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

Commission File Number 001-38476
fcbp-20200930_g1.gif
(Exact Name of Registrant as Specified in its Charter)
         
California82-2711227
(State or Other Jurisdiction of(I.R.S. Employer
Incorporation or Organization)Identification Number)
17785 Center Court Drive N, Suite 750
Cerritos, CA
90703
(Address of principal executive offices)(Zip Code)

562-345-9092
(Registrants telephone number, including area code)
 
 Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

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

There were 11,697,42911,706,130 shares of common stock outstanding as of August 1,November 2, 2020.


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


TABLE OF CONTENTS

    

 



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

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

June 30, 2020 (unaudited)December 31, 2019September 30, 2020 (unaudited)December 31, 2019 (audited)
ASSETSASSETS(dollars in thousands, except share data)ASSETS(dollars in thousands, except share data)
Cash and due from banksCash and due from banks$20,954  $27,359  Cash and due from banks$23,611 $27,359 
Interest-bearing deposits at other banksInterest-bearing deposits at other banks196,875  134,442  Interest-bearing deposits at other banks157,925 134,442 
Total cash and cash equivalentsTotal cash and cash equivalents217,829  161,801  Total cash and cash equivalents181,536 161,801 
Securities available-for-sale, at fair valueSecurities available-for-sale, at fair value36,783  26,653  Securities available-for-sale, at fair value37,999 26,653 
Securities held-to-maturity, at costSecurities held-to-maturity, at cost1,691  5,056  Securities held-to-maturity, at cost1,680 5,056 
Equity securities, at fair valueEquity securities, at fair value2,782  2,694  Equity securities, at fair value2,792 2,694 
Restricted stock investments, at costRestricted stock investments, at cost12,999  12,986  Restricted stock investments, at cost12,999 12,986 
Loans held for sale, at lower of cost or fair valueLoans held for sale, at lower of cost or fair value20,326  7,659  Loans held for sale, at lower of cost or fair value36,474 7,659 
Loans held for investmentLoans held for investment1,831,619  1,374,675  Loans held for investment1,884,930 1,374,675 
Allowance for loan lossesAllowance for loan losses(17,822) (13,522) Allowance for loan losses(18,734)(13,522)
Loans held for investment, netLoans held for investment, net1,813,797  1,361,153  Loans held for investment, net1,866,196 1,361,153 
Accrued interest receivableAccrued interest receivable13,809  5,451  Accrued interest receivable11,500 5,451 
Premises and equipmentPremises and equipment2,551  1,542  Premises and equipment2,341 1,542 
Servicing assetServicing asset2,516  3,202  Servicing asset2,368 3,202 
Deferred taxes, netDeferred taxes, net5,829  6,163  Deferred taxes, net6,095 6,163 
GoodwillGoodwill73,425  73,425  Goodwill73,425 73,425 
Core deposit intangibleCore deposit intangible5,342  5,728  Core deposit intangible5,149 5,728 
Foreclosed assets, net602  —  
Other assetsOther assets13,322  16,811  Other assets15,788 16,811 
TOTAL ASSETSTOTAL ASSETS$2,223,603  $1,690,324  TOTAL ASSETS$2,256,342 $1,690,324 
LIABILITIES AND SHAREHOLDERS’ EQUITYLIABILITIES AND SHAREHOLDERS’ EQUITYLIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:Deposits:Deposits:
Noninterest-bearing demandNoninterest-bearing demand$789,770  $626,569  Noninterest-bearing demand$736,118 $626,569 
Money market, interest checking and savingsMoney market, interest checking and savings620,719  514,366  Money market, interest checking and savings649,613 514,366 
Time depositsTime deposits194,508  172,758  Time deposits174,181 172,758 
Total depositsTotal deposits1,604,997  1,313,693  Total deposits1,559,912 1,313,693 
BorrowingsBorrowings150,000  90,000  Borrowings150,000 90,000 
Paycheck Protection Program Liquidity FacilityPaycheck Protection Program Liquidity Facility179,125  —  Paycheck Protection Program Liquidity Facility253,140 
Senior secured notesSenior secured notes6,500  9,600  Senior secured notes4,400 9,600 
Accrued interest payable and other liabilitiesAccrued interest payable and other liabilities16,032  15,226  Accrued interest payable and other liabilities16,419 15,226 
Total liabilitiesTotal liabilities1,956,654  1,428,519  Total liabilities1,983,871 1,428,519 
Commitments and contingencies - Note 10Commitments and contingencies - Note 10Commitments and contingencies - Note 10
Shareholders’ equity:Shareholders’ equity:Shareholders’ equity:
Preferred stock 100,000,000 shares authorized, 0ne outstandingPreferred stock 100,000,000 shares authorized, 0ne outstanding—  —  Preferred stock 100,000,000 shares authorized, 0ne outstanding
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, 2019217,420  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, 2019Common 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, 2019217,680 216,398 
Additional paid-in capitalAdditional paid-in capital2,538  3,493  Additional paid-in capital2,838 3,493 
Retained earningsRetained earnings46,352  41,920  Retained earnings51,308 41,920 
Accumulated other comprehensive income (loss), netAccumulated other comprehensive income (loss), net639  (6) Accumulated other comprehensive income (loss), net645 (6)
Total shareholders’ equityTotal shareholders’ equity266,949  261,805  Total shareholders’ equity272,471 261,805 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITYTOTAL 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.
4

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

Three Months EndedSix Months Ended June 30,Three Months EndedNine Months Ended September 30,
June 30, 2020March 31, 2020June 30, 201920202019September 30, 2020June 30,
2020
September 30, 201920202019
(dollars in thousands, except share and per share data)(dollars in thousands, except share and per share data)
INTEREST and DIVIDEND INCOMEINTEREST and DIVIDEND INCOMEINTEREST and DIVIDEND INCOME
Interest and fees on loansInterest 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 securitiesInterest on investment securities225  218  215  443  451  Interest on investment securities180 225 208 623 659 
Interest on deposits in other financial institutionsInterest on deposits in other financial institutions92  501  454  593  899  Interest on deposits in other financial institutions103 92 701 696 1,600 
Dividends on restricted stock investmentsDividends on restricted stock investments179  245  206  424  448  Dividends on restricted stock investments200 179 228 624 676 
Total interest and dividend incomeTotal interest and dividend income21,844  21,744  22,219  43,588  44,058  Total interest and dividend income23,154 21,844 24,343 66,742 68,401 
INTEREST EXPENSEINTEREST EXPENSEINTEREST EXPENSE
Interest on savings, interest checking and money market accountsInterest on savings, interest checking and money market accounts318  1,109  1,254  1,427  2,493  Interest on savings, interest checking and money market accounts382 318 1,283 1,809 3,776 
Interest on time depositsInterest on time deposits856  995  1,463  1,851  2,468  Interest on time deposits588 856 1,605 2,439 4,073 
Interest on borrowingsInterest on borrowings197  376  484  573  714  Interest on borrowings207 197 253 780 967 
Interest on Paycheck Protection Program Liquidity FacilityInterest on Paycheck Protection Program Liquidity Facility112  —  —  112  —  Interest on Paycheck Protection Program Liquidity Facility212 112 324 
Interest on senior secured notesInterest on senior secured notes57  91  182  148  355  Interest on senior secured notes39 57 176 187 531 
Total interest expenseTotal interest expense1,540  2,571  3,383  4,111  6,030  Total interest expense1,428 1,540 3,317 5,539 9,347 
Net interest incomeNet interest income20,304  19,173  18,836  39,477  38,028  Net interest income21,726 20,304 21,026 61,203 59,054 
Provision for loan lossesProvision for loan losses2,100  2,700  550  4,800  900  Provision for loan losses1,000 2,100 700 5,800 1,600 
Net interest income after provision for loan lossesNet interest income after provision for loan losses18,204  16,473  18,286  34,677  37,128  Net interest income after provision for loan losses20,726 18,204 20,326 55,403 57,454 
NONINTEREST INCOMENONINTEREST INCOMENONINTEREST INCOME
Gain on sale of loansGain on sale of loans—  377  1,271  377  2,199  Gain on sale of loans990 528 1,367 2,727 
Service charges and fees on deposit accountsService charges and fees on deposit accounts447  555  564  1,002  1,104  Service charges and fees on deposit accounts495 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 incomeOther income617  259  200  876  620  Other income230 617 428 1,106 1,048 
Total noninterest incomeTotal noninterest income1,055  1,415  2,322  2,470  4,444  Total noninterest income1,943 1,055 1,673 4,413 6,117 
NONINTEREST EXPENSENONINTEREST EXPENSENONINTEREST EXPENSE
Salaries and employee benefitsSalaries and employee benefits6,386  7,230  6,857  13,616  13,080  Salaries and employee benefits7,126 6,386 6,472 20,742 19,552 
Occupancy and equipmentOccupancy and equipment1,108  1,063  987  2,171  2,416  Occupancy and equipment1,137 1,108 1,097 3,308 3,513 
Data processingData processing874  807  639  1,681  1,243  Data processing955 874 718 2,636 1,961 
Professional feesProfessional fees450  471  426  921  845  Professional fees492 450 392 1,413 1,237 
Office, postage and telecommunicationsOffice, postage and telecommunications289  258  255  547  527  Office, postage and telecommunications274 289 253 821 780 
Deposit insurance and regulatory assessmentsDeposit insurance and regulatory assessments198  61  120  259  315  Deposit insurance and regulatory assessments386 198 30 645 345 
Loan relatedLoan related226  275  71  501  285  Loan related59 226 244 560 529 
Customer service relatedCustomer service related328  372  273  700  750  Customer service related81 328 437 781 1,187 
Amortization of core deposit intangibleAmortization of core deposit intangible193  193  197  386  393  Amortization of core deposit intangible193 193 197 579 590 
Other expensesOther expenses1,048  789  780  1,837  1,451  Other expenses825 1,048 811 2,662 2,262 
Total noninterest expenseTotal noninterest expense11,100  11,519  10,605  22,619  21,305  Total noninterest expense11,528 11,100 10,651 34,147 31,956 
Income before taxesIncome before taxes8,159  6,369  10,003  14,528  20,267  Income before taxes11,141 8,159 11,348 25,669 31,615 
Income taxesIncome taxes2,429  1,823  3,192  4,252  6,448  Income taxes3,260 2,429 3,277 7,512 9,725 
Net incomeNet 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:
BasicBasic$0.49  $0.39  $0.58  $0.88  $1.18  Basic$0.67 $0.49 $0.69 $1.55 $1.87 
DilutedDiluted$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:
BasicBasic11,564,965  11,558,039  11,581,889  11,561,486  11,616,223  Basic11,573,138 11,564,965 11,584,955 11,565,398 11,605,687 
DilutedDiluted11,606,280  11,632,050  11,675,057  11,619,149  11,741,910  Diluted11,612,270 11,606,280 11,659,146 11,616,839 11,714,020 
5

First Choice Bancorp and Subsidiary
Condensed Consolidated Statements of Income
(unaudited)
See accompanying notes to condensed consolidated financial statements.
56

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

Three Months EndedSix Months Ended June 30, Three Months EndedNine Months Ended September 30,
June 30, 2020March 31, 2020June 30, 201920202019 September 30, 2020June 30,
2020
September 30, 201920202019
(dollars in thousands)(dollars in thousands)
Net incomeNet 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 securitiesChange in net unrealized gain on available-for-sale securities389  527  534  916  872  Change in net unrealized gain on available-for-sale securities389 177 924 1,050 
Income tax expense:Income tax expense:Income tax expense:
Change in net unrealized gain on available-for-sale securitiesChange 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 incomeTotal other comprehensive income274  371  375  645  614  Total other comprehensive income274 125 651 739 
Total comprehensive net incomeTotal 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.



6

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

Common Stock
Number
of
Shares
AmountAdditional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss), net
Total
(dollars in thousands, except share and per share data)
Three Months Ended June 30, 2020
Balance at March 31, 202011,662,603  $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 options7,032  112  (48) —  —  64  
Issuance of restricted shares, net of forfeiture29,916  —  —  —  —  —  
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, 202011,697,766  $217,420  $2,538  $46,352  $639  $266,949  
Three Months Ended June 30, 2019
Balance at March 31, 201911,650,020  $216,265  $3,713  $28,617  $(460) $248,135  
Net income—  —  —  6,811  —  6,811  
Stock-based compensation—  —  564   —  567  
Cash dividends ($0.20 per share)—  —  —  (2,345) —  (2,345) 
Exercise of stock options85,271  2,400  (1,547) —  —  853  
Issuance of restricted shares, net of forfeiture15,101  —  —  —  —  —  
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, 201911,737,441  $218,532  $2,588  $33,086  $(85) $254,121  
See accompanying notes to condensed consolidated financial statements

7

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

Common StockCommon Stock
Number
of
Shares
AmountAdditional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss), net
TotalNumber
of
Shares
AmountAdditional
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, 201911,635,531  $216,398  $3,493  $41,920  $(6) $261,805  
Three Months Ended September 30, 2020Three Months Ended September 30, 2020
Balance at June 30, 2020Balance at June 30, 202011,697,766 $217,420 $2,538 $46,352 $639 $266,949 
Net incomeNet income—  —  —  10,276  —  10,276  Net income— — — 7,881 — 7,881 
Stock-based compensationStock-based compensation—  —  999   —  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 optionsExercise of stock options8,962  165  (80) —  —  85  Exercise of stock options8,686 237 (195)— — 42 
Issuance of restricted shares, net of forfeitureIssuance of restricted shares, net of forfeiture98,951  —  —  —  —  —  Issuance of restricted shares, net of forfeiture(140)— — — — — 
Vesting of restricted sharesVesting of restricted shares—  1,874  (1,874) —  —  —  Vesting of restricted shares— 30 (30)— — 
Repurchase of shares from restricted shares vestingRepurchase 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 taxesOther comprehensive income, net of taxes—  —  —  —  645  645  Other comprehensive income, net of taxes— — — — 
Balance at June 30, 202011,697,766  $217,420  $2,538  $46,352  $639  $266,949  
Balance at September 30, 2020Balance at September 30, 202011,705,878 $217,680 $2,838 $51,308 $645 $272,471 
Six Months Ended June 30, 2019
Balance at December 31, 201811,726,074  $217,514  $7,269  $23,985  $(699) $248,069  
Three Months Ended September 30, 2019Three Months Ended September 30, 2019
Balance at June 30, 2019Balance at June 30, 201911,737,441 $218,532 $2,588 $33,086 $(85)$254,121 
Net incomeNet income—  —  —  13,819  —  13,819  Net income— — — 8,071 — 8,071 
Stock-based compensationStock-based compensation—  —  966   —  969  Stock-based compensation— — 527 — 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 optionsExercise of stock options241,737  6,811  (4,252) —  —  2,559  Exercise of stock options2,512 52 (23)— — 29 
Issuance of restricted shares, net of forfeitureIssuance of restricted shares, net of forfeiture103,408  —  —  —  —  —  Issuance of restricted shares, net of forfeiture129 — — — — — 
Vesting of restricted sharesVesting of restricted shares—  1,287  (1,287) —  —  —  Vesting of restricted shares— 119 (119)— — 
Repurchase of shares from restricted shares vesting(5,008) —  (108) —  —  (108) 
Common stock repurchased under stock repurchase programCommon 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 taxesOther comprehensive income, net of taxes—  —  —  —  614  614  Other comprehensive income, net of taxes— — — — 125 125 
Balance at June 30, 201911,737,441  $218,532  $2,588  $33,086  $(85) $254,121  
Balance at September 30, 2019Balance at September 30, 201911,652,582 $216,792 $2,973 $38,865 $40 $258,670 
See accompanying notes to condensed consolidated financial statements


