First Choice Bancorp 10-Q 2019 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

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

(Exact Name of Registrant as Specified in its Charter)

California	82-2711227
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification Number)
17785 Center Court Drive N, Suite 750 Cerritos, CA	90703
(Address of principal executive offices)	(Zip Code)

562-345-9092

(Registrants telephone number, including area code)

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.                          x 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 12months (or for such shorter period that the registrant was required to submit and post such files).                                     x 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: [X] Non-accelerated Filer: [ ]

Smaller Reporting Company: [X] Emerging growth company [X]

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

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

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

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

There were 11,655,908 shares of common stock outstanding as of November 1, 2019.

FIRST CHOICE BANCORP AND SUBSIDIARY

FORM 10-Q

September 30, 2019

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION		4
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	4
	Condensed Consolidated Balance Sheets (Unaudited)	4
	Condensed Consolidated Statements of Income (Unaudited)	5
	Condensed Consolidated Statements of Comprehensive Income (Unaudited)	6
	Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)	7
	Condensed Consolidated Statements of Cash Flows (Unaudited)	9
	Notes to Condensed Consolidated Financial Statements (Unaudited)	10
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	34
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	65
ITEM 4.	CONTROLS AND PROCEDURES	67
PART II. OTHER INFORMATION		68
ITEM 1.	LEGAL PROCEEDINGS	68
ITEM 1A.	RISK FACTORS	68
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	68
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	68
ITEM 4.	MINE SAFETY RULES	68
ITEM 5.	OTHER INFORMATION	68
ITEM 6.	EXHIBITS	69

First Choice Bancorp and Subsidiary

Condensed Consolidated Balance Sheets

(unaudited)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

	September 30, 2019 (unaudited)			December 31, 2018
ASSETS	(dollars in thousands, except share data)
Cash and due from banks	$	13,918		$	17,874
Interest-bearing deposits at other banks	166,697			176,502
Federal funds sold	—			3,000
Total cash and cash equivalents	180,615			197,376
Securities available-for-sale, at fair value	27,344			29,543
Securities held-to-maturity, at cost	5,066			5,322
Equity securities, at fair value	2,681			2,538
Restricted stock investments, at cost	12,970			12,855
Loans held for sale, at lower of cost or fair value	11,906			28,022
Loans held for investment	1,316,620			1,250,981
Allowance for loan losses	(12,340		)	(11,056		)
Loans held for investment, net	1,304,280			1,239,925
Accrued interest receivable	5,477			5,069
Premises and equipment	1,796			1,973
Servicing asset	3,370			3,186
Deferred taxes, net	6,397			8,666
Goodwill	73,425			73,425
Core deposit intangible	5,986			6,576
Other assets	14,282			8,025
TOTAL ASSETS	$	1,655,595		$	1,622,501
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand	$	666,271		$	546,713
Money market, interest checking and savings	404,518			465,123
Time deposits	268,749			240,503
Total deposits	1,339,538			1,252,339
Borrowings	30,000			104,998
Senior secured debt	13,100			8,450
Accrued interest payable and other liabilities	14,287			8,645
Total liabilities	1,396,925			1,374,432
Commitments and contingencies - Note 10
Shareholders’ equity:
Preferred stock 100,000,000 shares authorized, none outstanding	—			—
Common stock no par value; 100,000,000 shares authorized; issued and outstanding: 11,652,582 at September 30, 2019 and 11,726,074 at December 31, 2018	216,792			217,514
Additional paid-in capital	2,973			7,269
Retained earnings	38,865			23,985
Accumulated other comprehensive income (loss), net	40			(699		)
Total shareholders’ equity	258,670			248,069
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,655,595		$	1,622,501

See accompanying notes to condensed consolidated financial statements.

4

First Choice Bancorp and Subsidiary

Condensed Consolidated Statements of Income
(unaudited)

	Three Months Ended						Nine Months Ended September 30,
	September 30, 2019		June 30, 2019		September 30, 2018		2019		2018
	(dollars in thousands, except share and per share data)
INTEREST and DIVIDEND INCOME
Interest and fees on loans	$	23,206	$	21,344	$	17,296	$	65,466	$	40,237
Interest on investment securities	208		215		226		659		698
Interest on deposits in other financial institutions	701		454		621		1,600		1,176
Dividends on FHLB and other stock	228		206		46		676		182
Total interest and dividend income	24,343		22,219		18,189		68,401		42,293
INTEREST EXPENSE
Interest on savings, interest checking and money market accounts	1,283		1,254		1,223		3,776		3,012
Interest on time deposits	1,605		1,463		1,072		4,073		2,607
Interest on borrowings	429		666		98		1,498		508
Total interest expense	3,317		3,383		2,393		9,347		6,127
Net interest income	21,026		18,836		15,796		59,054		36,166
Provision for loan losses	700		550		600		1,600		1,120
Net interest income after provision for loan losses	20,326		18,286		15,196		57,454		35,046
NONINTEREST INCOME
Gain on sale of loans	528		1,271		171		2,727		866
Service charges and fees on deposit accounts	475		564		380		1,579		803
Net servicing fees	242		287		39		763		318
Other income	428		200		122		1,048		81
Total noninterest income	1,673		2,322		712		6,117		2,068
NONINTEREST EXPENSE
Salaries and employee benefits	6,472		6,857		5,045		19,552		12,547
Occupancy and equipment	1,097		987		898		3,513		1,999
Data processing	718		639		666		1,961		1,536
Professional fees	392		426		400		1,237		1,082
Office, postage and telecommunications	253		255		256		780		641
Deposit insurance and regulatory assessments	30		120		143		345		339
Loan related	244		71		142		529		327
Customer service related	437		273		208		1,187		448
Merger, integration and public company registration costs	—		—		3,797		—		4,527
Amortization of core deposit intangible	197		197		133		590		133
Other expenses	811		780		684		2,262		1,801
Total noninterest expense	10,651		10,605		12,372		31,956		25,380
Income before taxes	11,348		10,003		3,536		31,615		11,734
Income taxes	3,277		3,192		932		9,725		3,317
Net income	$	8,071	$	6,811	$	2,604	$	21,890	$	8,417
Net income per share:
Basic	$	0.69	$	0.58	$	0.26	$	1.87	$	1.02
Diluted	$	0.68	$	0.58	$	0.25	$	1.85	$	1.01
Weighted-average common shares outstanding:
Basic	11,584,955		11,581,889		10,144,954		11,605,687		8,170,234
Diluted	11,659,146		11,675,057		10,357,069		11,714,020		8,268,763

See accompanying notes to condensed consolidated financial statements.

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First Choice Bancorp and Subsidiary

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

	Three Months Ended									Nine Months Ended September 30,
	September 30, 2019			June 30, 2019			September 30, 2018			2019			2018
	(dollars in thousands)
Net income	$	8,071		$	6,811		$	2,604		$	21,890		$	8,417
Other comprehensive income (loss):
Unrealized gain (loss) on investment securities:
Change in net unrealized gain (loss) on available-for-sale securities	177			534			(213		)	1,050			(738		)
Related income taxes:
Change in net unrealized gain (loss) on available-for-sale securities	(52		)	(159		)	63			(311		)	218
Total other comprehensive income (loss)	125			375			(150		)	739			(520		)
Total comprehensive net income	$	8,196		$	7,186		$	2,454		$	22,629		$	7,897

See accompanying notes to condensed consolidated financial statements.

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First Choice Bancorp and Subsidiary

Condensed Consolidated Statement of Shareholders’ Equity

(unaudited)

	Common Stock
	Number of Shares		Amount			Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss), net			Total
	(in thousands, except share and per share data)
Three Months Ended September 30, 2019
Balance at June 30, 2019	11,737,441		$	218,532		$	2,588			$	33,086			$	(85	)	$	254,121
Net income	—		—			—			—	8,071			—	—			8,071
Stock-based compensation	—		—			527			—	—			—	—			527
Cash dividends ($0.20 per share)	—		—			—			—	(2,292		)	—	—			(2,292		)
Exercise of stock options	2,512		52			(23		)	—	—			—	—			29
Issuance of restricted shares, net of forfeiture	129		—			—				—				—			—
Vesting of restricted shares	—		119			(119		)	—	—			—	—			—
Common stock repurchased under stock repurchase program	(87,500	)	(1,911		)	—			—	—			—	—			(1,911		)
Other comprehensive income, net of taxes	—		—			—			—	—			—	125			125
Balance at September 30, 2019	11,652,582		$	216,792		$	2,973			$	38,865			$	40		$	258,670
Three Months Ended September 30, 2018
Balance at June 30, 2018	7,253,787		$	89,215		$	1,143		—	$	19,349		—	$	(888	)	$	108,819
Net income	—		—			—				2,604				—			2,604
Stock and fair value of replacement awards issued in connection with business combination	4,386,816		125,902			7,371				—				—			133,273
Stock-based compensation	—		—			408				1				—			409
Cash dividends ($0.20 per share)	—		—			—				(2,329		)		—			(2,329		)
Exercise of stock options	74,343		2,126			(1,373		)									753
Issuance of restricted shares, net of forfeiture	5,636		—			—				—				—			—
Vesting of restricted shares	—		109			(109		)		—				—			—
Repurchase of shares from restricted shares vesting	—		—			(1		)		—				—			(1		)
Other comprehensive loss, net of taxes	—		—			—				—				(150		)	(150		)
Balance at September 30, 2018	11,720,582		$	217,352		$	7,439			$	19,624			$	(1,038	)	$	243,377

See accompanying notes to condensed consolidated financial statements.

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First Choice Bancorp and Subsidiary

Condensed Consolidated Statement of Shareholders’ Equity

(unaudited)

	Common Stock
	Number of Shares		Amount			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), net			Total
	(in thousands, except share and per share data)
Nine Months Ended September 30, 2019
Balance at December 31, 2018	11,726,074		$	217,514		$	7,269		$	23,985		$	(699	)	$	248,069
Net income	—		—			—			21,890			—			21,890
Stock-based compensation	—		—			1,493			3			—			1,496
Cash dividends ($0.60 per share)	—		—			—			(7,013		)	—			(7,013		)
Exercise of stock options	244,249		6,863			(4,275		)							2,588
Issuance of restricted shares, net of forfeiture	103,537		—			—			—			—			—
Vesting of restricted shares	—		1,406			(1,406		)	—			—			—
Repurchase of shares from restricted shares vesting	(5,008	)	—			(108		)	—			—			(108		)
Common stock repurchased under stock repurchase program	(416,270	)	(8,991		)	—			—			—			(8,991		)
Other comprehensive income, net of taxes	—		—			—			—			739			739
Balance at September 30, 2019	11,652,582		$	216,792		$	2,973		$	38,865		$	40		$	258,670
Nine Months Ended September 30, 2018
Balance at December 31, 2017	7,260,119		$	87,837		$	1,940		$	16,459		$	(542	)	$	105,694
Cumulative effect of changes in accounting principles (1)	—		—			—			(24		)	24			—
Net income	—		—			—			8,417			—			8,417
Stock and fair value of replacement awards issued in connection with business combination	4,386,816		125,902			7,371			—			—			133,273
Stock-based compensation	—		—			1,296			4			—			1,300
Cash dividends ($0.60 per share)	—		—			—			(5,232		)	—			(5,232		)
Exercise of stock options	74,343		2,126			(1,373		)	—			—			753
Issuance of restricted shares, net of forfeiture	11,723		—			—			—			—			—
Vesting of restricted shares	—		1,487			(1,487		)	—			—			—
Repurchase of shares from restricted shares vesting	(12,419	)	—			(308		)	—			—			(308		)
Other comprehensive loss, net of taxes	—		—			—			—			(520		)	(520		)
Balance at September 30, 2018	11,720,582		$	217,352		$	7,439		$	19,624		$	(1,038	)	$	243,377

(1) Impact due to adoption on January 1, 2018 of ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities"

See accompanying notes to condensed consolidated financial statements.

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First Choice Bancorp and Subsidiary

Condensed Consolidated Statements of Cash Flows

(unaudited)

	For the Nine Months Ended September 30,
	2019			2018
OPERATING ACTIVITIES	(dollars in thousands)
Net income	$	21,890		$	8,417
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,231			509
Amortization of premiums of investment securities	129			152
Amortization of servicing asset	699			753
Provision for loan losses	1,600			1,120
Provision for losses - unfunded commitments	—			53
Gain on sale of loans	(2,727		)	(866		)
Loss on disposal of fixed assets	31			6
Impairment charges of fixed assets and right-of-use assets	400			—
Loans originated for sale	(28,626		)	(26,934		)
Proceeds from loans originated for sale	47,364			12,047
Accretion of net discounts and deferred loan fees, net	(5,304		)	(2,672		)
Change in fair value of equity securities	(88		)	140
Deferred income taxes	1,958			1,585
Stock-based compensation	1,496			1,300
Appreciation of Bank Owned Life Insurance	(80		)	(18		)
Net (decrease) increase in other items, net	(827		)	674
Net cash provided by (used in) operating activities	39,146			(3,734		)
INVESTING ACTIVITIES
Cash acquired in business combination	—			111,035
Proceeds from maturities and paydown of securities available-for-sale	3,132			2,982
Proceeds from maturities and paydown of securities held-to-maturity	244			30
Purchase of securities available-for-sale	—			(1,185		)
Proceeds from sale of securities available-for-sale	—			1,237
Net increase in loans held-for-investment	(61,428		)	(82,142		)
(Purchase) Redemption of restricted stock investments	(115		)	1,653
Purchase of equity and qualified CRA investments	(388		)	(192		)
Proceeds from disposal of premises and equipment	—			6
Purchases of premises and equipment	(679		)	(767		)
Net cash (used in) provided by investing activities	(59,234		)	32,657
FINANCING ACTIVITIES
Net increase in deposits	87,199			59,506
Net decrease in borrowings	(74,998		)	(5,000		)
Increase in senior secured notes	4,650			12,200
Cash dividends paid	(7,013		)	(5,232		)
Repurchase of shares	(9,099		)	(308		)
Proceeds from exercise of stock options	2,588			753
Net cash provided by financing activities	3,327			61,919
Net (decrease) increase in cash and cash equivalents	(16,761		)	90,842
Cash and cash equivalents, beginning of period	197,376			103,132
Cash and cash equivalents, end of period	$	180,615		$	193,974
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest paid	$	9,173		$	5,873
Taxes paid	$	8,013		$	4,100
Noncash investing and financing activities:
Transfers of loans to (from) held for investment from (to) held for sale	$	(51	)	$	195
Servicing rights asset recognized	$	883		$	243
Transfer of securities available-for-sale to equity securities	$	—		$	2,540
Issuance of common stock for acquisition, including stock option consideration	$	—		$	133,273
Initial recognition of operating lease right-of-use assets	$	6,022		$	—
Initial recognition of operating lease liabilities	$	6,141		$	—

See accompanying notes to condensed consolidated financial statements.

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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. 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 and First Choice Bank collectively and on a consolidated basis. References to the “Bank” refer to First Choice Bank on a stand-alone 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.

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

As a California-chartered member bank, the Bank is primarily regulated by the California Department of Business Oversight (the “DBO”) and the Board of Governors of the Federal Reserve System (the “FRB”). 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 condensed consolidated financial statements include the accounts of Bancorp and the Bank and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and 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 for a fair presentation, have been included. Operating results for the nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. These 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, 2018 and 2017, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC").

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

Certain reclassifications have been made to the condensed consolidated income statement for the three and nine months ended September 30, 2018 to conform to the September 30, 2019 presentation. For the three and nine months ended September 30, 2018, these reclassifications include: (i) $97 thousand and $289 thousand of stock-based compensation expense for stock options and restricted stock awards for directors that were previously reported in salaries and employee

10

benefits expense and are now included in other expenses; and (ii) $7 thousand and $21 thousand of rental income that were previously reported in occupancy and equipment expense and are now included in other income. 

Use of Estimates in the Preparation of Consolidated Financial Statements

     The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could 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

Except for the update to reflect the impact of the adoption of ASU 2016-02, Leases (Topic 842) effective January 1, 2019, discussed below, there were no significant changes to our accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018 under the section entitled "Summary of Critical Accounting Policies," and Note 1 - Basis of Presentation and Summary of Significant Accounting Policies to the audited consolidated financial statements included therewith.

Leases

We determine if an arrangement contains a lease at contract inception and recognize a right-of-use ("ROU") asset and operating lease liability based on the present value of lease payments over the lease term. While our operating leases may include options to extend the term, these options are not included when calculating the ROU asset and lease liability unless we are reasonably certain we will exercise such options. Most of our leases do not provide an implicit rate and, therefore, we determine the present value of lease payments by using our incremental borrowing rate, currently our FHLB secured borrowing rate for the remaining lease term, and other information available at lease commencement. Leases with an initial term of 12 months or less are not recorded in the consolidated balance sheets. Lease expense is recognized on a straight line basis over the lease term. We have lease agreements with lease and non-lease components for which we have elected to account for as a single lease component. Refer to – Accounting Standards Adopted in 2019 below and Note 6. Leases for further discussion on our leasing arrangements and related accounting.

Accounting Standards Adopted in 2019

We adopted ASU 2016-02, Leases (Topic 842) and ASU 2018-11, Leases (Topic 842): Targeted Improvements, referred to herein as Topic 842, effective January 1, 2019. The new guidance establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. Entities are required to recognize ROU assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. Under the amendments in ASU 2018-11, entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard.

Upon adoption, we elected to use the modified retrospective transition approach and recorded ROU assets of $6.0 million and lease liabilities of $6.1 million at the date of adoption with no adjustment to opening equity. We elected to apply the package of practical expedients which permits entities to not reassess: (i) whether any expired or existing contracts contain a lease; (ii) lease classification for any expired or existing leases; and (iii) whether initial direct costs for any existing leases qualify for capitalization under the amended guidance. We also elected not to include short-term leases (leases with initial terms of 12 months or less) on the consolidated balance sheets.

