, 2020.


		Payments Due by Period																			Payments Due by Period
		Total		Less Than One Year		One to Three Years		More than Three to Five Years		After Five Years			Total		Less Than One Year		One to Three Years		More than Three to Five Years		After Five Years
		(dollars in thousands)																			(dollars in thousands)
Deposits without a stated maturity	Deposits without a stated maturity	$	1,410,489	$	1,410,489	$	—	$	—	$	—	Deposits without a stated maturity	$	1,385,731	$	1,385,731	$	—	$	—	$	—
Time deposits	Time deposits	194,508		105,086		63,837		25,585		—		Time deposits	174,181		87,136		63,271		23,774		—

Borrowings	Borrowings	150,000		150,000		—		—		—		Borrowings	150,000		150,000		—		—		—
Paycheck Protection Program Liquidity Facility	Paycheck Protection Program Liquidity Facility	179,125				179,125						Paycheck Protection Program Liquidity Facility	253,140				253,140
Senior secured notes	Senior secured notes	6,500		—		6,500		—		—		Senior secured notes	4,400		—		4,400		—		—
Operating lease obligations	Operating lease obligations	6,305		2,330		3,586		389		—		Operating lease obligations	5,747		2,332		3,198		217		—
		$	1,946,927	$	1,667,905	$	253,048	$	25,974	$	—		$	1,973,199	$	1,625,199	$	324,009	$	23,991	$	—

Off-Balance-Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in our consolidated financial statements. These transactions involve, to varying degrees, elements of credit,

interest rate and liquidity risk. These transactions generally take the form of loan commitments, unused lines of credit and standby letters of credit.

At ~~June~~September 30, 2020, we had unused loan commitments of ~~$386.5~~$383.7 million, standby letters of credit of ~~$6.9~~$7.2 million and commitments to contribute capital to a low-income housing tax credit project partnership and other CRA equity investments of ~~$1.4~~$2.2 million and ~~$185~~$61 thousand. At December 31, 2019, we had unused loan commitments of $376.9 million, standby letters of credit of $7.6 million and commitments to contribute capital to a low-income housing tax credit project partnership and other CRA investments of $1.7 million and $236 thousand.

Regulatory Capital

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

At ~~June~~September 30, 2020, we qualify for treatment under the Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) and, therefore, are not subject to consolidated capital rules at the bank holding company level. The Bank also opted into the CBLR framework beginning with the Call Report filed for the first quarter of 2020. At ~~June~~September 30, 2020, the Bank's CBLR ratio was ~~10.31%~~10.29% which exceeded all regulatory capital requirements under the CBLR framework and, accordingly, the Bank was considered to be ‘‘well-capitalized.’’

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

•A leverage ratio of greater than 9%;

•Total consolidated assets of less than $10 billion;

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

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

year, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the CBLR framework; and (ii) community banking organizations will have until January 1, 2022, before the CBLR requirement is reestablished at greater than 9%. Under the interim rules, the minimum CBLR ~~will be~~is 8% beginning in the second quarter and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. The interim rules also maintain

a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1% below the applicable community bank leverage ratio. Assets originated under the PPP which are also pledged under the PPPLF are deducted from average total consolidated assets for purposes of the CBLR. However, such assets are included in total consolidated assets for purposes of determining the eligibility to elect the CBLR framework.

Dividends

Our general dividend policy is to pay cash dividends within the range of typical peer payout ratios, provided that such payments do not adversely affect our consolidated financial condition and are not overly restrictive to our growth capacity. While we have paid a consistent level of quarterly cash dividends since the first quarter of 2017, no assurance can be given that our financial performance in any given year will justify the continued payment of a certain level of cash dividend, or any cash dividend at all. During three months ended ~~June~~September 30, 2020 and 2019, we declared cash dividends of $0.25 per share and $0.20 per share. During the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, we declared cash dividends of ~~$0.50~~$0.75 per share and ~~$0.40~~$0.60 per share.

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

Interest rate risk results from the following risks:

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

• Option risk - changes in the expected maturities of assets and liabilities, such as borrowers’ ability to prepay loans at any time and depositors’ ability to redeem certificates of deposit before maturity;

• Yield curve risk - changes in the yield curve where interest rates increase or decrease in a nonparallel fashion; and

• Basis risk - changes in spread relationships between different yield curves, such as U.S. Treasuries, U.S. Prime Rate and London Interbank Offered Rate ("LIBOR").