8

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

See accompanying notes to condensed consolidated financial statements
89

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,
2020201920202019
OPERATING ACTIVITIESOPERATING ACTIVITIES(dollars in thousands)OPERATING ACTIVITIES(dollars in thousands)
Net incomeNet 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 amortizationDepreciation and amortization909  812  Depreciation and amortization1,375 1,231 
Amortization of premiums of investment securitiesAmortization of premiums of investment securities89  84  Amortization of premiums of investment securities170 129 
Amortization of servicing assetAmortization of servicing asset754  417  Amortization of servicing asset1,013 699 
Provision for loan lossesProvision for loan losses4,800  900  Provision for loan losses5,800 1,600 
Provision for losses - unfunded commitmentsProvision for losses - unfunded commitments300  —  Provision for losses - unfunded commitments300 
Gain on sale of loansGain 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 assetsImpairment charges of fixed assets and right-of-use assets—  400  Impairment charges of fixed assets and right-of-use assets400 
Loans originated for saleLoans originated for sale(15,134) (19,839) Loans originated for sale(103,084)(28,626)
Proceeds from loans originated for saleProceeds from loans originated for sale3,783  37,141  Proceeds from loans originated for sale76,715 47,364 
Accretion of net discounts and deferred loan fees, netAccretion 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 securitiesChange in fair value of equity securities(54) (74) Change in fair value of equity securities(48)(88)
Deferred income taxesDeferred income taxes63  1,783  Deferred income taxes(205)1,958 
Stock-based compensationStock-based compensation1,002  969  Stock-based compensation1,527 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, netNet decrease in other items, net(4,029)(796)
Net cash (used in) provided by operating activitiesNet cash (used in) provided by operating activities(1,410) 28,953  Net cash (used in) provided by operating activities(9,798)39,146 
INVESTING ACTIVITIESINVESTING ACTIVITIESINVESTING ACTIVITIES
Proceeds from maturities and paydown of securities available-for-saleProceeds from maturities and paydown of securities available-for-sale3,670  1,786  Proceeds from maturities and paydown of securities available-for-sale7,398 3,132 
Proceeds from maturities and paydown of securities held-to-maturityProceeds from maturities and paydown of securities held-to-maturity3,369  235  Proceeds from maturities and paydown of securities held-to-maturity3,379 244 
Purchase of securities available-for-salePurchase of securities available-for-sale(12,978) —  Purchase of securities available-for-sale(17,993)
Net increase in loans held-for-investmentNet 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 investmentsPurchase of restricted stock investments(13) (72) Purchase of restricted stock investments(13)(115)
Purchase of equity and qualified CRA investmentsPurchase of equity and qualified CRA investments(403) (185) Purchase of equity and qualified CRA investments(675)(388)
Proceeds from disposal of premises and equipmentProceeds from disposal of premises and equipment31  —  Proceeds from disposal of premises and equipment31 
Purchases of premises and equipmentPurchases of premises and equipment(1,114) (403) Purchases of premises and equipment(1,177)(679)
Net cash used in investing activitiesNet cash used in investing activities(463,112) (77,268) Net cash used in investing activities(514,957)(59,234)
FINANCING ACTIVITIESFINANCING ACTIVITIESFINANCING ACTIVITIES
Net increase in depositsNet increase in deposits291,304  3,540  Net increase in deposits246,219 87,199 
Net increase in short-term borrowingsNet increase in short-term borrowings60,000  60,002  Net increase in short-term borrowings60,000 (104,998)
Proceeds from long-term borrowingsProceeds from long-term borrowings—  30,000  Proceeds from long-term borrowings30,000 
Proceeds from Paycheck Protection Program Liquidity FacilityProceeds from Paycheck Protection Program Liquidity Facility179,125  —  Proceeds from Paycheck Protection Program Liquidity Facility253,140 
(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 paidCash dividends paid(5,847) (4,721) Cash dividends paid(8,772)(7,013)
Repurchase of sharesRepurchase of shares(1,017) (7,188) Repurchase of shares(1,024)(9,099)
Proceeds from exercise of stock optionsProceeds from exercise of stock options85  2,559  Proceeds from exercise of stock options127 2,588 
Net cash provided by financing activitiesNet cash provided by financing activities520,550  88,542  Net cash provided by financing activities544,490 3,327 
Net increase in cash and cash equivalentsNet increase in cash and cash equivalents56,028  40,227  Net increase in cash and cash equivalents19,735 (16,761)
Cash and cash equivalents, beginning of periodCash and cash equivalents, beginning of period161,801  197,376  Cash and cash equivalents, beginning of period161,801 197,376 
Cash and cash equivalents, end of periodCash 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 paidInterest paid$4,041  $5,848  Interest paid$5,325 $9,173 
Taxes paidTaxes 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 saleTransfers 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 assetsTransfers of loans to foreclosed assets$602  $—  Transfers of loans to foreclosed assets$602 $
Servicing rights asset recognizedServicing rights asset recognized$68  $713  Servicing rights asset recognized$179 $883 
Initial recognition of operating lease right-of-use assetsInitial recognition of operating lease right-of-use assets$—  $6,022  Initial recognition of operating lease right-of-use assets$$6,022 
Initial recognition of operating lease liabilitiesInitial recognition of operating lease liabilities$—  $6,141  Initial recognition of operating lease liabilities$$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, thatwhich 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 OversightFinancial 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 sixnine months ended JuneSeptember 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

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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
10


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 diseaseDisease 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 athe 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 consideredqualifies 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 runcomplete parallel calculations, testing, and further sensitivity analysis in the third and fourth quartersquarter 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
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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 addadds 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.


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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 JuneSeptember 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, 2020September 30, 2020(dollars in thousands)
Securities available-for-sale:Securities available-for-sale:Securities available-for-sale:
U.S. Government and agency securitiesU.S. Government and agency securities$2,970  $30  $—  $3,000  U.S. Government and agency securities$2,679 $27 $$2,706 
Mortgage-backed securitiesMortgage-backed securities6,721  109  —  6,830  Mortgage-backed securities6,040 117 6,157 
Collateralized mortgage obligationsCollateralized mortgage obligations18,302  381  (73) 18,610  Collateralized mortgage obligations20,611 353 (56)20,908 
SBA poolsSBA pools7,881  462  —  8,343  SBA pools7,754 474 8,228 
$35,874  $982  $(73) $36,783  $37,084 $971 $(56)$37,999 
Securities held-to-maturity:Securities held-to-maturity:Securities held-to-maturity:
Mortgage-backed securitiesMortgage-backed securities$1,691  $118  $—  $1,809  Mortgage-backed securities$1,680 $121 $$1,801 
$1,691  $118  $—  $1,809  $1,680 $121 $$1,801 
December 31, 2019December 31, 2019December 31, 2019
Securities available-for-sale:Securities available-for-sale:Securities available-for-sale:
Mortgage-backed securitiesMortgage-backed securities$7,480  $20  $(69) $7,431  Mortgage-backed securities$7,480 $20 $(69)$7,431 
Collateralized mortgage obligationsCollateralized mortgage obligations10,571  52  (25) 10,598  Collateralized mortgage obligations10,571 52 (25)10,598 
SBA poolsSBA pools8,610  58  (44) 8,624  SBA pools8,610 58 (44)8,624 
$26,661  $130  $(138) $26,653  $26,661 $130 $(138)$26,653 
Securities held-to-maturity:Securities held-to-maturity:Securities held-to-maturity:
U.S. Government and agency securitiesU.S. Government and agency securities$3,342  $ $—  $3,351  U.S. Government and agency securities$3,342 $$$3,351 
Mortgage-backed securitiesMortgage-backed securities1,714  27  (15) 1,726  Mortgage-backed securities1,714 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 JuneSeptember 30, 2020, by contractual maturities are shown below. Contractual maturities may differ from expected maturities because the obligors and/or issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Held to MaturityAvailable for SaleHeld to MaturityAvailable 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 lessDue in one year or less$—  $—  $—  $—  Due in one year or less$$$$
Due after one year through five yearsDue after one year through five years—  —  —  —  Due after one year through five years
Due after five years through ten yearsDue after five years through ten years—  —  —  —  Due after five years through ten years
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 JuneSeptember 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
15


and $295 thousand in calls of U.S. Government and agency securities available-for-sale during the three months ended September 30, 2020. There were no sales and maturities of any investment securities held-to-maturity during the three months ended September 30, 2020. There were no purchases, sales and maturities or calls of any investment securities available-for-sale or held-to-maturity during the three months ended June 30, 2020 and September 30, 2019. There were $13.0
14


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 threenine 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 JuneSeptember 30, 2020. There were 0 purchases, sales and maturities or calls of any investment securities available-for-sale or held-to-maturity during the sixnine months ended JuneSeptember 30, 2019. At JuneSeptember 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 JuneSeptember 30, 2020 and December 31, 2019, unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows:

Less Than Twelve MonthsOver Twelve MonthsTotalLess Than Twelve MonthsOver Twelve MonthsTotal
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, 2020September 30, 2020(dollars in thousands)
Securities available-for-sale:Securities available-for-sale:Securities available-for-sale:
Collateralized mortgage obligationsCollateralized mortgage obligations(73) 5,315  —  —  (73) 5,315  Collateralized mortgage obligations$(56)$4,042 $$$(56)$4,042 
$(73) $5,315  $—  $—  $(73) $5,315  $(56)$4,042 $$$(56)$4,042 
Securities held-to-maturity:Securities held-to-maturity:Securities held-to-maturity:
Mortgage-backed securitiesMortgage-backed securities—  —  —  —  —  —  Mortgage-backed securities$$$$$$
$—  $—  $—  $—  $—  $—  $$$$$$
December 31, 2019December 31, 2019December 31, 2019
Securities available-for-sale:Securities available-for-sale:Securities available-for-sale:
Mortgage-backed securitiesMortgage-backed securities$—  $—  $(69) $6,271  $(69) $6,271  Mortgage-backed securities$$$(69)$6,271 $(69)$6,271 
Collateralized mortgage obligationsCollateralized mortgage obligations(2) 1,342  (23) 1,288  (25) 2,630  Collateralized mortgage obligations(2)1,342 (23)1,288 (25)2,630 
SBA poolsSBA pools(44) 3,043  —  —  (44) 3,043  SBA pools(44)3,043 (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 securitiesMortgage-backed securities—  —  (15) 790  (15) 790  Mortgage-backed securities$$$(15)$790 $(15)$790 
$—  $—  $(15) $790  $(15) $790  $$$(15)$790 $(15)$790 

    At JuneSeptember 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 JuneSeptember 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 JuneSeptember 30, 2019, respectively, all of which related to equity securities held during those periods. During the sixnine months ended JuneSeptember 30, 2020 and 2019, the Company recognized net gains of $54$48 thousand and $74$88 thousand related to changes in fair value.

16


Restricted Stock Investments

The Bank is a member of the FHLB system. Members are required to own FHLB stock of the greater of 1% of FHLB membership asset value or 2.7% of outstanding FHLB advances. At JuneSeptember 30, 2020 and December 31, 2019, the Bank owned $6.1 million of FHLB stock which is carried at cost. During the sixnine months ended JuneSeptember 30, 2020 and 2019, there were 0 required purchases of FHLB stock. The Company evaluated the carrying value of our FHLB stock investment at JuneSeptember 30,
15


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 JuneSeptember 30, 2020 and December 31, 2019. There were 0 required purchases of Federal Reserve stock during the three months ended JuneSeptember 30, 2020. The Company purchased $13 thousand of Federal Reserve stock during the sixnine months ended JuneSeptember 30, 2020. The Bank purchased $60$43 thousand and $72$117 thousand of Federal Reserve stock during the three and sixnine months ended JuneSeptember 30, 2019. The Company evaluated the carrying value of our Federal Reserve stock investment at JuneSeptember 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 JuneSeptember 30, 2020 and December 31, 2019 and are reported in other assets in the condensed consolidated balance sheets. During the three and sixnine months ended JuneSeptember 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 JuneSeptember 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 achievewhile achieving a satisfactory return on capital, and to receivecapital. Additionally, this investment provides the Bank with Community Reinvestment Act ("CRA") lendinginvestment credits. This equity security is recorded at cost and is included in other assets in the condensed consolidated balance sheets. During the three and sixnine months ended JuneSeptember 30, 2020 and 2019, the Company did not purchase additional securities. At JuneSeptember 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 partnership2 partnerships that sponsorssponsor affordable housing projects utilizing the Low Income Housing Tax Credit ("LIHTC") pursuant to Section 42 of the Internal Revenue Code in 2019. This investment isCode. These investments are recorded net of accumulated amortization, using the proportional amortization method. Under the proportional amortization method, the initial cost of the investmentinvestments 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 JuneSeptember 30, 2020. Total estimated tax credits allocated and proportional amortization expense recognized were $44$65 thousand and $33$54 thousand for the sixnine months ended JuneSeptember 30, 2020. At JuneSeptember 30, 2020 and December 31, 2019, the net LIHTC investment totaled $555$687 thousand and $236 thousand. During the three and sixnine months ended JuneSeptember 30, 2020, the Company made capital contributions of $325$153 thousand and $351$504 thousand. There were 0$204 thousand in capital contributioncontributions during the three and sixnine months ended JuneSeptember 30, 2019. At JuneSeptember 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.
17


 
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
16


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. PaymentsOn 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 eitherto 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 ofloan forgiveness proceedsamount to the lender orCompany (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 isif PPP borrowers do not submit a loan forgiveness application within 10 months after the last dayend of thetheir 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 JuneSeptember 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 thirdwill 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 JuneSeptember 30, 2020, the Company pledged $173.7had $253.1 million of PPP loans as eligible collateralin 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 JuneSeptember 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
18


Federal Reserve. See Note 8 –Borrowing Arrangements for additional information regarding the FHLB and Federal Reserve secured lines of credit.
 
    The loans held for investment portfolio includes originated and acquired loans. The acquired loans includes: (i) loans that were not credit impaired on the date of acquisition ("Non-PCI"); and (ii) purchased credit impaired ("PCI") loans, which are defined as loans with evidence of credit deterioration since their originations and for which it is probable that collection of all contractually required payments are unlikely as of the acquisition date. The following table presents loans held for investment, net, by loan class at JuneSeptember 30, 2020 and December 31, 2019:
June 30, 2020December 31, 2019September 30, 2020December 31, 2019
(dollars in thousands)(dollars in thousands)
Construction and land developmentConstruction and land development$218,226  $249,504  Construction and land development$215,109 $249,504 
Real estate:Real estate:Real estate:
Residential Residential39,145  43,736   Residential30,067 43,736 
Commercial real estate - owner occupied Commercial real estate - owner occupied162,508  171,595   Commercial real estate - owner occupied159,603 171,595 
Commercial real estate - non-owner occupied Commercial real estate - non-owner occupied502,693  423,823   Commercial real estate - non-owner occupied528,201 423,823 
Commercial and industrialCommercial and industrial335,411  309,011  Commercial and industrial361,170 309,011 
SBA loans (1)
SBA loans (1)
586,820  177,633  
SBA loans (1)
602,407 177,633 
ConsumerConsumer34  430  Consumer430 
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 investmentLoans held for investment1,831,619  1,374,675  Loans held for investment1,884,930 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, netLoans 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 JuneSeptember 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 JuneSeptember 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.
17


The following table presents the components of loans held for investment at JuneSeptember 30, 2020 and December 31, 2019:
June 30, 2020December 31, 2019September 30, 2020December 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 investmentLoans 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 JuneSeptember 30, 2020 and the net carrying value of PCI loans of $1.0 million$792 thousand and $1.1 million at JuneSeptember 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 JuneSeptember 30, 2020, unamortized net discounts totaled $7.9include $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 4.64.1 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.

19


The following table presents a summary of the changes in the allowance for loan losses for the three and sixnine months ended JuneSeptember 30, 2020 and 2019:
Three Months Ended June 30,Six Months Ended June 30,Three Months Ended September 30,Nine Months Ended September 30,
20202019202020192020201920202019
(dollars in thousands)(dollars in thousands)
Balance, beginning of periodBalance, 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-offsCharge-offs(550) (122) (578) (124) Charge-offs(194)(437)(772)(561)
RecoveriesRecoveries54  199  78  221  Recoveries106 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-offsNet charge-offs(88)(413)(588)(316)
Balance, end of periodBalance, 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 sixnine months ended at JuneSeptember 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 DevelopmentResidentialCommercial - Owner OccupiedCommercial - Non-owner OccupiedCommercial and IndustrialSBA LoansConsumerTotal
(dollars in thousands)
Balance, March 31, 2020$2,498  $333  $844  $4,131  $5,455  $2,954  $ $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  
Collectively218,226  39,145  160,890  501,354  334,751  580,959  34  1,835,359  
PCI loans—  —  103  —  475  433  —  1,011  
$218,226  $39,145  $162,508  $502,693  $335,411  $586,820  $34  $1,844,837  
(1)Includes $138 thousand of reserves for accrued interest receivable related to loans on deferment for the threeSeptember 30, 2019 and nine months ended JuneSeptember 30, 2020.2020 and 2019:
Three Months Ended September 30, 2020
Real Estate
Construction and Land DevelopmentResidentialCommercial - Owner OccupiedCommercial - Non-owner OccupiedCommercial and IndustrialSBA LoansConsumerTotal
(dollars in thousands)
Balance, June 30, 2020$2,470 $361 $1,365 $5,347 $5,607 $2,672 $$17,822 
Provision for (reversal of) loan losses(100)(86)(85)233 745 293 1,000 
Charge-offs(194)(194)
Recoveries106 106 
Net charge-offs(88)(88)
Balance, September 30, 2020$2,370 $275 $1,280 $5,580 $6,264 $2,965 $$18,734 
Reserves:
Specific$$$$165 $$377 $$542 
General2,370 275 1,280 5,415 6,264 2,588 18,192 
$2,370 $275 $1,280 $5,580 $6,264 $2,965 $$18,734 
Loans evaluated for impairment:
Individually$$259 $1,312 $6,286 $183 $5,271 $$13,311 
Collectively215,109 29,808 158,196 521,915 360,710 596,716 1,882,462 
PCI loans95 277 420 792 
$215,109 $30,067 $159,603 $528,201 $361,170 $602,407 $$1,896,565 

Nine Months Ended September 30, 2020
Real Estate
Construction and Land DevelopmentResidentialCommercial - Owner OccupiedCommercial - Non-owner OccupiedCommercial and IndustrialSBA LoansConsumerTotal
(dollars in thousands)
Balance, December 31, 2019$2,350 $292 $918 $3,074 $4,145 $2,741 $$13,522 
Provision for (reversal of) loan losses20 (17)362 2,506 2,273 658 (2)5,800 
Charge-offs(326)(446)(772)
Recoveries172 12 184 
Net charge-offs(154)(434)(588)
Balance, September 30, 2020$2,370 $275 $1,280 $5,580 $6,264 $2,965 $$18,734 


