First Choice Bancorp (Form: 10-Q, Received: 05/10/2021 15:24:55)

First Choice 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2021

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

For the transition period from __________ to __________

Commission File Number 001-38476

(Exact Name of Registrant as Specified in its Charter)

California

82-2711227

(State or Other Jurisdiction of

(I.R.S. Employer

Incorporation or Organization)

Identification Number)

17785 Center Court Drive N, Suite 750

Cerritos, CA

90703

(Address of principal executive offices)

(Zip Code)

562-345-9092

(Registrants telephone number, including area code)

Not Applicable

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

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


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

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

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

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


Large Accelerated Filer ☐			Accelerated Filer: ☒
Non-accelerated Filer: ☐			Smaller Reporting Company: ☒
			Emerging growth company ☒

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: There were 11,829,308 shares of common stock outstanding as of May 3, 2021.

FIRST CHOICE BANCORP AND SUBSIDIARY

FORM 10-Q

March 31, 2021

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)	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	35

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	63

ITEM 4.	CONTROLS AND PROCEDURES	65

PART II. OTHER INFORMATION		65

ITEM 1.	LEGAL PROCEEDINGS	65

ITEM 1A.	RISK FACTORS	65

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	67

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	67

ITEM 4.	MINE SAFETY RULES	67

ITEM 5.	OTHER INFORMATION	67

ITEM 6.	EXHIBITS	68

First Choice Bancorp and Subsidiary

Condensed Consolidated Balance Sheets

(unaudited)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements


	March 31, 2021 (unaudited)		December 31, 2020 (audited)
ASSETS	(dollars in thousands, except share data)
Cash and due from banks	$	29,452	$	18,011
Interest-bearing deposits at other banks	279,994		218,370

Total cash and cash equivalents	309,446		236,381
Securities available-for-sale, at fair value	37,376		42,027
Securities held-to-maturity, at cost	1,348		1,358
Equity securities, at fair value	2,774		2,798
Restricted stock investments, at cost	12,999		12,999
Loans held for sale, at lower of cost or fair value	12,669		9,932
Loans held for investment	2,028,599		1,880,777

Allowance for loan losses	(19,271)		(19,167)
Loans held for investment, net	2,009,328		1,861,610
Accrued interest receivable	9,364		9,569
Premises and equipment	1,805		2,149

Servicing asset	2,778		2,860
Deferred taxes, net	6,407		7,385
Goodwill	73,425		73,425
Core deposit intangible	4,768		4,956

Other assets	16,257		15,666
TOTAL ASSETS	$	2,500,744	$	2,283,115
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand	$	998,515	$	820,711
Money market, interest checking and savings	729,996		639,630
Time deposits	167,039		173,817
Total deposits	1,895,550		1,634,158
Borrowings	95,000		145,000

Paycheck Protection Program Liquidity Facility	209,998		204,719
Senior secured notes	—		2,000

Accrued interest payable and other liabilities	12,784		16,497
Total liabilities	2,213,332		2,002,374
Commitments and contingencies - Note 9
Shareholders’ equity:
Preferred stock 100,000,000 shares authorized, none outstanding	—		—
Common stock no par value; 100,000,000 shares authorized; issued and outstanding: 11,824,487 at March 31, 2021 and 11,705,684 at December 31, 2020	219,304		217,734
Additional paid-in capital	2,020		3,292
Retained earnings	65,979		59,176
Accumulated other comprehensive income, net	109		539
Total shareholders’ equity	287,412		280,741
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,500,744	$	2,283,115

See accompanying notes to condensed consolidated financial statements.

First Choice Bancorp and Subsidiary

Condensed Consolidated Statements of Income

(unaudited)


	Three Months Ended
	March 31, 2021		December 31, 2020		March 31, 2020
	(dollars in thousands, except share and per share data)
INTEREST and DIVIDEND INCOME
Interest and fees on loans	$	24,267	$	24,411	$	20,780
Interest on investment securities	152		154		218
Interest on deposits in other financial institutions	160		129		501
Dividends on restricted stock investments	213		179		245
Total interest and dividend income	24,792		24,873		21,744
INTEREST EXPENSE
Interest on savings, interest checking and money market accounts	338		344		1,109
Interest on time deposits	250		555		995
Interest on borrowings	193		205		376
Interest on Paycheck Protection Program Liquidity Facility	171		216		—
Interest on senior secured notes	9		20		91
Total interest expense	961		1,340		2,571
Net interest income	23,831		23,533		19,173
Provision for loan losses	—		100		2,700
Net interest income after provision for loan losses	23,831		23,433		16,473
NONINTEREST INCOME
Gain on sale of loans	706		3,286		377
Service charges and fees on deposit accounts	441		468		555
Net servicing fees	400		201		224
Other income	707		239		259
Total noninterest income	2,254		4,194		1,415
NONINTEREST EXPENSE
Salaries and employee benefits	7,578		7,884		7,230
Occupancy and equipment	1,083		1,168		1,063
Data processing	1,022		1,017		807
Professional fees	437		462		471

Office, postage and telecommunications	290		300		258
Deposit insurance and regulatory assessments	295		318		61
Loan related	136		84		275
Customer service related	107		60		372


Amortization of core deposit intangible	188		192		193
Other expenses	961		836		789
Total noninterest expense	12,097		12,321		11,519
Income before taxes	13,988		15,306		6,369
Income taxes	4,230		4,512		1,823
Net income	$	9,758	$	10,794	$	4,546
Net income per share:
Basic	$	0.83	$	0.92	$	0.39
Diluted	$	0.82	$	0.92	$	0.39
Weighted-average common shares outstanding:
Basic	11,614,333		11,580,236		11,558,039
Diluted	11,673,475		11,620,582		11,632,050

See accompanying notes to condensed consolidated financial statements.

First Choice Bancorp and Subsidiary

Condensed Consolidated Statements of Comprehensive Income

(unaudited)


	Three Months Ended
	March 31, 2021		December 31, 2020		March 31, 2020
	(dollars in thousands)
Net income	$	9,758	$	10,794	$	4,546
Other comprehensive income (loss):
Unrealized (loss) gain on investment securities:
Change in net unrealized (loss) gain on available-for-sale securities	(610)		(150)		527
Income tax benefit (expense):
Income tax benefit (expense) related to net unrealized holding loss (gains)	180		44		(156)
Total other comprehensive (loss) income	(430)		(106)		371
Total comprehensive net income	$	9,328	$	10,688	$	4,917

See accompanying notes to condensed consolidated financial statements.

First Choice Bancorp and Subsidiary

Condensed Consolidated Statements of Comprehensive Income

(unaudited)


	Common Stock
			Number of Shares	Amount		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss), net		Total
		(dollars in thousands, except share and per share data)
Three Months Ended March 31, 2021
Balance at December 31, 2020			11,705,684	$	217,734	$	3,292	$	59,176	$	539	$	280,741

Net income			—	—		—		9,758		—		9,758

Cash dividends ($0.25 per share)			—	—		—		(2,956)		—		(2,956)
Stock-based compensation			—	—		591		1		—		592
Issuance of restricted shares, net of forfeiture			131,896	—		—		—		—		—
Vesting of restricted shares			—	1,773		(1,773)		—		—		—
Repurchase of shares from restricted shares vesting			(18,623)	(353)		—		—		—		(353)
Exercise of stock options			5,530	150		(90)		—		—		60

Other comprehensive income, net of taxes			—	—		—		—		(430)		(430)
Balance at March 31, 2021			11,824,487	$	219,304	$	2,020	$	65,979	$	109	$	287,412

Three Months Ended March 31, 2020
Balance at December 31, 2019			11,635,531	$	216,398	$	3,493	$	41,920	$	(6)	$	261,805

Net income			—	—		—		4,546		—		4,546

Cash dividends ($0.25 per share)			—	—		—		(2,924)		—		(2,924)
Stock-based compensation			—	—		481		3		—		484
Issuance of restricted shares, net of forfeiture			69,035	—		—		—		—		—
Vesting of restricted shares			—	1,764		(1,764)		—		—		—
Repurchase of shares from restricted shares vesting			(5,482)	(138)		—		—		—		(138)
Exercise of stock options			1,930	53		(32)		—		—		21
Common stock repurchased under stock repurchase program			(38,411)	(858)		—		—		—		(858)
Other comprehensive income, net of taxes			—	—		—		—		371		371
Balance at March 31, 2020			11,662,603	$	217,219	$	2,178	$	43,545	$	365	$	263,307

See accompanying notes to condensed consolidated financial statements

First Choice Bancorp and Subsidiary

Condensed Consolidated Statements of Cash Flows

(unaudited)


	For the Three Months Ended March 31,
	2021		2020
OPERATING ACTIVITIES	(dollars in thousands)
Net income	$	9,758	$	4,546
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	491		398
Amortization of premiums of investment securities	72		32
Amortization of servicing asset	255		282
Provision for loan losses	—		2,700
Provision for losses - unfunded commitments	200		—
Gain on sale of loans	(706)		(377)

Gain on branch sale	(476)		—

Loans originated for sale	(10,402)		(8,402)
Proceeds from loans originated for sale	8,080		3,783
Accretion of net discounts and deferred loan fees, net	(3,794)		(1,195)
Change in fair value of equity securities	37		(42)
Deferred income taxes	1,158		538
Stock-based compensation	592		484
Appreciation of Bank Owned Life Insurance	(27)		(27)
Net decrease in other items, net	(4,277)		(969)
Net cash provided by operating activities	961		1,751
INVESTING ACTIVITIES

Proceeds from maturities and paydown of securities available-for-sale	3,971		1,195
Proceeds from maturities and paydown of securities held-to-maturity	8		3,360
Purchase of securities available-for-sale	—		(12,978)



Net increase in loans held-for-investment	(143,806)		(63,196)
Purchase of restricted stock investments	—		(13)
Purchase of equity and qualified CRA investments	(46)		(22)


Purchases of premises and equipment	(20)		(769)
Net cash transfer for branch sale	(21,599)		—
Net cash used in investing activities	(161,492)		(72,423)
FINANCING ACTIVITIES
Net increase in deposits	283,566		37,347
Net increase in short-term borrowings	—		50,000
Repayment and maturities of long term FHLB borrowings	(50,000)		—

Repayment of Paycheck Protection Program Liquidity Facility	(45,412)		—
Proceeds from Paycheck Protection Program Liquidity Facility	50,691		—
Repayment of senior secured notes	(2,000)		(4,900)
Proceeds from senior secured notes	—		3,900
Cash dividends paid	(2,956)		(2,924)
Repurchase of shares	(353)		(996)
Proceeds from exercise of stock options	60		21
Net cash provided by financing activities	233,596		82,448
Net increase in cash and cash equivalents	73,065		11,776
Cash and cash equivalents, beginning of period	236,381		161,801
Cash and cash equivalents, end of period	$	309,446	$	173,577

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest paid	$	948	$	2,468
Taxes paid	$	—	$	—
Noncash investing and financing activities:
Transfers of loans (to) from held for investment (from) to held for sale	$	(277)	$	933

Servicing rights asset recognized	$	173	$	68
Reduction of operating lease right-of-use assets and lease liabilities from branch sale	$	509	$	—

See accompanying notes to condensed consolidated financial statements.

First Choice Bancorp and Subsidiary

Notes to Condensed Consolidated Financial Statements

(unaudited)

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

Nature of Operations

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

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. The Bank is a Preferred Small Business Administration (“SBA”) Lender and conducts business through eight full-service branches and two loan production offices located in Los Angeles, Orange and San Diego Counties.

Effective at the close of business on January 29, 2021, the Rowland Heights branch was sold to a third party financial institution who acquired certain branch assets and assumed certain branch liabilities including deposits. No loans were sold as part of the transaction. The assets and liabilities of the Rowland Heights branch that were sold in this transaction primarily consisted of $117 thousand of cash and cash equivalents and $22 million of deposits. The transaction resulted in a net cash payment to the third party financial institution of $21.6 million, and a gain on sale of $476 thousand as a component of other noninterest income in the condensed consolidated statements of income.

As a California-chartered member bank, the Bank is primarily regulated by the California Department of Financial

Protection and Innovation (the “DFPI”) and the Board of Governors of the Federal Reserve System (the “Federal Reserve”).

The Bank’s deposits are insured up to the maximum legal limit by the Federal Deposit Insurance Corporation (the “FDIC”).

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

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of First Choice Bancorp, and its wholly-owned subsidiary, First Choice Bank, and the Bank's wholly-owned subsidiary, PCB Real Estate Holdings, LLC, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary to a fair presentation of the results for the interim periods presented have been included. Unaudited interim results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2021. These unaudited interim period condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements as of and for the years ended December 31, 2020 and 2019, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC"). The December 31, 2020 condensed consolidated balance sheet presented herein has been derived from the

audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC.

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

Use of Estimates in the Preparation of Consolidated Financial Statements

The preparation of the consolidated financial statements in conformity with GAAP requires management to make

estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and

liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the

reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to

significant change are the determination of the allowance for loan losses, the valuation of acquired loans, the valuation of

goodwill and separately identifiable intangible assets associated with mergers and acquisitions, loan sales and servicing of

financial assets and deferred tax assets and liabilities.

Accounting Policies

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, 2020 under the section entitled Note 1 - Basis of Presentation and Summary of Significant Accounting Policies to the audited consolidated financial statements included therewith.

Accounting Standards Adopted in 2021

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12) which simplifies the accounting for income taxes by removing certain exceptions for investments, intraperiod allocations, and interim calculations, and adds guidance to reduce the complexity of applying Topic 740. This ASU was effective for the Company on January 1, 2021. The adoption of ASU 2019-12 did not have a material impact to the Company's consolidated financial statements.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848). The amendments in ASU

2021-01 clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting

apply to derivatives that are affected by the discounting transition. Specifically, certain provisions in Topic 848, if elected by

an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that

is modified as a result of reference rate reform. Amendments in this Update to the expedients and exceptions in Topic 848

capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments

affected by the discounting transition. The amendments in ASU 2021-01 are elective and apply to all entities that have

derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a

result of reference rate reform. The amendments also optionally apply to all entities that designate receive-variable-rate, pay variable-rate cross-currency interest rate swaps as hedging instruments in net investment hedges that are modified as a result of reference rate reform. The amendments of this guidance may be elected retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications made on or after any date that includes January 7, 2021. The Company adopted this guidance on January 1, 2021 on a prospective basis and will assess the impact in conjunction with ASU 2020-04 as it occurs next year. The adoption of ASU 2021-01 did not have a material impact to the Company's consolidated financial statements.

Recent Accounting Guidance Not Yet Effective

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) (“ASU 2016-13”), also known as "CECL." This guidance will replace the incurred loss impairment methodology used to estimate the allowance for credit losses in current GAAP with a methodology that reflects future expected credit losses and requires consideration of a broader range of reasonable and supportable forecasts in the credit loss estimates. On October 16, 2019, the FASB delayed the effective date of ASU 2016-13 for smaller reporting companies, private companies and other non-SEC filers. The Company qualifies as a "smaller reporting company" under the regulations of the SEC. Therefore, this ASU will be effective for the Company on January 1, 2023 with early adoption permitted. The Company is considering early adoption of ASU 2016-13. Management has a cross functional committee in place to oversee the project, has selected a software to implement the new guidance using peer historical loss data, has engaged an existing third-party service provider to assist in the implementation and has subscribed to a third-party application vendor for economic forecasts. The Company has completed

data gap analyses, developed initial modeling assumptions, run high-level sensitivity analysis and parallel calculations. The Company expects to complete testing of final modeling assumptions and run additional parallel calculations in the second and third quarter of 2021. The Company has not yet determined the potential impact of the adoption of ASU 2016-13 to the consolidated financial statements.

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

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments –

Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This update made several

clarifications and improvements to various topics. Topic A: Codification Improvements Resulting from the June and

November 2018 Credit Losses Transition Resource Group (“TRG”) Meetings; Topic B: Codification Improvements to ASU

2016-13; Topic C: Codification improvements to ASU 2017-12, Derivatives and Hedging; Topic D: Codification

improvements to ASU 2016-01 Financial Instruments Overall; and Topic E: Codification Improvements Resulting from the

November 2018 Credit Losses TRG Meeting. Topics A, B and E, in ASU 2019-04 impact CECL implementation by

clarifying guidance related to accrued interest receivable, recoveries, the effect of prepayments in determining the effective

interest rate, vintage disclosure requirements related to line-of-credit arrangements and others. Transition requirements for

these amendments are the same as ASU 2016-13, and will be adopted by the Company with ASU 2016-13. Topics C and D

are not applicable to the Company, and therefore had no impact to the Company’s consolidated financial results.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument (ASU 2019-05) which grants entities with transition relief upon the adoption of ASU 2016-13 by providing an option to elect the fair value option on certain financial instruments measured at amortized cost. This ASU will be effective upon adoption of ASU 2016-13 (Topic 326). The Company plans to adopt this guidance with ASU 2016-13 (Topic 326). The Company has not yet determined the potential impact of the adoption of ASU 2019-05 to the consolidated financial statements.

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

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

NOTE 2. INVESTMENT SECURITIES

Investment securities have been classified in the condensed consolidated balance sheets according to management’s intent. The carrying amount of securities held-to-maturity and securities available-for-sale and their approximate fair values at the periods indicated were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands)
March 31, 2021
Securities available-for-sale:
U.S. Government and agency securities	$	2,679	$	—	$	(51)	$	2,628
Mortgage-backed securities	4,774		123		—		4,897
Collateralized mortgage obligations	22,522		208		(331)		22,399
SBA pools	7,246		213		(7)		7,452
	$	37,221	$	544	$	(389)	$	37,376

Securities held-to-maturity:

Mortgage-backed securities	$	1,348	$	69	$	—	$	1,417
	$	1,348	$	69	$	—	$	1,417

December 31, 2020
Securities available-for-sale:
U.S. Government and agency securities	$	2,679	$	26	$	—	$	2,705
Mortgage-backed securities	5,537		116		—		5,653
Collateralized mortgage obligations	25,552		328		(102)		25,778
SBA pools	7,494		397		—		7,891

	$	41,262	$	867	$	(102)	$	42,027

Securities held-to-maturity:

Mortgage-backed securities	$	1,358	$	112	$	—	$	1,470
	$	1,358	$	112	$	—	$	1,470

The amortized cost and estimated fair value of all investment securities held-to-maturity and available-for-sale at March 31, 2021, 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	—		—		—		—
Due after five years through ten years	—		—		—		—
Due after ten years	1,348		1,417		37,221		37,376


	$	1,348	$	1,417	$	37,221	$	37,376

At March 31, 2021 and December 31, 2020, there were no holdings of securities of any one issuer in an amount greater than 10% of our shareholders’ equity. There were no sales, purchases, maturities or calls of investment securities available-for-sale and held-to-maturity during the three months ended March 31, 2021. There were $8.0 million and $13.0 million in purchases of investment securities available-for-sale during the three months ended December 31, 2020 and March 31, 2020. There were no sales, maturities or calls of any investment securities during the three months ended December 31,

2020. There were $3.4 million in calls of U.S. Government and agency securities held-to-maturity and no sales or maturities of any investment securities during the three months ended March 31, 2020.