On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced

that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. The announcement indicates that the

continuation of LIBOR on the current basis cannot be guaranteed after 2021. The market transition away from LIBOR to an

alternative reference rates isare complex and could have a range of adverse effects on our business, consolidated financial

condition, and consolidated results of operations. For more information, refer to Part I, Item 1A - "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2019.

Although the manner and impact of the transition from LIBOR to an alternative reference rate, as well as the effect

of these developments on our funding costs, loan and investment and trading securities portfolios, asset-liability management,

and business, is uncertain, because the Bank does not have a material amount of LIBOR-based products and the Bank’s credit

documentation provides for the flexibility to move to alternative reference ~~rates,~~rates; our Management does not believe that the

discontinuation of LIBOR will have any material adverse impact on the Company.

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

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

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

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

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

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		NII at Risk						EVE							NII at Risk					EVE
		Adjusted Net Interest Income		Percentage Change from Base Case		Market Value		Percentage Change from Base Case			Adjusted Net Interest Income		Percentage Change from Base Case		Market Value			Percentage Change from Base Case
Interest Rate Scenario	Interest Rate Scenario	(dollars in thousands)															Interest Rate Scenario	(dollars in thousands)
Up 300 basis points	Up 300 basis points	$	103,749	21.6	%	$	379,920	8.0	%	Up 300 basis points	$	102,563	14.8	%	$	362,503		7.7	%
Up 200 basis points	Up 200 basis points	96,006		12.5	%	366,168		4.1	%	Up 200 basis points	96,685		8.2	%	350,694			4.1	%
Up 100 basis points	Up 100 basis points	89,306		4.7	%	355,649		1.1	%	Up 100 basis points	91,668		2.6	%	341,155			1.3	%
Base	Base	85,320		—		351,725		—		Base	89,343		—		336,737			—
Down 100 basis points	Down 100 basis points	85,268		(0.1)	%	350,318		(0.4)	%	Down 100 basis points	89,188		(0.2)	%	333,619			(0.9)	%
Down 200 basis points	Down 200 basis points	85,255		(0.1)	%	351,487		(0.1)	%	Down 200 basis points	89,164		(0.2)	%	334,795			(0.6)	%

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Principal Financial Officer have evaluated our disclosure controls and

procedures at ~~June~~September 30, 2020 and have concluded that these disclosure controls and procedures are effective to ensure

that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934

is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These

disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information

required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including

the Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required

disclosure.

Changes in Internal Control Over Financial Reporting

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

reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

7377

The ~~novel Coronavirus Disease 2019 ("COVID-19")~~COVID-19 pandemic ~~is adversely affecting us and~~has impacted our ~~customers, employees and third-party service providers,~~business, and the ~~adverse impacts~~ultimate impact on our business, financial position, results of operations and/or cash flows will depend on future developments, which are highly uncertain and ~~prospects have been~~cannot be predicted, including, but not limited to, the scope and ~~are expected~~duration of the pandemic and the actions taken by governmental authorities, our clients and our business partners in response to ~~continue to be significant~~.the pandemic.

The ~~spread~~global pandemic resulting from the outbreak of COVID-19 has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created ~~a global public health crisis that has resulted in unprecedented uncertainty,~~significant volatility and disruption in financial markets, and ~~in governmental, commercial and consumer activity in the United States and globally. Governmental responses to~~increased unemployment levels. In addition, the pandemic have included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, havehas resulted in ~~rapid decreases in commercial and consumer activity,~~ temporary closures of many businesses ~~that have led to loss~~and the institution of ~~revenues~~social distancing and ~~a rapid increase~~sheltering in ~~unemployment, material decreases~~place requirements in ~~oil~~many states and ~~gas prices~~communities. Some of the risks we face from the pandemic include, but are not limited to: the health and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment foravailability of our colleagues, the ~~foreseeable future. These changes have a significant adverse effect on the markets in which we conduct~~financial condition of our ~~business~~clients and the demand for our products and ~~services.~~services, falling interest rates, recognition of credit losses and increases in the allowance for credit losses, especially if businesses remain closed, unemployment continues to rise and clients and customers draw on their lines of credit or seek additional loans to help finance their businesses.

