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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 March 31, 2020
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)
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, without par value
"PMBC"
Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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.

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Large accelerated filer
 
o
  
Accelerated filer
 
x
Non-accelerated filer
 
o
  
Smaller reporting company
 
x
 
 
 
 
Emerging growth company
 
o
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 May 1, 2020, there were 22,134,368 shares of Common Stock and 1,467,155 shares of Non-Voting Common Stock outstanding.
 

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PACIFIC MERCANTILE BANCORP
QUARTERLY REPORT ON FORM 10Q
FOR THE QUARTER ENDED MARCH 31, 2020
TABLE OF CONTENTS
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
(Unaudited)
 
March 31, 2020
 
December 31, 2019
ASSETS
 
 
 
Cash and due from banks
$
16,010

 
$
17,409

Interest bearing deposits with financial institutions
375,992

 
202,729

Cash and cash equivalents
392,002

 
220,138

Interest-bearing time deposits with financial institutions
2,345

 
2,420

Federal Reserve Bank of San Francisco and Federal Home Loan Bank Stock, at cost
7,910

 
7,910

Securities available for sale, at fair value
27,712

 
28,344

Loans (net of allowances of $17,520 and $13,611, respectively)
1,130,305

 
1,117,511

Other real estate owned

 

Accrued interest receivable
4,083

 
4,095

Premises and equipment, net
1,137

 
1,117

Net deferred tax assets
9,017

 
8,434

Other assets
25,627

 
26,185

Total assets
$
1,600,138

 
$
1,416,154

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
494,442

 
$
397,000

Interest-bearing
801,846

 
802,570

Total deposits
1,296,288

 
1,199,570

Borrowings
120,000

 
30,000

Accrued interest payable
368

 
398

Other liabilities
18,457

 
19,611

Junior subordinated debentures
17,527

 
17,527

Total liabilities
1,452,640

 
1,267,106

Commitments and contingencies (Note 11 and Note 14)

 

Shareholders’ equity:
 
 
 
Common stock, no par value, 85,000,000 shares of voting common stock and 2,000,000 shares of non-voting common stock authorized; 22,136,484 and 22,106,374 voting shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively; 1,467,155 non-voting shares issued and outstanding at March 31, 2020 and December 31, 2019
153,834

 
153,570

Accumulated deficit
(6,316
)
 
(3,955
)
Accumulated other comprehensive loss
(20
)
 
(567
)
Total shareholders’ equity
147,498

 
149,048

Total liabilities and shareholders’ equity
$
1,600,138

 
$
1,416,154

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 March 31,
 
2020
 
2019
Interest income:
 
 
 
Loans, including fees
$
13,787

 
$
14,520

Securities available for sale and stock
261

 
292

Interest-bearing deposits with financial institutions
721

 
1,355

Total interest income
14,769

 
16,167

Interest expense:
 
 
 
Deposits
2,965

 
3,624

Borrowings
331

 
492

Total interest expense
3,296

 
4,116

Net interest income
11,473

 
12,051

Provision for loan and lease losses
6,200

 
3,300

Net interest income after provision for loan and lease losses
5,273

 
8,751

Noninterest income
 
 
 
Service fees on deposits and other banking services
522

 
398

Net gain on sale of Small Business Administration loans

 
300

Net gain (loss) on sale of other assets
6

 
(25
)
Other noninterest income
567

 
817

Total noninterest income
1,095

 
1,490

Noninterest expense
 
 
 
Salaries and employee benefits
6,069

 
5,441

Occupancy
671

 
627

Equipment and depreciation
452

 
461

Data processing
645

 
518

FDIC expense
193

 
164

Other real estate owned expense, net

 
68

Professional fees
861

 
796

Business development
172

 
196

Loan related expense
125

 
186

Insurance
63

 
61

Other operating expense
469

 
465

Total noninterest expense
9,720

 
8,983

Income (loss) before income taxes
(3,352
)
 
1,258

Income tax provision (benefit)
(991
)
 
376

Net income (loss) allocable to common shareholders
$
(2,361
)
 
$
882

Basic income (loss) per common share:
 
 
 
Net income (loss) allocable to common shareholders
$
(0.10
)
 
$
0.04

Diluted income (loss) per common share:
 
 
 
Net income (loss) allocable to common shareholders
$
(0.10
)
 
$
0.04

Weighted average number of common shares outstanding:
 
 
 