At March 31, 2021 and December 31, 2020, securities held-to-maturity with a carrying amount of $1.3 million and $1.4 million were pledged to the Federal Reserve Bank as discussed in Note 7 – Borrowing Arrangements.

As of March 31, 2021 and December 31, 2020, unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows:


	Less Than Twelve Months				Twelve Months Or Longer				Total
	Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value
March 31, 2021	(dollars in thousands)
Securities available-for-sale:
U.S. Government and agency securities	$	(51)	$	2,628	$	—	$	—	$	(51)	$	2,628

Collateralized mortgage obligations	(329)		12,326		(2)		1,262		(331)		13,588
SBA pools	(7)		1,172		—		—		(7)		1,172
	$	(387)	$	16,126	$	(2)	$	1,262	$	(389)	$	17,388





December 31, 2020
Securities available-for-sale:

Collateralized mortgage obligations	$	(102)	$	10,429	$	—	$	—	$	(102)	$	10,429


	$	(102)	$	10,429	$	—	$	—	$	(102)	$	10,429

At March 31, 2021, the Company had seven investment securities available-for-sale in an unrealized loss position with total unrealized losses of $389 thousand. Such unrealized losses on these investment securities have not been recognized into income. The Company does not believe these unrealized losses are other-than-temporary because the issuers’ bonds are above investment grade, the decline in fair value is largely due to changes in interest rates, and management does not intend to sell these securities nor is it more likely than not that management would be required to sell the securities prior to their anticipated recovery.

Equity Securities with a Readily Determinable Fair Value

At March 31, 2021 and December 31, 2020, equity securities with a readily determinable fair value of $2.8 million for both periods were represented by a mutual fund investment consisting of high-quality debt securities and other debt instruments supporting domestic affordable housing and community development. The Company recognized net losses of $37 thousand, and $9 thousand and net gains of $42 thousand related to changes in fair value during the three months ended March 31, 2021, December 31, 2020 and March 31, 2020, respectively, all of which related to equity securities held during those periods.

Restricted Stock Investments

The Bank is a member of the FHLB system. Members are required to own FHLB stock of the greater of 1% of FHLB membership asset value or 2.7% of outstanding FHLB advances. At March 31, 2021 and December 31, 2020, the Bank owned $6.1 million of FHLB stock which is carried at cost. During the three months ended March 31, 2021 and 2020, there were no required purchases of FHLB stock. The Company evaluated the carrying value of our FHLB stock investment at March 31, 2021 and determined that it was not impaired. This evaluation considered the long-term nature of the investment, the current financial and liquidity position of the FHLB, repurchase activity of excess stock by the FHLB at its carrying value, the return on the investment from recurring and special dividends, and our intent and ability to hold this investment for a period of time sufficient to recover our recorded investment.

As a member of the Federal Reserve Bank of San Francisco, the Company owned $6.9 million of Federal Reserve stock, which is carried at cost, at March 31, 2021 and December 31, 2020. There were no required purchases of Federal Reserve stock during the three months ended March 31, 2021. The Company purchased $13 thousand of Federal Reserve

stock during the three months ended March 31, 2020. The Company evaluated the carrying value of Federal Reserve stock investment at March 31, 2021 and determined that it was not impaired. This evaluation considered the long-term nature of the investment, the current financial and liquidity position of the Federal Reserve, repurchase activity of excess stock by the Federal Reserve at its carrying value, the return on the investment from recurring dividends, and our intent and ability to hold this investment for a period of time sufficient to recover our recorded investment.

Other Equity Securities Without A Readily Determinable Fair Value

The Company also has equity securities in the form of capital stock invested in two different banker’s bank stock (collectively "Other Bank Stocks") which totaled $1.0 million at March 31, 2021 and December 31, 2020 and are reported in other assets in the condensed consolidated balance sheets. During the three months ended March 31, 2021, the Company evaluated the carrying value of these equity securities and determined that they were not impaired, and no loss related to changes in the fair value of these equity securities was recognized.

The Company has an investment in Class A common stock of Clearinghouse Community Development Financial Institution ("CDFI") totaling $2.0 million at March 31, 2021 and December 31, 2020. Clearinghouse CDFI is a for-profit institution that is committed to provide economic opportunities and to improve the quality of life for low-income individuals and to improve the communities through innovative and affordable financing. The purpose of this investment, first and foremost, aligns with our mission statement as a community bank to help the underserved people in our communities, while achieving a satisfactory return on capital. Additionally, this investment provides the Bank with Community Reinvestment Act ("CRA") investment credits. This equity security is recorded at cost and is included in other assets in the condensed consolidated balance sheets. During the three months ended March 31, 2021 and 2020, the Company did not purchase additional securities. During the three months ended December 31, 2020, the Company purchased additional securities of $1.5 million. At March 31, 2021, the Company evaluated the carrying value of this equity security and determined that it was not impaired, and no loss was recognized related to changes in the fair value.

Qualified Affordable Housing Project Investments

The Company also has commitments and investments in two partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit ("LIHTC") pursuant to Section 42 of the Internal Revenue Code. These investments are recorded net of accumulated amortization, using the proportional amortization method. Under the proportional amortization method, the initial cost of the investments is being amortized in proportion to the tax credits and other tax benefits received, and the amortization is recognized as part of income tax expense in the condensed consolidated statements of income. Total estimated tax credits allocated and proportional amortization expense recognized were $27 thousand and $27 thousand for the three months ended March 31, 2021. At March 31, 2021 and December 31, 2020, the net LIHTC investment totaled $841 thousand and $808 thousand and is reported in other assets in the condensed consolidated balance sheets. During the three months ended March 31, 2021 and 2020, the Company made capital contributions of $60 thousand and $26 thousand. At March 31, 2021, the Company evaluated the carrying value of these securities and determined they were not impaired, and no loss was recognized related to changes in the fair value.

NOTE 3. LOANS

The Company's loan portfolio consists primarily of loans to borrowers within our principal market area of Los Angeles, Orange and San Diego Counties, California. Although the Company seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses, such as hospitality businesses, are among the principal industries in the Company's market area and, as a result, the Company's loan and collateral portfolios are, to some degree, concentrated in those industries. The Company also originates SBA loans either for sale to institutional investors or to hold in the loan portfolio. Loans identified as held for sale are carried at the lower of their net carrying value or market value and separately designated as such in the condensed consolidated financial statements. A portion of the Company's revenues are from origination and servicing of loans guaranteed by the SBA under its various programs and sale of the guaranteed portions of the loans. Funding for these loans depends on annual appropriations by the U.S. Congress.

Beginning in April of 2020, the Company participated in the Paycheck Protection Program ("PPP"), administrated

by the SBA, in assisting borrowers with additional liquidity. PPP loans are 100% guaranteed by the SBA and carry a fixed

rate of 1.00%. On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) was signed

into law which changed key provisions of the PPP, including provisions relating to the maturity of PPP loans, the deferral of

PPP loan payments, and the forgiveness of PPP loans. Under the Flexibility Act, as clarified by the SBA in an October 7,

2020 update, the maturity date for PPP loans funded before June 5, 2020 remained at two years from funding while the

maturity date for PPP loans funded after June 5, 2020 was five years from funding. In addition, the Flexibility Act, increased

the period during which PPP loan proceeds are to be used for purposes that would qualify the loan for forgiveness (the

“covered period”) from 8 weeks to 24 weeks, at the borrower’s election, for PPP loans made prior to June 5, 2020, and set the

covered period for loans made after June 5, 2020 at 24 weeks from funding. Under the Flexibility Act, PPP borrowers are not

required to make any payments of principal or interest before the date on which SBA remits the loan forgiveness amount to

the Company (or notifies the Company that no loan forgiveness is allowed) and, although PPP borrowers may submit an

application for loan forgiveness at any time prior to the maturity date, if PPP borrowers do not submit a loan forgiveness

application within 10 months after the end of their covered period, such borrowers will be required to begin paying principal

and interest after that period. For loans originated under the SBA's PPP loan program, interest and principal payment on

these loans were originally deferred for six months following the funding date, during which time interest would continue to

accrue. The Flexibility Act extended the deferral period for borrower payments of principal, interest, and fees on all PPP

loans to the date that the SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply

for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period). The extension of the

deferral period under the Flexibility Act automatically applied to all PPP loans.

In the first quarter of 2021, the Company participated in the First Draw and Second Draw PPP Loan Programs signed into law on December 27, 2020 as part of the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act ("Economic Act"), which was included in the Consolidated Appropriations Act, 2021 (also known as "PPP Round 3"). Like the 2020 PPP, loans originated in PPP Round 3 are fully guaranteed by the SBA and are subject to potential forgiveness by the SBA. PPP Round 3 is scheduled to expire on May 31, 2021.

At loan origination, the Company was paid a processing fee from the SBA ranging from 1% to 5% based on the loan

size. At March 31, 2021, PPP loans, net of unearned fees of $10.5 million, totaled $442.7 million. The unearned fees are

being accreted to interest income based on a contractual maturity of two years (loans originated before June 5, 2020) or five years (all other PPP loans). The SBA began approving forgiveness applications and making payments as forgiveness was approved in the fourth quarter of 2020. During the first quarter of 2021, approximately $67.9 million of PPP loans originated in 2020 were forgiven by the SBA or repaid by the borrowers. Net PPP deferred fees of $1.4 million were accelerated to income in the first quarter of 2021 at the time of SBA forgiveness or borrower repayment. PPP loans forgiven-to-date totaled $140.9 million at March 31, 2021.

On April 14, 2020, the Company was approved by the Federal Reserve to access its SBA Paycheck Protection

Program Liquidity Facility ("PPPLF"). The PPPLF enables the Company to borrow funds through the Federal Reserve

Discount Window to fund PPP loans. At March 31, 2021, the Company had $210.0 million in borrowings under the

PPPLF with a fixed rate of 0.35% which were collateralized by PPP loans. See Note 7 –Borrowing Arrangements for

additional information regarding the PPPLF.

In 2020, the Company participated in the Main Street Lending Program to support lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. Under this program, the Company originated loans to borrowers meeting the terms and requirements of the program, including requirements as to eligibility, use of proceeds and priority, and sold a 95% participation interest in these loans to Main Street Facilities, LLC, a special purpose vehicle ("SPV") organized by the Federal Reserve to purchase the participation interest from eligible lenders, including the Bank. During the fourth quarter of 2020, the Company originated 28 loans under the Main Street Lending Program totaling $102.4 million in principal and sold participation interest totaling $97.3 million to the SPV, resulting in a gain on sale of $660 thousand. During the year ended December 31, 2020, the Company originated 32 loans under the Main Street Lending Program totaling $172.2 million in principal and sold participation interest totaling $163.6 million to the SPV, resulting in a gain on sale of $1.1 million. The program expired on January 8, 2021 and no Main Street loan originations or sales occurred in the first quarter of 2021.

As of March 31, 2021, the Company had pledged $1.65 billion of loans with the FHLB under a blanket lien, of which $871.6 million was considered as eligible collateral under this secured borrowing arrangement, and loans with an unpaid principal balance of $226.6 million were pledged as collateral under a secured borrowing arrangement with the Federal Reserve. See Note 7 –Borrowing Arrangements for additional information regarding the FHLB and Federal Reserve secured lines of credit.

The loans held for investment portfolio includes originated and acquired loans. The acquired loans includes: (i) loans that were not credit impaired on the date of acquisition ("Non-PCI"); and (ii) purchased credit impaired ("PCI") loans, which are defined as loans with evidence of credit deterioration since their originations and for which it is probable that collection of all contractually required payments are unlikely as of the acquisition date.

The following table presents loans held for investment, net, by loan class at the periods indicated:


	March 31, 2021			December 31, 2020

	(dollars in thousands)
Construction and land development		$	229,637	$	197,634
Real estate:
Residential		25,505		27,683
Commercial real estate - owner occupied		159,039		161,823
Commercial real estate - non-owner occupied		572,414		550,788
Commercial and industrial		366,706		388,814
SBA loans (1)		688,197		562,842
Consumer		3		1
Loans held for investment, net of discounts (2)		2,041,501		1,889,585
Net deferred origination fees (1)		(12,902)		(8,808)
Loans held for investment		2,028,599		1,880,777
Allowance for loan losses		(19,271)		(19,167)
Loans held for investment, net		$	2,009,328	$	1,861,610

(1) Includes PPP loans with total outstanding principal of $453.2 million and $326.7 million and net unearned fees of $10.5 million and $6.6 million at March 31, 2021 and December 31, 2020, respectively.

(2) Loans held for investment, net of discounts includes the net carrying value of PCI loans of $722 thousand and $761 thousand at March 31, 2021 and December 31, 2020.

The following table presents the components of loans held for investment at the periods indicated:


	March 31, 2021		December 31, 2020
	(dollars in thousands)
Gross loans(1)	$	2,048,902	$	1,897,599
Unamortized net discounts(2)	(7,401)		(8,014)
Net unamortized deferred origination fees(3)	(12,902)		(8,808)
Loans held for investment	$	2,028,599	$	1,880,777

(1) Gross loans include PPP loans of $453.2 million and $326.7 million at March 31, 2021 and December 31, 2020 and the net carrying value of PCI loans of $722 thousand and $761 thousand at March 31, 2021 and December 31, 2020.

(2) Unamortized net discounts include discounts related to the retained portion of SBA loans and Main Street loans and net discounts on acquired loans. At March 31, 2021, unamortized net discounts include $3.4 million associated with loans acquired in the PCB acquisition and expected to be accreted into interest income over a weighted average life of 3.6 years. At December 31, 2020, unamortized net discounts on acquired loans associated with the PCB acquisition totaled $3.9 million.

(3) Net unamortized deferred origination fees include $10.5 million and $6.6 million for PPP loans at March 31, 2021 and December 31, 2020.

The following table presents a summary of the changes in the allowance for loan losses for the periods indicated:


	Three Months Ended March 31,
	2021		2020
	(dollars in thousands)
Balance, beginning of period	$	19,167	$	13,522
Provision for loan losses (1)	—		2,700
Charge-offs	(2)		(28)
Recoveries	106		24
Net recoveries (charge-offs)	104		(4)
Balance, end of period	$	19,271	$	16,218

(1) No provision for loan losses on PPP loans was recognized for the three months ended at March 31, 2021 as these loans are 100% guaranteed by the SBA under the program.

The following tables present the activity in the allowance for loan losses, the composition of the period end allowance, and the loans evaluated for impairment by loan class for the periods indicated:


	Three Months Ended March 31, 2021
			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, 2020	$	2,129	$	233	$	1,290	$	5,545	$	6,714	$	3,256	$	—	$	19,167
Provision for (reversal of) loan losses	407		(13)		15		316		(455)		(270)		—		—
Charge-offs	—		—		—		—		(2)		—		—		(2)
Recoveries	—		—		—		—		106		—		—		106
Net recoveries	—		—		—		—		104		—		—		104
Balance, March 31, 2021	$	2,536	$	220	$	1,305	$	5,861	$	6,363	$	2,986	$	—	$	19,271
Reserves:
Specific	$	—	$	—	$	—	$	76	$	—	$	—	$	—	$	76
General	2,536		220		1,305		5,785		6,363		2,986		—		19,195

	$	2,536	$	220	$	1,305	$	5,861	$	6,363	$	2,986	$	—	$	19,271
Loans evaluated for impairment:
Individually	$	—	$	—	$	1,255	$	1,234	$	120	$	1,899	$	—	$	4,508
Collectively	229,637		25,505		157,703		571,180		366,339		685,904		3		2,036,271
PCI loans	—		—		81		—		247		394		—		722
	$	229,637	$	25,505	$	159,039	$	572,414	$	366,706	$	688,197	$	3	$	2,041,501


	Three Months Ended December 31, 2020
			Real Estate
	Construction and Land Development		Residential		Commercial - Owner Occupied		Commercial - Non-owner Occupied		Commercial and Industrial		SBA Loans		Consumer		Total
	(dollars in thousands)
Balance, September 30, 2020	$	2,370	$	275	$	1,280	$	5,580	$	6,264	$	2,965	$	—	$	18,734
Provision for (reversal of) loan losses	(241)		(42)		10		(35)		138		270		—		100
Charge-offs	—		—		—		—		(5)		—		—		(5)
Recoveries	—		—		—		—		317		21		—		338
Net recoveries	—		—		—		—		312		21		—		333
Balance, December 31, 2020	$	2,129	$	233	$	1,290	$	5,545	$	6,714	$	3,256	$	—	$	19,167
Reserves:
Specific	$	—	$	—	$	—	$	101	$	—	$	343	$	—	$	444
General	2,129		233		1,290		5,444		6,714		2,913		—		18,723
	$	2,129	$	233	$	1,290	$	5,545	$	6,714	$	3,256	$	—	$	19,167
Loans evaluated for impairment:
Individually	$	—	$	254	$	1,293	$	1,465	$	183	$	3,570	$	—	$	6,765
Collectively	197,634		27,429		160,442		549,323		388,366		558,864		1		1,882,059
PCI loans	—		—		88		—		265		408		—		761
	$	197,634	$	27,683	$	161,823	$	550,788	$	388,814	$	562,842	$	1	$	1,889,585



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

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

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

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

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

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

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

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

The following tables present loans held for investment, net of discounts by loan class and risk category, excluding PCI loans, at the periods indicated:


	March 31, 2021
	Pass		Special Mention		Substandard (1)		Total
	(dollars in thousands)
Construction and land development	$	229,637	$	—	$	—	$	229,637
Real estate:
Residential	25,505		—		—		25,505
Commercial real estate - owner occupied	154,182		3,396		1,380		158,958
Commercial real estate - non-owner occupied	562,671		7,137		2,606		572,414
Commercial and industrial	362,350		300		3,809		366,459
SBA loans	680,329		—		7,474		687,803
Consumer	3		—		—		3

	$	2,014,677	$	10,833	$	15,269	$	2,040,779

(1)At March 31, 2021, substandard loans included $4.2 million of impaired loans and excluded $317 thousand of performing TDRs. There were no loans classified as doubtful or loss at March 31, 2021.


	December 31, 2020
	Pass		Special Mention		Substandard (1)		Total
	(dollars in thousands)
Construction and land development	$	197,634	$	—	$	—	$	197,634
Real estate:
Residential	27,429		—		254		27,683
Commercial real estate - owner occupied	160,318		—		1,417		161,735
Commercial real estate - non-owner occupied	547,252		—		3,536		550,788
Commercial and industrial	384,582		—		3,967		388,549
SBA loans	553,247		—		9,187		562,434
Consumer	1		—		—		1
	$	1,870,463	$	—	$	18,361	$	1,888,824

(1)At December 31, 2020, substandard loans included $6.4 million of impaired loans and excluded $319 thousand of performing TDRs . There were no loans classified as special mention, doubtful or loss at December 31, 2020.