11

Recent Accounting Guidance Not Yet Effective

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) (“ASU 2016-13”), also known as "CECL". This guidance will replace the incurred loss impairment methodology used to estimate the allowance for credit losses in current GAAP with a methodology that reflects future expected credit losses and requires consideration of a broader range of reasonable and supportable forecasts in the credit loss estimates. On October 16, 2019, the FASB decided to delay the effective date of ASU 2016-13 for smaller reporting companies, private companies and other non-SEC filers. We are considered a smaller reporting company. Therefore, this ASU will be effective for the Company on January 1, 2023 with early adoption permitted. Management continues to have a cross functional committee in place to oversee the project, has selected software to implement the new guidance, and has engaged an existing third-party service provider to assist in implementation. We have completed data gap analyses, developed initial modeling assumptions, and run a high level sensitivity analysis. We expect to run parallel calculations, testing, and further sensitivity analysis beginning in the first quarter of 2020. We have not yet determined the potential impact of the adoption of ASU 2016-13 to our 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 decided to delay the effective date of ASU 2017-04 for smaller reporting companies, private companies and other non-SEC filers. We are considered a smaller reporting company. 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. We do not expect the adoption of ASU 2017-04 to have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). The primary objective of ASU 2018-13 is to improve the effectiveness of disclosures in the notes to financial statements. ASU 2018-13 will be effective on January 1, 2020, although early adoption is permitted. The adoption of ASU 2018-13 is not expected to significantly impact our consolidated financial statements.

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

NOTE 2.    GOODWILL AND INTANGIBLE ASSETS

In connection with the acquisition of PCB, we recognized goodwill of $73.4 million and a core deposit intangible ("CDI") of $6.9 million on July 31, 2018. There were no changes in the carrying amount of goodwill during 2019 and 2018. For the three and nine months ended September 30, 2019, we recognized CDI amortization of $197 thousand and $590 thousand and $133 thousand for the three and nine months ended September 30, 2018. No impairment was recognized.

The following table presents the changes in CDI for the three and nine months ended September 30, 2019:

12

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(dollars in thousands)
Core deposit intangible:
Gross balance, beginning of period	$	6,908		$	—		$	6,908		$	—
Additions	—			6,908			—			6,908
Gross balance, end of period	$	6,908		$	6,908		$	6,908		$	6,908
Accumulated amortization:
Balance, beginning of period	(725		)	—			(332		)	—
Amortization	(197		)	(133		)	(590		)	(133		)
Balance, end of period	$	(922	)	$	(133	)	$	(922	)	$	(133	)
Net core deposit intangible, end of period	$	5,986		$	6,775		$	5,986		$	6,775

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

Year Ended December 31,	(dollars in thousands)
Remainder 2019	$	196
2020	771
2021	753
2022	732
2023	707
Thereafter	2,827
	$	5,986

NOTE 3.    INVESTMENT SECURITIES

Investment securities have been classified in the condensed consolidated balance sheets according to management’s intent to either hold them to maturity or make them available for sale. The carrying amount of securities held-to-maturity and securities available-for-sale and their approximate fair values at September 30, 2019 and December 31, 2018 were as follows:

13

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2019	(dollars in thousands)
Securities available-for-sale:
Mortgage-backed securities	$	8,057	$	25	$	(104	)	$	7,978
Collateralized mortgage obligations	10,293		46		(33		)	10,306
SBA pools	8,937		133		(10		)	9,060
	$	27,287	$	204	$	(147	)	$	27,344
Securities held-to-maturity:
U.S. Government and agency securities	$	3,342	$	—	$	(1	)	$	3,341
Mortgage-backed securities	1,724		60		(15		)	1,769
	$	5,066	$	60	$	(16	)	$	5,110
December 31, 2018
Securities available-for-sale:
Mortgage-backed securities	$	9,177	$	—	$	(333	)	$	8,844
Collateralized mortgage obligations	11,731		2		(272		)	11,461
SBA pools	9,628		—		(390		)	9,238
	$	30,536	$	2	$	(995	)	$	29,543
Securities held-to-maturity:
U.S. Government and agency securities	$	3,340	$	—	$	(122	)	$	3,218
Mortgage-backed securities	1,982		—		(105		)	1,877
	$	5,322	$	—	$	(227	)	$	5,095

The amortized cost and estimated fair value of all investment securities held-to-maturity and available-for-sale at September 30, 2019, by contractual maturities are shown below. Contractual maturities may differ from expected maturities because the obligors and/or issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Held to Maturity				Available for Sale
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(dollars in thousands)
Due in one year or less	$	—	$	—	$	—	$	—
Due after one year through five years	3,342		3,341		—		—
Due after five years through ten years	—		—		—		—
Due after ten years (1)	1,724		1,769		27,287		27,344
	$	5,066	$	5,110	$	27,287	$	27,344

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

At September 30, 2019 and December 31, 2018, there were no holdings of securities of any one issuer in an amount greater than 10% of our shareholders’ equity. There were no purchases, sales, maturities or calls of any investment securities available-for-sale or held-to-maturity during the three and nine months ended September 30, 2019. There were $1.2 million in sales and $1.2 million in purchases of investment securities available-for-sale during the three and nine months ended September 30, 2018 and no maturities or calls of any investment securities available-for-sale or held-to-maturity during the same period of 2018.

14

At September 30, 2019 securities held-to-maturity with a carrying amount of $5.1 million were pledged to the Federal Reserve Bank as discussed in Note 8 – Borrowing Arrangements.

As of September 30, 2019 and December 31, 2018, unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows:

	Less Than Twelve Months					Over Twelve Months					Total
	Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value
September 30, 2019	(dollars in thousands)
Securities available-for-sale:
Mortgage-backed securities	$	—		$	—	$	(104	)	$	6,525	$	(104	)	$	6,525
Collateralized mortgage obligations	—			—		(33		)	2,347		(33		)	2,347
SBA pools	(10		)	3,144		—			—		(10		)	3,144
	$	(10	)	$	3,144	$	(137	)	$	8,872	$	(147	)	$	12,016
Securities held-to-maturity:
U.S. Government and agency securities	$	(1	)	$	3,341	$	—		$	—	$	(1	)	$	3,341
Mortgage-backed securities	—			—		(15		)	795		(15		)	795
	$	(1	)	$	3,341	$	(15	)	$	795	$	(16	)	$	4,136
December 31, 2018
Securities available-for-sale:
Mortgage-backed securities	$	(20	)	$	2,397	$	(313	)	$	6,447	$	(333	)	$	8,844
Collateralized mortgage obligations	(3		)	1,127		(269		)	9,742		(272		)	10,869
SBA pools	—			—		(390		)	9,238		(390		)	9,238
	$	(23	)	$	3,524	$	(972	)	$	25,427	$	(995	)	$	28,951
Securities held-to-maturity:
U.S. Government and agency securities	$	—		$	—	$	(122	)	$	3,218	$	(122	)	$	3,218
Mortgage-backed securities	—			—		(105		)	1,877		(105		)	1,877
	$	—		$	—	$	(227	)	$	5,095	$	(227	)	$	5,095

At September 30, 2019, we had 13 investment securities in an unrealized loss position with total unrealized losses of $163 thousand. Such unrealized losses on these investment securities have not been recognized into income. We do not believe these unrealized losses are other-than-temporary because the issuers’ bonds are above investment grade, the decline in fair value is largely due to changes in interest rates, and management does not intend to sell these securities nor is it more likely than not that management would be required to sell the securities prior to their anticipated recovery.

Equity Securities with a Readily Determinable Fair Value

At September 30, 2019 and December 31, 2018, equity securities with a readily determinable fair value of $2.7 million and $2.5 million represent a mutual fund investment consisting of high quality debt securities and other debt instruments supporting domestic affordable housing and community development. With the adoption of ASU 2016-01 on January 1, 2018, we recorded a transition adjustment to reclassify $24 thousand in net unrealized losses from accumulated other comprehensive income to retained earnings for these investments. In addition, we recognized net gains of $14 thousand and net losses of $23 thousand related to changes in fair value during the three months ended September 30, 2019 and 2018, all of which related to equity securities held during those periods. During the nine months ended September 30, 2019 and 2018, we recognized net gains of $88 thousand and net losses of $94 thousand related to changes in fair value.

15

Restricted Stock and Other Bank Stock Investments

The Bank is a member of the FHLB system. Members are required to own FHLB stock of the greater of 1% of FHLB membership asset value or 2.7% of outstanding FHLB advances. At September 30, 2019 and December 31, 2018, the Bank owned $6.1 million of FHLB stock which is carried at cost. During the three and nine months ended September 30, 2019, there were no required purchases of FHLB stock. We evaluated the carrying value of our FHLB stock investment at September 30, 2019 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 Board of Governors of the Federal Reserve System ("FRB"), the Bank owned $6.8 million and $6.7 million of FRB stock, which is carried at cost, at September 30, 2019 and December 31, 2018. The Bank purchased $43 thousand and $115 thousand of FRB stock during the three and nine months ended September 30, 2019. We evaluated the carrying value of our FRB stock investment at September 30, 2019 and determined that it was not impaired. This evaluation considered the long-term nature of the investment, the current financial and liquidity position of the FRB, repurchase activity of excess stock by the FRB at its carrying value, the return on the investment from recurring dividends, and our intent and ability to hold this investment for a period of time sufficient to recover our recorded investment.

The Bank also has restricted securities in the form of capital stock invested in two different banker’s bank stocks (collectively "Other Bank Stocks") which totaled $1.0 million at September 30, 2019 and December 31, 2018 and are reported in other assets in the condensed consolidated balance sheets. During the three and nine months ended September 30, 2019, there were no changes in the fair value of these equity securities. There was no loss recognized related to changes in the fair value of these equity securities during the three months ended September 30, 2018 and a $46 thousand loss related to changes in the fair value of these equity securities for the nine months ended September 30, 2018.

NOTE 4.    LOANS

Our loan portfolio consists primarily of loans to borrowers within our principal market area which includes Los Angeles County, Orange County and San Diego County, California. Although we seek to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses, such as hospitality businesses, are among the principal industries in our market area and, as a result, our loan and collateral portfolios are, to some degree, concentrated in those industries.

We also originate 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 our revenues are from origination of loans guaranteed by the SBA under its various programs and sale of the guaranteed portions of the loans. Funding for these loans depends on annual appropriations by the U.S. Congress.

As of September 30, 2019, we had certain qualifying loans with an unpaid principal balance of $879.1 million pledged as collateral under a secured borrowing arrangement with the FHLB, and $226.9 million of loans with an unpaid principal balance pledged as collateral under a secured borrowing arrangement with the FRB. See Note 8 –Borrowing Arrangements for additional information regarding the FHLB and FRB 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; and (ii) purchased credit impaired ("PCI") loans, which are defined as loans with evidence of credit deterioration since their originations and for which it is probable that collection of all contractually required payments are unlikely as of the acquisition date. The following table presents loans held for investment, net by loan class at September 30, 2019 and December 31, 2018:

16

	September 30, 2019								December 31, 2018
	Loans			PCI Loans		Total			Loans			PCI Loans		Total
	(dollars in thousands)
Construction and land development	$	221,857		$	—	$	221,857		$	184,177		$	—	$	184,177
Real estate:
Residential	48,896			—		48,896			57,443			—		57,443
Commercial real estate - owner occupied	171,250			110		171,360			179,362			132		179,494
Commercial real estate - non-owner occupied	401,710			—		401,710			400,590			1,075		401,665
Commercial and industrial	310,699			506		311,205			281,121			597		281,718
SBA loans	161,044			564		161,608			145,622			840		146,462
Consumer	424			—		424			159			—		159
Loans held for investment, net of discounts	1,315,880			1,180		1,317,060			1,248,474			2,644		1,251,118
Net deferred origination fees	(440		)	—		(440		)	(137		)	—		(137		)
Loans held for investment	$	1,315,440		$	1,180	$	1,316,620		$	1,248,337		$	2,644	$	1,250,981
Allowance for loan losses	(12,340		)	—		(12,340		)	(11,056		)	—		(11,056		)
Loans held for investment, net	$	1,303,100		$	1,180	$	1,304,280		$	1,237,281		$	2,644	$	1,239,925

The following table presents the components of loans held for investment at September 30, 2019 and December 31, 2018:

	September 30, 2019			December 31, 2018
	(dollars in thousands)
Gross loans(1)	$	1,328,031		$	1,263,891
Unamortized net discounts(2)	(10,971		)	(12,773		)
Net unamortized deferred origination fees	(440		)	(137		)
Loans held for investment	$	1,316,620		$	1,250,981

(1) Gross loans include the net carrying value of PCI loans of $1.2 million and $2.6 million at September 30, 2019 and December 31, 2018.

(2) Unamortized net discounts include discounts related to the retained portion of SBA loans and net discounts on Non-PCI acquired loans. At September 30, 2019, net discounts related to loans acquired in the PCB acquisition totaled $7.6 million and are expected to be accreted into interest income over a weighted average life of 5.1 years. At December 31, 2018, net discounts related to loans acquired in the PCB acquisition totaled $9.5 million.

The following table presents a summary of the changes in the allowance for loan losses for the three and nine months ended September 30, 2019 and 2018:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(dollars in thousands)
Balance, beginning of period	$	12,053		$	10,376		$	11,056		$	10,497
Provision for loan losses	700			600			1,600			1,120
Charge-offs	(437		)	(358		)	(561		)	(1,133		)
Recoveries	24			38			245			172
Net charge-offs	(413		)	(320		)	(316		)	(961		)
Balance, end of period	$	12,340		$	10,656		$	12,340		$	10,656

17

The following tables present the activity in the allowance for loan losses, the composition of the period end allowance, and the loans evaluated for impariment by loan class for the three and nine months ended September 30, 2019 and 2018:

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

	Three Months Ended September 30, 2018
			Real Estate
	Construction and Land Development		Residential		Commercial - Owner Occupied		Commercial - Non-owner Occupied		Commercial and Industrial			SBA Loans			Consumer		Total
	(dollars in thousands)
Balance, June 30, 2018	$	1,603	$	384	$	637	$	2,755	$	3,288		$	1,709		$	—	$	10,376
Provision for (reversal of) loan losses	295		28		141		70		(215		)	281			—		600
Charge-offs	—		—		—		—		(8		)	(350		)	—		(358		)
Recoveries	—		—		—		—		38			—			—		38
Net recoveries (charge-offs)	—		—		—		—		30			(350		)	—		(320		)
Balance, September 30, 2018	$	1,898	$	412	$	778	$	2,825	$	3,103		$	1,640		$	—	$	10,656
Reserves:
Specific	$	—	$	—	$	—	$	—	$	—		$	—		$	—	$	—
General	1,898		412		778		2,825		3,103			1,640			—		10,656
	$	1,898	$	412	$	778	$	2,825	$	3,103		$	1,640		$	—	$	10,656
Loans evaluated for impairment:
Individually	$	—	$	—	$	—	$	—	$	95		$	1,032		$	—	$	1,127
Collectively	172,938		60,570		180,985		391,536		269,921			145,440			—		1,221,390
PCI loans	—		—		104		1,383		645			887			—		3,019
	$	172,938	$	60,570	$	181,089	$	392,919	$	270,661		$	147,359		$	—	$	1,225,536

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	Nine Months Ended September 30, 2019
			Real Estate
	Construction and Land Development		Residential			Commercial - Owner Occupied		Commercial - Non-owner Occupied			Commercial and Industrial			SBA Loans		Consumer		Total
	(dollars in thousands)
Balance, December 31, 2018	$	1,721	$	422		$	734	$	2,686		$	3,686		$	1,807	$	—	$	11,056
Provision for (reversal of) loan losses	418		(90		)	64		(278		)	1,292			191		3		1,600
Charge-offs	—		—			—		—			(561		)	—		—		(561		)
Recoveries	—		—			—		—			56			189		—		245
Net (charge-offs) recoveries	—		—			—		—			(505		)	189		—		(316		)
Balance, September 30, 2019	$	2,139	$	332		$	798	$	2,408		$	4,473		$	2,187	$	3	$	12,340

	Nine Months Ended September 30, 2018
			Real Estate
	Construction and Land Development		Residential		Commercial - Owner Occupied		Commercial - Non-owner Occupied			Commercial and Industrial			SBA Loans			Consumer			Total
	(dollars in thousands)
Balance, December 31, 2017	$	1,597	$	375	$	655	$	3,136		$	3,232		$	1,494		$	8		$	10,497
Provision for (reversal of) loan losses	301		37		123		(311		)	221			757			(8		)	1,120
Charge-offs	—		—		—		—			(522		)	(611		)	—			(1,133		)
Recoveries	—		—		—		—			172			—			—			172
Net charge-offs	—		—		—		—			(350		)	(611		)	—			(961		)
Balance, September 30, 2018	$	1,898	$	412	$	778	$	2,825		$	3,103		$	1,640		$	—		$	10,656

We categorize 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. We analyze loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. We use the following definitions for risk ratings:

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

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

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

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

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

19

The following tables present loans held for investment, net of discounts by loan class and risk category, excluding PCI loans, as of September 30, 2019 and December 31, 2018:

	September 30, 2019
	Pass		Special Mention		Substandard (1)		Total
	(dollars in thousands)
Construction and land development	$	221,857	$	—	$	—	$	221,857
Real estate:
Residential	48,896		—		—		48,896
Commercial real estate - owner occupied	166,085		—		5,165		171,250
Commercial real estate - non-owner occupied	400,862		—		848		401,710
Commercial and industrial	305,226		—		5,473		310,699
SBA loans	150,719		—		10,325		161,044
Consumer	424		—		—		424
	$	1,294,069	$	—	$	21,811	$	1,315,880

(1) At September 30, 2019, substandard loans included $7.4 million of impaired loans.

	December 31, 2018
	Pass		Special Mention		Substandard (1)		Total
	(dollars in thousands)
Construction and land development	$	184,177	$	—	$	—	$	184,177
Real estate:
Residential	57,443		—		—		57,443
Commercial real estate - owner occupied	174,505		4,857		—		179,362
Commercial real estate - non-owner occupied	399,457		1,133		—		400,590
Commercial and industrial	269,640		8,341		3,140		281,121
SBA loans	137,740		6,065		1,817		145,622
Consumer	159		—		—		159
	$	1,223,121	$	20,396	$	4,957	$	1,248,474

(1) At December 31, 2018, substandard loans included $1.7 million of impaired loans.

