0001628280-18-011991.txt : 20180920 0001628280-18-011991.hdr.sgml : 20180920 20180920163249 ACCESSION NUMBER: 0001628280-18-011991 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 79 CONFORMED PERIOD OF REPORT: 20180630 FILED AS OF DATE: 20180920 DATE AS OF CHANGE: 20180920 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFIC CITY FINANCIAL CORP CENTRAL INDEX KEY: 0001423869 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 000000000 STATE OF INCORPORATION: CA FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38621 FILM NUMBER: 181079759 BUSINESS ADDRESS: STREET 1: 3701 WILSHIRE BLVD STREET 2: SUITE 900 CITY: LOS ANGELES STATE: CA ZIP: 90010 BUSINESS PHONE: 213-210-2000 MAIL ADDRESS: STREET 1: 3701 WILSHIRE BLVD STREET 2: SUITE 900 CITY: LOS ANGELES STATE: CA ZIP: 90010 10-Q 1 pcb10q20180630.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
or
¨ 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 001-38621
PACIFIC CITY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of
incorporation or organization)
20-8856755
(IRS Employer Identification No.)
 
 
3701 Wilshire Boulevard, Suite 900
Los Angeles, California
(Address of principal executive offices)
90010
(Zip Code)
 
 
(213) 210-2000
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
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 ¨ No x
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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
Accelerated filer
¨
Non-accelerated filer
x
(Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨ No x
As of September 13, 2018, the registrant had outstanding 15,968,515 shares of common stock.





Pacific City Financial Corporation and Subsidiary
Quarterly Report on Form 10-Q
June 30, 2018
Table of Contents
Part I - Financial Information
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II - Other Information
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 



2



Forward-looking Statements
This prospectus contains forward-looking statements which reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as "may," "might," "should," "could," "predict," "potential," "believe," "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "projection," "goal," "target," "outlook," "aim," "would," "annualized" and "outlook," or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including those factors identified in "Risk Factors" or "Management’s Discussion and Analysis of Financial Condition and Results of Operations" or the following:
business and economic conditions, particularly those affecting the financial services industry and our primary market areas;
our ability to successfully manage our credit risk and the sufficiency of our allowance for loan loss;
factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers and the success of construction projects that we finance, including any loans acquired in acquisition transactions;
governmental monetary and fiscal policies, and changes in market interest rates;
compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities and tax matters;
the significant portion of our loan portfolio that is comprised of real estate loans;
our ability to attract and retain Korean-American customers;
our ability to identify and address cyber-security risks, fraud and systems errors;
our ability to effectively execute our strategic plan and manage our growth;
changes in our senior management team and our ability to attract, motivate and retain qualified personnel;
liquidity issues, including fluctuations in the fair value and liquidity of the securities we hold for sale and our ability to raise additional capital, if necessary;
costs and obligations associated with operating as a public company;
effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;
the impact of any claims or legal actions to which we may be subject, including any effect on our reputation; and
changes in federal tax law or policy.
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this prospectus. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this prospectus. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is initially made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.


3



Part I - Financial Information
Item 1 - Financial Statements

Pacific City Financial Corporation and Subsidiary
Consolidated Balance Sheets
(in thousands, except share data)
 
 
(Unaudited)
 
 
 
 
June 30, 2018
 
December 31, 2017
Assets
 
 
 
 
Cash and due from banks
 
$
33,800

 
$
16,662

Interest-bearing deposits in other financial institutions
 
134,846

 
56,996

Total cash and cash equivalents
 
168,646

 
73,658

Securities available-for-sale, at fair value
 
132,106

 
129,689

Securities held-to-maturity, at amortized cost (fair value of $19,745 at June 30, 2018 and $20,997 at December 31, 2017)
 
20,390

 
21,070

Total investment securities
 
152,496

 
150,759

Loans held-for-sale
 
20,331

 
5,297

Loans held-for-investment, net of deferred loan costs (fees)
 
1,254,856

 
1,189,999

Allowance for loan losses
 
(12,621
)
 
(12,224
)
Net loans held-for-investment
 
1,242,235

 
1,177,775

Premises and equipment, net
 
4,892

 
4,723

Federal Home Loan Bank and other restricted stock, at cost
 
7,433

 
6,589

Other real estate owned, net
 

 
99

Deferred tax assets, net
 
4,360

 
3,847

Servicing assets
 
8,390

 
8,973

Accrued interest receivable and other assets
 
10,386

 
10,279

Total assets
 
$
1,619,169

 
$
1,441,999

Liabilities and Shareholders’ Equity
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing demand
 
$
347,342

 
$
319,026

Savings, NOW and money market accounts
 
282,796

 
317,878

Time deposits under $250,000
 
445,553

 
347,774

Time deposits $250,000 and over
 
351,554

 
266,612

Total deposits
 
1,427,245

 
1,251,290

Borrowings from Federal Home Loan Bank
 
30,000

 
40,000

Accrued interest payable and other liabilities
 
10,493

 
8,525

Total liabilities
 
1,467,738

 
1,299,815

Commitments and contingent liabilities
 

 