The following tables present past due and nonaccrual loans, net of discounts by loan class, excluding PCI loans, at the periods indicated:


	March 31, 2021
	Still Accruing
	30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due		Nonaccrual
	(dollars in thousands)

Real estate:

Commercial real estate - owner occupied	$	—	$	—	$	—	$	1,255
Commercial real estate - non-owner occupied	—		—		—		1,234
Commercial and industrial	1		—		—		120
SBA loans	—		—		—		1,582

Total	$	1	$	—	$	—	$	4,191


	December 31, 2020
	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	$	—	$	—	$	—	$	254
Commercial real estate - owner occupied	—		—		—		1,293
Commercial real estate - non-owner occupied	—		—		—		1,465
Commercial and industrial	1		—		—		183
SBA loans	53		—		—		3,251

Total	$	54	$	—	$	—	$	6,446

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

The following tables present impaired loans, excluding PCI loans, by loan class at the periods indicated:


	March 31, 2021
					Impaired Loans
	Unpaid Principal Balance		Recorded Investment(1)		Without Specific Reserve		With Specific Reserve		Related Allowance
	(dollars in thousands)

Real estate:

Commercial real estate - owner occupied	$	1,307	$	1,255	$	1,255	$	—	$	—
Commercial real estate - non-owner occupied	1,277		1,234		—		1,234		76
Commercial and industrial	120		120		120		—		—
SBA loans	2,176		1,899		1,899		—		—


Total	$	4,880	$	4,508	$	3,274	$	1,234	$	76

(1)Includes TDRs on accrual of $317 thousand.


	December 31, 2020
					Impaired Loans
	Unpaid Principal Balance		Recorded Investment(1)		Without Specific Reserve		With Specific Reserve		Related Allowance
	(dollars in thousands)

Real estate:
Residential	$	253	$	254	$	254	$	—	$	—
Commercial real estate - owner occupied	1,345		1,293		1,293		—		—
Commercial real estate - non-owner occupied	1,507		1,465		202		1,263		101
Commercial and industrial	183		183		183		—		—
SBA loans	3,891		3,570		2,089		1,481		343


Total	$	7,179	$	6,765	$	4,021	$	2,744	$	444

(1) Includes TDRs on accrual of $319 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 periods indicated:


	Three Months Ended
	March 31, 2021				December 31, 2020				March 31, 2020
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)

Real estate:
Residential	$	127	$	—	$	256	$	—	$	—	$	—
Commercial real estate - owner occupied	1,274		—		1,302		—		2,607		—
Commercial real estate - non-owner occupied	1,349		—		3,876		—		1,368		—
Commercial and industrial	152		—		183		—		193		—
SBA loans	2,735		6		4,421		6		6,677		7


Total	$	5,637	$	6	$	10,038	$	6	$	10,845	$	7

Loan modifications resulting in TDR status generally included one or a combination of the following concessions: extensions of the maturity date, principal payment deferments or signed forbearance agreements with a payment plan. During the three months ended March 31, 2021, December 31, 2020 and March 31, 2020, there were no new loan modifications resulting in TDRs.

During the three months ended March 31, 2021, there were no TDRs for which there was a payment default within twelve months following the modification. During the three months ended December 31, 2020 and March 31, 2020, there was $82 thousand and $85 thousand TDRs for which there was a payment default within twelve months following the modification. A loan is considered to be in payment default once it is 90 days contractually past due under the modification.

COVID-Related Loan Deferments

At March 31, 2021, the Company had five loans on payment deferral for COVID-19 related reasons, four of which were from one relationship totaling $5.7 million. At December 31, 2020, the Company had three loans totaling $3.3 million on payment deferral for COVID-19 related reasons. Loans that were granted deferrals before the fourth quarter of 2020 have resumed making regular, contractually agreed-upon payments or were paid off. At March 31, 2021, no loan on payment deferral was reported as non-accrual and none are reported as TDRs under Section 4013 of the CARES Act.

Loans Held for Sale

At March 31, 2021 and December 31, 2020, loans held for sale consisted of SBA 7(a) loans and totaled $12.7 million and $9.9 million. The Company accounts for loans held for sale at the lower of carrying value or fair value. The fair value of loans held for sale totaled $13.7 million and $10.6 million at March 31, 2021 and December 31, 2020.

NOTE 4. TRANSFERS AND SERVICING OF FINANCIAL ASSETS

The Company sells loans in the secondary market and, for certain loans, retains the servicing responsibility. The loans serviced for others are accounted for as sales and, therefore, are not included in the accompanying condensed consolidated balance sheets. Loans serviced for others totaled $454.1 million and $454.3 million at March 31, 2021 and December 31, 2020. This includes SBA loans serviced for others of $223.7 million at March 31, 2021 and $222.5 million at December 31, 2020 for which there is a related servicing asset of $2.8 million and $2.9 million. In addition, the loan servicing portfolio includes construction and land development loans, commercial real estate loans and commercial & industrial loans

participated with various other institutions and Main Street SPV of $230.4 million and $231.8 million at March 31, 2021 and December 31, 2020 for which there is no related servicing asset.

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

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


	Three Months Ended March 31,
	2021		2020
	(dollars in thousands)
Balance, beginning of period	$	2,860	$	3,202
Additions	173		68
Amortization	(255)		(282)

Balance, end of period	$	2,778	$	2,988

The fair value of the servicing asset for SBA loans is measured quarterly and was $3.7 million and $3.4 million as of March 31, 2021 and December 31, 2020. The significant assumptions used in the valuation of the SBA servicing asset at March 31, 2021 included a weighted average discount rate of 8.4% and a weighted average prepayment speed assumption of 20.1%.

The following table summarizes the estimated change in the value of servicing assets as of March 31, 2021 given hypothetical shifts in prepayments speeds and yield assumptions:


	Change in Assumption	Change in Estimated Fair Value
		(dollars in thousands)
Prepayment speeds	+10%	$	(222)
Prepayment speeds	+20%	(421)
Discount rate	+1%	(103)
Discount rate	+2%	(200)

SBA loans (including SBA 7(a) and SBA 504 loans) sold during the three months ended March 31, 2021 and 2020, totaled $7.4 million and $3.4 million resulting in total gains on sale of SBA loans of $706 thousand and $377 thousand.

Net servicing fees, a component of noninterest income, represent contractually specified servicing fees reported net of the servicing asset amortization. Net servicing fees totaled $400 thousand and $224 thousand for the three months ended March 31, 2021 and 2020 including contractually specified servicing fees of $655 thousand and $506 thousand, offset by the amortization indicated in the table above.

During the fourth quarter of 2020, the Company originated 28 loans under the Main Street Lending Program totaling $102.4 million in principal and sold participation interest totaling $97.3 million to the SPV, resulting in a gain on sale of $660 thousand. For the year ended December 31, 2020, the Company originated Main Street loans totaling $172.2 million in principal amount and sold participation interests totaling $163.6 million to the SPV. The Main Street Lending Program expired in January 2021, and the Company had no originations or sales for the three month ended March 31, 2021. The Company is accruing servicing fee income of 0.25% per annum for the participation interests sold to SPV. The Company and the Federal Reserve believe that the terms of the Servicing Agreement are commercially reasonable and comparable to terms that unaffiliated third parties would accept to provide enhanced reporting services, under the terms and conditions set out in

the Servicing Agreement, with respect to the participation interest. Therefore, no servicing asset or liability was recorded at the time of sale.

NOTE 5. GOODWILL AND INTANGIBLE ASSETS

In connection with the acquisition of Pacific Commerce Bancorp ("PCB"), the Company recognized goodwill of $73.4 million and a core deposit intangible ("CDI") of $6.9 million on July 31, 2018. The Company evaluates goodwill for impairment annually, unless circumstances arise indicating potential impairment. The Company evaluated goodwill for impairment quarterly in 2020 due to the volatility in our stock price related to the COVID-19 pandemic. There were no changes in the carrying value of Goodwill during the year ended December 31, 2020. The Company plans to evaluate goodwill for impairment in the fourth quarter of 2021, and we observed no indications of potential impairment at March 31, 2021. For the three months ended March 31, 2021 and 2020, the Company recognized the CDI amortization indicated in the table below.


	Three Months Ended
	March 31, 2021		March 31, 2020
	(dollars in thousands)
Core deposit intangible:
Gross balance, beginning of period	$	6,908	$	6,908
Additions	—		—
Gross balance, end of period	$	6,908	$	6,908
Accumulated amortization:
Balance, beginning of period	(1,952)		(1,180)
Amortization	(188)		(193)

Balance, end of period	$	(2,140)	$	(1,373)
Net core deposit intangible, end of period	$	4,768	$	5,535

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


Year Ending December 31,	(dollars in thousands)
Remainder of 2021	$	565
2022	732
2023	707
2024	678
2025	646
Thereafter	1,440
	$	4,768

NOTE 6. DEPOSITS

The Company's ten largest depositor relationships represented approximately 28% of total deposits at March 31, 2021 and December 31, 2020. Brokered non-maturity deposits totaled $153.8 million and $78.7 million at March 31, 2021 and December 31, 2020. Brokered time deposits totaled $109.8 million and $101.1 million at March 31, 2021 and December 31, 2020.

Time deposits that exceeded the FDIC insurance limit of $250,000 amounted to $16.4 million and $30.7 million as of March 31, 2021 and December 31, 2020. The Company participates in a state public deposits program that allows it to receive deposits from the state or from political subdivisions within the state in amounts that would not be covered by the FDIC. This program provides a stable source of funding to the Company. Total collateralized deposits for other public agencies, were $44.8 million at March 31, 2021 and were collateralized by letters of credit issued by the FHLB under the

Bank's secured line of credit with the FHLB. See Note 7 –Borrowing Arrangements for additional information regarding the FHLB secured line of credit.

NOTE 7. BORROWING ARRANGEMENTS

Federal Home Loan Bank Secured Line of Credit

At March 31, 2021, the Company had a secured line of credit of $414.0 million from the FHLB, of which $259.0 million was available. This secured borrowing arrangement is collateralized under a blanket lien and is subject to the Bank providing adequate collateral and continued compliance with the Advances and Security Agreement and other eligibility requirements established by the FHLB. At March 31, 2021, the Company had pledged $1.65 billion of loans under the blanket lien, including PPP loans, of which $871.6 million was considered as eligible collateral. PPP loans are not considered eligible collateral under this borrowing agreement. In addition, at March 31, 2021, the Company used $60.0 million of its secured FHLB borrowing capacity by having the FHLB issue letters of credit to meet collateral requirements for deposits from the other public agencies.

At March 31, 2021, the Company participated in the FHLB San Francisco's new Recovery Advance loan program for $5.0 million at zero percent interest with a maturity date in May 2021. The following table shows the interest rates and maturity dates of FHLB advances at periods indicated:


	March 31, 2021					December 31, 2020
	Balance		Rate		Maturity Date	Balance		Rate		Maturity Date
Advances:	(dollars in thousands)


Recovery advance	$	5,000	—	%	5/19/2021	$	5,000	—	%	5/19/2021
Term and fixed-rate advance	—		—	%	—	50,000		0.19	%	2/26/2021
Term and fixed-rate advance	30,000		0.25	%	5/26/2021	30,000		0.25	%	5/26/2021
Term and fixed-rate advance	30,000		0.21	%	5/27/2021	30,000		0.21	%	5/27/2021
Term and fixed-rate advance	30,000		1.93	%	6/11/2021	30,000		1.93	%	6/11/2021
	$	95,000	0.75	%		$	145,000	0.56	%

The average outstanding balance of total FHLB borrowings was $129.2 million and $89.8 million with an average interest rate of 0.61% and 1.68% for the three months ended March 31, 2021 and 2020.

Federal Reserve Bank Secured Line of Credit

At March 31, 2021, the Company had a secured line of credit of $149.5 million from the Federal Reserve Bank, including secured borrowing capacity through the Borrower-in-Custody ("BIC") program. At March 31, 2021, the Bank had pledged qualifying loans with an unpaid principal balance of $226.6 million and securities held-to-maturity with a carrying value of $1.3 million as collateral for this line. Borrowings under this BIC program are overnight advances with interest chargeable at Federal Reserve discount window ("Primary Credit") borrowing rate. There were no borrowings under this credit facility at or during the three months ended March 31, 2021 and 2020.

Paycheck Protection Program Liquidity Facility

On April 14, 2020, the Company was approved by the Federal Reserve to access its SBA Paycheck Protection Program Liquidity Facility ("PPPLF") through the discount window. The PPPLF enables the Company to fund PPP loans without taking on additional liquidity or funding risks by providing non-recourse loans collateralized by the PPP loans. Borrowings under the PPPLF have a fixed-rate of 0.35%, with a term that matches the contractual maturity of the underlying loans pledged. At March 31, 2021 and December 31, 2020, the Bank had $210.0 million and $204.7 million in borrowings under the PPPLF which were collateralized by PPP loans. The average outstanding borrowings were $197.2 million during the three months ended March 31, 2021.

Federal Funds Unsecured Lines of Credit

The Company has established unsecured overnight borrowing arrangements for an aggregate amount of $125.0 million, subject to availability, with five of its correspondent banks. In general, interest rates on these lines approximate the federal funds target rate. There were no borrowings under these credit facilities at or during the three months ended March 31, 2021 and 2020.

Senior Secured Notes

The holding company has a senior secured revolving line of credit for $25 million, which matures on March 22, 2022. At March 31, 2021, there were no outstanding borrowings under this secured line of credit. At December 31, 2020, the outstanding balance totaled $2.0 million with a floating interest rate equal to Wall Street Journal Prime, or 3.25%. The average outstanding borrowings under this facility totaled $1.0 million and $8.0 million with an average interest rate of 3.57% and 4.56% for the three months ended March 31, 2021 and 2020, respectively. At March 31, 2021, the Company was in compliance with all loan covenants on the facility and the remaining available credit was $25.0 million. One of our executives is also a member of the lending bank's board of directors.

NOTE 8. INCOME TAXES

The Company accounts for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the amounts for financial reporting purposes and tax basis of its assets and liabilities. Deferred tax assets decreased by approximately $978 thousand during the three months ended March 31, 2021 as a result of changes to temporary differences and the reversal of interest accrued related to unrecognized tax benefits. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary. Based on this analysis, management has determined that a valuation allowance for deferred tax assets was not required at March 31, 2021.

For the three months ended March 31, 2021 and 2020, income tax expense was $4.2 million and $1.8 million, resulting in an effective income tax rate of 30.2% and 28.6%. Our effective tax rate varies from the statutory rate of 29.6% during the three months ended March 31, 2021 and 2020 due primarily to the tax effect of stock-based compensation.

The Company is subject to federal income and California franchise tax. At March 31, 2021, the federal statute of limitations for the assessment of income tax is closed for all tax years up to and including 2016. The California statute of limitations for the assessment of franchise tax is closed for all years up to and including 2015. The Company is currently not under examination in any taxing jurisdiction.

The Company did not have unrecognized tax benefits that related to uncertainties associated with federal and state income tax matters at March 31, 2021 and December 31, 2020.

There were no interest and penalties related to unrecognized tax benefits in income tax expense at March 31, 2021 and December 31, 2020.

On March 11, 2021, the President of the United States signed the American Rescue Plan Act, also called the COVID-19 Stimulus Package or American Rescue Plan into law. The American Rescue Plan includes many non-tax and tax provisions to help address the continuing pandemic, including extending the Employee Retention Credit to December 31, 2021. We will continue to evaluate the impact of the American Rescue Plan on the Company's consolidated financial condition, consolidated results of operations and cash flows.

NOTE 9. COMMITMENTS AND CONTINGENCIES

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

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

The Company had the following outstanding financial commitments whose contractual amounts represent credit risk at the periods indicated:


	March 31, 2021		December 31, 2020
	(dollars in thousands)
Commitments to extend credit	$	484,434	$	429,519
Standby letters of credit	3,415		3,777
Commitments to contribute capital to low income housing projects	2,029		2,089
Commitments to contribute capital to other CRA equity investments	61		61
Total	$	489,939	$	435,446

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management’s credit evaluation of the customer. The majority of the commitments to extend credit and standby letters of credit are secured by real estate. The Company recognized $200 thousand provision for unfunded loan commitments for the three months ended March 31, 2021 and did not recognize any provision for unfunded loan commitments for the three months ended March 31, 2020. The provision for unfunded loan commitments is included in "other expense" in the condensed consolidated statements of income. The reserve for unfunded commitments was $1.7 million and $1.5 million at March 31, 2021 and December 31, 2020. The reserve for unfunded commitments is included in "other liabilities" in our condensed consolidated balance sheets.

The Company committed to invest in two partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit ("LIHTC") pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing projects, and to assist in achieving goals associated with the Community Reinvestment Act ("CRA"). Capital contributions are called for up to an amount specified in the partnership agreement. In addition, the Company invested in other CRA investments such as the Small Business Investment Company ("SBIC") program. At March 31, 2021 and December 31, 2020, the Company had unfunded commitments to contribute capital to LIHTC investments and other CRA investments totaling $2.1 million and $2.2 million.

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

NOTE 10. RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company may provide loans to certain executive officers and directors and the companies with which they are associated. There were no related party loans for the three months ended March 31, 2021 and 2020. Deposits from certain officers and directors and the companies with which they are associated totaled $28.2 million and $25.8 million at March 31, 2021 and December 31, 2020.

The holding company has a $25.0 million senior secured facility and a $20.0 million federal funds unsecured line of credit (refer to Note 7 - Borrowing Arrangements) with a correspondent bank in which one of the Company's executives is also a member of the correspondent bank’s Board of Directors. There were no outstanding borrowings of the senior secured facility at March 31, 2021 and $2.0 million outstanding borrowings of the senior secured facility at December 31, 2020. There were no borrowings under the unsecured line of credit at March 31, 2021 and December 31, 2020. The Company maintains a correspondent deposit relationship with the correspondent bank, and had deposits of $1.2 million at March 31, 2021 and December 31, 2020. The Company has invested in stock of the correspondent bank which totaled $102 thousand at March 31, 2021 and December 31, 2020. In addition, the Company has loan participation agreements where the Company may participate out a portion of loans to the correspondent bank. The total participated loan balance was $22.9 million and $23.8 million at March 31, 2021 and December 31, 2020.

NOTE 11. STOCK-BASED COMPENSATION PLANS

The Company's 2013 Omnibus Stock Incentive Plan (“2013 Plan”) was approved by shareholders in May 2013. Under the terms of the 2013 Plan, officers and key employees may be granted both nonqualified and incentive stock options and directors and other consultants, who are not also an officer or employee, may only be granted nonqualified stock options. The 2013 Plan also permits the grant of stock appreciation rights (“SARs”), restricted shares, deferred shares, performance shares and performance unit awards. The 2013 Plan provides that the total number of awards of common stock that may be issued over the term of the plan shall not exceed 1,590,620 shares, of which a maximum of 300,000 shares may be granted as incentive stock options. An increase of 200,000 shares available for issuance under the 2013 Plan was approved by the Company's shareholders in June 2020. Stock options, SARs, performance share and unit awards are granted at a price not less than 100% of the fair market value of the stock on the date of grant. Options generally vest over a period of three to five years. Restricted shares generally vest over a period of one 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 date. The 2013 Plan expires in 2023.