The following tables present past due and nonaccrual loans, net of discounts by loan class, excluding PCI loans, at September 30, 2019 and December 31, 2018: 

	September 30, 2019
	Still Accruing
	30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due		Nonaccrual
	(dollars in thousands)
Real estate - residential	$	—	$	—	$	—	$	—
Commercial and industrial	—		4		—		730
SBA loans	—		—		—		6,678
Total	$	—	$	4	$	—	$	7,408

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	December 31, 2018
	Still Accruing
	30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due		Nonaccrual
	(dollars in thousands)
Real estate - residential	$	480	$	—	$	—	$	—
Commercial and industrial	3		1		—		89
SBA loans	—		—		—		1,633
Total	$	483	$	1	$	—	$	1,722

A loan is considered 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. Recorded investment represents unpaid principal balance, net of charge-offs, discounts and interest applied to principal on nonaccrual loans, if any. The following tables present impaired loans, excluding PCI loans, by loan class at September 30, 2019 and December 31, 2018:

	September 30, 2019
					Impaired Loans
	Unpaid Principal Balance		Recorded Investment(1)		Without Specific Reserve		With Specific Reserve		Related Allowance
	(dollars in thousands)
Commercial and industrial	$	828	$	730	$	730	$	—	$	—
SBA loans	7,842		7,002		5,103		1,899		624
Total	$	8,670	$	7,732	$	5,833	$	1,899	$	624

(1) Includes troubled-debt restructurings (“TDRs”) on accrual of $324 thousand.

	December 31, 2018
					Impaired Loans
	Unpaid Principal Balance		Recorded Investment(1)		Without Specific Reserve		With Specific Reserve		Related Allowance
	(dollars in thousands)
Commercial and industrial	$	178	$	89	$	89	$	—	$	—
SBA loans	2,964		1,960		1,960		—		—
Total	$	3,142	$	2,049	$	2,049	$	—	$	—

(1) Includes TDRs on accrual of $327 thousand.

The following tables present the average recorded investment in impaired loans, excluding PCI loans, and related interest income recognized by loan class for the three and nine months ended September 30, 2019 and 2018:

	Three Months Ended September 30,
	2019				2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial and industrial	$	732	$	—	$	98	$	—
SBA loans	4,179		54		1,805		9
Total	$	4,911	$	54	$	1,903	$	9

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	Nine Months Ended September 30,
	2019				2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial and industrial	$	304	$	—	$	239	$	—
SBA loans	2,563		71		1,459		19
Total	$	2,867	$	71	$	1,698	$	19

At September 30, 2019 and December 31, 2018, the total recorded investment for loans identified as a TDR was approximately $490 thousand and $922 thousand. There were no specific reserves allocated for these loans and we had not committed to lend any additional amounts to customers with outstanding loans that are classified as TDRs at September 30, 2019.

Loan modifications resulting in TDR status generally included one or a combination of the following: extensions of the maturity date, principal payment deferments or signed forbearance agreements with a payment plan. During the three and nine months ended September 30, 2019 and 2018, there were no new loan modifications resulting in TDRs.

A loan is considered to be in payment default once it is 90 days contractually past due under the modification. During the three and nine months ended September 30, 2019 and 2018, there was one loan in each period totaling $92 thousand and $95 thousand classified as a TDR for which there was a payment default within twelve months following the modification.

PCI Loans

The following table summarizes the changes in the carrying amount and accretable yield of PCI loans for the three and nine months ended September 30, 2019:

	Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
	Carrying Amount			Accretable Yield			Carrying Amount			Accretable Yield
	(dollars in thousands)
Balance, beginning of period	$	2,281		$	1,928		$	2,644		$	2,073
Accretion	1,635			(1,635		)	1,950			(1,950		)
Payments received	(2,780		)	—			(3,447		)	—
Increase in expected cash flows, net	44			814			33			984
Balance, end of period	$	1,180		$	1,107		$	1,180		$	1,107

Loans Held for Sale

At September 30, 2019 and December 31, 2018, loans held for sale consisted of SBA 7(a) loans and totaled $11.9 million and $28.0 million. We account for loans held for sale at the lower of carrying value or market. The fair value of loans held for sale totaled $12.6 million and $29.2 million at September 30, 2019 and December 31, 2018.

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NOTE 5.    TRANSFERS AND SERVICING OF FINANCIAL ASSETS

We sell loans in the secondary market and, for certain loans, retain 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 $295.7 million and $288.2 million at September 30, 2019 and December 31, 2018. This includes SBA loans serviced for others of $213.5 million at September 30, 2019 and $198.4 million at December 31, 2018 for which there is a related servicing asset of $3.4 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 of $82.2 million and $89.8 million at September 30, 2019 and December 31, 2018 for which there is no related servicing asset.

Consideration for each SBA loan sale includes the cash received and a related servicing asset. We receive 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 September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(dollars in thousands)
Balance, beginning of period	$	3,482		$	2,448		$	3,186		$	2,618
Additions (1)	170			1,111			883			1,297
Amortization	(282		)	(397		)	(699		)	(753		)
Balance, end of period	$	3,370		$	3,162		$	3,370		$	3,162

(1) For the three and nine months ended September 30, 2018, additions included the servicing asset fair value of $1.1 million from the PCB acquisition on July 31, 2018.

The fair value of the servicing asset for SBA loans is measured at least quarterly and was $3.3 million and $3.3 million as of September 30, 2019 and December 31, 2018. The significant assumptions used in the valuation of the SBA servicing asset at September 30, 2019 included discount rates, ranging from 6.8% to 35.3%, and a weighted average prepayment speed assumption of 17.9%.

The following table summarizes the estimated change in the value of servicing assets as of September 30, 2019 given hypothetical shifts in prepayments speeds and yield assumptions: 

	Change in Assumption	Change in Estimated Fair Value
		(dollars in thousands)
Prepayment speeds	+10%	$	(179	)
Prepayment speeds	+20%	(341		)
Discount rate	+1%	(88		)
Discount rate	+2%	(172		)

During the three months ended September 30, 2019 and 2018, SBA loans sold totaled $9.7 million and $2.4 million resulting in total gains on sale of SBA loans of $528 thousand and $171 thousand. During the nine months ended September 30, 2019 and 2018, SBA loans sold totaled $44.7 million and $11.2 million resulting in total gains of $2.7 million and $866 thousand.

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Net servicing fees, a component of noninterest income, represent contractually specified servicing fees reported net of the servicing asset amortization. Net servicing fees totaled $242 thousand and $39 thousand for the three months ended September 30, 2019 and 2018 including contractually specified servicing fees of $524 thousand and $435 thousand, offset by the amortization indicated in the table above. Net servicing fees totaled $763 thousand and $318 thousand for the nine months ended September 30, 2019 and 2018, including contractually specified servicing fees of $1.5 million and $1.1 million, offset by the amortization indicated in the table above.

NOTE 6.    LEASES

We adopted ASU 2016-02, Leases (Topic 842), and related amendmentson January 1, 2019, using the modified retrospective transition method whereby comparative periods were not restated. No cumulative effect adjustment to the opening balance of retained earnings was required. We elected the package of practical expedients permitted under the new standard as described in Note 1 - Basis of Presentation and Summary of Significant Accounting Policies - Accounting Standards Adopted in 2019.

All of our leases are operating leases for corporate offices, branch locations and loan production offices. The amount of the lease liability and ROU asset is impacted by the lease term and the discount rate applied to determine the present value of future lease payments. The remaining terms of our operating leases range from 9 months to 5.3 years.

Most of our leases include one or more options to renew, with renewal terms that can extend the lease term by varying amounts. The exercise of renewal options is at our sole discretion. We do not include renewal options in the measurement of ROU assets and lease liabilities unless they are considered reasonably certain of exercise.

Upon adoption of this standard, we recognized ROU assets of $6.0 million and lease liabilities of $6.1 million. Subsequent to adoption, we recognized a $220 thousand impairment of the ROU assets related to the consolidation of two branches. The impairment of the ROU assets was based on a discounted cash flow of estimated sublease income over the remaining lease term. The balance of ROU assets, net of impairment, and lease liabilities are included in other assets and other liabilities on the condensed consolidated balance sheets. In addition to the ROU impairment related to the branch consolidations, we recognized an $180 thousand impairment of other long lived assets; both impairment charges are included in occupancy and equipment expense on the condensed consolidated statements of income.

The balance sheet and supplemental information at September 30, 2019 are shown below.

Balance Sheet and Supplemental Information
(dollars in thousands)
Operating lease ROU assets classified as other assets	$5,456
Operating lease liability classified as other liabilities	$5,714
Weighted average remaining lease term, in years	3.1
Weighted average discount rate	2.52	%

We elected not to separate lease and non-lease components and instead to account for them as a single lease component. Variable lease cost primarily represents variable payments such as common area maintenance and utilities. The following table represents lease costs and other lease information for the periods indicated:

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	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
	(dollars in thousands)
Lease Costs
Operating lease cost	$	543	$	1,629
Variable lease cost	47		103
Short-term lease cost	3		17
Total lease costs	$	593	$	1,749
Other Information
Cash paid for amounts included in the measurement of lease liabilities	$	553	$	1,673

Maturities of lease liabilities for periods indicated:

Twelve Months Ended September 30,	(dollars in thousands)
2020	$	2,113
2021	1,715
2022	1,518
2023	422
2024	139
Thereafter	35
Total future minimum lease payments	5,942
Less: Imputed interest	(228		)
Present value of net future minimum lease payments	$	5,714

NOTE 7.    DEPOSITS

Our ten largest depositor relationships accounted for approximately 28% of total deposits at September 30, 2019 and 25% at December 31, 2018.

Time deposits that exceeded the FDIC insurance limit of $250,000 amounted to $76.9 million and $109.4 million as of September 30, 2019 and December 31, 2018. Such time deposits included collateralized time deposits from the State of California of $25 million and $35 million at September 30, 2019 and December 31, 2018.

Total collateralized deposits, including the deposits of State of California and other public agencies, are $64.8 million at September 30, 2019 and are collateralized by letters of credit issued by the FHLB under the Bank's secured line of credit with the FHLB. See Note 8 –Borrowing Arrangements for additional information regarding the FHLB secured line of credit.

NOTE 8.    BORROWING ARRANGEMENTS

Federal Home Loan Bank Secured Line of Credit

At September 30, 2019, the Bank had a secured line of credit of $432.6 million from the FHLB, of which $330.1 million was available. This secured borrowing arrangement is subject to the Bank providing adequate collateral and continued compliance with the Advances and Security Agreement and other eligibility requirements established by the FHLB. At September 30, 2019, the Bank had pledged as collateral certain qualifying loans with an unpaid principal balance of $879.1 million under this borrowing agreement. The Bank had a long term fixed-rate advance of $30.0 million that matures in June 2021 with a weighted average interest rate of 1.93% at September 30, 2019. There were no long term fixed-rated advances at December 31, 2018. There were no overnight borrowings outstanding under this arrangement at September 30, 2019 and $90.0 million with a weighted average interest rate of 2.56% at December 31, 2018. The average

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balance of total FHLB borrowings was $48.3 million and $4.6 million with an average interest rate of 2.08% and 2.17% for the three months ended September 30, 2019 and 2018. The average balance of FHLB borrowings was $53.1 million and $29.0 million with an average interest rate of 2.39% and 1.73% for the nine months ended September 30, 2019 and 2018.

In addition, at September 30, 2019, the Bank used $72.5 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.

Federal Reserve Bank Secured Line of Credit

At September 30, 2019, the Bank had a secured line of credit of $168.1 million from the Federal Reserve Bank. During the third quarter of 2019, the Bank expanded the existing secured borrowing capacity with the FRB through the Borrower-in-Custody ("BIC") program. At September 30, 2019, the Bank had pledged qualifying loans with an unpaid principal balance of $226.9 million and securities held-to-maturity with a carrying value of $5.1 million as collateral for this line. Borrowings under this BIC program are overnight advances with interest chargeable at FRB discount window ("Primary Credit") borrowing rate. There were no borrowings under this arrangement at or during the three and nine months ended September 30, 2019 and 2018.

Federal Funds Unsecured Lines of Credit

The Bank has established unsecured overnight borrowing arrangements for an aggregate amount of $77.0 million, subject to availability, with five of its correspondent banks. In general, interest rates on these lines approximate the federal funds target rate. There were no overnight borrowings under these credit facilities at September 30, 2019 and $15.0 million at December 31, 2018. There were no borrowings under this line for the three months ended September 30, 2019.

The average borrowings were $924 thousand with an average interest rate of 2.15% for the three months ended September 30, 2018. The average borrowings were $843 thousand and $531 thousand with an average interest rate of 2.70% and 2.52% for the nine months ended September 30, 2019 and 2018.

Senior Secured Notes

At September 30, 2019, the outstanding balance under the holding company's secured line of credit totaled $13.1 million with an interest rate of 5.25%. At December 31, 2018, the outstanding balance totaled $8.5 million with an interest rate of 5.75%. The average outstanding borrowings under this facility totaled $12.3 million and $5.0 million with an average interest rate of 5.69% and 5.38% for the three months ended September 30, 2019 and 2018. The average outstanding borrowings under this facility totaled $12.2 million and $3.1 million with an average interest rate of 5.82% and 5.20% for the nine months ended September 30, 2019 and 2018. At September 30, 2019, we were in compliance with all loan covenants on the facility and the remaining available credit was $11.9 million. One of our executives is also a member of the lending bank's board of directors.

NOTE 9.    INCOME TAXES

We account for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the amounts for financial reporting purposes and tax basis of its assets and liabilities. Deferred tax assets decreased by approximately $2.3 million during the nine months ended September 30, 2019 as a result of changes to temporary differences related to non-qualified stock options exercises and change in discount accretion on loans acquired in the PCB acquisition. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary. Based on this analysis, management has determined that a valuation allowance for deferred tax assets was not required at September 30, 2019.

For the three months ended September 30, 2019 and 2018, income tax expense was $3.3 million and $932 thousand, resulting in an effective income tax rate of 28.9% and 26.4%. For the nine months ended September 30, 2019 and 2018,

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income tax expense was $9.7 million and $3.3 million, resulting in an effective income tax rate of 30.8% and 28.3%. Our effective tax rate is lower than the statutory rate of 29.6% during the three months ended September 30, 2019 and higher than the statutory rate during the nine months ended September 30, 2019 due to the tax effect of stock-based compensation.

    We are subject to federal income and California franchise tax. At September 30, 2019, 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 2013. We are currently not under examination in any taxing jurisdiction.

The total amount of unrecognized tax benefits was $116 thousand and $480 thousand at September 30, 2019 and December 31, 2018, primarily comprised of unrecognized tax benefits from tax positions taken in prior years. The total amount of tax benefits that, if recognized, would favorably impact the effective tax rate was $0 at September 30, 2019 and December 31, 2018. We expect the total amount of unrecognized tax benefits to decrease by $3 thousand within the next twelve months due to the expiration of the statute of limitations for the assessment of taxes.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense. We had accrued $18 thousand and $59 thousand of interest at September 30, 2019 and December 31, 2018, respectively. No amounts for penalties were accrued.

NOTE 10.    COMMITMENTS

In the ordinary course of business, we enter 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 our condensed consolidated financial statements.

Our 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. We use the same credit policies in making commitments as we do for loans reflected in our condensed consolidated financial statements.

As of September 30, 2019 and December 31, 2018, we had the following outstanding financial commitments whose contractual amounts represent credit risk:

	September 30, 2019		December 31, 2018
	(dollars in thousands)
Commitments to extend credit	$	386,974	$	375,755
Standby letters of credit	8,353		4,019
Commitments to contribute capital to low income housing project partnerships and other CRA investments	2,032		385
Total	$	397,359	$	380,159

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. We evaluate each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by us is based on management’s credit evaluation of the customer. The majority of our commitments to extend credit and standby letters of credit are secured by real estate. The reserve for unfunded commitments was $1.4 million at September 30, 2019 and December 31, 2018. The reserve for unfunded commitments is included in "other liabilities" in our condensed consolidated balance sheets.

We committed to invest in a partnership 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

27

the partnership agreement. In addition, we invest in other CRA investments such as the Small Business Investment Company ("SBIC") program. At September 30, 2019, the Company had unfunded commitments to contribute capital to this LIHTC investments and other CRA investments totaling $2.0 million.

NOTE 11.    RELATED PARTY TRANSACTIONS

In the ordinary course of business, we may grant loans to certain executive officers and directors and the companies with which they are associated. There are no related party loans for the three and nine months ended September 30, 2019 and 2018. Deposits from certain officers and directors and the companies with which they are associated totaled $32.7 million and $33.2 million at September 30, 2019 and December 31, 2018.

We have a $25.0 million senior secured facility (refer to Note 8 – Borrowing Arrangements) with another bank in which one of our executives is also a member of the lending bank’s board of directors. The outstanding balance of this facility was $13.1 million at September 30, 2019.

NOTE 12.    STOCK-BASED COMPENSATION PLANS

Our 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 shares of common stock that may be awarded under the plan shall not exceed 1,390,620 shares, of which a maximum of 300,000 shares may be granted as incentive stock options. Stock options, SARs, performance share and unit awards are granted at a price 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. The 2013 Plan expires in 2023.

In connection with the PCB acquisition, we issued replacement stock options exercisable for 420,393 shares of our common stock in cancellation of PCB stock options with an aggregated fair value of $7.4 million to PCB directors, officers and employees, which we refer to as rollover stock options. The remaining term on the rollover stock options ranges from 1 month to 9 years.

We recognized stock-based compensation expense of $527 thousand and $409 thousand for the three months ended September 30, 2019 and 2018 and $1.5 million and $1.3 million for the nine months ended September 30, 2019 and 2018.

A summary of activity in our outstanding stock options during the three and nine months ended September 30, 2019 and 2018 is as follows:

	Three Months Ended September 30,
	2019				2018
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding, beginning of period	141,089		$	10.18	65,978		$	10.17
Rollover options	—		—		420,393		10.60
Exercised	(2,512	)	11.60		(74,343	)	10.13
Granted	—		—		—		—
Forfeited	—		—		—		—
Outstanding, end of period	138,577		$	10.16	412,028		$	10.62
Options exercisable	138,577		$	10.16	403,374		$	10.60

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	Nine Months Ended September 30,
	2019				2018
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding, beginning of period	383,212		$	10.44	65,978		$	10.17
Rollover options	—		—		420,393		10.60
Exercised	(244,249	)	10.60		(74,343	)	10.13
Granted	—		—		—		—
Forfeited	(386	)	12.94		—		—
Outstanding, end of period	138,577		$	10.16	412,028		$	10.62
Options exercisable	138,577		$	10.16	403,374		$	10.60

As of September 30, 2019, there was no unrecognized compensation cost related to the outstanding stock options. The weighted average of the remaining contractual terms of options outstanding and options exercisable were each 4.2 years at September 30, 2019 compared to 2.5 years and 2.4 years at September 30, 2018. The aggregate intrinsic value of the options outstanding and options exercisable were each $1.5 million at September 30, 2019 compared to an aggregate intrinsic value of options outstanding of $6.8 million and options exercisable of $6.7 million at September 30, 2018. The intrinsic value of options exercised during the three months ended September 30, 2019 and 2018 was approximately $25 thousand and $1.2 million. The intrinsic value of options exercised during the nine months ended September 30, 2019 and 2018 was approximately $2.7 million and $1.2 million.