~~Business customers~~While we have not experienced a significant impact on the availability of our employees to date, given the ~~Bank~~markets in which we operate, our colleagues are ~~experiencing varying degrees~~at risk of being exposed to COVID-19. While we have taken meaningful steps and precautions to ensure their health and well-being, COVID-19 could still impact our employees’ ability to work effectively and availability due to illness, quarantines, government actions, financial ~~distress, which is expected~~center closures or other reasons. In particular, our branches present an increased risk of exposure for our employees. If our employees are not able to ~~increase over the coming months~~work as ~~the pandemic and economic shutdown continues. Although certain federal and state relief programs may~~effectively or a substantial number of employees are unable to work due to COVID-19, our business would be available to assist borrowers, not all borrowers will qualify or, even if they do qualify, there may not be sufficient funds in the program that will be available to such borrowers at the time they do qualify.adversely affected.

~~For example, the Small Business Administration’s (the “SBA”) Procedural Notice 5000-20020, Implementation of Section 1112~~Our customers are subject to many of the ~~CARES Act, Subsidy for Certain Loan Payments, directs~~factors described above. Such events could affect the ~~SBA~~stability of our deposit base, impair the ability of borrowers to ~~pay 6 months~~repay outstanding loans, impair the value of ~~principal, interest,~~collateral securing loans, cause significant property damage, and ~~any associated fees~~result in loss of revenue. It is possible that ~~borrowers owe for all current 7(a), 504,~~the spread of COVID-19 may also cause delays in the willingness or ability of clients to perform, including, but not limited to, making timely payments to us, and Microloans in regular servicing status as well as new 7(a), 504, and Microloans disbursed prior to September 27, 2020. There is no similar program for non-SBA loans. During this six-month period ended June 30, 2020, our lending officers have reached out to borrowers who qualify for this subsidy in order to gauge the impact of the COVID pandemic on their businesses, even while payments are being made by the SBA. Although as of June 30, 2020, none of these borrowers reported closing their doors permanently or intending to do so and none have filed for bankruptcy protection, many have been operating on a limited basis compared to their operations before the crisis started.other unpredictable events.

~~If the COVID-19~~The pandemic persists and/or government relief programs become unavailable or are ineffective in curtailing the economic and business impact of the pandemic, the ability of our borrowers to timely pay interest and principal on their loans and the value of the collateral securing their obligations~~may be materially impacted. This, in turn, could influence~~has also influenced the recognition of credit losses in our loan ~~portfolios~~portfolio and ~~increase~~increased our allowance for credit ~~losses,~~losses. The pandemic may continue to have a material adverse effect on our loan portfolio, particularly as businesses remain closed and as more ~~customers are expected~~clients may need to draw on their lines of credit or seek additional loans to help finance their businesses. ~~These developments~~Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize other-than-temporary impairments in future periods on the securities we hold, as ~~a consequence of the pandemic could materially impact our business and the businesses of our customers and could have a material adverse effect on our financial results for 2020.~~well as reductions in other comprehensive income.

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

To the ~~health of our customers and employees, and to comply with applicable government directives, we have modified~~extent the COVID-19 pandemic adversely affects our business, ~~practices,~~financial position, results of operations and/or cash flows, it may also have the effect of heightening many of the other risks we face, including ~~restricting employee travel, directing employees~~the risks described in the section entitled “Risk Factors” in our 2019 Form 10-K and any subsequent Quarterly Reports on Form 10-Q.

We continue to work ~~from home insofar as is possible, cancelling in-person meetings and implementing~~with our ~~business continuity plans and protocols to the extent necessary. We may take further such actions that we determine are in the best interest of our~~stakeholders (including employees, customers, and ~~communities or as may be required by government order. These actions in response~~business partners) to ~~the COVID-19 pandemic,~~assess, address and similar actions by our vendors and business partners, have not materially impaired our ability to support our employees, conduct our business and serve our customers, but there is no assurance that these actions will be sufficient to successfully mitigate the risks presented by COVID-19 or that our ability to operate will not be materially affected going forward. For instance, our business operations may be disrupted if key personnel or significant portionsimpact of ~~our employees are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the COVID-19~~this global pandemic. ~~Similarly, if any of our vendors or business partners become unable to continue to provide their products and services, which~~However, we ~~rely upon to maintain our day-to-day operations, our ability to serve our customers could be impacted.~~