The fair value of each option award is estimated on the date of grant using the Black-Scholes model. Expected

volatilities are based on the historical volatilities of the Company’s common stock and a peer group of companies with a similar size and industry. The Company uses historical data to estimate option exercise and post-vesting termination

behavior. The expected term of options granted is based on the SEC simplified method, which calculates the expected term as

the mid-point between the weighted average time to vesting and the contractual term. The Company expects a zero forfeiture

rate, and the risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the

time of the grant.

The Company recognized stock-based compensation expense of $592 thousand and $484 thousand for the three months ended March 31, 2021 and 2020. As of March 31, 2021, there was $74 thousand unrecognized compensation cost related to the outstanding stock options. The intrinsic value of options exercised during the three months ended March 31, 2021 and 2020 was approximately $69 thousand and $28 thousand. A summary of activity in our outstanding stock options during the three months ended March 31, 2021 and 2020 is as follows:


	Three Months Ended March 31,
	2021						2020
	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value		Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
	(dollars in thousands, except share and per share data)
Outstanding, beginning of period	119,162	$	10.50				137,531	$	10.20

Exercised	(5,530)	10.92					(1,930)	10.74
Granted	10,000	25.32					—	—
Forfeited	—	—					(1,430)	12.69
Outstanding, end of period	123,632	$	11.68	3.6 years	$	1,571	134,171	$	10.16	3.6 years	$	676
Options exercisable	108,632	$	10.30	2.8 years	$	1,522	134,171	$	10.16	3.6 years	$	676

As of March 31, 2021, there was approximately $3.0 million of total unrecognized compensation cost related to the restricted shares that will be recognized over the weighted-average period of 1.4 years. The value of restricted shares that vested was approximately $1.8 million during the three months ended March 31, 2021 and 2020. A summary of activity for outstanding restricted shares for the three months ended March 31, 2021 and 2020 is as follows:


	Three Months Ended March 31,
	2021			2020
	Shares	Weighted Average Grant-Date Fair Value		Shares	Weighted Average Grant-Date Fair Value
Nonvested, beginning of period	124,898	$	21.69	113,635	$	22.50
Granted	132,496	19.91		72,111	25.12
Vested	(70,697)	25.08		(79,004)	22.33
Forfeited	(600)	20.33		(3,076)	27.82
Nonvested, end of period	186,097	$	19.14	103,666	$	24.30

NOTE 12. EARNINGS PER SHARE

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

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


	Three Months Ended
	March 31, 2021		December 31, 2020		March 31, 2020
Numerator for basic earnings per share:	(dollars in thousands, except share and per share data)
Net income	$	9,758	$	10,794	$	4,546
Less: dividends and net income allocated to participating securities	(138)		(116)		(39)
Net income available to common shareholders	$	9,620	$	10,678	$	4,507

Denominator for basic earnings per share:
Basic weighted average common shares outstanding during the period	11,614,333		11,580,236		11,558,039

Denominator for diluted earnings per share:
Basic weighted average common shares outstanding during the period	11,614,333		11,580,236		11,558,039
Net effect of dilutive stock options	59,142		40,346		74,011
Diluted weighted average common shares	11,673,475		11,620,582		11,632,050

Earnings per common share:
Basic	$	0.83	$	0.92	$	0.39
Diluted	$	0.82	$	0.92	$	0.39

NOTE 13. FAIR VALUE MEASUREMENTS

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

Fair value of financial instruments

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

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

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

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

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

because of the liquidity of these instruments.

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

nature of these deposits.

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

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

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

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

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

or exhibit strong signs indicative of non-performance.

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

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

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

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

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

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

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

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

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

certificates of deposit is not expected to be significant.

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

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

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

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

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

The following table provides the fair value hierarchy level and estimated fair value of significant financial instruments at the periods indicated:


		March 31, 2021				December 31, 2020
	Fair Value Hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Assets:		(dollars in thousands)
Cash and cash equivalents	Level 1	$	309,446	$	309,446	$	236,381	$	236,381
Securities available-for-sale	Level 2	37,376		37,376		42,027		42,027


Securities held-to-maturity	Level 2	1,348		1,417		1,358		1,470
Equity securities	Level 1	2,774		2,774		2,798		2,798
Loans held for sale	Level 2	12,669		13,687		9,932		10,618
Loan held for investment, net	Level 3	2,009,328		2,051,100		1,861,610		1,904,785
Restricted stock investments, at cost	Level 2	12,999		12,999		12,999		12,999
Servicing asset	Level 3	2,778		3,738		2,860		3,434
Accrued interest receivable	Level 2	9,364		9,364		9,569		9,569

Financial Liabilities:
Deposits	Level 2	$	1,895,550	$	1,895,794	$	1,634,158	$	1,634,170
Borrowings	Level 2	95,000		95,102		145,000		145,357
PPP Liquidity Facility	Level 2	209,998		210,152		204,719		204,820
Senior secured notes	Level 2	—		—		2,000		2,000
Accrued interest payable	Level 2	548		548		534		534

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 the periods indicated:


	Recurring Fair Value Measurements
	Level 1		Level 2		Level 3		Total
March 31, 2021:	(dollars in thousands)
Securities available-for-sale:
U.S. Government and agency securities	$	—	$	2,628	$	—	$	2,628
Mortgage-backed securities	—		4,897		—		4,897
Collateralized mortgage obligations	—		22,399		—		22,399
SBA Pools	—		7,452		—		7,452
Securities available-for-sale	$	—	$	37,376	$	—	$	37,376

Equity securities:
Mutual fund investment	$	2,774	$	—	$	—	$	2,774

December 31, 2020:
Securities available-for-sale:
U.S. Government and agency securities	$	—	$	2,705	$	—	$	2,705
Mortgage-backed securities	—		5,653		—		5,653
Collateralized mortgage obligations	—		25,778		—		25,778
SBA Pools	—		7,891		—		7,891
Securities available-for-sale	$	—	$	42,027	$	—	$	42,027

Equity securities:
Mutual fund investment	$	2,798	$	—	$	—	$	2,798

Nonrecurring fair value measurements

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

The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value on a nonrecurring basis at the periods indicated:


	Nonrecurring Fair Value Measurements
	Level 1		Level 2		Level 3		Total
March 31, 2021:	(dollars in thousands)
Impaired loans	$	—	$	—	$	1,158	$	1,158


December 31, 2020:
Impaired loans	$	—	$	—	$	2,300	$	2,300

The majority of the impaired loans are considered collateral-dependent loans or are supported by a SBA guaranty. The collateral-dependent impaired loans were written down to the fair value of their underlying collateral less costs to sell of $1.2 million and $2.3 million at March 31, 2021 and December 31, 2020, by establishing specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impaired loans. The Company generally utilized selling costs of 10% of appraised values for nonrecurring fair value measurements related to collateral-dependent impaired loans during the three months ended March 31, 2021 and 2020. The fair value adjustments (which include charge-offs, net of recoveries and changes in specific reserves) resulted in gains of $472 thousand and $62 thousand for the three months ended March 31, 2021 and 2020.

NOTE 14. REVENUE RECOGNITION

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

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


	Three Months Ended
	March 31, 2021		March 31, 2020
	(dollars in thousands)
Noninterest income, in-scope:
Service charges and fees on deposit accounts	$	441	$	555
Other income	42		41
Total noninterest income, in-scope	483		596
Noninterest income, not in-scope:
Gain on sale of loans	706		377
Net servicing fees	400		224

Other income	665		218
Total noninterest income, not in-scope	1,771		819
Total noninterest income	$	2,254	$	1,415

NOTE 15. EQUITY

Dividends

During the three months ended March 31, 2021 and 2020, total quarterly cash dividends declared were $0.25 per share and total cash dividends paid were $3.0 million and $2.9 million.

Stock Repurchase Plan

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

On March 17, 2020, the Company suspended the stock repurchase plan. There were no repurchases of common stock during the three months ended March 31, 2021, compared to 38,411 shares of the Company's common stock repurchased at an average price of $22.34 per share and a total cost of $858 thousand during the three months ended March 31, 2020. The remaining number of shares authorized to be repurchased under this plan was 695,489 shares at March 31, 2021. Although the Board approved the resumption of the stock repurchase plan in the first quarter of 2021, under the terms of the definitive merger agreement with Enterprise Financial Services Corp., the Company has agreed that it will not repurchase or otherwise redeem any of its outstanding common stock except in connection with the withholding of common stock to cover taxes as restricted shares of common stock vest.

NOTE 16. REGULATORY CAPITAL

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

At March 31, 2021, the Company qualified for treatment under the Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) and, therefore, is not subject to consolidated capital rules at the bank holding company level. The Bank has also opted into the Community Bank Leverage Ratio ("CBLR") framework, beginning with the Call Report filed for the first quarter of 2020. At March 31, 2021 and December 31, 2020, the Bank's CBLR ratio was 9.75% and 10.28% which exceeded all regulatory capital requirements under the CBLR framework and the Bank was considered to be ‘‘well-capitalized.’’

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

•A leverage ratio of greater than 9%;

•Total consolidated assets of less than $10 billion;

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

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

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

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

NOTE 17. SUBSEQUENT EVENTS

On April 25, 2021, the Company declared a $0.25 cash dividend payable on May 24, 2021 to shareholders of record as of May 10, 2021.

On April 26, 2021, the Company entered into a definitive merger agreement pursuant to which the Company will merge into Enterprise Financial Services Corp ("EFSC") in an all-stock transaction. Under the terms of the definitive merger agreement, the Company will merge with and into EFSC, and First Choice Bank will subsequently merge with and into Enterprise Bank & Trust ("EB&T"). On a pro forma consolidated basis, the combined company would have approximately $12.7 billion in consolidated total assets as of March 31, 2021. The merger is expected to close in the third quarter of 2021, subject to satisfaction of customary closing conditions, including receipt of regulatory approvals and approval of EFSC's and the Company's shareholders.

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 March 31, 2021 and December 31, 2020, and our condensed consolidated results of operations for the quarters ended March 31, 2021, December 31, 2020, and March 31, 2020. 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, 2020, should be read in conjunction with this MD&A.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

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

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

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

•Compression of our net interest margin.

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

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

For a more detailed discussion of some risks and uncertainties that could materially and adversely affect our financial condition and results of operations, see Part 1, Item 1A - Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 for discussion relating to risk factors impacting us.

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

Overview

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. The Bank is a Preferred Small Business Administration (“SBA”) Lender and conducts business through eight full-service branches and two loan production offices located in Los Angeles, Orange and San Diego Counties.

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

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

Recent Developments

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

For accounting policies related to COVID-19 loan payment deferrals authorized under the CARES Act, please refer to NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Guidance On Non-TDR Loan Modifications Due To COVID-19 on Form 10-K for the year ended December 31, 2020.

Effective at the close of business on January 29, 2021, the Rowland Heights branch was sold to a third party

financial institution who acquired certain branch assets and assumed certain branch liabilities including deposits. No loans

were sold as part of the transaction. The assets and liabilities of the Rowland Heights branch that were sold in this transaction

primarily consisted of $117 thousand of cash and cash equivalents and $22 million of deposits. The transaction resulted in a

net cash payment to the third party financial institution of $21.6 million, and a gain on sale of $476 thousand as a component of other noninterest income in the condensed consolidated statement of income.

On April 26, 2021, the Company entered into a definitive merger agreement pursuant to which we will merge into Enterprise Financial Services Corp ("EFSC") in an all-stock transaction. Refer to Note 17. Subsequent Events included in Part I, Item 1 of this Quarterly Report on Form 10-Q, for more information about the definitive merger agreement.

Key Events Related to COVID-19 During First Quarter of 2021:

The ongoing COVID-19 pandemic has caused serious disruptions in the U.S. economy and financial markets, and entire industries within our loan portfolio, such as hospitality and restaurants, have been impacted due to quarantines and travel restrictions and other industries we serve are experiencing or likely to experience similar disruptions and economic hardships as the COVID-19 pandemic persists. On April 6, 2021, the governor of California announced that he aims to fully reopen California's economy by June 15, 2021, although California will encourage that all residents get vaccinated and will continue to require mask coverings, particularly in more crowded areas. The U.S. economy appears to be recovering as the pandemic-related restrictions started easing in the first quarter of 2021. Although no assurances can be provided, we anticipate that the trend of cautiously lifting pandemic-related restrictions in California will continue in the second half of 2021, especially as COVID-19 vaccines become more widely available, which could positively impact commercial and consumer activity in the markets we serve and in the broader U.S. economy.

COVID-19 Updates for the First Quarter of 2021:

Continued Support for Employees, Clients, and Communities.

•Originated more than 700 PPP loans totaling $194.3 million, with net deferred fees of $6.5 million

•All branches re-opened with appropriate safety precautions in place. Implemented measures include: germ guards, social distancing markers, PPE (masks, gloves and hand sanitizer), daily enhanced cleaning with CDC recommended disinfectants, limited same time client entry and reduced lobby hours

•No COVID-19-related employee lay-offs, furloughs, or reduced hours

•$34,000 in donations to over 10 non-profit organizations within our footprint that serve communities disproportionately impacted by COVID-19 and the economic distress of this pandemic

Governmental Credit Assistance Programs

In response to the market volatility and instability resulting from the pandemic, the federal government passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in March 2020 which authorized certain government sponsored credit programs, including the Paycheck Protection Program ("PPP") and the Main Street Lending Program. The loan programs and the Company's participation in these programs are discussed below:

Paycheck Protection Program. On March 27, 2020, the CARES Act was signed into law authorizing the SBA to guarantee

an aggregate of up to $349 billion in forgivable PPP loans to assist small businesses nationwide adversely impacted by the

COVID-19 pandemic. On April 24, 2020, the PPP and Health Care Enhancement Act was signed into law and provided an

additional $310 billion in funding and authority for the PPP. On June 5, 2020, the PPP Flexibility Act of 2020 (the

“Flexibility Act”) was signed into law which changed key provisions of the PPP, including provisions relating to contractual

maturity, the deferral of loan payments, and the forgiveness of such loans. Under the Flexibility Act, the maturity date for

PPP loans funded before June 5, 2020 remained at two years from funding while the maturity date for PPP loans funded after June 5, 2020 was five years from funding. The Flexibility Act also increased the period during which PPP loan proceeds may be used for purposes that qualify the loan for forgiveness (the “covered period”) to 24 weeks. Under the Flexibility Act, borrowers are not required to make any payments of principal or interest before the date on which the SBA remits the loan forgiveness amount to the Bank (or notifies the Bank that no loan forgiveness is allowed). Interest continues to accrue during the PPP payment deferral period. Although PPP borrowers may submit an application for forgiveness at any time prior to the maturity date, if a forgiveness application is not submitted within 10 months after the end of the covered period, such borrowers will be required to begin paying principal and interest after that period.

In the first quarter of 2021, we participated in the First Draw and Second Draw PPP Loan Programs signed into law on December 27, 2020 as part of the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act ("Economic Act"), which was included in the Consolidated Appropriations Act, 2021 (also known as "PPP Round 3"). Unless otherwise

extended, PPP Round 3 is scheduled to expire on May 31, 2021. The maximum loan amount for First Draw borrowers is $10 million and is $2 million for the Second Draw borrowers. Like the 2020 PPP, loans originated in PPP Round 3 are fully guaranteed by the SBA and are subject to potential forgiveness by the SBA. During the first quarter of 2021, the Company originated more than 700 PPP Round 3 loans with outstanding principal of $194.3 million before net deferred fees of $6.5 million.

At origination, we are paid a processing fee by the SBA ranging from 1% to 5% based on the size of the PPP loan. At March 31, 2021, PPP loans, net of deferred fees of $10.5 million, totaled $442.7 million. The deferred fees are accreted to interest income based on a contractual maturity of two years (loans originated before June 5, 2020) or five years (all other PPP loans). The SBA began approving forgiveness applications in the fourth quarter of 2020. During the first quarter of 2021, approximately $67.9 million of PPP loans originated in 2020 were forgiven by the SBA or repaid by the borrowers. Net PPP deferred fees of $1.4 million were accelerated to income at the time of SBA forgiveness or borrower repayment. PPP loans forgiven-to-date totaled $140.9 million at March 31, 2021.

PPP Liquidity Facility. On April 14, 2020, we were approved by the Federal Reserve to access its SBA Paycheck Protection Program Liquidity Facility ("PPPLF"). The PPPLF enables us to borrow funds through the Federal Reserve Discount Window to fund PPP loans. At March 31, 2021, we had $210.0 million in borrowings under the PPPLF with a fixed-rate of 0.35% which are collateralized by PPP loans.

Main Street Lending Program. In 2020, we participated in the Main Street Lending Program to support lending to small- and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. Under this program, we originated loans to borrowers meeting the terms and requirements of the program, including requirements as to eligibility, use of proceeds and priority, and sold a 95% participation interest in these loans to Main Street Facilities, LLC, a special purpose vehicle ("SPV") organized by the Federal Reserve to purchase the participation interest from eligible lenders, including the Bank. During the fourth quarter of 2020, the Company originated 28 loans under the Main Street Lending Program totaling $102.4 million in principal and sold participation interests totaling $97.3 million to the SPV, resulting in a gain on sale of $660 thousand. During the year ended December 31, 2020, we originated 32 loans under the Main Street Lending Program totaling $172.2 million in principal and sold participation interests totaling $163.6 million to the SPV, resulting in a gain on sale of $1.1 million. The program expired on January 8, 2021 and no Main Street loan origination or sales occurred in the first quarter of 2021.

Payment Deferral Program. At March 31, 2021, we had five loans on payment deferral for COVID-19 related reasons, four of which were from one relationship totaling $5.7 million. At December 31, 2020, the Company had three loans totaling $3.3 million on payment deferral for COVID-19 related reasons. Loans that were granted deferrals before the fourth quarter of 2020 have resumed making regular, contractually agreed-upon payments or were paid off. At March 31, 2021, no loan on payment deferral was reported as non-accrual and none are reported as TDRs under Section 4013 of the CARES Act.

SBA Debt Relief Program. As a part of the CARES Act, for borrowers with current SBA 7(a) loans in good standing, and subject to availability of funds, the SBA has agreed to pay up to six months of principal and interest for borrowers with loans that were approved on or before September 27, 2020. The program was extended and for all new SBA 7(a) loans approved during the period beginning on February 1, 2021 and ending on September 30, 2021, the SBA had agreed to pay for borrowers up to an additional three months of principal and interest payments, capped at $9,000 per month and subject to availability of funds. For borrowers with SBA 7(a) loans approved before March 27, 2020 and considered to be underserved or hard-hit by the pandemic within specific Standard Industrial Classification (SIC) codes, the SBA had agreed to pay for each borrower up to an additional three months of principal and interest payments until September 2021.

