First Choice Bancorp Announces Second Quarter of 2020 Financial Results

Current Quarter Highlights

COVID-19 Updates

Cerritos, CA, July 21, 2020 (GLOBE NEWSWIRE) -- First Choice Bancorp (NASDAQ: FCBP) (“us,” “we,” “our,” or the “Company”), the holding company of First Choice Bank (the “Bank”), today reported net income of $5.7 million for the second quarter of 2020, or $0.49 per diluted share, compared to net income of $4.5 million, or $0.39 per diluted share, for the first quarter of 2020. Pre-tax pre-provision income was $10.3 million for the second quarter of 2020, an increase of $1.2 million, compared to the pre-tax pre-provision income of $9.1 million for the first quarter of 2020. Financial results for the second quarter of 2020 include a provision for loan losses and unfunded loan commitments of $2.4 million, or $0.15 per diluted share, compared to $2.7 million, or $0.16 per diluted share in the first quarter of 2020.

“During the COVID-19 crisis, our Board and team members have worked tirelessly to be a source of strength to our customers,” said Peter Hui, Chairman of the Board. “We are fortunate to have a strong base of clients with the capital and liquidity to be able to support their businesses as they weather this crisis. Through the efforts of our team, we have provided our clients with additional liquidity through the Paycheck Protection Program and we are now an approved lenders in the Main Street Lending Program. The Company has maintained strong earnings for our shareholders, which has allowed us to continue our quarterly dividend of $0.25 per share.”

“We had a highly productive quarter that resulted in strong balance sheet growth and the successful resolution of some lingering problem credits that reduced our non-performing assets,” said Robert M. Franko, President and CEO. “In terms of asset quality, we are encouraged by the trends we are seeing. Our Small Business Administration (SBA) borrowers are receiving tremendous relief thanks to the SBA’s 6-month deferred payment program. In addition, we provided COVID-19-related deferments for about a third of the loans in our portfolio, and a number of those clients have returned to regular payment programs. Through our PPP efforts, we added a significant number of new client relationships that contributed to the strong inflows we saw in core deposits during the quarter. We have a healthy pipeline of new business development opportunities that we will continue to service through the PPP program and our traditional lending activities. We are optimistic about being an approved lender in the Main Street Lending Program and hope to provide much needed liquidity to those that need it. While the ongoing pandemic continues to create uncertainty, we believe we are well positioned to continue delivering solid financial results in the second half of the year. On a final note, I am particularly proud of all of our team members, many working from home, who have continued to carry out our commitment to being First in Speed, Service and Solutions.”

STATEMENT OF INCOME

Net Interest Income

Net interest income for the second quarter of 2020 totaled $20.3 million, an increase of $1.1 million from the first quarter of 2020 due to slightly higher interest income of $100 thousand, coupled with lower interest expense of $1.0 million. The increase in net interest income was due primarily to interest income and fees recognized for PPP loans and reductions in the costs of interest-bearing deposits and borrowings. The decrease in loan yields and cost of funds for the second quarter of 2020 reflected the full quarter impact of the 150 basis point reduction in the target Federal Funds rate at the end of March 2020. Average loans increased by $333.5 million, of which $287.3 million was from PPP loans, net of earned fees, funded in the second quarter of 2020. PPP loans carry a fixed rate of 1.0% with a two-year contractual maturity, and the weighted average rate for the processing fee is 3.16%. These loans contributed $1.9 million to interest income for the second quarter of 2020. The decrease in interest expense for the second quarter of 2020 was due primarily to lower market interest rates and the Company’s proactive strategy to lower the cost of interest-bearing customer deposits, replace high rate brokered deposits and take advantage of the lower cost of borrowings and wholesale funding facilities. Interest expense on interest-bearing deposits decreased $930 thousand, coupled with a decrease of $101 thousand on total borrowings. Interest expense on the PPP Liquidity Facility (“PPPLF”) was $112 thousand for the second quarter of 2020.