1820


Six Months Ended June 30, 2020
Real Estate
Construction and Land DevelopmentResidentialCommercial - Owner OccupiedCommercial - Non-owner OccupiedCommercial and IndustrialSBA LoansConsumerTotal
(dollars in thousands)
Balance, December 31, 2019$2,350  $292  $918  $3,074  $4,145  $2,741  $ $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 DevelopmentResidentialCommercial - Owner OccupiedCommercial - Non-owner OccupiedCommercial and IndustrialSBA LoansConsumerTotal
(dollars in thousands)
Balance, March 31, 2020$2,498 $333 $844 $4,131 $5,455 $2,954 $$16,218 
Provision for (reversal of) loan losses(28)28 521 1,216 223 143 (3)2,100 
Charge-offs(125)(425)(550)
Recoveries54 54 
Net charge-offs(71)(425)(496)
Balance, June 30, 2020$2,470 $361 $1,365 $5,347 $5,607 $2,672 $$17,822 
Reserves:
Specific$$$$188 $$348 $$536 
General2,470 361 1,365 5,159 5,607 2,324 17,286 
$2,470 $361 $1,365 $5,347 $5,607 $2,672 $$17,822 
Loans evaluated for impairment:
Individually$$$1,515 $1,339 $185 $5,428 $$8,467 
Collectively218,226 39,145 160,890 501,354 334,751 580,959 34 1,835,359 
PCI loans103 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 six months ended June 30, 2020.
Three Months Ended September 30, 2019
Real Estate
Construction and Land DevelopmentResidentialCommercial - Owner OccupiedCommercial - Non-owner OccupiedCommercial and IndustrialSBA LoansConsumerTotal
(dollars in thousands)
Balance, June 30, 2019$1,892 $379 $905 $2,587 $4,502 $1,788 $$12,053 
Provision for (reversal of) loan losses247 (47)(107)(179)384 399 700 
Charge-offs(437)(437)
Recoveries24 24 
Net charge-offs(413)(413)
Balance, September 30, 2019$2,139 $332 $798 $2,408 $4,473 $2,187 $$12,340 
Reserves:
Specific$$$$$$624 $$624 
General2,139 332 798 2,408 4,473 1,563 11,716 
$2,139 $332 $798 $2,408 $4,473 $2,187 $$12,340 
Loans evaluated for impairment:
Individually$$$$$730 $7,002 $$7,732 
Collectively221,857 48,896 171,250 401,710 309,969 154,042 424 1,308,148 
PCI loans110 506 564 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 DevelopmentResidentialCommercial - Owner OccupiedCommercial - Non-owner OccupiedCommercial and IndustrialSBA LoansConsumerTotal
(dollars in thousands)
Balance, December 31, 2019$2,350  $292  $918  $3,074  $4,145  $2,741  $ $13,522  
Provision for (reversal of) loan losses148  41  (74) 1,057  1,305  222   2,700  
Charge-offs—  —  —  —  (7) (21) —  (28) 
Recoveries—  —  —  —  12  12  —  24  
Net recoveries (charge-offs)—  —  —  —   (9) —  (4) 
Balance, March 31, 2020$2,498  $333  $844  $4,131  $5,455  $2,954  $ $16,218  
Reserves:
Specific$—  $—  $—  $215  $—  $877  $—  $1,092  
General2,498  333  844  3,916  5,455  2,077   15,126  
$2,498  $333  $844  $4,131  $5,455  $2,954  $ $16,218  
Loans evaluated for impairment:
Individually$—  $—  $1,560  $1,368  $187  $6,339  $—  $9,454  
Collectively233,607  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 DevelopmentResidentialCommercial - Owner OccupiedCommercial - Non-owner OccupiedCommercial and IndustrialSBA LoansConsumerTotal
(dollars in thousands)
Balance, March 31, 2019$1,806  $402  $862  $2,508  $4,036  $1,812  $—  $11,426  
Provision for (reversal of) loan losses86  (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  $—  $12,053  
Reserves:
Specific$—  $—  $—  $—  $—  $—  $—  $—  
General1,892  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 DevelopmentResidentialCommercial - Owner OccupiedCommercial - Non-owner OccupiedCommercial and IndustrialSBA LoansConsumerTotal
(dollars in thousands)
Loans evaluated for impairment:
Individually$—  $—  $—  $—  $238  $3,161  $—  $3,399  
Collectively196,034  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, 2019Nine Months Ended September 30, 2019
Real EstateReal Estate
Construction and Land DevelopmentResidentialCommercial - Owner OccupiedCommercial - Non-owner OccupiedCommercial and IndustrialSBA LoansConsumerTotalConstruction and Land DevelopmentResidentialCommercial - Owner OccupiedCommercial - Non-owner OccupiedCommercial and IndustrialSBA LoansConsumerTotal
(dollars in thousands)(dollars in thousands)
Balance, December 31, 2018Balance, 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 $$11,056 
Provision for (reversal of) loan lossesProvision for (reversal of) loan losses171  (43) 171  (99) 908  (208) —  900  Provision for (reversal of) loan losses418 (90)64 (278)1,292 191 1,600 
Charge-offsCharge-offs—  —  —  —  (124) —  —  (124) Charge-offs(561)(561)
RecoveriesRecoveries—  —  —  —  32  189  —  221  Recoveries56 189 245 
Net (charge-off) recoveriesNet (charge-off) recoveries—  —  —  —  (92) 189  —  97  Net (charge-off) recoveries(505)189 (316)
Balance, June 30, 2019$1,892  $379  $905  $2,587  $4,502  $1,788  $—  $12,053  
Balance, September 30, 2019Balance, September 30, 2019$2,139 $332 $798 $2,408 $4,473 $2,187 $$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 JuneSeptember 30, 2020 and December 31, 2019:
June 30, 2020September 30, 2020
PassSpecial
Mention
Substandard (1)
TotalPassSpecial
Mention
Substandard (1)
Total
(dollars in thousands)(dollars in thousands)
Construction and land developmentConstruction and land development$218,226  $—  $—  $218,226  Construction and land development$215,109 $$$215,109 
Real estate:Real estate:Real estate:
Residential Residential39,145  —  —  39,145   Residential29,808 259 30,067 
Commercial real estate - owner occupied Commercial real estate - owner occupied160,890  —  1,515  162,405   Commercial real estate - owner occupied158,072 1,436 159,508 
Commercial real estate - non-owner occupied Commercial real estate - non-owner occupied500,644  —  2,049  502,693   Commercial real estate - non-owner occupied521,212 6,989 528,201 
Commercial and industrialCommercial and industrial333,816  —  1,120  334,936  Commercial and industrial359,800 1,093 360,893 
SBA loansSBA loans577,981  —  8,406  586,387  SBA loans593,776 8,211 601,987 
ConsumerConsumer34  —  —  34  Consumer


$1,830,736  $—  $13,090  $1,843,826  
$1,877,785 $$17,988 $1,895,773 
(1)At JuneSeptember 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 JuneSeptember 30, 2020.

December 31, 2019December 31, 2019
PassSpecial
Mention
Substandard (1)
TotalPassSpecial
Mention
Substandard (1)
Total
(dollars in thousands)(dollars in thousands)
Construction and land developmentConstruction and land development$249,504  $—  $—  $249,504  Construction and land development$249,504 $$$249,504 
Real estate:Real estate:Real estate:
Residential Residential43,736  —  —  43,736   Residential43,736 43,736 
Commercial real estate - owner occupied Commercial real estate - owner occupied161,863  —  9,624  171,487   Commercial real estate - owner occupied161,863 9,624 171,487 
Commercial real estate - non-owner occupied Commercial real estate - non-owner occupied421,731  —  2,092  423,823   Commercial real estate - non-owner occupied421,731 2,092 423,823 
Commercial and industrialCommercial and industrial305,918  —  2,630  308,548  Commercial and industrial305,918 2,630 308,548 
SBA loansSBA loans166,820  —  10,260  177,080  SBA loans166,820 10,260 177,080 
ConsumerConsumer430  —  —  430  Consumer430 430 
$1,350,002  $—  $24,606  $1,374,608  $1,350,002 $$24,606 $1,374,608 
(1)At December 31, 2019, substandard loans included $11.3 million of impaired loans. There were no loans classified as special mention, doubtful or loss at December 31, 2019.

    The following tables present past due and nonaccrual loans, net of discounts by loan class, excluding PCI loans, at JuneSeptember 30, 2020 and December 31, 2019: 
June 30, 2020September 30, 2020
Still Accruing Still Accruing 
30-59 Days
Past Due
60-89 Days
Past Due
90 Days or more
Past Due
Nonaccrual30-59 Days
Past Due
60-89 Days
Past Due
90 Days or more
Past Due
Nonaccrual
(dollars in thousands)(dollars in thousands)
Construction and land developmentConstruction and land development$—  $—  $—  $—  Construction and land development$$$$
Real estate:Real estate:Real estate:
ResidentialResidential—  —  267  —  Residential259 
Commercial real estate - owner occupiedCommercial real estate - owner occupied—  —  —  1,515  Commercial real estate - owner occupied1,312 
Commercial real estate - non-owner occupiedCommercial real estate - non-owner occupied—  —  —  1,339  Commercial real estate - non-owner occupied6,286 
Commercial and industrialCommercial and industrial  —  186  Commercial and industrial183 
SBA loansSBA loans—  347  —  5,109  SBA loans1,117 113 4,951 
ConsumerConsumer—  —  —  —  Consumer
TotalTotal$ $349  $267  $8,149  Total$1,120 $113 $$12,991 

2123



December 31, 2019December 31, 2019
Still AccruingStill Accruing
30-59 Days
Past Due
60-89 Days
Past Due
90 Days or more
Past Due
Nonaccrual30-59 Days
Past Due
60-89 Days
Past Due
90 Days or more
Past Due
Nonaccrual
(dollars in thousands)(dollars in thousands)
Construction and land developmentConstruction and land development$—  $—  $—  $—  Construction and land development$$$$
Real estate:Real estate:Real estate:
ResidentialResidential1,471  290  —  —  Residential1,471 290 
Commercial real estate - owner occupiedCommercial real estate - owner occupied—  —  —  3,049  Commercial real estate - owner occupied3,049 
Commercial real estate - non-owner occupiedCommercial real estate - non-owner occupied—  —  —  1,368  Commercial real estate - non-owner occupied1,368 
Commercial and industrialCommercial and industrial  —  229  Commercial and industrial229 
SBA loansSBA loans—  —  —  6,619  SBA loans6,619 
TotalTotal$1,475  $292  $—  $11,265  Total$1,475 $292 $$11,265 

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

The following tables present impaired loans, excluding PCI loans, by loan class at JuneSeptember 30, 2020 and December 31, 2019:
June 30, 2020September 30, 2020
Impaired LoansImpaired 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 $$
Commercial real estate - owner occupied Commercial real estate - owner occupied1,598  1,515  1,515  —  —   Commercial real estate - owner occupied1,363 1,312 1,312 
Commercial real estate - non-owner occupied Commercial real estate - non-owner occupied1,382  1,339  —  1,339  188   Commercial real estate - non-owner occupied6,329 6,286 5,004 1,282 165 
Commercial and industrialCommercial and industrial186  186  186  —  —  Commercial and industrial183 183 183 
SBA loansSBA loans5,755  5,428  3,803  1,625  348  SBA loans5,598 5,271 3,718 1,553 377 
TotalTotal$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, 2019December 31, 2019
Impaired LoansImpaired 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 $$
Commercial real estate - non-owner occupied Commercial real estate - non-owner occupied1,411  1,368  —  1,368  215   Commercial real estate - non-owner occupied1,411 1,368 1,368 215 
Commercial and industrialCommercial and industrial229  229  229  —  —  Commercial and industrial229 229 229 
SBA loansSBA loans7,344  6,940  4,750  2,190  939  SBA loans7,344 6,940 4,750 2,190 939 
TotalTotal$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 EndedThree Months Ended
June 30, 2020March 31, 2020June 30, 2019September 30, 2020June 30, 2020September 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  $ $—  $—  $—  $—   Residential$263 $$133 $$$
Commercial real estate - owner occupied Commercial real estate - owner occupied1,550  —  2,607  —  —  —   Commercial real estate - owner occupied1,413 1,550 
Commercial real estate - non-owner occupied Commercial real estate - non-owner occupied1,361  —  1,368  —  —  —   Commercial real estate - non-owner occupied3,813 1,361 
Commercial and industrialCommercial and industrial185  —  193  —  88  —  Commercial and industrial184 185 732 
SBA loansSBA loans6,074   6,677   1,552  10  SBA loans5,350 6,074 4,179 54 
TotalTotal$9,303  $ $10,845  $ $1,640  $10  Total$11,023 $$9,303 $$4,911 $54 


Six Months Ended June 30,Nine Months Ended September 30,
2020201920202019
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  $ $—  $—   Residential$131 $$$
Commercial real estate - owner occupied Commercial real estate - owner occupied2,078  —  —  —   Commercial real estate - owner occupied1,855 
Commercial real estate - non-owner occupied Commercial real estate - non-owner occupied1,364  —  —  —   Commercial real estate - non-owner occupied3,018 
Commercial and industrialCommercial and industrial142  —  86  —  Commercial and industrial188 304 
SBA loansSBA loans6,188  13  1,730  17  SBA loans6,030 19 2,563 71 
TotalTotal$9,905  $16  $1,816  $17  Total$11,222 $22 $2,867 $71 


At JuneSeptember 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 the Company had not committed to lend any additional amounts to customers with outstanding loans that are classified as TDRs at JuneSeptember 30, 2020.

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

25


COVID-Related Loan Deferments

At JuneSeptember 30, 2020, the Company had 52012 non-PPP loans totaling $37 million on payment deferral for COVID-19 related reasons, down from $626 million which included $11 millionat June 30, 2020. Over 97% of loans heldthat 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. Nocurrent 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
23


requirementtotaling $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 JuneSeptember 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 JuneSeptember 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 JuneSeptember 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 netat 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 sixnine months ended JuneSeptember 30, 2020. There were no provisions and reserves for OREO recorded for the three and sixnine months ended JuneSeptember 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 JuneSeptember 30, 2020 and December 31, 2019. This includes SBA loans serviced for others of $195.5$196.6 million at JuneSeptember 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 JuneSeptember 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,
2020201920202019
(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,
2020201920202019
(dollars in thousands)
Balance, beginning of period$2,516 $3,482 $3,202 $3,186 
Additions111 170 179 883 
Amortization(259)(282)(1,013)(699)
Balance, end of period$2,368 $3,370 $2,368 $3,370 

The fair value of the servicing asset for SBA loans is measured quarterly and was $2.8$3.1 million and $3.2 million as of JuneSeptember 30, 2020 and December 31, 2019. The significant assumptions used in the valuation of the SBA servicing asset at JuneSeptember 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 JuneSeptember 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 JuneSeptember 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 threenine months ended June 30, 2019. During the six months ended JuneSeptember 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 salessale of SBA loans were $377of $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 JuneSeptember 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 sixnine months ended JuneSeptember 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
27


the resulting volatility in our stock price during the first sixnine months of 2020, the Company evaluated goodwill for impairment at JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020. For the three and sixnine months ended JuneSeptember 30, 2020 and 2019, the Company recognized the CDI amortization indicated in the table below.     