Impacts from COVID-19:

The ongoing COVID-19 global pandemic has caused significant disruption in the international and United States economies and financial markets. In response to the COVID-19 pandemic, the state government of California has taken preventative or protective actions which have resulted in significant adverse effects for many different types of businesses, including, among others, those in the travel, hospitality and food and beverage industries, and have resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which we operate. Because we have not recently experienced a comparable crisis which resulted in, among other things, the complete cessation of operations for

entire industries in our portfolio, our ability to be predictive is uncertain. As a consequence, we cannot estimate the impact on our business, financial condition or near- or longer-term financial or operational results with reasonable certainty.

Net interest income and net interest margin. The Federal Reserve’s 150 basis point reduction in interest rates in March

2020 negatively impacted our net interest income and net interest margin for 2020, and put further pressure on our net interest margin during 2021. We have proactively worked to lower interest expense by lowering deposit rates, increasing our noninterest-bearing deposits as a percentage of total deposits and taking advantage of lower interest rate borrowing facilities. Participation in the PPP had a significant impact on our asset mix and net interest income for the three months ended March 31, 2021 and will continue to impact both asset mix and net interest income for 2021. These loans contributed $3.7 million of interest income, of which $1.4 million related to accelerated net deferred fee income from loan forgiveness for the three months ended March 31, 2021. The weighted average loan yield for PPP loans was 3.76%, including the accelerated accretion of deferred fee income from PPP forgiveness which lowered the total loan yield by 30 basis points for the three months ended March 31, 2021. We anticipate the accelerated deferred fee income as PPP loans payoff or are forgiven will partially offset the decrease in net interest margin from lower PPP interest rates.

Provision for loan losses. No provision for loan losses was recognized for the first quarter of 2021 primarily as a result of net recoveries, decrease in specific reserves, loan risk rating upgrades, lower historical loss rates, partially offset by an increase in reserves for organic loan growth in the first quarter of 2021. No provision for loan losses was recognized on PPP loans as the SBA guarantees 100% of loan principal under the program.

Loans to the hospitality industry. At March 31, 2021, our total loan commitments to the hospitality industry was $263.7 million, of which $238.1 million was outstanding, representing 11.7% of total loans including loans held for sale, and loans held for investment net of discount and deferred fees. The total outstanding balance consisted of $117.1 million CRE, $10.0 million C&I, $30.9 million Construction and Land and $80.1 million SBA, of which $51.3 million were SBA PPP loans which are fully guaranteed by the SBA. At March 31, 2021, non-accrual loans totaled $77 thousand and no loans were on deferment.

Loans to the restaurant industry. At March 31, 2021, our total loan commitments to the restaurant industry was $125.5 million, of which $119.7 million was outstanding, representing 5.9% of total loans including loans held for sale, and loans held for investment net of discount and deferred fees. The total outstanding balance consisted of $7.1 million CRE, $14.7 million C&I, $97.9 million SBA, of which $80.4 million were SBA PPP loans which are fully guaranteed by the SBA. At March 31, 2021, there were no non-accrual loans and no loans were on deferment.

Capital and liquidity. The Bank opted into the CBLR framework in the first quarter of 2020 and, because the Bank's CBLR was 9.75% as of March 31, 2021, we exceeded the reduced regulatory minimum required of 8.5%, and were considered "well-capitalized" at March 31, 2021. The Bank's primary and secondary liquidity sources were over $900 million at March 31, 2021.

Highlights for the First Quarter of 2021:

•Net income of $9.8 million, compared to $10.8 million for Q4'20 and $4.5 million for Q1'20

•Diluted earnings per common share of $0.82, compared to $0.92 for Q4'20 and $0.39 for Q1'20

• Pre-tax pre-provision income was $14.0 million, compared to $15.4 million for Q4'20 and $9.1 million for Q1'20

•Net interest margin of 4.20%, compared to 4.31% for Q4'20 and 4.78% for Q1'20

•Cost of funds of 0.18%, improved 9 bps from Q4'20 and 54 bps from Q1'20

•Return on average assets of 1.64%, compared to 1.88% for Q4'20 and 1.06% for Q1'20

•Return on average equity of 13.86%, compared to 15.44% for Q4'20 and 6.90% for Q1'20

•Efficiency ratio of 46.4%, compared to 44.4% for Q4'20 and 56.0% for Q1'20

•No provision for loan loss expense for Q1'21, compared to $100 thousand for Q4'20 and $2.7 million for Q1'20

•Sale of SBA and Main Street loans decreased from Q4’20 resulting in a $2.6 million decrease in gain on sale of loans

•Total loans held for investment excluding Paycheck Protection Program (“PPP”) loans increased $25.3 million, or 6.48% annualized

•Noninterest-bearing demand deposits increased $177.8 million, up 21.7% over Q4’20, represented 52.7% of total deposits at March 31, 2021, compared to 50.2% at December 31, 2020 and 46.5% at March 31, 2020

•Tangible book value per share of $17.69, up $0.40 per share from Q4’20 and up $1.88 per share from Q1’20

•Community bank leverage ratio was 9.75% at March 31, 2021

•Quarterly cash dividend of $0.25 per share

Financial Highlights


	At or for the Three Months Ended
	March 31, 2021			December 31, 2020			March 31, 2020
	(dollars in thousands, except per share amounts)
Results of Operations
Total interest and dividend income	$	24,792		$	24,873		$	21,744
Total interest expense	961			1,340			2,571
Net interest income	23,831			23,533			19,173
Total noninterest income	2,254			4,194			1,415
Total net interest income and noninterest income	26,085			27,727			20,588
Total noninterest expense	12,097			12,321			11,519
Pre-tax pre-provision income (1)	13,988			15,406			9,069
Provision for loan losses	—			100			2,700
Income before taxes	13,988			15,306			6,369
Income taxes	4,230			4,512			1,823
NET INCOME	$	9,758		$	10,794		$	4,546

Performance Ratios
Net income per share-diluted	$	0.82		$	0.92		$	0.39
Return on average assets	1.64		%	1.88		%	1.06		%
Return on average equity	13.86		%	15.44		%	6.90		%
Return on average tangible common equity (1)	19.09		%	21.52		%	9.84		%
Net interest margin	4.20		%	4.31		%	4.78		%
Average loan yield	4.97		%	5.15		%	5.95		%
Cost of deposits	0.13		%	0.22		%	0.63		%
Cost of funds	0.18		%	0.27		%	0.72		%
Efficiency ratio (1)	46.4		%	44.4		%	56.0		%

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

Financial Performance


	March 31, 2021			December 31, 2020
	(dollars in thousands, except per share amounts)
Financial Conditions
Total assets	$	2,500,744		$	2,283,115
Loans held for investment	2,028,599			1,880,777
Noninterest-bearing deposits	998,515			820,711
Total deposits	1,895,550			1,634,158
Shareholders’ equity	287,412			280,741

Key Ratios
Noninterest-bearing deposits to total deposits	52.7		%	50.2		%
Equity to assets ratio	11.49		%	12.30		%
Tangible common equity to tangible asset ratio (1)	8.64		%	9.18		%
Book value per share	$	24.31		$	23.98
Tangible book value per share (1)	$	17.69		$	17.29
Credit Quality
Nonperforming loans as a percentage of total assets	0.17		%	0.28		%
Allowance for loan losses as a percentage of total loans held for investment	0.95		%	1.02		%
Allowance for loan losses as a percentage of total loans held for investment excluding PPP loans	1.22		%	1.23		%

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

Non-GAAP Financial Measures

The following tables present a reconciliation of non-GAAP financial measures to GAAP financial measures for: (1) efficiency ratio, (2) pre-tax pre-provision income; (3) average tangible common equity, (4) return on average tangible common equity, (5) tangible common equity, (6) tangible assets, (7) tangible common equity to tangible asset ratio, and (8) tangible book value per share. We believe the presentation of certain non-GAAP financial measures provides useful information to assess our consolidated financial condition and consolidated results of operations and to assist investors in evaluating our financial results relative to our peers. These non-GAAP financial measures complement our GAAP reporting and are presented below to provide investors and others with information that we use to manage our 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 for the GAAP measures.


	Three Months Ended
	March 31, 2021			December 31, 2020			March 31, 2020
	(dollars in thousands)
Efficiency Ratio
Noninterest expense (numerator)	$	12,097		$	12,321		$	11,519



Net interest income	$	23,831		$	23,533		$	19,173
Plus: Noninterest income	2,254			4,194			1,415
Total net interest income and noninterest income (denominator)	$	26,085		$	27,727		$	20,588
Efficiency ratio (1)	46.4		%	44.4		%	56.0		%


Pre-tax pre-provision income
Net interest income	$	23,831		$	23,533		$	19,173


	Three Months Ended
	March 31, 2021			December 31, 2020			March 31, 2020
	(dollars in thousands)
Noninterest income	2,254			4,194			1,415
Total net interest income and noninterest income	26,085			27,727			20,588
Less: Noninterest expense	12,097			12,321			11,519
Pre-tax pre-provision income (1)	$	13,988		$	15,406		$	9,069

Return on Average Assets, Equity, and Tangible Equity
Net income	$	9,758		$	10,794		$	4,546



Average assets	$	2,418,946		$	2,288,205		$	1,727,401
Average shareholders’ equity	285,620			278,049			264,869
Less: Average intangible assets	78,309			78,501			79,083
Average tangible common equity (1)	$	207,311		$	199,548		$	185,786

Return on average assets	1.64		%	1.88		%	1.06		%

Return on average equity	13.86		%	15.44		%	6.90		%

Return on average tangible common equity (1)	19.09		%	21.52		%	9.84		%

(1) Non-GAAP measure.


	March 31, 2021			December 31, 2020
Tangible Common Equity Ratio/Tangible Book Value Per Share	(dollars in thousands, except share and per share data)
Shareholders’ equity	$	287,412		$	280,741
Less: Intangible assets	78,193			78,381
Tangible common equity (1)	$	209,219		$	202,360

Total assets	$	2,500,744		$	2,283,115
Less: Intangible assets	78,193			78,381
Tangible assets (1)	$	2,422,551		$	2,204,734
Equity to asset ratio	11.49		%	12.30		%
Tangible common equity to tangible asset ratio (1)	8.64		%	9.18		%
Book value per share	$	24.31		$	23.98
Tangible book value per share (1)	$	17.69		$	17.29
Shares outstanding	11,824,487			11,705,684

(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.

Net Interest Income

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


	Three Months Ended
	March 31, 2021						December 31, 2020						March 31, 2020
	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)	$	1,981,226	$	24,267	4.97	%	$	1,885,451	$	24,411	5.15	%	$	1,404,652	$	20,780	5.95	%
Investment securities	44,354		152		1.39	%	46,292		154		1.32	%	36,200		218		2.42	%
Deposits at other financial institutions	257,654		160		0.25	%	223,939		129		0.23	%	157,743		501		1.28	%

Restricted stock investments and other bank stocks	16,034		213		5.39	%	15,056		179		4.73	%	14,524		245		6.78	%
Total interest-earning assets	2,299,268		24,792		4.37	%	2,170,738		24,873		4.56	%	1,613,119		21,744		5.42	%

Noninterest-earning assets	119,678						117,467						114,282



Total assets	$	2,418,946					$	2,288,205					$	1,727,401


Interest-bearing liabilities:
Interest checking	$	373,248	$	138	0.15	%	$	276,539	$	119	0.17	%	$	156,407	$	262	0.67	%
Money market accounts	305,931		189		0.25	%	317,173		214		0.27	%	318,465		798		1.01	%
Savings accounts	32,080		11		0.14	%	32,655		11		0.13	%	28,264		49		0.70	%
Time deposits	66,457		119		0.73	%	78,775		134		0.68	%	117,567		490		1.68	%
Brokered time deposits	93,410		131		0.57	%	97,749		421		1.71	%	92,844		505		2.19	%
Total interest-bearing deposits	871,126		588		0.27	%	802,891		899		0.45	%	713,547		2,104		1.19	%
Borrowings	129,222		193		0.61	%	147,663		205		0.55	%	92,143		376		1.64	%
Paycheck Protection Program Liquidity Facility	197,243		171		0.35	%	244,638		216		0.35	%	—		—		—	%
Senior secured notes	1,022		9		3.57	%	2,252		20		3.50	%	8,022		91		4.56	%

Total interest-bearing liabilities	1,198,613		961		0.33	%	1,197,444		1,340		0.45	%	813,712		2,571		1.27	%

Noninterest-bearing liabilities:
Demand deposits	917,194						794,542						631,809
Other liabilities	17,519						18,170						17,011
Shareholders’ equity	285,620						278,049						264,869

Total liabilities and shareholders' equity	$	2,418,946					$	2,288,205					$	1,727,401

Net interest spread			$	23,831	4.04	%			$	23,533	4.11	%			$	19,173	4.15	%
Net interest margin					4.20	%					4.31	%					4.78	%

Total deposits	$	1,788,320	$	588	0.13	%	$	1,597,433	$	899	0.22	%	$	1,345,356	$	2,104	0.63	%
Total funding sources	$	2,115,807	$	961	0.18	%	$	1,991,986	$	1,340	0.27	%	$	1,445,521	$	2,571	0.72	%

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

(2) Interest income on loans includes $3.0 million, $3.4 million and $292 thousand related to the accretion of net deferred loan fees for the three months ended March 31, 2021, December 31, 2020 and March 31, 2020. In addition, interest income also includes $496 thousand, $287 thousand, and $624 thousand of discount accretion on loans acquired in a business combination, including the interest recognized on the payoff of PCI loans, for the three months ended March 31, 2021, December 31, 2020 and March 31, 2020.

Rate/Volume Analysis

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


	Three Months Ended
	March 31, 2021 vs. December 31, 2020						March 31, 2021 vs. March 31, 2020
	Change Attributable to				Total Change		Change Attributable to				Total Change
	Volume		Rate				Volume		Rate
Interest income:	(dollars in thousands)
Interest and fees on loans	$	906	$	(1,050)	$	(144)	$	7,270	$	(3,783)	$	3,487
Interest on investment securities	(7)		5		(2)		24		(90)		(66)
Interest on deposits at other financial institutions	20		11		31		199		(540)		(341)
Dividends on restricted stock investments and other bank stocks	11		23		34		23		(55)		(32)
Change in interest income	930		(1,011)		(81)		7,516		(4,468)		3,048
Interest expense:
Savings, interest checking and money market accounts	25		(31)		(6)		133		(904)		(771)
Time deposits	(41)		(264)		(305)		(159)		(586)		(745)
Borrowings	(28)		16		(12)		118		(301)		(183)
Paycheck Protection Program Liquidity Facility	(45)		—		(45)		171		—		171
Senior secured notes	(12)		1		(11)		(68)		(14)		(82)
Change in interest expense	(101)		(278)		(379)		195		(1,805)		(1,610)
Change in net interest income	$	1,031	$	(733)	$	298	$	7,321	$	(2,663)	$	4,658

First Quarter of 2021 Compared to Fourth Quarter of 2020

Net interest income for the first quarter of 2021 totaled $23.8 million, an increase of $298 thousand from the fourth quarter of 2020 due to lower interest expense of $379 thousand, partially offset with lower interest income of $81 thousand. The increase in net interest income was due primarily to higher discount accretion from loans acquired in a business combination, and organic loan growth, and lower cost of brokered time deposits, partially offset by there being two less days in the first quarter compared to the fourth quarter of 2020 and lower accelerated net deferred fees from PPP forgiveness. Average loans increased by $95.8 million from net organic loan growth and PPP loan originations in the first quarter of 2021. The Company commenced its participation in the latest round of PPP in January 2021 and did not originate any PPP loans in the fourth quarter of 2020 as the prior rounds of PPP had expired. The decrease in interest expense for the first quarter of 2021 was due primarily to lower interest expense on brokered time deposits and lower borrowing interest expense. Interest expense on deposits decreased $311 thousand, coupled with a decrease of $68 thousand on total borrowings. Interest expense on the PPP Liquidity Facility ("PPPLF") was $171 thousand for the first quarter of 2021, compared to $216 thousand in the fourth quarter of 2020 due to lower average borrowings.

Net interest margin for the first quarter of 2021 decreased 11 basis points to 4.20% from 4.31% for the fourth quarter of 2020. The decrease in the net interest margin was due primarily to an 18 basis point decrease in loan yields (including fees and discounts), partially offset by a 9 basis point decrease in total funding costs. The decrease in loan yields was due primarily to the lower accelerated deferred fee income from PPP forgiveness and lower yielding PPP Round 3 loans, offset by higher accelerated discount accretion in the first quarter of 2021. The yield on loans decreased to 4.97% for the first quarter of 2021, compared to 5.15% for the fourth quarter of 2020. The weighted average loan yield for PPP loans was 3.76% including the accelerated accretion of deferred fee income from PPP loan forgiveness, or 2.32% without the accelerated accretion income. The yield on loans, excluding PPP loans, was stable at 5.27% and 5.28% for the first quarter of 2021 and the fourth quarter of 2020, respectively. The discount accretion from loans acquired in a business combination of $496

thousand contributed 9 basis points to the net interest margin in the first quarter of 2021 compared to $287 thousand and 5 basis points in the fourth quarter of 2020.

The cost of funds decreased to 0.18% for the first quarter of 2021, compared to 0.27% for the fourth quarter of 2020, due primarily to higher average noninterest-bearing demand deposits which increased $122.7 million to $917.2 million and represented 51.3% of total average deposits for the first quarter of 2021, compared to $794.5 million, or 49.7% of total average deposits, for the fourth quarter of 2020, coupled with the lower brokered time deposit costs. The average cost of brokered time deposits decreased 114 basis points to 0.57% for the first quarter of 2021, compared to 1.71% for the fourth quarter of 2020. The increase in average noninterest-bearing demand deposits was attributable to core customer growth and increased deposits from the PPP Round 3 loans originated in the first quarter of 2021. The total cost of deposits decreased 9 basis points to 0.13% for the first quarter of 2021, compared to 0.22% for the fourth quarter of 2020.

Average borrowings and senior secured notes decreased $18.4 million and $1.2 million to $129.2 million and $1.0 million, respectively for the first quarter of 2021. Average PPPLF decreased $47.4 million to $197.2 million during the first quarter of 2021. The average cost of total borrowings and senior secured notes increased 3 basis points for the first quarter of 2021.

First Quarter of 2021 Compared to First Quarter of 2020

Net interest income increased $4.7 million to $23.8 million for the first quarter of 2021 primarily due to higher interest income of $3.0 million, coupled with lower interest expense of $1.6 million. The increase in net interest income was due to a number of factors, including but not limited to the following: (i) higher average loans and other interest-earning assets offset by lower market interest rates, (ii) higher accelerated accretion of net deferred fee income from PPP loan forgiveness, (iii) higher noninterest-bearing demand deposits in relationship to total deposits, and (iv) lower costs on interest-bearing liabilities. Average loans increased by $576.6 million, of which $394.6 million was from PPP loans, net of earned fees, contributing an increase in interest income of $7.3 million, partially offset by a decrease in discount accretion on loans acquired in a business combination, and lower loan yields from the low market interest rate environment. Average PPP loans outstanding were $394.6 million and contributed $3.7 million to interest income for the first quarter of 2021. The decrease in interest expense was due primarily to lower market interest rates, lower average time deposits and lower average senior secured notes, partially offset by an increase in average PPPLF. Interest expense on total interest-bearing deposits decreased $1.5 million, coupled with a decrease of $265 thousand on borrowings and senior secured notes, offset by an increase of $171 thousand on PPPLF for the first quarter of 2021 as compared to the same quarter of 2020.

