First Choice Bancorp Reports Annual Net Income of $7.4 Million and Restates Financial Statements

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CERRITOS, Calif., Feb. 5, 2018 – First Choice Bancorp, the “Company” (OTCQX: FCBP), the holding company of First Choice Bank (the “Bank”), a wholly-owned banking subsidiary, today announced earnings for the fourth quarter and full year of 2017, including the balance sheet for December 31, 2017, which included restated results for 2016, as well as selected unaudited restated financial information for 2017.

Restatement of 2016 and Three Quarters of 2017 Financial Statements

The Audit Committees of the Boards of Directors of the Bank and the Company, after consultation with Management and Vavrinek, Trine and Day & Co., LLP (“VTD”), the Company's independent registered accounting firm, determined that the Bank's financial statements for the fiscal year ended December 31, 2016, and for each of the three quarters of 2017, were not in compliance with generally accepted accounting principles.  Investors should no longer rely upon the Company's previously released financial statements and earnings releases for these periods. 

The decision to restate these financial statements is based on the Company's conclusion that it had been overly conservative in its earnings calculations, primarily as a result of the complex accounting treatment for the Bank's equity compensation plan.  In addition, the Bank had provided accruals for expenses in years 2014, 2015 and 2016 in anticipation of incurring certain expenses, which expenses, for a number of different reasons, were never incurred.  The result was that the Bank had over-accrued for expenses.  The net result of the restatement was that the Bank earned approximately $1.06 million more in income after taxes than was reported in the financial statements for the years ended December 31, 2014 through 2016. The restatement will be reflected as an increase in shareholders' equity account “retained earnings” for the opening balance sheet for the Bank as of January 1, 2016, and the 2016 income statement will also be restated. 

Subject to VTD's completion of the audit of the consolidated financial statements for the year ended December 31, 2017, the expected financial impact of the restatement described above is preliminary and may be subject to change.  There can be no assurance that the final reported adjustments will not differ materially from the amounts discussed in this press release, or that additional adjustments will not be identified.

Earnings for the Fourth Quarter and Full Year of 2017

Reported results for the fourth quarter and the full year of 2017 were negatively impacted by the enactment of the Tax Cuts and Jobs Act on December 22, 2017.  This tax reform reduces the federal corporate income tax rate from 35% to 21%, effective January 1, 2018.  The Company performed a re-measurement of its deferred tax assets (“DTA”), and determined that the value of the DTA had declined by $1.8 million.  As a result, the Company recorded additional tax expense of $1.8 million during the fourth quarter of 2017.

After recording the write-down of the DTA, net income for the three months ended December 31, 2017 was $0.96 million, compared to net income of $2.0 million, and $2.3 million for the three months ended September 30, 2017 and December 31, 2016.  Net income for the year ended December 31, 2017 was $7.4 million, compared to net income of $8.3 million a year ago.   

Excluding the DTA tax adjustment, the Company's earnings remained strong at $2.8 million and $9.2 million for the fourth quarter and full year of 2017, respectively.

On January 22, 2018, the Company's Board of Directors declared a cash dividend of $0.20 per common share to shareholders of record as of February 9, 2018, payable on February 20, 2018. 

“2017 was a very good year for us,” said Peter Hui, Founder & Chairman of First Choice Bank, “and we see a continued firming in the local economy.  We look forward to the benefits of the lower tax rate on the businesses that we serve.”

Total assets were $903.8 million, down $20.0 million or 2.2% from September 30, 2017.  Year-over-year, total assets increased $41.0 million or 4.8%, compared to the balance at December 31, 2016.

The gross loans balance, including loans held for sale, decreased $16.0 million, or 2.1%, during the fourth quarter of 2017 to $753.0 million, compared with $768.9 million at September 30, 2017.   The decrease was driven primarily by selling and participating some of the Company's commercial real estate (“CRE”) loan portfolio in order to manage the concentration of CRE loans.  The decrease in SBA and consumer loan portfolios was due to anticipated loan sales and early principal payoffs.  Year-over-year gross loans increased by $50.0 million, or 7.1% from $702.9 million at December 31, 2016.  The increase was primarily due to organic growth, spread across most loan types, primarily in the SBA, CRE and commercial loan portfolios, offset by a reduction in the balance of residential mortgage loans.  In addition to the organic growth in loans, the Company had an opportunity to purchase a $6.5 million loan portfolio at a discount of $1.6 million in the third quarter of 2017.  The discount will be accreted to income over the average life of the loans.