A summary of activity for outstanding restricted shares for the three and nine months ended September 30, 2019 and 2018 is as follows:

	Three Months Ended September 30,
	2019				2018
	Shares		Weighted Average Grant-Date Fair Value		Shares		Weighted Average Grant-Date Fair Value
Nonvested, beginning of period	128,053		$	22.91	77,627		$	23.03
Granted	972		22.56		7,652		29.85
Vested	(4,537	)	26.41		(4,945	)	22.24
Forfeited	(843	)	21.43		(2,016	)	23.35
Nonvested, end of period	123,645		$	22.79	78,318		$	23.73

	Nine Months Ended September 30,
	2019				2018
	Shares		Weighted Average Grant-Date Fair Value		Shares		Weighted Average Grant-Date Fair Value
Nonvested, beginning of period	84,120		$	23.90	142,553		$	20.28
Granted	111,205		22.19		18,592		27.71
Vested	(64,012	)	23.32		(75,958	)	22.29
Forfeited	(7,668	)	21.83		(6,869	)	20.45
Nonvested, end of period	123,645		$	22.79	78,318		$	23.73

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As of September 30, 2019, there was approximately $1.5 million of total unrecognized compensation cost related to the restricted shares that will be recognized over the weighted-average period of 2.5 years. The value of restricted shares that vested was approximately $120 thousand and $136 thousand during the three months ended September 30, 2019 and 2018.  The value of restricted shares that vested was approximately $1.5 million and $1.9 million during the nine months ended September 30, 2019 and 2018.

NOTE 13.    EARNINGS PER SHARE

Earnings per share (“EPS”) are 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. Our unvested grants of restricted stock contain non-forfeitable rights to dividends, which are required to be treated as participating securities and included in the computation of earnings per share. The following is a reconciliation of net income and shares outstanding used in the computation of basic and diluted EPS:

	Three Months Ended									Nine Months Ended September 30,
	September 30, 2019			June 30, 2019			September 30, 2018			2019			2018
Numerator for basic earnings per share:	(dollars in thousands, except share and per share data)
Net income	$	8,071		$	6,811		$	2,604		$	21,890		$	8,417
Less: dividends and net income allocated to participating securities	(86		)	(76		)	(17		)	(222		)	(73		)
Net income available to common shareholders	$	7,985		$	6,735		$	2,587		$	21,668		$	8,344
Denominator for basic earnings per share:
Basic weighted average common shares outstanding during the period	11,584,955			11,581,889			10,144,954			11,605,687			8,170,234
Denominator for diluted earnings per share:
Basic weighted average common shares outstanding during the period	11,584,955			11,581,889			10,144,954			11,605,687			8,170,234
Net effect of dilutive stock options	74,191			93,168			212,115			108,333			98,529
Diluted weighted average common shares	11,659,146			11,675,057			10,357,069			11,714,020			8,268,763
Net income per common share:
Basic	$	0.69		$	0.58		$	0.26		$	1.87		$	1.02
Diluted	$	0.68		$	0.58		$	0.25		$	1.85		$	1.01

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,

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involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

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

The methods and assumptions used to estimate the fair value of certain financial instruments are described below:

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

Securities.The fair values of securities available-for-sale are determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).

Equity Securities. 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, we use other inputs that are directly observable.

Recurring fair value measurements

The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value on a recurring basis at September 30, 2019 and December 31, 2018:

	Recurring Fair Value Measurements
	Level 1		Level 2		Level 3		Total
September 30, 2019:	(dollars in thousands)
Securities available-for-sale:
Mortgage-backed securities	$	—	$	7,978	$	—	$	7,978
Collateralized mortgage obligations	—		10,306		—		10,306
SBA Pools	—		9,060		—		9,060
Securities available-for-sale	$	—	$	27,344	$	—	$	27,344
Equity securities:
Mutual fund investment	$	2,681	$	—	$	—	$	2,681
December 31, 2018:
Securities available-for-sale:
Mortgage-backed securities	$	—	$	8,844	$	—	$	8,844
Collateralized mortgage obligations	—		11,461		—		11,461
SBA Pools	—		9,238		—		9,238
Securities available-for-sale	$	—	$	29,543	$	—	$	29,543
Equity securities:
Mutual fund investment	$	2,538	$	—	$	—	$	2,538

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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. At September 30, 2019 and December 31, 2018 the fair value measurements (Level 3) related to collateral dependent impaired loans totaled $1.9 millionand $690 thousand. Total nonrecurring losses (which include charge-offs, net of recoveries and changes in specific reserves) recognized for impaired loans during the three months ended September 30, 2019 and 2018 totaled $624 thousand and $22 thousand in losses. Total nonrecurring losses (which include charge-offs, net of recoveries and changes in specific reserves) recognized for impaired loans during the nine months ended September 30, 2019 and 2018 totaled $624 thousand and $590 thousand in losses. We utilized selling costs ranging from 8% to 10% of appraised values for nonrecurring fair value measurements related to collateral-dependent impaired loans during the three and nine months ended September 30, 2019 and 2018.

There were no transfers of financial assets between Levels 1, 2 and 3 for the three and nine months ended September 30, 2019 and 2018.

Fair value of financial instruments

The fair value hierarchy level and estimated fair value of significant financial instruments at September 30, 2019 and December 31, 2018:

		September 30, 2019				December 31, 2018
	Fair Value Hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Assets:		(dollars in thousands)
Cash and cash equivalents	Level 1	$	180,615	$	180,615	$	197,376	$	197,376
Securities available-for-sale	Level 2	27,344		27,344		29,543		29,543
Securities held-to-maturity	Level 2	5,066		5,110		5,322		5,095
Equity securities	Level 1	2,681		2,681		2,538		2,538
Loans held for sale	Level 2	11,906		12,594		28,022		29,238
Loan held for investment, net	Level 3	1,304,280		1,341,668		1,239,925		1,265,013
Restricted stock investments, at cost	Level 2	12,970		12,970		12,855		12,855
Servicing asset	Level 3	3,370		3,345		3,186		3,295
Accrued interest receivable	Level 2	5,477		5,477		5,069		5,069
Financial Liabilities:
Deposits	Level 2	$	1,339,538	$	1,339,611	$	1,252,339	$	1,250,555
Borrowings	Level 2	30,000		30,000		104,998		104,998
Senior secured notes	Level 2	13,100		13,100		8,450		8,450
Accrued interest payable	Level 2	339		339		366		366

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 our 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 we satisfy our 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:

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	Three Months Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019		2018
	(dollars in thousands)
Noninterest income, in-scope:
Service charges and fees on deposit accounts	$	475	$	380		$	1,579	$	803
Other income	46		58			133		75
Total noninterest income, in-scope	521		438			1,712		878
Noninterest income, not in-scope:
Gain on sale of loans	528		171			2,727		866
Net servicing fees	242		39			763		318
Change in fair value of equity securities	14		(23		)	88		(140		)
Other income	368		87			827		146
Total noninterest income, not in-scope	1,152		274			4,405		1,190
Total noninterest income	$	1,673	$	712		$	6,117	$	2,068

NOTE 16.EQUITY

Dividends

During the three months ended September 30, 2019 and 2018, total quarterly cash dividends declared were $0.20 per share and total cash dividends paid were $2.3 million and $2.3 million. During the nine months ended September 30, 2019 and 2018, total cash dividends declared were $0.60 per share and total cash dividends paid were $7.0 million and $5.2 million.

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.

During the three months ended September 30, 2019, we repurchased 87,500 shares at an average price of $21.84 per share and a total cost of $1.9 million under the repurchase plan. During the nine months ended September 30, 2019, we repurchased 416,270 shares at an average price of $21.60 per share and total cost of $9.0 million. Since the plan was announced, we have repurchased a total of 452,553 shares at an average price of $21.62 per share. The remaining number of shares authorized to be repurchased under this plan is 747,447 shares at September 30, 2019.

NOTE 17.     SUBSEQUENT EVENTS

The Company plans to relocate the downtown Los Angeles branch to a smaller space within the same building and has signed a sublease of the current space which shall begin on or after January 1, 2020. The sublease is contingent upon the Company executing a lease for smaller space in the same building and receiving all applicable federal and state regulatory approvals. As a result of this pending move and sublease agreement, the Company expects to recognize an after-tax impairment charge of between $475 thousand and $675 thousand, or $0.04 to $0.06 per diluted share, in the fourth quarter of 2019. Starting in the first quarter of 2020, annualized after-tax cost savings related to the sublease and newly leased space are estimated to be between $250 thousand and $325 thousand, or $0.02 to $0.03 per diluted share, through 2022.

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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 September 30, 2019, June 30, 2019, and December 31, 2018, and our condensed consolidated results of operations for the quarters ended September 30, 2019, June 30, 2019, and September 30, 2018 and for the nine months ended September 30, 2019 and 2018. 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, 2018, 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 in the meaning of the Private Securities Litigation Reform Act of 1995 regarding management’sbeliefs, 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 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and particularly, Item 1A, titled “Risk Factors.”

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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 we caution 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. 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 and First Choice Bank collectively and on a consolidated basis. References to the “Bank” refer to First Choice Bank, on a stand-alone 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.  

As a California-chartered member bank, the Bank is primarily regulated by the California Department of Business Oversight (the “DBO”) and the Board of Governors of the Federal Reserve System (the “FRB”). 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.”

Effective July 31, 2018, we acquired Pacific Commerce Bancorp (“PCB”) and its wholly-own subsidiary bank, Pacific Commerce Bank by merger in an all-stock transaction. In connection therewith, we issued, in the aggregate, 4,386,816 shares of our common stock in exchange for all of the outstanding shares of PCB common stock and replacement stock options exercisable for 420,393 shares of our common stock in cancellation of PCB stock options. The acquisition has been accounted for using the acquisition method of accounting and, accordingly, the operating results of PCB have been included in the consolidated financial statements since August 1, 2018.

Recent Developments

Downtown Branch Relocation

The Company plans to relocate the downtown Los Angeles branch to a smaller space within the same building and has signed a sublease of the current space which shall begin on or after January 1, 2020. The sublease is contingent upon the Company executing a lease for smaller space in the same building and receiving all applicable federal and state regulatory approvals, as may be required. As a result of this pending move and sublease agreement, the Company expects to recognize an after-tax impairment charge of between $475 thousand and $675 thousand, or $0.04 to $0.06 per diluted share, in the fourth quarter of 2019. Starting in the first quarter of 2020, annualized after-tax cost savings related to the sublease and newly leased space are estimated to be between $250 thousand and $325 thousand, or $0.02 to $0.03 per diluted share, through 2022.

Federal Reserve Bank Secured Borrowing Arrangement

During the third quarter of 2019, the Bank expanded its existing secured borrowing capacity with the Federal Reserve Bank by participating in the Borrower-in-Custody ("BIC") program. As a result, our borrowing capacity with the

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Federal Reserve Bank increased to $168.1 million at September 30, 2019 compared to $4.9 million at June 30, 2019. Prior to participating in the BIC program, the bank only pledged securities held-to-maturity as collateral for access to the discount window. Upon executing the BIC program, the Bank has pledged certain qualifying loans with an unpaid principal balance of $226.9 million and securities held-to-maturity with a carrying value of $5.1 million as collateral for this line of credit as of September 30, 2019. Borrowings under this BIC program are overnight advances with interest chargeable at the Discount Window ("Primary Credit") borrowing rate. There were no borrowings under this arrangement at or during the nine months ended September 30, 2019 and 2018.

Branch Consolidation

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. The consolidation of these branches resulted in one-time pre-tax charges of approximately $400 thousand in the first quarter of 2019 and estimated annualized pre-tax cost savings of $300 thousand which began during the second quarter of 2019.

Financial Highlights

	At or for the Three Months Ended									At or for the Nine Months Ended September 30,
	September 30, 2019			June 30, 2019			September 30, 2018			2019			2018
	(dollars in thousands, except per share amounts)
Operating Results
Total interest and dividend income	$	24,343		$	22,219		$	18,189		$	68,401		$	42,293
Total interest expense	3,317			3,383			2,393			9,347			6,127
Net interest income	21,026			18,836			15,796			59,054			36,166
Provision for loan losses	700			550			600			1,600			1,120
Net interest income after provision for loan losses	20,326			18,286			15,196			57,454			35,046
Total noninterest income	1,673			2,322			712			6,117			2,068
Total noninterest expense	10,651			10,605			12,372			31,956			25,380
Income before taxes	11,348			10,003			3,536			31,615			11,734
Income taxes	3,277			3,192			932			9,725			3,317
NET INCOME	$	8,071		$	6,811		$	2,604		$	21,890		$	8,417
Performance Ratios
Net income per share-diluted	$	0.68		$	0.58		$	0.25		$	1.85		$	1.01
Return on average assets	1.98		%	1.73		%	0.77		%	1.86		%	1.06		%
Return on average equity	12.45		%	10.86		%	5.18		%	11.60		%	8.09		%
Return on average tangible common equity (1)	18.03		%	15.89		%	7.07		%	16.95		%	9.28		%
Net interest margin	5.52		%	5.14		%	4.97		%	5.39		%	4.73		%
Average loan yield	6.93		%	6.42		%	6.32		%	6.66		%	6.06		%
Cost of deposits	0.89		%	0.89		%	0.81		%	0.84		%	0.85		%
Cost of funds	0.98		%	1.03		%	0.84		%	0.95		%	0.90		%
Efficiency ratio (1)	46.92		%	50.12		%	74.95		%	49.03		%	66.38		%

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

Financial Performance

Third Quarter of 2019 Compared to Second Quarter of 2019

Net income was $8.1 million, or $0.68 per diluted share, for the third quarter of 2019 compared to $6.8 million, or $0.58 per diluted share, for the second quarter of 2019. The return on average assets ("ROAA") and the return on average

36

tangible common equity ("ROTCE") increased to 1.98% and 18.03% for the third quarter of 2019, compared to 1.73% and 15.89% for the second quarter of 2019. Refer to the section entitled "Non-GAAP Financial Measures" in this MD&A.

The $1.3 million increase in net income was a result of higher net interest income of $2.2 million, partially offset by lower noninterest income of $649 thousand, higher provision for loan losses of $150 thousand, higher noninterest expense of $46 thousand, and higher income tax expense of $85 thousand. The increase in net interest income was due to higher discount accretion related to loans acquired in a business combination, including $1.6 million related to the payoff of one PCI loan, and one additional day in the third quarter compared to the second quarter of 2019. The net interest margin increased to 5.52% for the third quarter of 2019 compared to 5.14% for the prior quarter. The decrease in noninterest income is due mostly to lower gains on sale of SBA loans, partially offset by higher other income. The increase in provision for loan losses relates to higher net charge-offs and specific reserves related mostly to one lending relationship.

Third Quarter of 2019 Compared to Third Quarter of 2018

Net income was $8.1 million, or $0.68 per diluted share, for the third quarter of 2019 compared to $2.6 million, or $0.25 per diluted share, for the third quarter of 2018. The increase in net income was due mostly to including PCB's operations since August 1, 2018 in addition to other organic balance sheet growth since the end of the third quarter of 2018. The increase in net income relative to the growth in the balance sheet increased the ROAA and ROTCE to 1.98% and 18.03% for the third quarter of 2019 compared to 0.77% and 7.07% the same quarter in 2018. Refer to the section entitled "Non-GAAP Financial Measures" in this MD&A.

The $5.5 million increase in net income was primarily due to higher net interest income of $5.2 million, noninterest income of $1.0 million and lower noninterest expense of $1.7 million, partially offset by higher provision for loan losses of $100 thousand, and higher income tax expense of $2.3 million. Net interest income increased due to higher average interest-earning assets and a higher average loan yield, including the impact of $1.6 million related to the payoff of one PCI loan and higher market interest rates. The net interest margin expanded 55 basis points to 5.52% for the third quarter of 2019 from 4.97% for the same quarter of 2018. The increase in noninterest income is due to including PCB's operations since August 1, 2018 and higher gain on sale of loans. The decrease in noninterest expense was due to lower merger, integration and public company registration costs, offset by higher overhead expenses due to including PCB's operations after the acquisition date. The increase in provision for loan losses relates to higher net charge-offs and specific reserves in the current quarter compared to the same quarter of 2018.

Nine Months Ended September 30, 2019Compared toNine Months Ended September 30, 2018

Net income was $21.9 million, or $1.85 per diluted share, for the nine months ended September 30, 2019 compared to $8.4 million, or $1.01 per diluted share, for the nine months ended September 30, 2018. The increase in net income was driven primarily by the acquisition of PCB, organic balance sheet growth and the impact of higher market interest rates. The federal funds target rate was increased 25 basis points in March, June, September, and December of 2018 and was decreased 25 basis points in July and September of 2019. The increase in net income relative to the growth in the balance sheet increased the ROAA and ROTCE to 1.86% and 16.95% for the nine months ended September 30, 2019, compared to 1.06% and 9.28% for the same period in 2018. Refer to the section entitled "Non-GAAP Financial Measures" in this MD&A.

The $13.5 million increase in net income was primarily due to higher net interest income of $22.9 million and higher noninterest income of $4.0 million, offset by higher provision for loan losses of $480 thousand, higher noninterest expense of $6.6 million and higher tax expense of $6.4 million. Net interest income increased due to higher average interest-earning assets, organic loan growth and higher market interest rates. The net interest margin expanded 66 basis points to 5.39% for the nine months ended September 30, 2019 compared to 4.73% for the same 2018 period. The increase in noninterest income was due to including PCB's operations since August 1, 2018 and higher gain on sale of loans. The increase in provision for loan losses was mostly due to organic loan growth. The increase in noninterest expense was due to higher expense in most of the overhead expense categories due to including PCB's operations since August 1, 2018, offset by lower merger, integration and public company registration costs.

