Quarterly Report (10-q)

Date : 08/02/2019 @ 5:28PM
Source : Edgar (US Regulatory)
Stock : Pacific Mercantile Bancorp (PMBC)
Quote : 7.13  0.02 (0.28%) @ 2:42PM

Quarterly Report (10-q)


 
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, 2019
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 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.
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

1


Indicate by check mark whether the registrant is a shell company (as defined in Securities Exchange Act Rule 12b-2). Yes   ¨     No   x
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
As of July 31, 2019 , there were 22,051,371 shares of Common Stock and 1,467,155 shares of Non-Voting Common Stock outstanding.
 

2


PACIFIC MERCANTILE BANCORP
QUARTERLY REPORT ON FORM 10Q
FOR THE QUARTER ENDED JUNE 30, 2019
TABLE OF CONTENTS
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3




PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
(Unaudited)
 
June 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Cash and due from banks
$
17,561

 
$
13,250

Interest bearing deposits with financial institutions
247,680

 
174,468

Cash and cash equivalents
265,241

 
187,718

Interest-bearing time deposits with financial institutions
2,420

 
2,420

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

 
8,822

Securities available for sale, at fair value
28,393

 
31,231

Loans (net of allowances of $11,474 and $13,506, respectively)
1,077,595

 
1,083,240

Other real estate owned

 
1,173

Accrued interest receivable
4,365

 
4,003

Premises and equipment, net
922

 
1,039

Net deferred tax assets
8,795

 
10,935

Other assets
23,476

 
18,757

Total assets
$
1,419,117

 
$
1,349,338

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
378,063

 
$
340,406

Interest-bearing
821,567

 
795,596

Total deposits
1,199,630

 
1,136,002

Borrowings
40,000

 
40,000

Accrued interest payable
497

 
361

Other liabilities
15,547

 
14,074

Junior subordinated debentures
17,527

 
17,527

Total liabilities
1,273,201

 
1,207,964

Commitments and contingencies (Note 11)

 

Shareholders’ equity:
 
 
 
Preferred stock, no par value, 2,000,000 shares authorized:
 
 
 
Series A Non-Voting Preferred Stock, no par value, 0 and 1,467,155 shares authorized at June 30, 2019 and December 31, 2018, respectively; 0 and 1,467,155 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 
8,480

Common stock, no par value, 85,000,000 shares of common stock and 2,000,000 shares of non-voting common stock authorized; 23,514,870 and 21,916,195 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
152,445

 
143,466

Accumulated deficit
(6,025
)
 
(9,428
)
Accumulated other comprehensive loss
(504
)
 
(1,144
)
Total shareholders’ equity
145,916

 
141,374

Total liabilities and shareholders’ equity
$
1,419,117

 
$
1,349,338

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

4


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,
 
2019
 
2018
 
2019
 
2018
Interest income:
 
 
 
 
 
 
 
Loans, including fees
$
14,586

 
$
14,788

 
$
29,106

 
$
28,833

Securities available for sale and stock
260

 
262

 
551

 
536

Interest-bearing deposits with financial institutions
1,620

 
864

 
2,975

 
1,560

Total interest income
16,466

 
15,914

 
32,632

 
30,929

Interest expense:
 
 
 
 
 
 
 
Deposits
3,753

 
3,082

 
7,377

 
5,560

Borrowings
494

 
385

 
985

 
737

Total interest expense
4,247

 
3,467

 
8,362

 
6,297

Net interest income
12,219

 
12,447

 
24,270

 
24,632

Provision for loan and lease losses

 

 
3,300

 

Net interest income after provision for loan and lease losses
12,219

 
12,447

 
20,970

 
24,632

Noninterest income
 
 
 
 
 
 
 
Service fees on deposits and other banking services
443

 
407

 
840

 
794

Net gain on sale of securities available for sale

 

 

 
48

Net gain on sale of Small Business Administration loans
300

 

