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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
o
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 0-30777
 
PACIFIC MERCANTILE BANCORP
(Exact name of Registrant as specified in its charter)
 
California
 
33-0898238
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
949 South Coast Drive, Suite 300, Costa Mesa, California
 
92626
(Address of principal executive offices)
 
(Zip Code)
(714) 438-2500
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
o
  
Accelerated filer
 
x
Non-accelerated filer
 
o
  
Smaller reporting company
 
o
 
 
 
 
Emerging growth company
 
o

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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. o
Indicate by check mark whether the registrant is a shell company (as defined in Securities Exchange Act Rule 12b-2). Yes  ¨    No  x
As of August 1, 2018, there were 23,378,350 shares of Common Stock outstanding.
 

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PACIFIC MERCANTILE BANCORP
QUARTERLY REPORT ON FORM 10Q
FOR THE QUARTER ENDED JUNE 30, 2018
TABLE OF CONTENTS
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
(Unaudited)
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Cash and due from banks
$
15,108

 
$
12,198

Interest bearing deposits with financial institutions
220,498

 
186,010

Cash and cash equivalents
235,606

 
198,208

Interest-bearing time deposits with financial institutions
2,420

 
2,920

Federal Reserve Bank of San Francisco and Federal Home Loan Bank Stock, at cost
8,762

 
8,107

Securities available for sale, at fair value
29,187

 
39,738

Loans (net of allowances of $13,369 and $14,196, respectively)
1,049,003

 
1,053,201

Other real estate owned
2,073

 

Accrued interest receivable
4,066

 
3,872

Premises and equipment, net
1,184

 
1,094

Net deferred tax assets
11,085

 

Other assets
14,488

 
15,464

Total assets
$
1,357,874

 
$
1,322,604

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
343,718

 
$
338,273

Interest-bearing
824,085

 
801,120

Total deposits
1,167,803

 
1,139,393

Borrowings
30,000

 
40,866

Accrued interest payable
412

 
397

Other liabilities
9,827

 
11,545

Junior subordinated debentures
17,527

 
17,527

Total liabilities
1,225,569

 
1,209,728

Commitments and contingencies (Note 10)

 

Shareholders’ equity:
 
 
 
Common stock, no par value, 85,000,000 shares authorized; 23,378,350 and 23,232,515 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
151,478

 
150,689

Accumulated deficit
(17,691
)
 
(36,670
)
Accumulated other comprehensive loss
(1,482
)
 
(1,143
)
Total shareholders’ equity
132,305

 
112,876

Total liabilities and shareholders’ equity
$
1,357,874

 
$
1,322,604

The accompanying notes are an integral part of these consolidated financial statements.

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PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except for per share data)
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
Loans, including fees
$
14,788

 
$
11,544

 
$
28,833

 
$
22,542

Securities available for sale and stock
262

 
283

 
536

 
625

Interest-bearing deposits with financial institutions
864

 
305

 
1,560

 
569

Total interest income
15,914

 
12,132

 
30,929

 
23,736

Interest expense:
 
 
 
 
 
 
 
Deposits
3,082

 
1,571

 
5,560

 
2,947

Borrowings
385

 
165

 
737

 
322

Total interest expense
3,467

 
1,736

 
6,297

 
3,269

Net interest income
12,447

 
10,396

 
24,632

 
20,467

Provision for loan and lease losses

 

 

 

Net interest income after provision for loan and lease losses
12,447

 
10,396

 
24,632

 
20,467

Noninterest income
 
 
 
 
 
 
 
Service fees on deposits and other banking services
407

 
332

 
794

 
640

Net gain on sale of securities available for sale

 

 
48

 

Net (loss) gain on sale of other assets

 

 
(4
)
 
2

Other noninterest income
729

 
1,099

 
1,353

 
1,760

Total noninterest income
1,136

 
1,431

 
2,191

 
2,402

Noninterest expense
 
 
 
 
 
 
 
Salaries and employee benefits
5,916

 
5,662

 
12,076

 
11,375

Occupancy
590

 
654

 
1,208

 
1,299

Equipment and depreciation
457

 
400

 
903

 
818

Data processing
380

 
345

 
772

 
686

FDIC expense
266

 
262

 
548

 
566

Other real estate owned expense, net
8

 

 
8

 

Professional fees
636

 
1,032

 
1,386

 
2,142

Business development
315

 
214

 
499

 
357

Loan related expense
183

 
177

 
353

 
199

Insurance
62

 
62

 
125

 
124

Other operating expense
486

 
454

 
954

 
909

Total noninterest expense
9,299

 
9,262

 
18,832

 
18,475

Income before income taxes
4,284

 
2,565

 
7,991

 
4,394

Income tax (benefit) provision
(11,085
)
 
64

 
(11,085
)
 
113

Net income allocable to common shareholders
$
15,369

 
$
2,501

 
$
19,076

 
$
4,281

Basic income per common share:
 
 
 
 
 
 
 
Net income available to common shareholders
$
0.66

 
$
0.11

 
$
0.82

 
$
0.19

Diluted income per common share:
 
 
 
 
 
 
 
Net income available to common shareholders
$
0.65

 
$
0.11

 
$
0.81

 
$
0.19

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
23,332,323

 
23,186,551

 
23,299,209

 
23,162,551

Diluted
23,557,516

 
23,296,008

 
23,502,403

 
23,268,606

The accompanying notes are an integral part of these consolidated financial statements.

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PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
15,369

 
$
2,501

 
$
19,076

 
$
4,281

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Change in unrealized holding (loss) gain on securities available for sale
(41
)
 
412

 
(388
)
 
652

Less: Reclassification adjustment for change in accounting principle

 

 
(97
)
 

Less: Reclassification adjustment for net gains included in net income

 

 
48

 

Net unrealized holding (loss) gain on securities available for sale
(41
)
 
412

 
(339
)
 
652

Total comprehensive income
$
15,328

 
$
2,913

 
$
18,737

 
$
4,933

The accompanying notes are an integral part of these consolidated financial statements.