Basic
23,475,042

 
21,824,363

Diluted
23,475,042

 
23,546,751


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 March 31,
 
2020
 
2019
Net income (loss)
$
(2,361
)
 
$
882

Other comprehensive income, net of tax:
 
 
 
Change in unrealized holding gain on securities available for sale
547

 
367

Total comprehensive income (loss)
$
(1,814
)
 
$
1,249

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 Three Months Ended March 31, 2020 and 2019

  
 
Common stock
 
Accumulated
deficit
 
Accumulated
other
comprehensive
income (loss)
 
Total
 
Number
of shares
 
Amount
 
Balance at December 31, 2019
 
23,574

 
$
153,570

 
$
(3,955
)
 
$
(567
)
 
$
149,048

Issuance of restricted stock, net
 
19

 

 

 

 

Common stock based compensation expense
 

 
214

 

 

 
214

Common stock options exercised
 
11

 
50

 

 

 
50

Net income (loss)
 

 

 
(2,361
)
 

 
(2,361
)
Other comprehensive income
 

 

 

 
547

 
547

Balance at March 31, 2020
 
23,604

 
$
153,834

 
$
(6,316
)
 
$
(20
)
 
$
147,498




  
Series A Non-Voting
Preferred stock
 
Common stock
 
Accumulated
deficit
 
Accumulated
other
comprehensive
income (loss)
 
Total
Number
of shares
 
Amount
 
Number
of shares
 
Amount
 
Balance at December 31, 2018
1,467

 
$
8,480

 
21,916

 
$
143,466

 
$
(9,428
)
 
$
(1,144
)
 
$
141,374

Implementation of ASU 2016-02

 

 

 

 
(207
)
 

 
(207
)
Issuance of restricted stock, net

 

 
102

 

 

 

 

Common stock based compensation expense

 

 

 
200

 

 

 
200

Common stock options exercised

 

 

 

 

 

 

Net income

 

 

 

 
882

 

 
882

Other comprehensive income

 

 

 

 

 
367

 
367

Balance at March 31, 2019
1,467

 
$
8,480

 
22,018

 
$
143,666

 
$
(8,753
)
 
$
(777
)
 
$
142,616



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)
 
Three Months Ended March 31,
 
2020
 
2019
Cash Flows From Operating Activities:
 
 
 
Net income (loss)
$
(2,361
)
 
$
882

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
101

 
108

Provision for loan and lease losses
6,200

 
3,300

Amortization of premium on securities
33

 
38

Net amortization of deferred fees and unearned income on loans
(186
)
 
124

Net loss (gain) on sales of other real estate owned

 
66

Net loss on sale of other assets

 
25

Net gain on sale of Small Business Administration loans

 
(300
)
Small Business Administration loan originations

 
(4,751
)
Proceeds from sale of Small Business Administration loans

 
5,077

Stock-based compensation expense
214

 
200

Changes in operating assets and liabilities:
 
 
 
Net increase (decrease) in accrued interest receivable
12

 
(50
)
Net decrease in other assets
42

 
8,015

Net increase in deferred taxes
(812
)
 

Net decrease in income taxes receivable
195

 
177

Net increase (decrease) in accrued interest payable
(30
)
 
160

Net decrease in other liabilities
(1,154
)
 
(8,273
)
Net cash provided by operating activities
2,254

 
4,798

Cash Flows From Investing Activities:
 
 
 
Net decrease in interest-bearing time deposits with financial institutions
75

 

Maturities of and principal payments received on securities available for sale and other stock
1,375

 
2,293

Purchase of other investments

 
(594
)
Proceeds from sale of other real estate owned

 
1,107

Net (increase) decrease in loans
(18,493
)
 
16,739

Purchases of premises and equipment
(121
)
 
(68
)
Proceeds from sale of other assets
6

 
29

Net cash provided by (used in) investing activities
(17,158
)
 
19,506

Cash Flows From Financing Activities:
 
 
 
Net increase in deposits
96,718

 
45,348

Proceeds from borrowings
110,000

 
20,000

Payments of borrowings
(20,000
)
 
(20,000
)
Proceeds from exercise of common stock options
50

 

Net cash used in financing activities
186,768

 
45,348

Net increase in cash and cash equivalents
171,864

 
69,652

Cash and Cash Equivalents, beginning of period
220,138

 
187,718

Cash and Cash Equivalents, end of period
$
392,002

 
$
257,370

Supplementary Cash Flow Information:
 
 
 
Cash paid for interest on deposits and other borrowings
$
3,326

 
$
3,956

Cash paid for income taxes
$
17

 
$

Non-Cash Investing Activities:
 
 
 
Transfer of loans into other assets
$
315

 
$
58

Right-of-use assets obtained in exchange for new operating lease liabilities
$

 
$
10,618

 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 middle-market 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.
PMBC and the Bank are sometimes referred to, together, on a consolidated basis, in this report as the “Company” or as “we”, “us” or “our”.