Our net interest margin decreased 58 basis points to 4.20% for the first quarter of 2021 compared to 4.78% for the same quarter of 2020. The decrease in the net interest margin was due primarily to a 105 basis point decrease in interest-earnings asset yields, of which loan yields (including fees and discounts) decreased 98 basis points, and a change in the interest-earning asset mix, partially offset by a 54 basis points decrease in total funding costs. The net interest margin compression was driven by lower market interest rates resulting from the reduction in the target Federal Funds rate and lower-yielding PPP loans. The average yield on interest-earning assets decreased to 4.37% for the first quarter of 2021 compared to 5.42% for the same quarter of 2020 resulting from lower market interest rates and lower yielding PPP loans. Our loan yield decreased to 4.97% for the first quarter of 2021 compared to 5.95% for same quarter of 2020, driven by lower market interest rates, lower-yielding PPP loans, and lower discount accretion from loans acquired in a business combination.

The discount accretion related to loans acquired in a business combination, including the interest income recognized

on the payoff of PCI loans, of $496 thousand contributed 9 basis points to the net interest margin for the first quarter of 2021 compared to $624 thousand and 16 basis points for the same quarter of 2020. The weighted average loan yield for PPP loans was 3.76% including the $1.4 million accelerated accretion of deferred fee income from PPP loan forgiveness, or 2.32% without such accelerated accretion income for the first quarter of 2021. The yield on loans, excluding PPP loans, was 5.27% for the first quarter of 2021 compared to 5.95% for the same quarter of 2020.

Our average cost of funds decreased 54 basis points to 0.18% for the first quarter of 2021 compared to 0.72% for the same quarter of 2020 due to lower market interest rates and higher average noninterest-bearing demand deposits as a percentage of total deposits. Average noninterest-bearing deposits increased $285.4 million to $917.2 million and represented 51.3% of total average deposits for the first quarter of 2021, compared to $631.8 million, or 47.0% of total average deposits, for the first quarter of 2020. Average interest-bearing liabilities were $1.20 billion during the first quarter of 2021 compared to $813.7 million for the same quarter of 2020. Our cost of interest-bearing liabilities decreased 94 basis points to 0.33% compared to 1.27% for the same quarter of 2020. Average borrowings increased $37.1 million to $129.2

million, coupled with an increase of $197.2 million in average PPPLF. The average cost of borrowings decreased 103 basis points to 0.61%, partially offset by 35 basis points increase from the PPPLF. Average senior secured notes balance decreased $7.0 million to $1.0 million for the first quarter of 2021 compared to $8.0 million for the same quarter of 2020 and the average cost of such borrowings decreased 99 basis points to 3.57% for the first quarter of 2021.

Provision for Loan Losses

No provision for loan losses was recognized for the first quarter of 2021, compared to $100 thousand for the fourth quarter of 2020 and $2.7 million for the first quarter of 2020. The decrease in the first quarter provision for loan losses was driven primarily by $104 thousand in net recoveries, a decrease in specific reserves of $368 thousand from a risk rating upgrade of a nonperforming loan relationship, and lower historical loss rates in the first quarter of 2021, partially offset by an increase in reserves required for organic loan growth. While the economy gradually reopened in the first quarter of 2021 with the COVID-19 vaccine rollout, the timing of an economic recovery continues to remain uncertain. Accordingly, the assumptions underlying the COVID-19 related qualitative factors we used in determining the adequacy of the provision for loan losses continued to include (a) uncertain and volatile macroeconomic conditions caused by the pandemic; (b) a stabilized unemployment rate; and (c) the additional government stimulus package signed into law during the first quarter of 2021. No provision for loan losses was recognized on PPP loans in the current or prior quarters as the SBA guarantees 100% of loan principal under the program.

The $2.7 million decrease in the first quarter of 2021 as compared to the first quarter of 2020 resulted primarily from a $1.9 million provision for loan losses in the first quarter of 2020 driven by an increase in qualitative factors relating to COVID-19 and macro-economic conditions when the World Health Organization declared a pandemic crisis and California Governor Newsom issued a stay-at-home order. Nonperforming assets were lower in the first quarter of 2021 and net recoveries were higher as compared to the same quarter of 2020. We recorded specific reserves of $76 thousand in the first quarter of 2021 as compared to $1.1 million in the same quarter of 2020.

Noninterest Income

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


	Three Months Ended
	March 31, 2021		December 31, 2020		March 31, 2020
	(dollars in thousands)
Gain on sale of loans	$	706	$	3,286	$	377
Service charges and fees on deposit accounts	441		468		555
Net servicing fees	400		201		224
Other income	707		239		259
Total noninterest income	$	2,254	$	4,194	$	1,415

First Quarter of 2021 Compared to Fourth Quarter of 2020

Noninterest income for the first quarter of 2021 was $2.3 million, a decrease of $1.9 million from $4.2 million for the fourth quarter of 2020 due primarily to lower gains on loan sales of $2.6 million, partially offset by higher net servicing fees of $199 thousand and higher other income of $468 thousand. SBA loans sold during the first quarter of 2021 totaled $7.4 million resulting in a gain on sale of $706 thousand, compared to $36.7 million resulting in a gain on sale of $2.6 million in the fourth quarter of 2020. Gain on loan sales for the fourth quarter of 2020 also included the sale of 95% participation interests in the Main Street loans resulting in gains of $660 thousand. There were no sales of Main Street loans in the first quarter of 2021 as the program expired on January 8, 2021. The $199 thousand increase in net servicing fees was due primarily to higher volume of loans serviced, and lower servicing asset amortization from early loan pay-offs for the first quarter of 2021 compared to the fourth quarter of 2020. Other income included $476 thousand gain from sale of the Rowland Heights branch during the first quarter of 2021. There was no similar income in the fourth quarter of 2020.

First Quarter of 2021 Compared to First Quarter of 2020

Noninterest income increased $839 thousand to $2.3 million for the first quarter of 2021 compared to $1.4 million for the same quarter of 2020 due primarily to higher gain on sale of loans, coupled with higher other income of $448 thousand. SBA loans sold during the first quarter of 2021 totaled $7.4 million resulting in a gain on sale of $706 thousand, compared to $3.4 million resulting in a gain on sale of $377 thousand in the same quarter of 2020. Other income was $707 thousand for the first quarter of 2021 compared to $259 thousand for the same quarter of 2020. The increase primarily related to the $476 thousand gain from sale of the Rowland Heights branch during the first quarter of 2021. There was no similar income in the first quarter of 2020.

Noninterest Expense

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


	Three Months Ended
	March 31, 2021			December 31, 2020			March 31, 2020
	(dollars in thousands)
Salaries and employee benefits	$	7,578		$	7,884		$	7,230
Occupancy and equipment	1,083			1,168			1,063
Data processing	1,022			1,017			807
Professional fees	437			462			471
Office, postage and telecommunications	290			300			258
Deposit insurance and regulatory assessments	295			318			61
Loan related	136			84			275
Customer service related	107			60			372

Amortization of core deposit intangible	188			192			193
Other expenses	961			836			789
Total noninterest expense	$	12,097		$	12,321		$	11,519
Efficiency ratio (1)	46.4		%	44.4		%	56.0		%

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

First Quarter of 2021 Compared to Fourth Quarter of 2020

Noninterest expense decreased $224 thousand to $12.1 million for the first quarter of 2021 from $12.3 million for the fourth quarter of 2020. This decrease was due primarily to lower salaries and employee benefit expenses, and lower occupancy and equipment, partially offset by higher other expenses.

The $306 thousand decrease in salaries and employee benefits was due primarily to lower commission and incentive accruals and higher deferred origination costs, partially offset by higher payroll taxes and employee benefits resulting from a seasonally higher first quarter. The $85 thousand decrease in occupancy and equipment was due primarily to the reduction of rent expense from the branch sale and other office space consolidations during the first quarter of 2021. The increase in other expenses related primarily to a $200 thousand increase in the provision for unfunded loan commitments resulting from a volume increase in the first quarter of 2021. There was no provision for unfunded loan commitments recognized in the fourth quarter of 2020.

The efficiency ratio remained favorable and increased to 46.4% in the first quarter of 2021, compared to 44.4% in the fourth quarter of 2020. The higher efficiency ratio in the first quarter of 2021 was driven primarily by lower revenue.

First Quarter of 2021 Compared to First Quarter of 2020

Noninterest expense for the first quarter of 2021 increased $578 thousand to $12.1 million from $11.5 million for the same quarter of 2020. The increase was due to higher salaries and employee benefits expense, data processing expense, FDIC assessment fees and other expenses, partially offset by lower customer service and loan related expenses.

The $348 thousand increase in salaries and employee benefits was due mostly to annual merit increases, higher bonus and incentives resulting from an increase in organic production and PPP originations and higher payroll taxes, partially offset by increased deferred loan origination costs during the first quarter of 2021. The $215 thousand increase in data processing expenses was due to increases in transaction volumes from loans and deposit growth and enhancing automation such as online account opening solutions, coupled with higher software amortization of new and upgraded technology. The $234 thousand increase in FDIC assessment fees was due primarily to the organic growth in the total assets during the first quarter of 2021. The $172 thousand increase in other expenses related primarily to an increase in the provision for unfunded loan commitments resulting from a volume increase in the first quarter of 2021. There was no provision for unfunded loan commitments recognized in the first quarter of 2020.

The $265 thousand decrease in customer service related expenses was due primarily to lower earnings credit rates, coupled with a lower average of certain demand deposits accounts during the first quarter of 2021. The $139 thousand decrease in loan related expenses was due primarily to a recovery of expenses in the first quarter of 2021.

The efficiency ratio remained strong at 46.4% in the first quarter of 2021, compared to 56.0% in the first quarter of 2020. The lower efficiency ratio in the first quarter of 2021 was driven by higher revenues.

Income Taxes

Income tax expense was $4.2 million, $4.5 million and $1.8 million for the first quarter of 2021, the fourth quarter of 2020 and the first quarter of 2020. The effective tax rates were 30.2%, 29.5% and 28.6% for the first quarter of 2021, the fourth quarter of 2020 and the first quarter of 2020. The difference in our effective tax rate compared to the statutory rate of 29.5% for the respective reporting periods was primarily attributable to the impact of the vesting and exercise of equity awards combined with changes in the Company's stock price over time.

Financial Condition

Total assets increased $217.6 million during the first quarter of 2021 to $2.50 billion at March 31, 2021 from $2.28 billion at December 31, 2020. This increase was due mostly to a $73.1 million increase in cash and cash equivalents, a $2.7 million increase in loans held for sale and a $147.8 million increase in loans held for investment, partially offset by $4.7 million decrease in investment securities available-for sale. Total liabilities increased $211.0 million during the first quarter of 2021 to $2.21 billion at March 31, 2021 from $2.00 billion at December 31, 2020. This increase was due mostly to a $261.4 million increase in total deposits and $5.3 million increase in PPPLF, partially offset by a $50.0 million decrease in borrowings, a $2.0 million decrease in senior secured notes, and a $3.7 million decrease in accrued interest payable and other liabilities.

Cash and Cash Equivalents

Cash and cash equivalents are comprised of cash and due from banks, and interest-bearing deposits at the Federal Reserve and other banks with original maturities of less than 90 days. Cash and cash equivalents totaled $309.4 million at March 31, 2021, an increase of $73.1 million from December 31, 2020. The increase during the three months ended March 31, 2021 was primarily attributable to an increase in deposits and excess liquidity in the marketplace.

Investment Securities

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


	March 31, 2021				December 31, 2020
	Fair Value		Percentage of Total		Fair Value		Percentage of Total
Securities available-for-sale:	(dollars in thousands)
U.S. Government and agency securities	$	2,628	7.0	%	$	2,705	6.4	%
Mortgage-backed securities	4,897		13.1	%	$	5,653	13.5	%
Collateralized mortgage obligations	22,399		60.0	%	25,778		61.3	%


SBA pools	7,452		19.9	%	7,891		18.8	%

	$	37,376	100.0	%	$	42,027	100.0	%

	March 31, 2021				December 31, 2020
	Amortized Cost		Percentage of Total		Amortized Cost		Percentage of Total
Securities held-to-maturity:

Mortgage-backed securities	$	1,348	100.0	%	$	1,358	100.0	%
	$	1,348	100.0	%	$	1,358	100.0	%

The following table presents the contractual maturities of investment securities available-for-sale and held-to-maturity as of March 31, 2021:


	March 31, 2021
	One Year or Less			After One Year Through Five Years			After Five Years Through Ten Years			After Ten Years			Total
Securities available-for-sale:	(dollars in thousands)
U.S. Government and agency securities	$	—		$	—		$	—		$	2,628		$	2,628
Mortgage-backed securities	—			—			—			4,897			4,897
Collateralized mortgage obligations	—			—			—			22,399			22,399
SBA pools	—			—			—			7,452			7,452
	$	—		$	—		$	—		$	37,376		$	37,376
Weighted average yield:
U.S. Government and agency securities	—		%	—		%	—		%	2.13		%	2.13		%
Mortgage-backed securities	—		%	—		%	—		%	1.90		%	1.90		%
Collateralized mortgage obligations	—		%	—		%	—		%	1.03		%	1.03		%
SBA pools	—		%	—		%	—		%	2.43		%	2.43		%
	—		%	—		%	—		%	1.49		%	1.49		%


	March 31, 2021
	One Year or Less			After One Year Through Five Years			After Five Years Through Ten Years			After Ten Years			Total
Securities held-to-maturity:	(dollars in thousands)

Mortgage-backed securities	$	—		$	—		$	—		$	1,348		$	1,348
	$	—		$	—		$	—		$	1,348		$	1,348
Weighted average yield:

Mortgage-backed securities	—		%	—		%	—		%	2.81		%	2.81		%
	—		%	—		%	—		%	2.81		%	2.81		%

At March 31, 2021 and December 31, 2020, no issuer represented 10% or more of our shareholders’ equity. There were no sales, purchases, maturities or calls of investment securities available-for-sale and held-to-maturity during the three months ended March 31, 2021. There were $8.0 million in purchases of investment securities available-for-sale during the three months ended December 31, 2020. There were no sales, maturities or calls of any investment securities during the three months ended December 31, 2020. At March 31, 2021, securities held-to-maturity with a carrying amount of $1.3 million were pledged to the Federal Reserve Bank as collateral for a secured line of credit.

Loans

Loans are the single largest contributor to our net income. It is our goal to continue to grow the consolidated balance

sheet through the origination of loans, and to a lesser extent, through loan purchases. This effort will serve to maximize our

yield on interest-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 including assisting small and medium sized businesses with new government approved

loan programs resulting from COVID-19. Our lending strategy emphasizes quality loan growth, product diversification, and

competitive and profitable pricing. Continued balanced growth is anticipated over the coming years.

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


	March 31, 2021				December 31, 2020
	Amount		Percentage of Total		Amount		Percentage of Total
	(dollars in thousands)
Construction and land development	$	229,637	11.2	%	$	197,634	10.5	%
Real estate:
Residential	25,505		1.2	%	27,683		1.5	%
Commercial real estate - owner occupied	159,039		7.8	%	161,823		8.6	%
Commercial real estate - non-owner occupied	572,414		28.0	%	550,788		29.1	%
Commercial and industrial	366,706		18.1	%	388,814		20.5	%
SBA loans (1)	688,197		33.7	%	562,842		29.8	%
Consumer	3		—	%	1		—	%
Loans held for investment, net of discounts (2)	$	2,041,501	100.0	%	$	1,889,585	100.0	%
Net deferred origination fees (3)	(12,902)				(8,808)
Loans held for investment	2,028,599				1,880,777
Allowance for loan losses	(19,271)				(19,167)
Loans held for investment, net	$	2,009,328			$	1,861,610

(1) SBA loans include PPP loans with total gross outstanding principal of $453.2 million and $326.7 million at March 31, 2021 and December 31, 2020.

(2) Loans held for investment, net of discounts includes the net carrying value of PCI loans of $722 thousand, and $761 thousand at March 31, 2021, and December 31, 2020.

(3) Net deferred origination fees include $10.5 million and $6.6 million for PPP loans at March 31, 2021 and December 31, 2020.

Total loans held for investment increased $147.8 million to $2.03 billion at March 31, 2021 due to net loan growth from PPP of $122.6 million, coupled with $25.3 million of organic loan growth. Organic loan growth for the first quarter of 2021 on an annualized basis was 6.48% over December 31, 2020. During the first quarter of 2021 as compared to December 31, 2020, construction and land development loans increased $32.0 million, commercial real estate loans ("CRE") increased $18.8 million, commercial and industrial ("C&I") loans decreased $22.1 million, SBA loans increased $125.4 million, of which $126.4 million related to gross PPP loans before net deferred fees, and residential loans decreased $2.2 million. Excluding the PPP loans totaling $453.2 million at March 31, 2021, the diversification and portfolio composition remained similar at March 31, 2021 compared to December 31, 2020.

The most significant categories in the loan portfolio are SBA, CRE (non-owner occupied) and commercial and

industrial loans which represent 33.7%, 28.0% and 18.1% of total loans held for investment, net of discounts at March 31, 2021.

In 2020, we participated in the Main Street Lending Program to support lending to small- and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. Under this program, we originated loans to borrowers meeting the terms and requirements of the program, including requirements as to

eligibility, use of proceeds and priority, and sold a 95% participation interest in these loans to Main Street Facilities, LLC, a

special purpose vehicle ("SPV") organized by the Federal Reserve to purchase the participation interest from eligible lenders,

including the Bank. During the year ended December 31, 2020, the Company originated 32 loans under the Main Street

Lending Program totaling $172.2 million in principal and sold participation interest totaling $163.6 million to the SPV,

resulting in a gain on sale of $1.1 million. The program expired on January 8, 2021 and no Main Street loan originations or sales occurred for the quarter ended March 31, 2021.

Per the regulatory definition of commercial real estate, at March 31, 2021 and December 31, 2020, our concentration of such loans represented 315% and 308% of our total risk-based capital and were below our internal policy limit of 350% of our total risk-based capital. In addition, at March 31, 2021 and December 31, 2020, total loans secured by commercial real estate under construction and land development represented 104% and 94% 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.

Loans to the hospitality industry totaled $238.1 million and $212.3 million, which included loans held for sale, at March 31, 2021 and December 31, 2020. 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 our concentration and the levels of hospitality loans are measured against our total risk-based capital and reported to our Board of Directors regularly. Our internal guidance is to limit CRE and construction hospitality industry commitments to 150% and 75% of total risk-based capital, respectively. At March 31, 2021 and December 31, 2020, total commitments to fund CRE loans to the hospitality industry represented 67% and 71% of our total risk-based capital. Total commitments to fund construction loans to the hospitality industry were 18% and 17% of our total risk-based capital at March 31, 2021 and December 31, 2020. Please refer to the Recent Developments “COVID-19 Updates for the First Quarter of 2021” section for pandemic impact relating to hospitality loans. At March 31, 2021, non-accrual hospitality loans totaled $77 thousand and no loans were on deferment.