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PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Shares and dollars in thousands)
(Unaudited)
For the Six Months Ended June 30, 2018
  
Common stock
 
Retained
earnings
(accumulated
deficit)
 
Accumulated
other
comprehensive
income (loss)
 
Total
Number
of shares
 
Amount
 
Balance at December 31, 2017
23,233

 
$
150,689

 
$
(36,670
)
 
$
(1,143
)
 
$
112,876

Implementation of ASU 2016-01

 

 
(97
)
 

 
(97
)
Issuance of restricted stock, net
70

 

 

 

 

Common stock based compensation expense

 
416

 

 

 
416

Common stock options exercised
75

 
373

 

 

 
373

Net income

 

 
19,076

 

 
19,076

Other comprehensive loss

 

 

 
(339
)
 
(339
)
Balance at June 30, 2018
23,378

 
$
151,478

 
$
(17,691
)
 
$
(1,482
)
 
$
132,305

The accompanying notes are an integral part of these consolidated financial statements.


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PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2018
 
2017
Cash Flows From Operating Activities:
 
 
 
Net income
$
19,076

 
$
4,281

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
193

 
200

Amortization of premium on securities
96

 
116

Net gain on sale of securities available for sale
(48
)
 

Net amortization of deferred fees and unearned income on loans
(11
)
 
(411
)
Net gain on sale of premises and equipment

 
(2
)
Net loss on sale of other assets
4

 

Stock-based compensation expense
416

 
405

Other
59

 

Changes in operating assets and liabilities:
 
 
 
Net increase in accrued interest receivable
(194
)
 
(387
)
Net decrease (increase) in other assets
1,134

 
(567
)
Net increase in deferred taxes
(11,085
)
 

Net increase in income taxes receivable
(53
)
 

Net increase in accrued interest payable
15

 
22

Net (decrease) increase in other liabilities
(1,718
)
 
49

Net cash provided by operating activities
7,884

 
3,706

Cash Flows From Investing Activities:
 
 
 
Net decrease in interest-bearing time deposits with financial institutions
500

 

Maturities of and principal payments received on securities available for sale and other stock
3,125

 
3,924

Purchase of securities available for sale and other stock
(655
)
 
(1,036
)
Proceeds from sale of securities available for sale and other stock
6,883

 

Purchase of other investments
(141
)
 
(133
)
Net decrease (increase) in loans
1,997

 
(95,773
)
Purchases of premises and equipment
(283
)
 
(80
)
Proceeds from sale of other assets
32

 

Proceeds from sale of premises and equipment

 
2

Net cash provided by (used in) investing activities
11,458

 
(93,096
)
Cash Flows From Financing Activities:
 
 
 
Net increase in deposits
28,410

 
65,404

Proceeds from borrowings
21,000

 
15,000

Payments of borrowings
(31,727
)
 
(15,000
)
Proceeds from exercise of common stock options
373

 
995

Net cash provided by financing activities
18,056

 
66,399

Net increase (decrease) in cash and cash equivalents
37,398

 
(22,991
)
Cash and Cash Equivalents, beginning of period
198,208

 
138,845

Cash and Cash Equivalents, end of period
$
235,606

 
$
115,854

Supplementary Cash Flow Information:
 
 
 
Cash paid for interest on deposits and other borrowings
$
6,282

 
$
3,247

Cash paid for income taxes
$
53

 
$
2

Non-Cash Investing Activities:
 
 
 
Transfer of loans into other assets
$

 
$
181

Transfer of loans into other real estate owned
$
1,346

 
$

Impact of change in accounting principle
$
97

 
$

Assumption of debt upon foreclosure of property
$
727

 
$

 The accompanying notes are an integral part of these consolidated financial statements.

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1. Nature of Business
Organization
Pacific Mercantile Bancorp (“PMBC”) is a bank holding company which, through its wholly owned subsidiary, Pacific Mercantile Bank (the “Bank”), is engaged in the commercial banking business in Southern California. PMBC is registered as a one bank holding company under the United States Bank Holding Company Act of 1956, as amended, and, as such, is regulated by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the Federal Reserve Bank of San Francisco (“FRBSF”) under delegated authority from the Federal Reserve Board. Substantially all of our operations are conducted and substantially all of our assets are owned by the Bank, which accounts for substantially all of our consolidated revenues, expenses, and income. The Bank provides a full range of banking services to small and medium-size businesses and professionals primarily in Orange, Los Angeles, San Bernardino and San Diego counties in Southern California and is subject to competition from, among other things, other banks and financial institutions and from financial services organizations conducting operations in those same markets. The Bank is chartered by the California Department of Business Oversight under the Division of Financial Institutions and is a member of the FRBSF. In addition, the deposit accounts of the Bank’s customers are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the maximum amount allowed by law. PM Asset Resolution, Inc. (“PMAR”) is a wholly owned subsidiary of PMBC, which exists for the purpose of purchasing certain non-performing loans and other real estate from the Bank and thereafter collecting on or disposing of those assets.
PMBC, the Bank and PMAR are sometimes referred to, together, on a consolidated basis, in this report as the “Company” or as “we”, “us” or “our”.

