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 September 30, 2015

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission file number 0-30777

PACIFIC MERCANTILE BANCORP

(Exact name of Registrant as specified in its charter)

California	33-0898238
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
949 South Coast Drive, Suite 300, Costa Mesa, California	92626
(Address of principal executive offices)	(Zip Code)

(714) 438-2500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	o	Accelerated filer	x
Non-accelerated filer	o	Smaller reporting company	o

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 November 4, 2015, there were 22,809,211 shares of Common Stock outstanding.

1

PACIFIC MERCANTILE BANCORP

QUARTERLY REPORT ON FORM 10Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2015

TABLE OF CONTENTS

		Page No.
Part I. Financial Information
Item 1.	Financial Statements (unaudited)	3
	Consolidated Statements of Financial Condition at September 30, 2015 and December 31, 2014	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014	4
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2015 and 2014	5
	Consolidated Statement of Shareholders' Equity for the Nine Months Ended September 30, 2015	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014	7
	Notes to Interim Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	52
Item 4.	Controls and Procedures	52
Part II. Other Information
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 6.	Exhibits	54
Signatures		55

2

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands, except for per share data)

(Unaudited)

	September 30, 2015			December 31, 2014
ASSETS
Cash and due from banks	$	12,329		$	9,997
Interest bearing deposits with financial institutions	164,424			167,138
Cash and cash equivalents	176,753			177,135
Interest-bearing time deposits with financial institutions	4,916			4,668
Federal Reserve Bank of San Francisco and Federal Home Loan Bank Stock, at cost	8,170			8,137
Securities available for sale, at fair value	54,506			60,926
Loans (net of allowances of $12,279 and $13,833, respectively)	816,715			824,197
Other real estate owned	1,872			1,592
Accrued interest receivable	2,236			2,436
Premises and equipment, net	1,287			1,092
Net deferred tax assets	5,804			5,933
Other assets	11,411			13,494
Total assets	$	1,083,670		$	1,099,610
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	262,508		$	237,491
Interest-bearing	664,804			678,818
Total deposits	927,312			916,309
Borrowings	10,000			39,500
Accrued interest payable	198			222
Other liabilities	6,824			6,771
Junior subordinated debentures	17,527			17,527
Total liabilities	961,861			980,329
Commitments and contingencies (Note 10)
Shareholders’ equity:
Preferred stock, no par value, 2,000,000 shares authorized:
Series B Convertible 8.4% Noncumulative Preferred Stock, 300,000 shares authorized; 0 and 112,000 issued and outstanding at September 30, 2015 and December 31, 2014, respectively; liquidation preference $100 per share, plus accumulated but undeclared dividends at December 31, 2014	—			8,747
Series C 8.4% Noncumulative Preferred Stock, 300,000 shares authorized; 0 and 29,308 issued and outstanding at September 30, 2015 and December 31, 2014, respectively; liquidation preference $100 per share plus accumulated but undeclared dividends at December 31, 2014	—			2,930
Common stock, no par value, 85,000,000 shares authorized; 22,811,075 and 19,462,561 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively	146,858			131,181
Accumulated deficit	(24,542		)	(22,885		)
Accumulated other comprehensive loss	(507		)	(692		)
Total shareholders’ equity	121,809			119,281
Total liabilities and shareholders’ equity	$	1,083,670		$	1,099,610

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

3

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except for per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Interest income:
Loans, including fees	$	9,166		$	9,185		$	27,360		$	26,631
Securities available for sale and stock	389			397			1,321			1,217
Interest-bearing deposits with financial institutions	98			82			258			237
Total interest income	9,653			9,664			28,939			28,085
Interest expense:
Deposits	1,142			1,204			3,411			3,573
Borrowings	200			149			578			732
Total interest expense	1,342			1,353			3,989			4,305
Net interest income	8,311			8,311			24,950			23,780
Provision for loan and lease losses	—			450			—			1,500
Net interest income after provision for loan and lease losses	8,311			7,861			24,950			22,280
Noninterest income
Service fees on deposits and other banking services	230			207			676			633
Net gain on sale of small business administration loans	—			257			—			1,416
Other noninterest income	332			390			1,384			968
Total noninterest income	562			854			2,060			3,017
Noninterest expense
Salaries and employee benefits	5,329			5,545			16,659			16,568
Occupancy	730			643			2,143			1,841
Equipment and depreciation	408			400			1,231			1,133
Data processing	269			220			760			671
FDIC expense	329			336			1,021			989
Other real estate owned expense, net	68			640			229			1,698
Professional fees	538			439			1,910			1,677
Business development	225			138			617			476
Loan related expense	100			79			338			295
Insurance	87			120			263			398
Other operating expense	469			469			1,464			1,366
Total noninterest expense	8,552			9,029			26,635			27,112
Income (loss) from continuing operations before income taxes	321			(314		)	375			(1,815		)
Income tax (benefit) provision	—			—			—			—
Net income (loss) from continuing operations	321			(314		)	375			(1,815		)
Discontinued Operations
(Loss) income from discontinued operations before income taxes	—			(71		)	—			1,885
Income tax provision (benefit)	—			—			—			—
Net (loss) income from discontinued operations	—			(71		)	—			1,885
Net income (loss)	321			(385		)	375			70
Accumulated declared dividends on preferred stock	—			—			—			(592		)
Accumulated undeclared dividends on preferred stock	—			(308		)	—			(320		)
Dividends on preferred stock	(309		)	—			(927		)	—
Inducements for exchange of the preferred stock	(512		)	—			(512		)	—
Net loss allocable to common shareholders	$	(500	)	$	(693	)	$	(1,064	)	$	(842	)
Basic loss per common share:
Net loss from continuing operations	$	(0.03	)	$	(0.03	)	$	(0.05	)	$	(0.14	)
Net loss available to common shareholders	$	(0.03	)	$	(0.04	)	$	(0.05	)	$	(0.04	)
Diluted loss per common share:
Net loss from continuing operations	$	(0.03	)	$	(0.03	)	$	(0.05	)	$	(0.14	)
Net loss available to common shareholders	$	(0.03	)	$	(0.04	)	$	(0.05	)	$	(0.04	)
Weighted average number of common shares outstanding:
Basic	19,823,746			19,291,269			19,738,837			19,231,083
Diluted	19,823,746			19,291,269			19,738,837			19,231,083

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

4

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2015		2014			2015		2014
Net income (loss)	$	321	$	(385	)	$	375	$	70
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss) on securities available for sale	324		(85		)	185		938
Total comprehensive income (loss)	$	645	$	(470	)	$	560	$	1,008

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

5

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Shares and dollars in thousands)

(Unaudited)

For the Nine Months EndedSeptember 30, 2015

	Series B and C 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, 2014	141		$	11,677		19,463		$	131,181		$	(22,885	)	$	(692	)	$	119,281
Exchange of Series B Preferred Stock for common stock	(112	)	(8,747		)	2,105		8,747			—			—			—
Exchange of Series C Preferred Stock for common stock	(35	)	(3,523		)	662		3,523			—			—			—
Dividends on preferred stock exchanged for common stock	—		—			174		927			(927		)	—			—
Inducement for exchange of preferred stock for common stock	—		—			68		512			(512		)	—			—
Costs related to the exchange of preferred stock for common stock	—		—			—		(324		)	—			—			(324		)
Issuance of restricted stock, net	—		—			95		—			—			—			—
Tax effect from vesting of restricted stock	—		—			(13	)	(87		)	—			—			(87		)
Series C Preferred Stock issued as a stock dividend on Series B Preferred Stock	6		593			—		—			(593		)	—			—
Common Stock based compensation expense	—		—			—		1,029			—			—			1,029
Common stock options exercised	—		—			257		1,350			—			—			1,350
Net income	—		—			—		—			375			—			375
Other comprehensive income	—		—			—		—			—			185			185
Balance at September 30, 2015	—		$	—		22,811		$	146,858		$	(24,542	)	$	(507	)	$	121,809

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

6

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(Dollars in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2015			2014
Cash Flows From Operating Activities:
Net income	$	375		$	70
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	389			331
Provision for loan and lease losses	—			1,500
Amortization of premium on securities	248			250
Net gains on sales of securities available for sale	—			—
Net amortization of deferred fees and unearned income on loans	(422		)	(334		)
Net loss on sales of other real estate owned	—			317
Net gain on sale of premises and equipment	(27		)	(41		)
Net gain on sale of small business administration loans	—			(1,416		)
Small business administration loan originations	—			(18,219		)
Proceeds from sale of small business administration loans	—			19,681
Write down of other real estate owned	—			298
Stock-based compensation expense	1,029			862
Tax effect of restricted stock vesting	(87		)	—
Other	—			(105		)
Changes in operating assets and liabilities:
Net decrease (increase) in accrued interest receivable	200			(354		)
Net decrease (increase) in other assets	54			(946		)
Net decrease in deferred taxes	—			1,372
Net increase in income taxes receivable	(58		)	(758		)
Net (decrease) increase in accrued interest payable	(24		)	397
Net increase (decrease) in other liabilities	53			(1,786		)
Net cash provided by discontinued operations	—			8,702
Net cash provided by operating activities	1,730			9,821
Cash Flows From Investing Activities:
Net increase in interest-bearing time deposits with financial institutions	(248		)	(997		)
Maturities of and principal payments received on securities available for sale and other stock	6,486			7,503
Purchase of securities available for sale and other stock	(33		)	—
Principal payments received on other investments	2,087			—
Proceeds from sale of other real estate owned	—			13,424
Capitalized cost of other real estate owned	—			(21		)
Net decrease (increase) in loans	7,624			(48,059		)
Purchases of premises and equipment	(584		)	(301		)
Proceeds from sale of premises and equipment	27			62
Net cash provided by (used in) investing activities	15,359			(28,389		)
Cash Flows From Financing Activities:
Payments for exchange of preferred stock for common stock	(324		)	—
Net increase in deposits	11,003			102,174
Payments of borrowings	(29,500		)	(25,500		)
Proceeds from exercise of common stock options	1,350			496
Net cash (used in) provided by financing activities	(17,471		)	77,170
Net (decrease) increase in cash and cash equivalents	(382		)	58,602
Cash and Cash Equivalents, beginning of period	177,135			106,940
Cash and Cash Equivalents, end of period	$	176,753		$	165,542
Supplementary Cash Flow Information:
Cash paid for interest on deposits and other borrowings	$	4,013		$	3,908
Cash paid for income taxes	$	58		$	—
Non-Cash Investing Activities:
Transfer of loans into other real estate owned	$	280		$	5,188
Non-Cash Financing Activities:
Series C Preferred Stock issued in connection with dividends on Series B Preferred Stock	$	593		$	1,112
Exchange of Series B and Series C Preferred Stock for common stock	$	13,709		$	—

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

7

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 in Orange, Los Angeles, San Bernardino and San Diego counties in Southern California and is subject to competition from 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 up to the maximum amount allowed by law. PM Asset Resolution, Inc. ("PMAR") is a wholly owned subsidiary of PMBC which exists for the purpose of purchasing certain non-performing loans and other real estate from the Bank and thereafter collecting on or disposing of those assets.

During the fourth quarter of 2013, the Bank announced the closure of our mortgage banking business, which was completed during the third quarter of 2014. The Bank operated a direct-to-consumer retail mortgage banking business, originating and funding residential mortgage loans and selling those loans, generally within the succeeding 30 days. Our mortgage banking operations are classified as discontinued operations within the consolidated financial statements and footnotes for all presented periods.

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

2. Significant Accounting Policies

Except as discussed below, our accounting policies are described in Note 2, Significant Accounting Policies of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2014 (“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”), other real estate owned (“OREO”), the fair values of securities available for sale, repurchase reserves, 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 nine months ended September 30, 2015 and 2014 include the accounts of PMBC, the Bank and PMAR. All significant intercompany balances and transactions were eliminated in consolidation.

8

Recent Accounting Pronouncements

In February 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-04, “Receivables — Troubled Debt Restructurings by Creditors (Subtopic 310-40) — Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” which amended its guidance to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. This guidance is effective for interim and annual periods beginning after December 15, 2014. Early adoption is permitted. We adopted this guidance on January 1, 2015 and it did not have a material effect on our consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which amended its guidance on classification and reporting of discontinued operations. The amendments clarify when an entity should classify a component as discontinued operations, how to report the balances related to discontinued operations for prior periods, and additional disclosure requirements for discontinued operations. This guidance is effective for interim and annual periods beginning after December 15, 2014. Early adoption is permitted only for disposals which have not been previously reported. We adopted this guidance on January 1, 2015 and it did not have a material effect on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which amended its guidance on revenue recognition to conform with international accounting guidance under the International Accounting Standards Board. The ASU provides a framework for addressing revenue recognition and replaces most existing revenue recognition guidance, as well as requires increased disclosure requirements. In August 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09 by one year. Accordingly, this guidance is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted for interim and annual periods beginning after December 15, 2016. We will adopt this guidance on January 1, 2018. We are currently evaluating the expected impact on our consolidated financial statements.

In June 2014, the FASB issued ASU 2014-11, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,” which amended its guidance on how to account for certain performance related share-based compensation plans. The amendments clarify the guidance on how to account for performance based awards when the requisite service period is met prior to potential performance targets being achieved. This guidance is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. We will adopt this guidance on January 1, 2016 and do not expect it to have a material effect on our consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern,” which defines management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and clarifies when to provide related footnote disclosure. This guidance is effective for interim and annual periods beginning after December 15, 2016. Early adoption is permitted. We will adopt this guidance on January 1, 2017 and do not expect it to have a material effect on our consolidated financial statements.

In January 2015, the FASB issued ASU 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items,” which eliminated the concept of extraordinary items from GAAP. This guidance is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. We adopted this guidance on January 1, 2015 and it did not have an impact on our consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,” amends the guidance for assessing how relationships of related parties affect the consolidation analysis, eliminates the presumption that a general partner should consolidate a limited partnership, eliminates the consolidation model specific to limited partnerships, clarifies when fees paid to a decision maker should be a factor in consolidation of a variable interest entity, and reduces the number of variable interest entity consolidation models. This guidance is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. We will adopt this guidance on January 1, 2016 and do not expect it to have an impact on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” which requires that the debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This simplifies the presentation of debt issuance costs and makes the presentation consistent with the presentation of debt discounts. This guidance is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. We will adopt this guidance on January 1, 2016 and do not expect it to have a material impact on our consolidated financial statements.

9

In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements — Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting,” which clarifies the accounting for debt issuance costs for line-of-credit arrangements. We will adopt this guidance on January 1, 2016 and do not expect it to have a material impact on our consolidated financial statements.

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 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 nine months ended September 30, 2015, we purchased $0 and $33 thousand, respectively, in value of FHLB stock and no shares of FRBSF stock. 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, U.S. Treasury securities that are traded by dealers or brokers in active over-the- counter markets and money market funds. 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.

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

10

of several methods, including collateral value, market value of similar debt, liquidation value and discounted cash flows. Those impaired loans not requiring a specific loan loss reserve represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. When the fair value of the collateral is based on an observable market price or a current appraised value, we record the impaired loan at Level 2. When an appraised value is not available or we determine that the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the impaired loan at Level 3.

Loans. The fair value for loans with variable interest rates less a credit discount is the carrying amount. The fair value of fixed rate loans is derived by calculating the discounted value of future cash flows expected to be received by the various homogeneous categories of loans. All loans have been adjusted to reflect changes in credit risk. 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.

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.

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.

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 September 30, 2015 and December 31, 2014:

	At September 30, 2015
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Assets and Liabilities at Fair Value:
Investment securities available for sale
Residential mortgage backed securities issued by U.S. agencies	$	47,608	$	—	$	47,608	$	—
Residential collateralized mortgage obligations issued by non-agency	671		—		671		—
Asset-backed security	1,441		—		—		1,441
Mutual funds	4,786		4,786		—		—
Total securities available for sale at fair value	$	54,506	$	4,786	$	48,279	$	1,441

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	At December 31, 2014
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Assets and Liabilities at Fair Value:
Investment securities available for sale
Residential mortgage backed securities issued by U.S. agencies	$	53,739	$	—	$	53,739	$	—
Residential collateralized mortgage obligations issued by non-agency	777		—		777		—
Asset-backed security	1,650		—		—		1,650
Mutual funds	4,760		4,760		—		—
Total securities available for sale at fair value	$	60,926	$	4,760	$	54,516	$	1,650

The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows for the nine months ended September 30, 2015:

	Asset Backed Securities
	(Dollars in thousands)
Balance of recurring Level 3 instruments at December 31, 2014	$	1,650
Total gains or losses (realized/unrealized):
Included in other comprehensive income	(165		)
Settlements	(44		)
Transfers in and/or out of Level 3	—
Balance of recurring Level 3 instruments at September 30, 2015	$	1,441

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 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 September 30, 2015
	Total		Level 1		Level 2		Level 3
Assets at Fair Value:	(Dollars in thousands)
Impaired loans	$	26,962	$	—	$	—	$	26,962
Other real estate owned	1,872		—		1,872		—
Total	$	28,834	$	—	$	1,872	$	26,962

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 September 30, 2015, a summary of the significant unobservable inputs and valuation techniques is as follows:

	Fair Value Measurement as of September 30, 2015		Valuation Techniques(3)	Unobservable Inputs(3)	Range	Weighted Average
	(Dollars in thousands)
Assets
Asset-backed security	$	1,441	Third-Party Pricing	Marketability discount	N/A (1)	N/A (1)
				Illiquidity discount	N/A (1)	N/A (1)
Impaired loans	26,962		Third-Party Pricing	Appraisals	N/A (2)	N/A (2)
	$	28,403

(1) Information is unavailable as valuation was obtained from third-party pricing services.