Asset quality measures remained strong at December 31, 2017.  The allowance for loan and lease losses (the “ALLL”) was $10.5 million, and the allowance for off-balance sheet unfunded credit commitments was $0.95 million at December 31, 2017.  The $10.5 million allowance for loan losses at December 31, 2017, decreased $1.1 million, or 9.5%, from $11.6 million at December 31, 2016, primarily resulting from two loans which were charged off during the year.

The allowance for loan losses represented 1.41% of year-end gross loans, and 586.15% of non-performing assets as of December 31, 2017.  The comparable ratios were 1.66% of year-end gross loans, and 346.3% of non-performing assets as of December 31, 2016.

Non-performing assets remained stable at $1.8 million or 0.20% of total assets as of December 31, 2017, compared to $1.5 million or 0.17% of total assets as of September 30, 2017, and decreased by $1.5 million from the $3.3 million reported at December 31, 2016. 

The Company recorded a negative provision of $0.4 million in the fourth quarter of 2017, compared to a provision expense of $1 million in the third quarter of 2017.  The negative provision was driven by decline in reserves as a result of the changes in portfolio mix and decline in portfolio balances, combined with a decrease in potential problem loans in the fourth quarter, leaving an overall better quality portfolio of loans in light of the improving economic picture.  The Bank increased its reserve for unfunded commitments by $0.4 million in the fourth quarter. The total reserve for unfunded commitments was $0.95 million at December 31, 2017. 

At year-end, the loan portfolio included six non-accrual loans in the amount of $1.8 million; all six of the non-accrual loans are current under their existing contractual terms.  Included in the non-accrual loans were five loans classified as Troubled Debt Restructured (“TDR”), which amounted to $1.4 million.  There was no Other Real Estate Owned.   

SBA loan production remained strong in the fourth quarter of 2017.  The total SBA loan portfolio, net of retained discount, increased $4.1 million, or 4.78%, to $89.2 million as of December 31, 2017, compared to $85.1 million as of September 30, 2017, and increased $4.8 million, or 5.71%, from $84.4 million as of December 31, 2016.  New loan funding during the fourth quarter of 2017 was $6.6 million.  Gain-on-sale of loans amounted to $0.3 million and $3.2 million for the fourth quarter and the full year of 2017, respectively, primarily related to the sale of the guaranteed portions of SBA 7a loans. 

Robert M. Franko, President and CEO of the Bank further commented, “2017 was an active year.  We set up a holding company, experienced strong organic growth, and used loan sales and participations to address our CRE concentrations.  We hope to continue our growth in the coming year.”

The Bank's total investment portfolio at quarter-end stood at $40.3 million, including $5.3 million in the Bank's held-to-maturity portfolio that was pledged as collateral for the Federal Reserve Bank discount window.  In addition, cash and due from banks was $103.1 million.

As of December 31, 2017, total deposits were $772.7 million, of which $235.6 million, 30.0% of total deposits, was in non-interest bearing checking accounts.  Total deposits were down $20.8 million, or 2.6% from the previous quarter.  Year-over-year, the increase in total deposits was $16.1 million, or 2.1%, compared to the balance at December 31, 2016.  The Bank's net loan-to-deposit ratio was 96% at December 31, 2017.  Federal Home Loan Bank of San Francisco advances remained at $20.0 million as of December 31, 2017. 

Total common equity capital at the quarter-end was $105.7 million, a year-over-year increase of 3.1% compared to December 31, 2016.  The Bank's book value (BV) and tangible book value (TBV) per common share of stock were $14.56 and $14.56, respectively, at quarter-end, following the Bank's fourth quarterly cash dividend of $0.20 paid in November 2017.  This compared with $14.70 (BV) and $14.70 (TBV) at September 30, 2017, and $14.41 (BV) and $14.41 (TBV) at December 31, 2016.  The decrease in common book value per share at December 31, 2017, as compared to September 30, 2017, was primarily attributable to the aforementioned dividend and the one-time, non-cash deferred tax asset write down of $1.8 million.  Year-over-year, the increase in both BV and TBV was attributable to net income and shares granted for bonuses and options that were exercised during the periods, partially offset by the cash dividends and the DTA tax adjustment.     

Capital ratios remained strong at year ended 2017, with Tier 1 risk-based capital and total risk-based ratios at 13.4% and 14.7%, respectively, comparing favorably to the well-capitalized requirements of 8% and 10%, respectively.   