2. Significant Accounting Policies
Except as discussed below, our accounting policies are described in Note 2, Significant Accounting Policies of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 (“Form 10-K”).
Interim Consolidated Financial Statements Basis of Presentation
Our interim consolidated financial statements are prepared in accordance with generally accepted accounting principles in effect in the United States (“GAAP”) for interim financial information pursuant to rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), including instructions to Form 10-Q and Article 10 of Regulation S-X, on a basis consistent with prior periods. Our financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. The interim results are not necessarily indicative of operating results for the full year. The interim information should be read in conjunction with our audited consolidated financial statements in our Form 10-K.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires us to make certain estimates and assumptions that could affect the reported amounts of certain of our assets, liabilities, and contingencies at the date of the financial statements and the reported amounts of our revenues and expenses during the reporting periods. For the fiscal periods covered by this report, those estimates related primarily to our determinations of the allowance for loan and lease losses (“ALLL”), the fair values of securities available for sale, and the determination of the valuation allowance pertaining to deferred tax assets. If circumstances or financial trends on which those estimates were based were to change in the future or there were to occur any currently unanticipated events affecting the amounts of those estimates, our future financial position or results of operations could differ, possibly materially, from those expected at the current time.
Principles of Consolidation
Our consolidated financial statements for the three and six months ended June 30, 2018 and 2017 include the accounts of PMBC, the Bank and PMAR. All significant intercompany balances and transactions were eliminated in consolidation. 
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606),” which amended its guidance on revenue recognition to conform with international accounting guidance under the International Accounting Standards Board. The ASU provides a framework for addressing revenue recognition and replaces most existing revenue recognition guidance, as well as requires increased disclosure requirements. In August 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09 by one year. Accordingly,

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this guidance is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted for interim and annual periods beginning after December 15, 2016. We adopted this guidance on January 1, 2018 using the modified retrospective approach. Adoption of this guidance did not have a significant impact on our financial statements as the accounting for interest income on loans and investments, loan service fee income, prepayment fees, and loan origination fees are excluded from the scope of this standard. Upon implementation of this guidance, the cumulative effect of any adjustments was deemed immaterial and thus not significant. As such, the expanded disclosures required by the guidance, including the disaggregated revenue disclosures, were not deemed necessary since interest income sources are scoped out and there are no additional significant sources of non-interest income to be broken out on the consolidated statement of operations.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which enhances the reporting model for financial instruments to provide users of financial statements with more useful information. Some of the provisions include: requiring equity investments to be measured at fair value with changes in fair value recognized in net income, simplifying the impairment assessment of equity investments without readily determinable fair values, eliminating the requirement to disclose the method and significant assumptions used to estimate fair value on financial instruments measured at amortized cost on the balance sheet, requiring public business entities to use the exit price notion when measuring the fair value of financial instruments, requiring the reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option, requiring separate presentation of financial assets and liabilities by measurement category and form of financial asset on the balance sheet or notes to the financial statements, and clarifying that the reporting organization should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the organization's other deferred tax assets. This guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption was not permitted for public companies. We adopted this guidance on January 1, 2018. We recorded a $97 thousand adjustment to our beginning retained earnings upon adoption of this guidance as we had one available-for-sale equity investment where the change in fair value is currently recognized in net income, as compared to the previous practice of flowing through changes in fair value to other comprehensive income. This investment was sold during the three months ended March 31, 2018 limiting the impact of this accounting change on our consolidated financial statements or on our disclosures related to investments.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability measured on a discounted basis and a right-of-use asset a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged and the accounting for sale and leaseback transactions were simplified. This guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. We will adopt this guidance on January 1, 2019. We expect our statement of financial condition to be grossed up on both the asset and liability side to reflect our lease obligations, and we do not expect adoption of this guidance to have a material impact on our consolidated financial statements or on our disclosures related to leases.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires the measurement of all expected credit losses for financial assets held at the reporting date, based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions will now use forward-looking information to better inform their credit loss estimates. Additionally, the ASU amends the accounting guidance for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. This guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for interim and annual periods beginning after December 15, 2018. We will adopt this guidance on January 1, 2020 and expect that it will have a material impact on the determination of our ALLL. We are unable to estimate the expected impact to the ALLL upon adoption due to various factors, primarily the fine tuning of our qualitative assumptions used within our preliminary model, uncertainty regarding economic conditions and the size and mix of our loan portfolio at the time of adoption, which could impact our historical loss factors. We are currently working with our existing ALLL software provider on further developing the model to perform the ALLL calculations upon adoption and we believe that we currently have in place the internal team capable of handling this implementation.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which provides guidance for classification of specific items on the statement of cash flows. This guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. We adopted this guidance on January 1, 2018 and it did not have a material impact on our consolidated statement of cash flows.
In May 2017, the FASB issued ASU 2017-09, “Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting,” which provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting. This guidance is effective for interim and annual periods beginning after

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December 15, 2017. Early adoption is permitted. We adopted this guidance on January 1, 2018 and it did not have an impact on our consolidated financial statements and disclosures.

3. Fair Value Measurements
Under FASB Accounting Standards Codification (“ASC”) 820-10, we group assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1
Valuation is based upon quoted prices for identical instruments traded in active markets.
 
 
Level 2
Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
 
 
Level 3
Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
Risks with Fair Value Measurements
Fair value estimates are made at a discrete point in time based on relevant market information and other information about the financial instruments. Because no active market exists for a significant portion of our financial instruments, fair value estimates are based in large part on judgments we make primarily regarding current economic conditions, risk characteristics of various financial instruments, prepayment rates, and future expected loss experience. These estimates are subjective in nature and invariably involve some inherent uncertainties. Additionally, the occurrence of unexpected events or changes in circumstances can occur that could require us to make changes to our assumptions and which, in turn, could significantly affect and require us to make changes to our previous estimates of fair value.
In addition, the fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of existing and anticipated future customer relationships and the value of assets and liabilities that are not considered financial instruments, such as premises and equipment and other real estate owned (“OREO”).
Measurement Methodology
Cash and Cash Equivalents. The fair value of cash and cash equivalents approximates its carrying value.
Interest-Bearing Deposits with Financial Institutions. The fair values of interest-bearing deposits maturing within one year approximate their carrying values.
FHLB and FRBSF Stock. The Bank is a member of the Federal Home Loan Bank of San Francisco (“FHLB”) and the FRBSF. As members, we are required to own stock of the FHLB and the FRBSF, the amount of which is based primarily on the level of our borrowings from those institutions. We also have the right to acquire additional shares of stock in either or both of the FHLB and the FRBSF. During the three and six months ended June 30, 2018, we purchased no FHLB stock. During the three and six months ended June 30, 2018, we purchased 3,143 and 9,945 shares of FRBSF stock, respectively. No shares of FHLB stock or FRBSF stock were called during the three and six months ended June 30, 2018. The fair values of the FHLB and FRBSF stock are equal to their respective carrying amounts, are classified as restricted securities and are periodically evaluated for impairment based on our assessment of the ultimate recoverability of our investments in that stock. Any cash or stock dividends paid to us on such stock are reported as income.
Investment Securities Available for Sale. Fair value measurement for our investment securities available for sale is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 investment securities include those traded on an active exchange, such as the New York Stock Exchange, and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. Level 2 investment securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Equity Investments Without Readily Determinable Fair Value. Equity investments without readily determinable fair value are accounted for under the measurement alternative method of accounting. These investments are measured at cost, less any