(2) 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.

(3) As of September 30, 2015, 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, 2014.

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Fair Value Measurements for Other Financial Instruments

The table below provides estimated fair values and related carrying amounts of our financial instruments as of September 30, 2015 and December 31, 2014, excluding financial assets and liabilities which are recorded at fair value on a recurring basis.

	Estimated Fair Value
	At September 30, 2015										At December 31, 2014
	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	$	176,753	$	176,753	$	176,753	$	—	$	—	$	177,135	$	177,135	177,135	—	—
Interest-bearing deposits with financial institutions	4,916		4,916		4,916		—		—		4,668		4,668		4,668	—	—
Federal Reserve Bank of San Francisco and Federal Home Loan Bank stock	8,170		8,170		8,170		—		—		8,137		8,137		8,137	—	—
Loans, net	816,715		813,849		—		—		813,849		824,197		818,547		—	—	818,547
Accrued interest receivable	2,236		2,236		2,236		—		—		2,436		2,436		2,436	—	—
Financial liabilities:
Noninterest bearing deposits	262,508		262,508		262,508		—		—		237,491		237,491		237,491	—	—
Interest-bearing deposits	664,804		664,493		—		664,493		—		678,818		678,890		—	678,890	—
Borrowings	10,000		9,974		—		9,974		—		39,500		39,418		—	39,418	—
Junior subordinated debentures	17,527		17,527		—		17,527		—		17,527		17,527		—	17,527	—
Accrued interest payable	198		198		198		—		—		222		222		222	—	—

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 September 30, 2015 and December 31, 2014:

(Dollars in thousands)	September 30, 2015									December 31, 2014
	Amortized Cost		Gross Unrealized					Estimated Fair Value		Amortized Cost		Gross Unrealized					Estimated Fair Value
			Gain		Loss							Gain		Loss
Securities Available for Sale
Residential mortgage backed securities issued by U.S. Agencies(1)	$	48,065	$	72	$	(529	)	$	47,608	$	54,653	$	26	$	(940	)	$	53,739
Residential collateralized mortgage obligations issued by non agencies(1)	686		—		(15		)	671		790		—		(13		)	777
Asset backed security(2)	2,040		—		(599		)	1,441		2,083		—		(433		)	1,650
Mutual funds(3)	4,750		60		(24		)	4,786		4,750		45		(35		)	4,760
Total	$	55,541	$	132	$	(1,167	)	$	54,506	$	62,276	$	71	$	(1,421	)	$	60,926

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

(2) Comprised of a security that represents an interest in a pool of trust preferred securities issued by U.S.-based banks and insurance companies.

(3) Consists primarily of mutual fund investments in closed-end first liens on 1-4 family residential mortgages.

At September 30, 2015, U.S. agency mortgage backed securities with an aggregate fair market value of $2.9 million were pledged to secure repurchase agreements, local agency deposits and treasury, tax and loan accounts. At December 31, 2014, U.S. agency mortgage backed securities and collateralized mortgage obligations with an aggregate fair market value of $3.6 million 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 September 30, 2015 and December 31, 2014 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.

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	At September 30, 2015 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	$	8,537		$	28,458		$	13,070		$	5,476		$	55,541
Securities available for sale, estimated fair value	8,447			28,329			12,895			4,835			54,506
Weighted average yield	1.46		%	1.58		%	1.52		%	1.96		%	1.59		%

	At December 31, 2014 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	$	7,483		$	29,008		$	17,448		$	8,337		$	62,276
Securities available for sale, estimated fair value	7,359			28,614			17,148			7,805			60,926
Weighted average yield	1.54		%	1.64		%	1.60		%	1.83		%	1.64		%

We had no sales of securities available for sale during the three and nine months ended September 30, 2015 and 2014.

The tables below indicate, as of September 30, 2015 and December 31, 2014, the gross unrealized losses and fair values of our investments, aggregated by investment category, and length of time that the individual securities have been in a continuous unrealized loss position.

	Securities with Unrealized Loss at September 30, 2015
	Less than 12 months					12 months or more					Total
(Dollars in thousands)	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Residential mortgage backed securities issued by U.S. Agencies	$	5,288	$	(15	)	$	25,095	$	(514	)	$	30,383	$	(529	)
Residential collateralized mortgage obligations issued by non-agencies	—		—			671		(15		)	671		(15		)
Asset backed security	—		—			1,441		(599		)	1,441		(599		)
Mutual funds	1,976		(24		)	—		—			1,976		(24		)
Total	$	7,264	$	(39	)	$	27,207	$	(1,128	)	$	34,471	$	(1,167	)

	Securities With Unrealized Loss at December 31, 2014
	Less than 12 months					12 months or more					Total
(Dollars In thousands)	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Residential mortgage backed securities issued by U.S. Agencies	$	—	$	—		$	50,697	$	(940	)	$	50,697	$	(940	)
Residential collateralized mortgage obligations issued by non-agencies	—		—			776		(13		)	776		(13		)
Asset-backed security	—		—			1,651		(433		)	1,651		(433		)
Mutual funds	2,464		(35		)	—		—			2,464		(35		)
Total	$	2,464	$	(35	)	$	53,124	$	(1,386	)	$	55,588	$	(1,421	)

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 (loss) in our consolidated statements of financial condition.

Through the impairment assessment process, we determined that the available-for-sale securities discussed below were other-than-temporarily impaired at September 30, 2015. We recorded no impairment credit losses on available-for-sale securities

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in our consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014. The OTTI related to factors other than credit losses, in the aggregate amount of $599 thousand, and was recognized as other comprehensive loss in our accompanying consolidated statement of financial condition as of September 30, 2015.

The table below presents, for the nine months ended September 30, 2015, a roll-forward of OTTI in those instances when a portion of the OTTI was attributable to non-credit related factors and, therefore, was recognized in other comprehensive loss:

(Dollars in thousands)	Gross Other- Than- Temporary Impairments			Other-Than- Temporary Impairments Included in Other Comprehensive Loss			Net Other-Than- Temporary Impairments Included in Retained  Earnings (Deficit)
Balance – December 31, 2014	$	(986	)	$	(433	)	$	(553	)
Change in market value on a security for which an OTTI was previously recognized	(205		)	(205		)	—
Principal received on OTTI security	39			39			—
Balance – September 30, 2015	$	(1,152	)	$	(599	)	$	(553	)

In determining the component of OTTI related to credit losses, we compare the amortized cost basis of each OTTI security to the present value of its expected cash flows, discounted using the effective interest rate implicit in the security at the date of acquisition.

As a part of our OTTI assessment process with respect to securities available for sale with unrealized losses, we consider available information about (i) the performance of the collateral underlying each such security, including any credit enhancements, (ii) historical prepayment speeds, (iii) delinquency and default rates, (iv) loss severities, (v) the age or “vintage” of the security, and (vi) any rating agency reports on the security. Significant judgments are required with respect to these and other factors in order to make a determination of the future cash flows that can be expected to be generated by the security.

Based on our OTTI assessment process, we determined that there is one asset-backed security in our portfolio of securities available for sale that was impaired as of September 30, 2015. This security is a multi-class, cash flow collateralized bond obligation backed by a pool of trust preferred securities issued by a diversified pool of 56 issuers that consisted of 45 U.S. depository institutions and 11 insurance companies at the time of the security’s issuance in November 2007. We purchased $3.0 million face amount of this security in November 2007 at a price of 95.21% for a total purchase price of $2.9 million, out of a total of $363 million of this security sold at the time of issuance. The security that we own (CUSIP 74042CAE8) is the mezzanine class B piece security with a variable interest rate of 3 month LIBOR plus 60 basis points, which had a rating of Aa2 and AA by Moody’s and Fitch, respectively, at the time of issuance in 2007.

As of September 30, 2015, the amortized cost of this security was $2.0 million with a fair value of $1.4 million, for an unrealized loss of approximately $599 thousand. As of September 30, 2015, the security had a Baa3 rating from Moody’s and a B rating from Fitch and had experienced $42.5 million in defaults (12.5% of total current collateral) and $12.0 million in deferring securities (3.5% of total current collateral) from issuance to September 30, 2015. As of September 30, 2015, the mezzanine class B tranche had $53.4 million in excess subordination.

We have made a determination that the remainder of our securities with respect to which there were unrealized losses as of September 30, 2015 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).

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Other Investments

As of December 31, 2014, we had one investment in a limited partnership which was accounted for under the equity method of accounting and included within other assets on the consolidated statements of financial condition. During the nine months ended September 30, 2015, we redeemed 100% of our investment in the limited partnership for a return of capital of $2.1 million. As of September 30, 2015 and December 31, 2014, our other investment was as follows:

	September 30, 2015		December 31, 2014
	(Dollars in thousands)
Investment accounted for under the equity method	$	—	$	2,081

5. Loans and Allowance for Loan and Lease Losses

The loan portfolio consisted of the following at:

	September 30, 2015					December 31, 2014
(Dollars in thousands)	Amount			Percent		Amount			Percent
Commercial loans	$	321,696		38.8	%	$	301,746		36.0	%
Commercial real estate loans – owner occupied	197,671			23.9	%	212,515			25.4	%
Commercial real estate loans – all other	137,108			16.5	%	146,676			17.5	%
Residential mortgage loans – multi-family	84,295			10.2	%	95,276			11.4	%
Residential mortgage loans – single family	57,620			7.0	%	64,326			7.7	%
Land development loans	6,908			0.8	%	7,745			0.9	%
Consumer loans	23,313			2.8	%	9,687			1.2	%
Total loans	828,611			100.0	%	837,971			100.0	%
Deferred loan origination costs, net	383					59
Allowance for loan and lease losses	(12,279		)			(13,833		)
Loans, net	$	816,715				$	824,197

At September 30, 2015 and December 31, 2014, loans of approximately $548 million and $425 million, respectively, were pledged to secure borrowings obtained from the FHLB and to support our unfunded borrowing capacity.

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 non-accrual status for loss exposure and (ii) establishing specific reserves as needed. ASC 310-10 defines loan impairment as the existence of uncertainty concerning collection of all principal and interest in accordance with the contractual terms of a loan. For collateral dependent loans, impairment is typically measured by comparing the loan amount to the fair value of collateral, less estimated costs to sell, with any “shortfall” amount charged off. Other methods can be used in estimating impairment, including market price and the present value of expected future cash flows discounted at the loan’s original interest rate. We are an active lender with the U.S. Small Business Administration and collection of a percentage of the loan balance of many of the loans originated is guaranteed.  The ALLL reserves are calculated against the non-guaranteed loan balances. 

On a quarterly basis, we utilize a classification based loan loss migration model as well as review individual loans in determining the adequacy of the ALLL for homogenous pools of loans that are not subject to specific reserve allocations. Our loss migration analysis tracks a certain number of quarters of loan loss history and industry loss factors to determine historical losses by classification category for each loan type, except certain consumer loans (automobile, mortgage and credit cards). We then apply these calculated loss factors, together with qualitative factors based on external economic conditions and trends and internal assessments, to the outstanding loan balances in each homogenous group of loans, and then, using our internal asset quality grading parameters, we grade the loans as “Pass,” “Special Mention,” “Substandard” or “Doubtful”. We analyze impaired loans individually. This grading is based on the credit classifications of assets as prescribed by government regulations and industry standards and is separated into the following groups:

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• 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.

• 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.

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Set forth below is a summary of the activity in the ALLL during the three and nine months ended September 30, 2015 and 2014:

(Dollars in thousands)	Commercial			Real  Estate			Land Development			Consumer and Single Family Mortgages			Total
ALLL in the three months ended September 30, 2015:
Balance at beginning of period	$	6,481		$	4,889		$	44		$	929		$	12,343
Charge offs	(526		)	—			—			(48		)	(574		)
Recoveries	507			1			—			2			510
Provision	(173		)	(325		)	36			462			—
Balance at end of period	$	6,289		$	4,565		$	80		$	1,345		$	12,279
ALLL in the nine months ended September 30, 2015:
Balance at beginning of period	$	7,670		$	5,133		$	296		$	734		$	13,833
Charge offs	(2,643		)	—			(85		)	(199		)	(2,927		)
Recoveries	1,364			3			—			6			1,373
Provision	(102		)	(571		)	(131		)	804			—
Balance at end of period	$	6,289		$	4,565		$	80		$	1,345		$	12,279
ALLL in the three months ended September 30, 2014:
Balance at beginning of period	$	6,477		$	5,397		$	85		$	621		$	12,580
Charge offs	(27		)	—			—			—			(27		)
Recoveries	107			57			—			3			167
Provision	302			214			88			(154		)	450
Balance at end of period	$	6,859		$	5,668		$	173		$	470		$	13,170
ALLL in the nine months ended September 30, 2014:
Balance at beginning of period	$	5,812		$	4,517		$	165		$	864		$	11,358
Charge offs	$	(303	)	$	—		$	—		$	(102	)	$	(405	)
Recoveries	559			76			—			82			717
Provision	791			1,075			8			(374		)	1,500
Balance at end of period	$	6,859		$	5,668		$	173		$	470		$	13,170

Set forth below is information regarding loan balances and the related ALLL, by portfolio type, as of September 30, 2015 and December 31, 2014.

(Dollars in thousands)	Commercial		Real  Estate		Land Development		Consumer and Single Family Mortgages		Total
ALLL balance at September 30, 2015 related to:
Loans individually evaluated for impairment	$	—	$	508	$	—	$	—	$	508
Loans collectively evaluated for impairment	6,289		4,057		80		1,345		11,771
Total	$	6,289	$	4,565	$	80	$	1,345	$	12,279
Loans balance at September 30, 2015 related to:
Loans individually evaluated for impairment	$	12,322	$	9,441	$	1,640	$	3,559	$	26,962
Loans collectively evaluated for impairment	309,374		409,633		5,268		77,374		801,649
Total	$	321,696	$	419,074	$	6,908	$	80,933	$	828,611
ALLL Balance at December 31, 2014 related to:
Loans individually evaluated for impairment	$	995	$	537	$	—	$	—	$	1,532
Loans collectively evaluated for impairment	6,675		4,596		296		734		12,301
Total	$	7,670	$	5,133	$	296	$	734	$	13,833
Loans balance at December 31, 2014 related to:
Loans individually evaluated for impairment	$	21,117	$	7,536	$	2,111	$	4,373	$	35,137
Loans collectively evaluated for impairment	280,629		446,931		5,634		69,640		802,834
Total	$	301,746	$	454,467	$	7,745	$	74,013	$	837,971

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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 September 30, 2015 and December 31, 2014:

(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 September 30, 2015
Commercial loans	$	5,346	$	—	$	10,383	$	15,729	$	305,967	$	321,696	$	—
Commercial real estate loans – owner-occupied	—		1,255		1,139		2,394		195,277		197,671		—
Commercial real estate loans – all other	—		—		1,440		1,440		135,668		137,108		—
Residential mortgage loans – multi-family	—		—		—		—		84,295		84,295		—
Residential mortgage loans – single family	—		—		535		535		57,085		57,620		—
Land development loans	—		—		1,640		1,640		5,268		6,908		—
Consumer loans	—		—		—		—		23,313		23,313		—
Total(1)	$	5,346	$	1,255	$	15,137	$	21,738	$	806,873	$	828,611	$	—
At December 31, 2014
Commercial loans	$	553	$	—	$	—	$	553	$	301,193	$	301,746	$	—
Commercial real estate loans – owner-occupied	—		—		—		—		212,515		212,515		—
Commercial real estate loans – all other	20		—		2,117		2,137		144,539		146,676		—
Residential mortgage loans – multi-family	—		—		—		—		95,276		95,276		—
Residential mortgage loans – single family	835		—		285		1,120		63,206		64,326		—
Land development loans	—		—		364		364		7,381		7,745		—
Consumer loans	17		—		—		17		9,670		9,687		—
Total	$	1,425	$	—	$	2,766	$	4,191	$	833,780	$	837,971	$	—

(1)    Loans 90 days or more past due included one consumer mortgage loan collateralized by residential real estate with a recorded investment of $535 thousand which is in the process of foreclosure.

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 September 30, 2015 or December 31, 2014. In certain instances, when a loan is placed on non-accrual 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). Non-accrual loans may be restored to accrual status when principal and interest become current and full repayment becomes expected.

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The following table provides information with respect to loans on nonaccrual status, by portfolio type, as of September 30, 2015 and December 31, 2014:

	September 30, 2015		December 31, 2014
	(Dollars in thousands)
Nonaccrual loans:
Commercial loans	$	12,149	$	16,182
Commercial real estate loans – owner occupied	1,640		2,171
Commercial real estate loans – all other	2,642		2,117
Residential mortgage loans – multi-family	449		—
Residential mortgage loans – single family	706		1,472
Land development loans	1,640		2,111
Total(1)	$	19,226	$	24,053

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

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 September 30, 2015 and December 31, 2014:

	September 30, 2015		December 31, 2014
	(Dollars in thousands)
Pass:
Commercial loans	$	309,310	$	280,102
Commercial real estate loans – owner occupied	193,783		208,687
Commercial real estate loans – all other	118,023		128,974
Residential mortgage loans – multi family	83,846		94,817
Residential mortgage loans – single family	56,914		62,854
Land development loans	5,268		5,634
Consumer loans	23,313		9,687
Total pass loans	$	790,457	$	790,755
Special Mention:
Commercial loans	$	16	$	351
Commercial real estate loans – owner occupied	178		—
Commercial real estate loans – all other	9,515		6,588
Residential mortgage loans – multi family	—		459
Total special mention loans	$	9,709	$	7,398
Substandard:
Commercial loans	$	12,370	$	19,655
Commercial real estate loans – owner occupied	3,710		3,828
Commercial real estate loans – all other	9,570		11,114
Residential mortgage loans – multi family	449		—
Residential mortgage loans – single family	706		1,472
Land development loans	1,640		2,111
Total substandard loans	$	28,445	$	38,180
Doubtful:
Commercial loans	$	—	$	1,638
Total doubtful loans	$	—	$	1,638
Total Loans:	$	828,611	$	837,971

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

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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 September 30, 2015 and December 31, 2014:

	September 30, 2015		December 31, 2014
	(Dollars in thousands)
Impaired loans:
Nonaccruing loans	$	5,162	$	18,118
Nonaccruing restructured loans	14,064		5,935
Accruing restructured loans (1)	7,736		11,084
Accruing impaired loans	—		—
Total impaired loans	$	26,962	$	35,137
Impaired loans less than 90 days delinquent and included in total impaired loans	$	12,626	$	32,371

(1) See "Troubled Debt Restructurings" below for a description of accruing restructured loans at September 30, 2015 and December 31, 2014.