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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, 2019 (“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 months ended March 31, 2020 and 2019 include the accounts of PMBC and the Bank. All significant intercompany balances and transactions were eliminated in consolidation. 
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. On November 15, 2019, the FASB issued ASU 2019-10, "Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates" which finalizes various effective date delays for private companies, not-for-profit organizations, and smaller reporting companies applying the credit losses (CECL), leases, and hedging standards. The effective date for smaller reporting companies has been delayed from the interim and annual periods beginning after December 15, 2020 to the interim and annual periods beginning after December 15, 2022. Early adoption is permitted for interim and annual periods beginning after December 15, 2018. We plan to adopt this guidance on January 1, 2023 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 December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes," which eliminates certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance is effective for public business entities for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is permitted. Entities that elect to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, entities that elect early adoption must adopt all the amendments in the same period. We are currently evaluating this guidance to determine the date of adoption and the impact on the Company.

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In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides temporary optional expedients to ease the financial reporting burdens of the expected market transition from London Interbank Offered Rate (LIBOR) to an alternative reference rate such as Secured Overnight Financing Rate (SOFR). The guidance was effective upon issuance and generally can be applied through December 31, 2022. We are currently evaluating this guidance to determine the date of adoption and the impact on the Company.
 


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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 months ended March 31, 2020, we purchased no FHLB or FRBSF stock. No shares of FHLB stock or FRBSF stock were called during the three months ended March 31, 2020. 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 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

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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 March 31, 2020 and December 31, 2019:
 
At March 31, 2020
(Dollars in thousands)
Total
 
Level 1
 
Level 2
 
Level 3
Assets at Fair Value:
 
 
 
 
 
 
 
Debt securities available for sale
 
 
 
 
 
 
 
Commercial mortgage backed securities issued by U.S. Agencies
$
9,343

 
$

 
$
9,343

 
$

Residential mortgage backed securities issued by U.S. agencies
18,369

 

 
18,369

 

Total debt securities available for sale at fair value
$
27,712

 
$

 
$
27,712

 
$


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At December 31, 2019
(Dollars in thousands)
Total
 
Level 1
 
Level 2
 
Level 3
Assets at Fair Value:
 
 
 
 
 
 
 
Debt securities available for sale
 
 
 
 
 
 
 
Commercial mortgage backed securities issued by U.S. Agencies
$
9,229

 
$

 
$
9,229

 
$

Residential mortgage backed securities issued by U.S. agencies
19,115

 

 
19,115

 

Total debt securities available for sale
$
28,344

 
$

 
$
28,344

 
$

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 March 31, 2020
 
At December 31, 2019
(Dollars in thousands)
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets at Fair Value:
 
 
 
Impaired loans
$
20,021

 
$

 
$

 
$
20,021

 
$
15,682

 
$

 
$

 
$
15,682

Other foreclosed assets
392

 

 
392

 

 
164

 

 
164

 

Total
$
20,413

 
$

 
$
392

 
$
20,021

 
$
15,846

 
$

 
$
164

 
$
15,682

 
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 March 31, 2020, a summary of the significant unobservable inputs and valuation techniques is as follows:
 
Fair Value Measurement as of March 31, 2020
 
Valuation Techniques(2)
 
Unobservable Inputs(2)
 
Range
 
Weighted Average
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Impaired loans
$
20,021

 
Third-Party Pricing
 
Discounted cash flow
 
N/A (1)
 
N/A (1)
 
(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 March 31, 2020, 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, 2019.

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Table of Contents

Fair Value Measurements for Other Financial Instruments
The table below provides estimated fair values and related carrying amounts of our financial instruments as of March 31, 2020 and December 31, 2019, excluding financial assets and liabilities which are recorded at fair value on a recurring basis.
 