Preferred stock, 10,000,000 shares authorized, no par value, 0 issued and outstanding shares
 

 

Common stock, 60,000,000 shares authorized, no par value; issued and outstanding 13,435,214 shares at June 30, 2018 and 13,417,899 at December 31, 2017
 
125,579

 
125,430

Additional paid-in capital
 
3,206

 
2,941

Retained earnings
 
25,258

 
15,036

Accumulated other comprehensive loss, net
 
(2,612
)
 
(1,223
)
Total shareholders’ equity
 
151,431

 
142,184

Total liabilities and shareholders’ equity
 
$
1,619,169

 
$
1,441,999

 
 
 
 
 
See Accompanying Notes to Consolidated Financial Statements (Unaudited)

4



Pacific City Financial Corporation and Subsidiary
Consolidated Statements of Income (Unaudited)
(in thousands, except share and per share data)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
 
Interest and fees on loans
 
$
18,610

 
$
14,807

 
$
36,050

 
$
28,684

Interest on tax-exempt investment securities
 
41

 
48

 
81

 
96

Interest on investment securities
 
828

 
540

 
1,636

 
1,000

Interest and dividends on other interest-earning assets
 
865

 
294

 
1,205

 
526

Total interest income
 
20,344

 
15,689

 
38,972

 
30,306

Interest expense:
 
 
 
 
 
 
 
 
Interest on deposits
 
4,292

 
2,302

 
7,458

 
4,449

Interest on borrowings
 
170

 
3

 
338

 
3

Total interest expense
 
4,462

 
2,305

 
7,796

 
4,452

Net interest income
 
15,882

 
13,384

 
31,176

 
25,854

Provision (reversal) for loan losses
 
425

 
(274
)
 
520

 
(472
)
Net interest income after provision (reversal) for loan losses
 
15,457

 
13,658

 
30,656

 
26,326

Noninterest income:
 
 
 
 
 
 
 
 
Service charges and fees on deposits
 
376

 
337

 
725

 
687

Servicing income
 
585

 
601

 
1,211

 
1,167

Gain on sale of loans
 
1,033

 
2,370

 
3,149

 
4,714

Other income
 
279

 
274

 
550

 
503

Total noninterest income
 
2,273

 
3,582

 
5,635

 
7,071

Noninterest expense:
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
6,153

 
5,574

 
12,399

 
11,095

Occupancy and equipment
 
1,246

 
1,090

 
2,390

 
2,186

Professional fees
 
988

 
476

 
1,511

 
896

Marketing and business promotion
 
541

 
419

 
929

 
720

Data processing
 
295

 
261

 
597

 
510

Director fees and expenses
 
211

 
180

 
441

 
343

Loan related expenses
 
63

 
92

 
122

 
203

Regulatory assessments
 
145

 
103

 
277

 
201

Other expenses
 
1,298

 
601

 
1,905

 
1,163

Total noninterest expense
 
10,940

 
8,796

 
20,571

 
17,317

Income before income taxes
 
6,790

 
8,444

 
15,720

 
16,080

Income tax expense
 
2,028

 
3,584

 
4,694

 
6,822

Net income
 
$
4,762

 
$
4,860

 
$
11,026

 
$
9,258

 
 
 
 
 
 
 
 
 
Earnings per common share, basic
 
$
0.35

 
$
0.36

 
$
0.82

 
$
0.69

Earnings per common share, diluted
 
$
0.35

 
$
0.36

 
$
0.81

 
$
0.68

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding, basic
 
13,432,775

 
13,408,282

 
13,425,557

 
13,401,859

Weighted-average common shares outstanding, diluted
 
13,628,677

 
13,542,538

 
13,607,834

 
13,523,128

 
 
 
 
 
 
 
 
 
See Accompanying Notes to Consolidated Financial Statements (Unaudited)

5



Pacific City Financial Corporation and Subsidiary
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
4,762

 
$
4,860

 
$
11,026

 
$
9,258

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Unrealized gain (loss) on securities available-for-sale arising during the period
 
(515
)
 
(8
)
 
(1,960
)
 
111

Income tax benefit (expense) related to items of other comprehensive income
 
151

 
3

 
571

 
(46
)
Total other comprehensive income (loss), net of tax
 
(364
)
 
(5
)
 
(1,389
)
 
65

Total comprehensive income
 
$
4,398

 
$
4,855

 
$
9,637

 
$
9,323

 
 
 
 
 
 
 
 
 
See Accompanying Notes to Consolidated Financial Statements (Unaudited)

6



Pacific City Financial Corporation and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(in thousands, except per share data)
 
 
 