 
600

 

Net loss on sale of other assets
(11
)
 

 
(36
)
 
(4
)
Other noninterest income
654

 
729

 
1,472

 
1,353

Total noninterest income
1,386

 
1,136

 
2,876

 
2,191

Noninterest expense
 
 
 
 
 
 
 
Salaries and employee benefits
5,737

 
5,916

 
11,177

 
12,076

Occupancy
647

 
590

 
1,274

 
1,208

Equipment and depreciation
480

 
457

 
941

 
903

Data processing
526

 
380

 
1,044

 
772

FDIC expense
193

 
266

 
357

 
548

Other real estate owned expense, net
1

 
8

 
69

 
8

Professional fees
1,190

 
636

 
1,986

 
1,386

Business development
241

 
315

 
437

 
499

Loan related expense
122

 
183

 
307

 
353

Insurance
61

 
62

 
123

 
125

Other operating expense
509

 
486

 
976

 
954

Total noninterest expense
9,707

 
9,299

 
18,691

 
18,832

Income before income taxes
3,898

 
4,284

 
5,155

 
7,991

Income tax provision (benefit)
1,170

 
(11,085
)
 
1,545

 
(11,085
)
Net income allocable to common shareholders
$
2,728

 
$
15,369

 
$
3,610

 
$
19,076

Basic income per common share:
 
 
 
 
 
 
 
Net income allocable to common shareholders
$
0.12

 
$
0.66

 
$
0.15

 
$
0.82

Diluted income per common share:
 
 
 
 
 
 
 
Net income allocable to common shareholders
$
0.12

 
$
0.65

 
$
0.15

 
$
0.81

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
22,619,993

 
23,213,382

 
22,224,376

 
23,184,877

Diluted
23,615,958

 
23,557,516

 
23,581,106

 
23,502,403

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

5


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,
 
2019
 
2018
 
2019
 
2018
Net income
$
2,728

 
$
15,369

 
$
3,610

 
$
19,076

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in unrealized holding gain (loss) on securities available for sale
273

 
(41
)
 
640

 
(388
)
Less: Reclassification adjustment for change in accounting principle

 

 

 
(97
)
Less: Reclassification adjustment for net gains included in net income

 

 

 
48

Net unrealized holding gain (loss) on securities available for sale
273

 
(41
)
 
640

 
(339
)
Total comprehensive income
$
3,001

 
$
15,328

 
$
4,250

 
$
18,737

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


6


PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Shares and dollars in thousands)
(Unaudited)
For the Three and Six Months Ended June 30, 2019 and 2018
   
Series A Non-Voting
Preferred stock
 
Common stock
 
Retained
earnings
(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

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

Issuance of restricted stock, net

 

 
15

 

 

 

 

Exchange Series A Non-Voting Preferred Stock to Series A Non-Voting Common Stock
(1,467
)
 
(8,480
)
 
1,467

 
8,480

 

 

 

Common stock based compensation expense

 

 

 
219

 

 

 
219

Common stock options exercised

 

 
15

 
80

 

 

 
80

Net income

 

 

 

 
2,728

 

 
2,728

Other comprehensive income

 

 

 

 

 
273

 
273

Balance at June 30, 2019

 

 
23,515

 
152,445

 
(6,025
)
 
(504
)
 
145,916


   
Series A Non-Voting
Preferred stock
 
Common stock
 
Retained
earnings
(accumulated
deficit)
 
Accumulated
other
comprehensive
income (loss)
 
Total
Number
of shares
 
Amount
 
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

 

 
72

 

 

 

 

Common stock based compensation expense

 

 

 
179

 

 

 
179

Common stock options exercised

 

 
8

 
28

 

 

 
28

Net income

 

 

 

 
3,707

 

 
3,707

Other comprehensive loss

 

 

 

 

 
(298
)
 
(298
)
Balance at March 31, 2018

 
$

 
23,313

 
$
150,896

 
$
(33,060
)
 
$
(1,441
)
 
$
116,395

Issuance of common stock

 

 

 

 

 

 

Issuance of restricted stock, net

 

 
(2
)
 

 

 

 

Common stock based compensation expense

 

 

 
237

 

 

 
237

Common stock options exercised

 

 
67

 
345



 

 
345

Net income

 

 

 

 
15,369

 

 
15,369

Other comprehensive income

 

 

 

 

 
(41
)
 
(41
)
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.