Net Interest Margin

Net interest margin for the second quarter of 2020 decreased 66 basis points to 4.12% from 4.78% for the first quarter of 2020. The decrease in the net interest margin was due primarily to a 101 basis point decrease in loan yields (including fees and discounts), partially offset by a change in the interest-earning asset mix, and a 38 basis point decrease in funding costs. The decrease in the interest-earning assets yield and loan yield were driven by the lower market interest rates and the lower-yielding PPP loans. The yield on loans decreased to 4.94% for the second quarter of 2020, compared to 5.95% for the first quarter of 2020. The weighted average loan yield for PPP loans was 2.64%, which lowered the total loan yield by 46 basis points for the second quarter of 2020.

The cost of funds decreased to 0.34% for the second quarter of 2020, compared to 0.72% for the first quarter of 2020, due primarily to lower market interest rates and a change in the funding mix with a higher percentage of average noninterest-bearing demand deposits, and a higher percentage of average total borrowings. Average borrowings increased $53.3 million to $145.4 million, coupled with an increase of $128.0 million from the PPPLF with an average rate of 0.35% to support the PPP loans funded. The average cost of borrowings decreased 110 basis points to 0.54% for the second quarter of 2020, compared to 1.64% for the first quarter of 2020. Average senior secured notes decreased $1.3 million to $6.8 million and the average cost of such borrowings decreased 117 basis points to 3.39%. Average noninterest-bearing demand deposits increased $151.4 million to $783.3 million and represented 50.7% of total average deposits for the second quarter of 2020, compared to $631.8 million, or 47.0% of total average deposits, for the first quarter of 2020. The increase in average noninterest-bearing demand deposits was primarily due to new accounts opened for PPP loans with an average balance of $116 million for the second quarter of 2020. The total cost of deposits decreased 32 basis points to 0.31% for the second quarter of 2020, compared to 0.63% for the first quarter of 2020. The discount accretion from loans acquired in a business combination of $421 thousand contributed 9 basis points to the net interest margin in the second quarter of 2020 compared to $624 thousand and 16 basis points in the first quarter of 2020.

Provision for Loan Losses

The provision for loan losses for the second quarter of 2020 decreased $600 thousand to $2.1 million, compared to $2.7 million for the first quarter of 2020. Approximately $1.4 million of the second quarter provision was driven by an increase in qualitative factors relating to the COVID-19 pandemic and macro-economic conditions including a reserve of $138 thousand for accrued interest receivable related to loans on deferment. While the economy gradually reopened during the second quarter of 2020, the Governor of California has since implemented further restrictions and the timing of an economic recovery remains uncertain. The assumptions underlying the COVID-19 related qualitative factors included (a) uncertain and volatile macro-economic conditions caused by the pandemic; (b) the high unemployment rate; and (c) the loan deferment program. No provision for loan losses on PPP loans was recognized in the second quarter of 2020 as the SBA guarantees 100% of loans funded under the program.

Noninterest Income

Noninterest income for the second quarter of 2020 was $1.1 million, a decrease of $360 thousand from $1.4 million for the first quarter of 2020 due primarily to lower gains on loan sales of $377 thousand and lower net servicing fees of $233 thousand, partially offset by higher other income of $358 thousand. There were no loans sold during the second quarter of 2020, compared to $3.4 million in loans sold and a gain on sale of $377 thousand in the first quarter of 2020. The $233 thousand decrease in net servicing fees was due primarily to higher amortization from early loan pay-offs which totaled $277 thousand for the second quarter of 2020 compared to $69 thousand for the first quarter of 2020. Gains, included in other income, on transfer of loan collateral to foreclosed assets of $153 thousand were recognized for the second quarter of 2020. There was no similar income in the first quarter of 2020. Other income for the second quarter of 2020 also included a Bank Enterprise Award of $233 thousand from the U.S.Treasury’s Community Development Financial Institutions Fund to recognize the Bank for providing small business loans or commercial real estate development loans to businesses located in distressed communities. There was no similar income in the first quarter of 2020.