 
Shareholders' Equity
 
 
Common Stock Outstanding Shares
 
Common stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total
Balance at January 1, 2017
 
13,391,222

 
$
125,094

 
$
2,444

 
$

 
$
(531
)
 
$
127,007

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 
9,258

 

 
9,258

Other comprehensive income, net of tax
 

 

 

 

 
65

 
65

Share-based compensation expense
 

 

 
347

 

 

 
347

Stock options exercised
 
20,971

 
262

 
(180
)
 

 

 
82

Retirement of fractional shares
 
(134
)
 
(2
)
 

 

 

 
(2
)
Cash dividends declared on common stock ($0.06 per common share)
 

 

 

 
(804
)
 

 
(804
)
Balance at June 30, 2017
 
13,412,059

 
$
125,354

 
$
2,611

 
$
8,454

 
$
(466
)
 
$
135,953

Balance at January 1, 2018
 
13,417,899

 
$
125,430

 
$
2,941

 
$
15,036

 
$
(1,223
)
 
$
142,184

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 
11,026

 

 
11,026

Other comprehensive loss, net of tax
 

 

 

 

 
(1,389
)
 
(1,389
)
Share-based compensation expense
 

 

 
339

 

 

 
339

Stock options exercised
 
17,315

 
149

 
(74
)
 

 

 
75

Cash dividends declared on common stock ($0.06 per common share)
 

 

 

 
(804
)
 

 
(804
)
Balance at June 30, 2018
 
13,435,214

 
$
125,579

 
$
3,206

 
$
25,258

 
$
(2,612
)
 
$
151,431

 
 
 
 
 
 
 
 
 
 
 
 
 
See Accompanying Notes to Consolidated Financial Statements (Unaudited)

7



Pacific City Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
 
Six Months Ended June 30,
 
 
2018
 
2017
Cash flows from operating activities
 
 
 
 
Net income
 
$
11,026

 
$
9,258

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization of premises and equipment
 
612

 
549

Amortization of net premiums on securities
 
406

 
366

Amortization of servicing assets
 
1,244

 
1,096

Provision (reversal) for loan losses
 
520

 
(472
)
Deferred tax expense (benefit)
 
57

 
(583
)
Stock-based compensation
 
339

 
347

Gain on sale of loans
 
(3,149
)
 
(4,714
)
Originations of loans held-for-sale
 
(60,399
)
 
(83,318
)
Proceeds from sales of and principal collected on loans held-for-sale
 
49,135

 
81,827

Change in accrued interest receivable and other assets
 
(41
)
 
(184
)
Change in accrued interest payable and other liabilities
 
1,968

 
1,143

Net cash provided by operating activities
 
1,718

 
5,315

Investing activities:
 
 
 
 
Purchase of securities available-for-sale
 
(16,060
)
 
(34,935
)
Proceeds from maturities, calls, and paydowns of securities available-for-sale
 
11,329

 
7,582

Purchase of securities held-to-maturity
 

 
(1,983
)
Proceeds from maturities and paydowns of securities held-to-maturity
 
629

 
825

Proceeds from sale of loans held-for-investment
 
7,208

 

Net change in loans receivable
 
(73,533
)
 
(49,889
)
Purchase of Federal Home Loan Bank stock
 
(844
)
 
(903
)
Proceeds from sale of other real estate owned
 
102

 
291

Purchases of premises and equipment
 
(787
)
 
(303
)
Net cash used in investing activities
 
(71,956
)
 
(79,315
)
Financing activities:
 
 
 
 
Net increase in deposits
 
175,955

 
86,399

Proceeds from long-term borrowings from Federal Home Loan Bank
 

 
40,000

Repayment of long-term borrowings from Federal Home Loan Bank
 
(10,000
)
 

Stock options exercised
 
75

 
80

Cash dividends paid on common stock
 
(804
)
 
(804
)
Net cash provided by financing activities
 
165,226

 
125,675

Net increase in cash and cash equivalents
 
94,988

 
51,675

Cash and cash equivalents at beginning of year
 
73,658

 
69,951

Cash and cash equivalents at end of year
 
$
168,646

 
$
121,626

 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
Interest paid
 
$
7,438

 
$
4,095

Income taxes paid
 
4,194

 
4,896

Supplemental disclosures of non-cash investment activities:
 
 
 
 
Loans transferred to loans held-for-sale
 
$
7,034

 
$

 
 
 
 
 
See Accompanying Notes to Consolidated Financial Statements (Unaudited)