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impairment, plus or minus any changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Any cash or stock dividends paid to us on such investments are reported as noninterest income.
Impaired Loans. Loans measured for impairment are measured at an observable market price (if available), or the fair value of the loan’s collateral (if the loan is collateral dependent). The fair value of an impaired loan may be estimated using one of several methods, including collateral value, market value of similar debt, liquidation value and discounted cash flows. Those impaired loans not requiring a specific loan loss reserve represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. When the fair value of the collateral is based on an observable market price or a current appraised value, we record the impaired loan at Level 2. When an appraised value is not available or we determine that the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the impaired loan at Level 3.
Loans. The fair value for loans with variable interest rates less a credit discount is the carrying amount. The fair value of fixed rate loans is derived by calculating the present value of expected future cash flows discounted at the loan’s original interest rate by the various homogeneous categories of loans. All loans have been adjusted to reflect changes in credit risk and represent the exit price of the loans. Changes are not recorded directly as an adjustment to current earnings or comprehensive income, but rather as an adjustment component in determining the overall adequacy of the loan loss reserve.
Other Real Estate Owned. OREO is reported at its net realizable value (fair value less estimated costs to sell) at the time any real estate collateral is acquired by the Bank in satisfaction of a loan. Subsequently, OREO is carried at the lower of carrying value or fair value less estimated costs to sell. Fair value is determined based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, we record the foreclosed asset at Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the foreclosed asset at Level 3.
Other Foreclosed Assets. Other foreclosed assets are reported at their net realizable value (fair value less estimated costs to sell) at the time any collateral other than real estate is acquired by the Bank in satisfaction of a loan. Subsequently, other foreclosed assets are carried at the lower of carrying value or fair value less estimated costs to sell. Fair value is determined based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, we record the foreclosed asset at Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the foreclosed asset at Level 3.

Deposits. Deposits are carried at historical cost. The carrying amounts of deposits from savings and money market accounts are deemed to approximate fair value as they either have no stated maturities or short-term maturities. Certificates of deposit are estimated utilizing discounted cash flow techniques. The interest rates applied are rates currently being offered for similar certificates of deposit.
Borrowings. The fair value of borrowings is the carrying amount for those borrowings that mature on a daily basis. The fair value of term borrowings is derived by calculating the discounted value of future cash flows expected to be paid out by the Company. We classify our borrowings in Level 2 of the fair value hierarchy.
Junior Subordinated Debentures. The fair value of the junior subordinated debentures is based on quoted market prices of the underlying securities. These securities are variable rate in nature and repriced quarterly. We classify our junior subordinated debentures in Level 2 of the fair value hierarchy.
Commitments to Extend Credit and Standby Letters of Credit. The fair value of commitments to extend credit and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.
Interest Receivable and Interest Payable. The carrying amounts of our accrued interest receivable and accrued interest payable are deemed to approximate fair value.
Assets Recorded at Fair Value on a Recurring Basis
The following tables show the recorded amounts of assets and liabilities measured at fair value on a recurring basis at June 30, 2018 and December 31, 2017:

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At June 30, 2018
(Dollars in thousands)
Total
 
Level 1
 
Level 2
 
Level 3
Assets at Fair Value:
 
 
 
 
 
 
 
Debt securities available for sale
 
 
 
 
 
 
 
U.S. Treasury securities
$
2,966

 
$

 
$
2,966

 
$

Residential mortgage backed securities issued by U.S. agencies
26,221

 

 
26,221

 

Total debt securities available for sale at fair value
$
29,187

 
$

 
$
29,187

 
$

 
 
At December 31, 2017
(Dollars in thousands)
Total
 
Level 1
 
Level 2
 
Level 3
Assets at Fair Value:
 
 
 
 
 
 
 
Debt securities available for sale
 
 
 
 
 
 
 
U.S. Treasury securities
$
2,971

 
$

 
$
2,971

 
$

Residential mortgage backed securities issued by U.S. agencies
30,122

 

 
30,122

 

Asset-backed security (1)
1,741

 

 

 
1,741

Total debt securities available for sale
34,834

 

 
33,093

 
1,741

Equity securities
 
 
 
 
 
 
 
Mutual funds (1)
4,904

 
4,904

 

 

Total debt and equity securities available for sale at fair value
$
39,738

 
$
4,904

 
$
33,093

 
$
1,741

 
(1)
These investments were sold during the six months ended June 30, 2018. Refer to Note 4, Investments for further detail regarding these sales.

The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows for the six months ended June 30, 2018:
 
Asset Backed Securities
 
(Dollars in thousands)
Balance of recurring Level 3 instruments at December 31, 2017
$
1,741

Total gains or losses (realized/unrealized):
 
Included in earnings-realized
53

Included in other comprehensive income
251

Sales
(2,054
)
Settlements
9

Balance of recurring Level 3 instruments at June 30, 2018
$

Assets Recorded at Fair Value on a Nonrecurring Basis
We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These nonrecurring fair value adjustments typically involve application of the lower of cost or market accounting or write-downs of individual assets. Information regarding assets measured at fair value on a nonrecurring basis is set forth in the table below.
 