~~COVID-19 does not yet appear to be contained and could affect significantly more households and businesses. Given the ongoing and dynamic nature of the circumstances, it is not possible to accurately~~cannot predict the ~~extent, severity or duration of these conditions or when normal economic~~length and operating conditions will resume. For this reason, the extent to which the COVID-19 pandemic affects our business, operations and financial condition, as well as our regulatory capital and liquidity ratios and credit ratings, is highly uncertain and unpredictable and depends on, among other things, new information

~~that may emerge concerning the scope, duration and severity~~impact of the COVID-19 pandemic and actions taken by governmental authorities and other parties in response to the pandemic. If the pandemic is prolonged, the adverse impact on the markets in which we operate and on our business, operations and financial condition is likely to deepen.at this time.

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

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

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

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

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

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

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

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

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

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

•We compete against larger banks and other institutions.

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

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

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

The following table presents information relating to the repurchase of shares of common stock during the periods indicated:

Period
(a)
Total number of shares (or units) purchased ⁽¹⁾
(b)
Average price paid per share (or unit) (c)
Total number of shares (or units) purchased as part of publicly announced plans or programs
(d)
Maximum number of shares (or units) that may yet be purchased under the plans or programs ^{(2) (3)}
Apr 1 - 30, 2020 1,561 $ 12.41 — 695,489
May 1 - 31, 2020 174 $ 14.10 — 695,489
Jun 1 - 30, 2020 50 $ 15.57 — 695,489
Total 1,785 $ 12.66 —


Period	(a) Total number of shares (or units) purchased (1)	(b) Average price paid per share (or unit)		(c) Total number of shares (or units) purchased as part of publicly announced plans or programs	(d) Maximum number of shares (or units) that may yet be purchased under the plans or programs (2)
Jul 1 - 31, 2020	357	$	15.76	—	695,489
Aug 1 - 31, 2020	45	$	15.03	—	695,489
Sep 1 - 30, 2020	32	$	13.68	—	695,489
Total	434	$	15.53	—

(1) The total number of shares repurchased during the periods indicated ~~include shares purchased as part of a publicly announced stock purchase plan and~~were shares withheld for income tax purposes in connection with the vesting of restricted stock awards. The shares were ~~purchased or otherwise~~ valued at the closing price of our common stock on the dates of ~~purchase and/or withholding.~~vesting.

(2) AnOn December 3, 2018, the Company authorized a stock repurchase ~~plan~~program providing for the repurchase of up to 1.2 million shares of our outstanding common stock, or approximately 10% of our then outstanding ~~shares, was publicly announced on December 3, 2018.~~shares. The repurchase program does not obligate us to repurchase any particular number of shares.

~~(3)~~ On March 17, 2020, the Company issued a press release announcing the suspension of the stock repurchase program in light of news reports indicating that members of Congress had voiced concerns about the practice of banks repurchasing shares during an

economic crisis. Suspending the stock repurchase program will allow the Company to preserve capital and provide liquidity during the COVID-19 pandemic to meet the credit needs of the Company’s customers, as well as support small businesses and the local economies served by the Company through the Bank's lending and other important services.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

7679

ITEM 6. EXHIBITS

EXHIBIT INDEX


Exhibit No.						Exhibit Description

2.1						Agreement and Plan of Reorganization and Merger dated February 23, 2018 by and between First Choice Bancorp and Pacific Commerce Bancorp.¹

3.1						Articles of Incorporation of First Choice Bancorp.¹

3.2						Bylaws of First Choice Bancorp.¹

31.1						Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2						Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1						Certifications of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2						Certifications of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 101.INS						XBRL Instance Document
Exhibit 101.SCH						XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF						XBRL Taxonomy Extension Definitions Linkbase Document
Exhibit 101.LAB						XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document

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

7780

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


						FIRST CHOICE BANCORP

			Dated: ~~August 10,~~November 6, 2020			/s/ Robert M. Franko
						Robert M. Franko
						President and Chief Executive Officer
						(principal executive officer)