8



Pacific City Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation and Significant Accounting Policies
Nature of Operations
Pacific City Financial Corporation (collectively, with its consolidated subsidiary, "the Company," "we," "us" or "our") is a bank holding company whose subsidiary is Pacific City Bank ("the Bank"). The Bank is a single operating segment that operates eleven full-service branches in Los Angeles and Orange counties, California, one full-service branch in each of Fort Lee, New Jersey and Bayside, New York, and ten loan production offices in Irvine and Los Angeles, California; Lynnwood, Washington; Annandale, Virginia; Chicago, Illinois; Atlanta, Georgia; Bellevue, Washington; Aurora, Colorado; Carrollton, Texas; and New York, New York. The Bank offers a broad range of loans, deposits, and other products and services predominantly to small and middle market businesses and individuals.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared pursuant to Article 10 of SEC Regulation S-X and other SEC rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by U.S. generally accepted accounting principles ("GAAP") are not included herein. These interim statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s registration statement on Form S-1 filed with the SEC on July 17, 2018 (333-226208) and declared effective by the SEC on August 9, 2018.
In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial condition and consolidated results of operations as of the dates and for the periods presented. Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary as of June 30, 2018 and December 31, 2017 and for the three and six months ended June 30, 2018 and 2017. Significant inter-company accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, all references to the Company include its wholly owned subsidiaries.
Significant Accounting Policies
The Company’s accounting policies are based upon GAAP and conform to predominant practices within the banking industry. The Company has not made any significant changes in its critical accounting policies from those disclosed in its registration statement on Form S-1 filed with the SEC on July 17, 2018 (333-226208) and declared effective by the SEC on August 9, 2018. Refer to Adopted Accounting Pronouncements below for discussion of accounting pronouncements adopted during the six months ended June 30, 2018.
Use of Estimates in the Preparation of Financial Statements
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are subject to change and such change could have a material effect on the consolidated financial statements. Actual results may differ from those estimates.

9



Adopted Accounting Pronouncements
During the six months ended June 30, 2018, the following accounting pronouncements applicable to the Company were adopted:
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)." This ASU clarifies principles for recognizing revenue from contracts with customers and supersedes current guidelines, Topic 605 - "Revenue Recognition," and most industry specific guidance. The principal of this ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity should apply the following "Five-steps Model" prescribed in Accounting Standard Codification ("ASC") 606: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. This ASU also specifies the accounting for some costs to obtain or fulfill a contract with a customer. The amended disclosure guidance requires sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This ASU, as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20, ASU 2017-13, and ASU 2017-14, is effective for interim and annual periods beginning after December 15, 2017, and entities have the option of using either a modified retrospective or full retrospective approach for the adoption.
The Company adopted this guidance on January 1, 2018 utilizing the modified retrospective approach. The Company’s source of revenue is net interest income and noninterest income. The scope of this ASU explicitly excludes net interest income and other revenues from transactions involving financial instruments, such as loans and securities. The Company identified and reviewed fees and service charges on deposit accounts and income and expense from other real estate owned ("OREO"), which are within the scope of this ASU. Based on this analysis performed, the Company concluded this ASU did not have significant changes to the method in which the Company recognizes these revenue streams. Adoption of this ASU did not have a material impact on the Company's consolidated financial statements. See note 13 for additional information.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurements of Financial Assets and Financial Liabilities." The amendments in this ASU require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments by requiring a qualitative assessment; eliminates the requirement for public business entities to disclose methods and assumptions for financial instruments measured at amortized cost on the statement of financial condition; requires the exit price notion to be used when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability; requires separate presentation of financial assets and liabilities by measurement category; and certain other requirements. This ASU became effective for fiscal years beginning after December 15, 2017. The Company adopted this guidance on January 1, 2018 and the adoption of this ASU did not have a material impact on the Company’s consolidated financial statements. See note 2 for additional information.
Recent Accounting Pronouncements Not Yet Adopted
The following are recently issued accounting pronouncements applicable to the Company that have not yet been adopted:
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." The amendments in this ASU require lessees to recognize lease assets and lease liabilities for both leases classified as operating leases and finance leases, except leases with a term of 12 months or less where lessees are permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. For leases with a term of greater than 12 months, lessees are required to recognize a liability to make lease payments and a right-of-use assets representing its right to use the underlying asset for the lease term measured at the present value of the lease payments. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for a public business entity. At June 30, 2018, the future lease rental payable under non-cancelable operating lease commitments for the Company’s offices and loan production offices were $12.2 million. The Company is in the process of evaluating the impact that adoption of this ASU may have on its consolidated financial statements.