At June 30, 2018
 
At December 31, 2017
(Dollars in thousands)
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets at Fair Value:
 
 
 
Impaired loans
$
5,325

 
$

 
$

 
$
5,325

 
$
6,360

 
$

 
$

 
$
6,360

Other real estate owned
2,073

 

 
2,073

 

 

 

 

 

Total
$
7,398

 
$

 
$
2,073

 
$
5,325

 
$
6,360

 
$

 
$

 
$
6,360

 
Significant Unobservable Inputs and Valuation Techniques of Level 3 Fair Value Measurements
For our fair value measurements classified in Level 3 of the fair value hierarchy as of June 30, 2018, a summary of the significant unobservable inputs and valuation techniques is as follows:

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Fair Value Measurement as of June 30, 2018
 
Valuation Techniques(2)
 
Unobservable Inputs(2)
 
Range
 
Weighted Average
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Impaired loans
5,325

 
Third-Party Pricing
 
Discounted cash flow
 
N/A (1)
 
N/A (1)
 
$
5,325

 
 
 
 
 
 
 
 
 
(1)
As part of our process, we obtain appraisals for our various properties included within impaired loans which primarily rely upon market comparisons. These market comparisons support our assumption that the carrying value of the respective loans either requires or does not require additional impairment.
(2)
As of June 30, 2018, there has been no change to our valuation techniques or the types of unobservable inputs used in the calculation of fair value from December 31, 2017.
Fair Value Measurements for Other Financial Instruments
The table below provides estimated fair values and related carrying amounts of our financial instruments as of June 30, 2018 and December 31, 2017, excluding financial assets and liabilities which are recorded at fair value on a recurring basis.
 
Estimated Fair Value
At June 30, 2018
 
At December 31, 2017
Carrying Value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Carrying Value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(Dollars in thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
235,606

 
$
235,606

 
$
235,606

 
$

 
$

 
$
198,208

 
$
198,208

 
198,208

 

 

Interest-bearing deposits with financial institutions
2,420

 
2,420

 
2,420

 

 

 
2,920

 
2,920

 
2,920

 

 

Federal Reserve Bank of San Francisco and Federal Home Loan Bank stock
8,762

 
8,762

 
8,762

 

 

 
8,107

 
8,107

 
8,107

 

 

Loans, net
1,049,003

 
1,039,721

 

 

 
1,039,721

 
1,053,201

 
1,046,171

 

 

 
1,046,171

Accrued interest receivable
4,066

 
4,066

 
4,066

 

 

 
3,872

 
3,872

 
3,872

 

 

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest bearing deposits
343,718

 
343,718

 
343,718

 

 

 
338,273

 
338,273

 
338,273

 

 

Interest-bearing deposits
824,085

 
821,959

 

 
821,959

 

 
801,120

 
800,169

 

 
800,169

 

Borrowings
30,000

 
30,229

 

 
30,229

 

 
40,866

 
41,238

 

 
41,238

 

Junior subordinated debentures
17,527

 
17,527

 

 
17,527

 

 
17,527

 
17,527

 

 
17,527

 

Accrued interest payable
412

 
412

 
412

 

 

 
397

 
397

 
397

 

 


4. Investments
Securities Available For Sale, at Fair Value
The following table sets forth the major components of securities available for sale and compares the amortized costs and estimated fair market values of, and the gross unrealized gains and losses on, these securities at June 30, 2018 and December 31, 2017:
(Dollars in thousands)
June 30, 2018
 
December 31, 2017
Amortized
Cost
 
Gross Unrealized
 
Estimated
Fair Value
 
Amortized
Cost
 
Gross Unrealized
 
Estimated
Fair Value
Gain
 
Loss
 
Gain
 
Loss
 
Securities Available for Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
2,997

 
$

 
$
(31
)
 
$
2,966

 
$
2,996

 
$

 
$
(25
)
 
$
2,971

Residential mortgage backed securities issued by U.S. Agencies(1)
27,672

 
1

 
(1,452
)
 
26,221

 
30,894

 
5

 
(777
)
 
30,122

Asset backed security(2)

 

 

 

 
1,992

 

 
(251
)
 
1,741

Mutual funds(3)

 

 

 

 
5,000

 
11

 
(107
)
 
4,904

Total
$
30,669

 
$
1

 
$
(1,483
)
 
$
29,187

 
$
40,882

 
$
16

 
$
(1,160
)
 
$
39,738

 
 
(1)
Secured by closed-end first liens on 1-4 family residential mortgages.
(2)
Comprised of a security that represented an interest in a pool of trust preferred securities issued by U.S.-based banks and insurance companies. This investment was sold during the six months ended June 30, 2018.

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Table of Contents

(3)
Consisted primarily of mutual fund investments in closed-end first liens on 1-4 family residential mortgages. As a result of the adoption of ASU 2016-01 effective January 1, 2018, the change in fair value for all equity securities is required to be recorded within the income statement and would no longer be included in this table. However, this investment was sold during the six months ended June 30, 2018 so the only impact from the adoption of ASU 2016-01 in 2018 relates to the adjustment to beginning retained earnings for the $97 thousand gross unrealized loss as of December 31, 2017.
At June 30, 2018 and December 31, 2017, U.S. agency residential mortgage backed securities with an aggregate fair market value of $16.1 million and $22.7 million, respectively, were pledged to secure repurchase agreements, local agency deposits and treasury, tax and loan accounts.
The amortized cost and estimated fair values of securities available for sale at June 30, 2018 and December 31, 2017 are shown in the tables below by contractual maturities taking into consideration historical prepayments based on the prior twelve months of principal payments. Expected maturities will differ from contractual maturities and historical prepayments, particularly with respect to collateralized mortgage obligations, primarily because prepayment rates are affected by changes in conditions in the interest rate market and, therefore, future prepayment rates may differ from historical prepayment rates.
 