Three Months EndedSix Months Ended June 30,
June 30, 2020June 30, 201920202019
(dollars in thousands)
Core deposit intangible:
Gross balance, beginning of period$6,908  $6,908  $6,908  $6,908  
Additions—  —  —  —  
Gross balance, end of period$6,908  $6,908  $6,908  $6,908  
Accumulated amortization:
Balance, beginning of period(1,373) (528) (1,180) (332) 
Amortization(193) (197) (386) (393) 
Balance, end of period$(1,566) $(725) $(1,566) $(725) 
Net core deposit intangible, end of period$5,342  $6,183  $5,342  $6,183  
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Three Months EndedNine Months Ended September 30,
September 30, 2020September 30, 201920202019
(dollars in thousands)
Core deposit intangible:
Gross balance, beginning of period$6,908 $6,908 $6,908 $6,908 
Additions
Gross balance, end of period$6,908 $6,908 $6,908 $6,908 
Accumulated amortization:
Balance, beginning of period(1,566)(725)(1,180)(332)
Amortization(193)(197)(579)(590)
Balance, end of period$(1,759)$(922)$(1,759)$(922)
Net core deposit intangible, end of period$5,149 $5,986 $5,149 $5,986 
    
The following table shows the estimated amortization expense for CDI during the next five fiscal years:

Year Ending December 31,Year Ending December 31,(dollars in thousands)Year Ending December 31,(dollars in thousands)
Remainder of 2020Remainder of 2020$386  Remainder of 2020$193 
20212021753  2021753 
20222022732  2022732 
20232023707  2023707 
20242024678  2024678 
ThereafterThereafter2,086  Thereafter2,086 
$5,342  $5,149 


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

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

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

    At JuneSeptember 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 thea 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 JuneSeptember 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 JuneSeptember 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, 2020December 31, 2019September 30, 2020December 31, 2019
BalanceRateMaturity DateBalanceRateMaturity DateBalanceRateMaturity DateBalanceRateMaturity Date
Advances:Advances:(dollars in thousands)Advances:(dollars in thousands)
Recovery advanceRecovery advance$5,000  — %11/19/2020$—  — %—  Recovery advance$5,000 %11/19/2020$— — %— 
Recovery advanceRecovery advance5,000  — %5/19/2021—  — %—  Recovery advance5,000 %5/19/2021— — %— 
Term and fixed-rate advanceTerm and fixed-rate advance50,000  0.19 %8/27/202060,000  1.72 %3/20/2020Term and fixed-rate advance30,000 0.22 %11/27/202060,000 1.72 %3/20/2020
Term and fixed-rate advanceTerm and fixed-rate advance30,000  0.22 %11/27/2020—  — %—  Term and fixed-rate advance50,000 0.19 %2/26/2021— — %— 
Term and fixed-rate advanceTerm and fixed-rate advance30,000  0.25 %5/26/2021—  — %—  Term and fixed-rate advance30,000 0.25 %5/26/2021— — %— 
Term and fixed-rate advanceTerm and fixed-rate advance30,000  1.93 %6/11/202130,000  1.93 %6/11/2021Term and fixed-rate advance30,000 1.93 %6/11/202130,000 1.93 %6/11/2021
$150,000  0.54 %$90,000  1.79 %$150,000 0.54 %$90,000 1.79 %

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    In addition, at JuneSeptember 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 JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020 and 2019.

Federal Reserve Bank Secured Line of Credit

    At JuneSeptember 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 JuneSeptember 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 sixnine months ended JuneSeptember 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. TheAt September 30, 2020, the Bank pledged $173.7had $253.1 million of PPP loans as eligible collateralin borrowings under the PPPLF borrowing arrangement at June 30, 2020. which were collateralized by PPP loans.
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The average outstanding borrowings were $128.0$240.6 million and $63.8$123.1 million during the three and sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 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 JuneSeptember 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 JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020 and 2019. At JuneSeptember 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
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decreased by approximately $334$68 thousand during the sixnine months ended JuneSeptember 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 JuneSeptember 30, 2020.
    
    For the three months ended JuneSeptember 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 tovaries from the statutory rate of 29.6% during the three and sixnine months ended JuneSeptember 30, 2020 and higher than the statutory rate during the three and six months ended JuneSeptember 30, 2019 due to the tax effect of stock-based compensation.

     The Company is subject to federal income and California franchise tax. At JuneSeptember 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 amountThere 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 JuneSeptember 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
30


accrued $23 thousand and $19 thousand of interest at June 30, 2020 and December 31, 2019, respectively. No2019. NaN amounts for penalties were accrued at JuneSeptember 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.
 
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As of JuneSeptember 30, 2020 and December 31, 2019, the Company had the following outstanding financial commitments whose contractual amounts represent credit risk:
June 30, 2020December 31, 2019September 30, 2020December 31, 2019
(dollars in thousands)(dollars in thousands)
Commitments to extend creditCommitments to extend credit$386,509  $376,879  Commitments to extend credit$383,666 $376,879 
Standby letters of creditStandby letters of credit6,905  7,616  Standby letters of credit7,210 7,616 
Commitments to contribute capital to low income housing projectsCommitments to contribute capital to low income housing projects1,387  1,738  Commitments to contribute capital to low income housing projects2,234 1,738 
Commitments to contribute capital to other CRA equity investmentsCommitments to contribute capital to other CRA equity investments185  236  Commitments to contribute capital to other CRA equity investments61 236 
TotalTotal$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 JuneSeptember 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 JuneSeptember 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 partnership2 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
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Small Business Investment Company ("SBIC") program. At JuneSeptember 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 sixnine months ended JuneSeptember 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 JuneSeptember 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 JuneSeptember 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 JuneSeptember 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 JuneSeptember 30, 2020 and December 31, 2019. The Company has invested in stock of the correspondent bank which totaled $102 thousand at JuneSeptember 30, 2020 and December 31,
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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 JuneSeptember 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 JuneSeptember 30, 2020 and 2019. For the sixnine months ended JuneSeptember 30, 2020 and 2019, the Company recognized stock-based compensation expense of $1.0$1.5 million and $969 thousand.for both periods.
 
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A summary of activity in our outstanding stock options during the three and sixnine months ended JuneSeptember 30, 2020 and 2019 is as follows:
Three Months Ended June 30,Three Months Ended September 30,
2020201920202019
SharesWeighted
Average
Exercise Price
SharesWeighted
Average
Exercise Price
SharesWeighted
Average
Exercise Price
SharesWeighted
Average
Exercise Price
Outstanding, beginning of periodOutstanding, beginning of period134,171  $10.16  226,360  $10.11  Outstanding, beginning of period131,424 $10.33 141,089 $10.18 
ExercisedExercised(7,032) 9.18  (85,271) 10.00  Exercised(8,686)4.86 (2,512)11.60 
GrantedGranted5,000  14.42  —  —  Granted
ForfeitedForfeited(715) 17.83  —  —  Forfeited(3,576)18.04 
Outstanding, end of periodOutstanding, end of period131,424  $10.33  141,089  $10.18  Outstanding, end of period119,162 $10.50 138,577 $10.16 
Options exercisableOptions exercisable126,424  $10.17  141,089  $10.18  Options exercisable114,162 $10.33 138,577 $10.16 


Six Months Ended June 30,Nine Months Ended September 30,
2020201920202019
SharesWeighted
Average
Exercise Price
Weighted Average Remaining Contractual Life (Years)Aggregate Intrinsic ValueSharesWeighted
Average
Exercise Price
Weighted Average Remaining Contractual Life (Years)Aggregate Intrinsic ValueSharesWeighted
Average
Exercise Price
Weighted Average Remaining Contractual Life (Years)Aggregate Intrinsic ValueSharesWeighted
Average
Exercise Price
Weighted Average Remaining Contractual Life (Years)Aggregate Intrinsic Value
(dollars in thousands, except share and per share data)(dollars in thousands, except share and per share data)
Outstanding, beginning of periodOutstanding, beginning of period137,531  $10.20  383,212  $10.44  Outstanding, beginning of period137,531 $10.20 383,212 $10.44 
ExercisedExercised(8,962) 9.51  (241,737) 10.58  Exercised(17,648)7.22 (244,249)10.60 
GrantedGranted5,000  14.42  —  —  Granted5,000 14.42 
ForfeitedForfeited(2,145) 14.40  (386) 12.94  Forfeited(5,721)16.67 (386)12.94 
Outstanding, end of periodOutstanding, end of period131,424  $10.33  3.5 years$808  141,089  $10.18  4.4 years$1,772  Outstanding, end of period119,162 $10.50 3.5 years$359 138,577 $10.16 4.2 years$1,547 
Options exercisableOptions exercisable126,424  $10.17  3.2 years$798  141,089  $10.18  4.4 years$1,772  Options exercisable114,162 $10.33 3.3 years$359 138,577 $10.16 4.2 years$1,547 


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As of JuneSeptember 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 JuneSeptember 30, 2020 and 2019 was approximately $34$83 thousand and $1.0 million.$25 thousand. The intrinsic value of options exercised during the sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020 and 2019 is as follows:
Three Months Ended June 30,Three Months Ended September 30,
2020201920202019
SharesWeighted Average
Grant-Date
Fair Value
SharesWeighted Average
Grant-Date
Fair Value
SharesWeighted Average
Grant-Date
Fair Value
SharesWeighted Average
Grant-Date
Fair Value
Nonvested, beginning of periodNonvested, beginning of period103,666  $24.30  119,226  $23.10  Nonvested, beginning of period128,661 $21.79 128,053 $22.91 
GrantedGranted30,156  13.26  21,413  21.50  Granted100 16.27 972 22.56 
VestedVested(4,921) 22.35  (6,274) 22.38  Vested(1,146)25.24 (4,537)26.41 
ForfeitedForfeited(240) 21.53  (6,312) 22.21  Forfeited(240)23.36 (843)21.43 
Nonvested, end of periodNonvested, end of period128,661  $21.79  128,053  $22.91  Nonvested, end of period127,375 $21.75 123,645 $22.79 


Six Months Ended June 30,
20202019
SharesWeighted Average
Grant-Date
Fair Value
SharesWeighted Average
Grant-Date
Fair Value
Nonvested, beginning of period113,635  $22.50  84,120  $23.90  
Granted102,267  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 period128,661  $21.79  128,053  $22.91  
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Nine Months Ended September 30,
20202019
SharesWeighted Average
Grant-Date
Fair Value
SharesWeighted Average
Grant-Date
Fair Value
Nonvested, beginning of period113,635 $22.50 84,120 $23.90 
Granted102,367 21.62 111,205 22.19 
Vested(85,071)22.37 (64,012)23.32 
Forfeited(3,556)27.09 (7,668)21.83 
Nonvested, end of period127,375 $21.75 123,645 $22.79 

As of JuneSeptember 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 JuneSeptember 30, 2020 and 2019. The value of restricted shares that vested was approximately $1.9 million and $1.4$1.5 million for the sixnine months ended JuneSeptember 30, 2020 and 2019.


NOTE 13.    EARNINGS PER SHARE
 
Earnings per share (“EPS”) areis 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.
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The following is a reconciliation of net income and shares outstanding used in the computation of basic and diluted EPS:
Three Months EndedSix Months Ended June 30,Three Months EndedNine Months Ended September 30,
June 30, 2020March 31, 2020June 30, 201920202019September 30, 2020June 30,
2020
September 30, 201920202019
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 incomeNet 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 securitiesLess: 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 shareholdersNet 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 periodBasic weighted average common shares outstanding during the period11,564,965  11,558,039  11,581,889  11,561,486  11,616,223  Basic weighted average common shares outstanding during the period11,573,138 11,564,965 11,584,955 11,565,398 11,605,687 
Denominator for diluted earnings per share:Denominator for diluted earnings per share:Denominator for diluted earnings per share:
Basic weighted average common shares outstanding during the periodBasic weighted average common shares outstanding during the period11,564,965  11,558,039  11,581,889  11,561,486  11,616,223  Basic weighted average common shares outstanding during the period11,573,138 11,564,965 11,584,955 11,565,398 11,605,687 
Net effect of dilutive stock optionsNet effect of dilutive stock options41,315  74,011  93,168  57,663  125,687  Net effect of dilutive stock options39,132 41,315 74,191 51,441 108,333 
Diluted weighted average common sharesDiluted weighted average common shares11,606,280  11,632,050  11,675,057  11,619,149  11,741,910  Diluted weighted average common shares11,612,270 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:
BasicBasic$0.49  $0.39  $0.58  $0.88  $1.18  Basic$0.67 $0.49 $0.69 $1.55 $1.87 
DilutedDiluted$0.49  $0.39  $0.58  $0.88  $1.17  Diluted$0.67 $0.49 $0.68 $1.55 $1.85 

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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 EquivalentsDue 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
32


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
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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 JuneSeptember 30, 2020 and December 31, 2019:

June 30, 2020December 31, 2019September 30, 2020December 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 equivalentsCash 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-saleSecurities available-for-sale Level 236,783  36,783  26,653  26,653  Securities available-for-sale Level 237,999 37,999 26,653 26,653 
Securities held-to-maturitySecurities held-to-maturity Level 21,691  1,809  5,056  5,077  Securities held-to-maturity Level 21,680 1,801 5,056 5,077 
Equity securitiesEquity securitiesLevel 12,792 2,792 2,694 2,694 
Loans held for saleLoans held for sale Level 236,474 39,271 7,659 8,420 
Loan held for investment, netLoan held for investment, net Level 31,866,196 1,906,039 1,361,153 1,393,282 
Restricted stock investments, at costRestricted stock investments, at cost Level 212,999 12,999 12,986 12,986 
Servicing assetServicing asset Level 32,368 3,063 3,202 3,246 
Accrued interest receivableAccrued interest receivable Level 211,500 11,500 5,451 5,451 
Financial Liabilities:Financial Liabilities:
DepositsDeposits Level 2$1,559,912 $1,561,061 $1,313,693 $1,316,287 
BorrowingsBorrowings Level 2150,000 150,336 90,000 91,029 
PPP Liquidity FacilityPPP Liquidity FacilityLevel 2253,140 253,245 
Senior secured notesSenior secured notes Level 24,400 4,400 9,600 9,600 
Accrued interest payableAccrued interest payable Level 2418 418 203 203 

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Equity securitiesLevel 12,782  2,782  2,694  2,694  
Loans held for sale Level 220,326  21,859  7,659  8,420  
Loan held for investment, net Level 31,813,797  1,860,925  1,361,153  1,393,282  
Restricted stock investments, at cost Level 212,999  12,999  12,986  12,986  
Servicing asset Level 32,516  2,756  3,202  3,246  
Accrued interest receivable Level 213,809  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 2150,000  150,409  90,000  91,029  
PPP Liquidity FacilityLevel 2179,125  179,101  —  —  
Senior secured notes Level 26,500  6,500  9,600  9,600  
Accrued interest payable Level 2274  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 JuneSeptember 30, 2020 and December 31, 2019:
Recurring Fair Value MeasurementsRecurring Fair Value Measurements
Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
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 securitiesU.S. Government and agency securities$—  $3,000  $—  $3,000  U.S. Government and agency securities$$2,706 $$2,706 
Mortgage-backed securitiesMortgage-backed securities—  6,830  —  6,830  Mortgage-backed securities6,157 6,157 
Collateralized mortgage obligationsCollateralized mortgage obligations—  18,610  —  18,610  Collateralized mortgage obligations20,908 20,908 
SBA PoolsSBA Pools—  8,343  —  8,343  SBA Pools8,228 8,228 
Securities available-for-saleSecurities available-for-sale$—  $36,783  $—  $36,783  Securities available-for-sale$$37,999 $$37,999 
Equity securities:Equity securities:Equity securities:
Mutual fund investmentMutual fund investment$2,782  $—  $—  $2,782  Mutual fund investment$2,792 $$$2,792 
December 31, 2019:December 31, 2019:December 31, 2019:
Securities available-for-sale:Securities available-for-sale:Securities available-for-sale:
Mortgage-backed securitiesMortgage-backed securities$—  $7,431  $—  $7,431  Mortgage-backed securities$$7,431 $$7,431 
Collateralized mortgage obligationsCollateralized mortgage obligations—  10,598  —  10,598  Collateralized mortgage obligations10,598 10,598 
SBA PoolsSBA Pools—  8,624  —  8,624  SBA Pools8,624 8,624 
Securities available-for-saleSecurities available-for-sale$—  $26,653  $—  $26,653  Securities available-for-sale$$26,653 $$26,653 
Equity securities:Equity securities:Equity securities:
Mutual fund investmentMutual fund investment$2,694  $—  $—  $2,694  Mutual fund investment$2,694 $$$2,694 

Nonrecurring fair value measurements

These fair value measurements typically result from the application of specific accounting pronouncements under GAAP. The fair value measurements are considered nonrecurring fair value measurements under FASB ASC 820-10.
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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 JuneSeptember 30, 2020 and December 31, 2019:
Nonrecurring Fair Value Measurements
Level 1Level 2Level 3Total
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 1Level 2Level 3Total
September 30, 2020:(dollars in thousands)
Impaired loans$$$2,293 $2,293 
December 31, 2019:
Impaired loans$$$3,558 $3,558 

The majority of the impaired loans are considered collateral-dependent loans or are supported by a SBA guaranty. The collateral-dependent impaired loans were written down to the fair value of their underlying collateral less costs to sell of $2.4$2.3 million and $3.6 million at JuneSeptember 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 sixnine months ended JuneSeptember 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
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thousand in gains for the three and sixnine months ended JuneSeptember 30, 2020. There were no collateral-dependent impaired loans measured at fair value on a nonrecurring basis during the three and sixnine months ended JuneSeptember 30, 2019. In addition, there were no fair value adjustments for the three and sixnine months ended JuneSeptember 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 EndedSix Months Ended June 30,
June 30, 2020June 30, 201920202019
(dollars in thousands)
Noninterest income, in-scope:
Service charges and fees on deposit accounts$447  $564  $1,002  $1,104  
Other income182  45  223  87  
Total noninterest income, in-scope629  609  1,225  1,191  
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Three Months EndedSix Months Ended June 30,Three Months EndedNine Months Ended September 30,
June 30, 2020June 30, 201920202019September 30, 2020September 30, 201920202019
(dollars in thousands)
Noninterest income, in-scope:Noninterest income, in-scope:
Service charges and fees on deposit accountsService charges and fees on deposit accounts$495 $475 $1,497 $1,579 
Other incomeOther income45 46 268 133 
Total noninterest income, in-scopeTotal noninterest income, in-scope540 521 1,765 1,712 
Noninterest income, not in-scope:Noninterest income, not in-scope:Noninterest income, not in-scope:
Gain on sale of loansGain on sale of loans—  1,271  377  2,199  Gain on sale of loans990 528 1,367 2,727 
Net servicing (costs) fees(9) 287  215  521  
Net servicing feesNet servicing fees228 242 443 763 
Other incomeOther income435  155  653  533  Other income185 382 838 915 
Total noninterest income, not in-scopeTotal noninterest income, not in-scope426  1,713  1,245  3,253  Total noninterest income, not in-scope1,403 1,152 2,648 4,405 
Total noninterest incomeTotal 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 JuneSeptember 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 sixnine months ended JuneSeptember 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.