10



In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326)." The amendments in this ASU require that entities change the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model. Under this model, entities will estimate credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. It includes financial assets such as loan receivables, held-to-maturity debt securities, net investment in leases that are not accounted for at fair value through net income, and certain off-balance sheet credit exposures. This ASU is effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has formed a committee that is assessing data and system needs in order to evaluate the impact of adopting this ASU. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which this ASU is effective. The Company is in the process of evaluating the impact that adoption of this ASU may have on its consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities." The amendments in this ASU shorten the amortization period for certain callable debt securities acquired at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount, which continue to be amortized to maturity. Public business entities must prospectively apply the amendments in this ASU to annual periods beginning after December 15, 2018, including interim periods. The Company believes the adoption of this guidance will not have a material impact on its consolidated financial statements.
Note 2 - Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (i.e.; an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The three-level fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Fair value is measured on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate certain assets or liabilities for impairment or for disclosure purposes. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The Company records securities available-for-sale at fair value on a recurring basis. Certain other assets, such as loans held-for-sale, impaired loans, servicing assets and other real estate owned ("OREO") are recorded at fair value on a non-recurring basis. Non-recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the re-measurement is performed.
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:
Investment securities: The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Management reviews the valuation techniques and assumptions used by the provider and determines that the provider uses widely accepted valuation techniques based on observable market inputs appropriate for the type of security being measured. Securities held-to-maturity are not measured at fair value on a recurring basis.

11



Loans held-for-sale: The Company records SBA loans held-for-sale, residential property loans held-for-sale and certain non-residential real estate loans held-for-sale at the lower of cost or fair value, on an aggregate basis. The Company obtains fair values from a third party independent valuation service provider. Loans held-for-sale accounted for at the lower of cost or fair value are considered to be recognized at fair value when they are recorded at below cost, on an aggregate basis, and are classified as Level 2.
Impaired loans: The Company records fair value adjustments on certain loans that reflect (i) partial write-downs, through charge-offs or specific reserve allowances, that are based on the current appraised or market-quoted value of the underlying collateral or (ii) the full charge-off of the loan carrying value. In some cases, the properties for which market quotes or appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for collateral-dependent impaired loans are obtained from real estate brokers or other third-party consultants, and are classified as Level 3.
Servicing Assets: Servicing assets represent the value associated with servicing loans that have been sold. The fair value for servicing assets is determined through discounted cash flow analysis and utilizes discount rates and prepayment speed assumptions as inputs. All of these assumptions require a significant degree of management estimation and judgment. The fair market valuation is performed on a quarterly basis for servicing assets. Servicing assets are accounted for at the lower of cost or market value and considered to be recognized at fair value when they are recorded at below cost and are classified as Level 3.
Other real estate owned: The Company initially records OREO at fair value at the time of foreclosure. Thereafter, OREO is recorded at the lower of cost or fair value based on their subsequent changes in fair value. The fair value of OREO is generally based on recent real estate appraisals adjusted for estimated selling costs. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and result in a Level 3 classification due to the unobservable inputs used for determining fair value. Only OREO with a valuation allowance are considered to be carried at fair value.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of dates indicated:
 
 
Fair Value Measurement Level
 
 
($ in thousands)
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
June 30, 2018
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency securities
 
$

 
$
24,626

 
$

 
$
24,626

Municipal bonds
 

 
1,296

 

 
1,296

Mortgage-backed securities
 

 
51,641

 

 
51,641

Collateralized mortgage obligations
 

 
54,543

 

 
54,543

Total securities available-for-sale
 

 
132,106

 

 
132,106

Total assets measured at fair value on a recurring basis
 
$

 
$
132,106

 
$

 
$
132,106

Total liabilities measured at fair value on a recurring basis
 
$

 
$

 
$

 
$

December 31, 2017
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency securities
 
$

 
$
24,925

 
$

 
$
24,925

Municipal bonds
 

 
2,375

 

 
2,375

Mortgage-backed securities
 

 
51,904

 

 
51,904

Collateralized mortgage obligations
 

 
50,485

 

 
50,485

Total securities available-for-sale
 

 
129,689

 

 
129,689

Total assets measured at fair value on a recurring basis
 
$

 
$
129,689

 
$

 
$
129,689

Total liabilities measured at fair value on a recurring basis
 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 

12



Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The following table presents the Company’s assets and liabilities measured at fair value on a non-recurring basis as of dates indicated:
 
 
Fair Value Measurement Level
 
 
($ in thousands)
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
June 30, 2018
 
 
 
 
 
 
 
 
Impaired loans:
 
 
 
 
 
 
 
 
SBA property
 
$

 
$

 
$
287

 
$
287

Total impaired loans
 

 

 
287

 
287

Servicing assets - SBA real estate
 

 

 
6,940

 
6,940

Total assets measured at fair value on a non-recurring basis
 
$

 
$

 
$
7,227

 
$
7,227

Total liabilities measured at fair value on a non-recurring basis
 
$

 
$

 
$

 
$

December 31, 2017
 
 
 
 
 
 
 
 
Total assets measured at fair value on a non-recurring basis
 
$

 
$

 
$

 
$

Total liabilities measured at fair value on a non-recurring basis
 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
For assets measured at fair value, the following table presents the total net losses, which include charge-offs, recoveries, specific reserves, impairment on servicing assets, gain (loss) on sale of OREO, and OREO valuation write-downs recorded for the periods indicated:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
($ in thousands)
 