Estimated Fair Value
At March 31, 2020
 
At December 31, 2019
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
$
392,002

 
$
392,002

 
$
392,002

 
$

 
$

 
$
220,138

 
$
220,138

 
220,138

 

 

Interest-bearing deposits with financial institutions
2,345

 
2,345

 
2,345

 

 

 
2,420

 
2,420

 
2,420

 

 

Federal Reserve Bank of San Francisco and Federal Home Loan Bank stock
7,910

 
7,910

 
7,910

 

 

 
7,910

 
7,910

 
7,910

 

 

Loans, net
1,130,305

 
1,135,393

 

 

 
1,135,393

 
1,117,511

 
1,120,096

 

 

 
1,120,096

Accrued interest receivable
4,083

 
4,083

 
4,083

 

 

 
4,095

 
4,095

 
4,095

 

 

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest bearing deposits
494,442

 
494,442

 
494,442

 

 

 
397,000

 
397,000

 
397,000

 

 

Interest-bearing deposits
801,846

 
804,437

 

 
804,437

 

 
802,570

 
803,549

 

 
803,549

 

Borrowings
120,000

 
119,709

 

 
119,709

 

 
30,000

 
29,974

 

 
29,974

 

Junior subordinated debentures
17,527

 
17,527

 

 
17,527

 

 
17,527

 
17,527

 

 
17,527

 

Accrued interest payable
368

 
368

 
368

 

 

 
398

 
398

 
398

 

 



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Table of Contents

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 March 31, 2020 and December 31, 2019:
(Dollars in thousands)
March 31, 2020
 
December 31, 2019
Amortized
Cost
 
Gross Unrealized
 
Estimated
Fair Value
 
Amortized
Cost
 
Gross Unrealized
 
Estimated
Fair Value
Gain
 
Loss
 
Gain
 
Loss
 
Securities Available for Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage backed securities issued by U.S. Agencies(1)
$
9,026

 
$
331

 
$
(14
)
 
$
9,343

 
$
9,147

 
$
128

 
$
(46
)
 
$
9,229

Residential mortgage backed securities issued by U.S. Agencies(2)
18,093

 
278

 
(2
)
 
18,369

 
19,380

 
12

 
(277
)
 
19,115

Total
$
27,119

 
$
609

 
$
(16
)
 
$
27,712

 
$
28,527

 
$
140

 
$
(323
)
 
$
28,344

 
 
(1)
Secured by first liens on commercial apartment building mortgages.
(2)
Secured by closed-end first liens on 1-4 family residential mortgages.

At March 31, 2020 and December 31, 2019, U.S. agency residential mortgage backed securities with an aggregate fair market value of $8.8 million and $9.2 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 March 31, 2020 and December 31, 2019 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 March 31, 2020 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
$
5,625

 
$
13,340

 
$
8,154

 
$

 
$
27,119

Securities available for sale, estimated fair value
5,707

 
13,618

 
8,387

 

 
27,712

Weighted average yield
1.54
%
 
1.60
%
 
2.08
%
 
%
 
1.73
%
 
At December 31, 2019 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
$
5,286

 
$
13,032

 
$
6,842

 
$
3,367

 
$
28,527

Securities available for sale, estimated fair value
5,230

 
12,887

 
6,849

 
3,378

 
28,344

Weighted average yield
1.58
%
 
1.66
%
 
2.22
%
 
2.53
%
 
1.88
%
We purchased no securities available for sale during the three months ended March 31, 2020 or during the three months ended March 31, 2019. We had no sales of securities available for sale during the three months ended March 31, 2019 or the three months ended March 31, 2020.
The tables below indicate, as of March 31, 2020 and December 31, 2019, 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.

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Table of Contents

 
Securities with Unrealized Loss at March 31, 2020
 
Less than 12 months
 
12 months or more
 
Total
(Dollars in thousands)
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
Commercial mortgage backed securities issued by U.S. Agencies
$
726

 
$
(14
)
 
$

 
$

 
$
726

 
$
(14
)
Residential mortgage backed securities issued by U.S. Agencies

 

 
167

 
(2
)
 
167

 
(2
)
Total
$
726

 
$
(14
)
 
$
167

 
$
(2
)
 
$
893

 
$
(16
)
  
Securities with Unrealized Loss at December 31, 2019
 
Less than 12 months
 
12 months or more
 
Total
(Dollars in thousands)
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
Commercial mortgage backed securities issued by U.S. Agencies
4,472

 
(46
)
 

 