Noninterest Expense

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

The $844 thousand decrease in salaries and employee benefits was due to lower incentive accruals resulting from a decrease in organic loan production in the second quarter of 2020 and lower payroll taxes and employee benefits resulting from a seasonally higher first quarter. The $49 thousand decrease in loan related expenses was due primarily to a recovery of expenses in the second quarter of 2020. The $44 thousand decrease in customer service related expenses was due primarily to lower average demand deposits for certain deposit accounts during the second quarter of 2020.

The $137 thousand increase in FDIC assessment fees was due to Small Bank Assessment Credits received in the first quarter of 2020 for which there are no further credits. The increase in other expenses related primarily to a $300 thousand increase in the provision for unfunded loan commitments resulting from an increase in unfunded loan commitments and historical loss rates.

The efficiency ratio remained favorable at 52.0% in the second quarter of 2020, compared to 56.0% in the first quarter of 2020. The lower efficiency ratio in the second quarter of 2020 was driven by higher revenue including the benefits of the PPP loan volume.

Income Taxes

Income tax expense was $2.4 million for the second quarter of 2020 compared to $1.8 million for the first quarter of 2020. The effective tax rate was 29.8% for the second quarter of 2020 and 28.6% for the first quarter of 2020. The effective tax rate for the full year of 2020 is expected to be in the range of 29% to 30%.

STATEMENT OF FINANCIAL CONDITION

Loan Portfolio

Total loans held for investment increased $393.6 million in the second quarter of 2020, or 27.4%, to $1.83 billion at June 30, 2020 primarily due to the Company’s participation in the PPP loan program and an increase in commercial real estate loans, partially offset by a decrease in commercial and industrial loans, residential loans and construction and land loans.

PPP loans, net of unearned fees of $11.5 million, totaled $389.2 million at June 30, 2020. The unearned fees are being accreted based on the two-year contractual maturity. The Company anticipates that the SBA may forgive a significant number of PPP loans in the third and fourth quarters of 2020, at which point the recognition of fee income will be accelerated. New loan commitments from organic growth, excluding PPP loans, totaled $94.3 million for the second quarter of 2020, compared to $188.5 million for the first quarter of 2020. The second quarter new loan commitments included $50.8 million in construction and commercial real estate loans, $23.5 million in commercial and industrial loans, $12.1 million in SBA loans held for investment and $7.9 million of SBA loans held for sale. Total unfunded loan commitments increased $11.1 million to $393.4 million at June 30, 2020 from $382.3 million at March 31, 2020 due to lower utilization and higher repayment on existing lines of credit. During the second quarter of 2020, borrower repayments on existing lines of credit totaled $44.8 million, partially offset by drawdowns and new commitments.

Loan Deferment

At June 30, 2020, the Company had 520 loans totaling $626 million with a 90-day principal and/or interest deferral for COVID-related reasons. No deferred payment loans which met the requirement under Section 4013 of the CARES Act were reported as past due loans or troubled debt restructurings (“TDRs”). The Company currently expects that the majority of these loans will resume payments in the third quarter of 2020. Total accrued interest receivable related to these loans on deferment was $10 million with an aforementioned reserve of $138 thousand at June 30, 2020. Borrowers are contractually required to resume making full payments after the deferral period ends. As of July 16, 2020, 232 loans with a net carrying value of $397 million at June 30, 2020, or 63% of total loan balance, resumed making payments or paid off, and only four loans totaling $11 million were granted an additional 90-day deferment. The remainder is expected to resume payments as scheduled.

Deposits

Total deposits increased $254.0 million from the prior quarter to $1.60 billion at June 30, 2020 due to new noninterest-bearing deposit accounts opened for PPP loans, and strong core deposit growth.

Noninterest-bearing deposits totaled $789.8 million, an increase of $162.0 million in the second quarter of 2020. Approximately $83 million of the increase was due to new deposit accounts for PPP loans at June 30, 2020. The remaining increase was due to core deposit growth. Interest-bearing nonmaturity deposits increased $95.3 million primarily due to an increase in core deposits from the FDIC Insurance Program through Demand Deposit Marketplace (“DDM”) and other financial institutions. Time deposits had a slight decrease of $3.4 million due primarily to a decrease in customer time deposits, offset by higher brokered time deposits. At June 30, 2020, brokered time deposits totaled $115.5 million, of which $78.6 million are callable in six months. Noninterest-bearing deposits were $789.8 million and represented 49.2% of total deposits at June 30, 2020, compared to $627.8 million and 46.5% of total deposits at March 31, 2020.