2018
 
2017
 
2018
 
2017
Collateral dependent impaired loans:
 
 
 
 
 
 
 
 
Commercial property
 
$
(53
)
 
$

 
$
(53
)
 
$

SBA property
 
(25
)
 
(215
)
 
(151
)
 
(215
)
Servicing assets - SBA real estate
 
(63
)
 

 
(63
)
 

Other real estate owned
 

 
(5
)
 
3

 
(6
)
Net losses recognized
 
$
(141
)
 
$
(220
)
 
$
(264
)
 
$
(221
)
 
 
 
 
 
 
 
 
 
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the consolidated balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates. The following methods and assumptions were used to estimate the fair value of significant financial instruments.

13



Financial assets: The carrying amounts of interest-bearing deposits with other financial institutions and accrued interest receivable are considered to approximate fair value. The fair values of investment securities are generally based on matrix pricing (Level 2). The fair value of loans is estimated based on a discounted cash flow approach under an exit price notion for June 30, 2018 and an entry price notion for December 31, 2017. The fair value reflects the estimated yield that would be negotiated with a willing market participant. Because sale transactions of such loans are not readily observable, as many of the loans have unique risk characteristics, the valuation is based on significant unobservable inputs (Level 3). It is not practical to determine the fair value of Federal Home Loan Bank ("FHLB") and other restricted stock due to restrictions placed on its transferability.
Financial liabilities: The carrying amounts of accrued interest payable are considered to approximate fair value. The fair value of deposits is estimated based on discounted cash flows. The discount rate is derived from the interest rates currently being offered for similar remaining maturities. Non-maturity deposits are estimated based on their historical decaying experiences (Level 3). The fair value of borrowings from FHLB is estimated based on discounted cash flows. The discount rate is derived from the current market rates for borrowings with similar remaining maturities (Level 2).
Off-balance-sheet financial instruments: The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair value of these financial instruments is not material and is excluded from the table below.
The following table presents the carrying value and estimated fair values of financial assets and liabilities as of the dates indicated:
 
 
Carrying Value
 
Fair Value
 
Fair Value Measurements
($ in thousands)
 
 
 
Level 1
 
Level 2
 
Level 3
June 30, 2018
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in other financial institutions
 
$
168,646

 
$
168,646

 
$
168,646

 
$

 
$

Securities available-for-sale
 
132,106

 
132,106

 

 
132,106

 

Securities held-to-maturity
 
20,390

 
19,745

 

 
19,745

 

Loans held-for-sale
 
20,331

 
21,741

 

 
21,741

 

Net loans held-for-investment
 
1,242,235

 
1,252,933

 

 

 
1,252,933

FHLB and other restricted stock
 
7,433

 
 N/A

 
 N/A

 
 N/A

 
 N/A

Accrued interest receivable
 
4,488

 
4,488

 
74

 
524

 
3,890

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
1,427,245

 
$
1,398,088

 
$

 
$

 
$
1,398,088

Borrowings from FHLB
 
30,000

 
29,409

 

 
29,409

 

Accrued interest payable
 
3,902

 
3,902

 

 
46

 
3,856

December 31, 2017
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in other financial institutions
 
$
56,996

 
$
56,996

 
$
56,996

 
$

 
$

Securities available-for-sale
 
129,689

 
129,689

 

 
129,689

 

Securities held-to-maturity
 
21,070

 
20,997

 

 
20,997

 

Loans held-for-sale
 
5,297

 
5,813

 

 
5,813

 

Net loans held-for-investment
 
1,177,775

 
1,177,539

 

 

 
1,177,539

FHLB and other restricted stock
 
6,589

 
 N/A

 
 N/A

 
 N/A

 
 N/A

Accrued interest receivable
 
4,251

 
4,251

 
25

 
533

 
3,693

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
1,251,290

 
$
1,250,259

 
$

 
$

 
$
1,250,259

FHLB and other restricted stock
 
40,000

 
39,778

 

 
39,778

 

Accrued interest payable
 
2,251

 
2,251

 

 
60

 
2,191

 
 
 
 
 
 
 
 
 
 
 


14



Note 3 - Investment Securities
Debt and equity securities have been classified as available-for-sale or held-to-maturity in the consolidated balance sheet according to management’s intent. The following table presents the amortized cost and fair value of the investment securities as of the dates indicated:
($ in thousands)
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
June 30, 2018
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency securities
 
$
25,257

 
$
4

 
$
(635
)
 
$
24,626

Municipal bonds
 
1,296

 
1

 
(1
)
 
1,296

Mortgage-backed securities
 
53,212

 
4

 
(1,575
)
 
51,641

Collateralized mortgage obligations
 
56,243

 
5

 
(1,705
)
 
54,543

Total securities available-for-sale
 
$
136,008

 
$
14

 
$
(3,916
)
 