7


PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
Cash Flows From Operating Activities:
 
 
 
Net income
$
3,610

 
$
19,076

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
213

 
193

Provision for loan and lease losses
3,300

 

Amortization of premium on securities
77

 
96

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

 
(48
)
Net amortization of deferred fees and unearned income on loans
320

 
(11
)
Net loss (gain) on sales of other real estate owned
66

 

Net loss on sale of other assets
36

 
4

Net gain on sale of small business administration loans
(600
)
 

Small business administration loan originations
(7,139
)
 

Proceeds from sale of small business administration loans
7,800

 

Stock-based compensation expense
419

 
416

Other

 
59

Changes in operating assets and liabilities:
 
 
 
Net (increase) decrease in accrued interest receivable
(362
)
 
(194
)
Net decrease in other assets
5,675

 
1,134

Net (increase) decrease in deferred taxes
1,872

 
(11,085
)
Net decrease (increase) in income taxes receivable
390

 
(53
)
Net increase in accrued interest payable
136

 
15

Net decrease in other liabilities
(8,653
)
 
(1,718
)
Net cash provided by operating activities
7,160

 
7,884

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
3,669

 
3,125

Purchase of securities available for sale and other stock

 
(655
)
Proceeds from sale of securities available for sale and other stock
912

 
6,883


8


Purchase of other investments
(877
)
 
(141
)
Proceeds from sale of other real estate owned
1,107

 

Net decrease in loans
1,885

 
1,997

Purchases of premises and equipment
(96
)
 
(283
)
Proceeds from sale of other assets
55

 
32

Net cash provided by investing activities
6,655

 
11,458

Cash Flows From Financing Activities:
 
 
 
Net increase (decrease) in deposits
63,628

 
28,410

Proceeds from borrowings
40,000

 
21,000

Payments of borrowings
(40,000
)
 
(31,727
)
Proceeds from exercise of common stock options
80

 
373

Net cash provided by financing activities
63,708

 
18,056

Net increase (decrease) in cash and cash equivalents
77,523

 
37,398

Cash and Cash Equivalents, beginning of period
187,718

 
198,208

Cash and Cash Equivalents, end of period
$
265,241

 
$
235,606

Supplementary Cash Flow Information:
 
 
 
Cash paid for interest on deposits and other borrowings
$
8,226

 
$
6,282

Cash paid for income taxes
$

 
$
53

Non-Cash Investing Activities:
 
 
 
Transfer of loans into other assets
$
82

 
$

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

Right-of-use assets obtained in exchange for new operating lease liabilities
$
9,919

 
$

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

9



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”) was a wholly owned subsidiary of PMBC, which existed 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. PMAR was dissolved and all remaining capital was returned to PMBC during the third quarter of 2018.
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”.


10


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, 2018 (“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, 2019 and 2018 include the accounts of PMBC, the Bank and PMAR; PMAR was liquidated during the third quarter of 2018. All significant intercompany balances and transactions were eliminated in consolidation.  
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. Under the new guidance, lessor accounting is largely unchanged and the accounting for sale and leaseback transactions were simplified. We elected most of the new standard’s available transition practical expedients. The new standard had a material effect on our financial statements. While we continue to assess all of the effects of adoption, we currently believe the most significant effects relate to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our office and equipment operating leases; and (2) providing significant new disclosures about our leasing activities. The new standard also provides practical expedients for an entity’s ongoing accounting. We have elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we did not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” which provides an additional transition method upon adoption of ASU 2016-02. The guidance allows an entity to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to beginning retained earnings in the period of adoption. In March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements,” which provides additional guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers, requires lessors that are banking institutions to present all "principal payments received under leases" within investing activities, and exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard. On adoption of these accounting standards, we recognized additional operating liabilities of $11.1 million , with corresponding ROU assets of the same or less amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. We recorded a $207 thousand adjustment to our beginning retained earnings. This guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. We adopted this guidance on January 1, 2019.