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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 JuneSeptember 30, 2020, compared to 12,82487,500 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 JuneSeptember 30, 2019. During the sixnine months ended JuneSeptember 30, 2020 and 2019, the Company repurchased 38,411 and 328,770416,270 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 JuneSeptember 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. 

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At JuneSeptember 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 JuneSeptember 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;
39



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

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

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

On April 6, 2020, the federal banking regulators, implementing the applicable provisions of the CARES Act, issued interim rules which modified the CBLR framework so that: (i) beginning in the second quarter 2020 and until the end of the year, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the CBLR framework; and (ii) community banking organizations will have until January 1, 2022, before the CBLR requirement is reestablished at greater than 9%. Under the interim rules, the minimum CBLR will beis 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 JuneSeptember 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 JuneSeptember 30, 2019 and for the sixnine months ended JuneSeptember 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 ReportReports on Form 10-Q for quarterquarters 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, 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, thatwhich was acquired as part of the acquisition of Pacific Commerce Bank. PCB Real Estate Holding, LLC is used for holding other real estate owned and other assets acquired by foreclosure. References herein to “First Choice Bancorp,” “Bancorp” or the “holding company,” refer to First Choice Bancorp on a stand-alone basis. The words “we," "us," "our," or the "Company" refer to First Choice Bancorp, First Choice Bank and PCB Real Estate Holdings, LLC collectively and on a consolidated basis. References to the “Bank” refer to First Choice Bank and PCB Real Estate Holdings, LLC on a consolidated basis.

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

    As a California-chartered member bank, the Bank is primarily regulated by the California Department of Business OversightFinancial 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”) and, as a result, the FDIC also has examination authority over the Bank.

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

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

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

Key Events Related to COVID-19 During SecondThird 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 emergencypandemic 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.Entireentire industries within our loan portfolio, such as hospitality and restaurants, have been impacted due to quarantines and
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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
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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 SecondThird 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

$60,00080,000 in donations to over 3031 non-profits organizations within our footprint wherethat 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
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4013 of the CARES Act were reported as past due loans or troubled debt restructurings ("TDRs"). The Company currently expects that the majority ofCompany'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 estate664  36 %179324  49 %
Commercial and industrial335  18 %105108  32 %
SBA loans (2)
597  32 %213133  22 %
Others39  %5 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  %$22  54 %
Car washes31  %21  68 %
Gas station34  %10  29 %
Hospitality212  11 %100  47 %
Restaurant92  %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 ofOn March 27, 2020, the Company participatedCARES 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 byand 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 byto be used for purposes that would qualify the SBAloan for forgiveness (the “covered period”) from 8 weeks to 24 weeks, for PPP loans made prior to June 5, 2020, and carry a fixed rateset 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 eitherprincipal or interest on their PPP loan before the date on which the SBA remits the amount ofloan forgiveness proceedsamount to the lender orCompany (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 isif PPP borrowers do not submit a loan forgiveness application within 10 months after the last dayend of thetheir 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 JuneSeptember 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 thirdwill 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 LoansGross BalanceWeighted average feeNet FeesNet Balance
(dollars in millions)
 <$350K1,617$137  4.69 %$ $131  
 >$350K & <$2MM247185  2.95 % 180  
 >$2MM2279  1.00 % 78  
1,886$401  3.16 %$12  $389  

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The following table presents the total PPP loan balance, net of unearned fees, by industry at June 30, 2020:
NAICS Industry# of LoansNet Balance% of Total
(dollars in millions)
Arts, Entertainment, Recreation48  $15  4%
Car Washes22   1%
Construction96  40  10%
Finance and Insurance63   2%
Gas Station40   1%
Health250  42  11%
Hospitality123  32  8%
Income Producing Real Estate165  21  5%
Manufacturing102  38  10%
Professional250  41  11%
Restaurant206  51  13%
Retail Trade152  20  5%
Transportation55  12  3%
Others314  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 JuneSeptember 30, 2020, the Company borrowed $179.1had $253.1 million in borrowings under the PPPLF with a fixed-rate of 0.35% which were collateralized by PPP loans.
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Main Street Lending Program. On April 9, 2020, the Federal Reserve established the Main Street Lending Program to support lending to small and pledged PPPmedium-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 securequalified 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, 2020At June 30, 2020
Total loan
balance (1)
# of loan deferments (2)
Loan balance on deferments (2)
% of category balance (3)
Total loan
balance (1)
# of loan deferments (2)
Loan balance on deferments (2)
% of category balance (3)
(dollars in millions)
Construction and land development$214 2$15 %$217 18$53 24 %
Commercial real estate687 411%664 17932449 %
Commercial and industrial360 — — — %335 10510832 %
SBA loans (4)
630 28%597 21313322 %
Others30 4310 %39 5821 %
$1,921 12 $37 %$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.


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Impacts from COVID-19:

The ongoing COVID-19 global and national health emergencypandemic 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 duringfor the second quarter ofnine 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 ofnine 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 ofthree 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.

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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 quarterand 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 higha 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 JuneSeptember 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 JuneSeptember 30, 2020, non-accrual loans totaled $85$81 thousand. As of JuneSeptember 30, 2020, the totalonly 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 JuneSeptember 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 JuneSeptember 30, 2020, non-accrual loans totaled $2 million, and no loans were downgraded during the 2ndthird quarter of 2020. As of JuneSeptember 30, 2020, the totalonly 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 JuneSeptember 30, 2020, we exceeded the reduced regulatory minimum required of 8%, and were considered "well-capitalized" at JuneSeptember 30, 2020. The Bank's primary and secondary liquidity sources were over $900 million at JuneSeptember 30, 2020.



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Highlights for the SecondThird Quarter of 2020:


Net income of $5.7$7.9 million, up 26.0%37.5% over Q1'20Q2'20
Diluted earnings per common share of $0.49,$0.67, up 25.6%36.7% over Q1'20Q2'20
Pre-tax pre-provision income was $12.1 million, up 18.3% from Q2'20
Net interest margin of 4.12% and cost4.05%, 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 lossesloss expense of $2.1$1.0 million, including approximately $1.4down $1.1 million related to the impact of COVID-19
Provision for unfunded loan commitments of $300 thousandfrom 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 Q1'20Q2'20
Noninterest-bearing demand deposits grew $162.0were $736.1 million, up 25.8% over Q1'20 and represent 49.2%representing 47.2% of total deposits
depositsTangible 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 JuneSeptember 30, 2020
Quarterly cash dividend of $0.25 per share


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Financial Highlights

At or for the Three Months EndedAt or for the Six Months Ended June 30,At or for the Three Months EndedAt or for the Nine Months Ended September 30,
June 30, 2020March 31, 2020June 30, 201920202019September 30, 2020June 30,
2020
September 30, 201920202019
(dollars in thousands, except per share amounts)(dollars in thousands, except per share amounts)
Results of OperationsResults of OperationsResults of Operations
Total interest and dividend incomeTotal 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 expenseTotal interest expense1,540  2,571  3,383  4,111  6,030  Total interest expense1,428 1,540 3,317 5,539 9,347 
Net interest incomeNet interest income20,304  19,173  18,836  39,477  38,028  Net interest income21,726 20,304 21,026 61,203 59,054 
Total noninterest incomeTotal noninterest income1,055  1,415  2,322  2,470  4,444  Total noninterest income1,943 1,055 1,673 4,413 6,117 
Total net interest income and noninterest incomeTotal net interest income and noninterest income21,359  20,588  21,158  41,947  42,472  Total net interest income and noninterest income23,669 21,359 22,699 65,616 65,171 
Total noninterest expenseTotal noninterest expense11,100  11,519  10,605  22,619  21,305  Total noninterest expense11,528 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 lossesProvision for loan losses2,100  2,700  550  4,800  900  Provision for loan losses1,000 2,100 700 5,800 1,600 
Income before taxesIncome before taxes8,159  6,369  10,003  14,528  20,267  Income before taxes11,141 8,159 11,348 25,669 31,615 
Income taxesIncome taxes2,429  1,823  3,192  4,252  6,448  Income taxes3,260 2,429 3,277 7,512 9,725 
NET INCOMENET 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 assets1.09 %1.06 %1.73 %1.08 %1.80 %
Return on average equity8.59 %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 margin4.12 %4.78 %5.14 %4.42 %5.32 %
Average loan yield4.94 %5.95 %6.42 %5.39 %6.52 %
Cost of deposits0.31 %0.63 %0.89 %0.46 %0.82 %
Cost of funds0.34 %0.72 %1.03 %0.51 %0.94 %
Efficiency ratio (1)52.0 %56.0 %50.1 %53.9 %50.2 %
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At or for the Three Months EndedAt or for the Nine Months Ended September 30,
September 30, 2020June 30,
2020
September 30, 201920202019
(dollars in thousands, except per share amounts)
Performance Ratios
Net income per share-diluted$0.67 $0.49 $0.68 $1.55 $1.85 
Return on average assets1.39 %1.09 %1.98 %1.19 %1.86 %
Return on average equity11.57 %8.59 %12.45 %9.05 %11.60 %
Return on average tangible common equity (1)16.31 %12.18 %18.03 %12.83 %16.95 %
Net interest margin4.05 %4.12 %5.52 %4.28 %5.39 %
Average loan yield4.77 %4.94 %6.93 %5.15 %6.66 %
Cost of deposits0.25 %0.31 %0.89 %0.38 %0.84 %
Cost of funds0.29 %0.34 %0.98 %0.42 %0.95 %
Efficiency ratio (1)48.7 %52.0 %46.9 %52.0 %49.0 %
(1) Non-GAAP measure. See – Non-GAAP Financial Measures in this MD&A.


Financial Performance

June 30, 2020March 31, 2020December 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 investment1,831,619  1,438,055  1,374,675  
Noninterest-bearing deposits789,770  627,793  626,569  
Total deposits1,604,997  1,351,040  1,313,693  
Shareholders’ equity266,949  263,307  261,805  
Key Ratios
Noninterest-bearing deposits to total deposits49.2 %46.5 %47.7 %
Equity to assets ratio12.01 %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  
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September 30, 2020June 30,
2020
December 31, 2019
(dollars in thousands, except per share amounts)
Financial ConditionsFinancial Conditions
Total assetsTotal assets$2,256,342 $2,223,603 $1,690,324 
Loans held for investmentLoans held for investment1,884,930 1,831,619 1,374,675 
Noninterest-bearing depositsNoninterest-bearing deposits736,118 789,770 626,569 
Total depositsTotal deposits1,559,912 1,604,997 1,313,693 
Shareholders’ equityShareholders’ equity272,471 266,949 261,805 
Key RatiosKey Ratios
Noninterest-bearing deposits to total depositsNoninterest-bearing deposits to total deposits47.2 %49.2 %47.7 %
Equity to assets ratioEquity to assets ratio12.08 %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 shareBook 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 QualityCredit QualityCredit Quality
Nonperforming loans as a percentage of total assetsNonperforming loans as a percentage of total assets0.41 %0.51 %0.67 %Nonperforming loans as a percentage of total assets0.58 %0.41 %0.67 %
Allowance for loan losses as a percentage of total loans held for investmentAllowance for loan losses as a percentage of total loans held for investment0.97 %1.13 %0.98 %Allowance for loan losses as a percentage of total loans held for investment0.99 %0.97 %0.98 %
Allowance for loan losses as a percentage of total loans held for investment without PPP loansAllowance for loan losses as a percentage of total loans held for investment without PPP loans1.24 %1.13 %0.98 %Allowance for loan losses as a percentage of total loans held for investment without PPP loans1.25 %1.24 %0.98 %
(1) Non-GAAP measure. See - Non-GAAP Financial Measures in this MD&A.



Non-GAAP Financial Measures

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


comparable to other similarly titled measures used by other companies. These non-GAAP measures should be taken together with the corresponding GAAP measures and should not be considered a substitute of the GAAP measures.
Three Months EndedSix Months Ended June 30,
June 30, 2020March 31, 2020June 30, 201920202019
(dollars in thousands)
Efficiency Ratio
Noninterest expense (numerator)$11,100  $11,519  $10,605  $22,619  $21,305  
Net interest income20,304  19,173  18,836  $39,477  $38,028  
Plus: Noninterest income1,055  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 income1,055  1,415  2,322  2,470  4,444  
Total net interest income and noninterest income21,359  20,588  21,158  41,947  42,472  
Less: Noninterest expense11,100  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’ equity268,168  264,869  251,662  266,518  249,924  
Less: Average intangible assets78,901  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 assets1.09 %1.06 %1.73 %1.08 %1.80 %
Return on average equity8.59 %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.
45


June 30, 2020March 31, 2020December 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 assets78,767  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 assets78,767  78,960  79,153  
Tangible assets (1)
$2,144,836  $1,696,702  $1,611,171  
Equity to asset ratio12.01 %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 outstanding11,697,766  11,662,603  11,635,531  
Three Months EndedNine Months Ended September 30,
September 30, 2020June 30,
2020
September 30, 201920202019
(dollars in thousands)
Efficiency Ratio
Noninterest expense (numerator)$11,528 $11,100 $10,651 $34,147 $31,956 
Net interest income21,726 20,304 21,026 61,203 59,054 
Plus: Noninterest income1,943 1,055 1,673 4,413 6,117 
Total net interest income and noninterest income (denominator)$23,669 $21,359 $22,699 $65,616 $65,171 
Efficiency ratio (1)
48.7 %52.0 %46.9 %52.0 %49.0 %
Pre-tax pre-provision income
Net interest income$21,726 $20,304 $21,026 $61,203 $59,054 
Noninterest income1,943 1,055 1,673 4,413 6,117 
Total net interest income and noninterest income23,669 21,359 22,699 65,616 65,171 
Less: Noninterest expense11,528 11,100 10,651 34,147 31,956 
Pre-tax pre-provision income (1)
$12,141 $10,259 $12,048 $31,469 $33,215 
Return on Average Assets, Equity, and Tangible Equity
Net income$7,881 $5,730 $8,071 $18,157 $21,890 
Average assets$2,254,461 $2,109,208 $1,620,804 $2,031,175 $1,574,960 
Average shareholders’ equity270,903 268,168 257,158 267,990 252,362 
Less: Average intangible assets78,696 78,901 79,535 78,888 79,730 
Average tangible common equity (1)
$192,207 $189,267 $177,623 $189,102 $172,632 
Return on average assets1.39 %1.09 %1.98 %1.19 %1.86 %
Return on average equity11.57 %8.59 %12.45 %9.05 %11.60 %
Return on average tangible common equity (1)
16.31 %12.18 %18.03 %12.83 %16.95 %
(1) Non-GAAP measure.