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

As a preferred SBA lender, we participated in the PPP administrated by the SBA, in assisting borrowers with additional liquidity. Borrowers who used the funds from their PPP loans to maintain payroll and pay for certain eligible non-payroll expenses may have up to 100% of their loans forgiven by the SBA. These loans carry a fixed rate of 1.00% and a contractual maturity of two years (loans originated before June 5, 2020) or five years (all other PPP loans). At March 31, 2021 and December 31, 2020, we had gross outstanding balances of $453.2 million and $326.7 million , or $442.7 million and $320.1 million, net of deferred fees of $10.5 million and $6.6 million, respectively. The SBA began approving forgiveness applications and making payments as forgiveness was approved in the fourth quarter of 2020. During the three months ended March 31, 2021, approximately $67.9 million of PPP loans originated in 2020 were forgiven by the SBA or repaid. In the first quarter of 2021, net PPP deferred fees of $1.4 million were accelerated to income at the time of SBA forgiveness or borrower repayment. PPP loans forgiven-to-date totaled $140.9 million at March 31, 2021. Refer to Note 3. Loans to the condensed consolidated financial statements.

At March 31, 2021 and December 31, 2020, non-accrual SBA loans totaled $1.6 million and $3.3 million. Excluding PPP loans, our SBA portfolio represents 14.8% and 15.1% of total loans held for investment, net of discounts at March 31, 2021 and December 31, 2020. Please refer to the Recent Developments “Key Events and Updates Related to COVID-19” section for pandemic impact relating to PPP loans. At March 31, 2021, there were two SBA 7(a) loans totaling $2.7 million on payment deferral. At December 31, 2020, there was one SBA 7(a) loan with an outstanding balance of $542 thousand on payment deferral.

The following table summarizes the SBA loan types in the portfolio at the periods indicated:


	March 31, 2021		December 31, 2020
	(dollars in thousands)
SBA 7(a) (1)	$	544,457	$	418,621
SBA 504	143,740		144,221
Total	$	688,197	$	562,842

(1) SBA 7(a) includes PPP loans with total gross outstanding principal of $453.2 million and $326.7 million at March 31, 2021 and December 31, 2020.

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


	March 31, 2021		December 31, 2020
	(dollars in thousands)
Secured - industrial warehouse	$	62,608	$	66,969
Secured - hospitality	24,870		25,172
Secured - retail center/building	26,220		24,960
Secured - other real estate	85,688		82,933
Unsecured or secured by other business assets	10,452		11,905
Total unguaranteed portion	209,838		211,939
Guaranteed portion (1)	478,359		350,903
Total	$	688,197	$	562,842

(1) Guaranteed portion includes PPP loans with total gross outstanding principal of $453.2 million and $326.7 million as the SBA guarantees 100% of loans funded under the program.at March 31, 2021 and December 31, 2020.

Loan Maturities

The following table presents the contractual maturities and the distribution between fixed and adjustable interest rates for loans held for investment at period indicated:


	March 31, 2021
	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	$	9,052	$	116,454	$	25,452	$	66,812	$	—	$	11,867	$	229,637
Real estate:
Residential	—		—		—		846		1,781		22,878		25,505
Commercial real estate - owner occupied	2,260		1,216		18,884		37,978		18,457		80,244		159,039
Commercial real estate - non-owner occupied	6,471		9,815		87,731		128,055		69,653		270,689		572,414
Commercial and industrial	4,093		93,845		24,197		90,340		20,710		133,521		366,706
SBA loans (1)	—		19,308		455,920		11,761		9,631		191,577		688,197
Consumer	3		—		—		—		—		—		3
Total	$	21,879	$	240,638	$	612,184	$	335,792	$	120,232	$	710,776	$	2,041,501

(1) PPP loans with total gross outstanding principal of $453.2 million are fixed-rate with two-year or five-year contractual maturity.

Potential Problem Loans

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

Loan delinquencies (30-89 days past due) totaled $1 thousand and $54 thousand at March 31, 2021 and December 31, 2020. Deferred payment loans which met the requirement under Section 4013 of the CARES Act are not considered as TDRs and are accruing interest as of March 31, 2021.

The following tables present the recorded investment balances of substandard loans, excluding PCI loans, by loan class at the periods indicated:


	March 31, 2021
			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	$	—	$	—	$	3,396	$	7,137	$	300	$	—	$	—	$	10,833
Substandard (1)	—		—		1,380		2,606		3,809		7,474		—		15,269
Total	$	—	$	—	$	4,776	$	9,743	$	4,109	$	7,474	$	—	$	26,102

(1)At March 31, 2021, substandard loans included $4.2 million of impaired loans and excluded $317 thousand of performing TDR. There were no loans classified as doubtful or loss at March 31, 2021.


	December 31, 2020
			Real Estate
	Construction and land development		Residential		Commercial real estate - owner occupied		Commercial real estate - non-owner occupied		Commercial and industrial		SBA loans		Consumer		Total
	(dollars in thousands)

Substandard (1)	$	—	$	254	$	1,417	$	3,536	$	3,967	$	9,187	$	—	$	18,361
Total	$	—	$	254	$	1,417	$	3,536	$	3,967	$	9,187	$	—	$	18,361

(1)At December 31, 2020, substandard loans included $6.4 million of impaired loans and excluded $319 thousand of performing TDR. There were no loans classified as special mention, doubtful or loss at December 31, 2020.

Since December 31, 2020, the increase in the special mention loans was due to six loans from two loan relationships totaling $10.8 million were downgraded. These loans are adequately secured by commercial real estate properties. The decrease in substandard loans was due to $2.5 million from risk rating upgrades, coupled with $568 thousand in payoffs and paydowns.

Nonperforming Assets

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


	March 31, 2021			December 31, 2020
	(dollars in thousands)
Accruing loans past due 90 days or more	$	—		$	—
Non-accrual	4,114			6,099
Troubled debt restructurings on non-accrual	77			347
Total nonperforming loans	4,191			6,446
Foreclosed assets	—			—
Total nonperforming assets	$	4,191		$	6,446
Troubled debt restructurings - on accrual	$	317		$	319

Nonperforming loans as a percentage of total loans held for investment	0.21		%	0.34		%
Nonperforming assets as a percentage of total assets	0.17		%	0.28		%

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


	March 31, 2021		December 31, 2020
Nonperforming loans:	(dollars in thousands)

Real estate:
Residential	$	—	$	254
Commercial real estate - owner occupied	1,255		1,293
Commercial real estate - non-owner occupied	1,234		1,465
Commercial and industrial	120		183
SBA loans	1,582		3,251

Total nonperforming loans (1)	$	4,191	$	6,446

(1) There were no purchased credit impaired loans on nonaccrual at March 31, 2021 and December 31, 2020.

Since December 31, 2020, the decrease in nonperforming loans was due mostly to $1.7 million in loans upgraded and returned to accrual status, coupled with $521 thousand in payoffs and paydowns. There were no loans over 90 days past due that were still accruing interest at March 31, 2021 and December 31, 2020.

Troubled Debt Restructurings

At March 31, 2021 and December 31, 2020, the total recorded investment for loans identified as a TDR was approximately $394 thousand and $666 thousand. There were no specific reserves allocated for these loans and we have not committed to lend any additional amounts to customers with outstanding loans that are classified as TDRs at March 31, 2021 and December 31, 2020. During the three months ended March 31, 2021, there were no new loan modifications resulting in TDRs. Loan modifications resulting in TDR status generally included one or a combination of the following concessions: extensions of the maturity date, principal payment deferments or signed forbearance agreements with a payment plan.

During the three months ended March 31, 2021, there were no TDRs for which there was a payment default within twelve months following the modification. During the three months ended December 31, 2020, there was $82 thousand TDRs for which there was a payment default within twelve months following the modification. A loan is considered to be in payment default once it is 90 days contractually past due under the modification.

COVID Related Loan Deferments

At March 31, 2021, the Company had five loans on payment deferral for COVID-19 related reasons, four of which were from one relationship, totaling $5.7 million. At December 31, 2020, the Company had three loans totaling $3.3 million on payment deferral for COVID-19 related reasons. Loans that were granted deferrals before the fourth quarter of 2020 have resumed making regular, contractually agreed-upon payments or were paid off. At March 31, 2021, no loan on payment deferral was reported as non-accrual and none are reported as TDRs under Section 4013 of the CARES Act.

Allowance for Loan losses

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

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 adjusted

for the effects of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date

to differ from the portfolio segment’s historical loss experience. Qualitative factors include consideration of the following:

changes in lending policies and procedures; changes in economic conditions; changes in the nature and volume of the

portfolio; changes in the experience, ability and depth of lending management and other relevant staff; changes in the volume

and severity of past due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the

value of the underlying collateral for collateral-dependent loans; concentrations of credit; and the effect of other external

factors such as competition, COVID-19 pandemic and legal and regulatory requirements.

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

In addition, the evaluation of the appropriate allowance for loan losses on non-PCI loans in the various loan

segments considers discounts recorded as a part of the initial determination of the fair value of the loans. For these loans, no

allowance for loan losses is recorded at the acquisition date. Interest and credit discounts are components of the initial fair

value. Additional credit deterioration on acquired non-PCI loans, in excess of the remaining discounts are being recognized in

the allowance through the provision for loan losses.

The evaluation of the appropriate allowance for loan losses for purchased credit-impaired loans in the various loan

segments considers the expected cash flows to be collected from the borrower. These loans are initially recorded at fair value

and, therefore, no allowance for loan losses is recorded at the acquisition date. Subsequent to the acquisition date, the

expected cash flows of purchased loans are subject to evaluation. Decreases in expected cash flows are recognized by

recording an allowance for loan losses with the related provision for loan losses. If the expected cash flows on the purchased

loans increase, a previously recorded impairment allowance can be reversed. Increases in expected cash flows of purchased

loans, when there are no reversals of previous impairment allowances, are recognized over the remaining life of the loans.

At March 31, 2021, we evaluated and considered the impacts relating to COVID-19 and macro-economic conditions on our qualitative factors. The assumptions underlying these qualitative factors included (a) uncertain and volatile macro-economic conditions caused by the pandemic; (b) a stabilized unemployment rate; and (c) the additional government stimulus package signed into law during the first quarter of 2021.

At March 31, 2021, the allowance for loan losses was $19.3 million, or 0.95% of loans held for investment, compared to $19.2 million, or 1.02% of loans held for investment at December 31, 2020. The allowance for loan losses as a percentage of total loans held for investment without PPP loans was 1.22% at March 31, 2021. At March 31, 2021, the net carrying value of acquired loans totaled $152.9 million and included a remaining net discount of $3.4 million. The discount is available to absorb losses on the acquired loans and represented 2.2% of the net carrying value of acquired loans and 0.17% of total gross loans held for investment.

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

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


	Three Months Ended
	March 31, 2021			March 31, 2020
	(dollars in thousands)
Balance, beginning of period	$	19,167		$	13,522
Charge-offs:





Commercial and industrial	(2)			(7)
SBA loans	—			(21)

Total charge-offs	(2)			(28)
Recoveries:





Commercial and industrial	106			12
SBA loans	—			12

Total recoveries	106			24
Net recoveries (charge-offs)	104			(4)
Provision for loan losses	—			2,700
Balance, end of period	$	19,271		$	16,218



Allowance for loan losses as a percentage of total loans held for investment	0.95		%	1.13		%
Allowance for loan losses as a percentage of total loans held for investment excluding PPP loans	1.22		%	1.13		%
Annualized net recoveries (charge-offs) to average loans	0.02		%	—		%

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


	March 31, 2021				December 31, 2020
	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	$	2,536	11.2	%	$	2,129	10.5	%
Real estate:
Residential	220		1.2	%	233		1.5	%
Commercial real estate - owner occupied	1,305		7.8	%	1,290		8.6	%
Commercial real estate - non-owner occupied	5,861		28.0	%	5,545		29.1	%
Commercial and industrial	6,363		18.1	%	6,714		20.5	%
SBA loans	2,986		33.7	%	3,256		29.8	%
Consumer	—		—	%	—		—	%
	$	19,271	100.0	%	$	19,167	100.0	%

Loan Held for Sale

Loans held for sale typically consist of the guaranteed portion of SBA 7a loans and Main Street loans that are originated and intended for sale in the secondary market and to the Main Street SPV and may also include commercial real estate loans and SBA 504 loans. Loans held for sale are carried at the lower of carrying value or estimated market value. At March 31, 2021, loans held for sale were $12.7 million, an increase of $2.8 million from $9.9 million at December 31, 2020. The change in loans held for sale was due to the origination of $10.4 million in loans held for sale, offset by the sale of loans with a carrying value of $7.4 million during the three months ended March 31, 2021. In addition, there were $277 thousand loans held for sale transferred to loans held for investment during the three months ended March 31, 2021. At March 31, 2021 and December 31, 2020, loans held for sale consisted entirely of SBA 7a loans and the fair value of loans held for sale totaled $13.7 million and $10.6 million.

Servicing Asset and Loan Servicing Portfolio

Loans serviced for others totaled $454.1 million and $454.3 million at March 31, 2021 and December 31, 2020. The loan servicing portfolio includes SBA loans serviced for others of $223.7 million and $222.5 million for which there was a related servicing asset of $2.8 million and $2.9 million at March 31, 2021 and December 31, 2020. The fair value of the servicing asset for SBA loans is measured quarterly and was $3.7 million and $3.4 million as of March 31, 2021 and December 31, 2020. The significant assumptions used in the valuation of the SBA servicing asset at March 31, 2021 included a weighted average discount rate of 8.4% and a weighted average prepayment speed assumption of 20.1%.

In addition, the loan servicing portfolio includes construction and land development loans, commercial real estate loans and commercial & industrial loans participated out to various other institutions and the Main Street SPV of $230.4 million and $231.8 million for which there is no related servicing asset at March 31, 2021 and December 31, 2020.

Under the Main Street Lending Program, we are accruing servicing fee income of 0.25% per annum of the participation interest sold to the SPV. The Company and the Federal Reserve believe that the terms of the Servicing Agreement are commercially reasonable and comparable to terms that unaffiliated third parties would accept to provide Enhanced Reporting Services, under the terms and conditions set out in the Servicing Agreement, with respect to the participation interest. Therefore no servicing asset or liability was recorded at the time of sale.

Goodwill and Other Intangible Assets

In connection with the acquisition of Pacific Commerce Bancorp ("PCB"), we recognized goodwill of $73.4 million and a core deposit intangible ("CDI") of $6.9 million on July 31, 2018. We evaluate goodwill for impairment annually, unless circumstances arise indicating potential impairment. We evaluated goodwill for impairment quarterly in 2020 due to the volatility in our stock price related to the COVID-19 pandemic. There were no changes in the carrying value of Goodwill during the year ended December 31, 2020. We plan to evaluate goodwill for impairment in the fourth quarter of 2021, and we observed no indications of potential impairment at March 31, 2021. For the three months ended March 31, 2021 and 2020, we recognized CDI amortization of $188 thousand and $193 thousand.

Deposits

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


	March 31, 2021				December 31, 2020
	Amount		Percentage of Total		Amount		Percentage of Total
	(dollars in thousands)
Noninterest-bearing demand	$	998,515	52.7	%	$	820,711	50.2	%
Interest-bearing deposits:
Interest checking (1)	385,675		20.3	%	297,337		18.2	%
Money market (2)	312,452		16.5	%	309,488		19.0	%
Savings	31,869		1.7	%	32,805		2.0	%
Retail time deposits	57,200		3.0	%	62,742		3.8	%
Wholesale time deposits	109,839		5.8	%	111,075		6.8	%
	$	1,895,550	100.0	%	$	1,634,158	100.0	%

(1) Included brokered deposits of $108.7 million and $33.7 million at March 31, 2021 and December 31, 2020.

(2) Included brokered deposits of $45.1 million and $45.0 million at March 31, 2021 and December 31, 2020.

Total deposits increased $261.4 million from December 31, 2020 to $1.90 billion at March 31, 2021 due to an increase in both noninterest-bearing and interest-bearing nonmaturity deposits, partially offset by a decrease in time deposit accounts. At March 31, 2021, noninterest-bearing deposits totaled $998.5 million, an increase of $177.8 million in the first quarter of 2021 due primarily to the increase in core customer deposits, coupled with the increase in customers' accounts funded by the PPP funds. Interest-bearing nonmaturity deposits increased $90.4 million due primarily to an increase in low cost brokered deposits, coupled with an increase in core deposits from the FDIC Insurance Program through Demand Deposit

Marketplace ("DDM") . Noninterest-bearing deposits represented 52.7% of total deposits at March 31, 2021, compared to 50.2% of total deposits at December 31, 2020.

Time deposits decreased $6.8 million due primarily to a decrease in customer time deposits which matured in the first quarter of 2021.

Wholesale time deposits includes brokered time deposits and collateralized time deposits from the State of California. There were no collateralized time deposits from the State of California at March 31, 2021 and $10.0 million at December 31, 2020. The State of California deposits are collateralized by letters of credit issued by the FHLB under the Bank's secured line of credit. Please refer to Note 6 - Deposits and Note 7 - Borrowing Arrangements to the condensed consolidated financial statements. Our ten largest depositor relationships accounted for approximately 28% of total deposits at March 31, 2021 and December 31, 2020.

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


	March 31, 2021
	(dollars in thousands)
Three months or less	$	2,440
Over three months through six months	1,870
Over six months through twelve months	4,206
Over twelve months	7,871
	$	16,387

Borrowings

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

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


	March 31, 2021		December 31, 2020
	(dollars in thousands)
FHLB advances	$	95,000	$	145,000
Paycheck Protection Program Liquidity Facility	209,998		204,719
Senior secured notes	—		2,000

Federal Home Loan Bank Secured Line of Credit

At March 31, 2021, we had a secured line of credit of $414.0 million from the FHLB, of which $259.0 million was available. This secured borrowing arrangement is collateralized under a blanket lien and is subject to us providing adequate collateral and continued compliance with the Advances and Security Agreement and other eligibility requirements established by the FHLB. At March 31, 2021, we had pledged $1.65 billion of loans under the blanket lien, including PPP loans, of which $871.6 million was considered as eligible collateral. PPP loans are not considered eligible collateral under this borrowing agreement. In addition, at March 31, 2021, we used $60.0 million of our secured FHLB borrowing capacity by having the FHLB issue letters of credit to meet collateral requirements for deposits from other public agencies.

At March 31, 2021, we also participated in the FHLB San Francisco's new Recovery Advance loan program for $5 million at zero percent interest with a maturity date in May 2021.