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	September 30, 2019			June 30, 2019			December 31, 2018
	(dollars in thousands, except per share amounts)
Financial Conditions
Total assets	$	1,655,595		$	1,730,433		$	1,622,501
Loans held for investment	1,316,620			1,336,015			1,250,981
Noninterest-bearing deposits	666,271			547,434			546,713
Total deposits	1,339,538			1,255,878			1,252,339
Shareholders’ equity	258,670			254,121			248,069
Key Ratios
Noninterest-bearing deposits to total deposits	49.7		%	43.6		%	43.7		%
Equity to assets ratio	15.62		%	14.69		%	15.29		%
Tangible common equity to tangible asset ratio (1)	11.37		%	10.57		%	10.90		%
Book value per share	$	22.20		$	21.65		$	21.16
Tangible book value per share (1)	$	15.38		$	14.87		$	14.33
Credit Quality
Nonperforming loans as a percentage of total assets	0.45		%	0.15		%	0.11		%
Allowance for loan losses as a percentage of total loans held for investment	0.94		%	0.90		%	0.88		%

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

Balance Sheet Performance

• Total consolidated assets increased $33.1 million to $1.66 billion at September 30, 2019 from $1.62 billion at December 31, 2018. Total loans held for investment increased $65.6 million, or 7.0% annualized, to $1.32 billion at September 30, 2019 since year-end.

• Total consolidated liabilities increased $22.5 million to $1.40 billion at September 30, 2019 since December 31, 2018. Total deposits increased $87.2 million, or 9.3% annualized, to $1.34 billion offset by lower borrowings of $75.0 million. Noninterest-bearing demand deposits totaled $666.3 million and represent 49.7% of total deposits at September 30, 2019 compared to $546.7 million and 43.7% of total deposits at December 31, 2018.

• Total consolidated equity increased $10.6 million during the nine months ended September 30, 2019 to $258.7 million due to net income of $21.9 million and the vesting and exercise of equity awards of $4.0 million, offset by stock repurchases of $9.0 million and cash dividends of $7.0 million. At September 30, 2019, tangible book value per share was $15.38 compared to $14.33 at December 31, 2018. Refer to the section entitled "- Non-GAAP Financial Measures" in this MD&A.

• The Bank remains well-capitalized from a regulatory perspective. At September 30, 2019, the Bank had a total risk-based capital ratio of 14.37% and a Tier 1 common to risk weighted assets ratio of 13.42% compared to a total risk-based capital ratio of 14.18% and a Tier 1 common to risk weighted assets ratio of 13.26% at December 31, 2018.

Credit Quality

• Credit quality remains solid. Non-performing assets totaled $7.4 million and $1.7 million and represented 0.45% and 0.11% of total assets at September 30, 2019 and December 31, 2018. Non-performing loans were $7.4 million and $1.7 million and represented 0.56% and 0.14% of loans held for investment at September 30, 2019 and December 31, 2018. The increase in nonperforming assets is due mostly to downgrading 15 SBA 7(a) loans totaling $6.0 million and three commercial and industrial loans totaling $1.1 million, offset by charge-offs and payoffs totaling $1.4 million.

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Non-GAAP Financial Measures

     The following tables present a reconciliation of non-GAAP financial measures to GAAP measures for: (1) efficiency ratio, (2) adjusted efficiency ratio, (3) adjusted net income, (4) average tangible common equity, (5) adjusted return on average assets, (6) adjusted return on average equity, (7) return on average tangible common equity, (8) adjusted return on average tangible common equity, (9) tangible common equity, (10) tangible assets, (11) tangible common equity to tangible asset ratio, and (12) tangible book value per share. We believe the presentation of certain non-GAAP financial measures provides useful information to assess our consolidated financial condition and consolidated results of operations and to assist investors in evaluating our financial results relative to our peers. These non-GAAP financial measures complement our GAAP reporting and are presented below to provide investors and others with information that we use to manage the business each period. Because not all companies use identical calculations, the presentation of these non-GAAP financial measures may not be comparable to other similarly titled measures used by other companies. These non-GAAP measures should be taken together with the corresponding GAAP measures and should not be considered a substitute of the GAAP measures.

	Three Months Ended									Nine Months Ended September 30,
	September 30, 2019			June 30, 2019			September 30, 2018			2019			2018
	(dollars in thousands)
Efficiency Ratio
Noninterest expense (numerator)	$	10,651		$	10,605		$	12,372		$	31,956		$	25,380
Less: Merger, integration and public company registration costs	—			—			3,797			—			4,527
Adjusted noninterest expense (numerator)	$	10,651		$	10,605		$	8,575		$	31,956		$	20,853
Net interest income	$	21,026		$	18,836		$	15,796		$	59,054		$	36,166
Plus: Noninterest income	1,673			2,322			712			6,117			2,068
Total net interest income and noninterest income (denominator)	$	22,699		$	21,158		$	16,508		$	65,171		$	38,234
Efficiency ratio (1)	46.9		%	50.1		%	74.9		%	49.0		%	66.4		%
Adjusted efficiency ratio (1)	46.9		%	50.1		%	51.9		%	49.0		%	54.5		%
Return on Average Assets, Equity, and Tangible Equity
Net income	$	8,071		$	6,811		$	2,604		$	21,890		$	8,417
Add: After-tax merger, integration and public company registration costs	—			—			2,716			—			3,424
Adjusted net income (1)	$	8,071		$	6,811		$	5,320		$	21,890		$	11,841
Average assets	$	1,620,804		$	1,579,740		$	1,342,564		$	1,574,960		$	1,056,971
Average shareholders’ equity	257,158			251,662			199,270			252,362			139,163
Less: Average intangible assets	79,535			79,731			53,078			79,730			17,887
Average tangible common equity (1)	$	177,623		$	171,931		$	146,192		$	172,632		$	121,276
Return on average assets	1.98		%	1.73		%	0.77		%	1.86		%	1.06		%
Adjusted return on average assets (1)	1.98		%	1.73		%	1.57		%	1.86		%	1.50		%
Return on average equity	12.45		%	10.86		%	5.18		%	11.60		%	8.09		%
Adjusted return on average equity(1)	12.45		%	10.86		%	10.59		%	11.60		%	11.38		%
Return on average tangible common equity (1)	18.03		%	15.89		%	7.07		%	16.95		%	9.28		%
Adjusted return on average tangible common equity (1)	18.03		%	15.89		%	14.44		%	16.95		%	13.05		%

(1) Non-GAAP measure.

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	September 30, 2019			December 31, 2018
Tangible Common Equity Ratio/Tangible Book Value Per Share	(dollars in thousands, except share and per share data)
Shareholders’ equity	$	258,670		$	248,069
Less: Intangible assets	79,411			80,001
Tangible common equity (1)	$	179,259		$	168,068
Total assets	$	1,655,595		$	1,622,501
Less: Intangible assets	79,411			80,001
Tangible assets (1)	$	1,576,184		$	1,542,500
Equity to asset ratio	15.62		%	15.29		%
Tangible common equity to tangible asset ratio (1)	11.37		%	10.90		%
Book value per share	$	22.20		$	21.16
Tangible book value per share (1)	$	15.38		$	14.33
Shares outstanding	11,652,582			11,726,074

(1) Non-GAAP measure.

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. The comparability of financial information is affected by the acquisition of PCB completed on July 31, 2018. This acquisition has been accounted for using the acquisition method of accounting and, accordingly, PCB’s operating results have been included in the consolidated financial statements since August 1, 2018.

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:

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	Three Months Ended
	September 30, 2019						June 30, 2019						September 30, 2018
	Average Balance		Interest Income / Expense		Yield / Cost		Average Balance		Interest Income / Expense		Yield / Cost		Average Balance		Interest Income / Expense		Yield / Cost
Interest-earning assets:	(dollars in thousands)
Loans (1) (2)	$	1,328,088	$	23,206	6.93	%	$	1,334,188	$	21,344	6.42	%	$	1,085,572	$	17,296	6.32	%
Investment securities	35,651		208		2.31	%	36,337		215		2.37	%	37,064		226		2.42	%
Deposits in other financial institutions	134,557		701		2.07	%	83,183		442		2.13	%	130,537		611		1.86	%
Federal funds sold/resale agreements	—		—		—	%	2,018		12		2.39	%	1,989		10		1.99	%
FHLB and other bank stock dividends	13,988		228		6.47	%	13,932		206		5.93	%	6,180		46		2.95	%
Total interest-earning assets	1,512,284		24,343		6.39	%	1,469,658		22,219		6.06	%	1,261,342		18,189		5.72	%
Noninterest-earning assets	108,520						110,082						81,222
Total assets	$	1,620,804					$	1,579,740					$	1,342,564
Interest-bearing liabilities:
Interest checking	$	116,107	$	337	1.15	%	$	111,116	$	298	1.08	%	$	132,492	$	361	1.08	%
Money market accounts	267,493		890		1.32	%	271,067		900		1.33	%	260,468		781		1.19	%
Savings accounts	29,070		56		0.76	%	28,825		56		0.78	%	43,465		81		0.74	%
Time deposits	147,568		676		1.82	%	150,601		674		1.80	%	210,158		863		1.63	%
Brokered time deposits	138,682		929		2.66	%	128,555		789		2.46	%	53,710		209		1.54	%
Total interest-bearing deposits	698,920		2,888		1.64	%	690,164		2,717		1.58	%	700,293		2,295		1.30	%
Borrowings	48,263		253		2.08	%	77,442		484		2.51	%	5,514		30		2.16	%
Senior secured notes	12,267		176		5.69	%	12,398		182		5.89	%	5,018		68		5.38	%
Total interest-bearing liabilities	759,450		3,317		1.73	%	780,004		3,383		1.74	%	710,825		2,393		1.34	%
Noninterest-bearing liabilities:
Demand deposits	590,212						534,192						425,842
Other liabilities	13,984						13,882						6,627
Shareholders’ equity	257,158						251,662						199,270
Total liabilities and shareholders' equity	$	1,620,804					$	1,579,740					$	1,342,564
Net interest spread			$	21,026	4.66	%			$	18,836	4.32	%			$	15,796	4.38	%
Net interest margin					5.52	%					5.14	%					4.97	%
Total deposits	$	1,289,132	$	2,888	0.89	%	$	1,224,356	$	2,717	0.89	%	$	1,126,135	$	2,295	0.81	%
Total funding sources	$	1,349,662	$	3,317	0.98	%	$	1,314,196	$	3,383	1.03	%	$	1,136,667	$	2,393	0.84	%

(1) Average loans include net discounts and deferred costs.

(2) Interest income on loans includes $254 thousand, $236 thousand and $143 thousand related to the accretion of net deferred loan fees for the quarters ended September 30, 2019, June 30, 2019 and September 30, 2018. Interest income also includes $2.2 million, $642 thousand, and $872 thousand 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, 2019, June 30, 2019 and September 30, 2018.

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	Nine Months Ended September 30,
	2019						2018
	Average Balance		Interest Income / Expense		Yield / Cost		Average Balance		Interest Income / Expense		Yield / Cost
Interest-earning assets:	(dollars in thousands)
Loans (1) (2)	$	1,314,513	$	65,466	6.66	%	$	888,208	$	40,237	6.06	%
Investment securities	36,355		659		2.42	%	38,232		698		2.44	%
Deposits in other financial institutions	99,711		1,570		2.11	%	90,874		1,166		1.72	%
Federal funds sold/resale agreements	1,662		30		2.41	%	670		10		2.00	%
FHLB and other bank stock dividends	13,937		676		6.48	%	4,736		182		5.14	%
Total interest-earning assets	1,466,178		68,401		6.24	%	1,022,720		42,293		5.53	%
Noninterest-earning assets	108,782						34,251
Total assets	$	1,574,960					$	1,056,971
Interest-bearing liabilities:
Interest checking	$	115,358	$	944	1.09	%	$	154,908	$	1,273	1.10	%
Money market accounts	270,163		2,658		1.32	%	168,240		1,401		1.11	%
Savings accounts	30,731		174		0.76	%	54,589		338		0.83	%
Time deposits	156,095		2,080		1.78	%	168,416		2,049		1.63	%
Brokered time deposits	109,598		1,993		2.43	%	52,709		558		1.42	%
Total interest-bearing deposits	681,945		7,849		1.54	%	598,862		5,619		1.25	%
Borrowings	53,987		967		2.39	%	29,529		386		1.75	%
Senior secured notes	12,190		531		5.82	%	3,134		122		5.20	%
Total interest-bearing liabilities	748,122		9,347		1.67	%	631,525		6,127		1.30	%
Noninterest-bearing liabilities:
Demand deposits	562,195						281,337
Other liabilities	12,281						4,946
Shareholders’ equity	252,362						139,163
Total liabilities and shareholders' equity	$	1,574,960					$	1,056,971
Net interest spread			$	59,054	4.57	%			$	36,166	4.23	%
Net interest margin					5.39	%					4.73	%
Total deposits	$	1,244,140	$	7,849	0.84	%	$	880,199	$	5,619	0.85	%
Total funding sources	$	1,310,317	$	9,347	0.95	%	$	912,862	$	6,127	0.90	%

(1) Average loans include net discounts and deferred costs.

(2) Interest income on loans includes $721 thousand and $315 thousand related to the accretion of net deferred loan fees for the nine months ended September 30, 2019 and 2018. Interest income also includes $3.8 million, and $872 thousand related to discount accretion on loans acquired in a business combination, including the interest recognized on the payoff of PCI loans, for the nine months ended September 30, 2019 and 2018.

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. 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.

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	Three Months Ended
	September 30, 2019 vs. June 30, 2019									September 30, 2019 vs. September 30, 2018
	Change Attributable to						Total Change			Change Attributable to						Total Change
	Volume			Rate						Volume			Rate
Interest income:	(dollars in thousands)
Interest and fees on loans	$	(85	)	$	1,947		$	1,862		$	4,127		$	1,783		$	5,910
Interest on investment securities	(3		)	(4		)	(7		)	(9		)	(9		)	(18		)
Interest on deposits in other financial institutions	266			(19		)	247			21			59			80
Dividends on FHLB and other stock	1			21			22			95			87			182
Change in interest income	179			1,945			2,124			4,234			1,920			6,154
Interest expense:
Savings, interest checking and money market accounts	11			18			29			(51		)	111			60
Time deposits	58			84			142			214			319			533
Borrowings and senior secured debt	(157		)	(80		)	(237		)	330			1			331
Change in interest expense	(88		)	22			(66		)	493			431			924
Change in net interest income	$	267		$	1,923		$	2,190		$	3,741		$	1,489		$	5,230

	Nine Months Ended
	September 30, 2019 vs. September 30, 2018
	Change Attributable to						Total Change
	Volume			Rate
Interest income:	(dollars in thousands)
Interest and fees on loans	$	20,915		$	4,314		$	25,229
Interest on investment securities	(32		)	(7		)	(39		)
Interest on deposits in other financial institutions	136			288			424
Dividends on FHLB and other stock	437			57			494
Change in interest income	21,456			4,652			26,108
Interest expense:
Savings, interest checking and money market accounts	503			261			764
Time deposits	711			755			1,466
Borrowings and senior secured debt	793			197			990
Change in interest expense	2,007			1,213			3,220
Change in net interest income	$	19,449		$	3,439		$	22,888

Third Quarter of 2019 Compared to Second Quarter of 2019

Net interest income for the third quarter of 2019 was $21.0 million, an increase of $2.2 million, from $18.8 million for the second quarter of 2019. The increase was due to higher interest income of $2.1 million, coupled with lower interest expense of $66 thousand. The increase in interest income was due mostly to $1.5 million in higher discount accretion related to loans acquired in a business combination, including the interest recognized on the payoff of PCI loans, and one additional day in the third quarter compared to the second quarter of 2019. The third quarter of 2019 included $1.6 million related to the payoff of one PCI loan. The decrease in interest expense for the third quarter of 2019 is due primarily to lower average borrowings and the cost of such funds, offset partially by higher interest-bearing deposit costs in the third quarter of 2019. Average borrowings decreased $29.2 million to $48.3 million and the cost of such funds decreased 43 basis points to 2.08%. The Company paid down overnight borrowings in the third quarter of 2019 as average noninterest-bearing deposits increased $56.0 million compared to the prior quarter. Average interest-bearing deposits increased $8.8 million and the cost of such funds increased 6 basis points to 1.64%.

Net interest margin for the third quarter of 2019 increased 38 basis points to 5.52% from 5.14% for the second quarter of 2019. The increase in the net interest margin is due primarily to a 51 basis point increase in higher loan yields, including fees and discounts, and a 5 basis points decrease of total funding costs, offset partially by lower yields on other

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earning assets of 14 basis points, and a change in the earning assets mix of 4 basis points. Interest income from discount accretion related to loans acquired in a business combination, including the payoff of PCI loans, totaled $2.2 million and contributed 65 basis points to the loan yield in the third quarter of 2019; this compares to $642 thousand and 18 basis points in the second quarter of 2019. The cost of funds decreased to 0.98% for the third quarter of 2019, compared to 1.03% for the second quarter of 2019 due primarily to the change in the funding mix with a lower percentage of borrowings and higher percentage of noninterest-bearing demand deposits. Average noninterest-bearing demand deposits totaled $590.2 million and represented 45.8% of total average deposits for the third quarter of 2019 compared to $534.2 million, or 43.6% of total average deposits for the second quarter of 2019. The total cost of deposits for the third quarter of 2019 remained flat at 0.89% as compared to the second quarter of 2019.

The discount accretion related to loans acquired in a business combination, including the interest income recognized on the payoff of PCI loans, of $2.2 million contributed 57 basis points to the net interest margin in the third quarter of 2019; this compares to $642 thousand and 17 basis points in the second quarter of 2019 as shown in the table below.

	Three Months Ended
	September 30, 2019				June 30, 2019				Variance
Net interest income and net interest margin	Net Interest Income		Net Interest Margin		Net Interest Income		Net Interest Margin		Net Interest Income		Net Interest Margin
	(dollars in thousands)
As reported	$	21,026	5.52	%	$	18,836	5.14	%	$	2,190	0.38	%
Discount accretion on loans acquired in a business combination	2,182		0.57	%	642		0.17	%	1,540		0.40	%
Net interest income and net interest margin excluding discount accretion on loans acquired in a business combination	$	18,844	4.95	%	$	18,194	4.97	%	$	650	(0.02	)%

Third Quarter of 2019 Compared to Third Quarter of 2018

Net interest income increased $5.2 million to $21.0 million for the third quarter of 2019 when compared to the same quarter of 2018 due to higher average interest-earning assets and higher average loan yield. Average interest-earning assets increased $250.9 million primarily due to the inclusion of PCB's operations since August 1, 2018 and organic loan growth since September 30, 2018. Average loan balances increased $242.5 million to $1.33 billion and represent 89% of average earning assets for the third quarter of 2019 compared to $1.09 billion and 86% of average earning assets for the same quarter of 2018. The PCB acquisition added $399.8 million in net loans at the time of acquisition.