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


September 30, 2020June 30,
2020
December 31, 2019
Tangible Common Equity Ratio/Tangible Book Value Per Share(dollars in thousands, except share and per share data)
Shares outstanding11,705,878 11,697,766 11,635,531 
(1) Non-GAAP measure.
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 EndedThree Months Ended
June 30, 2020March 31, 2020June 30, 2019September 30, 2020June 30, 2020September 30, 2019
Average
Balance
Interest
Income / Expense
Yield / CostAverage
Balance
Interest
Income / Expense
Yield / CostAverage
Balance
Interest
Income / Expense
Yield / CostAverage
Balance
Interest
Income / Expense
Yield / CostAverage
Balance
Interest
Income / Expense
Yield / CostAverage
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 securitiesInvestment securities42,553  225  2.13 %36,200  218  2.42 %36,337  215  2.37 %Investment securities43,154 180 1.66 %42,553 225 2.13 %35,651 208 2.31 %
Deposits at other financial institutionsDeposits at other financial institutions186,741  92  0.20 %157,743  501  1.28 %83,183  442  2.13 %Deposits at other financial institutions184,606 103 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 stocksRestricted stock investments and other bank stocks14,534  179  4.95 %14,524  245  6.78 %13,932  206  5.93 %Restricted stock investments and other bank stocks14,534 200 5.47 %14,534 179 4.95 %13,988 228 6.47 %
Total interest-earning assetsTotal interest-earning assets1,982,000  21,844  4.43 %1,613,119  21,744  5.42 %1,469,658  22,219  6.06 %Total interest-earning assets2,134,744 23,154 4.31 %1,982,000 21,844 4.43 %1,512,284 24,343 6.39 %
Noninterest-earning assetsNoninterest-earning assets127,208  114,282  110,082  Noninterest-earning assets119,717 127,208 108,520 
Total assetsTotal 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 checkingInterest 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 accountsMoney market accounts298,040  207  0.28 %318,465  798  1.01 %271,067  900  1.33 %Money market accounts338,970 260 0.31 %298,040 207 0.28 %267,493 890 1.32 %
Savings accountsSavings accounts30,104  10  0.13 %28,264  49  0.70 %28,825  56  0.78 %Savings accounts31,639 11 0.14 %30,104 10 0.13 %29,070 56 0.76 %
Time depositsTime deposits91,051  292  1.29 %117,567  490  1.68 %150,601  674  1.80 %Time deposits81,837 201 0.98 %91,051 292 1.29 %147,568 676 1.82 %
Brokered time depositsBrokered time deposits90,349  564  2.51 %92,844  505  2.19 %128,555  789  2.46 %Brokered time deposits107,347 387 1.43 %90,349 564 2.51 %138,682 929 2.66 %
Total interest-bearing depositsTotal interest-bearing deposits760,942  1,174  0.62 %713,547  2,104  1.19 %690,164  2,717  1.58 %Total interest-bearing deposits839,738 970 0.46 %760,942 1,174 0.62 %698,920 2,888 1.64 %
BorrowingsBorrowings145,440  197  0.54 %92,143  376  1.64 %77,442  484  2.51 %Borrowings152,762 207 0.54 %145,440 197 0.54 %48,263 253 2.08 %
Paycheck Protection Program Liquidity FacilityPaycheck Protection Program Liquidity Facility127,962  112  0.35 %—  —  — %—  —  — %Paycheck Protection Program Liquidity Facility240,602 212 0.35 %127,962 112 0.35 %— — — %
Senior secured notesSenior secured notes6,754  57  3.39 %8,022  91  4.56 %12,398  182  5.89 %Senior secured notes4,620 39 3.36 %6,754 57 3.39 %12,267 176 5.69 %
Total interest-bearing liabilitiesTotal interest-bearing liabilities1,041,098  1,540  0.59 %813,712  2,571  1.27 %780,004  3,383  1.74 %Total interest-bearing liabilities1,237,722 1,428 0.46 %1,041,098 1,540 0.59 %759,450 3,317 1.73 %
Noninterest-bearing liabilities:Noninterest-bearing liabilities:Noninterest-bearing liabilities:
Demand depositsDemand deposits783,258  631,809  534,192  Demand deposits730,306 783,258 590,212 
Other liabilitiesOther liabilities16,684  17,011  13,882  Other liabilities15,530 16,684 13,984 
Shareholders’ equityShareholders’ equity268,168  264,869  251,662  Shareholders’ equity270,903 268,168 257,158 
Total liabilities and shareholders' equityTotal 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 spreadNet 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 marginNet interest margin4.12 %4.78 %5.14 %Net interest margin4.05 %4.12 %5.52 %
Total depositsTotal 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 sourcesTotal 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 JuneSeptember 30, 2019. InterestIn 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 JuneSeptember 30, 2019.

47
50



Six Months Ended June 30,Nine Months Ended September 30,
2020201920202019
Average
Balance
Interest
Income / Expense
Yield / CostAverage
Balance
Interest
Income / Expense
Yield / CostAverage
Balance
Interest
Income / Expense
Yield / CostAverage
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 securitiesInvestment securities39,377  443  2.26 %36,714  451  2.48 %Investment securities40,645 623 2.05 %36,355 659 2.42 %
Deposits at other financial institutionsDeposits at other financial institutions172,242  593  0.69 %81,998  869  2.14 %Deposits at other financial institutions176,393 696 0.53 %99,711 1,570 2.11 %
Federal funds sold/resale agreementsFederal 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 stocksRestricted stock investments and other bank stocks14,529  424  5.87 %13,912  448  6.49 %Restricted stock investments and other bank stocks14,531 624 5.74 %13,937 676 6.48 %
Total interest-earning assetsTotal interest-earning assets1,797,560  43,588  4.88 %1,442,743  44,058  6.16 %Total interest-earning assets1,910,775 66,742 4.67 %1,466,178 68,401 6.24 %
Noninterest-earning assetsNoninterest-earning assets120,745  108,915  Noninterest-earning assets120,400 108,782 
Total assetsTotal 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 checkingInterest 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 accountsMoney market accounts308,253  1,005  0.66 %271,521  1,768  1.31 %Money market accounts318,567 1,267 0.53 %270,163 2,658 1.32 %
Savings accountsSavings accounts29,184  59  0.41 %31,575  118  0.75 %Savings accounts30,008 69 0.31 %30,731 174 0.76 %
Time depositsTime deposits104,309  782  1.51 %160,429  1,404  1.76 %Time deposits96,764 983 1.36 %156,095 2,080 1.78 %
Brokered time depositsBrokered time deposits91,596  1,069  2.35 %94,814  1,064  2.26 %Brokered time deposits96,885 1,456 2.01 %109,598 1,993 2.43 %
Total interest-bearing depositsTotal interest-bearing deposits737,245  3,278  0.89 %673,317  4,961  1.49 %Total interest-bearing deposits771,660 4,248 0.74 %681,945 7,849 1.54 %
BorrowingsBorrowings118,956  573  0.97 %56,897  714  2.53 %Borrowings130,344 780 0.80 %53,987 967 2.39 %
Paycheck Protection Program Liquidity FacilityPaycheck Protection Program Liquidity Facility63,816  112  0.35 %—  —  — %Paycheck Protection Program Liquidity Facility123,138 324 0.35 %— — — %
Senior secured notesSenior secured notes7,388  148  4.03 %12,151  355  5.89 %Senior secured notes6,458 187 3.87 %12,190 531 5.82 %
Total interest-bearing liabilitiesTotal interest-bearing liabilities927,405  4,111  0.89 %742,365  6,030  1.64 %Total interest-bearing liabilities1,031,600 5,539 0.72 %748,122 9,347 1.67 %
Noninterest-bearing liabilities:Noninterest-bearing liabilities:Noninterest-bearing liabilities:
Demand depositsDemand deposits707,534  547,954  Demand deposits715,180 562,195 
Other liabilitiesOther liabilities16,848  11,415  Other liabilities16,405 12,281 
Shareholders’ equityShareholders’ equity266,518  249,924  Shareholders’ equity267,990 252,362 
Total liabilities and shareholders' equityTotal liabilities and shareholders' equity$1,918,305  $1,551,658  Total liabilities and shareholders' equity$2,031,175 $1,574,960 
Net interest spreadNet interest spread$39,477  3.99 %$38,028  4.52 %Net interest spread$61,203 3.95 %$59,054 4.57 %
Net interest marginNet interest margin4.42 %5.32 %Net interest margin4.28 %5.39 %
Total depositsTotal 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 sourcesTotal 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 $1.63.3 million and $467721 thousand related to the accretion of net deferred loan fees for the sixnine months ended JuneSeptember 30, 2020 and 2019. In addition, interest income includes $1.01.9 million and $1.63.8 million of discount accretion on loans acquired in a business combination, including the interest recognized on the payoff of PCI loans, for the sixnine months ended JuneSeptember 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 EndedThree Months Ended
June 30, 2020 vs. March 31, 2020June 30, 2020 vs. June 30, 2019September 30, 2020 vs. June 30, 2020September 30, 2020 vs. September 30, 2019
Change Attributable toTotal ChangeChange Attributable toTotal ChangeChange Attributable toTotal ChangeChange Attributable toTotal Change
VolumeRateVolumeRateVolumeRateTotal ChangeRateTotal Change
Interest income:Interest income:(dollars in thousands)Interest income:(dollars in thousands)
Interest and fees on loansInterest and fees on loans$4,446  $(3,878) $568  $5,578  $(5,574) $ Interest and fees on loans$2,024 $(701)$1,323 $8,011 $(8,546)$(535)
Interest on investment securitiesInterest on investment securities32  (25)  37  (27) 10  Interest on investment securities(48)(45)37 (65)(28)
Interest on deposits at other financial institutionsInterest on deposits at other financial institutions78  (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 stocksDividends on restricted stock investments and other bank stocks—  (66) (66)  (35) (27) Dividends on restricted stock investments and other bank stocks— 21 21 (36)(28)
Change in interest incomeChange in interest income4,556  (4,456) 100  5,876  (6,251) (375) Change in interest income2,026 (716)1,310 8,248 (9,437)(1,189)
Interest expense:Interest expense:Interest expense:
Savings, interest checking and money market accountsSavings, interest checking and money market accounts72  (863) (791) 288  (1,224) (936) Savings, interest checking and money market accounts27 37 64 356 (1,257)(901)
Time depositsTime deposits(112) (27) (139) (465) (142) (607) Time deposits69 (337)(268)(411)(606)(1,017)
BorrowingsBorrowings157  (336) (179) 249  (535) (286) Borrowings11 (1)10 243 (289)(46)
Paycheck Protection Program Liquidity FacilityPaycheck Protection Program Liquidity Facility112  —  112  112  —  112  Paycheck Protection Program Liquidity Facility100 — 100 212 — 212 
Senior secured notesSenior secured notes(13) (21) (34) (65) (61) (126) Senior secured notes(18)— (18)(83)(54)(137)
Change in interest expenseChange in interest expense216  (1,247) (1,031) 119  (1,962) (1,843) Change in interest expense189 (301)(112)317 (2,206)(1,889)
Change in net interest incomeChange 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 toTotal Change
VolumeRate
Interest income:(dollars in thousands)
Interest and fees on loans$7,834  $(7,966) $(132) 
Interest on investment securities15  (23) (8) 
Interest on deposits at other financial institutions545  (851) (306) 
Dividends on restricted stock investments and other bank stocks20  (44) (24) 
Change in interest income8,414  (8,884) (470) 
Interest expense:
Savings, interest checking and money market accounts504  (1,570) (1,066) 
Time deposits(476) (141) (617) 
Borrowings465  (605) (140) 
Paycheck Protection Program Liquidity Facility112  —  112  
Senior secured notes(115) (93) (208) 
Change in interest expense490  (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 toTotal Change
VolumeRate
Interest income:(dollars in thousands)
Interest and fees on loans$15,987 $(16,654)$(667)
Interest on investment securities39 (75)(36)
Interest on deposits at other financial institutions752 (1,626)(874)
Interest on Federal funds sold/resale agreements(15)(15)(30)
Dividends on restricted stock investments and other bank stocks28 (80)(52)
Change in interest income16,791 (18,450)(1,659)
Interest expense:
Savings, interest checking and money market accounts867 (2,834)(1,967)
Time deposits(893)(741)(1,634)
Borrowings739 (926)(187)
Paycheck Protection Program Liquidity Facility324 — 324 
Senior secured notes(201)(143)(344)
Change in interest expense836 (4,644)(3,808)
Change in net interest income$15,955 $(13,806)$2,149 
4952


SecondThird Quarter of 2020 Compared to FirstSecond Quarter of 2020

Net interest income for the secondthird quarter of 2020 totaled $20.3$21.7 million, an increase of $1.1$1.4 million from the firstsecond 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 PPPhigher discount accretion from loans and reductionsacquired 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 thea business combination, full quarter impact of the 150 basis point reduction in the target Federal Funds rate at the endinterest 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 secondthird quarter of 2020 was due primarily to lower market interest ratesa 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 decreasepartially 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 forin the second quarter of 2020.2020 due to higher average borrowings.

Net interest margin for the secondthird quarter of 2020 decreased 667 basis points to 4.12%4.05% from 4.78%4.12% for the firstsecond quarter of 2020. The decrease in the net interest margin was due primarily to a 10117 basis point decrease in loan yields (including fees and discounts), partially offset by a change in the interest-earning asset mix, and a 385 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-yieldinglower yielding PPP loans. The yield on loans decreased to 4.94%4.77% for the secondthird quarter of 2020, compared to 5.95%4.94% for the firstsecond 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 secondthird quarter of 2020, compared to 0.72%0.34% for the firstsecond quarter of 2020, due primarily to lower market interest rates, runoff of higher cost time deposits and a changeactive 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 percentagewas primarily due to our customers' use of averagefunds 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 thein 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 toremained relatively flat at 0.54% for the second quarter of 2020, compared to 1.64% for the firstthird 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 1173 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 deposits3.36% for the secondthird 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.

SecondThird Quarter of 2020 Compared to SecondThird Quarter of 2019

    Net interest income increased $1.5 million$700 thousand to $20.3$21.7 million for the secondthird quarter of 2020 when compared to the same quarter of 2019 primarily due to a slight decrease of interest incomeexpense of $375 thousand,$1.9 million, partially offset by lower interest expenseincome 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 incomerates partially offset by higher average loans and fees recognized for organic loan growthother 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 secondthird quarter of 2020 primarily related to the 150 basis point reduction in the target Federal FundsFund rate at the end ofstarting 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 secondthird quarter of 2020. The decrease in interest expense for the secondthird 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 decreasepartially 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
50


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

53


    Our net interest margin decreased 102147 basis points to 4.12%4.05% for the secondthird 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 148216 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 FundsFund 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 secondthird quarter of 2020 compared to 2.40%2.20% for the same quarter of 2019. The average yield on interest-earning assets decreased 163208 basis points to 4.43%4.31% for the secondthird 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 148216 basis points to 4.94%4.77% for the secondthird 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 secondthird 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 secondthird 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 secondthird 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 secondthird quarter of 2020 compared to $780.0$759.5 million for the same quarter of 2019. Our cost of interest-bearing liabilities decreased 115127 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 197154 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 secondthird quarter of 2020 compared to $12.4$12.3 million for the same quarter of 2019 and the average cost of such borrowings decreased 250233 basis points to 3.39%3.36%.

SixNine Months Ended JuneSeptember 30, 2020 Compared to SixNine Months Ended JuneSeptember 30, 2019

Net interest income increased $1.4$2.1 million to $39.5$61.2 million for the sixnine months ended JuneSeptember 30, 2020 when compared to $38.0$59.1 million for the sixnine months ended JuneSeptember 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 earninginterest-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 sixnine months ended JuneSeptember 30, 2020, as compared to the sixnine months ended JuneSeptember 30, 2019. PPP loans averaged $143.6$226.2 million and contributed $1.9$4.5 million to interest income for the sixnine months ended JuneSeptember 30, 2020. The decrease in interest expense for the sixnine months ended JuneSeptember 30, 2020 was due primarily to lower market interest rates, coupled with a decrease in funding costs, partially offset by higherand lower average borrowings to support organic loan growthtime 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 sixnine months ended JuneSeptember 30, 2020 compared to 5.32%5.39% for the sixnine months ended JuneSeptember 30, 2019. The decrease in the net interest margin was due primarily to a 128157 basis point decrease in interest-earnings asset yields, of which loan yields (including fees and discounts) decreased 113151 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 sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 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%
5154


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 sixnine months ended JuneSeptember 30, 2020 compared to $1.6$3.8 million and 2234 basis points for the sixnine months ended JuneSeptember 30, 2019.

    Our average cost of funds decreased 4353 basis points to 0.51%0.42% for the sixnine months ended JuneSeptember 30, 2020 compared to 0.94%0.95% for the sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 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 156159 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 sixnine months ended JuneSeptember 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 secondthird quarter of 2019. The provision for loan losses for the sixnine months ended JuneSeptember 30, 2020 was $4.8$5.8 million, an increase of $3.9$4.2 million compared to the sixnine months ended JuneSeptember 30, 2019. The increase in the provision for loan losses for the three and six months ended JuneSeptember 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 sixcomparable period in 2019 was primarily related to organic growth in the loan portfolio. The provision for loan losses for the nine months ended JuneSeptember 30, 2020 was driven mostlyalso 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 JuneSeptember 30, 2020 as compared to $1.37$1.32 billion at JuneSeptember 30, 2019. No provision for loan losses on PPP loans was recognized infor the second quarter ofnine 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 EndedSix Months Ended June 30,Three Months EndedNine Months Ended September 30,
June 30, 2020March 31, 2020June 30, 201920202019September 30, 2020June 30,
2020
September 30, 201920202019
(dollars in thousands)(dollars in thousands)
Gain on sale of loansGain 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 accountsService charges and fees on deposit accounts447  555  564  1,002  1,104  Service charges and fees on deposit accounts495 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 incomeOther income617  259  200  876  620  Other income230 617 428 1,106 1,048 
Total noninterest incomeTotal 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 

SecondThird Quarter of 2020 Compared to FirstSecond Quarter of 2020

Noninterest income for the secondthird quarter of 2020 was $1.1$1.9 million, a decreasean increase of $360$888 thousand from $1.4$1.1 million for the firstsecond quarter of 2020 due primarily to lowerhigher gains on loan sales of $377$990 thousand and lowerhigher 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
5255


thousand, partially offset by higher other income of $358 thousand. There were no loans sold during the second quarter of 2020, compared to $3.4totaled $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 firstsecond quarter of 2020.

The $233$237 thousand decreaseincrease in net servicing fees was due primarily to higherlower 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 $692020. Other income decreased $387 thousand for the first quarter of 2020. Other income was $617 thousand for the secondthird quarter of 2020 compareddue to $259$153 thousand for the first quartergain 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 secondthird quarter of 2019.2020.