11


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 plan to 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 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement,” which amends the disclosure requirements related to fair value. The guidance removes disclosure related to transfers between Level 1 and Level 2 of the fair value hierarchy, the timing of these transfers and the valuation processes for Level 3 fair value measurements. Additional disclosures required as a result of adoption of this ASU will include the change in Level 3 unrealized gains and losses included in other comprehensive income and the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements. This guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosure requirements until their effective date. We are currently evaluating this guidance to determine the date of adoption and impact on the Company.


12


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, 2019 , we purchased no FHLB or FRBSF stock. No shares of FHLB stock or FRBSF stock were called during the three and six months ended June 30, 2019 . 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

13


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, 2019 and December 31, 2018 :

14


 
At June 30, 2019
(Dollars in thousands)
Total
 
Level 1
 
Level 2
 
Level 3
Assets at Fair Value:
 
 
 
 
 
 
 
Debt securities available for sale
 
 
 
 
 
 
 
U.S. Treasury securities
$
1,996

 
$

 
$
1,996

 
$

Commercial mortgage backed securities issued by U.S. Agencies
4,586

 

 
4,586

 

Residential mortgage backed securities issued by U.S. agencies
21,811

 

 
21,811

 

Total debt securities available for sale at fair value
$
28,393

 
$

 
$
28,393

 
$

 
 
At December 31, 2018
(Dollars in thousands)
Total
 
Level 1
 
Level 2
 
Level 3
Assets at Fair Value:
 
 
 
 
 
 
 
Debt securities available for sale
 
 
 
 
 
 
 
U.S. Treasury securities
$
2,980

 
$

 
$
2,980

 
$

Commercial mortgage backed securities issued by U.S. Agencies
4,534

 

 
4,534

 

Residential mortgage backed securities issued by U.S. agencies
23,717

 

 
23,717

 

Total debt securities available for sale
31,231

 

 
31,231

 

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, 2019
 
At December 31, 2018
(Dollars in thousands)
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets at Fair Value:
 
 
 
Impaired loans
$
1,344

 
$

 
$

 
$
1,344

 
$
4,226

 
$

 
$

 
$
4,226

Other foreclosed assets
82

 

 
82

 

 
91

 

 
91

 

Other real estate owned

 

 

 

 
1,173

 

 
1,173

 

Total
$
1,426

 
$

 
$
82

 
$
1,344

 
$
5,490

 
$

 
$
1,264

 
$
4,226

 
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, 2019 , a summary of the significant unobservable inputs and valuation techniques is as follows:
 
Fair Value Measurement as of June 30, 2019
 
Valuation Techniques (2)
 
Unobservable Inputs (2)
 
Range
 
Weighted Average
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Impaired loans
$
1,344

 
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 June 30, 2019 , 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, 2018.

15


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, 2019 and December 31, 2018 , excluding financial assets and liabilities which are recorded at fair value on a recurring basis.
 