Our net interest margin increased 55 basis points to 5.52% for the third quarter of 2019 compared to 4.97% for the same quarter of 2018. The net interest margin expansion was driven by the higher earning asset yields and an improved funding mix. The average yield on interest-earning assets increased 67 basis points to 6.39% for the third quarter of 2019 compared to 5.72% for the same quarter of 2018 due mostly to a higher loan yield. Our loan yield increased 61 basis points to 6.93% for the third quarter of 2019 compared to 6.32% for the same quarter of 2018 due to higher discount accretion related to loans acquired in a business combination, including the interest recognized on the payoff of PCI loans, and the impact of higher market interest rates. The average effective federal funds target rate was 2.20% for the third quarter of 2019 compared to 1.92% for the same quarter of 2018.

The discount accretion related to loans acquired in a business combination, including the interest income recognized on the payoff of PCI loans, of $2.2 million contributed 57 basis points to the net interest margin in the third quarter of 2019 compared to $872 thousand and 27 basis points in the same quarter of 2018 as shown in the table below.

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	Three Months Ended
	September 30, 2019				September 30, 2018				Variance
Net interest income and net interest margin	Net Interest Income		Net Interest Margin		Net Interest Income		Net Interest Margin		Net Interest Income		Net Interest Margin
	(dollars in thousands)
As reported	$	21,026	5.52	%	$	15,796	4.97	%	$	5,230	0.55	%
Discount accretion on loans acquired in a business combination	2,182		0.57	%	872		0.27	%	1,310		0.30	%
Net interest income and net interest margin excluding discount accretion on loans acquired in a business combination	$	18,844	4.95	%	$	14,924	4.70	%	$	3,920	0.25	%

Our average cost of funds increased 14 basis points to 0.98% for the third quarter of 2019 compared to 0.84% for the same quarter of 2018 due to an increase in the cost of interest-bearing liabilities from higher market rates, offset by the improved funding mix attributed to the PCB acquisition. Average noninterest-bearing deposits totaled $590.2 million and represented 45.8% of average total deposits for the third quarter of 2019 compared to $425.8 million and 37.8% of average total deposits for the same quarter of 2018. Average interest-bearing liabilities were $759.5 million during the third quarter of 2019 compared to $710.8 million for the same quarter of 2018. Our cost of interest-bearing liabilities increased 39 basis points to 1.73% compared to the same quarter of 2018. The average senior secured note balance increased $7.2 million to $12.3 million for the third quarter of 2019 as we used the funds for corporate initiatives including common stock repurchases, dividends, and merger, integration and public company registration costs.

Nine Months Ended September 30, 2019Compared toNine Months Ended September 30, 2018

Net interest income increased $22.9 million to $59.1 million for the nine months ended September 30, 2019 when compared to the nine months ended September 30, 2018 due to higher interest income of $26.1 million, offset partially by higher interest expense of $3.2 million. The increase in interest income was driven by higher average interest-earning assets of $443.5 million due to assets acquired in the PCB acquisition and organic loan growth since September 30, 2018 and higher average market interest rates. Average loan balances increased $426.3 million to $1.31 billion for the nine months ended September 30, 2019 compared to $888.2 million for the same 2018 period. The average effective federal funds target rate was 2.33% for the nine months ended September 30, 2019 compared to 1.70% for the same 2018 period.

Our net interest margin increased 66 basis points to 5.39% for the nine months ended September 30, 2019 compared to 4.73% for the same 2018 period. The increase in our net interest margin was driven by the increase in the target federal funds rates during 2018, higher discount accretion related to loans acquired in a business combination, including interest income recognized on the payoff of PCI loans, and an improved funding mix. The average yield on interest-earning assets increased 71 basis points to 6.24% for the nine months ended September 30, 2019 compared to 5.53% for the same 2018 period. Our loan yield increased 60 basis points to 6.66% for the nine months ended September 30, 2019 compared to 6.06% for the same 2018 period. The increase in the interest-earning assets yield and loan yield were driven by higher market interest rates and higher discount accretion related to loans acquired in a business combination, including the payoff of PCI loans. Such discount accretion increased our loan yield 41 basis points and 30 basis points for the nine months ended September 30, 2019 and 2018.

For the nine months ended September 30, 2019, interest income included discount accretion on loans acquired in a business combination of $3.8 million, which contributed 34 basis points to the net interest margin; this compared to $872 thousand, or 11 basis points, for the same 2018 period as shown in the table below.

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	Nine Months Ended September 30, 2019
	2019				2018				Variance
Net interest income and net interest margin	Net Interest Income		Net Interest Margin		Net Interest Income		Net Interest Margin		Net Interest Income		Net Interest Margin
	(dollars in thousands)
As reported	$	59,054	5.39	%	$	36,166	4.73	%	$	22,888	0.66	%
Discount accretion on loans acquired in a business combination	3,780		0.34	%	872		0.11	%	2,908		0.23	%
Net interest income and net interest margin excluding discount accretion on loans acquired in a business combination	$	55,274	5.05	%	$	35,294	4.62	%	$	19,980	0.43	%

Our average cost of funds increased 5 basis points to 0.95% for the nine months ended September 30, 2019 from the same 2018 period as a result of an increase in the cost of interest-bearing liabilities due to the impact of higher market interest rates, offset by an improved funding mix from the PCB acquisition. Average noninterest-bearing deposits increased to $562.2 million and represented 45.2% of average total deposits for the nine months ended September 30, 2019 compared to $281.3 million and 32.0% of total average deposits for the same 2018 period. Average interest-bearing liabilities were $748.1 million during the nine months ended September 30, 2019 compared to $631.5 million for the same 2018 period and our cost of interest-bearing liabilities increased 37 basis points to 1.67% from the year-ago period.

Provision for Loan Losses

We maintain an allowance for loan losses, which we also refer to as the allowance, at a level we believe is adequate to absorb probable incurred credit losses. The allowance for loan losses is estimated using past loan loss experience, the nature and volume of the loans held for investment, information about specific borrower situations, estimated collateral values, economic conditions, and other factors. At September 30, 2019, the allowance was $12.3 million, or 0.94% of loans held for investment, compared to $11.1 million, or 0.88% of loans held for investment at December 31, 2018. The increase in the allowance at September 30, 2019 results primarily from loan growth and higher specific reserves offset in part by the net recapture of general reserves from risk rating changes. The net carrying value of loans acquired through the acquisition of PCB includes a remaining net discount of $7.6 million at September 30, 2019, which represents 0.57% of total gross loans.

The provision for loan losses totaled $700 thousand for the third quarter of 2019 compared to $550 thousand for the second quarter of 2019 and $600 thousand for the third quarter of 2018. The provision for loan losses totaled $1.6 million for nine months ended September 30, 2019 compared to $1.1 million for the same 2018 period. The provision for loan losses in the third quarter of 2019 was primarily the result of higher net charge-offs and specific reserves, the majority of which related to one credit relationship. The provision for loan losses for the nine months ended September 30, 2019 was primarily due to organic loan growth and, to a lesser extent, renewals of acquired loans included in loans held for investment.

Noninterest Income

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

	Three Months Ended						Nine Months Ended September 30,
	September 30, 2019		June 30, 2019		September 30, 2018		2019		2018
	(dollars in thousands)
Gain on sale of loans	$	528	$	1,271	$	171	$	2,727	$	866
Service charges and fees on deposit accounts	475		564		380		1,579		803
Net servicing fees	242		287		39		763		318
Other income	428		200		122		1,048		81
Total noninterest income	$	1,673	$	2,322	$	712	$	6,117	$	2,068

Third Quarter of 2019 Compared to Second Quarter of 2019

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Noninterest income for the third quarter of 2019 was $1.7 million, a decrease of $649 thousand from $2.3 million for the second quarter of 2019 due to lower gains on sale of loans of $743 thousand, offset by higher other income of $228 thousand. Loan sales for the third quarter of 2019 relate to loans with a net carrying value of $9.7 million at an average premium percentage of 5.4%, resulting in a gain of $528 thousand compared to loans with a net carrying value of $16.4 million at an average premium percentage of 7.8%, resulting in a gain of $1.3 million for the second quarter of 2019.

Net servicing fees totaled $242 thousand and $287 thousand for the third quarter of 2019 and second quarter of 2019 including contractually-specified servicing fees of $524 thousand and $493 thousand, offset by the amortization of the servicing asset of $282 thousand and $206 thousand. The increase in amortization of the servicing asset was due to higher amortization from early loan pay-offs which totaled $145 thousand for the third quarter of 2019 compared to $69 thousand for the second quarter of 2019. Our SBA loan servicing portfolio averaged $210.7 million for the third quarter of 2019 compared to $210.6 million for the prior quarter.

Other income for the third quarter of 2019 included a Bank Enterprise Award of $233 thousand from the U.S. Treasury’s Community Development Financial Institutions Fund to recognize the Bank's efforts in providing affordable housing development and small business loans within distressed communities. There was no similar income in the prior quarter.

Third Quarter of 2019 Compared to Third Quarter of 2018

Noninterest income increased $1.0 million to $1.7 million for the third quarter of 2019 compared to $712 thousand for the same quarter of 2018 due to higher net earnings for all of the categories due to including PCB's operations since August 1, 2018 and higher gain on sale of loans. The $357 thousand increase in gain on sale of loans for the third quarter of 2019 compared to the same quarter of 2018 is due to a higher volume of loans sold. The $9.7 million of loans sold in the third quarter of 2019 compares to loans sold with a net carrying value of $2.4 million at an average premium percentage of 7.0%, resulting in a gain of $171 thousand for the third quarter of 2018. Services charges and fees on deposit accounts increased $95 thousand due to a higher number of transaction-based accounts and higher total account balances; average non-maturity deposit account balances totaled $1.0 billion for the third quarter of 2019 compared to $862.3 million for the same quarter of 2018.

Net servicing fees increased due to higher contractual servicing fees and lower amortization expense of the related servicing asset in the third quarter of 2019. Our SBA loan servicing portfolio averaged $210.7 million for the third quarter of 2019 compared to $180.7 million for the same quarter of 2018. The increase in our SBA loan servicing portfolio related mostly to the acquisition of PCB which contributed $73.8 million to the portfolio of serviced SBA loans on the date of acquisition. We also acquired a servicing asset of $1.1 million in conjunction with the PCB acquisition. During the third quarter of 2019 and 2018, contractually-specified servicing fees were $524 thousand and $435 thousand, offset by the amortization of the servicing asset of $282 thousand and $397 thousand. The decrease in amortization of the servicing asset was due to a lower level of early loan pay-offs in the current quarter. Amortization expense related to early loan pay-offs totaled $145 thousand for the third quarter of 2019 compared to $285 thousand for the same quarter of 2018.

Other income was $428 thousand for the third quarter of 2019 compared to $122 thousand for the same quarter of 2018. The $306 thousand increase is primarily due to the aforementioned Bank Enterprise Award of $233 thousand recognized in the current quarter, higher net realized gains on equity securities with a readily determinable fair value and higher appreciation in the cash surrender value of Bank Owned Life Insurance ("BOLI") acquired from PCB.

Nine Months Ended September 30, 2019Compared toNine Months Ended September 30, 2018

Noninterest income increased $4.0 million to $6.1 million for the nine months ended September 30, 2019 compared to $2.1 million for the same 2018 period due to higher net earnings for all of the categories as a result of including PCB's operation since the acquisition date and higher gain on the sale of loans of $1.9 million. The 2019 loan sales relate to 36 loans with a net carrying value of $44.7 million at an average premium of 6.1%, resulting in a gain of $2.7 million; this compares to 12 SBA loan sales with a net carrying value of $11.2 million at an average premium of 7.7%, resulting in a gain of $866 thousand during the same 2018 period. Services charges and fees on deposit accounts increased $776 thousand due to a higher number of transaction-based accounts and higher account balances as a result of the PCB acquisition. Average non-

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maturity deposit account balances totaled $978.4 million for the nine months ended September 30, 2019 compared to $659.1 million for the same 2018 period.

The increase in net servicing fees was due to higher servicing fee income and lower amortization expense of the related servicing assets. Our SBA loan servicing portfolio averaged $206.4 million for the nine months ended September 30, 2019 compared to $152.7 million for the same 2018 period; this increase is attributed mostly to the PCB acquired servicing portfolio. During the nine months ended September 30, 2019 and 2018, contractually-specified servicing fees were $1.5 million and $1.1 million, offset by the amortization of the servicing asset of $699 thousand and $753 thousand. The decrease in servicing asset amortization was due to a lower level of early loan pay-offs. Amortization expense related to early loan pay-offs totaled $307 thousand for the nine months ended September 30, 2019 and $483 thousand for the same 2018 period.

Other income increased $967 thousand to $1.0 million for the nine months ended September 30, 2019 from $81 thousand for the same 2018 period. The increase is attributed primarily to: (i) higher net realized gains on equity securities with a readily determinable fair value of $229 thousand; (ii) higher appreciation in the cash surrender value of the BOLI of $62 thousand; and (iii) two Bank Enterprise Awards totaling $466 thousand for which there was no similar income in thesame 2018 period. We recognized two Bank Enterprise Awards in 2019 as these awards were granted in 2018 for use and recognition in the current year; one award was granted to PCB prior to its acquisition date in 2018 and the other award was granted to First Choice Bank.

Noninterest Expense

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

	Three Months Ended									Nine Months Ended September 30,
	September 30, 2019			June 30, 2019			September 30, 2018			2019			2018
	(dollars in thousands)
Salaries and employee benefits	$	6,472		$	6,857		$	5,045		$	19,552		$	12,547
Occupancy and equipment	1,097			987			898			3,513			1,999
Data processing	718			639			666			1,961			1,536
Professional fees	392			426			400			1,237			1,082
Office, postage and telecommunications	253			255			256			780			641
Deposit insurance and regulatory assessments	30			120			143			345			339
Loan related	244			71			142			529			327
Customer service related	437			273			208			1,187			448
Merger, integration and public company registration costs	—			—			3,797			—			4,527
Amortization of core deposit intangible	197			197			133			590			133
Other expenses	811			780			684			2,262			1,801
Total noninterest expense	$	10,651		$	10,605		$	12,372		$	31,956		$	25,380
Efficiency ratio (1)	46.9		%	50.1		%	74.9		%	49.0		%	66.4		%
Adjusted efficiency ratio (1)	46.9		%	50.1		%	51.9		%	49.0		%	54.5		%

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

Third Quarter of 2019 Compared to Second Quarter of 2019

Noninterest expense increased $46 thousand to $10.7 million for the third quarter of 2019 from $10.6 million for the second quarter of 2019. This increase was primarily due to higher occupancy and equipment, data processing, loan related, and customer service related expenses, offset partially by lower salaries and employee benefits expenses and deposit insurance and regulatory assessments. The $110 thousand increase in occupancy and equipment expense was due mostly to a $42 thousand refund in common area charges received in the prior quarter; there was no such credit in the current quarter. The $79 thousand increase in data processing was due in part to higher software amortization of new and upgraded technology. The $173 thousand increase in loan related expenses was due to a $59 thousand protective advance for one defaulted loan in the third quarter and higher reimbursements for loan related expenses in the second quarter; the timing and recovery of loan related costs varies. The $164 thousand increase in customer service related expenses was due to higher

48

average demand deposits during the third quarter. The $385 thousand decrease in salaries and employee benefits was due to lower commissions and incentives, seasonally lower payroll taxes in the third quarter, and lower severance costs. During the third quarter of 2019, we had an average of 181 full time equivalent ("FTE") employees compared to an average of 182 FTE employees for the second quarter of 2019. The $90 thousand decrease in deposit insurance and regulatory assessments was due primarily to the Small Bank Assessment Credits received from the FDIC in the third quarter.

Third Quarter of 2019 Compared to Third Quarter of 2018

Noninterest expense for the third quarter of 2019 decreased $1.7 million from $12.4 million for the same quarter of 2018. The decrease was due to lower merger, integration and public company registration costs, offset by higher salaries and employee benefits, higher occupancy and equipment costs and higher customer service related expenses. The $1.4 million increase in salaries and employee benefits due to the growth in headcount resulting from the PCB acquisition; the current quarter average of 181 FTE employees compares to an average of 155 FTE employees for the same quarter of 2018. The $199 thousand increase in occupancy and equipment expense is due to the additional occupancy costs associated with the net locations added in the PCB acquisition. The $229 thousand increase in customer service related expenses is due to higher average demand deposits during the third quarter of 2019 as compared to the same quarter in 2018.

Nine Months Ended September 30, 2019Compared toNine Months Ended September 30, 2018

Noninterest expense for the nine months ended September 30, 2019 was $32.0 million, an increase of $6.6 million from $25.4 million for the same 2018 period. The increase in most of the overhead expense categories is due to including PCB's operations since the date of acquisition and the increase in customer service related expenses from higher average demand deposits, offset by the decrease of $4.5 million in merger, integration and public company registration costs. The $7.0 million increase in salaries and employee benefits is primarily due to the growth in headcount resulting from the PCB acquisition. The average FTE employees for 2019 was 180 compared to 127 FTE employees for the same 2018 period. The $1.5 million increase in occupancy and equipment costs is due to the branches added in the PCB acquisition and impairment charges related to the right-of-use assets for operating leases and fixed assets for the branch consolidations of $400 thousand in 2019. The $739 thousand increase in customer service related expenses is due to higher average demand deposits. In connection with the PCB acquisition, we established a core deposit intangible (CDI) asset of $6.9 million and CDI amortization expense increased $457 thousand in 2019 compared to 2018.

Income Taxes

Income tax expense was $3.3 million, $3.2 million and $932 thousand for the third quarter of 2019, second quarter of 2019 and third quarter of 2018. The effective tax rates were 28.9%, 31.9% and 26.4% for the third quarter of 2019, second quarter of 2019 and third quarter of 2018. Income tax expense was $9.7 million and $3.3 million for the nine months ended September 30, 2019 and 2018. The effective tax rates were 30.8% and 28.3% for the nine months ended September 30, 2019 and 2018. 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 decreased $74.8 million during the third quarter to $1.66 billion at September 30, 2019 from $1.73 billion at June 30, 2019. This decrease is due mostly to the $57.0 million decrease in cash and cash equivalents and the $19.4 million decrease in loans held for investment, partially offset by a $3.5 million increase in loans held for sale. Total liabilities decreased $79.4 million during the third quarter to $1.40 billion at September 30, 2019 from $1.48 billion at June 30, 2019. Other borrowings decreased $165.0 million during the third quarter to $30.0 million at September 30, 2019, offset by an increase in total deposits of $83.7 million to $1.34 billion at September 30, 2019.