$
132,106

Securities held-to-maturity:
 
 
 
 
 
 
 
 
Municipal bonds
 
$
5,244

 
$
49

 
$
(21
)
 
$
5,272

Mortgage-backed securities
 
15,146

 

 
(673
)
 
14,473

Total securities held-to-maturity
 
$
20,390

 
$
49

 
$
(694
)
 
$
19,745

December 31, 2017
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
U.S. government and agency securities
 
$
25,231

 
$
17

 
$
(323
)
 
$
24,925

Municipal bonds
 
2,376

 
1

 
(2
)
 
2,375

Mortgage-backed securities
 
52,565

 
8

 
(669
)
 
51,904

Collateralized mortgage obligations
 
51,459

 
34

 
(1,008
)
 
50,485

Total securities available-for-sale
 
$
131,631

 
$
60

 
$
(2,002
)
 
$
129,689

Securities held-to-maturity:
 
 
 
 
 
 
 
 
Municipal bonds
 
$
5,263

 
$
181

 
$
(5
)
 
$
5,439

Mortgage-backed securities
 
15,807

 
8

 
(257
)
 
15,558

Total securities held-to-maturity
 
$
21,070

 
$
189

 
$
(262
)
 
$
20,997

 
 
 
 
 
 
 
 
 
As of June 30, 2018 and December 31, 2017, pledged securities were $113.1 million and $109.9 million, respectively. These securities were pledged for the State Deposit from the California State Treasurer.


15



The following table presents the amortized cost and fair value of the investment securities by contractual maturity as of June 30, 2018. Expected maturities may differ from contractual maturities, if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
 
 
Securities Available-For-Sale
 
Securities Held-To-Maturity
($ in thousands)
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Within one year
 
$
502

 
$
501

 
$
126

 
$
126

One to five years
 

 

 
581

 
577

Five to ten years
 
4,307

 
4,263

 
2,016

 
2,011

Greater than ten years
 
21,744

 
21,158

 
2,521

 
2,558

Mortgage-backed securities and collateralized mortgage obligations
 
109,455

 
106,184

 
15,146

 
14,473

Total
 
$
136,008

 
$
132,106

 
$
20,390

 
$
19,745

 
 
 
 
 
 
 
 
 
The following table presents proceeds from sales and calls of securities available-for-sale and the associated gross gains and losses realized through earnings upon the sales and calls of securities available-for-sale for the periods indicated:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
($ in thousands)
 
2018
 
2017
 
2018
 
2017
Gross realized gains on sales and calls of securities available-for-sale
 
$

 
$

 
$

 
$

Gross realized losses on sales and calls of securities available-for-sale
 

 

 

 

Net realized gains (losses) on sales and calls of securities available-for-sale
 
$

 
$

 
$

 
$

Proceeds from sales and calls of securities available-for-sale
 
$

 
$

 
$
1,060

 
$

Tax expense on sales and calls of securities available-for-sale
 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 



16



The following table summarizes the investment securities with unrealized losses by security type and length of time in a continuous unrealized loss position as of the dates indicated:
 
 
Length of Time that individual securities have been in a continuous unrealized loss position
 
 
Less Than 12 Months
 
12 Months or Longer
 
Total
($ in thousands)
 
Fair Value
 
Gross Unrealized Losses
 
Number of Securities
 
Fair Value
 
Gross Unrealized Losses
 
Number of Securities
 
Fair Value
 
Gross Unrealized Losses
 
Number of Securities
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
 
$
9,484

 
$
(260
)
 
8

 
$
13,138

 
$
(375
)
 
11

 
$
22,622

 
$
(635
)
 
19

Municipal bonds
 
1,098

 
(1
)
 
2

 

 

 

 
1,098

 
(1
)
 
2

Mortgage-backed securities
 
29,143

 
(799
)
 
24

 
21,722

 
(776
)
 
28

 
50,865

 
(1,575
)
 
52

Collateralized mortgage obligations
 
17,570

 
(321
)
 
12

 
28,974

 
(1,384
)
 
28

 
46,544

 
(1,705
)
 
40

Total securities available-for-sale
 
$
57,295

 
$
(1,381
)
 
46

 
$
63,834

 
$
(2,535
)
 
67

 
$
121,129

 
$
(3,916
)
 
113

Securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds
 
$
2,434

 
$
(21
)
 
10

 

 

 

 
$
2,434

 
$
(21
)
 
10

Mortgage-backed securities
 
9,064

 
(351
)
 
8

 
5,409

 
(322
)
 
7

 
14,473

 
(673
)
 
15

Total securities held-to-maturity
 
$
11,498

 
$
(372
)
 
18

 
$
5,409

 
$
(322
)
 
7

 
$
16,907

 
$
(694
)
 
25

December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
 
$
11,736

 
$
(103
)
 
9

 
$
8,798

 
$
(220
)
 