Net interest income and net interest margin for the current quarter were $9.8 million and 4.35% respectively.  The increase of $0.7 million and 31 basis points from the previous quarter was primarily due to early payoffs in the commercial real estate (“CRE”) and SBA loan portfolios, which resulted in the immediate recognition of interest income from the unamortized loan discount accretion.  The average loan portfolio balance was $772.0 million for the fourth quarter of 2017, a 0.55% increase from $767.8 million for the third quarter of 2017.  The cost of deposits was 0.76% for the fourth quarter of 2017, a decrease of 3 basis points compared to the third quarter of 2017.

Net interest income and net interest margin for the year of 2017 were $34.8 million and 3.97%, an increase of $3.3 million, and 9 basis point in net interest margin from the same period of last year.  The increase was primarily due to organic growth in average earning assets, and some increase in yield as a result of the Fed rate increases over the year.  The average loan portfolio balance was $739.9 million for the year ended December 31, 2017, a 9.84% increase from $673.6 million for the year ended December 31, 2016.  The average yield of loans was 5.22% for the year ended December 31, 2017 compared to 5.31% for the year ended December 31, 2016.  The decrease in the average loan yields was primarily due to early payoffs in residential mortgage loans during 2017, which resulted in the immediate amortization of purchase premium. The cost of deposits was 0.77% for 2017, a decrease of 8 basis points compared to the year ended December 31, 2016.

Non-interest income for the fourth quarter of 2017 totaled $0.9 million, a $0.5 million decrease from the third quarter of 2017.  Gains on sales of SBA loans were $0.3 million for the fourth quarter of 2017, down $0.6 million from the third quarter of 2017 as the volume of SBA loans sold decreased to $4.0 million from $9.6 million for the preceding quarter.

For the year ended 2017, non-interest income totaled $5.1 million, a $0.7 million increase from the same period last year.  Gains on sales of SBA loans, CRE and commercial loans were $3.2 million and $0.4 million, respectively, up $0.4 million from the year ended 2016.  Net servicing fee income was increased by $0.3 million due to strong growth in the SBA loan portfolio and the servicing income from the sold guaranteed portions of SBA loans.   

Non-interest expense increased to $6.5 million for the fourth quarter of 2017, compared to $6.2 million for the third quarter of 2017.  Included in non-interest expense during the fourth quarter of 2017 was $328,000 of bank holding company formation expenses.  Excluding the bank holding company expense, non-interest expense was flat at $6.2 million for the fourth quarter of 2017.  As a result of the increase in non-interest expense, the efficiency ratio increased to 60.6% in the fourth quarter from 58.3% in the prior quarter.

For the year ended 2017, non-interest expense increased to $23.8 million, compared to $19.9 million for the same period last year primarily due to increased salaries and employee benefits expense, largely reflecting increased hiring along with an increase in bonus accrual and commission incentive to support the organic growth in loans and deposits.  Other additional costs related to higher data processing, training and seminar expense, and the $0.4 million increase in off balance sheet provision for unfunded loan commitments.  As a result of the increase in non-interest expense, the efficiency ratio increased to 59.6% for the year ended 2017 from 55.5% for the year ended 2016.

Selected Financial Highlights for the year ended December 31, 2017:

Pre-Tax, Pre-Provision for Loan Losses Income of $4.2 million for the quarter and $16.1 million for the year
Net After-Tax Income of $0.96 million for the quarter and $7.4 million for the year
Return on average assets annualized at 0.42% for the quarter and 0.83% at year end
Return on average tangible common equity annualized at 3.58% for the quarter and 6.96% at year end
Allowance for Loan and Lease Losses at 1.41% of total loans, and 586.15% of all non-performing assets
Earnings per Share for the quarter at $0.13 (basic) and $0.13 (diluted)
Earnings per Share for the year-to-date at $1.04 (basic) and $1.02 (diluted)
Earnings per Share Trailing 12 Months at $1.04 (basic) and $1.02 (diluted)  
Book Value and Tangible Book Value per Share at $14.56 (BV) and $14.56 (TBV), respectively
Tier 1 Leverage Ratio, CET1, Tier 1 Risk-Based Capital and total Risk-Based Ratios at 11.7%, 13.4%, 13.4% and 14.7%, compares very favorably to 5%, 6.5%, 8% and 10%, which are the respective minimum required ratios for a bank to be deemed “Well-Capitalized” by the FDIC
Basel III Capital conservation buffer was 6.7%, well above the dividend payout restriction of 1.25% and 2.5% requirements in the 2017 transition period and the 2019 fully effective limit

ABOUT FIRST CHOICE BANCORP

First Choice Bancorp is the registered bank holding company for First Choice Bank.  First Choice Bank, headquartered in Cerritos, California is a community-focused financial institution, serving diverse consumers and commercial clients and specializing in loans to small businesses, Private Banking clients, Commercial and Industrial (C&I) loans, and commercial real estate loans with a niche in providing finance for the hospitality industry.  The Bank is a Preferred Small Business Administration (SBA) Lender.  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 and professionalism and are committed to being “First in Speed, Service, and Solutions.”