The table below contains additional information with respect to impaired loans, by portfolio type, as of September 30, 2015 and December 31, 2014:

	September 30, 2015						December 31, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance (1)		Recorded Investment		Unpaid Principal Balance		Related Allowance (1)
	(Dollars in thousands)
No allowance recorded:
Commercial loans	$	12,322	$	14,011	$	—	$	18,563	$	18,839	$	—
Commercial real estate loans – owner occupied	621		737		—		2,171		2,440		—
Commercial real estate loans – all other	6,731		6,828		—		5,365		5,423		—
Residential mortgage loans – multi-family	449		452		—		—		—		—
Residential mortgage loans – single family	3,559		3,892		—		4,373		4,610		—
Land development loans	1,640		1,732		—		2,111		2,146		—
Total	25,322		27,652		—		32,583		33,458		—
With allowance recorded:
Commercial loans	$	—	$	—	$	—	$	2,554	$	2,983	$	1,532
Commercial real estate loans – owner occupied	1,640		1,872		508		—		—		—
Total	1,640		1,872		508		2,554		2,983		1,532
Total
Commercial loans	$	12,322	$	14,011	$	—	$	21,117	$	21,822	$	1,532
Commercial real estate loans – owner occupied	2,261		2,609		508		2,171		2,440		—
Commercial real estate loans – all other	6,731		6,828		—		5,365		5,423		—
Residential mortgage loans – multi-family	449		452		—		—		—		—
Residential mortgage loans – single family	3,559		3,892		—		4,373		4,610		—
Land development loans	1,640		1,732		—		2,111		2,146		—
Total	26,962		29,524		508		35,137		36,441		1,532

(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 September 30, 2015 and December 31, 2014, there were $25.3 million and $32.6 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 September 30, 2015 for which no specific reserves were allocated, $20.4 million had been deemed impaired in the prior year.

Average balances and interest income recognized on impaired loans, by portfolio type, for the three and nine months ended September 30, 2015 and 2014 were as follows:

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	Three Months Ended September 30,								Nine Months Ended September 30,
	2015				2014				2015				2014
	Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized
	(Dollars in thousands)
No allowance recorded:
Commercial loans	$	13,003	$	2	$	12,236	$	133	$	14,988	$	105	$	10,570	$	489
Commercial real estate loans – owner occupied	2,733		3		2,213		14		2,444		10		1,988		170
Commercial real estate loans – all other	6,503		46		7,032		82		5,930		255		6,770		292
Residential mortgage loans – multi-family	451		—		—		—		340		13		—		—
Residential mortgage loans – single family	3,807		29		3,700		59		4,055		88		3,847		147
Land development loans	1,662		—		1,246		23		1,788		7		816		68
Total	28,159		80		26,427		311		29,545		478		23,991		1,166
With allowance recorded:
Commercial loans	—		—		2,724		—		—		—		1,659		14
Commercial real estate loans – owner occupied	820		—		243		—		410		—		121		—
Total	820		—		2,967		—		410		—		1,780		14
Total
Commercial loans	13,003		2		14,960		133		14,988		105		12,229		503
Commercial real estate loans – owner occupied	3,553		3		2,456		14		2,854		10		2,109		170
Commercial real estate loans – all other	6,503		46		7,032		82		5,930		255		6,770		292
Residential mortgage loans – multi-family	451		—		—		—		340		13		—		—
Residential mortgage loans – single family	3,807		29		3,700		59		4,055		88		3,847		147
Land development loans	1,662		—		1,246		23		1,788		7		816		68
Total	$	28,979	$	80	$	29,394	$	311	$	29,955	$	478	$	25,771	$	1,180

The interest that would have been earned had the impaired loans remained current in accordance with their original terms was $175 thousand and $164 thousand during the three months ended September 30, 2015 and 2014, respectively. The interest that would have been earned had the impaired loans remained current in accordance with their original terms was $683 thousand and $351 thousand during the nine months ended September 30, 2015 and 2014, respectively.

Troubled Debt Restructurings (“TDRs”)

Pursuant to the FASB's ASU No. 2011-2, A Creditor's Determination of whether a Restructuring is a Troubled Debt Restructuring, the Bank's TDRs totaled $21.8 million and $17.0 million at September 30, 2015 and December 31, 2014, respectively. TDRs consist of loans to which modifications have been made for the purpose of alleviating temporary impairments of the borrower's financial condition and cash flows. Those modifications have come in the forms of changes in amortization terms, reductions in interest rates, interest only payments and, in limited cases, concessions to outstanding loan balances. The modifications are made as part of workout plans we enter into with the borrower that are designed to provide a bridge for the borrower's cash flow shortfalls in the near term. If a borrower works through the near term issues, then in most cases, the original contractual terms of the borrower's loan will be reinstated.

Of the $21.8 million of TDRs outstanding at September 30, 2015, $7.7 million were performing in accordance with their terms and accruing interest, and $14.1 million were not. Our impairment analysis determined no specific reserves were required on the TDR balances outstanding at September 30, 2015.

The following table presents loans restructured as TDRs during the three and nine months ended September 30, 2015 and 2014:

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	Three Months Ended
	September 30, 2015					September 30, 2014
(Dollars in thousands)	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Performing
Commercial loans	2	$	84	$	84	—	$	—	$	—
Commercial real estate – owner occupied	1	178		178		—	—		—
Commercial real estate – all other	1	391		391		—	—		—
	4	653		653		—	—		—
Nonperforming
Commercial loans	1	937		678		1	916		916
Commercial real estate – owner occupied	—	—		—		1	460		460
Commercial real estate – all other	—	—		—		1	1,296		1,296
Residential mortgage loans – single family	—	—		—		1	244		244
	1	937		678		4	2,916		2,916
Total Troubled Debt Restructurings	5	$	1,590	$	1,331	4	$	2,916	$	2,916
	Nine Months Ended
	September 30, 2015					September 30, 2014
(Dollars in thousands)	Number of loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Performing
Commercial loans	3	$	173	$	173	—	$	—	$	—
Commercial real estate – owner occupied	1	178		178		—	—		—
Commercial real estate – all other	2	4,532		4,532		—	—		—
	6	4,883		4,883		—	—		—
Nonperforming
Commercial loans	2	1,173		914		2	1,216		1,091
Commercial real estate – owner occupied	—	—		—		1	460		460
Commercial real estate – all other	—	—		—		1	1,296		1,296
Residential mortgage loans – single family	—	—		—		1	244		244
	2	1,173		914		5	3,216		3,091
Total Troubled Debt Restructurings	8	$	6,056	$	5,797	5	$	3,216	$	3,091

During the three and nine months ended September 30, 2015 and 2014, we had no TDRs that were modified within the preceding 12-month period which subsequently defaulted.

6. Income Taxes

For the three and nine months ended September 30, 2015 and September 30, 2014, we recorded no income tax provision. Our net deferred tax asset at September 30, 2015 was $5.8 million, net of a valuation allowance of $10.8 million. Based on the analysis performed, and the positive and negative evidence considered, management determined that no increase in the $10.8 million valuation allowance as of September 30, 2015 was needed. Positive evidence included our current period taxable income, improvement in asset quality, tax planning strategies, and economic conditions. Negative evidence included historical losses over the previous 12 quarter look back period and our accumulated deficit. Management concluded that it was more-likely-than-not that the existing $5.8 million net deferred tax asset would be realized. Our net deferred tax asset at September 30, 2014 was $6.2 million, net of a valuation allowance of $12.2 million. Based on the analysis performed, and the positive and negative evidence considered, management chose not to release any portion of the $12.2 million valuation allowance as of September 30, 2014. Positive evidence included improvement in our asset quality, tax planning strategies, and economic conditions. Negative evidence included historical operating losses and our accumulated deficit. Management determined the negative evidence was significant

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enough to outweigh the positive evidence and support no reversal of the valuation allowance; however, we did conclude that it was more-likely-than-not that the existing $6.2 million net deferred tax asset at the time would be realized.

We file income tax returns with the U.S. federal government and the state of California. As of September 30, 2015, we were subject to examination by the Internal Revenue Service with respect to our U.S. federal tax returns for the 2011 to 2013 tax years and Franchise Tax Board for California state income tax returns for the 2010 to 2013 tax years. Net operating losses (“NOLs”) on our U.S. federal and California state income tax returns may be carried forward twenty years. As of September 30, 2015, we do not believe there will be any material adverse changes in our unrecognized tax benefits over the next 12 months.

Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of tax expense. We did not have any accrued interest or penalties associated with any unrecognized tax benefits, and no interest expense was recognized during the three and nine months ended September 30, 2015 and 2014.

7. Stock-Based Employee Compensation Plans

In May 2010, our shareholders approved the adoption of our 2010 Equity Incentive Plan (the “2010 Incentive Plan”), which authorized and set aside a total of 400,000 shares of our common stock for issuance on the exercise of stock options or the grant of restricted stock or other equity incentives to our officers, and other key employees and directors. An additional 158,211 shares of common stock were also set aside which was equal to the total of the shares that were available for the grant of equity incentives under our shareholder-approved 2008 and 2004 Equity Incentive Plans (the "Previously Approved Plans") at the time of the adoption of the 2010 Incentive Plan. Options to purchase a total of 483,386 shares of our common stock granted under the Previously Approved Plans were outstanding at September 30, 2015. The 2010 Incentive Plan provides that if any of these outstanding options under the Previously Approved Plans expire or are terminated for any reason, then the number of shares that would become available for grants or awards of equity incentives under the 2010 Incentive Plan would be increased by an equivalent number of shares. At the Annual Shareholders meeting held in May 2013, our shareholders approved an additional 800,000 share increase in the maximum number of shares of our common stock that may be issued pursuant to grants or exercises of options or restricted shares or other equity incentives under the 2010 Incentive Plan, of which 95,000 shares of restricted stock, net of shares withheld for taxes, have vested as of September 30, 2015 thereby decreasing the maximum number of shares authorized under the 2010 Incentive Plan. As a result, as of September 30, 2015, the maximum number of shares that were authorized for the grant of options or other equity incentives under the 2010 Incentive Plan totaled 1,759,948 (assuming that all 483,386 shares of our common stock subject to options under the Previously Approved Plans expire or are terminated), or approximately 8% of the shares of our common stock then outstanding.

A stock option entitles the recipient to purchase shares of our common stock at a price per share that may not be less than 100% of the fair market value of the Company’s shares on the date the option is granted. Restricted shares may be granted at such purchase prices and on such other terms, including restrictions and Company repurchase or reacquisition rights, as are fixed by the Compensation Committee at the time rights to purchase such restricted shares are granted. Stock Appreciation Rights ("SARs") entitle the recipient to receive a cash payment in an amount equal to the difference between the fair market value of the Company’s shares on the date of vesting and a “base price” (which, in most cases, will be equal to the fair market value of the Company’s shares on the date the SAR is granted), subject to the right of the Company to make such payment in shares of its common stock at their then fair market value. Options, restricted shares and SARs may vest immediately or in installments over various periods generally ranging up to five years, subject to the recipient’s continued employment or service or the achievement of specified performance goals, as determined by the Compensation Committee at the time it grants or awards the options, the restricted shares or the SARs. Stock options and SARs may be granted for terms of up to 10 years after the date of grant, but will terminate sooner upon or shortly after a termination of service occurring prior to the expiration of the term of the option or SAR. The Company will become entitled to repurchase any unvested restricted shares, at the same price that was paid for the shares by the recipient, or to cancel those shares in the event of a termination of employment or service of the holder of such shares or if any performance goals specified in the award are not satisfied. To date, the Company has not granted any SARs.

Under FASB ASC 718-10, we are required to recognize, in our financial statements, the fair value of the options or any restricted shares that we grant as compensation cost over their respective service periods. The fair values of the options that were outstanding at September 30, 2015 under the 2010 Incentive Plan were estimated as of their respective dates of grant using the Black-Scholes option-pricing model. The Company, under the 2010 Incentive Plan, granted restricted stock for the benefit of its employees and directors. These restricted shares vest over a period of three years for employees and one year for directors. The recipients of restricted shares have the right to vote all shares subject to such grant and receive all dividends with respect to such shares whether or not the shares have vested. The recipients do not pay any cash consideration for the shares.

Stock Options

The table below summarizes the weighted average assumptions used to determine the fair values of the options granted during the following periods:

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	Three Months Ended September 30,						Nine Months Ended September 30,
Assumptions with respect to:	2015(1)			2014			2015			2014
Expected volatility	—		%	44		%	44		%	44		%
Risk-free interest rate	—		%	2.14		%	1.82		%	2.14		%
Expected dividends	—		%	0.61		%	—		%	0.61		%
Expected term (years)	—			6.7			6.0			6.7
Weighted average fair value of options granted during period	$	—		$	3.04		$	3.13		$	2.84

(1) No stock options were granted during the three months ended September 30, 2015.

The following table summarizes the stock option activity under the Company’s equity incentive plans during the nine months ended September 30, 2015 and 2014, respectively.

	Number of Shares		Weighted- Average Exercise Price Per Share		Number of Shares		Weighted- Average Exercise Price Per Share
	2015				2014
Outstanding – January 1,	1,257,390		$	6.51	1,821,000		$	6.88
Granted	112,828		7.09		58,970		6.38
Exercised	(257,526	)	5.30		(140,446	)	3.58
Forfeited/Canceled	(142,053	)	11.53		(327,254	)	10.59
Outstanding – September 30,	970,639		6.16		1,412,270		6.33
Options Exercisable – September 30,	655,393		$	5.98	892,916		$	6.42
Options Vested – September 30,	655,393		$	5.98	892,916		$	6.42

Options to purchase 30,962 and 48,246 shares of our common stock were exercised during the three months ended September 30, 2015 and 2014, respectively. Options to purchase 257,526 and 140,446 shares of our common stock were exercised during the nine months ended September 30, 2015 and 2014, respectively. The aggregate intrinsic value of options exercised during the three months ended September 30, 2015 and 2014 was $115 thousand and $172 thousand, respectively. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2015 and 2014 was $458 thousand and $416 thousand, respectively. The fair values of options that vested during the three months ended September 30, 2015 and 2014 was $453 thousand and $508 thousand, respectively. The fair values of options that vested during the nine months ended September 30, 2015 and 2014 was $623 thousand and $721 thousand, respectively.

The following table provides additional information regarding the vested and unvested options that were outstanding at September 30, 2015.

Options Outstanding as of September 30, 2015						Options Exercisable as of September 30, 2015(1)
	Vested	Unvested	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Shares	Weighted Average Exercise Price
$2.97 – $5.99	225,271	3,467	$	3.96	4.95	225,271	$	3.96
$6.00 – $9.99	403,822	311,779	6.47		8.00	403,822	6.39
$13.00 – $17.99	14,800	—	15.93		1.13	14,800	15.93
$18.00 – $18.84	11,500	—	18.11		0.32	11,500	18.11
	655,393	315,246	$	6.16	7.09	655,393	$	5.98

(1) The weighted average remaining contractual life of the options that were exercisable as of September 30, 2015 was 6.43 years.

The aggregate intrinsic value of options that were outstanding and exercisable under the 2010 Incentive Plan at September 30, 2015 and December 31, 2014 was $768 thousand and $1.2 million, respectively.

A summary of the status of the unvested options outstanding as of September 30, 2015, and changes in the weighted average grant date fair values of the unvested options during the nine months ended September 30, 2015, are set forth in the following table.

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	For the nine months ended September 30,
	2015				2014
	Number of Shares Subject to Options		Weighted Average Grant Date Fair Value		Number of Shares Subject to Options		Weighted Average Grant Date Fair Value
Unvested at the beginning of the period	468,504		$	2.68	785,566		$	2.57
Granted	112,828		3.13		58,970		2.84
Vested	(236,372	)	2.63		(290,541	)	2.48
Forfeited/Canceled	(29,714	)	2.55		(34,641	)	2.61
Unvested at the end of the period	315,246		2.90		519,354		2.64

At September 30, 2015, the weighted average period over which nonvested awards were expected to be recognized was 1.81 years.

Restricted Stock

The following table summarizes the activity related to restricted stock granted, vested and forfeited under our equity incentive plans during the nine months ended September 30, 2015 and 2014.