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Since December 31, 2018, total assets have increased $33.1 million due mostly to a $65.6 million increase in loans held for investment to $1.32 billion at September 30, 2019, or an annualized growth rate of 7.0%. In addition, other assets increased $6.3 million due mostly to the adoption of the new lease accounting standard (Topic 842) effective January 1, 2019 which added operating lease right-of-use assets of $5.5 million at September 30, 2019. These increases were offset by a $16.8 million decrease in cash and cash equivalents, a $16.1 million decrease in loans held for sale and a $2.3 million decrease in deferred tax assets. Total liabilities at September 30, 2019 were $1.40 billion, an increase of $22.5 million from $1.37 billion at December 31, 2018. Total deposits increased $87.2 million, borrowings decreased $75.0 million, senior secured notes increased $4.7 million, and other liabilities, including operating lease liabilities, increased $5.6 million due to the adoption of the new lease accounting standard (Topic 842) effective January 1, 2019.

Cash and Cash Equivalents

Cash and cash equivalents are comprised of cash and due from banks, interest-bearing deposits at other banks with original maturities of less than 90 days, and federal funds sold. Cash and cash equivalents totaled $180.6 million at September 30, 2019, a decrease of $57.0 million from June 30, 2019 and $16.8 million from December 31, 2018. The decrease in cash and cash equivalents during the three and nine months ended September 30, 2019 was primarily attributable to the decrease in borrowings as the Bank's period end on balance sheet liquidity decreased to be in line with the daily operating liquidity levels.

Investment Securities

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

	September 30, 2019				June 30, 2019				December 31, 2018
	Fair Value		Percentage of Total		Fair Value		Percentage of Total		Fair Value		Percentage of Total
Securities available-for-sale:	(dollars in thousands)
Mortgage-backed securities	$	7,978	29.2	%	$	8,557	30.0	%	$	8,844	29.9	%
Collateralized mortgage obligations	10,306		37.7	%	10,828		37.9	%	11,461		38.8	%
SBA pools	9,060		33.1	%	9,173		32.1	%	9,238		31.3	%
	$	27,344	100.0	%	$	28,558	100.0	%	$	29,543	100.0	%
	September 30, 2019				June 30, 2019				December 31, 2018
	Amortized Cost		Percentage of Total		Amortized Cost		Percentage of Total		Amortized Cost		Percentage of Total
Securities held-to-maturity:	(dollars in thousands)
U.S. Government and agency securities	$	3,342	66.0	%	$	3,341	65.8	%	$	3,340	62.8	%
Mortgage-backed securities	1,724		34.0	%	1,735		34.2	%	1,982		37.2	%
	$	5,066	100.0	%	$	5,076	100.0	%	$	5,322	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 September 30, 2019:

	September 30, 2019
	One Year or Less			After One Year Through Five Years			After Five Years Through Ten Years			After Ten Years (1)			Total
Securities available-for-sale:	(dollars in thousands)
Mortgage-backed securities	$	—		$	—		$	—		$	7,978		$	7,978
Collateralized mortgage obligations	—			—			—			10,306			10,306
SBA pools	—			—			—			9,060			9,060
	$	—		$	—		$	—		$	27,344		$	27,344
Weighted average yield:
Mortgage-backed securities	—		%	—		%	—		%	2.55		%	2.55		%
Collateralized mortgage obligations	—		%	—		%	—		%	2.19		%	2.19		%
SBA pools	—		%	—		%	—		%	2.50		%	2.50		%
	—		%	—		%	—		%	2.40		%	2.40		%

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

	September 30, 2019
	One Year or Less			After One Year Through Five Years			After Five Years Through Ten Years			After Ten Years (1)			Total
Securities held-to-maturity:	(dollars in thousands)
U.S. Government and agency securities	$	—		$	3,342		$	—		$	—		$	3,342
Mortgage-backed securities	—			—			—			1,724			1,724
	$	—		$	3,342		$	—		$	1,724		$	5,066
Weighted average yield:
U.S. Government and agency securities	—		%	2.06		%	—		%	—		%	2.06		%
Mortgage-backed securities	—		%	—		%	—		%	2.83		%	2.83		%
	—		%	2.06		%	—		%	2.83		%	2.32		%

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

At September 30, 2019, no issuer represented 10% or more of our shareholders’ equity. At September 30, 2019, securities held-to-maturity with a carrying amount of $5.1 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 for the three and nine months ended September 30, 2019.

Loans

Loans are the single largest contributor to our net income. It is our goal to continue to grow the 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. The following table shows the composition of our loans held for investment as of the dates indicated:

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	September 30, 2019					June 30, 2019					December 31, 2018
	Amount			Percentage of Total		Amount			Percentage of Total		Amount			Percentage of Total
	(dollars in thousands)
Construction and land development	$	221,857		16.8	%	$	196,034		14.7	%	$	184,177		14.7	%
Real estate:
Residential	48,896			3.7	%	51,512			3.9	%	57,443			4.6	%
Commercial real estate - owner occupied	171,360			13.0	%	180,161			13.5	%	179,494			14.3	%
Commercial real estate - non-owner occupied	401,710			30.6	%	404,177			30.2	%	401,665			32.2	%
Commercial and industrial	311,205			23.6	%	332,709			24.9	%	281,718			22.5	%
SBA loans	161,608			12.3	%	171,300			12.8	%	146,462			11.7	%
Consumer	424			—	%	159			—	%	159			—	%
Loans held for investment, net of discounts	$	1,317,060		100.0	%	$	1,336,052		100.0	%	$	1,251,118		100.0	%
Net deferred origination fees	(440		)			(37		)			(137		)
Loans held for investment	1,316,620					1,336,015					1,250,981
Allowance for loan losses	(12,340		)			(12,053		)			(11,056		)
Loans held for investment, net	$	1,304,280				$	1,323,962				$	1,239,925

At September 30, 2019, loans held for investment totaled $1.32 billion, a decrease of $19.4 million, for the third quarter of 2019, and an increase of $65.6 million, since year end. The annualized growth rate during 2019 is 7.0%. During the third quarter of 2019 as compared to June 30, 2019, construction and land development loans increased $25.8 million, commercial real estate loans ("CRE") decreased $11.3 million, commercial and industrial loans decreased $21.5 million, SBA loans decreased $9.7 million, and residential loans decreased $2.6 million. The diversification and portfolio composition remained similar at September 30, 2019 compared to year end. The most significant categories in the loan portfolio are CRE (non-owner occupied) and commercial and industrial loans which represent 30.6% and 23.6% of total loans held for investments, net of discounts at September 30, 2019.

As of September 30, 2019, June 30, 2019 and December 31, 2018, loans secured by non-owner occupied commercial real estate represented 298%, 299% and 309% of our total risk-based capital (as defined by the federal bank regulators) and were below our internal policy limit of 350% of our total risk-based capital. In addition, at September 30, 2019, June 30, 2019 and December 31, 2018, total loans secured by commercial real estate under construction and land development represented 112%, 107% and 108% 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.

In addition, our single largest concentration of CRE loans is to hospitality owners, which comprised 12%, 12% and 14% of total commercial real estate loans at September 30, 2019, June 30, 2019 and December 31, 2018. Some of the members of our Board of Directors are active in the hospitality sector, and therefore, are able to provide referrals for financing on 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 this 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 hospitality industry commitments to 150% of total risk-based capital. At September 30, 2019, June 30, 2019 and December 31, 2018, hospitality loans represented 50%, 53% and 61% of our total risk-based capital. At September 30, 2019, June 30, 2019 and December 31, 2018, total commitments to fund hospitality loans represented 52%, 55% and 64% of our total risk-based capital.

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. The guaranty is conditional and covers a portion of the

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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 65 percent loan to value ratio on SBA 504 program loans at origination. The following table summarizes the SBA loan types in the portfolio as of the dates indicated:

	September 30, 2019		June 30, 2019		December 31, 2018
	(dollars in thousands)
SBA 7(a)	$	106,874	$	105,343	$	100,159
SBA 504	54,734		65,957		46,303
Total	$	161,608	$	171,300	$	146,462

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

	September 30, 2019		June 30, 2019		December 31, 2018
	(dollars in thousands)
Secured - Industrial warehouse	$	25,131	$	31,704	$	31,585
Secured - Hospitality	24,820		28,139		22,665
Secured - Other	57,843		60,469		47,035
Unsecured or secured by other business assets	16,606		16,046		14,961
Total unguaranteed portion	124,400		136,358		116,246
Guaranteed portion	37,208		34,942		30,216
Total	$	161,608	$	171,300	$	146,462

Loan Maturities

The following table presents the contractual maturities and the distribution between fixed and adjustable interest rates for loans held for investment at September 30, 2019:

	September 30, 2019
	Within One Year				After One Year Through Five Years				After Five Years
	Fixed		Adjustable Rate		Fixed		Adjustable Rate		Fixed		Adjustable Rate		Total
	(dollars in thousands)
Construction and land development	$	3,248	$	136,521	$	7,469	$	65,869	$	—	$	8,750	$	221,857
Real estate:
Residential	19		534		—		1,449		2,449		44,445		48,896
Commercial real estate - owner occupied	5,421		2,135		20,298		37,785		11,105		94,506		171,250
Commercial real estate - non-owner occupied	28,832		30,826		65,842		107,850		18,157		150,203		401,710
Commercial and industrial	4,700		57,856		23,918		107,699		12,604		103,922		310,699
SBA loans	—		9,078		2,904		11,919		8,538		128,605		161,044
Consumer & other	16		408		—		—		—		—		424
	$	42,236	$	237,358	$	120,431	$	332,571	$	52,853	$	530,431	$	1,315,880
PCI loans	—		—		538		131		9		502		1,180
Total	$	42,236	$	237,358	$	120,969	$	332,702	$	52,862	$	530,933	$	1,317,060

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

53

discontinued are designated as nonaccrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income.

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

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

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

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

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

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

The following tables present the recorded investment balances of potential problem loans, excluding PCI loans, by risk rating at September 30, 2019 and December 31, 2018:

	September 30, 2019
			Real Estate
	Construction and land development		Residential		Commercial real estate - owner occupied		Commercial real estate - non-owner occupied		Commercial and industrial		SBA loans		Consumer		Total
	(dollars in thousands)
Substandard	$	—	$	—	$	5,165	$	848	$	5,473	$	10,325	$	—	$	21,811
Total	$	—	$	—	$	5,165	$	848	$	5,473	$	10,325	$	—	$	21,811

(1) At September 30, 2019, substandard loans included $7.4 million of impaired loans. We had no loans classified as special mention, doubtful or loss at September 30, 2019.

	December 31, 2018
			Real Estate
	Construction and land development		Residential		Commercial real estate - owner occupied		Commercial real estate - non-owner occupied		Commercial and industrial		SBA loans		Consumer		Total
	(dollars in thousands)
Special Mention	$	—	$	—	$	4,857	$	1,133	$	8,341	$	6,065	$	—	$	20,396
Substandard	—		—		—		—		3,140		1,817		—		4,957
Total	$	—	$	—	$	4,857	$	1,133	$	11,481	$	7,882	$	—	$	25,353

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(1) At December 31, 2018, substandard loans included $1.7 million of impaired loans. We had no loans classified as doubtful or loss at December 31, 2018.

Since December 31, 2018, special mention loans decreased $20.4 million to zero due to $14.7 million in upgrades, $3.7 million in downgrades to substandard, and $2.0 million in payoffs. The remaining increase in the substandard loans is due to $14.5 million in downgrades, offset by charge-offs and payoffs totaling $1.4 million.

Nonperforming Assets

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

	September 30, 2019			June 30, 2019			December 31, 2018
	(dollars in thousands)
Accruing loans past due 90 days or more	$	—		$	—		$	—
Non-accrual	7,242			2,504			1,128
Troubled debt restructurings on non-accrual	166			175			594
Total nonperforming loans	7,408			2,679			1,722
Foreclosed assets	—			—			—
Total nonperforming assets	$	7,408		$	2,679		$	1,722
Troubled debt restructurings - on accrual	$	324		$	720		$	327
Nonperforming loans as a percentage of total loans held for investment	0.56		%	0.20		%	0.14		%
Nonperforming assets as a percentage of total assets	0.45		%	0.15		%	0.11		%

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

	September 30, 2019		June 30, 2019		December 31, 2018
Nonperforming loans:	(dollars in thousands)
Commercial and industrial	$	730	$	238	$	89
SBA loans	6,678		2,441		1,633
Total nonperforming loans (1)	$	7,408	$	2,679	$	1,722

(1) There were no purchased credit impaired loans on nonaccrual at September 30, 2019, June 30, 2019 and December 31, 2018.

Since year end, the increase in nonperforming loans was due mostly to downgrading 15 SBA loans totaling $6.0 million and three commercial and industrial loans totaling $1.1 million, offset by a $1.4 million reduction due to loans being paid off or charged off. During the third quarter of 2019, the increase in non-performing loans was due mostly to downgrading 7 SBA loans totaling $4.3 million and a commercial and industrial loan of $497 thousand all of which were placed on non-accrual status.

Troubled Debt Restructurings

At September 30, 2019 and December 31, 2018, we had approximately $490 thousand and $922 thousand in recorded investment in loans identified as TDRs and no specific reserves were allocated to these loans. We have not committed to lend any additional amounts to customers with outstanding loans that are classified as TDRs as of September 30, 2019. During the three and nine months ended September 30, 2019, there were no new loan modifications resulting in TDRs. At September 30,

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2019 and December 31, 2018, one TDR with a recorded investment balance of $92 thousand and $95 thousand was not performing in accordance with its restructured terms.

Allowance for Loan losses

The allowance for loan losses, which we also refer to as the allowance, is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the un-collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Amounts are charged-off when available information confirms that specific loans or portions thereof, are uncollectible. This methodology for determining charge-offs is consistently applied to each loan portfolio segment. 

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

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

In addition, the evaluation of the appropriate allowance for loan losses on purchased non-impaired loans in the various loan segments considers credit discounts recorded as a part of the initial determination of the fair value of the loans. For these loans, no allowance for loan losses is recorded at the acquisition date. Credit discounts representing the principal losses expected over the life of the loans are a component of the initial fair value. Subsequent to the acquisition date, the methods utilized to estimate the required allowance for loan losses for these loans is similar to our originated loans; however, we record a provision for loan losses only when the required allowance exceeds any remaining purchase discounts.

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

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The table below presents a summary of activity in our allowance for loan losses for the periods indicated:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(dollars in thousands)
Balance, beginning of period	$	12,053		$	10,376		$	11,056		$	10,497
Charge-offs:
Commercial and industrial	(437		)	(8		)	(561		)	(522		)
SBA loans	—			(350		)	—			(611		)
Total charge-offs	(437		)	(358		)	(561		)	(1,133		)
Recoveries:
Commercial and industrial	24			38			56			172
SBA loans	—			—			189			—
Total recoveries	24			38			245			172
Net charge-offs	(413		)	(320		)	(316		)	(961		)
Provision for loan losses	700			600			1,600			1,120
Balance, end of period	$	12,340		$	10,656		$	12,340		$	10,656
Loans held for investment, net of discounts	$	1,317,060		$	1,225,376		$	1,317,060		$	1,225,376
Average loans	$	1,328,088		$	1,085,572		$	1,314,513		$	888,208
Allowance for loan losses as a percentage of total loans held for investment, net of discounts	0.94		%	0.87		%	0.94		%	0.87		%
Annualized net charge-offs to average loans	(0.12		)%	(0.12		)%	(0.03		)%	(0.14		)%

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

	September 30, 2019				June 30, 2019				December 31, 2018
	Allowance for Loan Losses		% of Loans in Each Category to Total Loans		Allowance for Loan Losses		% of Loans in Each Category to Total Loans		Allowance for Loan Losses		% of Loans in Each Category to Total Loans
	(dollars in thousands)
Construction and land development	$	2,139	16.8	%	$	1,892	14.7	%	$	1,721	14.7	%
Real estate:
Residential	332		3.7	%	379		3.9	%	422		4.6	%
Commercial real estate - owner occupied	798		13.0	%	905		13.5	%	734		14.3	%
Commercial real estate - non-owner occupied	2,408		30.6	%	2,587		30.2	%	2,686		32.2	%
Commercial and industrial	4,473		23.6	%	4,502		24.9	%	3,686		22.5	%
SBA loans	2,187		12.3	%	1,788		12.8	%	1,807		11.7	%
Consumer	3		—	%	—		—	%	—		—	%
	$	12,340	100.0	%	$	12,053	100.0	%	$	11,056	100.0	%

PCI Loans

The following table summarizes the changes in the carrying amount and accretable yield of PCI loans for the three and nine months ended September 30, 2019:

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	Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
	Carrying Amount			Accretable Yield			Carrying Amount			Accretable Yield
	(dollars in thousands)
Balance, beginning of period	$	2,281		$	1,928		$	2,644		$	2,073
Accretion	1,635			(1,635		)	1,950			(1,950		)
Payments received	(2,780		)	—			(3,447		)	—
Increase in expected cash flows, net	44			814			33			984
Balance, end of period	$	1,180		$	1,107		$	1,180		$	1,107

Loan Held for Sale

Loans held for sale typically consist of the guaranteed portion of SBA 7a loans that are originated and intended for sale in the secondary market and may also include commercial real estate loans and SBA 504 loans. Loans held for sale are carried at the lower of carrying value or estimated market value. At September 30, 2019, loans held for sale were $11.9 million, an increase of $3.5 million from $8.4 million at June 30, 2019 and a decrease of $16.1 million from $28.0 million at December 31, 2018. The change in loans held for sale was due to the origination of $8.8 million and $28.6 million in loans held for sale, offset by the sale of loans with a carrying value of $9.7 million and $44.7 million during the three and nine months ended September 30, 2019. 

Servicing Asset and Loan Servicing Portfolio

Loans serviced for others totaled $295.7 million and $288.2 million at September 30, 2019 and December 31, 2018. The loan servicing portfolio includes SBA loans serviced for others of $213.5 million and $198.4 million for which there is a related servicing asset of $3.4 million and $3.2 million at September 30, 2019 and December 31, 2018.

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 $82.2 million and $89.8 million for which there is no related servicing asset at September 30, 2019 and December 31, 2018.

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 $6.0 million at September 30, 2019.