 
4,472

 
(46
)
Residential mortgage backed securities issued by U.S. Agencies
76

 
(1
)
 
15,965

 
(276
)
 
16,041

 
(277
)
Total
$
4,548

 
$
(47
)
 
$
15,965

 
$
(276
)
 
$
20,513

 
$
(323
)
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 March 31, 2020. We recorded no impairment credit losses on available-for-sale debt securities in our consolidated statements of operations for the three months ended March 31, 2020 and 2019.
We have made a determination that the remainder of our securities with respect to which there were unrealized losses as of March 31, 2020 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 March 31, 2020, we had three investments in private companies and limited partnerships without a readily determinable fair value. As of March 31, 2020, we owned less than 3% of the total investment in each such company or 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 months ended March 31, 2020, these investments were not impaired and there were no observable price changes. As a result, the balance shown below as of March 31, 2020 represents the cost of the investments and is included within other assets on the consolidated statements of financial condition. During the three months ended March 31, 2020, we had zero capital contributions to these investments. We had $594 thousand of capital contributions to these investments during the three months ended March 31, 2019. As of March 31, 2020 and December 31, 2019, our equity investments without readily determinable fair value were as follows:

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Table of Contents

 
March 31, 2020
 
December 31, 2019
 
(Dollars in thousands)
Equity investments without readily determinable fair value
$
2,117

 
$
2,117



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Table of Contents

5. Loans and Allowance for Loan and Lease Losses
The loan portfolio consisted of the following at:
 
March 31, 2020
 
December 31, 2019
(Dollars in thousands)
Amount
 
Percent
 
Amount
 
Percent
Commercial loans
$
454,493

 
39.8
%
 
$
409,420

 
36.2
%
Commercial real estate loans – owner occupied
200,917

 
17.6
%
 
219,483

 
19.5
%
Commercial real estate loans – all other
205,116

 
17.9
%
 
208,283

 
18.5
%
Residential mortgage loans – multi-family
172,703

 
15.1
%
 
176,523

 
15.7
%
Residential mortgage loans – single family
16,863

 
1.5
%
 
18,782

 
1.7
%
Construction and land development loans
5,457

 
0.5
%
 
2,981

 
0.3
%
Consumer loans
87,608

 
7.6
%
 
90,867

 
8.1
%
Gross loans
1,143,157

 
100.0
%
 
1,126,339

 
100.0
%
Deferred fee (income) costs, net
4,668

 
 
 
4,783

 
 
Allowance for loan and lease losses
(17,520
)
 
 
 
(13,611
)
 
 
Loans, net
$
1,130,305

 
 
 
$
1,117,511

 
 
At March 31, 2020 and December 31, 2019, real estate loans of approximately $443 million and $278 million, respectively, were pledged to secure borrowings obtained from the FHLB and to support our unfunded borrowing capacity. At March 31, 2020 and December 31, 2019, commercial and consumer loans of $193 million and $210 million, respectively, were pledged to secure borrowings from the FRB to support our unfunded borrowing capacity. No loans were sold during the three months ended March 31, 2020. During the three months ended March 31, 2019, $5.1 million of Small Business Administration ("SBA") loans were sold for a gain of $300 thousand. During the three months ended March 31, 2020 and March 31, 2019, we purchased no loans.
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 utilizes a series of nineteen staggered 16-quarter migration periods 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 months ended March 31, 2020 and 2019:
(Dollars in thousands)
Commercial
 
Real  Estate
 
Construction and Land
Development
 
Consumer 
and Single
Family
Mortgages
 
Unallocated
 
Total
ALLL in the three months ended March 31, 2020:
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
8,883

 
$
2,897

 
$
34

 
$
1,797

 
$

 
$
13,611

Charge offs
(2,250
)
 

 

 
(64
)
 

 
(2,314
)
Recoveries
19

 

 

 
4

 

 
23

Provision
4,566

 
1,471

 
21

 
142

 

 
6,200

Balance at end of period
$
11,218

 
$
4,368

 
$
55

 
$
1,879

 
$

 
$
17,520

ALLL in the three months ended March 31, 2019:
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
8,071

 
$
3,643

 
$
426

 
$
1,290

 
$
76

 
$
13,506

Charge offs
(5,669
)
 

 

 
(29
)
 

 
(5,698
)
Recoveries
401

 

 

 
5

 

 
406

Provision
4,092

 
(934
)
 
(131
)
 