	For the nine months ended September 30,
	2015				2014
	Number of Shares		Average Grant Date Fair Value		Number of Shares		Average Grant Date Fair Value
Outstanding at the beginning of the period	141,254		$	6.29	141,284		$	6.23
Granted	98,829		7.11		51,256		6.37
Vested	(63,351	)	6.45		(35,000	)	6.24
Forfeited	(3,638	)	6.18		(6,286	)	6.21
Outstanding at the end of the period	173,094		$	6.70	151,254		$	6.28

Compensation Expense

We expect that the compensation expense that will be recognized during the periods presented below in respect of stock options and restricted stock outstanding at September 30, 2015, will be as follows:

	Estimated Stock Based Compensation Expense Stock Options		Estimated Stock Based Compensation Expense Restricted Stock		Estimated Stock Based Compensation Expense Total
(Dollars in thousands)
For the years ending December 31,
Remainder of 2015	$	122	$	181	$	303
2016	336		489		826
2017	111		189		299
2018	35		24		58
2019 and beyond	6		—		6
	$	609	$	883	$	1,493

The aggregate amounts of stock based compensation expense recognized in our consolidated statements of operations for the three months ended September 30, 2015 and 2014 were $347 thousand and $325 thousand, respectively, and for the nine months ended September 30, 2015 and 2014 were $1.0 million and $862 thousand, respectively, in each case net of taxes.

8. Earnings Per Share (“EPS”)

Basic EPS excludes dilution and is computed by dividing net income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock that would then share in our earnings.

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The following table shows how we computed basic and diluted EPS for the three and nine months ended September 30, 2015 and 2014.

(In thousands, except per share data)	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2015			2014			2015			2014
Numerator:
Net income (loss) from continuing operations	$	321		$	(314	)	$	375		$	(1,815	)
Accumulated declared dividends on preferred stock	—			—			—			(592		)
Accumulated undeclared dividends on preferred stock	—			(308		)	—			(320		)
Dividends on preferred stock	(309		)	—			(927		)	—
Inducements for exchange of the preferred stock	(512		)	—			(512		)	—
Numerator for basic and diluted net loss from continuing operations	(500		)	(622		)	(1,064		)	(2,727		)
Net (loss) income from discontinued operations	—			(71		)	—			1,885
Numerator for basic and diluted net (loss) income available to common shareholders	$	(500	)	$	(693	)	$	(1,064	)	$	(842	)
Denominator:
Basic weighted average outstanding shares of common stock	19,824			19,291			19,739			19,231
Dilutive effect of employee stock options and contingently issuable shares	—			—			—			—
Diluted weighted average common stock and common stock equivalents	19,824			19,291			19,739			19,231
Basic (loss) income per common share:
Net loss from continuing operations	$	(0.03	)	$	(0.03	)	$	(0.05	)	$	(0.14	)
Net (loss) income from discontinued operations	$	—		$	(0.01	)	$	—		$	0.10
Net loss available to common shareholders	$	(0.03	)	$	(0.04	)	$	(0.05	)	$	(0.04	)
Diluted (loss) income per common share:
Net loss from continuing operations	$	(0.03	)	$	(0.03	)	$	(0.05	)	$	(0.14	)
Net (loss) income from discontinued operations	$	—		$	(0.01	)	$	—		$	0.10
Net loss available to common shareholders	$	(0.03	)	$	(0.04	)	$	(0.05	)	$	(0.04	)

The weighted average shares that have an antidilutive effect in the calculation of diluted net loss per share and have been excluded from the computations above were as follows:

	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2015	2014	2015	2014
Stock options(1)	988,842	1,464,319	1,048,822	1,700,448
Convertible securities(2)	—	2,594,970	—	2,555,539
Shares subject to stock purchase warrants(3)	—	761,278	—	761,278

(1) Stock options were excluded from the computation of diluted earnings per common share for the three and nine months ended September 30, 2015 and 2014 as we reported a net loss from continuing operations.

(2) Convertible securities were excluded from the computation of diluted earnings per common share for the three and nine months ended September 30, 2014 as we reported a net loss from continuing operations.

(3) Stock purchase warrants were excluded from the computation of diluted earnings per common share for the three and nine months ended September 30, 2014 because the exercisability of those warrants was conditioned on the happening of certain future events.

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9. Shareholders’ Equity

Preferred Stock and Warrants

On August 28, 2015, we entered into an Exchange Agreement (the “Exchange Agreement”) with SBAV, LP, an affiliate of Clinton Group, Inc. (“SBAV”), and Carpenter Community BancFund, L.P. and Carpenter Community BancFund-A, L.P. (together, the “Carpenter Funds”) pursuant to which SBAV and the Carpenter Funds exchanged an aggregate of 112,000 shares of the Company’s Series B Convertible 8.4% Noncumulative Preferred Stock (the “Series B Shares”), 35,225 shares of the Series C 8.4% Noncumulative Preferred Stock (the “Series C Shares”) and warrants to purchase 761,278 shares of the Company’s common stock (the “Warrants”) for an aggregate of 3,009,148 shares of the Company’s common stock (the “Exchange Transaction”). The Series B Shares, Series C Shares and Warrants exchanged by SBAV and the Carpenter Funds in the Exchange Transaction comprised all of the Company’s outstanding shares of preferred stock and warrants to purchase shares of the Company’s common stock. The Exchange Transaction closed on September 30, 2015.

Accumulated Other Comprehensive Income (Loss), net

Accumulated other comprehensive income (loss), net as of September 30, 2015 and December 31, 2014 was as follows:

	Unrealized Gain (Loss) on Securities Available-for-Sale, net of tax			Accumulated Other Comprehensive Income, Net
	(Dollars in thousands)
Ending balance as of December 31, 2013	$	(2,154	)	$	(2,154	)
Other comprehensive income before reclassifications, net of tax provision of $847 thousand (1)	1,462			1,462
Amounts reclassified from accumulated other comprehensive loss, net of tax	—			—
Other comprehensive income, net of tax provision of $847 thousand	1,462			1,462
Ending balance as of December 31, 2014	$	(692	)	$	(692	)
Other comprehensive loss before reclassifications, net of tax provision of $129 thousand	185			185
Amounts reclassified from accumulated other comprehensive income, net of tax	—			—
Other comprehensive loss, net of tax provision of $129 thousand	185			185
Ending balance as of September 30, 2015	$	(507	)	$	(507	)

(1) Tax impact included in Deferred tax assets.

10. Commitments and Contingencies

Repurchase Reserves

We have historically maintained reserves for possible repurchases that we may have been required to make of certain of the mortgage loans which we sold as a result of deficiencies or defects that may be found to exist in such loans. Our repurchase reserve also covered returns of any premiums earned and administrative fees pertaining to the repurchase of mortgage loans that did not meet investor guidelines, including potential loss of advances on Veterans Affairs or Federal Housing Authority Ginnie Mae loans.  As a result of our exit from the mortgage banking business and no longer being subject to potential loss for anything other than mortgage fraud, we have undertaken an analysis of our accrual. Our analysis assumes that the repurchase liability exposure will decrease over time as mortgage loans are paid off and as we are no longer originating new mortgage loans. We repurchased $619 thousand of loans during the nine months ended September 30, 2015. We repurchased $1.3 million of loans during the nine months ended September 30, 2014. No loans were repurchased during the three months ended September 30, 2015 and September 30, 2014. The following table sets forth information at September 30, 2015 and December 31, 2014, with respect to our repurchase reserves:

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	At and For the Nine Months Ended			At and For the Year Ended
	September 30, 2015			December 31, 2014
	(Dollars in thousands)
Beginning balance	$	381		$	1,883
(Recovery of)/Provision for repurchases	13			(1,502		)
Settlements	(66		)	—
Total repurchases reserve	$	328		$	381

Commitments

To meet the financing needs of our customers in the normal course of business, we are a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. At September 30, 2015 and December 31, 2014, we were committed to fund certain loans including letters of credit amounting to approximately $226 million and $148 million, respectively. The contractual amounts of a credit-related financial instrument, such as a commitment to extend credit, a credit-card arrangement or a letter of credit, represent the amount of potential accounting loss should the commitment be fully drawn upon, the customer were to default, and the value of any existing collateral securing the customer’s payment obligation becomes worthless. The loss reserve for unfunded loan commitments was $275 thousand at each of September 30, 2015 and December 31, 2014.

As a result, we use the same credit policies in making commitments to extend credit and conditional obligations as we do for on-balance sheet instruments. Commitments generally have fixed expiration dates; however, since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis, using the same credit underwriting standards that are employed in making commercial loans. The amount of collateral obtained, if any, upon an extension of credit is based on our evaluation of the creditworthiness of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, residential real estate and income-producing commercial properties.

Litigation, Claims and Assessments

We are a defendant in or a party to a number of legal actions or proceedings that arise in the ordinary course of business. In some of these actions and proceedings, claims for monetary damages are asserted against us.

In accordance with applicable accounting guidance, we assess the likelihood of any loss or exposure with respect to lawsuits and other proceedings that are pending against us. We establish an accrued liability for lawsuits or other legal proceedings when they present loss contingencies that are both probable and estimable. Where a loss is not probable but it is reasonably possible or where a loss in excess of an amount accrued is reasonably possible, we disclose an estimate of the amount of the loss or range of possible losses for the claim if a reasonable estimate can be made, unless the amount of reasonably possible losses with respect to the matter is not material to our financial condition, results of operations or cash flows. We estimate any potential loss based upon currently available information and significant judgments and a variety of assumptions, and known and unknown uncertainties. Moreover, the facts and circumstances on which such estimates are based will change over time. Therefore, the amount of any losses we might incur in any lawsuits or other legal proceedings may exceed amounts which we had accrued based on our estimates and those estimates do not represent the maximum loss exposure that we may have in connection with any lawsuits or other legal proceedings.

Based on our evaluation of the lawsuits and other proceedings that were pending against us as of September 30, 2015, the outcomes in those suits or other proceedings are not expected to have, either individually or in the aggregate, a material adverse effect on our consolidated financial position, results of operations or cash flows. However, in light of the inherent uncertainties involved, some of which are beyond our control, and the very large or indeterminate damages often sought in such legal actions or proceedings, an adverse outcome in one or more of these suits or proceedings could be material to our financial position, results of operations or cash flows for any particular reporting period.

11. Business Segment Information

We have one reportable business segment, commercial banking. The commercial banking segment provides small and medium-size businesses, professional firms and individuals with a diversified range of products and services such as various types of deposit accounts, various types of commercial and consumer loans, cash management services, and online banking services. We also have one non-reportable segment, discontinued operations, which is comprised of our mortgage banking business. Our

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mortgage banking business originated mortgage loans that, for the most part, were resold within 30 days to long-term investors in the secondary residential mortgage market.

Since our operating segment derives all of its revenues from interest and noninterest income and interest expense constitutes its most significant expense, this segment, as well as our discontinued operations, are reported below using net interest income (interest income less interest expense) and noninterest income (primarily net gains on sales of SBA loans and fee income). We do not allocate general and administrative expenses or income taxes to our operating segment.

The following table sets forth information regarding the net interest income and noninterest income for our commercial banking and discontinued operations segments, respectively, for the three and nine months ended September 30, 2015 and 2014.

(Dollars in thousands)	Commercial		Other			Total from continuing operations		Discontinued Operations			Total including discontinued operations
Net interest income for the three months ended September 30,
2015	$	8,443	$	(132	)	$	8,311	$	—		$	8,311
2014	$	8,343	$	(32	)	$	8,311	$	—		$	8,311
Noninterest income for the three months ended September 30,
2015	$	558	$	4		$	562	$	—		$	562
2014	$	854	$	—		$	854	$	(254	)	$	600
Net interest income for the nine months ended September 30,
2015	$	25,249	$	(299	)	$	24,950	$	—		$	24,950
2014	$	23,882	$	(102	)	$	23,780	$	77		$	23,857
Noninterest income for the nine months ended September 30,
2015	$	2,050	$	10		$	2,060	$	—		$	2,060
2014	$	3,017	$	—		$	3,017	$	1,145		$	4,162
Segment Assets at:
September 30, 2015	$	1,071,459	$	12,211		$	1,083,670	$	—		$	1,083,670
December 31, 2014	$	1,094,120	$	5,490		$	1,099,610	$	—		$	1,099,610

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12. Regulatory Capital

Under federal banking regulations that apply to all United States based bank holding companies and federally insured banks, the Company (on a consolidated basis) and the Bank (on a stand-alone basis) must meet specific capital adequacy requirements that, for the most part, involve quantitative measures, primarily in terms of the ratios of their capital to their assets, liabilities, and certain off-balance sheet items, calculated under regulatory accounting practices. Under those regulations, each bank holding company must meet a minimum capital ratio and each federally insured bank is determined by its primary federal bank regulatory agency to come within one of the following capital adequacy categories on the basis of its capital ratios:

• well capitalized

• adequately capitalized

• undercapitalized

• significantly undercapitalized; or

• critically undercapitalized

Certain qualitative assessments also are made by a banking institution’s primary federal regulatory agency that could lead the agency to determine that the banking institution should be assigned to a lower capital category than the one indicated by the quantitative measures used to assess the institution’s capital adequacy. At each successive lower capital category, a banking institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency.

The following table sets forth the capital and capital ratios of the Company (on a consolidated basis) and the Bank (on a stand-alone basis) at September 30, 2015, as compared to the respective regulatory requirements applicable to them.

					Applicable Federal Regulatory Requirement
					For Capital Adequacy Purposes			To be Categorized As Well Capital
	Amount		Ratio		Amount		Ratio	Amount		Ratio
	(Dollars in thousands)
Total Capital to Risk Weighted Assets:
Company	$	147,535	17.0	%	$	69,641	At least 8.0	N/A		N/A
Bank	128,943		14.7	%	70,024		At least 8.0	$	87,530	At least 10.0
Common Equity Tier 1 Capital to Risk Weighted Assets:
Company	$	121,084	13.9	%	$	39,173	At least 4.5	N/A		N/A
Bank	117,943		13.5	%	39,389		At least 4.5	$	56,895	At least 6.5
Tier 1 Capital to Risk Weighted Assets:
Company	$	136,595	15.7	%	$	52,231	At least 6.0	N/A		N/A
Bank	117,943		13.5	%	52,518		At least 6.0	$	70,024	At least 8.0
Tier 1 Capital to Average Assets:
Company	$	136,595	12.8	%	$	42,556	At least 4.0	N/A		N/A
Bank	117,943		11.2	%	42,092		At least 4.0	$	52,615	At least 5.0

In early July 2013, the Federal Reserve Board and the FDIC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes.  The rules revise minimum capital requirements and adjust prompt correct action thresholds.  The final rules revise the regulatory capital elements, add a new common equity Tier 1 capital ratio, increase the minimum Tier 1 capital ratio requirement, and implement a new capital conservation buffer.  The rules also permit certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income.  The final rules took effect for community banks on January 1, 2015, subject to a transition period for certain parts of the rules.  At September 30, 2015, the Bank (on a stand-alone basis) continued to qualify as a well-capitalized institution, and the Company continued to exceed the minimum required capital ratios applicable to it, under the capital adequacy guidelines described above.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

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Statements contained in this Quarterly Report on Form 10-Q (this “Report”) that are not historical facts or that discuss our expectations, beliefs or views regarding our future operations or future financial performance, or financial or other trends in our business or in the markets in which we operate, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project,” "forecast," or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” The information contained in such forward-looking statements is based on current information available to us and on assumptions that we make about future economic and market conditions and other events over which we do not have control. In addition, our business and the markets in which we operate are subject to a number of risks and uncertainties. Such risks and uncertainties, and the occurrence of events in the future or changes in circumstances that had not been anticipated, could cause our financial condition or actual operating results in the future to differ materially from our expected financial condition or operating results that are set forth in the forward-looking statements contained in this Report and could, therefore, also affect the price performance of our shares.

In addition to the risk of incurring loan losses, which is an inherent risk of the banking business, these risks and uncertainties include, but are not limited to, the following: the risk that the economic recovery in the United States, which is improving but still relatively fragile, will be adversely affected by domestic or international economic conditions, which could cause us to incur additional loan losses and adversely affect our results of operations in the future; the risk that our interest margins and, therefore, our net interest income will be adversely affected by changes in prevailing interest rates; the risk that we will not succeed in further reducing our remaining nonperforming assets, in which event we would face the prospect of further loan charge-offs and write-downs of assets; the risk that we will not be able to manage our interest rate risks effectively, in which event our operating results could be harmed; the prospect that government regulation of banking and other financial services organizations will increase, causing our costs of doing business to increase and restricting our ability to take advantage of business and growth opportunities; the risk that our efforts to develop a robust commercial banking platform may not succeed; and the risk that we may be unable to realize our expected level of increasing deposit inflows. Additional information regarding these and other risks and uncertainties to which our business is subject is contained in our Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”) that we filed with the Securities and Exchange Commission (“SEC”) on March 13, 2015, and readers of this Report are urged to review the additional information contained in that report, and in any subsequent Quarterly Report on Form 10-Q that we file with the SEC. We urge you to read those risk factors in conjunction with your review of the following discussion and analysis of our results of operations for the three and nine months ended, and our financial condition at, September 30, 2015.

Due to the risks and uncertainties we face, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Report, which speak only as of the date of this Report, or to make predictions about future performance based solely on historical financial performance. We also disclaim any obligation to update forward-looking statements contained in this Report as a result of new information, future events or otherwise, except as may otherwise be required by law.

Overview

The following discussion presents information about our consolidated results of operations, financial condition, liquidity and capital resources and should be read in conjunction with our consolidated financial statements and the notes thereto included in Item 1 above of this Report.

Our principal operating subsidiary is Pacific Mercantile Bank (the “Bank”), which is a California state chartered bank. The Bank accounts for substantially all of our consolidated revenues, expenses and income and our consolidated assets and liabilities. Accordingly, the following discussion focuses primarily on the Bank’s results of operations and financial condition.