7

 
$
20,534

 
$
(323
)
 
16

Municipal bonds
 
1,115

 
(2
)
 
2

 

 

 

 
1,115

 
(2
)
 
2

Mortgage-backed securities
 
31,876

 
(352
)
 
29

 
18,762

 
(317
)
 
21

 
50,638

 
(669
)
 
50

Collateralized mortgage obligations
 
31,191

 
(454
)
 
19

 
16,284

 
(554
)
 
19

 
47,475

 
(1,008
)
 
38

Total securities available-for-sale
 
$
75,918

 
$
(911
)
 
59

 
$
43,844

 
$
(1,091
)
 
47

 
$
119,762

 
$
(2,002
)
 
106

Securities held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds
 
$
1,183

 
$
(5
)
 
5

 

 

 

 
$
1,183

 
$
(5
)
 
5

Mortgage-backed securities
 
7,997

 
(93
)
 
6

 
5,739

 
(164
)
 
7

 
13,736

 
(257
)
 
13

Total securities held-to-maturity
 
$
9,180

 
$
(98
)
 
11

 
$
5,739

 
$
(164
)
 
7

 
$
14,919

 
$
(262
)
 
18

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



17



In accordance with FASB ASC 320, Investments - Debt and Equity Securities, the Company performs an other-than-temporary impairment ("OTTI") assessment periodically. OTTI is recognized when fair value is below the amortized cost where: (i) an entity has the intent to sell the security; (ii) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (iii) an entity does not expect to recover the entire amortized cost basis of the security.
All individual securities in a continuous unrealized loss position for 12 months or more as of June 30, 2018 and December 31, 2017 had an investment grade rating upon purchase. The issuers of these securities have not established any cause for default on these securities and various rating agencies have reaffirmed their long-term investment grade status as of June 30, 2018 and December 31, 2017. These securities have fluctuated in value since their purchase dates as market interest rates fluctuated. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell before the recovery of its amortized cost basis. In addition, the unrealized losses on municipal bonds are not considered other-than-temporary impaired, as the bonds are rated investment grade and there are no credit quality concerns with the issuers. Interest payments have been made as scheduled, and management believes this will continue in the future until the bonds get paid in full. The Company determined that the investment securities with unrealized losses for twelve months or more are not other-than-temporary impaired, and, therefore, no impairment was recognized during the three and six months ended June 30, 2018 and 2017.
Note 4 - Loans and Allowance for Loan Losses
Loans Held-For-Investment
The following table presents the composition of the Company’s loans held-for-investment as of the dates indicated:
($ in thousands)
 
June 30, 2018
 
December 31, 2017
Real estate loans:
 
 
 
 
Commercial property
 
$
674,599

 
$
662,840

Residential property
 
197,598

 
168,898

SBA property
 
133,081

 
130,438

Construction
 
28,659

 
23,215

Total real estate loans
 
1,033,937

 
985,391

Commercial and industrial loans:
 
 
 
 
Commercial term
 
80,791

 
77,438

Commercial lines of credit
 
72,799

 
60,850

SBA commercial term
 
28,276

 
30,199

International
 
7,734

 
1,920

Total commercial and industrial loans
 
189,600

 
170,407

Consumer loans
 
30,775

 
33,870

Loans held-for-investment
 
1,254,312

 
1,189,668

Deferred loan costs (fees)
 
544

 
331

Loans held-for-investment, net of deferred loan costs (fees)
 
1,254,856

 
1,189,999

Allowance for loan losses
 
(12,621
)
 
(12,224
)
Net loans held-for-investment
 
$
1,242,235

 
$
1,177,775

 
 
 
 
 
In the ordinary course of business, the Company may grant loans to certain officers and directors, and the companies with which they are associated. As of June 30, 2018 and December 31, 2017, the Company had no such loans outstanding.


18



Allowance for Loan Losses
The following table presents the activities in allowance for loan losses by portfolio segment, which is consistent with the Company’s methodology for determining allowance for loan losses, for the three months ended June 30, 2018 and 2017:
 
 
Three Months Ended
($ in thousands)
 
Real Estate
 
Commercial and Industrial
 
Consumer
 
Total
June 30, 2018
 
 
 
 
 
 
 
 
Balance at April 1, 2018
 
$
9,076

 
$
3,100

 
$
195

 
$
12,371

Charge-offs
 
(79
)
 
(90
)
 
(127
)
 
(296
)
Recoveries on loans previously charged off
 
50

 
54

 
17

 
121

Provision (reversal) for loan losses
 
276

 
44

 
105

 
425

Balance at June 30, 2018
 
$
9,323

 
$
3,108

 
$
190

 
$
12,621

June 30, 2017
 
 
 
 
 
 
 
 
Balance at April 1, 2017
 
$
7,737

 
$
3,410

 
$
168

 
$
11,315