At June 30, 2018 Maturing in
(Dollars in thousands)
One year
or less
 
Over one
year through
five years
 
Over five
years through
ten years
 
Over ten
Years
 
Total
Securities available for sale, amortized cost
$
6,616

 
$
16,628

 
$
7,120

 
$
305

 
$
30,669

Securities available for sale, estimated fair value
6,301

 
15,863

 
6,727

 
296

 
29,187

Weighted average yield
1.43
%
 
1.49
%
 
1.63
%
 
2.60
%
 
1.52
%
 
At December 31, 2017 Maturing in
(Dollars in thousands)
One year
or less
 
Over one
year through
five years
 
Over five
years through
ten years
 
Over ten
Years
 
Total
Securities available for sale, amortized cost (1)
$
5,685

 
$
23,772

 
$
8,956

 
$
2,469

 
$
40,882

Securities available for sale, estimated fair value (1)
5,543

 
23,253

 
8,727

 
2,215

 
39,738

Weighted average yield (1)
1.49
%
 
1.60
%
 
1.63
%
 
3.86
%
 
1.73
%
 
(1)
Included within these balances are equity securities that consisted primarily of mutual fund investments in closed-end first liens on 1-4 family residential mortgages. As a result of the adoption of ASU 2016-01 effective January 1, 2018, the change in fair value for all equity securities is required to be recorded within the income statement and would no longer be included in this table. However, this investment was sold during the six months ended June 30, 2018 so the only impact from the adoption of ASU 2016-01 in 2018 relates to the adjustment to beginning retained earnings for the $97 thousand gross unrealized loss as of December 31, 2017.
We purchased no securities available for sale during the three and six months ended June 30, 2018. During the three and six months ended June 30, 2017, we purchased $0 and $1.0 million of securities available for sale. During the six months ended June 30, 2018, we had sales proceeds of $2.1 million on the sale of debt securities available for sale, with a gain of $53 thousand, and sales proceeds of $4.8 million on the sale of our equity securities, with a loss of $5 thousand. We had no sales of securities available for sale during the three months ended June 30, 2018 and the three and six months ended June 30, 2017.
The tables below indicate, as of June 30, 2018 and December 31, 2017, the gross unrealized losses and fair values of our investments, aggregated by investment category, and length of time that the individual securities have been in a continuous unrealized loss position.
 
Securities with Unrealized Loss at June 30, 2018
 
Less than 12 months
 
12 months or more
 
Total
(Dollars in thousands)
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
U.S. Treasury securities
$
2,966

 
$
(31
)
 
$

 
$

 
$
2,966

 
$
(31
)
Residential mortgage backed securities issued by U.S. Agencies
1,665

 
(47
)
 
24,492

 
(1,405
)
 
26,157

 
(1,452
)
Total
$
4,631

 
$
(78
)
 
$
24,492

 
$
(1,405
)
 
$
29,123

 
$
(1,483
)

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Table of Contents

  
Securities with Unrealized Loss at December 31, 2017
 
Less than 12 months
 
12 months or more
 
Total
(Dollars in thousands)
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
U.S. Treasury securities
$
2,971

 
$
(25
)
 
$

 
$

 
$
2,971

 
$
(25
)
Residential mortgage backed securities issued by U.S. Agencies
1,400

 
(15
)
 
28,241

 
(762
)
 
29,641

 
(777
)
Asset-backed security

 

 
1,740

 
(251
)
 
1,740

 
(251
)
Mutual funds (1)
1,485

 
(15
)
 
2,658

 
(92
)
 
4,143

 
(107
)
Total
$
5,856

 
$
(55
)
 
$
32,639

 
$
(1,105
)
 
$
38,495

 
$
(1,160
)
 
(1)
Consisted primarily of mutual fund investments in closed-end first liens on 1-4 family residential mortgages. As a result of the adoption of ASU 2016-01 effective January 1, 2018, the change in fair value for all equity securities is required to be recorded within the income statement and would no longer be included in this table. However, this investment was sold during the six months ended June 30, 2018 so the only impact from the adoption of ASU 2016-01 in 2018 relates to the adjustment to beginning retained earnings for the $97 thousand gross unrealized loss as of December 31, 2017.
We regularly monitor investments for significant declines in fair value. We have determined that declines in the fair values of these investments below their respective amortized costs, as set forth in the tables above, are temporary because (i) those declines were due to interest rate changes and not to a deterioration in the creditworthiness of the issuers of those investment securities, and (ii) we have the ability to hold those securities until there is a recovery in their values or until their maturity.
We recognize other-than-temporary impairments (“OTTI”) to our available-for-sale debt securities in accordance with FASB ASC 320-10. When there are credit losses associated with, but we have no intention to sell, an impaired debt security, and it is more likely than not that we will not have to sell the security before recovery of its cost basis, we will separate the amount of impairment, or OTTI, between the amount that is credit related and the amount that is related to non-credit factors. Credit-related impairments are recognized in our consolidated statements of operations. Any non-credit-related impairments are recognized and reflected in other comprehensive income in our consolidated statements of financial condition.
Through the impairment assessment process, we determined that there were no available-for-sale debt securities that were other-than-temporarily impaired at June 30, 2018. We recorded no impairment credit losses on available-for-sale debt securities in our consolidated statements of operations for the three and six months ended June 30, 2018 and 2017.
We have made a determination that the remainder of our securities with respect to which there were unrealized losses as of June 30, 2018 are not other-than-temporarily impaired, because we have concluded that we have the ability to continue to hold those securities until their respective fair market values increase above their respective amortized costs or, if necessary, until their respective maturities. In reaching that conclusion we considered a number of factors and other information, which included: (i) the significance of each such security, (ii) the amount of the unrealized losses attributable to each such security, (iii) our liquidity position, (iv) the impact that retention of those securities could have on our capital position and (v) our evaluation of the expected future performance of these securities (based on the criteria discussed above).
Equity Investments Without Readily Determinable Fair Value
As of June 30, 2018, we had two investments in limited partnerships without a readily determinable fair value. As of June 30, 2018, we owned less than 3% of the total investment in each partnership. Under ASU 2016-01, we elected to measure these equity investments using the measurement alternative, which requires that these investments are measured at cost, less any impairment, plus or minus any changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. During the three and six months ended June 30, 2018, these investments were not impaired and there were no observable price changes. As a result, the balance shown below as of June 30, 2018 represents the cost of the investments and is included within other assets on the consolidated statements of financial condition. Prior to the adoption of ASU 2016-01, these investments were accounted for under the cost method of accounting and included within other assets on the consolidated statements of financial condition. During the three and six months ended June 30, 2018, we had $52 thousand and $141 thousand, respectively, of capital contributions to these investments. We had $133 thousand of capital contributions to these investments during both the three and six months ended June 30, 2017. As of June 30, 2018 and December 31, 2017, our equity investments without readily determinable fair value were as follows:
 