As of September 30, 2015, our total assets, net loans and total deposits were $1.1 billion, $817 million and $927 million, respectively.

The Bank, which is headquartered in Orange County, California, approximately 40 miles south of Los Angeles, conducts a commercial banking business in Orange, Los Angeles, San Bernardino and San Diego counties in Southern California. The Bank is also a member of the Federal Reserve System and its deposits are insured, to the maximum extent permitted by law, by the Federal Deposit Insurance Corporation (the “FDIC”). For the nine months ended September 30, 2015 and 2014, we operated as one reportable segment, Commercial Banking, and one non-reportable segment, Discontinued Operations.

Unless the context otherwise requires, the “Company,” “we,” “our,” “ours,” and “us” refer to Pacific Mercantile Bancorp and its consolidated subsidiaries.

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Current Developments

During the first quarter of 2015, the Company made the strategic decision to discontinue its business of funding broker-originated Small Business Administration (“SBA”) loans. The Bank employed a group that was originally hired in May 2012 which focused on originating loans through the SBA 504 and 7(a) lending programs (“SBA Group”). The SBA Group sourced loans through broker relationships, which generally did not result in the Bank having the borrower's full banking relationship. We concluded that the transactional nature of the business model in the SBA Group was not in line with our strategy of transitioning to a relationship-oriented commercial banking model. As a result of this decision, during the first quarter of 2015, we terminated the 15 employees within the SBA Group and we incurred total personnel expense including severance pay of $611 thousand, which is recorded within noninterest expense for the nine months ended September 30, 2015 and will be nonrecurring. We do not expect any additional expenses to be incurred as a result of this decision. The Bank continues to be in good standing with the SBA as a Preferred Lender and we will continue to originate SBA 504 and 7(a) loans through our core relationship banking strategy. We intend to sell the guaranteed portion of the 7(a) loans in the secondary market from time to time.

On August 28, 2015, we entered into an Exchange Agreement (the “Exchange Agreement”) with SBAV, LP, an affiliate of Clinton Group, Inc. (“SBAV”), and Carpenter Community BancFund, L.P. and Carpenter Community BancFund-A, L.P. (together, the “Carpenter Funds”) pursuant to which SBAV and the Carpenter Funds exchanged an aggregate of 112,000 shares of the Company’s Series B Convertible 8.4% Noncumulative Preferred Stock (the “Series B Shares”), 35,225 shares of the Series C 8.4% Noncumulative Preferred Stock (the “Series C Shares”) and warrants to purchase 761,278 shares of the Company’s common stock (the “Warrants”) for an aggregate of 3,009,148 shares of the Company’s common stock (the “Exchange Transaction”). The Series B Shares, Series C Shares and Warrants exchanged by SBAV and the Carpenter Funds in the Exchange Transaction comprised all of the Company’s outstanding shares of preferred stock and warrants to purchase shares of the Company’s common stock. The Exchange Transaction closed on September 30, 2015.

Results of Operations

Discontinued Operations

In connection with our exit from the mortgage banking business described in our 2014 Form 10-K, the revenues and expenses of our mortgage banking division have been classified as discontinued operations for all periods presented. As a result, all comparisons below reflect results from continuing operations. We completed the final wind down of the mortgage banking division during 2014 and had no additional revenue or expense during the nine months ended September 30, 2015.

Operating Results for the Three and Nine Months Ended September 30, 2015 and 2014

Our operating results for the three and nine months ended September 30, 2015, compared to the same periods in September 30, 2014, were as follows:

	Three Months Ended September 30,					2015 vs. 2014 % Change		Nine Months Ended September 30,					2015 vs. 2014 % Change
	2015		2014					2015		2014
								(Dollars in thousands)
Interest income	$	9,653	$	9,664		(0.1	)%	$	28,939	$	28,085		3.0	%
Interest expense	1,342		1,353			(0.8	)%	3,989		4,305			(7.3	)%
Provision for loan and lease losses	—		450			(100.0	)%	—		1,500			(100.0	)%
Non-interest income	562		854			(34.2	)%	2,060		3,017			(31.7	)%
Non-interest expense	8,552		9,029			(5.3	)%	26,635		27,112			(1.8	)%
Net income (loss) from continuing operations	321		(314		)	(202.2	)%	375		(1,815		)	(120.7	)%
Net (loss) income from discontinued operations	—		(71		)	(100.0	)%	—		1,885			(100.0	)%
Net income (loss)	321		(385		)	(183.4	)%	375		70			435.7	%

Interest Income

Three Months Ended September 30, 2015 and 2014

Total interest income remained flat for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014. This was primarily due to a decrease in interest income on loans during the three months ended September 30, 2015 compared to the same prior year period partially offset by an increase in interest income on investments and securities available-for-sale and stock. The decrease in interest income on loans is primarily attributable to a decrease in the

33

average yield on loans for the three months ended September 30, 2015 compared to the prior-year period, partially offset by an increase in the average loan balance for the same period. During the three months ended September 30, 2015 and 2014, interest income on loans was $9.2 million and $9.2 million, respectively, yielding 4.41% and 4.54% on average loan balances of $824.6 million and $802.9 million, respectively. The increase in the average loan balances is attributable to an increase in loan demand. The decrease in loan yield is primarily attributable to the actions of the Federal Reserve Board to keep short-term interest rates low.

During the three months ended September 30, 2015 and 2014, interest income from our securities available-for-sale and stock was $389 thousand and $397 thousand, respectively, yielding 2.42% and 2.26% on average balances of $63.7 million and $69.7 million, respectively. The investment yield increase is primarily due to an increase in the cash dividend paid on our Federal Home Loan Bank of San Francisco (“FHLB”) stock during the third quarter of 2015, partially offset by a decrease in the average securities balance during the same period. The average securities balances decreased as a result of maturities of, and payments on, securities which we did not fully replace. Interest income from our short-term investments, including our federal funds sold and interest-bearing deposits, was $98 thousand and $82 thousand for the three months ended September 30, 2015 and 2014, respectively, in each case, yielding 0.26% on average balances of $148.5 million and $125.6 million, respectively. As a result, total interest income on investments increased slightly for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014.

Nine Months Ended September 30, 2015 and 2014

Total interest income increased 3.0% to $28.9 million for the nine months ended September 30, 2015 from $28.1 million for the nine months ended September 30, 2014, with an average yield on interest-earning assets of 3.77% for the nine months ended September 30, 2015 compared to 3.79% for the nine months ended September 30, 2014. This increase was primarily due to an increase in interest income on loans during the nine months ended September 30, 2015 compared to the same prior year period due to an increase in average loan balances, partially offset by a decline in the average yield on loans over the same period. During the nine months ended September 30, 2015 and 2014, interest income on loans was $27.4 million and $26.6 million, respectively, yielding 4.43% and 4.51% on average loan balances of $825.6 million and $790.1 million, respectively. The increase in the average loan balances is attributable to an increase in loan demand.

During the nine months ended September 30, 2015 and 2014, interest income from our securities available-for-sale and stock was $1.3 million and $1.2 million, respectively, yielding 2.67% and 2.27% on average balances of $66.0 million and $71.8 million, respectively. The investment yield increase is primarily due to our receipt of a cash dividend paid on our FHLB stock during the nine months ended September 30, 2015 and lower premium amortization attributable to slower projected prepayment speeds on our securities available-for-sale, returning our prepayment speed to a more historically normal level as compared to the accelerated prepayment speed seen in the prior year. The average securities balances decreased as a result of maturities of, and payments on, securities which we did not fully replace. Interest income from our short-term investments, including our federal funds sold and interest-bearing deposits, was $258 thousand and $237 thousand for the nine months ended September 30, 2015 and 2014, respectively, yielding 0.26% and 0.24% on average balances of $133.5 million and $129.7 million, respectively. As a result, total interest income on investments increased for the nine months ended September 30, 2015 and 2014.

Interest Expense

Three Months Ended September 30, 2015 and 2014

Total interest expense decreased 0.8% to $1.3 million for the three months ended September 30, 2015 from $1.4 million for the three months ended September 30, 2014. The decrease was primarily due to a decrease in average interest-bearing liabilities from $696.1 million at September 30, 2014 to $688.8 million at September 30, 2015, respectively, in each case with a cost of funds of 0.77%, respectively, which consisted of deposits, borrowings and junior subordinated debentures. The decrease in our interest expense was also partially attributable to the decrease in the cost of our borrowings as a result of our decision to decrease our FHLB borrowings as well as a decrease in the volume of certificates of deposit and a decrease in the rates of interest paid on certificates of deposit. Interest expense on our certificates of deposit for the three months ended September 30, 2015 and 2014 was $697 thousand and $1.1 million, respectively, with a cost of funds of 0.90% and 0.96% on average balances of $308.8 million and $445.1 million, respectively.

Nine Months Ended September 30, 2015 and 2014

Total interest expense decreased 7.3% to $4.0 million for the nine months ended September 30, 2015 from $4.3 million for the nine months ended September 30, 2014. The decrease was primarily due to a decrease in average interest-bearing liabilities from $706.5 million at September 30, 2014 to $694.4 million at September 30, 2015, respectively, with a cost of funds of 0.81% and 0.77%, respectively, which consisted of deposits, borrowings and junior subordinated debentures. The decrease in our interest expense was also partially attributable to the decrease in the cost of our borrowings as a result of our decision to decrease our FHLB borrowings as well as a decrease in the volume of certificates of deposit and a decrease in the rates of interest paid on certificates of deposit. Interest expense on our certificates of deposit for the nine months ended September 30, 2015 and 2014 was

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$2.1 million and $3.1 million, respectively, with a cost of funds of 0.89% and 0.96% on average balances of $314.2 million and $439.5 million, respectively.

Net Interest Margin

One of the principal determinants of a bank’s income is its net interest income, which is the difference between (i) the interest that a bank earns on loans, investment securities and other interest earning assets, on the one hand, and (ii) its interest expense, which consists primarily of the interest it must pay to attract and retain deposits and the interest that it pays on borrowings and other interest-bearing liabilities, on the other hand. As a general rule, all other things being equal, the greater the difference or "spread" between the amount of our interest income and the amount of our interest expense, the greater will be our net income; whereas, a decline in that difference or "spread" will generally result in a decline in our net income.

A bank’s interest income and interest expense are affected by a number of factors, some of which are outside of its control, including national and local economic conditions and the monetary policies of the Federal Reserve Board which affect interest rates, competition in the market place for loans and deposits, the demand for loans and the ability of borrowers to meet their loan payment obligations. Net interest income, when expressed as a percentage of total average interest earning assets, is a banking organization’s “net interest margin.”

The following tables set forth information regarding our average balance sheet, yields on interest earning assets, interest expense on interest-bearing liabilities, the interest rate spread and the interest rate margin for the three and nine months ended September 30, 2015 and 2014. Average balances are calculated based on average daily balances.

	Three Months Ended September 30,
	2015						2014
	Average Balance		Interest Earned/ Paid		Average Yield/ Rate		Average Balance		Interest Earned/ Paid		Average Yield/ Rate
	(Dollars in thousands)
Interest-earning assets
Short-term investments(1)	$	148,454	$	98	0.26	%	$	125,639	$	82	0.26	%
Securities available for sale and stock(2)	63,702		389		2.42	%	69,661		397		2.26	%
Loans(3)	824,596		9,166		4.41	%	802,912		9,185		4.54	%
Total interest-earning assets	1,036,752		9,653		3.69	%	998,212		9,664		3.84	%
Noninterest-earning assets
Cash and due from banks	18,237						12,494
All other assets	10,156						21,435
Total assets	$	1,065,145					$	1,032,141
Interest-bearing liabilities:
Interest-bearing checking accounts	$	35,896	24		0.27	%	$	36,719	25		0.27	%
Money market and savings accounts	300,650		421		0.56	%	149,372		106		0.28	%
Certificates of deposit	308,836		697		0.90	%	445,108		1,073		0.96	%
Other borrowings	25,870		50		0.77	%	47,337		80		0.67	%
Junior subordinated debentures	17,527		150		3.40	%	17,527		69		1.56	%
Total interest bearing liabilities	688,779		1,342		0.77	%	696,063		1,353		0.77	%
Noninterest bearing liabilities
Demand deposits	247,884						208,366
Accrued expenses and other liabilities	6,741						9,698
Shareholders' equity	121,741						118,014
Total liabilities and shareholders' equity	$	1,065,145					$	1,032,141
Net interest income			$	8,311					$	8,311
Net interest income/spread					2.92	%					3.07	%
Net interest margin					3.18	%					3.30	%

(1) Short-term investments consist of federal funds sold and interest bearing deposits that we maintain at other financial institutions.

(2) Stock consists of FHLB stock and Federal Reserve Bank of San Francisco (“FRBSF”) stock.

(3) Loans include the average balance of nonaccrual loans.

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	Nine Months Ended September 30,
	2015						2014
	Average Balance		Interest Earned/ Paid		Average Yield/ Rate		Average Balance		Interest Earned/ Paid		Average Yield/ Rate
	(Dollars in thousands)
Interest-earning assets
Short-term investments(1)	$	133,497	$	258	0.26	%	$	129,665	$	237	0.24	%
Securities available for sale and stock(2)	66,032		1,321		2.67	%	71,760		1,217		2.27	%
Loans(3)	825,583		27,360		4.43	%	790,081		26,631		4.51	%
Total interest-earning assets	1,025,112		28,939		3.77	%	991,506		28,085		3.79	%
Noninterest-earning assets
Cash and due from banks	17,258						12,544
All other assets	10,132						23,666
Total assets	$	1,052,502					$	1,027,716
Interest-bearing liabilities:
Interest-bearing checking accounts	$	36,987	72		0.26	%	$	37,778	74		0.26	%
Money market and savings accounts	294,003		1,245		0.57	%	155,616		357		0.31	%
Certificates of deposit	314,227		2,094		0.89	%	439,473		3,142		0.96	%
Other borrowings	31,611		177		0.75	%	56,107		363		0.87	%
Junior subordinated debentures	17,527		401		3.06	%	17,527		369		2.81	%
Total interest bearing liabilities	694,355		3,989		0.77	%	706,501		4,305		0.81	%
Noninterest bearing liabilities
Demand deposits	230,259						196,603
Accrued expenses and other liabilities	6,676						8,177
Shareholders' equity	121,212						116,435
Total liabilities and shareholders' equity	$	1,052,502					$	1,027,716
Net interest income			$	24,950					$	23,780
Net interest income/spread					3.00	%					2.98	%
Net interest margin					3.25	%					3.21	%

(1) Short-term investments consist of federal funds sold and interest bearing deposits that we maintain at other financial institutions.

(2) Stock consists of FHLB stock and FRBSF stock.

(3) Loans include the average balance of nonaccrual loans.

The following table sets forth changes in interest income, including loan fees, and interest paid in the three and nine months ended September 30, 2015 and 2014 and the extent to which those changes were attributable to changes in (i) the volumes of or the rates of interest earned on interest-earning assets and (ii) the volumes of or the rates of interest paid on our interest-bearing liabilities.

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	Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014 Increase (Decrease) due to Changes in									Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014 Increase (Decrease) due to Changes in
	Volume			Rates			Total Increase (Decrease)			Volume			Rates			Total Increase (Decrease)
	(Dollars in thousands)
Interest income
Short-term investments(1)	$	15		$	1		$	16		$	7		$	14		$	21
Securities available for sale and stock(2)	(35		)	27			(8		)	(103		)	207			104
Loans	245			(264		)	(19		)	1,182			(453		)	729
Total earning assets	225			(236		)	(11		)	1,086			(232		)	854
Interest expense
Interest-bearing checking accounts	(1		)	—			(1		)	(2		)	—			(2		)
Money market and savings accounts	161			154			315			455			433			888
Certificates of deposit	(311		)	(65		)	(376		)	(846		)	(202		)	(1,048		)
Borrowings	(40		)	10			(30		)	(142		)	(44		)	(186		)
Junior subordinated debentures	—			81			81			—			32			32
Total interest-bearing liabilities	(191		)	180			(11		)	(535		)	219			(316		)
Net interest income	$	416		$	(416	)	$	—		$	1,621		$	(451	)	$	1,170

(1) Short-term investments consist of federal funds sold and interest bearing deposits that we maintain at financial institutions.

(2) Stock consists of FHLB stock and FRBSF stock.

Provision for Loan and Lease Losses

We maintain reserves to provide for loan losses that occur in the ordinary course of the banking business. When it is determined that the payment in full of a loan has become unlikely, the carrying value of the loan is reduced ("written down") to what management believes is its realizable value or, if it is determined that a loan no longer has any realizable value, the carrying value of the loan is written off in its entirety (a loan "charge-off"). Loan charge-offs and write-downs are charged against our allowance for loan and lease losses (“ALLL”). The amount of the ALLL is increased periodically to replenish the ALLL after it has been reduced due to loan write-downs or charge-offs. The ALLL also is increased or decreased periodically to reflect increases or decreases in the volume of outstanding loans and to take account of changes in the risk of potential loan losses due to a deterioration or improvement in the condition of borrowers or in the value of properties securing non-performing loans or adverse changes or improvements in economic conditions. Increases in the ALLL are made through a charge, recorded as an expense in the statement of operations, referred to as the "provision for loan and lease losses." Recoveries of loans previously charged-off are added back to and, therefore, to that extent increase the ALLL and reduce the amount of the provision for loan and lease losses that might otherwise have had to be made to replenish or increase the ALLL.