220

 
53

 
3,300

Balance at end of period
$
6,895

 
$
2,709

 
$
295

 
$
1,486

 
$
129

 
$
11,514

Set forth below is information regarding loan balances and the related ALLL, by portfolio type, as of March 31, 2020 and December 31, 2019.
(Dollars in thousands)
Commercial
 
Real  Estate
 
Construction and Land
Development
 
Consumer 
and Single
Family
Mortgages
 
Unallocated
 
Total
ALLL balance at March 31, 2020 related to:
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
560

 
$

 
$

 
$

 
$

 
$
560

Loans collectively evaluated for impairment
10,658

 
4,368

 
55

 
1,879

 

 
16,960

Total
$
11,218

 
$
4,368

 
$
55

 
$
1,879

 
$

 
$
17,520

Loans balance at March 31, 2020 related to:
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
12,597

 
$
6,004

 
$

 
$

 
$

 
$
18,601

Loans collectively evaluated for impairment
441,896

 
572,732

 
5,457

 
104,471

 

 
1,124,556

Total
$
454,493

 
$
578,736

 
$
5,457

 
$
104,471

 
$

 
$
1,143,157

ALLL balance at December 31, 2019 related to:
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
561

 
$

 
$

 
$

 
$

 
$
561

Loans collectively evaluated for impairment
8,322

 
2,897

 
34

 
1,797

 

 
13,050

Total
$
8,883

 
$
2,897

 
$
34

 
$
1,797

 
$

 
$
13,611

Loans balance at December 31, 2019 related to:
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
9,056

 
$
6,507

 
$

 
$

 
$

 
$
15,563

Loans collectively evaluated for impairment
400,364

 
597,782

 
2,981

 
109,649

 

 
1,110,776

Total
$
409,420

 
$
604,289

 
$
2,981

 
$
109,649

 
$

 
$
1,126,339


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 March 31, 2020 and December 31, 2019:

20

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 March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial loans
$
17,975

 
$
2,928

 
$
3,671

 
$
24,574

 
$
429,919

 
$
454,493

 
$

Commercial real estate loans – owner-occupied
955

 

 

 
955

 
199,962

 
200,917

 

Commercial real estate loans – all other

 

 

 

 
205,116

 
205,116

 

Residential mortgage loans – multi-family

 

 

 

 
172,703

 
172,703

 

Residential mortgage loans – single family

 

 

 

 
16,863

 
16,863

 

Construction and land development loans

 

 

 

 
5,457

 
5,457

 

Consumer loans
518

 
61

 
94

 
673

 
86,935

 
87,608

 

Total
$
19,448

 
$
2,989

 
$
3,765

 
$
26,202

 
$
1,116,955

 
$
1,143,157

 
$

At December 31, 2019
 
Commercial loans
$
354

 
$
1,361

 
$
533

 
$
2,248

 
$
407,172

 
$
409,420

 
$

Commercial real estate loans – owner-occupied
749

 

 

 
749

 
218,734

 
219,483

 

Commercial real estate loans – all other

 

 

 

 
208,283

 
208,283

 

Residential mortgage loans – multi-family

 

 

 

 
176,523

 
176,523

 

Residential mortgage loans – single family

 

 

 

 
18,782

 
18,782

 

Construction and land development loans

 

 

 

 
2,981

 
2,981

 

Consumer loans
312

 
3

 

 
315

 
90,552

 
90,867

 

Total
$
1,415

 
$
1,364

 
$
533

 
$
3,312

 
$
1,123,027

 
$
1,126,339

 
$

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 March 31, 2020. There were no loans 90 days or more past due and still accruing interest at December 31, 2019. 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 March 31, 2020 and December 31, 2019:
 
March 31, 2020
 
December 31, 2019
 
(Dollars in thousands)
Nonaccrual loans:
 
 
 
Commercial loans
$
13,465

 
$
9,101

Commercial real estate loans – owner occupied
6,370

 
6,507

Consumer
186

 
74

Total(1)
$
20,021

 
$
15,682

 
(1)    Nonaccrual loans may include loans that are currently considered performing loans.