June 30, 2018
 
December 31, 2017
 
(Dollars in thousands)
Equity investments without readily determinable fair value
$
1,035

 
$
893


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Table of Contents


5. Loans and Allowance for Loan and Lease Losses
The loan portfolio consisted of the following at:
 
June 30, 2018
 
December 31, 2017
(Dollars in thousands)
Amount
 
Percent
 
Amount
 
Percent
Commercial loans
$
403,152

 
38.1
%
 
$
394,493

 
37.1
%
Commercial real estate loans – owner occupied
225,018

 
21.2
%
 
214,365

 
20.1
%
Commercial real estate loans – all other
224,555

 
21.2
%
 
228,090

 
21.4
%
Residential mortgage loans – multi-family
90,270

 
8.5
%
 
114,302

 
10.7
%
Residential mortgage loans – single family
24,583

 
2.3
%
 
24,848

 
2.3
%
Construction and land development loans
30,395

 
2.9
%
 
34,614

 
3.3
%
Consumer loans
61,084

 
5.8
%
 
53,918

 
5.1
%
Gross loans
1,059,057

 
100.0
%
 
1,064,630

 
100.0
%
Deferred fee (income) costs, net
3,315

 
 
 
2,767

 
 
Allowance for loan and lease losses
(13,369
)
 
 
 
(14,196
)
 
 
Loans, net
$
1,049,003

 
 
 
$
1,053,201

 
 
At June 30, 2018 and December 31, 2017, real estate loans of approximately $800 million and $669 million, respectively, were pledged to secure borrowings obtained from the FHLB and to support our unfunded borrowing capacity. During the three and six months ended June 30, 2018, we sold $15.1 million of commercial real estate loans - all other at par value. No loans were sold during the three and six months ended June 30, 2017. During the three and six months ended June 30, 2018, we purchased no loans. During the three and six months ended June 30, 2017, we purchased $30.1 million of performing commercial real estate loans - owner occupied and commercial real estate loans - all other.
Allowance for Loan and Lease Losses
The ALLL represents our estimate of credit losses in our loan and lease portfolio that are probable and estimable at the balance sheet date. We employ economic models that are based on bank regulatory guidelines, industry standards and our own historical loan loss experience, as well as a number of more subjective qualitative factors, to determine both the sufficiency of the ALLL and the amount of the provisions that are required to increase or replenish the ALLL.
 
The ALLL is first determined by (i) analyzing all classified loans (graded as “Substandard” or “Doubtful” under our internal asset quality grading parameters) on nonaccrual status for loss exposure and (ii) establishing specific reserves as needed. ASC 310-10 defines loan impairment as the existence of uncertainty concerning collection of all principal and interest in accordance with the contractual terms of a loan. For collateral dependent loans, impairment is typically measured by comparing the loan amount to the fair value of collateral, less estimated costs to sell, with any “shortfall” amount charged off. Other methods can be used in estimating impairment, including market price and the present value of expected future cash flows discounted at the loan’s original interest rate. We are an active lender with the U.S. Small Business Administration and collection of a percentage of the loan balance of many of the loans originated is guaranteed.  The ALLL reserves are calculated against the non-guaranteed loan balances. 
On a quarterly basis, we utilize a classification based loan loss migration model as well as review individual loans in determining the adequacy of the ALLL for homogenous pools of loans that are not subject to specific reserve allocations. Our loss migration analysis tracks 16 quarters of loan loss history and industry loss factors to determine historical losses by classification category for each loan type, except certain consumer loans (automobile, mortgage and credit cards). We then apply these calculated loss factors, together with qualitative factors based on external economic conditions and trends and internal assessments, to the outstanding loan balances in each homogenous group of loans, and then, using our internal asset quality grading parameters, we grade the loans as “Pass,” “Special Mention,” “Substandard” or “Doubtful”. We analyze impaired loans individually. This grading is based on the credit classifications of assets as prescribed by government regulations and industry standards and is separated into the following groups:
Pass: Loans classified as pass include current loans performing in accordance with contractual terms, installment/consumer loans that are not individually risk rated, and loans which exhibit certain risk factors that require greater than usual monitoring by management.
Special Mention: Loans classified as special mention, while generally not delinquent, have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank’s credit position at some future date.

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Table of Contents

Substandard: Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in a substandard loan, and may also be at delinquency status and have defined weaknesses based on currently existing facts, conditions and values making collection or liquidation in full highly questionable and improbable.
Set forth below is a summary of the activity in the ALLL, by portfolio type, during the three and six months ended June 30, 2018 and 2017:
(Dollars in thousands)
Commercial
 
Real  Estate
 
Construction and Land
Development
 
Consumer 
and Single
Family
Mortgages
 
Unallocated
 
Total
ALLL in the three months ended June 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
7,634

 
$
3,255

 
$
888

 
$
1,112

 
$
516

 
$
13,405

Charge offs
(355
)
 

 

 

 

 
(355
)
Recoveries
288

 

 

 
31

 

 
319

Provision
(74
)
 
(302
)
 
(561
)
 
435

 
502

 

Balance at end of period
$
7,493

 
$
2,953

 
$
327

 
$
1,578

 
$
1,018

 
$
13,369

ALLL in the six months ended June 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
9,155

 
$
2,906

 
$
650

 
$
1,043

 
$
442

 
$
14,196

Charge offs
(1,423
)
 

 

 

 

 
(1,423
)
Recoveries
560

 

 

 
36

 

 
596

Provision
(799
)
 
47

 
(323
)
 
499

 
576

 