The Bank's web site is www.FirstChoiceBankCA.com.

Forward Looking Statements

Except for the historical information in this news release, the matters described herein contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially. Such risks and uncertainties include: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and charge-offs, results of examinations by our banking regulators, our ability to maintain adequate levels of capital and liquidity, our ability to manage loan delinquency rates, our ability to price deposits to retain existing customers and achieve low-cost deposit growth, manage expenses and lower the efficiency ratio, expand or maintain the net interest margin, mitigate interest rate risk for changes in the interest rate environment, competitive pressures in the banking industry, access to available sources of credit to manage liquidity, the local and national economic environment, and other risks and uncertainties.  Accordingly, undue reliance should not be placed on forward-looking statements. These forward-looking statements speak only as of the date of this release. First Choice Bank and First Choice Bancorp undertake no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances after the date of this release or to reflect the occurrence of unanticipated events.

FIRST CHOICE BANCORP

FOURTH QUARTER REPORT / DECEMBER 31, 2017

BALANCE SHEET

(all amounts in thousand dollars except share and per share information)

December 31, 2017

September 30, 2017

June 30, 2017

March 31, 2017

December 31, 2016

(unaudited)

(restated)

(restated)

(restated)

(restated)

ASSETS

Cash and due from banks

$103,132

$106,766

$122,266

$119,762

$110,032

Investment securities 

40,302

40,289

41,666

45,316

41,465

Stock Investments, restricted

3,933

3,933

3,933

3,764

3,764

Loans held for sale

10,599

18,525

3,946

7,432

4,827

Loans (gross)

742,407

750,384

734,241

734,363

698,080

Less : unaccreted disc. acquired loans

(694)

(826)

1,090

1,492

1,438

Less allowance for loan losses

(10,497)

(10,803)

(11,333)

(11,523)

(11,599)

Loan receivable, net

731,216

738,755

723,998

724,332

687,919

Premises and equipment, net

1,035

1,034

906

975

1,036

Other assets

13,577

14,374

15,715

13,227

13,647

TOTAL ASSETS

$903,795

$923,675

$912,430

$914,809

$862,690

LIABILITIES AND SHAREHOLDERS' EQUITY

Noninterest bearing deposits

$235,584

$238,188

$160,081

$197,672

$150,764

Interest checking accounts

200,586

241,742

268,522

260,748

265,381

Money market accounts

95,598

77,603

76,990

78,659

92,309

Savings accounts

76,024

78,729

84,315

92,209

89,139

Certificates of deposits

164,886

157,269

166,781

138,148

158,968

Total Deposits

772,679

793,531

756,689

767,436

756,561

Federal Home Loan Bank borrowings

20,000

20,000

45,000

40,000

0

Senior Secured Debt

350

0

0

0

0

Other liabilities

5,072

4,214

5,648

3,630

3,622

Total liabilities

798,101

817,745

807,337

811,067

760,183

Total shareholders' equity

105,694

105,930

105,093

103,742

102,507

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$903,795

$923,675

$912,430

$914,809

$862,690

STATEMENT OF INCOME

For the three months ended

 For the twelve months ended 

December 31, 2017

September 30, 2017

December 31, 2016

December 31, 2017

December 31, 2016

(unaudited)

(restated)

(restated)

(unaudited)

(restated)

Interest income

$11,367

$10,755

$9,146

$40,819

$37,511

Interest expense

1,560

1,604

1,646

6,041

6,047

Net interest income

9,807

9,151

7,499

34,778

31,463

Provision for loan losses

(358)

1,000

0

642

1,740

Net interest income after provision for loan losses

10,165

8,151

7,499

34,137

29,723

Noninterest income

944

1,433

1,066

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Sarah Thompson

Sarah Thompson

Sarah is a financial reporter, focusing on technology, national security, and policing. Before joining Daily Telescope she worked as a staff writer at Fast Company and spent two years as a foreign correspondent in Turkey. Her work has been published in Al Jazeera America, The Nation, Vice News, Motherboard, and many other outlets.
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