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 we believe need to be made for potential loan losses to increase or replenish the ALLL. However, those determinations involve judgments and assumptions about trends in current economic conditions and other events that can affect the ability of borrowers to meet their loan obligations to us and a weighting among the quantitative and qualitative factors we consider in determining the amount of the ALLL. Moreover, the duration and anticipated effects of prevailing economic conditions or trends can be uncertain and can be affected by a number of risks and circumstances that are outside of our ability to control. If changes in economic or market conditions or unexpected subsequent events or changes in circumstances were to occur, or if changes were made to bank regulatory guidelines or industry standards that are used to assess the sufficiency of the ALLL, it could become necessary for us to record additional, and possibly significant, charges to increase the ALLL, which would have the effect of reducing our income or causing us to incur losses.

In addition, the FRBSF and the California Department of Business Oversight (“CDBO”), as an integral part of their examination processes, periodically review the adequacy of our ALLL. These agencies may require us to make additional provisions for possible loan losses, over and above the provisions that we have already made, the effect of which would be to reduce our income or increase any losses we might incur.

During the three months ended September 30, 2015, we recorded no provision for loan and lease losses, as compared to $450 thousand recorded during the three months ended September 30, 2014. There was no provision for loan and lease losses during the three months ended September 30, 2015 as our loan portfolio decreased by $4.7 million during the three months ended

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September 30, 2015. Taking into account net recoveries of $140 thousand during the three months ended September 30, 2014 and net loan growth of $13.4 million during the same period, our analysis supported a provision of $450 thousand during the three months ended September 30, 2014 in order to maintain the ALLL within the determined range.

During the nine months ended September 30, 2015, we recorded no provision for loan and lease losses, as compared to $1.5 million recorded during the nine months ended September 30, 2014. There was no provision for loan and lease losses during the nine months ended September 30, 2015 as our loan portfolio decreased by $9.4 million during the nine months ended September 30, 2015. Taking into account net recoveries of $312 thousand during the nine months ended September 30, 2014 and net loan growth of $43.3 million during the same period, our analysis supported a provision of $1.5 million during the nine months ended September 30, 2014 in order to maintain the ALLL within the determined range.

See "—Financial Condition—Nonperforming Assets and Allowance for Loan and Lease Losses" below in this Item 2 for additional information regarding the ALLL.

Noninterest Income

The following table identifies the components of and the percentage changes in noninterest income during the three and nine months ended September 30, 2015 and 2014:

	Three Months Ended September 30,						Nine Months Ended September 30,
	Amount		Amount		Percentage Change		Amount		Amount		Percentage Change
	2015		2014		2015 vs. 2014		2015		2014		2015 vs. 2014
							(Dollars in thousands)
Service fees on deposits and other banking services	230		207		11.1	%	676		633		6.8	%
Net gain on sale of small business administration loans	—		257		(100.0	)%	—		1,416		(100.0	)%
Other noninterest income	332		390		(14.9	)%	1,384		968		43.0	%
Total noninterest income	$	562	$	854	(34.2	)%	$	2,060	$	3,017	(31.7	)%

Three Months Ended September 30, 2015 and 2014

Noninterest income decreased by $292 thousand for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014, primarily as a result of a $257 thousand decrease in net gain on sale of SBA loans, partially offset by an increase in loan servicing and referral fees.

Nine Months Ended September 30, 2015 and 2014

Noninterest income decreased$957 thousand, or 31.7%, for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014, primarily as a result of:

• A decrease of $1.4 million in net gain on sale of SBA loans; partially offset by

• A $200 thousand recovery during the nine months ended September 30, 2015 on a charged off loan in excess of the amount previously charged off against the ALLL; and

• An increase in loan servicing and referral fees during the nine months ended September 30, 2015 as compared to the same period in 2014.

Noninterest Expense

The following table sets forth the principal components and the amounts of, and the percentage changes in, noninterest expense during the three and nine months ended September 30, 2015 and 2014.

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	Three Months Ended September 30,						Nine Months Ended September 30,
	2015		2014		2015 vs. 2014		2015		2014		2015 vs. 2014
	Amount		Amount		Percent Change		Amount		Amount		Percent Change
							(Dollars in thousands)
Salaries and employee benefits	$	5,329	$	5,545	(3.9	)%	$	16,659	$	16,568	0.5	%
Occupancy	730		643		13.5	%	2,143		1,841		16.4	%
Equipment and depreciation	408		400		2.0	%	1,231		1,133		8.6	%
Data processing	269		220		22.3	%	760		671		13.3	%
FDIC expense	329		336		(2.1	)%	1,021		989		3.2	%
Other real estate owned expense, net	68		640		(89.4	)%	229		1,698		(86.5	)%
Professional fees	538		439		22.6	%	1,910		1,677		13.9	%
Business development	225		138		63.0	%	617		476		29.6	%
Loan related expense	100		79		26.6	%	338		295		14.6	%
Insurance	87		120		(27.5	)%	263		398		(33.9	)%
Other operating expenses (1)	469		469		—	%	1,464		1,366		7.2	%
Total noninterest expense	$	8,552	$	9,029	(5.3	)%	$	26,635	$	27,112	(1.8	)%

(1) Other operating expenses primarily consist of telephone, investor relations, promotional, regulatory expenses, and correspondent bank fees.

Three Months Ended September 30, 2015 and 2014

Noninterest expense decreased$477 thousand, or 5.3%, for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014, primarily as a result of:

• A decrease of $572 thousand in the carrying costs and other costs associated with real properties acquired by or in lieu of loan foreclosures (commonly referred to as other real estate owned or “OREO”) during the three months ended September 30, 2015 as compared to the same period in 2014; partially offset by

• An increase in various expense accounts related to the normal course of operating, including expenses related to an increase in the square footage of our leased premises, the implementation of our mobile banking platform and the roll out of our new credit card platform.

Nine Months Ended September 30, 2015 and 2014

Noninterest expense decreased$477 thousand, or 1.8%, for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014, primarily as a result of:

• A decrease of $1.5 million in OREO as a result of lower carrying costs and other expenses related to OREO during the nine months ended September 30, 2015 as compared to the same period in 2014; partially offset by

• An increase in various expense accounts related to the normal course of operating, including expenses related to an increase in the square footage of our leased premises, the implementation of our mobile banking platform and the roll out of our new credit card platform.

Provision for Income Tax

For the three and nine months ended September 30, 2015 and the three and nine months ended September 30, 2014, we recorded no income tax provision. Our net deferred tax asset at September 30, 2015 was $5.8 million, net of a valuation allowance of $10.8 million. Based on the analysis performed, and the positive and negative evidence considered, management determined that no increase in the $10.8 million valuation allowance as of September 30, 2015 was needed. Positive evidence included our current period taxable income, improvement in asset quality, tax planning strategies, and economic conditions. Negative evidence included our historical losses over the previous 12 quarter look back period and our accumulated deficit. Management concluded that it was more-likely-than-not that the existing $5.8 million net deferred tax asset would be realized. Our net deferred tax asset at September 30, 2014 was $6.2 million, net of a valuation allowance of $12.2 million. Based on the analysis performed, and the positive and negative evidence considered, management chose not to release any portion of the $12.2 million valuation allowance as of September 30, 2014. Positive evidence included improvement in our asset quality, tax planning strategies, and economic conditions. Negative evidence included historical operating losses and our accumulated deficit. Management determined the negative evidence was significant enough to outweigh the positive evidence and support no reversal of the valuation allowance; however, we did conclude that it was more-likely-than-not that the existing $6.2 million net deferred tax asset at the time would be realized.

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Financial Condition

Assets

Our total assets decreased by $16 million to $1.1 billion at September 30, 2015 from $1.1 billion at December 31, 2014. The following table sets forth the composition of our interest earning assets at:

	September 30, 2015		December 31, 2014
	(Dollars in thousands)
Interest-bearing deposits with financial institutions (1)	$	164,424	$	167,138
Interest-bearing time deposits with financial institutions	4,916		4,668
Federal Reserve Bank of San Francisco and Federal Home Loan Bank Stock, at cost	8,170		8,137
Securities available for sale, at fair value	54,506		60,926
Loans (net of allowances of $12,279 and $13,833, respectively)	816,715		824,197

(1) Includes interest-earning balances maintained at the FRBSF.

Investment Portfolio

Securities Available for Sale. Securities that we intend to hold for an indefinite period of time, but which may be sold in response to changes in liquidity needs, in interest rates, or in prepayment risks or other similar factors, are classified as “securities available for sale”. Such securities are recorded on our balance sheet at their respective fair values and increases or decreases in those values are recorded as unrealized gains or losses, respectively, and are reported as other comprehensive income (loss) on our accompanying consolidated statements of financial condition, rather than included in or deducted from our earnings.

The following is a summary of the major components of securities available for sale and a comparison of the amortized cost, estimated fair values and the gross unrealized gains and losses attributable to those securities, as of September 30, 2015 and December 31, 2014:

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Estimated Fair Value
Securities available for sale at September 30, 2015:
Residential mortgage backed securities issued by U.S. Agencies	$	48,065	$	72	$	(529	)	$	47,608
Residential collateralized mortgage obligations issued by non agencies	686		—		(15		)	671
Asset backed security	2,040		—		(599		)	1,441
Mutual funds	4,750		60		(24		)	4,786
Total securities available for sale	$	55,541	$	132	$	(1,167	)	$	54,506
Securities available for sale at December 31, 2014:
Residential mortgage backed securities issued by U.S. Agencies	$	54,653	$	26	$	(940	)	$	53,739
Residential collateralized mortgage obligations issued by non agencies	790		—		(13		)	777
Asset backed security	2,083		—		(433		)	1,650
Mutual funds	4,750		45		(35		)	4,760
Total securities available for sale	$	62,276	$	71	$	(1,421	)	$	60,926

The amortized cost of securities available for sale at September 30, 2015 is shown in the table 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.

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	September 30, 2015 Maturing in
	One year or less				Over one year through five years				Over five years through ten years				Over ten years				Total
(Dollars in thousands)	Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield
Securities available for sale:
Residential mortgage-backed securities issued by U.S. Agencies	$	8,537	1.46	%	$	23,022	1.47	%	$	13,070	1.52	%	$	3,436	1.63	%	$	48,065	1.49	%
Non-agency collateralized mortgage obligations	—		—		686		2.97	%	—		—		—		—		686		2.97	%
Asset backed securities	—		—		—		—		—		—		2,040		2.52	%	2,040		2.52	%
Mutual funds	—		—		4,750		1.93	%	—		—		—		—		4,750		1.93	%
Total Securities Available for sale	$	8,537	1.46	%	$	28,458	1.58	%	$	13,070	1.52	%	$	5,476	1.96	%	$	55,541	1.59	%

Loans

The following table sets forth the composition, by loan category, of our loan portfolio at September 30, 2015 and December 31, 2014:

	September 30, 2015					December 31, 2014
	Amount			Percent		Amount			Percent
	(Dollars in thousands)
Commercial loans	$	321,696		38.8	%	$	301,746		36.0	%
Commercial real estate loans – owner occupied	197,671			23.9	%	212,515			25.4	%
Commercial real estate loans – all other	137,108			16.5	%	146,676			17.5	%
Residential mortgage loans – multi-family	84,295			10.2	%	95,276			11.4	%
Residential mortgage loans – single family	57,620			7.0	%	64,326			7.7	%
Land development loans	6,908			0.8	%	7,745			0.9	%
Consumer loans	23,313			2.8	%	9,687			1.2	%
Total loans	828,611			100.0	%	837,971			100.0	%
Deferred loan origination costs, net	383					59
Allowance for loan and lease losses	(12,279		)			(13,833		)
Loans, net	$	816,715				$	824,197

Commercial loans are loans to businesses to finance capital purchases or improvements, or to provide cash flow for operations. Commercial real estate and residential mortgage loans are loans secured by trust deeds on real properties, including commercial properties and single family and multi-family residences. Land development loans are loans secured by non-arable bare land. Consumer loans include installment loans to consumers.

The following table sets forth the maturity distribution of our loan portfolio (excluding single and multi-family residential mortgage loans and consumer loans) at September 30, 2015:

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	September 30, 2015
	One Year or Less		Over One Year Through Five Years		Over Five Years		Total
	(Dollars in thousands)
Real estate loans(1)
Floating rate	$	12,268	$	18,586	$	133,488	$	164,342
Fixed rate	29,361		56,078		91,906		177,345
Commercial loans
Floating rate	61,583		19,849		16,174		97,606
Fixed rate	140,694		73,060		10,336		224,090
Total	$	243,906	$	167,573	$	251,904	$	663,383

(1) Does not include mortgage loans on single or multi-family residences or consumer loans, which totaled $141.9 million and $23.3 million, respectively, at September 30, 2015.

Nonperforming Assets and Allowance for Loan and Lease Losses

Nonperforming Assets. Non-performing loans consist of (i) loans on non-accrual status which are loans on which the accrual of interest has been discontinued and include restructured loans when there has not been a history of past performance on debt service in accordance with the contractual terms of the restructured loans, and (ii) loans 90 days or more past due and still accruing interest. Non-performing assets are comprised of non-performing loans and OREO, which consists of real properties which we have acquired by or in lieu of foreclosure and which we intend to offer for sale.

Loans are placed on non-accrual status when, in our opinion, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless we believe the loan is adequately collateralized and the loan is in the process of collection. However, in certain instances, we may place a particular loan on non-accrual status earlier, depending upon the individual circumstances involved in that loan’s delinquency. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of unpaid amounts on such a loan are applied to reduce principal when received, except when the ultimate collectability of principal is probable, in which case such payments are applied to interest and are credited to income. Non-accrual loans may be restored to accrual status if and when principal and interest become current and full repayment is expected. Interest income is recognized on the accrual basis for impaired loans which, based on our non-accrual policy, do not require non-accrual treatment.

The following table sets forth information regarding our nonperforming assets, as well as information regarding restructured loans, at September 30, 2015 and December 31, 2014:

	At September 30, 2015		At December 31, 2014
	(Dollars in thousands)
Nonaccrual loans:
Commercial loans	$	12,149	$	16,182
Commercial real estate	4,282		4,288
Residential real estate	1,155		1,472
Land development	1,640		2,111
Total nonaccrual loans	$	19,226	$	24,053
Loans past due 90 days and still accruing interest:
Total loans past due 90 days and still accruing interest	$	—	$	—
Other real estate owned (OREO):
Residential real estate	962		962
Construction and land development	910		630
Total other real estate owned	$	1,872	$	1,592
Total nonperforming assets	$	21,098	$	25,645
Restructured loans:
Accruing loans	$	7,736	$	11,084
Nonaccruing loans (included in nonaccrual loans above)	14,064		5,935
Total restructured loans	$	21,800	$	17,019

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As the above table indicates, total nonperforming assets decreased by approximately $4.5 million, or 1.8%, to $21.1 million as of September 30, 2015 from $25.6 million as of December 31, 2014, attributable to regular payment amortizations and payoffs and the charge off of loans that were no longer deemed collectible in the ordinary course of business.

Information Regarding Impaired Loans. At September 30, 2015, loans deemed impaired totaled $27.0 million as compared to $35.1 million at December 31, 2014. We had an average investment in impaired loans of $30.0 million for the nine months ended September 30, 2015 as compared to $25.8 million for the nine months ended September 30, 2014. The interest that would have been earned during the nine months ended September 30, 2015 had the nonaccruing impaired loans remained current in accordance with their original terms was approximately $683 thousand.

The following table sets forth the amount of impaired loans to which a portion of the ALLL has been specifically allocated, and the aggregate amount so allocated, in accordance with Accounting Standards Codification (“ASC”) 310-10, and the amount of the ALLL and the amount of impaired loans for which no such allocations were made, in each case at September 30, 2015 and December 31, 2014:

	September 30, 2015						December 31, 2014
	Loans		Reserves for Loan Losses		% of Reserves to Loans		Loans		Reserves for Loan Losses		% of Reserves to Loans
	(Dollars in thousands)
Impaired loans with specific reserves	$	1,640	$	508	31.0	%	$	2,554	$	1,532	60.0	%
Impaired loans without specific reserves	25,322		—		—		32,583		—		—
Total impaired loans	$	26,962	$	508	1.9	%	$	35,137	$	1,532	4.4	%

The $8.2 milliondecrease in impaired loans to $27.0 million at September 30, 2015 from $35.1 million at December 31, 2014 was primarily attributable to paydowns of $12.2 million and net charge-offs of $2.6 million, partially offset by the addition of ten impaired loans, consisting of five commercial loans, four commercial real estate - all other loans and one commercial real estate - owner occupied loan. Accruing restructured loans were comprised of a number of loans performing in accordance with modified terms, which included lowering of interest rates, deferral of payments, or modifications to payment terms. Based on an internal analysis, using the current estimated fair values of the collateral or the discounted present values of the future estimated cash flows of the impaired loans, we concluded that, at September 30, 2015, $508 thousand of specific reserves were required on one impaired loan and that all remaining impaired loans were well secured and adequately collateralized with no specific reserves required.

Allowance for Loan and Lease Losses. The ALLL totaled $12.3 million, representing 1.48% of loans outstanding, at September 30, 2015, as compared to $13.8 million, or 1.65% of loans outstanding, at December 31, 2014.

The adequacy of the ALLL is determined through periodic evaluations of the loan portfolio and other factors that can reasonably be expected to affect the ability of borrowers to meet their loan obligations. Those factors are inherently subjective as the process for determining the adequacy of the ALLL involves some significant estimates and assumptions about such matters such as (i) economic conditions and trends and the amounts and timing of expected future cash flows of borrowers which can affect their ability to meet their loan obligations to us, (ii) the fair value of the collateral securing non-performing loans, (iii) estimates of losses that we may incur on non-performing loans, which are determined on the basis of historical loss experience and industry loss factors and bank regulatory guidelines, which are subject to change, and (iv) various qualitative factors. Since those factors are subject to changes in economic and other conditions and changes in regulatory guidelines or other circumstances over which we have no control, the amount of the ALLL may prove to be insufficient to cover all of the loan losses we might incur in the future. In such an event, it may become necessary for us to increase the ALLL from time to time to maintain its adequacy. Such increases are effectuated by means of a charge to income, referred to as the “provision for loan and lease losses”, in our statements of our operations. See “—Results of Operations— Provision for Loan and Lease Losses, above in this Item 2.