Estimated Fair Value
At June 30, 2019
 
At December 31, 2018
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
$
265,241

 
$
265,241

 
$
265,241

 
$

 
$

 
$
187,718

 
$
187,718

 
187,718

 

 

Interest-bearing deposits with financial institutions
2,420

 
2,420

 
2,420

 

 

 
2,420

 
2,420

 
2,420

 

 

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

 
7,910

 
7,910

 

 

 
8,822

 
8,822

 
8,822

 

 

Loans, net
1,077,595

 
1,070,951

 

 

 
1,070,951

 
1,083,240

 
1,066,147

 

 

 
1,066,147

Accrued interest receivable
4,365

 
4,365

 
4,365

 

 

 
4,003

 
4,003

 
4,003

 

 

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest bearing deposits
378,063

 
378,063

 
378,063

 

 

 
340,406

 
340,406

 
340,406

 

 

Interest-bearing deposits
821,567

 
822,553

 

 
822,553

 

 
795,596

 
794,321

 

 
794,321

 

Borrowings
40,000

 
40,018

 

 
40,018

 

 
40,000

 
39,976

 

 
39,976

 

Junior subordinated debentures
17,527

 
17,527

 

 
17,527

 

 
17,527

 
17,527

 

 
17,527

 

Accrued interest payable
497

 
497

 
497

 

 

 
361

 
361

 
361

 

 



16


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, 2019 and December 31, 2018 :
(Dollars in thousands)
June 30, 2019
 
December 31, 2018
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
$
1,999

 
$

 
$
(3
)
 
$
1,996

 
$
2,999

 
$

 
$
(19
)
 
$
2,980

Commercial mortgage backed securities issued by U.S. Agencies (1)
4,428

 
158

 

 
4,586

 
4,495

 
40

 
(1
)
 
4,534

Residential mortgage backed securities issued by U.S. Agencies (2)
22,060

 
2

 
(251
)
 
21,811

 
24,739

 
1

 
(1,023
)
 
23,717

Total
$
28,487

 
$
160

 
$
(254
)
 
$
28,393

 
$
32,233

 
$
41

 
$
(1,043
)
 
$
31,231

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

At June 30, 2019 and December 31, 2018 , U.S. agency residential mortgage backed securities with an aggregate fair market value of $12.4 million and $18.2 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 June 30, 2019 and December 31, 2018 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, 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
$
7,055

 
$
12,948

 
$
7,305

 
$
1,179

 
$
28,487

Securities available for sale, estimated fair value
7,018

 
12,807

 
7,345

 
1,223

 
28,393

Weighted average yield
1.47
%
 
1.60
%
 
2.21
%
 
3.26
%
 
1.79
%
 
At December 31, 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
$
7,874

 
$
13,466

 
$
9,971

 
$
922

 
$
32,233

Securities available for sale, estimated fair value
7,663

 
12,934

 
9,710

 
924

 
31,231

Weighted average yield
1.46
%
 
1.62
%
 
2.22
%
 
3.13
%
 
1.81
%
We purchased no securities available for sale during the three and six months ended June 30, 2019 or during the three and six months ended June 30, 2018 . During the three months ended March 31, 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 or the three and six months ended June 30, 2019.
The tables below indicate, as of June 30, 2019 and December 31, 2018 , 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.

17


 
Securities with Unrealized Loss at June 30, 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
U.S. Treasury securities
$

 
$

 
$
1,996

 
$
(3
)
 
$
1,996

 
$
(3
)
Commercial mortgage backed securities issued by U.S. Agencies

 

 

 

 

 

Residential mortgage backed securities issued by U.S. Agencies

 

 
19,487

 
(251
)
 
19,487

 
(251
)
Total
$

 
$

 
$
21,483

 
$
(254
)
 
$
21,483

 
$
(254
)
   
Securities with Unrealized Loss at December 31, 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
$

 
$

 
$
2,980

 
$
(19
)
 
$
2,980

 
$
(19
)
Commercial mortgage backed securities issued by U.S. Agencies
999

 
(1
)
 

 

 
999

 
(1
)
Residential mortgage backed securities issued by U.S. Agencies
361

 
(3
)
 
23,299

 
(1,020
)
 
23,660

 
(1,023
)
Total
$
1,360

 
$
(4
)
 
$
26,279

 
$
(1,039
)
 