21

Table of Contents

 We classify our loan portfolio using internal asset quality ratings. The following table provides a summary of loans by portfolio type and our internal asset quality ratings as of March 31, 2020 and December 31, 2019:
 
March 31, 2020
 
December 31, 2019
 
(Dollars in thousands)
Pass:
 
 
 
Commercial loans
$
377,555

 
$
357,079

Commercial real estate loans – owner occupied
190,224

 
206,589

Commercial real estate loans – all other
205,116

 
208,283

Residential mortgage loans – multi family
172,703

 
176,523

Residential mortgage loans – single family
16,863

 
18,782

Construction and land development loans
5,457

 
2,981

Consumer loans
87,059

 
90,793

Total pass loans
$
1,054,977

 
$
1,061,030

Special Mention:
 
 
 
Commercial loans
$
39,423

 
$
21,894

Commercial real estate loans – owner occupied
4,324

 
6,387

Total special mention loans
$
43,747

 
$
28,281

Substandard:
 
 
 
Commercial loans
$
37,515

 
$
30,447

Commercial real estate loans – owner occupied
6,369

 
6,507

Consumer loans
549

 
74

Total substandard loans
$
44,433

 
$
37,028

Total Loans:
$
1,143,157

 
$
1,126,339

Impaired Loans
A loan generally is classified as impaired when, in our opinion, principal or interest is not likely to be collected in accordance with the contractual terms of the loan agreement. We measure for impairments on a loan-by-loan basis, using either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent.
The following table sets forth information regarding impaired loans, at March 31, 2020 and December 31, 2019:
 
March 31, 2020
 
December 31, 2019
 
(Dollars in thousands)
Impaired loans:
 
Nonaccruing loans
$
20,021

 
$
15,682

Nonaccruing restructured loans(1)

 

Accruing restructured loans(1)(2)

 

Total impaired loans
$
20,021

 
$
15,682

Impaired loans less than 90 days delinquent and included in total impaired loans
$
16,255

 
$
15,149

 
(1)
As of March 31, 2020 and December 31, 2019, we had no restructured loans.
(2)
See “Troubled Debt Restructurings” below for a description of accruing restructured loans at March 31, 2020 and December 31, 2019.

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Table of Contents

The table below contains additional information with respect to impaired loans, by portfolio type, as of March 31, 2020 and December 31, 2019:
 
March 31, 2020
 
December 31, 2019
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance (1)
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance (1)
 
(Dollars in thousands)
No allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial loans
$
12,360

 
$
17,955

 
$

 
$
7,996

 
$
12,090

 
$

Commercial real estate loans – owner occupied
6,370

 
6,767

 

 
6,507

 
6,784

 

Consumer loans
186

 
221

 

 
74

 
101

 

Total
18,916

 
24,943

 

 
14,577

 
18,975

 

With allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Total
1,105

 
1,122

 
560

 
1,105

 
1,122

 
561

Total
 
 
 
 
 
 
 
 
 
 
 
Commercial loans
$
13,465

 
$
19,077

 
$
560

 
$
9,101

 
$
13,212

 
$
561

Commercial real estate loans – owner occupied
6,370

 
6,767

 

 
6,507

 
6,784

 

Consumer loans
186

 
221

 

 
74

 
101

 

Total
20,021

 
26,065

 
560

 
15,682

 
20,097

 
561

 
(1)
When the discounted cash flows, collateral value or market price equals or exceeds the recorded investment in the loan, then specific reserves are not required to be set aside for the loan within the ALLL. This typically occurs when the impaired loans have been partially charged-off and/or there have been interest payments received and applied to the balance of the principal outstanding.
 
At March 31, 2020 and December 31, 2019, there were $18.9 million and $14.6 million, respectively, of impaired loans for which no specific reserves had been allocated because these loans, in our judgment, were sufficiently collateralized. Of the impaired loans at March 31, 2020 for which no specific reserves were allocated, $12.9 million had been deemed impaired in the prior year.
Average balances and interest income recognized on impaired loans, by portfolio type, for the three months ended March 31, 2020 and 2019 were as follows:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
Average Balance
 
Interest Income Recognized
 
Average Balance
 
Interest Income Recognized
 
(Dollars in thousands)
No allowance recorded:
 
 
 
 
 
 
 
 
Commercial loans
 
$
10,178

 
$

 
$
1,914

 
$

Commercial real estate loans – owner occupied
 
6,438

 

 
819

 

Commercial real estate loans – all other
 

 

 

 

Residential mortgage loans – single family
 

 

 

 

Consumer loans
 
130

 

 
41

 

Total
 
16,746

 

 
2,774

 

With allowance recorded:
 
 
 
 
 
 
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