The amount of the ALLL is first determined by assigning reserve ratios for all loans. All non-accrual loans and other loans classified as “Special Mention,” “Substandard” or “Doubtful” (“classified loans” or “classification categories”) and not fully collateralized are then assigned specific reserves within the ALLL, with greater reserve allocations made to loans deemed to be of a higher risk. These ratios are determined based on prior loss history and industry guidelines and loss factors, by type of loan, adjusted for current economic factors and current economic trends. Refer to Note 5, Loans and Allowance for Loan and Lease Losses, in Item 1 for definitions related to our internal asset quality indicators stated above.

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. Our loss migration analysis tracks a certain number of quarters of loan loss history and industry loss factors to determine historical losses by classification category for each loan type, except certain consumer loans

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(automobile, mortgage and credit cards), which are analyzed as homogeneous loan pools. These calculated loss factors are then applied to outstanding loan balances. We analyze impaired loans individually.

In determining whether and the extent to which we will make adjustments to our loan loss migration model for purposes of determining the ALLL, we also consider a number of qualitative factors that can affect the performance and the collectability of the loans in our loan portfolio. Such qualitative factors include:

• The effects of changes that we may make in our loan policies or underwriting standards on the quality of the loans and the risks in our loan portfolios;

• Trends and changes in local, regional and national economic conditions, as well as changes in industry specific conditions, and any other reasonably foreseeable events that could affect the performance or the collectability of the loans in our loan portfolios;

• Material changes that may occur in the mix or in the volume of the loans in our loan portfolios that could alter, whether positively or negatively, the risk profile of those portfolios;

• Changes in management or loan personnel or other circumstances that could, either positively or negatively, impact the application of our loan underwriting standards, the monitoring of nonperforming loans or our loan collection efforts; and

• External factors that, in addition to economic conditions, can affect the ability of borrowers to meet their loan obligations, such as fires, earthquakes and terrorist attacks.

Determining the effects that these qualitative factors may have on the performance of each category of loans in our loan portfolio requires numerous judgments, assumptions and estimates about conditions, trends and events which may subsequently prove to have been incorrect due to circumstances outside of our control. Moreover, the effects of qualitative factors such as these on the performance of our loan portfolios are often difficult to quantify. As a result, we may sustain loan losses in any particular period that are sizable in relation to the ALLL or that may even exceed the ALLL.

In response to the economic recession, we (i) implemented more stringent loan underwriting standards, (ii) strengthened loan underwriting and approval processes, and (iii) added personnel with experience in addressing problem assets.

Set forth below is information regarding loan balances and the related ALLL, by portfolio type, for the nine months ended September 30, 2015 and 2014 (excluding mortgage loans held for sale).

(Dollars in thousands)	Commercial			Real  Estate			Land Development			Consumer and Single Family Mortgages			Total
ALLL for the nine months ended September 30, 2015:
Balance at beginning of year	$	7,670		$	5,133		$	296		$	734		$	13,833
Charge offs	(2,643		)	—			(85		)	(199		)	(2,927		)
Recoveries	1,364			3			—			6			1,373
Provision	(102		)	(571		)	(131		)	804			—
Balance at end of year	$	6,289		$	4,565		$	80		$	1,345		$	12,279
Allowance for loan and lease losses as a percentage of average total loans													1.49		%
Allowance for loan and lease losses as a percentage of total outstanding loans													1.48		%
Ratio of net charge-offs to average loans outstanding (annualized)													0.38		%
ALLL for the nine months ended September 30, 2014:
Balance at beginning of year	$	5,812		$	4,517		$	165		$	864		$	11,358
Charge offs	(303		)	—			—			(102		)	(405		)
Recoveries	559			76			—			82			717
Provision	791			1,075			8			(374		)	1,500
Balance at end of year	$	6,859		$	5,668		$	173		$	470		$	13,170
Allowance for loan and lease losses as a percentage of average total loans													1.67		%
Allowance for loan and lease losses as a percentage of total outstanding loans													1.57		%
Ratio of net charge-offs to average loans outstanding (annualized)													(0.08		)%

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The ALLL decreased$891 thousand from September 30, 2014 to September 30, 2015 primarily as a result of the full and partial charge offs of several loans that largely had specific reserves. These charge offs were partially offset by loss recoveries or additional provisions during the same period. The decrease in the provision for loan and lease losses from September 30, 2014 to September 30, 2015 was primarily a result of improving asset quality evidenced by declining delinquencies, lower levels of classified loans and generally positive asset quality trends which more than offset the portfolio growth.

We classify our loan portfolios using asset quality ratings. The credit quality table in Note 5, Loans and Allowance for Loan and Lease Losses above in Item 1, provides a summary of loans by portfolio type and asset quality ratings as of September 30, 2015 and December 31, 2014. Loans totaled approximately $828.6 million at September 30, 2015, a decrease of $9.4 million from $838.0 million at December 31, 2014. The disaggregation of the loan portfolio by risk rating in the credit quality table located in Note 5 reflects the following changes that occurred between December 31, 2014 and September 30, 2015:

• Loans rated "Pass" totaled $790.5 million, a decrease of $298 thousand from $790.8 million at December 31, 2014. The decrease was primarily attributable to the planned exit of one syndicated loan, downgrades and other paydowns partially offset by new loan growth.

• Loans rated "Special Mention" totaled $9.7 million, an increase of $2.3 million from $7.4 million at December 31, 2014. The increase was primarily the result of the downgrade of five commercial real estate loans and one commercial loan from "Pass", partially offset by the payoff of one commercial loan and the downgrade to "Substandard" of a related multi-family loan.

• Loans rated "Substandard" totaled $28.4 million, a decrease of $9.7 million from $38.2 million at December 31, 2014. This decrease was primarily the result of principal payments of $2.6 million, payoffs of $11.4 million, the foreclosure and transfer to OREO of a $280 thousand land development loan and $825 thousand of loans charged off, partially offset by $5.7 million downgraded from "Pass" and "Special Mention".

• Loans rated "Doubtful" totaled $0, a decrease of $1.6 million from $1.6 million at December 31, 2014. The decrease is attributable to the charge off of one commercial loan of $1.0 million and the write down of $584 thousand on a commercial loan.

Our loss migration analysis currently utilizes a series of twelve staggered 16-quarter migration periods, which was increased during the second quarter of 2015 from four staggered 16-quarter migration periods in order to broaden the loss experience incorporated into the analysis. As a result, for purposes of determining applicable loss factors at September 30, 2015, our migration analysis covered the period from December 1, 2010 to September 30, 2015. We believe this was consistent with and reasonably reflects current economic conditions, portfolio trends and the risks that were inherent in our loan portfolio at September 30, 2015.

The table below sets forth loan delinquencies, by quarter, for the five preceding quarters ended September 30, 2015.

	September 30, 2015		June 30, 2015		March 31, 2015		December 31, 2014		September 30, 2014
Loans Delinquent:	(Dollars in thousands)
90 days or more:
Commercial loans	$	10,383	$	12,132	$	—	$	—	$	303
Commercial real estate	2,579		—		—		2,117		2,117
Residential mortgages	535		763		733		285		244
Land development loans	1,640		1,685		—		364		364
	15,137		14,580		733		2,766		3,028
30-89 days:
Commercial loans	5,346		527		24,143		553		1,079
Commercial real estate	1,255		4,847		891		20		—
Residential mortgages	—		—		181		835		43
Land development loans	—		—		1,717		—		—
Consumer loans	—		—		—		17		—
	6,601		5,374		26,932		1,425		1,122
Total Past Due(1):	$	21,738	$	19,954	$	27,665	$	4,191	$	4,150

(1) Past due balances include nonaccrual loans.

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As the above table indicates, total past due loans increased by $17.5 million, to $21.7 million at September 30, 2015 from $4.2 million at December 31, 2014. Loans past due 90 days or more increased by $12.4 million, to $15.1 million at September 30, 2015, from $2.8 million at December 31, 2014 attributable to the addition of seven loan relationships for $14.0 million, including one loan relationship of $11.2 million, partially offset by payments received on a $1.9 million loan relationship during the nine months ended September 30, 2015 and the foreclosure and transfer to OREO of a $280 thousand nonaccrual land development loan.

Loans 30-89 days past due increased by $5.2 million to $6.6 million at September 30, 2015 from $1.4 million at December 31, 2014 primarily attributable to two loan relationships totaling $6.5 million, which have returned to current status subsequent to September 30, 2015.

Deposits

Average Balances of and Average Interest Rates Paid on Deposits

Set forth below are the average amounts of, and the average rates paid on, deposits for the nine months ended September 30, 2015 and year ended December 31, 2014:

	Nine Months Ended September 30, 2015				Year Ended December 31, 2014
	Average Balance		Average Rate		Average Balance		Average Rate
	(Dollars in thousands)
Noninterest bearing demand deposits	$	230,259	—		$	206,295	—
Interest-bearing checking accounts	36,987		0.26	%	36,281		0.28	%
Money market and savings deposits	294,003		0.57	%	170,047		0.34	%
Time deposits(1)	314,227		0.89	%	431,789		0.96	%
Total deposits	$	875,476	0.52	%	$	844,412	0.57	%

(1) Comprised of time certificates of deposit in denominations of less than and more than $100,000.

Deposit Totals

Deposits totaled $927.3 million at September 30, 2015 as compared to $916.3 million at December 31, 2014. The following table provides information regarding the mix of our deposits at September 30, 2015 and December 31, 2014:

	At September 30, 2015				At December 31, 2014
	Amounts		% of Total Deposits		Amounts		% of Total Deposits
	(Dollars in thousands)
Deposits
Noninterest bearing demand deposits	$	262,508	28.4	%	$	237,491	25.9	%
Savings and other interest-bearing transaction deposits	366,282		39.5	%	318,096		34.7	%
Time deposits(1)	298,522		32.2	%	360,722		39.4	%
Total deposits	$	927,312	100.0	%	$	916,309	100.0	%

(1) Comprised of time certificates of deposit in denominations of less than and more than $100,000.

Certificates of deposit in denominations of $100,000 or more, on which we pay higher rates of interest than on other deposits, aggregated $261.8 million, or 28.2%, of total deposits at September 30, 2015, as compared to $315.0 million, or 34.4%, of total deposits at December 31, 2014.

Set forth below is a maturity schedule of domestic time certificates of deposit outstanding at September 30, 2015 and December 31, 2014:

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	September 30, 2015				December 31, 2014
Maturities	Certificates of Deposit Under $ 100,000		Certificates of Deposit $100,000 or more		Certificates of Deposit Under $100,000		Certificates of Deposit $100,000 or more
	(Dollars in thousands)
Three months or less	$	6,860	$	59,275	$	16,841	$	118,302
Over three and through six months	14,051		108,791		6,740		29,933
Over six and through twelve months	11,055		68,577		13,707		96,507
Over twelve months	4,717		25,196		8,433		70,259
Total	$	36,683	$	261,839	$	45,721	$	315,001

Liquidity

We actively manage our liquidity needs to ensure that sufficient funds are available to meet our needs for cash, including to fund new loans and deposit withdrawals by our customers. We project the future sources and uses of funds and maintain liquid funds for unanticipated events. Our primary sources of cash include cash we have on deposit at other financial institutions, payments from borrowers on their loans, proceeds from sales or maturities of securities held for sale, sales of residential mortgage loans, increases in deposits and increases in borrowings principally from the FHLB. The primary uses of cash include funding new loans and making advances on existing lines of credit, purchasing investments, including securities available for sale, funding new residential mortgage loans, funding deposit withdrawals and paying operating expenses. We maintain funds in overnight federal funds and other short-term investments to provide for short-term liquidity needs. We also have obtained credit lines from the FHLB and other financial institutions to meet any additional liquidity requirements we might have. See "—Contractual Obligations—Borrowings" below for additional information related to our borrowings from the FHLB.

Our liquid assets, which included cash and due from banks, federal funds sold, interest earning deposits that we maintain with financial institutions and unpledged securities available for sale (excluding FRBSF and FHLB stock) totaled $220.5 million, which represented 20% of total assets, at September 30, 2015. We believe that our cash and cash equivalent resources, together with available borrowings under our credit facilities, will be sufficient to meet normal operating requirements for at least the next twelve months, including to enable us to meet any increase in deposit withdrawals that might occur in the foreseeable future.

Cash Flow Provided by Operating Activities. During the nine months ended September 30, 2015, operating activities provided net cash of $1.7 million, primarily attributable to our net income of $375 thousand and adjusting for our $1.0 million of stock based compensation expense. During the nine months ended September 30, 2014, operating activities provided net cash of $9.8 million, comprised primarily of $8.7 million provided by our discontinued operations and our net income of $70 thousand.

Cash Flow Provided by (Used in) Investing Activities. During the nine months ended September 30, 2015, investing activities provided cash of $15.4 million, primarily comprised of $6.5 million of cash from maturities of and principal payments on securities available for sale, $2.1 million of cash from principal payments on other investments and $7.6 million provided by paydowns in loans. During the nine months ended September 30, 2014, investing activities used net cash of $28.4 million, primarily attributable to $48.1 million used to fund an increase in loans, partially offset by $7.5 million of cash from maturities and principal payments on securities available for sale and $13.4 million from sale of OREO.

Cash Flow (Used in) Provided by Financing Activities. During the nine months ended September 30, 2015, financing activities used net cash of $17.5 million, consisting primarily of a $29.5 million decrease in borrowings and a $14.0 million net decrease in interest bearing deposits, which resulted primarily from a decision to decrease the rates of interest we pay on our certificates of deposit in order to increase our loan-to-deposit ratio and decrease our cost of funds, partially offset by an increase in our noninterest bearing deposits of $25.0 million. During the nine months ended September 30, 2014, financing activities provided net cash of $77.2 million, consisting primarily of a $99.2 million net increase in interest bearing deposits, which resulted primarily from a decision to increase the rates of interest we pay on our certificates of deposit in order to decrease our loan-to-deposit ratio and increase our liquidity, and an increase in noninterest bearing deposits of $3.0 million, partially offset by a $25.5 million decrease in borrowings.

Ratio of Loans to Deposits. The relationship between gross loans and total deposits can provide a useful measure of a bank’s liquidity. Since repayment of loans tends to be less predictable than the maturity of investments and other liquid resources, the higher the loan-to-deposit ratio the less liquid are our assets. On the other hand, since we realize greater yields on loans than we do on investments, a lower loan-to-deposit ratio can adversely affect interest income and earnings. As a result, our goal is to achieve a loan-to-deposit ratio that appropriately balances the requirements of liquidity and the need to generate a fair return on our assets. At September 30, 2015 and December 31, 2014, the loan-to-deposit ratio was 89% and 91%, respectively.

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Capital Resources

Regulatory Capital Requirements Applicable to Banking Institutions

Under federal banking regulations that apply to all United States based bank holding companies and federally insured banks, the Company (on a consolidated basis) and the Bank (on a stand-alone basis) must meet specific capital adequacy requirements that, for the most part, involve quantitative measures, primarily in terms of the ratios of their capital to their assets, liabilities, and certain off-balance sheet items, calculated under regulatory accounting practices. Under those regulations, each bank holding company must meet a minimum capital ratio and each federally insured bank is determined by its primary federal bank regulatory agency to come within one of the following capital adequacy categories on the basis of its capital ratios:

• well capitalized

• adequately capitalized

• undercapitalized

• significantly undercapitalized; or

• critically undercapitalized

Certain qualitative assessments also are made by a banking institution’s primary federal regulatory agency that could lead the agency to determine that the banking institution should be assigned to a lower capital category than the one indicated by the quantitative measures used to assess the institution’s capital adequacy. At each successive lower capital category, a banking institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency.

The following table sets forth the capital and capital ratios of the Company (on a consolidated basis) and the Bank (on a stand-alone basis) at September 30, 2015, as compared to the respective regulatory requirements applicable to them.

					Applicable Federal Regulatory Requirement
					For Capital Adequacy Purposes			To be Categorized As Well Capital
	Amount		Ratio		Amount		Ratio	Amount		Ratio
	(Dollars in thousands)
Total Capital to Risk Weighted Assets:
Company	$	147,535	17.0	%	$	69,641	At least 8.0	N/A		N/A
Bank	128,943		14.7	%	70,024		At least 8.0	$	87,530	At least 10.0
Common Equity Tier 1 Capital to Risk Weighted Assets:
Company	$	121,084	13.9	%	$	39,173	At least 4.5	N/A		N/A
Bank	117,943		13.5	%	39,389		At least 4.5	$	56,895	At least 6.5
Tier 1 Capital to Risk Weighted Assets:
Company	$	136,595	15.7	%	$	52,231	At least 6.0	N/A		N/A
Bank	117,943		13.5	%	52,518		At least 6.0	$	70,024	At least 8.0
Tier 1 Capital to Average Assets:
Company	$	136,595	12.8	%	$	42,556	At least 4.0	N/A		N/A
Bank	117,943		11.2	%	42,092		At least 4.0	$	52,615	At least 5.0

In early July 2013, the Federal Reserve Board and the FDIC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes.  The rules revise minimum capital requirements and adjust prompt correct action thresholds.  The final rules revise the regulatory capital elements, add a new common equity Tier 1 capital ratio, increase the minimum Tier 1 capital ratio requirement, and implement a new capital conservation buffer.  The rules also permit certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income.  The final rules took effect for community banks on January 1, 2015, subject to a transition period for certain parts of the rules.  At September 30, 2015 the Bank (on a stand-alone basis) continued to qualify as a well-capitalized institution, and the Company continued to exceed the minimum required capital ratios applicable to it, under the capital adequacy guidelines described above.