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


	March 31, 2021					December 31, 2020
	Balance		Rate		Maturity Date	Balance		Rate		Maturity Date
Advances:	(dollars in thousands)


Recovery advance	$	5,000	—	%	5/19/2021	$	5,000	—	%	5/19/2021
Term and fixed-rate advance	—		—	%	—	50,000		0.19	%	2/26/2021
Term and fixed-rate advance	30,000		0.25	%	5/26/2021	30,000		0.25	%	5/26/2021
Term and fixed-rate advance	30,000		0.21	%	5/27/2021	30,000		0.21	%	5/27/2021
Term and fixed-rate advance	30,000		1.93	%	6/11/2021	30,000		1.93	%	6/11/2021
	$	95,000	0.75	%		$	145,000	0.56	%

The average outstanding balance of total FHLB borrowings was $129.2 million and $89.8 million with an average interest rate of 0.61% and 1.68% for the three months ended March 31, 2021 and 2020.

Federal Reserve Bank Secured Line of Credit

At March 31, 2021, we had a secured line of credit of $149.5 million from the Federal Reserve Bank, including secured borrowing capacity through the Borrower-in-Custody ("BIC") program. At March 31, 2021, we had pledged qualifying loans with an unpaid principal balance of $226.6 million and securities held-to-maturity with a carrying value of $1.3 million as collateral for this line. Borrowings under this BIC program are overnight advances with interest chargeable at the Federal Reserve discount window ("Primary Credit") borrowing rate. There were no borrowings under this credit facility at or during the three months ended March 31, 2021 and December 31, 2020.

Paycheck Protection Program Liquidity Facility

On April 14, 2020, we were approved by the Federal Reserve to access its SBA Paycheck Protection Program Liquidity Facility ("PPPLF") through the discount window. The PPPLF enables the Company to fund PPP loans without taking on additional liquidity or funding risks by providing non-recourse loans collateralized by the PPP loans. Borrowings under the PPPLF have a fixed-rate of 0.35%, with a term that matches the contractual maturity of the underlying loans pledged. At March 31, 2021 and December 31, 2020, we had $210.0 million and $204.7 million in borrowings under the PPPLF which were collateralized by PPP loans. The average outstanding borrowings were $197.2 million during the three months ended March 31, 2021.

Federal Funds Unsecured Lines of Credit

We have established unsecured overnight borrowing arrangements for an aggregate amount of $125.0 million, subject to availability, with five of our correspondent banks. In general, interest rates on these lines approximate the federal funds target rate. There were no borrowings under these credit facilities at or during the three months ended March 31, 2021 and there were no borrowings at December 31, 2020.

Senior Secured Notes

Shareholders’ Equity

Total shareholders’ equity increased $6.7 million to $287.4 million at March 31, 2021 from $280.7 million at December 31, 2020. The increase in shareholders' equity was primarily due to $9.8 million in net earnings, $592 thousand of share-based compensation and $60 thousand of stock options exercised, partially offset by $3.0 million in cash dividends, and $353 thousand in stock repurchases and $430 thousand related to changes in the fair value of investment securities, available-for-sale and the resulting impact on accumulated other comprehensive income during the three months ended March 31, 2021.

Liquidity and Capital Resources

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

Holding Company Liquidity

As a bank holding company, we currently have no significant assets other than our equity interest in the Bank. Our primary sources of liquidity at the holding company are dividends from the Bank, cash on hand at the holding company, which was approximately $218 thousand at March 31, 2021, a $25.0 million secured line of credit of which $25.0 million was available at March 31, 2021, and our ability to raise capital, issue subordinated debt, and secure other outside borrowings. The holding company's ability to declare and pay cash dividends to shareholders and repurchase our common stock depends upon cash on hand, availability on our senior secured revolving line of credit and dividends from the Bank. Dividends from the Bank to the holding company depend upon the Bank's earnings, financial position, regulatory standing, ability to meet current and anticipated regulatory capital requirements, and other factors deemed relevant by our Board of Directors. The Bank paid $5 million in dividends to the holding company during the three months ended March 31, 2021. Please refer to the section "— Regulatory Capital" for a discussion of dividend limitations at both the holding company and the Bank.

Consolidated Company Liquidity

Our liquidity ratio is defined as liquid assets (cash and due from banks, fed funds sold and repos, interest-bearing deposits in other banks, other investments with a remaining maturity of one year or less, available-for-sale and equity securities, unpledged held-to-maturity securities and fully funded loans held for sale) divided by total assets. At March 31, 2021, our liquidity ratio was 14.2%.

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

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

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

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

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

11.0%.

Additional sources of liquidity available to us at March 31, 2021 included $259.0 million in remaining secured borrowing capacity with the FHLB, $149.5 million in secured borrowing capacity with the Federal Reserve Bank through the Borrower-in-Custody Program ("BIC"), unsecured lines of credit with correspondent banks with a remaining borrowing capacity of $125.0 million, and $243.2 million in PPPLF borrowing capacity with the Federal Reserve Bank through the Discount Window.

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

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

Stock Repurchase Plan

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

On March 17, 2020, the Company suspended the stock repurchase plan. There were no repurchases of common stock during the three months ended March 31, 2021, compared to 38,411 shares of the Company's common stock repurchased at an average price of $22.34 per share and a total cost of $858 thousand during the three months ended March 31, 2020. The remaining number of shares authorized to be repurchased under this plan was 695,489 shares at March 31, 2021. Although our Board approved the resumption of our stock repurchase plan in the first quarter of 2021, under the terms of the definitive merger agreement with Enterprise Financial Services Corp., we have agreed that we will not repurchase or otherwise redeem any of our outstanding common stock except in connection with the withholding of common stock to cover taxes as restricted shares of common stock vest.

Contractual Obligations

The following table summarizes aggregated information about our outstanding contractual obligations and other long-term liabilities, excluding interest payments, at March 31, 2021.


	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	$	1,728,511	$	1,728,511	$	—	$	—	$	—
Time deposits	167,039		54,752		83,276		29,011		—


Borrowings	95,000		95,000		—		—		—
Paycheck Protection Program Liquidity Facility	209,998		—		159,308		50,690		—

Operating lease obligations	4,471		1,720		2,706		45		—
	$	2,205,019	$	1,879,983	$	245,290	$	79,746	$	—

Off-Balance-Sheet Arrangements

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

At March 31, 2021, we had unused loan commitments of $484.4 million, standby letters of credit of $3.4 million and commitments to contribute capital to a low-income housing tax credit project partnership and other CRA equity investments of $2.0 million and $61 thousand.

Regulatory Capital

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by

regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

At March 31, 2021, we qualify for treatment under the Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) and, therefore, are not subject to consolidated capital rules at the bank holding company level. The Bank also opted into the CBLR framework beginning with the first quarter of 2020. At March 31, 2021 and December 31, 2020, the Bank's CBLR ratio was 9.75% and 10.28% which exceeded all regulatory capital requirements under the CBLR framework and, accordingly, the Bank was considered to be ‘‘well-capitalized.’’

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

•A leverage ratio of greater than 9%;

•Total consolidated assets of less than $10 billion;

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

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

Dividends

Our general dividend policy is to pay cash dividends within the range of typical peer payout ratios, provided that such payments do not adversely affect our consolidated financial condition and are not overly restrictive to our growth capacity. While we have paid a consistent level of quarterly cash dividends since the first quarter of 2017, no assurance can be given that our financial performance in any given year will justify the continued payment of a certain level of cash dividend, or any cash dividend at all. During three months ended March 31, 2021 and 2020, we declared cash dividends of $0.25 per share for each period.

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

The holding company's primary source of funds is dividends from the Bank, as well as availability under our $25

million secured line of credit. Under the California Financial Code, the Bank is permitted to pay a dividend in the following

circumstances: (i) without the consent of either the California Department of Financial Protection and Innovation ("DFPI") or

the Bank's shareholders, in an amount not exceeding the lesser of (a) the retained earnings of the Bank; or (b) the net income

of the Bank for its last three fiscal years, less the amount of any distributions made during the prior period; (ii) with the prior

approval of the DFPI, in an amount not exceeding the greatest of: (x) the retained earnings of the Bank; (y) the net income of

the Bank for its last fiscal year; or (z) the net income for the Bank for its current fiscal year; and (iii) with the prior approval

of the DFPI and the Bank's shareholders in connection with a reduction of its contributed capital. Further, as a Federal

Reserve member bank, the Bank is prohibited from declaring or paying a dividend if the dividend would exceed the Bank's

undivided profits as reportable on its Reports of Condition and Income in the absence of prior regulatory and shareholder

approvals.

The Federal Reserve limits the amount of dividends that bank holding companies may pay on common stock to

income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected

future needs and financial condition. It is also the Federal Reserve’s policy that bank holding companies should not maintain

dividend levels that undermine their ability to be a source of strength to its banking subsidiaries. Additionally, in

consideration of the current financial and economic environment, the Federal Reserve has indicated that bank holding

companies should carefully review their dividend policies.

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

Interest rate risk results from the following risks:

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

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

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

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

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

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

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

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

condition, and consolidated results of operations. For more information, refer to Part I, Item 1A - "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2020.

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, we have identified the contracts that will be impacted by the reference rate reform and are reviewing the contracts of our LIBOR-based products to ensure that our documentation provides for the flexibility to move to alternative reference rates. We have not yet chosen a substitute reference rate or index. Management does not believe that the discontinuation of LIBOR will have any material adverse impact on the Company.

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

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

Our consolidated balance sheet is considered “asset sensitive” when an increase in short-term interest rates is expected to expand our net interest margin, as rates earned on our interest-earning assets reprice higher at a pace faster than rates paid on our interest-bearing liabilities. Conversely, our consolidated balance sheet is considered “liability sensitive” when an increase in short-term interest rates is expected to compress our net interest margin, as rates paid on our interest-bearing liabilities reprice higher at a pace faster than rates earned on our interest-earning assets. At March 31, 2021, we were "asset sensitive."

In order to model and evaluate interest rate risk, we use two approaches: Net Interest Income at Risk ("NII at Risk"), and Economic Value of Equity ("EVE"). Under NII at Risk, the impact on net interest income, 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 March 31, 2021:


	NII at Risk				EVE
	Adjusted Net Interest Income		Percentage Change from Base Case		Market Value		Percentage Change from Base Case
Interest Rate Scenario	(dollars in thousands)
Up 300 basis points	$	109,890	19.2	%	$	391,848	7.1	%
Up 200 basis points	102,873		11.6	%	380,297		4.0	%
Up 100 basis points	96,362		4.5	%	370,237		1.2	%
Base	92,211		—		365,827		—
Down 100 basis points	91,854		(0.4)	%	361,840		(1.1)	%
Down 200 basis points	91,803		(0.4)	%	358,498		(2.0)	%

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

procedures at March 31, 2021 and have concluded that these disclosure controls and procedures are effective to ensure

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

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

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

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

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

disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits. Management, following consultation with legal counsel, does not expect the ultimate disposition of any or a combination of these matters to have a material adverse effect on our results of operations and financial condition. However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security and anti-money laundering and anti-terrorism laws), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risks. Please also refer to Note 9. “Commitments and Contingencies” in the notes to consolidated financial statements included in Part I, Item 1 which is incorporated herein by reference.

ITEM 1A. RISK FACTORS

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, 2020. See also "Forward-Looking Information" disclosed in Part I, Item 2 of this Quarterly Report

on Form 10-Q.

The disclosures below supplement the risk factors previously disclosed under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020.

We are subject to business uncertainties and contractual restrictions while the merger is pending.

Uncertainties about the effect of the merger on employees and customers may have an adverse effect on us and consequently on EFSC. These uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with us to consider changing our existing business relationships. Retention of certain employees may be challenging during the pendency of the merger, as certain employees may experience uncertainty about their future roles. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the business, our business prior to the merger and EFSC’s business following the merger could be negatively impacted. In addition, the definitive merger agreement restricts us from taking specified actions relative to our business without the prior consent of EFSC. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the merger.

The merger is subject to certain closing conditions that, if not satisfied or waived, will result in the merger not being completed, which may cause the price of our common stock to decline.

Specified conditions set forth in the definitive merger agreement must be satisfied or waived to complete the merger. If the conditions are not satisfied or waived, to the extent permitted by law, the merger will not occur or will be delayed, and we may lose some or all of the intended benefits of the merger. The conditions described in “The Definitive Merger Agreement—Conditions to Completion of the Merger” must be satisfied or waived before EFSC and we are obligated to complete the merger.

In addition, the definitive merger agreement may be terminated in certain circumstances if the merger is not consummated on or before December 31, 2021, provided that if additional time is necessary to obtain the requisite regulatory approvals, this date may be automatically extended by three months. We cannot assure that all of the conditions precedent in the definitive merger agreement will be satisfied, or to the extent legally permissible, waived or that the acquisition will be completed.

If the merger is not completed, the price of our common stock on the Nasdaq Capital Market may decline to the extent that the current prices reflect a market assumption that the merger will be completed. In addition, we would not realize any of the expected benefits of having completed the merger.

Failure to complete the merger could negatively impact stock prices and future businesses and financial results of EFSC and the Company.

There can be no assurance that the merger will become effective. If the merger is not completed, EFSC's and our ongoing businesses may be adversely affected, and we and EFSC will be subject to a number of risks, including the following:

• We and EFSC will be required to pay certain costs relating to the merger, whether or not the merger is completed, such as legal, accounting, financial advisor, proxy solicitation and printing fees;

• under the definitive merger agreement, we are subject to restrictions on the conduct of our business before completing the merger, which may adversely affect our ability to execute certain of our business strategies if the definitive merger agreement is terminated; and

• matters relating to the merger may require substantial commitments of time and resources by EFSC and our management, which could otherwise have been devoted to other opportunities that may have been beneficial to EFSC or us as independent companies.

In addition, if the merger is not completed, we and/or EFSC may experience negative reactions from the financial markets and from the respective customers and employees. We and/or EFSC also could be subject to litigation related to any failure to complete the merger or to proceedings commenced by EFSC or us against the other seeking damages or to compel the other to perform the obligations under the definitive merger agreement. These factors and similar risks could have an adverse effect on EFSC's and our results of operation, business and stock prices.

The termination fee and non-solicitation provisions of the definitive merger agreement limit our ability to pursue alternatives to the merger with EFSC.

The definitive merger agreement contains terms and conditions that make it difficult for us to enter into a business combination with a party other than EFSC. Subject to limited exceptions, we and our directors, officers and agents are prohibited from initiating or knowingly encouraging inquiries with respect to alternative acquisition proposals. The prohibition limits our ability to seek offers that may be superior from a financial point of view from other possible acquirers. If we receive an unsolicited superior proposal from a third party that our board of directors concludes in good faith is superior to EFSC's merger proposal and that the failure to take such actions would breach or reasonably be expected to result in a breach of the fiduciary duties, and the definitive merger agreement is terminated, then we would be obligated to pay a $16.8 million termination fee to EFSC. The presence of those restrictions in the definitive merger agreement could discourage a competing third party from considering or proposing an acquisition generally, including on better terms than offered by EFSC. Further, the termination fee might result in a potential competing third party acquirer proposing a lower per share price than it might otherwise have proposed in order to acquire us.

Completion of the merger is subject to the receipt of approvals from regulatory authorities that may impose conditions that could have an adverse effect on us.

Before the merger may be completed, appropriate filings, submissions, or notices must be made to the FDIC, the Missouri Department of Finance (“MDOF”), the Federal Reserve, and the California Department of Financial Protection and Innovation (“CDFPI”). These regulatory authorities may impose conditions on the completion of the merger or require changes to the terms of the merger. Although we do not currently expect the imposition of any conditions or changes, there can be no assurance that such conditions or changes will not be imposed. Such conditions or changes could have the effect of delaying completion of the merger or imposition of additional costs on or limiting our revenues following the merger, any of which might have a material adverse effect on us following the merger. Furthermore, we are not obligated to complete the merger if the regulatory approvals received in connection with the merger include certain burdensome conditions, as described in the definitive merger agreement.

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

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


Period	(a) Total number of shares (or units) purchased (1)	(b) Average price paid per share (or unit)		(c) Total number of shares (or units) purchased as part of publicly announced plans or programs	(d) Maximum number of shares (or units) that may yet be purchased under the plans or programs (2)
Jan 1 - 31, 2021	276	$	19.11	—	695,489
Feb 1 - 28, 2021	18,347	$	19.02	—	695,489
Mar 1 - 31, 2021	—	$	—	—	695,489
Total	18,623	$	19.02	—

(1) The total number of shares repurchased during the periods indicated were shares withheld for income tax purposes in connection with the vesting of restricted stock awards. The shares were valued at the closing price of our common stock on the dates of vesting.

(2) On December 3, 2018, the Company authorized a stock repurchase program providing for the repurchase of up to 1.2 million shares of our outstanding common stock, or approximately 10% of our then outstanding shares. The repurchase program does not obligate us to repurchase any particular number of shares. On March 17, 2020, the Board suspended the stock repurchase program. Although the Board approved the resumption of our stock repurchase plan in the first quarter of 2021, under the terms of the definitive merger agreement with Enterprise Financial Services Corp., the Company has agreed that it will not repurchase or otherwise redeem any of its outstanding common stock except in connection with the withholding of common stock to cover taxes as restricted shares of common stock vest.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

EXHIBIT INDEX


Exhibit No.						Exhibit Description

2.1						Agreement and Plan of Merger dated April 26, 2021 by and among Enterprise Financial Services Corp, Enterprise Bank & Trust, First Choice Bancorp and First Choice Bank.1

2.2						Agreement and Plan of Reorganization and Merger dated February 23, 2018 by and between First Choice Bancorp and Pacific Commerce Bancorp.2

3.1						Articles of Incorporation of First Choice Bancorp.2

3.2						Bylaws of First Choice Bancorp.2

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

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

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

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

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

1Filed as an Exhibit to the Form 8-K filed with the SEC on April 26, 2021 and incorporate herein by reference.

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

SIGNATURES

Pursuant to the requirements of Section 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: May 10, 2021			/s/ Robert M. Franko
						Robert M. Franko
						President and Chief Executive Officer
						(principal executive officer)

			Dated: May 10, 2021			/s/ Diana C. Hanson
						Diana C. Hanson
						Senior Vice President and Chief Accounting Officer
						(principal financial officer)

Exhibit 31.1

Certification

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Robert M. Franko, certify that:

1.I have reviewed this report on Form 10-Q for the quarterly period ended March 31, 2021 of First Choice Bancorp;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date:			/s/ Robert M. Franko
May 10, 2021			Robert M. Franko President, Chief Executive Officer and Chief Financial Officer

Exhibit 31.2

Certification

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Diana C. Hanson, certify that:

1.I have reviewed this report on Form 10-Q for the quarterly period ended March 31, 2021 of First Choice Bancorp;

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date:			/s/ Diana C. Hanson
May 10, 2021			Diana C. Hanson Senior Vice President and Chief Accounting Officer (principal financial officer)

Exhibit 32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted

Pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), the undersigned officer of First Choice Bancorp (the “Company”) hereby certifies that the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date:			/s/ Robert M. Franko
May 10, 2021			Robert M. Franko President, Chief Executive Officer and Chief Financial Officer

Exhibit 32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted

Pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002


Date:			/s/ Diana C. Hanson
May 10, 2021			Diana C. Hanson Senior Vice President and Chief Accounting Officer (principal financial officer)