Borrowing

Being an SBA-qualified PPP lender, the Company participated in the PPPLF established by the Federal Reserve. At June 30, 2020, the Company borrowed $179.1 million under the PPPLF with a fixed-rate of 0.35% and pledged PPP loans as collateral to secure the borrowings. The Company also participated in the FHLB San Francisco’s new Recovery Advance loan program for $10 million at zero percent interest at June 30, 2020 with maturity dates in November 2020 and May 2021.

Credit Quality

Nonperforming loans decreased to $8.4 million at June 30, 2020, compared to $9.1 million at March 31, 2020, and represented 0.46% and 0.64% of total loans held for investment, respectively. The decrease in nonperforming loans was due to three SBA loans that were charged-off or paid off, partially offset by an increase of one loan past due 90 days or more that was still accruing interest at June 30, 2020. There were no loans over 90 days past due that were still accruing interest at March 31, 2020. Net charge-offs for the second quarter of 2020 were $496 thousand, or 0.11% of average loans on an annualized basis, compared to $4 thousand or 0.001% of average loans on an annualized basis for the first quarter of 2020. Foreclosed assets increased to $602 thousand at June 30, 2020. There were no foreclosed assets in the first quarter of 2020. Nonperforming assets totaled $9.0 million at June 30, 2020, compared to $9.1 million at March 31, 2020, and represented 0.41% and 0.51% of total assets, respectively.

Loan delinquencies (30-89 days past due) totaled $353 thousand at June 30, 2020, compared to $2.3 million at March 31, 2020. Deferred payment loans which met the requirement under Section 4013 of the CARES Act are not considered past due or TDRs.

The allowance for loan losses, including $138 thousand for accrued interest receivable related to loans on deferment, increased 9.9% to $17.8 million and represented 0.97% of total loans held for investment and 211.8% of nonperforming loans at June 30, 2020, compared with 1.13% and 177.5% at March 31, 2020, respectively. The allowance for loan losses as a percentage of total loan held for investments without PPP loans was 1.24% at June 30, 2020. At June 30, 2020, the net carrying value of acquired loans totaled $187.3 million and included a remaining net discount of $4.8 million. The discount is available to absorb losses on the acquired loans and represented 2.6% of the net carrying value of acquired loans and 0.26% of total gross loans held for investment.

CAPITAL POSITION

Capital Ratios

The Bank opted into the Community Bank Leverage Ratio (“CBLR”) framework, beginning with the Call Report filed for the first quarter of 2020. The CBLR replaces the risk-based and leverage capital requirements in the generally applicable capital rules. The minimum CBLR was originally 9%, however, on April 23, 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 re-established at greater than 9%. Under the interim rules, the minimum CBLR will be 8% beginning in the second quarter and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. The interim rules also maintain a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1% below the applicable community bank leverage ratio. In addition, assets originated under the PPP and covered loans pledged under the PPPLF are deducted from the average total consolidated assets for purposes of the leverage ratio calculation. However, such assets are included in total consolidated assets for purposes of determining the eligibility to elect the CBLR framework.

At June 30, 2020, the Bank’s preliminary CBLR ratio was 10.31% which exceeded all regulatory capital requirements under the CBLR framework and the Bank was considered to be ‘‘well-capitalized’’.

Stock Repurchase Program

The Company suspended the stock repurchase program on March 17, 2020. During the second quarter of 2020, there were no repurchases of common stock, compared to 38,411 shares of common stock repurchased at an average price of $22.34 and a total cost of $858 thousand in the first quarter of 2020. The remaining number of shares authorized to be repurchased under this program was 695,489 shares at June 30, 2020. Suspending the stock repurchase program allows the Company to preserve capital and provide liquidity during the COVID-19 pandemic to meet the credit needs of the Company’s customers, as well as support small businesses and the local economies served by the Company through the Bank’s lending and other important services.