The consolidated total capital and Tier 1 capital of the Company at September 30, 2015 includes an aggregate of $17.0 million principal amount of the $17.5 million of 30-year junior subordinated debentures that we issued in 2002 and 2004 (the “Debentures”). See “—Contractual Obligations—Junior Subordinated Debentures” below for additional information. We contributed the net proceeds from the sales of the Debentures to the Bank, thereby providing it with additional cash to fund the growth of its banking operations and, at the same time, to increase its total capital and Tier 1 capital.

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Quarterly interest payments on the Debentures require prior approval of the FRBSF. As of September 30, 2015, we were current on all interest payments.

Dividend Policy and Share Repurchase Programs.

It is, and since the beginning of 2009 it has been, the policy of the Boards of Directors of the Company and the Bank to preserve cash to enhance our capital positions and the Bank's liquidity. Accordingly, we do not expect to pay dividends or make share repurchases for the foreseeable future.

The principal source of cash available to a bank holding company consists of cash dividends from its bank subsidiaries. There are currently several restrictions on the Bank’s ability to pay us cash dividends. Government regulations, including the laws of the State of California, as they pertain to the payment of cash dividends by California state chartered banks, limits the amount of funds that the Bank is permitted to dividend to us. Further, Section 23(a) of the Federal Reserve Act limits the amounts that a bank may loan to its bank holding company to an aggregate of no more than 10% of the bank subsidiary’s capital surplus and retained earnings and requires that such loans be secured by specified assets of the bank holding company. See Note 14, Shareholders’ Equity, in the notes to our consolidated financial statements included in our 2014 Form 10-K for more detail regarding the restrictions on dividends and inter-company transactions. While restrictions on the payment of dividends from the Bank to us exist, there are no restrictions on the dividends that PM Asset Resolution, Inc. (“PMAR”), our wholly owned subsidiary, may pay us. PMAR has approximately $15.2 million in assets and could provide us with additional cash if required. In addition, we currently have sufficient cash on hand to meet our cash obligations. As a result, we do not expect that these restrictions will impact our ability to meet our cash obligations.

Off Balance Sheet Arrangements

Loan Commitments and Standby Letters of Credit. To meet the financing needs of our customers in the normal course of business, we are a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. At September 30, 2015 and December 31, 2014, we were committed to fund certain loans including letters of credit amounting to approximately $226 million and $148 million, respectively.

Commitments to extend credit and standby letters of credit generally have fixed expiration dates or other termination clauses and the customer may be required to pay a fee and meet other conditions in order to draw on those commitments or standby letters of credit. We expect, based on historical experience, that many of the commitments will expire without being drawn upon and, therefore, the total commitment amounts do not necessarily represent future cash requirements.

To varying degrees, commitments to extend credit involve elements of credit and interest rate risk for us that are in excess of the amounts recognized in our balance sheets. Our maximum exposure to credit loss in the event of nonperformance by the customers to whom such commitments are made could potentially be equal to the amount of those commitments. As a result, before making such a commitment to a customer, we evaluate the customer’s creditworthiness using the same underwriting standards that we would apply if we were approving loans to the customer. In addition, we often require the customer to secure its payment obligations for amounts drawn on such commitments with collateral such as accounts receivable, inventory, property, plant and equipment, income-producing commercial properties, residential properties and properties under construction. As a consequence, our exposure to credit and interest rate risk on such commitments is not different in character or amount than risks inherent in the outstanding loans in our loan portfolio.

Standby letters of credit are conditional commitments issued by the Bank to guarantee a payment obligation of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.

Contractual Obligations

Borrowings. As of September 30, 2015, we had $10.0 million of outstanding short-term borrowings that we had obtained from the FHLB. The table below sets forth the amounts of, the interest rates we pay on and the maturity dates of these FHLB borrowings. These borrowings had a weighted-average annualized interest rate of 1.02% for the nine months ended September 30, 2015.

Principal Amounts		Interest Rate		Maturity Dates
(Dollars in thousands)
$	5,000	1.08	%	September 19, 2016
5,000		0.96	%	September 30, 2016

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At September 30, 2015, $548 million of loans were pledged to secure these FHLB borrowings and to support our unfunded borrowing capacity. At September 30, 2015, we had unused borrowing capacity of $261 million with the FHLB.

The highest amount of borrowings outstanding at any month-end during the three months ended September 30, 2015 was $39.5 million, which consisted of borrowings from the FHLB. By comparison, the highest amount of borrowings outstanding at any month end in 2014 consisted of $70 million of borrowings from the FHLB.

Junior Subordinated Debentures. Pursuant to rulings of the Federal Reserve Board, bank holding companies were permitted to issue long term subordinated debt instruments that, subject to certain conditions, would qualify as and, therefore, augment capital for regulatory purposes. At September 30, 2015, we had outstanding approximately $17.5 million principal amount of Debentures, of which $17.0 million qualified as additional Tier 1 capital for regulatory purposes as of September 30, 2015.

Set forth below is certain information regarding the Debentures:

Original Issue Dates	Principal Amount		Interest Rates	Maturity Dates
September 2002	$	7,217	LIBOR plus 3.40%	September 2032
October 2004	10,310		LIBOR plus 2.00%	October 2034
Total	$	17,527

(1) Subject to the receipt of prior regulatory approval, we may redeem the Debentures, in whole or in part, without premium or penalty, at any time prior to maturity.

These Debentures require quarterly interest payments, which are used to make quarterly distributions required to be paid on the corresponding trust preferred securities. Subject to certain conditions, we have the right, at our discretion, to defer those interest payments, and the corresponding distributions on the trust preferred securities, for up to five years. Exercise of this deferral right does not constitute a default of our obligations to pay the interest on the Debentures or the corresponding distributions that are payable on the trust preferred securities. As of September 30, 2015, we were current on all interest payments.

Credit Risk

Credit risk is the risk of loss arising from adverse changes in a client’s or counterparty’s ability to meet its financial obligations under agreed-upon terms. Credit risk primarily exists in our loan and investment portfolio. The degree of credit risk will vary based on many factors including the duration of the transaction, the financial capacity of the client, the contractual terms of the agreement and the availability and quality of collateral. We manage credit risk by limiting the total amount of credit extended to a single borrower relationship, by verification of its business operations and assets and with a thorough understanding of the nature and scope of the business activities in which they are engaged.

As appropriate, management and Board level committees evaluate and approve credit standards and oversee the credit risk management function related to loans and investments. These committees’ primary responsibilities include ensuring the adequacy of our credit risk management infrastructure, overseeing credit risk management strategies and methodologies, monitoring economic and market conditions that may impact our credit-related activities, and finally, evaluating and monitoring overall portfolio credit risk.

We maintain a comprehensive credit policy that includes specific underwriting guidelines as well as standards for loan origination and reporting as well as portfolio management. The credit policy is developed by credit management and approved by the Board of Directors, which also reviews it at least annually. In addition, the credit policy sets forth requirements that ensure compliance with all applicable laws and regulatory guidance.

Our underwriting guidelines outline specific standards and risk management criteria for each lending product offered. Loan types are further segmented into subsections where the inherent credit risk warrants detailed transaction and monitoring parameters, as follows:

• Loan structures, which includes the lien priority, amortization terms and loan tenors;

• Collateral requirements, coverage margins and valuation methods;

• Underwriting considerations which include recommended due diligence and verification requirements; and

• Specific credit performance standards. Examples include minimum debt service coverage ratios, liquidity requirements as well as limits on financial leverage.

We measure and document each loan’s compliance with our policy criteria at underwriting. If an exception to these criteria exists, an explanation of the factors that mitigate this additional risk is considered before an approval is granted. A report of loans with policy exceptions is reported to the Credit Policy Committee of the Board of Directors of the Bank on a monthly basis.

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We continuously monitor a client’s ability to perform under its obligations. Reporting requirements and loan covenants are set forth in each loan approval and compliance with these items are monitored on at least an annual basis or more frequently as conditions warrant. Loan covenant compliance is tracked and results are reported to credit management.

Under our credit risk management structure, each loan is assigned an internal asset quality rating that is based on defined credit standards. While the criteria may vary by product, each rating focuses on the borrower’s inherent operating risks, the quality of management, historical financial performance, financial capacity, the stability of profits and cash flow, and the adequacy of the secondary repayment sources. Asset quality ratings for each loan are monitored and reassessed on an ongoing basis. If necessary, ratings are adjusted to reflect changes in the client’s financial condition, cash flow or financial position. Regular reporting to management and the Board includes the aggregated portfolio exposure by asset quality rating as one measure of credit risk within the loan portfolio. Refer to “Financial Condition — Allowance for Loan and Lease Losses” above in this Item 2 for further detail regarding our internal asset quality ratings.

The Bank recognizes that substantial risks are posed by concentrations of credit assets. As such, it maintains a diversified loan portfolio by limiting exposures by loan structure, business type or purpose, collateral type, and perceived asset quality. Credit management defines areas of concentration, recommends appropriate thresholds to the Board of Directors and takes action if needed to manage potential risk where asset concentrations exist.

Market Risk

Market risk is the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions such as interest rate fluctuations. This risk is inherent in the financial instruments associated with our operations and/or activities, including loans, securities and short-term borrowings.

The primary market risk to which we are exposed is interest rate risk, which is inherent in the financial instruments associated with our operations, primarily including our loans, deposits and borrowings. Interest rate risk is the exposure of a company’s financial condition, both earnings and the market value of assets and liabilities, to adverse movements in interest rates. Interest rate risk results from differences in the maturity or timing of interest earning assets and interest bearing liabilities, changes in the slope of the yield curve over time, imperfect correlation in the adjustment of rates earned and paid on different instruments with otherwise similar characteristics (e.g. three-month Treasury bill versus three-month LIBOR) and from interest-rate-related options embedded in bank products (e.g. loan prepayments, floors and caps, callable investment securities, customers redeploying non-interest bearing to interest bearing deposits, etc.).

The potential impact of interest rate risk is significant because of the liquidity and capital adequacy consequences that reduced earnings or net operating losses caused by a reduction in net interest income imply. We recognize and accept that interest rate risk is a routine part of bank operations and will from time to time impact our profits and capital position. The objective of interest rate risk management is to control exposure of net interest income to risks associated with interest rate movements in the market, to achieve consistent growth in net interest income and to profit from favorable market opportunities.

We measure interest rate risk and the effect of changes in market interest rates using a net interest income simulation analysis. The analysis incorporates our balance sheet as of September 30, 2015 and assumptions that reflect the current interest rate environment. The analysis estimates the interest rate impact of a parallel increase in interest rates over a twelve-month horizon.

The analysis below incorporates our assumptions for the market yield curve, pricing sensitivities on loans and deposits, reinvestment of asset and liability cash flows, and prepayments on loans and securities. The new loans, investment securities, borrowings and deposits are assumed to have interest rates that reflect our forecast of prevailing market terms. We also assumed that LIBOR and prime rates do not fall below 0% for loans and borrowings. FHLB borrowings are assumed to convert to cash as they run off. Actual results may differ from forecasted results due to changes in market conditions as well as changes in management strategies.

The estimated changes in net interest income for a twelve-month period based on changes in the interest rates applied as of September 30, 2015 were as follows:

Change in Market Interest Rates (basis points)	Amount ($)			Percent (%)
	(in thousands)
+200	$	2,877		8.76	%
+100	949			2.89	%
-100	(112		)	(0.34	)%

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In addition to NII simulation, we measure the impact of market interest rate changes on our economic value of equity (“EVE”). EVE is defined as the net present value of assets, less the net present value of liabilities, adjusted for any off-balance sheet items.

The estimated changes in EVE in the following table are based on a discounted cash flow analysis which incorporates the impacts of changes in market interest rates. The model simulations and calculations are highly assumption-dependent and will change regularly as our asset/liability structure changes, as interest rate environments evolve, and as we change our assumptions in response to relevant market or business circumstances. These calculations do not reflect the changes that we anticipate or may make to reduce our EVE exposure in response to a change in market interest rates as part of our overall interest rate risk management strategy. As with any method of measuring interest rate risk, certain limitations are inherent in the method of analysis presented in the preceding table. We are exposed to yield curve risk, prepayment risk and basis risk, which cannot be fully modeled and expressed using the above methodology. Accordingly, the results in the following table should not be relied upon as a precise indicator of actual results in the event of changing market interest rates. Additionally, the resulting changes in EVE and NII estimates are not intended to represent, and should not be construed to represent the underlying value.

The estimated changes in EVE based on interest rates applied as of September 30, 2015 were as follows:

Change in Market Interest Rates (basis points)	Amount ($)			Percent (%)
	(in thousands)
+200	$	9,302		7.01	%
+100	5,360			4.04	%
-100	(2,121		)	(1.60	)%

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and general practices in the banking industry. Certain of those accounting policies are considered critical accounting policies, because they require us to make assumptions and judgments regarding circumstances or trends that could affect the carrying value of our material assets, such as, for example, assumptions regarding economic conditions or trends that could impact our ability to fully collect our loans or ultimately realize the carrying value of certain of our other assets, such as securities available for sale and our deferred tax asset. Those assumptions and judgments are based on current information available to us regarding those economic conditions or trends or other circumstances. If adverse changes were to occur in the conditions, trends or other events on which our assumptions or judgments had been based, then under GAAP it could become necessary for us to reduce the carrying values of any affected assets on our balance sheet. In addition, because reductions in the carrying value of assets are sometimes effectuated by or require charges to income, such reductions also may have the effect of reducing our income.

There have been no significant changes during the nine months ended September 30, 2015 to the items that we disclosed as our critical accounting policies and estimates in Critical Accounting Policies within Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2014 Form 10-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain financial risks, which are discussed in detail in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Credit Risk and Market Risk sections.

ITEM 4.     CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of

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achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC rules, an evaluation was performed under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness, as of September 30, 2015, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2015, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are subject to legal actions that arise from time to time in the ordinary course of our business. Currently, neither we nor any of our subsidiaries is a party to, and none of our or our subsidiaries' property is the subject of, any material legal proceeding.

ITEM 1A. RISK FACTORS

There have been no material changes in our assessment of our risk factors from those set forth in our 2014 Form 10-K.

ITEM 6. EXHIBITS

(a) Exhibits

The Index to Exhibits attached hereto is incorporated by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 6, 2015.

PACIFIC MERCANTILE BANCORP
By:	/S/   STEVEN K. BUSTER
	Steven K. Buster
	President and Chief Executive Officer
	(Principal Executive Officer)

PACIFIC MERCANTILE BANCORP
By:	/S/   CURT A. CHRISTIANSSEN
	Curt A. Christianssen
	Chief Financial Officer
	(Principal Financial Officer)

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EXHIBIT INDEX

Exhibit No.	Description of Exhibit
3.1	Articles of Incorporation of Pacific Mercantile Bancorp (Incorporated by reference to the same numbered exhibit to the Company's Registration Statement (No. 333-33452) on Form S-1 filed with the Commission on June 14, 2000.)
3.2	Certificate of Amendment of Articles of Incorporation of Pacific Mercantile Bancorp (Incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q dated August 14, 2001.)
3.3	Certificate of Amendment of Articles of Incorporation of Pacific Mercantile Bancorp (Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K dated January 26, 2012 and filed with the Commission on February 1, 2012.)
3.4	Certificate of Determination of Rights, Preferences, Privileges and Restrictions of Series A Convertible 10% Cumulative Preferred Stock of Pacific Mercantile Bancorp. (Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (No. 000-30777) dated October 6, 2010.)
3.5	Certificate of Amendment of Certificate of Determination of Rights, Preferences, Privileges and Restrictions of the Series A Convertible 10% Cumulative Preferred Stock of Pacific Mercantile Bancorp. (Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K dated January 26, 2012 and filed with the Commission on February 1, 2012.)
3.6	Certificate of Determination of Rights, Preferences, Privileges and Restrictions of the Series B Convertible 8.4% Noncumulative Preferred Stock of Pacific Mercantile Bancorp. (Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (No. 000-30777) dated August 22, 2011.)
3.7	Certificate of Determination of Rights, Preferences, Privileges and Restrictions of the Series C 8.4% Noncumulative Preferred Stock of Pacific Mercantile Bancorp. (Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K (No. 000-30777) dated August 22, 2011.)
3.8	Pacific Mercantile Bancorp Bylaws, Amended and Restated as of January 22, 2014. (Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K (No. 000-30777) dated January 22, 2014.)
10.1	Exchange Agreement, dated as of August 28, 2015, by and among Pacific Mercantile Bancorp, SBAV, LP, Carpenter Community BancFund, L.P. and Carpenter Community BancFund-A, L.P. (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (No. 000-30777) dated August 28, 2015.
10.2	Registration Rights Agreement, dated as of August 28, 2015, by and among Pacific Mercantile Bancorp, SBAV, LP, Carpenter Community BancFund, L.P. and Carpenter Community BancFund-A, L.P. (Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (No. 000-30777) dated August 28, 2015.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101.INS	XBRL Instance Document
Exhibit 101.SCH	XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB	XBRL Taxonomy Extension Labels Linkbase Document
Exhibit 101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

** Furnished herewith.

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