SixThird 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 JuneSeptember 30, 2020 Compared to SixNine Months Ended JuneSeptember 30, 2019

Noninterest income decreased $2.01.7 million to $2.54.4 million for the sixnine months ended JuneSeptember 30, 2020 compared to $4.46.1 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 $1.81.4 million decrease in gain on sale of loans for the sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020 totaled $3.475.2 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 sixnine months ended JuneSeptember 30, 2020. Our SBA loan servicing portfolio averaged $208.1203.4 million for the sixnine months ended JuneSeptember 30, 2020 compared to $204.2$206.4 million for the same period of 2019. During the sixnine months ended JuneSeptember 30, 2020 and 2019, contractually-specified servicing fees were $969 thousand1.5 million and $938 thousand1.5 million, offset by the amortization of the servicing asset of $754 thousand$1.0 million and $417699 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 sixnine months ended JuneSeptember 30, 2020 compared to $161307 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
5356


$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 EndedSix Months Ended June 30,Three Months EndedNine Months Ended September 30,
June 30, 2020March 31, 2020June 30, 201920202019September 30, 2020June 30,
2020
September 30, 201920202019
(dollars in thousands)(dollars in thousands)
Salaries and employee benefitsSalaries 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 equipmentOccupancy and equipment1,108  1,063  987  2,171  2,416  Occupancy and equipment1,137 1,108 1,097 3,308 3,513 
Data processingData processing874  807  639  1,681  1,243  Data processing955 874 718 2,636 1,961 
Professional feesProfessional fees450  471  426  921  845  Professional fees492 450 392 1,413 1,237 
Office, postage and telecommunicationsOffice, postage and telecommunications289  258  255  547  527  Office, postage and telecommunications274 289 253 821 780 
Deposit insurance and regulatory assessmentsDeposit insurance and regulatory assessments198  61  120  259  315  Deposit insurance and regulatory assessments386 198 30 645 345 
Loan relatedLoan related226  275  71  501  285  Loan related59 226 244 560 529 
Customer service relatedCustomer service related328  372  273  700  750  Customer service related81 328 437 781 1,187 
Amortization of core deposit intangibleAmortization of core deposit intangible193  193  197  386  393  Amortization of core deposit intangible193 193 197 579 590 
Other expensesOther expenses1,048  789  780  1,837  1,451  Other expenses825 1,048 811 2,662 2,262 
Total noninterest expenseTotal 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.

SecondThird Quarter of 2020 Compared to FirstSecond Quarter of 2020

Noninterest expense decreased $419increased $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 decreaseincrease was due primarily to lowerhigher 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 decreaseincrease in salaries and employee benefits was due to lowerhigher incentive accruals resulting from a decreasean increase in organic loan production in the secondthird quarter of 2020, higher deferred loan origination cost for2020. 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 secondthird 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 secondthird 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 increasedecrease in other expenses related primarily to a $300 thousand increase in theresulted from no provision for unfunded loan commitments resulting from an increaserecognized 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 secondthird quarter of 2020, compared to 56.0%52.0% in the firstsecond quarter of 2020. The lower efficiency ratio in the secondthird quarter of 2020 was driven by higher revenue including the benefits of the PPPgains from SBA and Main Street loan volume.sales.

SecondThird Quarter of 2020 Compared to SecondThird Quarter of 2019

    Noninterest expense for the secondthird 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 occupancysalaries and equipmentemployee benefits expense, data processing expense, FDIC assessment fees, partially offset by loan related expense partially offset by lower salaries and employee benefitscustomer service related expense.

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The $471$654 thousand decreaseincrease in salaries and employee benefits was due mostly to an increase inhigher incentives from the loan growth, partially offset by increased deferred loan origination costs for the PPP loans originated during the secondthird 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 organicloans 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
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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 incurredhigher 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 secondthird quarter of 2020.

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

SixNine Months Ended JuneSeptember 30, 2020 Compared to SixNine Months Ended JuneSeptember 30, 2019

Noninterest expense for the sixnine months ended JuneSeptember 30, 2020 increased $1.3$2.2 million to $22.6$34.1 million from $21.3$32.0 million for the sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020. The $438$675 thousand increase in data processing expenses was due to increases in transaction volumes from organicproduction 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 expenseFDIC assessment fees was due primarily to expense incurred for the roll-outorganic 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 sixnine months ended JuneSeptember 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 stablestrong at 53.9%52.0% for the sixnine months ended JuneSeptember 30, 2020, compared to 50.2%49.0% for the sixnine months ended JuneSeptember 30, 2019. The higher efficiency ratio in the sixnine months ended JuneSeptember 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 JuneSeptember 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 JuneSeptember 30, 2019. For the sixnine months ended JuneSeptember 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 secondthird 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 $389.2and $2.5 million an $8.1increase in other assets, partially offset by a $36.3 million increasedecrease 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
55


securities, $1.6 million increase in the allowance for loan losses and $1.8 milliona $602 thousand decrease in othernet foreclosed assets. Total liabilities increased $444.3$27.2 million during the secondthird 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
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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 JuneSeptember 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$8.4increased $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 JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020 was primarily attributable to an increaseincreases 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 carryingfair values of investment securities available-for-sale and amortized cost of investment securities held-to-maturity as of the periods indicated:
June 30, 2020March 31, 2020December 31, 2019September 30, 2020June 30, 2020December 31, 2019
Fair
Value
Percentage of TotalFair
Value
Percentage of TotalFair
Value
Percentage of TotalFair
Value
Percentage of TotalFair
Value
Percentage of TotalFair
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 securitiesU.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 securitiesMortgage-backed securities6,830  18.6 %$7,299  18.8 %7,431  27.9 %Mortgage-backed securities6,157 16.2 %$6,830 18.6 %7,431 27.9 %
Collateralized mortgage obligationsCollateralized mortgage obligations18,610  50.5 %20,170  51.8 %10,598  39.7 %Collateralized mortgage obligations20,908 55.0 %18,610 50.5 %10,598 39.7 %
SBA poolsSBA pools8,343  22.7 %8,457  21.7 %8,624  32.4 %SBA pools8,228 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 %$26,653 100.0 %
September 30, 2020June 30, 2020December 31, 2019
Amortized CostPercentage of TotalAmortized CostPercentage of TotalAmortized CostPercentage of Total
Securities held-to-maturity:Securities held-to-maturity:Securities held-to-maturity:
U.S. Government and agency securitiesU.S. Government and agency securities$—  — %$—  — %$3,342  66.1 %U.S. Government and agency securities$— — %$— — %$3,342 66.1 %
Mortgage-backed securitiesMortgage-backed securities1,691  100.0 %1,702  100.0 %1,714  33.9 %Mortgage-backed securities1,680 100.0 %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 %
        
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The following table presents the contractual maturities of investment securities available-for-sale and held-to-maturity as of JuneSeptember 30, 2020:
June 30, 2020September 30, 2020
One Year
or Less
After One Year Through Five YearsAfter Five Years Through Ten YearsAfter Ten Years (1)TotalOne Year
or Less
After One Year Through Five YearsAfter Five Years Through Ten YearsAfter 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 securitiesU.S. Government and agency securities$—  $—  $—  $3,000  $3,000  U.S. Government and agency securities$— $— $— $2,706 $2,706 
Mortgage-backed securitiesMortgage-backed securities—  —  —  6,830  6,830  Mortgage-backed securities— — — 6,157 6,157 
Collateralized mortgage obligationsCollateralized mortgage obligations—  —  —  18,610  18,610  Collateralized mortgage obligations— — — 20,908 20,908 
SBA poolsSBA 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 securitiesU.S. Government and agency securities— %— %— %2.13 %2.13 %U.S. Government and agency securities— %— %— %2.13 %2.13 %
Mortgage-backed securitiesMortgage-backed securities— %— %— %2.10 %2.10 %Mortgage-backed securities— %— %— %1.82 %1.82 %
Collateralized mortgage obligationsCollateralized mortgage obligations— %— %— %1.79 %1.79 %Collateralized mortgage obligations— %— %— %1.30 %1.30 %
SBA poolsSBA 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, 2020September 30, 2020
One Year
or Less
After One Year Through Five YearsAfter Five Years Through Ten YearsAfter Ten Years (1)TotalOne Year
or Less
After One Year Through Five YearsAfter Five Years Through Ten YearsAfter Ten Years (1)Total
Securities held-to-maturity:Securities held-to-maturity:(dollars in thousands)Securities held-to-maturity:(dollars in thousands)
Mortgage-backed securitiesMortgage-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 securitiesMortgage-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 JuneSeptember 30, 2020, no issuer represented 10% or more of our shareholders’ equity. At JuneSeptember 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 JuneSeptember 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.

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

June 30, 2020March 31, 2020December 31, 2019September 30, 2020June 30, 2020December 31, 2019
AmountPercentage of TotalAmountPercentage of TotalAmountPercentage of TotalAmountPercentage of TotalAmountPercentage of TotalAmountPercentage of Total
(dollars in thousands)(dollars in thousands)
Construction and land developmentConstruction 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:
ResidentialResidential39,145  2.1 %42,904  3.0 %43,736  3.2 %Residential30,067 1.6 %39,145 2.1 %43,736 3.2 %
Commercial real estate - owner occupiedCommercial real estate - owner occupied162,508  8.8 %148,517  10.3 %171,595  12.5 %Commercial real estate - owner occupied159,603 8.4 %162,508 8.8 %171,595 12.5 %
Commercial real estate - non-owner occupiedCommercial real estate - non-owner occupied502,693  27.3 %476,472  33.2 %423,823  30.8 %Commercial real estate - non-owner occupied528,201 27.9 %502,693 27.3 %423,823 30.8 %
Commercial and industrialCommercial and industrial335,411  18.2 %350,090  24.3 %309,011  22.5 %Commercial and industrial361,170 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 %
ConsumerConsumer34  — %450  — %430  — %Consumer— %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 investmentLoans held for investment1,831,619  1,438,055  1,374,675  Loans held for investment1,884,930 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, netLoans 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 JuneSeptember 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 JuneSeptember 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 secondthird 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 $14.7increased $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 diversificationcomposition decreased in all categories, except forcommercial 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 JuneSeptember 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 JuneSeptember 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 JuneSeptember 30, 2020.

Being a preferred SBA lender, we participated in the PPP and funded a total of 1,886 loans withhad 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 JuneSeptember 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 ourThe SBA has commenced making determinations as to PPP borrowers will apply for and receive approval for loan forgiveness applications in the second halffourth 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 JuneSeptember 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.

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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 JuneSeptember 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 JuneSeptember 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 JuneSeptember 30, 2020, March 31,June 30, 2020 and December 31, 2019. Some of the members of our
58


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 JuneSeptember 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 impactsimpact 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, 2020March 31, 2020December 31, 2019September 30, 2020June 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 504SBA 50496,088  89,971  $77,530  SBA 504108,261 96,088 $77,530 
TotalTotal$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.


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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, 2020March 31, 2020December 31, 2019September 30, 2020June 30, 2020December 31, 2019
(dollars in thousands)(dollars in thousands)
Secured - industrial warehouseSecured - industrial warehouse$41,008  $30,612  $23,364  Secured - industrial warehouse$43,361 $41,008 $23,364 
Secured - hospitalitySecured - hospitality24,175  24,744  24,858  Secured - hospitality24,894 24,175 24,858 
Secured - retail center/buildingSecured - retail center/building23,288  27,986  28,182  Secured - retail center/building24,527 23,288 28,182 
Secured - other real estateSecured - other real estate60,203  64,231  58,757  Secured - other real estate71,083 60,203 58,757 
Unsecured or secured by other business assetsUnsecured or secured by other business assets11,868  11,800  11,921  Unsecured or secured by other business assets13,528 11,868 11,921 
Total unguaranteed portionTotal unguaranteed portion160,542  159,373  147,082  Total unguaranteed portion177,393 160,542 147,082 
Guaranteed portion (1)
Guaranteed portion (1)
426,278  28,034  30,551  
Guaranteed portion (1)
425,014 426,278 30,551 
TotalTotal$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.

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Loan Maturities
    
    The following table presents the contractual maturities and the distribution between fixed and adjustable interest rates for loans held for investment at JuneSeptember 30, 2020:
June 30, 2020September 30, 2020
Within One YearAfter One Year Through Five YearsAfter Five YearsWithin One YearAfter One Year Through Five YearsAfter Five Years
FixedAdjustable RateFixedAdjustable RateFixedAdjustable
Rate
TotalFixedAdjustable RateFixedAdjustable RateFixedAdjustable
Rate
Total
(dollars in thousands)(dollars in thousands)
Construction and land developmentConstruction 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 occupied1,319  1,697  20,717  39,759  21,681  77,335  162,508   Commercial real estate - owner occupied1,443 2,085 20,552 40,368 22,219 72,936 159,603 
Commercial real estate - non-owner occupied Commercial real estate - non-owner occupied14,802  29,152  74,901  101,719  54,723  227,396  502,693   Commercial real estate - non-owner occupied12,968 22,451 77,413 125,237 62,791 227,341 528,201 
Commercial and industrialCommercial and industrial8,203  72,012  23,571  104,987  13,595  113,043  335,411  Commercial and industrial7,075 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 & other34  —  —  —  —  —  34  
ConsumerConsumer— — — — — 
TotalTotal$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 JuneSeptember 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 oras TDRs and are accruing interest as of JuneSeptember 30, 2020.

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The following tables present the recorded investment balances of substandard loans, excluding PCI loans, by loan class at JuneSeptember 30, 2020 and December 31, 2019:
June 30, 2020September 30, 2020
Real EstateReal Estate
Construction and land developmentResidentialCommercial real estate - owner occupiedCommercial real estate - non-owner occupiedCommercial and industrialSBA loansConsumerTotalConstruction and land developmentResidentialCommercial real estate - owner occupiedCommercial real estate - non-owner occupiedCommercial and industrialSBA loansConsumerTotal
(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 $— $17,988 
TotalTotal$—  $—  $1,515  $2,049  $1,120  $8,406  $—  $13,090  Total$— $259 $1,436 $6,989 $1,093 $8,211 $— $17,988 
(1)At JuneSeptember 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 JuneSeptember 30, 2020.

December 31, 2019
Real Estate
Construction and land developmentResidentialCommercial real estate - owner occupiedCommercial real estate - non-owner occupiedCommercial and industrialSBA loansConsumerTotal
(dollars in thousands)
Substandard (1)
$— $— $9,624 $2,092 $2,630 $10,260 $— $24,606 
Total$— $— $9,624 $2,092 $2,630 $10,260 $— $24,606 
(1)At December 31, 2019, substandard loans included $11.3 million of impaired loans. There were no loans classified as special mention, doubtful or loss at December 31, 2019.
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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 twosix 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, 2020March 31, 2020December 31, 2019September 30, 2020June 30,
2020
December 31, 2019
(dollars in thousands)(dollars in thousands)
Accruing loans past due 90 days or moreAccruing loans past due 90 days or more$267  $—  $—  Accruing loans past due 90 days or more$— $267 $— 
Non-accrualNon-accrual7,999  8,984  11,107  Non-accrual12,847 7,999 11,107 
Troubled debt restructurings on non-accrualTroubled debt restructurings on non-accrual150  151  158  Troubled debt restructurings on non-accrual144 150 158 
Total nonperforming loansTotal nonperforming loans8,416  9,135  11,265  Total nonperforming loans12,991 8,416 11,265 
Foreclosed assetsForeclosed assets602  —  —  Foreclosed assets— 602 — 
Total nonperforming assetsTotal nonperforming assets$9,018  $9,135  $11,265  Total nonperforming assets$12,991 $9,018 $11,265 
Troubled debt restructurings - on accrualTroubled 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 investmentNonperforming loans as a percentage of total loans held for investment0.46 %0.64 %0.82 %Nonperforming loans as a percentage of total loans held for investment0.69 %0.46 %0.82 %
Nonperforming assets as a percentage of total assetsNonperforming assets as a percentage of total assets0.41 %0.51 %0.67 %Nonperforming assets as a percentage of total assets0.58 %0.41 %0.67 %
    
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The following table shows our nonperforming loans by loan class as of the dates indicated:
June 30, 2020March 31, 2020December 31, 2019September 30, 2020June 30, 2020December 31, 2019
Nonperforming loans:Nonperforming loans:(dollars in thousands)Nonperforming loans:(dollars in thousands)
Construction and land developmentConstruction and land development$—  $—  $—  Construction and land development$— $— $— 
Real estate:Real estate:Real estate:
ResidentialResidential267  —  —  Residential259 267 — 
Commercial real estate - owner occupiedCommercial real estate - owner occupied$1,515  $1,560  $3,049  Commercial real estate - owner occupied1,312 1,515 3,049 
Commercial real estate - non-owner occupiedCommercial real estate - non-owner occupied1,339  1,368  1,368  Commercial real estate - non-owner occupied6,286 1,339 1,368 
Commercial and industrialCommercial and industrial186  187  229  Commercial and industrial183 186 229 
SBA loansSBA loans5,109  6,020  6,619  SBA loans4,951 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 JuneSeptember 30, 2020, March 31,June 30, 2020 and December 31, 2019.

Since year end, the decreaseincrease in nonperforming loans was due mostly to $756 thousand in charge-offs, $2.6$3.0 million in payoffs and paydowns, offset by twofive 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 JuneSeptember 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 JuneSeptember 30, 2020 and December 31, 2019. During the three and sixnine months ended JuneSeptember 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.