$
27,639

 
$
(1,043
)
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, 2019 . 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, 2019 and 2018 .
We have made a determination that the remainder of our securities with respect to which there were unrealized losses as of June 30, 2019 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, 2019 , we had three investments in private companies and limited partnerships without a readily determinable fair value. As of June 30, 2019 , 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 and six months ended June 30, 2019 , these investments were not impaired and there were no observable price changes. As a result, the balance shown below as of June 30, 2019 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, 2019 , we had $283 thousand and $877 thousand , respectively, of capital contributions to these investments. We had $89 thousand and $89 thousand , respectively, of capital contributions to these investments during the three and six months ended June 30, 2018 . As of June 30, 2019 and December 31, 2018 , our equity investments without readily determinable fair value were as follows:

18


 
June 30, 2019
 
December 31, 2018
 
(Dollars in thousands)
Equity investments without readily determinable fair value
$
2,117

 
$
1,240



19


5. Loans and Allowance for Loan and Lease Losses
The loan portfolio consisted of the following at:
 
June 30, 2019
 
December 31, 2018
(Dollars in thousands)
Amount
 
Percent
 
Amount
 
Percent
Commercial loans
$
441,850

 
40.7
%
 
$
444,441

 
40.7
%
Commercial real estate loans – owner occupied
214,233

 
19.7
%
 
211,645

 
19.3
%
Commercial real estate loans – all other
221,437

 
20.4
%
 
226,441

 
20.7
%
Residential mortgage loans – multi-family
83,966

 
7.7
%
 
97,173

 
8.9
%
Residential mortgage loans – single family
21,294

 
2.0
%
 
21,176

 
1.9
%
Construction and land development loans
12,230

 
1.1
%
 
38,496

 
3.5
%
Consumer loans
91,442

 
8.4
%
 
54,514

 
5.0
%
Gross loans
1,086,452

 
100.0
%
 
1,093,886

 
100.0
%
Deferred fee (income) costs, net
2,617

 
 
 
2,860

 
 
Allowance for loan and lease losses
(11,474
)
 
 
 
(13,506
)
 
 
Loans, net
$
1,077,595

 
 
 
$
1,083,240

 
 
At June 30, 2019 and December 31, 2018 , real estate loans of approximately $386 million and $807 million , respectively, were pledged to secure borrowings obtained from the FHLB and to support our unfunded borrowing capacity. At June 30, 2019 and December 31, 2018 , commercial and consumer loans of $219 million and $51 million , respectively, were pledged to secure borrowings from the FRB to support our unfunded borrowing capacity. During the three and six months ended June 30, 2019, we sold $2.4 million and $7.1 million , respectively, of Small Business Administration (SBA) loans at a premium. 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. During the three and six months ended June 30, 2019 , we purchased loans totaling $46.4 million , of which $39.9 million were consumer loans. We purchased no loans during the three and six months ended June 30, 2018.
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.

20


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.
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, 2019 and 2018:
(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, 2019:
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
6,895

 
$
2,709

 
$
295

 
$
1,486

 
$
129

 
$
11,514

Charge offs
(103
)
 

 

 
(24
)
 

 
(127
)
Recoveries
82

 

 

 
5

 

 
87

Provision
(65
)
 
81

 
(176
)
 
289

 
(129
)
 

Balance at end of period
$
6,809

 
$
2,790

 
$
119

 
$
1,756

 
$

 
$
11,474

ALLL in the six months ended June 30, 2019:
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
8,071

 
$
3,643

 
$
426

 
$
1,290

 
$
76

 
$
13,506

Charge offs
(5,772
)
 

 

 
(53
)
 

 
(5,825
)
Recoveries
483

 

 

 
10

 

 
493

Provision
4,027

 
(853
)
 
(307
)
 
509

 
(76
)
 
3,300

Balance at end of period
$
6,809

 
$
2,790

 
$
119

 
$
1,756

 
$

 
$
11,474

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
)