Balance at end of period
$
7,493

 
$
2,953

 
$
327

 
$
1,578

 
$
1,018

 
$
13,369

ALLL in the three months ended June 30, 2017:
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
10,234

 
$
3,857

 
$
116

 
$
806

 
$
1,781

 
$
16,794

Charge offs
(19
)
 
(432
)
 

 
(105
)
 

 
(556
)
Recoveries
934

 

 

 
6

 

 
940

Provision
(1,036
)
 
1,232

 
41

 
416

 
(653
)
 

Balance at end of period
$
10,113

 
$
4,657

 
$
157

 
$
1,123

 
$
1,128

 
$
17,178

ALLL in the six months ended June 30, 2017:
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
11,276

 
$
4,226

 
$
343

 
$
642

 
$
314

 
$
16,801

Charge offs
$
(465
)
 
$
(432
)
 
$

 
$
(114
)
 
$

 
$
(1,011
)
Recoveries
1,194

 

 
27

 
167

 

 
1,388

Provision
(1,892
)
 
863

 
(213
)
 
428

 
814

 

Balance at end of period
$
10,113

 
$
4,657

 
$
157

 
$
1,123

 
$
1,128

 
$
17,178


18

Table of Contents

Set forth below is information regarding loan balances and the related ALLL, by portfolio type, as of June 30, 2018 and December 31, 2017.
(Dollars in thousands)
Commercial
 
Real  Estate
 
Construction and Land
Development
 
Consumer 
and Single
Family
Mortgages
 
Unallocated
 
Total
ALLL balance at June 30, 2018 related to:
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$

 
$

 
$

 
$

 
$

 
$

Loans collectively evaluated for impairment
7,493

 
2,953

 
327

 
1,578

 
1,018

 
13,369

Total
$
7,493

 
$
2,953

 
$
327

 
$
1,578

 
$
1,018

 
$
13,369

Loans balance at June 30, 2018 related to:
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
4,413

 
$
862

 
$

 
$
50

 
$

 
$
5,325

Loans collectively evaluated for impairment
398,739

 
538,981

 
30,395

 
85,617

 

 
1,053,732

Total
$
403,152

 
$
539,843

 
$
30,395

 
$
85,667

 
$

 
$
1,059,057

ALLL balance at December 31, 2017 related to:
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
7

 
$

 
$

 
$

 
$

 
$
7

Loans collectively evaluated for impairment
9,148

 
2,906

 
650

 
1,043

 
442

 
14,189

Total
$
9,155

 
$
2,906

 
$
650

 
$
1,043

 
$
442

 
$
14,196

Loans balance at December 31, 2017 related to:
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
3,672

 
$
2,461

 
$

 
$
227

 
$

 
$
6,360

Loans collectively evaluated for impairment
390,821

 
554,296

 
34,614

 
78,539

 

 
1,058,270

Total
$
394,493

 
$
556,757

 
$
34,614

 
$
78,766

 
$

 
$
1,064,630


Credit Quality
The amounts of nonperforming assets and delinquencies that occur within our loan portfolio factor into our evaluation of the adequacy of the ALLL.
The following table provides a summary of the delinquency status of loans by portfolio type at June 30, 2018 and December 31, 2017:

19

Table of Contents

(Dollars in thousands)
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days and Greater
 
Total Past Due
 
Current
 
Total Loans Outstanding
 
Loans >90 Days and Accruing
At June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial loans
$
553

 
$
6,245

 
$
2,669

 
$
9,467

 
$
393,685

 
$
403,152

 
$

Commercial real estate loans – owner-occupied

 
3,870

 

 
3,870

 
221,148

 
225,018

 

Commercial real estate loans – all other

 

 

 

 
224,555

 
224,555

 

Residential mortgage loans – multi-family

 

 

 

 
90,270

 
90,270

 

Residential mortgage loans – single family

 

 

 

 
24,583

 
24,583

 

Construction and land development loans

 

 

 

 
30,395

 
30,395

 

Consumer loans

 

 

 

 
61,084

 
61,084

 

Total
$
553

 
$
10,115

 
$
2,669

 
$
13,337

 
$
1,045,720

 
$
1,059,057

 
$

At December 31, 2017
 
Commercial loans
$
1,387

 
$

 
$
2,125

 
$
3,512

 
$
390,981

 
$
394,493

 
$

Commercial real estate loans – owner-occupied

 

 

 

 
214,365

 
214,365

 

Commercial real estate loans – all other

 
936

 

 
936

 
227,154

 
228,090

 

Residential mortgage loans – multi-family

 

 

 

 
114,302

 
114,302

 

Residential mortgage loans – single family

 

 

 

 
24,848

 
24,848

 

Construction and land development loans

 

 

 

 
34,614

 
34,614

 

Consumer loans

 

 

 

 
53,918

 
53,918

 

Total
$
1,387

 
$
936

 
$
2,125

 
$
4,448

 
$
1,060,182

 
$
1,064,630

 
$

Generally, the accrual of interest on a loan is discontinued when principal or interest payments become more than 90 days past due, unless we believe that the loan is adequately collateralized and it is in the process of collection. There were no loans 90 days or more past due and still accruing interest at June 30, 2018 or December 31, 2017. In certain instances, when a loan is placed on nonaccrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received (referred to as full nonaccrual basis of accounting), except when the ultimate collectability of principal is probable, in which case such payments are applied to accrued and unpaid interest, which is credited to income (referred to as nonaccrual cash basis of accounting). Nonaccrual loans may be restored to accrual status when principal and interest become current and full repayment becomes expected.
The following table provides information with respect to loans on nonaccrual status, by portfolio type, as of June 30, 2018 and December 31, 2017:
 
June 30, 2018
 
December 31, 2017
 
(Dollars in thousands)
Nonaccrual loans:
 
 
 
Commercial loans
$
4,413

 
$
3,222

Commercial real estate loans – owner occupied
862

 
893

Commercial real estate loans – all other

 
1,568

Residential mortgage loans – single family

 
171

Consumer
50

 
56

Total(1)
$
5,325