About First Choice Bancorp

First Choice Bancorp, headquartered in Cerritos, California, is the sole shareholder of and the registered bank holding company for, First Choice Bank. As of June 30, 2020, First Choice Bancorp had total consolidated assets of $2.22 billion. First Choice Bank, also headquartered in Cerritos, California, is a community-based financial institution that serves primarily commercial and consumer clients in diverse communities and specializes in loans to small- to medium-sized businesses and private banking clients, commercial and industrial loans, and commercial real estate loans with a specialization in providing financial solutions for the hospitality industry. First Choice Bank is a Preferred Small Business Administration (SBA) Lender. First Choice Bank conducts business through nine full-service branches and two loan production offices located in Los Angeles, Orange and San Diego Counties. Founded in 2005, First Choice Bank has quickly become a leading provider of financial services that enable our customers to grow, maintain strength, and achieve their business objectives. We strive to surpass our clients’ expectations through our efficiency, personalized services and financial solutions and professionalism and are committed to being “First in Speed, Service, and Solutions.” First Choice Bank is a strong believer in social justice and equality and is proud of its cultural- and gender-diverse workforce. As of June 30, 2020, more than 70% of the Company’s total workforce identified as ethnic minorities and more than 65% of its workforce and more than 50% of its senior management identified as female. First Choice Bancorp stock is traded on the Nasdaq Capital Market under the ticker symbol “FCBP.”

First Choice Bank’s website is www.FirstChoiceBankCA.com.

Non-GAAP Financial Measures

This press release contains certain non-GAAP financial measures in addition to results presented in accordance with GAAP. The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s results of operations and financial condition and to enhance investors’ overall understanding of such results of operations and financial condition, permit investors to effectively analyze financial trends of our business activities, and enhance comparability with peers across the financial services sector. These non-GAAP financial measures are not a substitute for GAAP measures and should be read in conjunction with the Company’s GAAP financial information. A reconciliation of non-GAAP financial measures to GAAP financial measures is included in the accompanying financial tables.

Forward-Looking Statements

In addition to historical information, certain matters set forth herein constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to 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. As well, forward-looking statements may relate to future outlook and anticipated events, such as the Company’s plans and protocols with regard to managing potential impacts related to the COVID-19 virus, the Company’s strategy to help keep its workforce and local communities safe, the Company’s business continuity protocols and the potential impact on operations related to COVID-19, and the Company’s ability to successfully advance its development and expansion projects and achieve its growth objectives. These forward-looking statements involve risks and uncertainties, based on the beliefs and assumptions of management and on the information available to management at the time that this presentation 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. Many factors could cause actual results to differ materially from those contemplated by these forward-looking statements. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by law. Any statements about future operating results, such as those concerning accretion and dilution to the Company’s earnings or shareholders, are for illustrative purposes only, are not forecasts, and actual results may differ. 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, including under Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as may be supplemental and/or amended by our Quarterly Reports on Form 10-Q as filed subsequent thereto.

Contacts
First Choice Bancorp
Robert M. Franko, 562.345.9241
President & Chief Executive Officer

First Choice Bancorp
Khoi D. Dang, Esq., 562.263.8336
Executive Vice President and General Counsel

First Choice Bancorp and Subsidiary

Financial Highlights and Selected Ratios (unaudited):

First Choice Bancorp and Subsidiary

Condensed Consolidated Balance Sheets (unaudited)

First Choice Bancorp and Subsidiary

Condensed Consolidated Statements of Income (unaudited)

First Choice Bancorp and Subsidiary

Average Balance Sheets and Yield Analysis

First Choice Bancorp and Subsidiary

Average Balance Sheets and Yield Analysis (continued)

First Choice Bancorp and Subsidiary

Loan Composition

Total loans held for investment

Allowance for Loan losses

Credit Quality (1)

GAAP to Non-GAAP Reconciliation

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