Deposits

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

	September 30, 2019				June 30, 2019				December 31, 2018
	Amount		Percentage of Total		Amount		Percentage of Total		Amount		Percentage of Total
	(dollars in thousands)
Noninterest-bearing demand	$	666,271	49.7	%	$	547,434	43.6	%	$	546,713	43.7	%
Interest-bearing deposits:
Interest checking	116,268		8.7	%	110,290		8.8	%	129,884		10.4	%
Money market	256,887		19.3	%	262,416		20.9	%	296,085		23.6	%
Savings	31,363		2.3	%	28,237		2.2	%	39,154		3.1	%
Retail time deposits	115,495		8.6	%	130,236		10.4	%	152,121		12.1	%
Wholesale time deposits	153,254		11.4	%	177,265		14.1	%	88,382		7.1	%
	$	1,339,538	100.0	%	$	1,255,878	100.0	%	$	1,252,339	100.0	%

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During the three months ended September 30, 2019, total deposits increased $83.7 million to $1.34 billion from $1.26 billion at June 30, 2019 due to higher noninterest-bearing demand deposits of $118.8 million and higher interest-bearing non-maturity deposits of $3.6 million, offset partially by lower time deposits of $38.8 million. Noninterest-bearing deposits totaled $666.3 million and represented 49.7% of total deposits at September 30, 2019 compared to $547.4 million and 43.6% of total deposits at June 30, 2019.

During the nine months ended September 30, 2019, total deposits increased $87.2 million from $1.25 billion at December 31, 2018 due to higher noninterest-bearing demand deposits of $119.6 million and higher time deposits of $28.2 million, offset by lower interest-bearing non-maturity deposits of $60.6 million. The decrease in interest-bearing non-maturity deposits, is attributed primarily to our customers' use of year end cash and lower wholesale money market of $6.5 million. The increase in time deposits includes a $64.9 million increase in wholesale time deposits offset by a $36.6 million decrease in retail time deposits due to maturities that were not renewed at our current offer rates. Noninterest-bearing deposits totaled $546.7 million and 43.7% of total deposits at December 31, 2018.

Wholesale time deposits includes brokered time deposits and collateralized time deposits from the State of California. At September 30, 2019 brokered time deposits totaled $128.3 million, of which $103.4 million are callable, and the weighted average remaining maturity, including call options, is 2.33 years. The brokered time deposits totaled $152.3 million and $53.4 million at June 30, 2019 and December 31, 2018. At September 30, 2019 and June 30, 2019, collateralized time deposits from the State of California totaled $25.0 million compared to $35.0 million at December 31, 2018. These deposits are collateralized by letters of credit issued by the FHLB under the Bank's secured line of credit with the FHLB. Refer to Note 7 - Deposits and Note 8 - Borrowing Arrangements to the Condensed Consolidated Financial Statements.

Our ten largest depositor relationships accounted for approximately 28% and 25% of total deposits at September 30, 2019 and December 31, 2018.

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

	September 30, 2019
	(dollars in thousands)
Three months or less	$	26,899
Over three months through six months	19,328
Over six months through twelve months	23,401
Over twelve months	7,271
	$	76,899

Borrowings

The following tables presents the components of borrowings as of the periods indicated:

	September 30, 2019			June 30, 2019			December 31, 2018
	(dollars in thousands)
Borrowings
FHLB advances	$	30,000		$	165,000		$	90,000
Federal funds purchased	—			30,000			14,998
Borrowings	$	30,000		$	195,000		$	104,998
Weighted-average interest rate, end of period	1.93		%	2.45		%	2.57		%
Senior secured notes	$	13,100		$	12,800		$	8,450
Interest rate, end of period	5.25		%	5.75		%	5.75		%

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In addition to deposits, we use borrowings, such as FHLB advances and Federal fund purchases, as a source of funds to meet the daily liquidity needs of our customers. At September 30, 2019, borrowings totaled $30.0 million which was a secured fixed-rate term advance that matures in June 2021, and there were no overnight borrowings. At June 30, 2019, the long term fixed rate advances were $30.0 million. There were no long term fixed rate advances outstanding at December 31, 2018.

Federal Home Loan Bank Secured Line of Credit

At September 30, 2019, the Bank had a secured line of credit of $432.6 million from the FHLB, of which $330.1 million was available. At September 30, 2019, the Bank had pledged as collateral certain qualifying loans with an unpaid principal balance of $879.1 million under this borrowing agreement. At September 30, 2019, FHLB advances totaled $30.0 million which was a fixed-rate term advance that matures in June 2021 with a weighted average interest rate of 1.93%. There were no overnight advances at September 30, 2019; this compares to overnight advances of $90.0 million with a weighted average rate of 2.56% at December 31, 2018. The average balance of FHLB borrowings totaled $48.3 million and $4.6 million with an average interest rate of 2.08% and 2.17% for the three months ended September 30, 2019 and 2018. The average balance of FHLB borrowings totaled $53.1 million and $29.0 million with an average interest rate of 2.39% and 1.73% for the nine months ended September 30, 2019 and 2018.

In addition, at September 30, 2019, the Bank used another $72.5 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.

Federal Reserve Bank Secured Line of Credit

At September 30, 2019, the Bank had a secured line of credit of $168.1 million from the Federal Reserve Bank. During the third quarter of 2019, the Bank expanded the existing secured borrowing capacity through the Borrower-in-Custody program. At September 30, 2019, the Bank had pledged qualifying loans with an unpaid principal balance of $226.9 million and securities held-to-maturity with a carrying value of $5.1 million as collateral for this line. Borrowings under this BIC program are overnight advances with interest chargeable at the Discount Window ("Primary Credit") borrowing rate. There were no borrowings under this arrangement at or during the nine months ended September 30, 2019 and twelve months ended December 31, 2018.

Federal Funds Unsecured Lines of Credit

The Bank has established unsecured overnight borrowing arrangements for an aggregate amount of $77.0 million, subject to availability, with five of its primary correspondent banks. In general, interest rates on these lines approximate the federal funds target rate. There were no overnight borrowings under these credit facilities at September 30, 2019. The overnight borrowings were $30.0 million and $15.0 million at June 30, 2019 and December 31, 2018. For the three months ended September 30, 2019, the average borrowings were zero, compared to $924 thousand with an average interest rate of 2.15% for the same period last year. For the nine months ended September 30, 2019 and 2018, the average borrowings were $843 thousand and $531 thousand with an average interest rate of 2.70% and 2.52%.

Senior Secured Notes

At September 30, 2019, the outstanding balance under the holding company's senior secured line of credit totaled $13.1 million with an interest rate of 5.25%. At December 31, 2018, the outstanding balance totaled $8.5 million with an interest rate of 5.75%. The average outstanding borrowings under this facility totaled $12.3 million with an average interest rate of 5.69% for the three months ended September 30, 2019 compared to $5.0 million with an average interest rate of 5.38% for the three months ended September 30, 2018. The average outstanding borrowings under this facility totaled $12.2 million with an average interest rate of 5.82% for the nine months ended September 30, 2019 compared to $3.1 million with an average interest rate of 5.20% for the nine months ended September 30, 2018. At September 30, 2019, we were in compliance with all loan covenants on the facility and the remaining available credit was $11.9 million. In addition, one of our executives is a member of the lending bank's board of directors.

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Shareholders’ Equity

Total shareholders’ equity increased $10.6 million to $258.7 million at September 30, 2019 from $248.1 million at December 31, 2018. The increase in shareholders' equity is primarily due to net income of $21.9 million and the vesting and exercising of equity awards of $4.0 million, partially offset by the common stock repurchases of $9.0 million and cash dividends of $7.0 million.

Liquidity and Capital Resources

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

Holding Company Liquidity

As a bank holding company, we currently have no significant assets other than our equity interest in First Choice Bank. Our primary sources of liquidity at the holding company include dividends from the Bank, cash on hand at the holding company, which was approximately $230 thousand at September 30, 2019, a $25.0 million secured line of credit of which $11.9 million was available at September 30, 2019, 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 depends upon cash on hand, availability on our secured line of credit and dividends from the Bank. Dividends from the Bank to the holding company 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 has paid $12 million in dividends to the holding company during the nine months ended September 30, 2019. Refer to the Regulatory Capital section 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 financial institutions, other investments with a remaining maturity of one year or less, available-for-sale and equity securities, held-to-maturity securities and loans held for sale less pledged securities and loans held for sale that are in the process of being fully funded) divided by total assets. Using this definition, at September 30, 2019, our liquidity ratio was 13.4%.

Our objective is to ensure adequate liquidity at all times by maintaining liquid assets and by being able to raise deposits. Having too little liquidity can present difficulties in meeting commitments to fund loans or honor deposit withdrawals. Having too much liquidity can result in lower income because liquid assets generally yield less than long-term assets. A proper balance is the goal of management and the Board of Directors, as administered by various policies and guidelines. Our policy was updated during the third quarter of 2019 to require a minimum daily liquidity ratio of 11%. Previously, our policy required that we maintain a sufficient level of daily on balance sheet liquidity and achieve a liquidity ratio of 15% as of each month end.

Additional sources of liquidity available to us at September 30, 2019 included $330.1 million in remaining secured borrowing capacity with the FHLB, $168.1 million in secured borrowing capacity with the Federal Reserve Bank through the Borrower-in-Custody Program ("BIC"), and unsecured lines of credit with correspondent banks with a remaining borrowing capacity of $77.0 million.

We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate liquidity levels. We expect to maintain adequate liquidity levels through profitability, loan payoffs, securities

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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.

Contractual Obligations

The following table summarizes aggregated information about our outstanding contractual obligations and other long-term liabilities, excluding interest payments at September 30, 2019.

	Payments Due by Period
	Total		Less Than One Year		One to Three Years		More than Three to Five Years		After Five Years
	(dollars in thousands)
Deposits without a stated maturity	$	1,070,789	$	1,070,789	$	—	$	—	$	—
Time deposits (1)	268,749		159,924		64,801		44,024		—
Borrowings	30,000		—		30,000		—		—
Senior secured notes	13,100		13,100		—		—		—
Operating lease obligations	5,942		2,113		3,233		561		35
	$	1,388,580	$	1,245,926	$	98,034	$	44,585	$	35

(1) Includes $128.3 million of brokered time deposits reported based on their contractual maturity dates.

Off-Balance-Sheet Arrangements

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

At September 30, 2019, we had unused loan commitments of $387.0 million, standby letters of credit of $8.4 million and commitments to contribute capital to a low income housing tax credit project partnership and other CRA investments of $2.0 million. At December 31, 2018, we had unused loan commitments of $375.8 million, standby letters of credit of $4.0 million and commitments to contribute capital to other CRA investments of $385 thousand.

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, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. 

In July 2013, the federal bank regulatory agencies approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks, “Basel III rules.” The new rules became effective on January 1, 2015, with certain of the requirements phased-in over a multi-year schedule, and fully phased in by January 1, 2019. Specifically, the capital conservation buffer was subject to a three year phase-in period that began on January 1, 2016 and was fully phased-in on January 1, 2019 at 2.50%. The net unrealized gain or loss on investment securities available-for-sale is not included in computing regulatory capital.

Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of total Tier 1 and Common Tier 1 Capital ("CET1") (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). At September 30, 2019, the Bank meets all capital adequacy requirements to which it is subject, and is categorized as well-capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification that management

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believes have changed the Bank’s category) by the FDIC. To be categorized as well-capitalized, the Bank must maintain minimum ratios as set forth in the table below:

			Minimum Capital Required
First Choice Bank	Actual		For Capital Adequacy Purposes		Capital Conservation Buffer Phase-In		For Well Capitalized Requirement
September 30, 2019:
Total Capital (to risk-weighted assets)	14.37	%	8.00	%	10.500	%	10.00	%
Tier 1 Capital (to risk-weighted assets)	13.42	%	6.00	%	8.500	%	8.00	%
CET1 Capital (to risk-weighted assets)	13.42	%	4.50	%	7.000	%	6.50	%
Tier 1 Capital (to average assets)	12.56	%	4.00	%	4.000	%	5.00	%
December 31, 2018:
Total Capital (to risk-weighted assets)	14.18	%	8.00	%	9.875	%	10.00	%
Tier 1 Capital (to risk-weighted assets)	13.26	%	6.00	%	7.875	%	8.00	%
CET1 Capital (to risk-weighted assets)	13.26	%	4.50	%	6.375	%	6.50	%
Tier 1 Capital (to average assets)	12.03	%	4.00	%	4.000	%	5.00	%

At September 30, 2019, 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.

On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Relief Act”) was signed into law. Among the Relief Act's key provisions are targeted tailoring measures to reduce the regulatory burden on community banks, including increasing the threshold for institutions qualifying for relief under the Policy Statement from $1 billion to $3 billion. The Relief Act tasked federal banking regulators to develop a community bank leverage ratio (the “CBLR”) applicable to certain depository institutions and depository institution holding companies with total consolidated assets of less than $10 billion.  On September 17, 2019, the federal banking regulators adopted a final rule as required by the Relief Act that provides for a simple measure of capital adequacy for certain community banking organizations. This final rule will become effective on January 1, 2020.

Under this final rule, 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.

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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.

Currently, the Company qualifies as a “qualifying community banking organization” under these rules and intends to opt-in to the CBLR framework and to maintain a leverage ratio greater than 9%. Accordingly, for periods commencing January 1, 2020 and until the earlier of: (a) such time as the Company opts-out of the CBLR framework or (b) such time as the Company no longer qualifies as a “qualifying community banking organization,” the minimum regulatory capital ratio will be a 9% CBLR, as determined in accordance with the final rules.

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 Board (the "FRB"), 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 FRB'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. Under the California Financial Code, the Bank is permitted to pay a dividend in the following circumstances: (i) without the consent of either the California Department of Business Oversight ("DBO") or the Bank's shareholders, in an amount not exceeding the lesser of (a) the retained earnings of the Bank; or (b) the net income of the Bank for its last three fiscal years, less the amount of any distributions made during the prior period; (ii) with the prior approval of the DBO, in an amount not exceeding the greatest of: (x) the retained earnings of the Bank; (y) the net income of the Bank for its last fiscal year; or (z) the net income for the Bank for its current fiscal year; and (iii) with the prior approval of the DBO and the Bank's shareholders in connection with a reduction of its contributed capital. Further, as an FRB-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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

Interest rate risk results from the following risks:

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

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

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

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

On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit information to the administrator of LIBOR after 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot be guaranteed after 2021.While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, a group of market participants convened by the Federal Reserve, the Alternative Reference Rate Committee, has selected the Secured Overnight Finance Rate as its recommended alternative to LIBOR. The Secured Overnight Financing Rate is a broad measure of the cost of overnight borrowings collateralized by Treasury securities. At this time, it is impossible to predict whether the Secured Overnight Financing Rate will become an accepted alternative to LIBOR. The transition away from LIBOR to an alternative reference rate will require the transition to or development of appropriate systems and analytics to effectively transition the Company’s risk management and other processes from LIBOR-based products to those based on the applicable alternative reference rate, such as the Secured Overnight Financing Rate.  Although the manner and impact of the transition from LIBOR to an alternative reference rate, as well as the effect of these developments on our funding costs, loan and investment and trading securities portfolios, asset-liability management, and business, is uncertain, because the Bank does not have a material amount of LIBOR-based products and the Bank’s credit documentation provides for the flexibility to move to alternative reference rates, our Management does not believe that the discontinuation of LIBOR will have any material adverse impact on the Company.

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

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

A 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, a balance sheet is considered “liability sensitive” when an increase in short-term

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interest rates is expected to compress our net interest margin, as rates paid on our interest-bearing liabilities reprice higher at a pace faster than rates earned on our interest-earning assets. At September 30, 2019, our balance sheet was "asset sensitive".

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

The following table presents the projected changes in NII at Risk and EVE that would occur upon an immediate change in interest rates based on independent analysis, but without giving effect to any steps that management might take to counteract that change as of September 30, 2019:

	NII at Risk				EVE
	Adjusted Net Interest Income		Percentage Change from Base Case		Market Value		Percentage of Change from Base Case
Interest Rate Scenario	(dollars in thousands)
Up 300 basis points	$	95,458	25.9	%	$	358,787	7.6	%
Up 200 basis points	$	88,706	17.0	%	$	350,730	5.2	%
Up 100 basis points	$	81,780	7.9	%	$	341,507	2.4	%
Base	$	75,825	—		$	333,541	—
Down 100 basis points	$	72,372	(4.6	)%	$	327,019	(2.0	)%
Down 200 basis points	$	70,183	(7.4	)%	$	323,279	(3.1	)%

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management has conducted an evaluation, with the participation of our CEO and our CFO, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) and, based upon that evaluation, concluded that as of September 30, 2019, these disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the Company’s quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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.

ITEM 1A. RISK FACTORS

For information regarding factors that could materially and adversely affect our results of operations and financial condition and liquidity, see the risk factors disclosed in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2018. See also "Forward-Looking Information" disclosed in Part I, Item 2 of this Quarterly Report on Form 10-Q. There were no material changes from those risk factors as disclosed in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2018.

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

The following table presents information relating to our 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)
July 1 - 31, 2019	—	$	—	—	834,947
August 1- 31, 2019	67,500	$	22.30	67,500	767,447
September 1 - 30, 2019	20,000	$	20.29	20,000	747,447
Total	87,500	$	21.84	87,500

(1) The total number of shares repurchased during the periods indicated include shares purchased as part of a publicly announced stock purchase plan and 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.

(2) An authorized stock repurchase plan 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. The repurchase program does not obligate us to repurchase any particular number of shares.

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	Agreement and Plan of Reorganization and Merger dated February 23, 2018 by and between First Choice Bancorp and Pacific Commerce Bancorp.1
3.1	Articles of Incorporation of First Choice Bancorp.2
3.2	Bylaws of First Choice Bancorp.3
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certifications of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certifications of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 101.INS	XBRL Instance Document
Exhibit 101.SCH	XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF	XBRL Taxonomy Extension Definitions Linkbase Document
Exhibit 101.LAB	XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

¹  Filed as Exhibit 2.2 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference.

²  Filed as Exhibit 3.1 to the Form S-4 filed with the SEC on April 4, 2018 and incorporated herein by reference.

³  Filed as Exhibit 3.2 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: November 12, 2019	/s/ Robert M. Franko
	Robert M. Franko
	President and Chief Executive Officer
	(principal executive officer)
Dated: November 12, 2019	/s/ Lynn M. Hopkins
	Lynn M. Hopkins
	Executive Vice President and Chief Financial Officer
	(principal financial officer)

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