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During the three months ended September 30, 2020, June 30, 2020 March 31, 2020 and JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020 and JuneSeptember 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 JuneSeptember 30, 2020, the Company had 52012 non-PPP loans totaling $626$37 million which included $11 million of loans held for sale, with a 90-day principal and/or intereston payment deferral for COVID-related reasons. Noreasons, 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 requirementtotaling $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") asthe SBA is paying six months of Juneloan 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, 232193 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 loansbalances totaling $11$73 million were granted an additional 90-day deferment. The remainder is expected to resumehaving payments as scheduled. Please refer tomade 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
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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.
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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 JuneSeptember 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 highstable 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 JuneSeptember 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 JuneSeptember 30, 2020. At JuneSeptember 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.

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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 EndedSix Months Ended June 30,
June 30, 2020March 31, 2020June 30, 201920202019
(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 industrial54  12  10  66  32  
SBA loans—  12  189  12  189  
Total recoveries54  24  199  78  221  
Net (charge-offs) recoveries(496) (4) 77  (500) 97  
Provision for loan losses2,100  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  
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Three Months EndedNine Months Ended September 30,
September 30, 2020June 30,
2020
September 30, 201920202019
(dollars in thousands)
Balance, beginning of periodBalance, beginning of period$17,822 $16,218 $12,053 $13,522 $11,056 
Charge-offs:Charge-offs:
Commercial and industrialCommercial and industrial(194)(125)(437)(326)(561)
SBA loansSBA loans— (425)— (446)— 
Total charge-offsTotal charge-offs(194)(550)(437)(772)(561)
Recoveries:Recoveries:
Commercial and industrialCommercial and industrial106 54 24 172 56 
SBA loansSBA loans— — — 12 189 
Total recoveriesTotal recoveries106 54 24 184 245 
Net charge-offsNet charge-offs(88)(496)(413)(588)(316)
Provision for loan lossesProvision for loan losses1,000 2,100 700 5,800 1,600 
Balance, end of periodBalance, end of period$18,734 $17,822 $12,340 $18,734 $12,340 
16218000
Loans held for investmentLoans held for investment$1,884,930 $1,831,619 $1,316,620 $1,884,930 $1,316,620 
Average loansAverage 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 investmentAllowance for loan losses as a percentage of total loans held for investment0.97 %1.13 %0.90 %0.97 %0.90 %Allowance for loan losses as a percentage of total loans held for investment0.99 %0.97 %0.94 %0.99 %0.94 %
Allowance for loan losses as a percentage of total loans held for investment without PPP loansAllowance for loan losses as a percentage of total loans held for investment without PPP loans1.24 %1.13 %0.90 %1.24 %0.90 %Allowance for loan losses as a percentage of total loans held for investment without PPP loans1.25 %1.24 %0.94 %1.25 %0.94 %
Annualized net (charge-offs) recoveries to average loans(0.11)%(0.001)%0.02 %(0.06)%0.01 %
Annualized net charge-offs to average loansAnnualized 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, 2020March 31, 2020December 31, 2019September 30, 2020June 30, 2020December 31, 2019
Allowance for Loan Losses% of Loans in Each Category to Total LoansAllowance for Loan Losses% of Loans in Each Category to Total LoansAllowance for Loan Losses% of Loans in Each Category to Total LoansAllowance for Loan Losses% of Loans in Each Category to Total LoansAllowance for Loan Losses% of Loans in Each Category to Total LoansAllowance for Loan Losses% of Loans in Each Category to Total Loans
(dollars in thousands)(dollars in thousands)
Construction and land developmentConstruction 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:
ResidentialResidential361  2.1 %333  3.0 %292  3.2 %Residential275 1.6 %361 2.1 %292 3.2 %
Commercial real estate - owner occupiedCommercial real estate - owner occupied1,365  8.8 %844  10.3 %918  12.5 %Commercial real estate - owner occupied1,280 8.4 %1,365 8.8 %918 12.5 %
Commercial real estate - non-owner occupiedCommercial real estate - non-owner occupied5,347  27.3 %4,131  33.2 %3,074  30.8 %Commercial real estate - non-owner occupied5,580 27.9 %5,347 27.3 %3,074 30.8 %
Commercial and industrialCommercial and industrial5,607  18.2 %5,455  24.3 %4,145  22.5 %Commercial and industrial6,264 19.0 %5,607 18.2 %4,145 22.5 %
SBA loansSBA loans2,672  31.8 %2,954  13 %2,741  12.9 %SBA loans2,965 31.8 %2,672 31.8 %2,741 12.9 %
ConsumerConsumer—  — % — % — %Consumer— — %— — %— %
$17,822  100.0 %$16,218  100.0 %$13,522  100.0 %$18,734 100.0 %$17,822 100.0 %$13,522 100.0 %

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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 JuneSeptember 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 saleoffset by SBA and there were no SBAMain Street loan sales during the three months ended JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020.  In addition, there were no loans held for investment transferred to loans held for sale during the three months ended JuneSeptember 30, 2020 and $933$932 thousand of loans held for investment were transferred to loans held for sale during the sixnine months ended JuneSeptember 30, 2020. At JuneSeptember 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 JuneSeptember 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 JuneSeptember 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 JuneSeptember 30, 2020 and December 31, 2019. The significant assumptions used in the valuation of the SBA servicing asset at JuneSeptember 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 JuneSeptember 30, 2020 and December 31, 2019.

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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 JuneSeptember 30, 2020. Due to the COVID-19 pandemic and the resulting volatility in our stock price during the first sixnine months of 2020, the Company evaluated goodwill for impairment at JuneSeptember 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 priceacquisition 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-monthtwelve month earnings” market transaction multiple was applied to theto: (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 sixnine months ended JuneSeptember 30, 2020.

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

    The following table presents the ending balance and percentage of deposits as of the periods indicated:
June 30, 2020March 31, 2020December 31, 2019September 30, 2020June 30, 2020December 31, 2019
AmountPercentage of TotalAmountPercentage of TotalAmountPercentage of TotalAmountPercentage of TotalAmountPercentage of TotalAmountPercentage of Total
(dollars in thousands)(dollars in thousands)
Noninterest-bearing demandNoninterest-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 %
SavingsSavings31,116  1.9 %28,543  2.1 %27,091  2.1 %Savings31,470 2.0 %31,116 1.9 %27,091 2.1 %
Retail time depositsRetail time deposits68,987  4.3 %92,311  6.8 %97,220  7.4 %Retail time deposits62,880 4.0 %68,987 4.3 %97,220 7.4 %
Wholesale time depositsWholesale time deposits125,521  7.8 %105,565  7.8 %75,538  5.8 %Wholesale time deposits111,301 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 JuneSeptember 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 JuneSeptember 30, 2020, total deposits increased $254.0decreased $45.1 million from the prior quarter and $291.3but increased $246.2 million from year end to $1.60 billion at JuneSeptember 30, 2020.

The decrease during three months ended September 30, 2020 was due primarily to newa decrease in noninterest-bearing deposit accounts opened for PPP loans, and strong coretime deposit growth. Noninterest-bearingaccounts, partially offset by increases in interest-bearing nonmaturity deposits. At September 30, 2020, noninterest-bearing deposits totaled $789.8$736.1 million, an increasea decrease of $162.0 million and $163.2$53.7 million in the threethird 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 endedrepresented 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 JuneSeptember 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 induring the three and sixnine months ended JuneSeptember 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 threethe nine months ended JuneSeptember 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 brokeredwholesale time deposits, partially offset by a decrease oflower 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.

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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 JuneSeptember 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 JuneSeptember 30, 2020 and December 31, 2019.

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The following table shows time deposits greater than $250,000 by time remaining until maturity:
JuneSeptember 30, 2020
(dollars in thousands)
Three months or less$21,0154,110 
Over three months through six months1,75915,545 
Over six months through twelve months7,7623,587 
Over twelve months7,3427,349 
$37,87830,591 


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, 2020December 31, 2019September 30, 2020December 31, 2019
(dollars in thousands)(dollars in thousands)
BorrowingsBorrowingsBorrowings
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 periodWeighted-average interest rate, end of period0.54 %1.79 %Weighted-average interest rate, end of period0.54 %1.79 %
Paycheck Protection Program Liquidity FacilityPaycheck Protection Program Liquidity Facility$179,125  $—  Paycheck Protection Program Liquidity Facility$253,140 $— 
Interest rate, end of periodInterest rate, end of period0.35 %— %Interest rate, end of period0.35 %— %
Senior secured notesSenior secured notes$6,500  $9,600  Senior secured notes$4,400 $9,600 
Interest rate, end of periodInterest rate, end of period3.25 %5.00 %Interest rate, end of period3.25 %5.00 %
(1) Based on original maturity date.
(2) Included $10 million of 0% interest borrowings under the FHLB San Francisco's new Recovery Advance loan program at September 30, 2020.

Federal Home Loan Bank Secured Line of Credit

    At JuneSeptember 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 JuneSeptember 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 JuneSeptember 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.
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The following table shows the interest rates and maturity dates of FHLB advances at periods indicated:
June 30, 2020December 31, 2019September 30, 2020December 31, 2019
BalanceRateMaturity DateBalanceRateMaturity DateBalanceRateMaturity DateBalanceRateMaturity Date
Advances:Advances:(dollars in thousands)Advances:(dollars in thousands)
Recovery advanceRecovery advance$5,000  — %11/19/2020$—  — %—  Recovery advance$5,000 — %11/19/2020$— — %— 
Recovery advanceRecovery advance5,000  — %5/19/2021—  — %—  Recovery advance5,000 — %5/19/2021— — %— 
Term and fixed-rate advanceTerm and fixed-rate advance50,000  0.19 %8/27/202060,000  1.72 %3/20/2020Term and fixed-rate advance30,000 0.22 %11/27/202060,000 1.72 %3/20/2020
Term and fixed-rate advanceTerm and fixed-rate advance30,000  0.22 %11/27/2020—  — %—  Term and fixed-rate advance50,000 0.19 %2/26/2021— — %— 
Term and fixed-rate advanceTerm and fixed-rate advance30,000  0.25 %5/26/2021—  — %—  Term and fixed-rate advance30,000 0.25 %5/26/2021— — %— 
Term and fixed-rate advanceTerm and fixed-rate advance30,000  1.93 %6/11/202130,000  1.93 %6/11/2021Term and fixed-rate advance30,000 1.93 %6/11/202130,000 1.93 %6/11/2021
$150,000  0.54 %$90,000  1.79 %$150,000 0.54 %$90,000 1.79 %

In addition, at JuneSeptember 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 JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020 and 2019.

Federal Reserve Bank Secured Line of Credit

    At JuneSeptember 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 JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020 and there were no borrowings at December 31, 2019.

Paycheck Protection Program Liquidity Facility

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

Federal Funds Unsecured Lines of Credit

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

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Senior Secured Notes

    The holding company has a senior secured revolving line of credit for $25 million, which matures on March 22, 2022. At JuneSeptember 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
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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 JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020 and 2019. At JuneSeptember 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 JuneSeptember 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 sixnine months ended JuneSeptember 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 JuneSeptember 30, 2020, a $25.0 million secured line of credit of which $18.5$20.6 million was available at JuneSeptember 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 sixnine months ended JuneSeptember 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 JuneSeptember 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
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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 JuneSeptember 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
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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 MarchDecember 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, comparedstock. The remaining number of shares authorized to 38,411be 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 JuneSeptember 30, 2020.
Payments Due by PeriodPayments Due by Period
TotalLess Than
One Year
One to
Three Years
More than Three to
Five Years
After
Five Years
TotalLess 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 maturityDeposits without a stated maturity$1,410,489  $1,410,489  $—  $—  $—  Deposits without a stated maturity$1,385,731 $1,385,731 $— $— $— 
Time depositsTime deposits194,508  105,086  63,837  25,585  —  Time deposits174,181 87,136 63,271 23,774 — 
BorrowingsBorrowings150,000  150,000  —  —  —  Borrowings150,000 150,000 — — — 
Paycheck Protection Program Liquidity FacilityPaycheck Protection Program Liquidity Facility179,125  179,125  Paycheck Protection Program Liquidity Facility253,140 253,140 
Senior secured notesSenior secured notes6,500  —  6,500  —  —  Senior secured notes4,400 — 4,400 — — 
Operating lease obligationsOperating lease obligations6,305  2,330  3,586  389  —  Operating lease obligations5,747 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 $— 

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

At JuneSeptember 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 JuneSeptember 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 JuneSeptember 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.

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
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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 beis 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
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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 JuneSeptember 30, 2020 and 2019, we declared cash dividends of $0.25 per share and $0.20 per share. During the sixnine months ended JuneSeptember 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 OversightFinancial 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 DBODFPI 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;
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•    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
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•    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 JuneSeptember 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 JuneSeptember 30, 2020:

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NII at RiskEVENII at RiskEVE
Adjusted Net Interest IncomePercentage Change from Base CaseMarket Value Percentage Change from Base CaseAdjusted Net Interest IncomePercentage Change from Base CaseMarket Value Percentage Change from Base Case
Interest Rate ScenarioInterest Rate Scenario(dollars in thousands)Interest Rate Scenario(dollars in thousands)
Up 300 basis pointsUp 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 pointsUp 200 basis points96,006  12.5 %366,168  4.1 %Up 200 basis points96,685 8.2 %350,694 4.1 %
Up 100 basis pointsUp 100 basis points89,306  4.7 %355,649  1.1 %Up 100 basis points91,668 2.6 %341,155 1.3 %
BaseBase85,320  —  351,725  —  Base89,343 — 336,737 — 
Down 100 basis pointsDown 100 basis points85,268  (0.1)%350,318  (0.4)%Down 100 basis points89,188 (0.2)%333,619 (0.9)%
Down 200 basis pointsDown 200 basis points85,255  (0.1)%351,487  (0.1)%Down 200 basis points89,164 (0.2)%334,795 (0.6)%
   
ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Principal Financial Officer have evaluated our disclosure controls and
procedures at JuneSeptember 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 controlcontrols over financial reporting that occurred during the quarter ended JuneSeptember 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 ReportReports on Form 10-Q for the quarterquarters 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 Quarterand Second Quarters Form 10-Q.

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The novel Coronavirus Disease 2019 ("COVID-19")COVID-19 pandemic is adversely affecting us andhas impacted our customers, employees and third-party service providers,business, and the adverse impactsultimate 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 beencannot be predicted, including, but not limited to, the scope and are expectedduration 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 spreadglobal 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 toincreased 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 lossand the institution of revenuessocial distancing and a rapid increasesheltering in unemployment, material decreasesplace requirements in oilmany states and gas pricescommunities. 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 conductfinancial condition of our businessclients 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 customersWhile we have not experienced a significant impact on the availability of our employees to date, given the Bankmarkets in which we operate, our colleagues are experiencing varying degreesat 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 expectedcenter 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 monthswork as the pandemic and economic shutdown continues. Although certain federal and state relief programs mayeffectively 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 1112Our customers are subject to many of the CARES Act, Subsidy for Certain Loan Payments, directsfactors described above. Such events could affect the SBAstability of our deposit base, impair the ability of borrowers to pay 6 monthsrepay outstanding loans, impair the value of principal, interest,collateral securing loans, cause significant property damage, and any associated feesresult 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-19The 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 obligationsmay be materially impacted. This, in turn, could influencehas also influenced the recognition of credit losses in our loan portfoliosportfolio and increaseincreased 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 expectedclients may need to draw on their lines of credit or seek additional loans to help finance their businesses. These developmentsSimilarly, 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 orderThe volatility in the global capital markets resulting from the pandemic and related business conditions may restrict our access to protectcapital and/or increase our cost of capital.

To the health of our customers and employees, and to comply with applicable government directives, we have modifiedextent 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 employeesthe 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 implementingwith 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 ourstakeholders (including employees, customers, and communities or as may be required by government order. These actions in responsebusiness 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-19this global pandemic. Similarly, if any of our vendors or business partners become unable to continue to provide their products and services, whichHowever, 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 accuratelycannot predict the extent, severity or duration of these conditions or when normal economiclength 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
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that may emerge concerning the scope, duration and severityimpact 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.

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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, 20201,561  $12.41  —  695,489  
May 1 - 31, 2020174  $14.10  —  695,489  
Jun 1 - 30, 202050  $15.57  —  695,489  
Total1,785  $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, 2020357 $15.76 — 695,489 
Aug 1 - 31, 202045 $15.03 — 695,489 
Sep 1 - 30, 202032 $13.68 — 695,489 
Total434 $15.53 — 
(1) The total number of shares repurchased during the periods indicated include shares purchased as part of a publicly announced stock purchase plan andwere 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 planprogram 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
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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.

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ITEM 6. EXHIBITS

EXHIBIT INDEX 
Exhibit No.Exhibit Description
2.1
3.1
 
3.2
31.1
31.2
32.1
32.2
Exhibit 101.INSXBRL Instance Document
Exhibit 101.SCHXBRL Taxonomy Extension Schema Document
Exhibit 101.CALXBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEFXBRL Taxonomy Extension Definitions Linkbase Document
Exhibit 101.LABXBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PREXBRL 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.

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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)

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