			Dated: ~~August 10,~~November 6, 2020			/s/ Diana C. Hanson
						Diana C. Hanson
						Senior Vice President and Chief Accounting Officer
						(principal financial officer)

7881


	Three Months Ended March 31, 2020
			Real Estate
	Construction and Land Development		Residential		Commercial - Owner Occupied		Commercial - Non-owner Occupied		Commercial and Industrial		SBA Loans		Consumer		Total
	(dollars in thousands)
Balance, December 31, 2019	$	2,350	$	292	$	918	$	3,074	$	4,145	$	2,741	$	2	$	13,522
Provision for (reversal of) loan losses	148		41		(74)		1,057		1,305		222		1		2,700
Charge-offs	—		—		—		—		(7)		(21)		—		(28)
Recoveries	—		—		—		—		12		12		—		24
Net recoveries (charge-offs)	—		—		—		—		5		(9)		—		(4)
Balance, March 31, 2020	$	2,498	$	333	$	844	$	4,131	$	5,455	$	2,954	$	3	$	16,218
Reserves:
Specific	$	—	$	—	$	—	$	215	$	—	$	877	$	—	$	1,092
General	2,498		333		844		3,916		5,455		2,077		3		15,126
	$	2,498	$	333	$	844	$	4,131	$	5,455	$	2,954	$	3	$	16,218
Loans evaluated for impairment:
Individually	$	—	$	—	$	1,560	$	1,368	$	187	$	6,339	$	—	$	9,454
Collectively	233,607		42,904		146,851		475,104		349,460		180,542		450		1,428,918
PCI loans	—		—		106		—		443		526		—		1,075
	$	233,607	$	42,904	$	148,517	$	476,472	$	350,090	$	187,407	$	450	$	1,439,447



	Three Months Ended June 30, 2019
			Real Estate
	Construction and Land Development		Residential		Commercial - Owner Occupied		Commercial - Non-owner Occupied		Commercial and Industrial		SBA Loans		Consumer		Total
	(dollars in thousands)
Balance, March 31, 2019	$	1,806	$	402	$	862	$	2,508	$	4,036	$	1,812	$	—	$	11,426
Provision for (reversal of) loan losses	86		(23)		43		79		578		(213)		—		550
Charge-offs	—		—		—		—		(122)		—		—		(122)
Recoveries	—		—		—		—		10		189		—		199
Net recoveries	—		—		—		—		(112)		189		—		77
Balance, June 30, 2019	$	1,892	$	379	$	905	$	2,587	$	4,502	$	1,788	$	—	$	12,053
Reserves:
Specific	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
General	1,892		379		905		2,587		4,502		1,788		—		12,053
	$	1,892	$	379	$	905	$	2,587	$	4,502	$	1,788	$	—	$	12,053


	Total loan balance ⁽¹⁾		% of total loan balance		# of loan deferments ⁽²⁾	Loan balance on deferments ⁽¹⁾		% of category balance
	(dollars in millions)
Construction and land development	$	217	12	%	18	$	53	24	%
Commercial real estate	664		36	%	179	324		49	%
Commercial and industrial	335		18	%	105	108		32	%
SBA loans ⁽²⁾	597		32	%	213	133		22	%
Others	39		2	%	5	8		21	%
	$	1,852	100	%	520	$	626	34	%


Balance Tier	# of Loans	Gross Balance		Weighted average fee		Net Fees		Net Balance
	(dollars in millions)
<$350K	1,617	$	137	4.69	%	$	6	$	131
>$350K & <$2MM	247	185		2.95	%	5		180
>$2MM	22	79		1.00	%	1		78
	1,886	$	401	3.16	%	$	12	$	389


NAICS Industry	# of Loans	Net Balance		% of Total
		(dollars in millions)
Arts, Entertainment, Recreation	48	$	15	4%
Car Washes	22	2		1%
Construction	96	40		10%
Finance and Insurance	63	9		2%
Gas Station	40	3		1%
Health	250	42		11%
Hospitality	123	32		8%
Income Producing Real Estate	165	21		5%
Manufacturing	102	38		10%
Professional	250	41		11%
Restaurant	206	51		13%
Retail Trade	152	20		5%
Transportation	55	12		3%
Others	314	63		16%
	1,886	$	389	100%