Loans and Allowance for Loan and Lease Losses | Loans and Allowance for Loan and Lease Losses The loan portfolio consisted of the following at: June 30, 2016 December 31, 2015 (Dollars in thousands) Amount Percent Amount Percent Commercial loans $ 342,579 38.7 % $ 347,300 40.3 % Commercial real estate loans – owner occupied 216,845 24.5 % 195,554 22.7 % Commercial real estate loans – all other 141,883 16.0 % 146,641 17.0 % Residential mortgage loans – multi-family 92,101 10.4 % 81,487 9.5 % Residential mortgage loans – single family 39,823 4.5 % 52,072 6.0 % Land development loans 12,562 1.4 % 10,001 1.2 % Consumer loans 38,634 4.4 % 28,663 3.3 % Total loans 884,427 100.0 % 861,718 100.0 % Deferred loan origination costs, net 1,200 731 Allowance for loan and lease losses (13,429 ) (12,716 ) Loans, net $ 872,198 $ 849,733 At June 30, 2016 and December 31, 2015 , loans of approximately $510 million and $523 million , respectively, were pledged to secure borrowings obtained from the FHLB and to support our unfunded borrowing capacity. During the three and six months ended June 30, 2016, we purchased $29.9 million of performing residential multi-family mortgage loans. No loans were purchased during the three and six months ended June 30, 2015. 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 16 quarters of loan loss history and industry loss factors to determine historical losses by classification category for each loan type, except certain consumer loans (automobile, mortgage and credit cards). We then apply these calculated loss factors, together with qualitative factors based on external economic conditions and trends and internal assessments, to the outstanding loan balances in each homogenous group of loans, and then, using our internal asset quality grading parameters, we grade the loans as “Pass,” “Special Mention,” “Substandard” or “Doubtful”. We analyze impaired loans individually. This grading is based on the credit classifications of assets as prescribed by government regulations and industry standards and is separated into the following groups: • Pass: Loans classified as pass include current loans performing in accordance with contractual terms, installment/consumer loans that are not individually risk rated, and loans which exhibit certain risk factors that require greater than usual monitoring by management. • Special Mention: Loans classified as special mention, while generally not delinquent, have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank’s credit position at some future date. • Substandard: Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. • Doubtful: Loans classified as doubtful have all the weaknesses inherent in a substandard loan, and may also be at delinquency status and have defined weaknesses based on currently existing facts, conditions and values making collection or liquidation in full highly questionable and improbable. Set forth below is a summary of the activity in the ALLL during the three and six months ended June 30, 2016 and 2015: (Dollars in thousands) Commercial Real Estate Land Development Consumer and Single Family Mortgages Total ALLL in the three months ended June 30, 2016: Balance at beginning of period $ 8,059 $ 4,069 $ 203 $ 698 $ 13,029 Charge offs (8,509 ) — — (540 ) (9,049 ) Recoveries 724 — — 5 729 Provision 8,429 (241 ) 23 509 8,720 Balance at end of period $ 8,703 $ 3,828 $ 226 $ 672 $ 13,429 ALLL in the six months ended June 30, 2016: Balance at beginning of period $ 6,639 $ 5,109 $ 282 $ 686 $ 12,716 Charge offs (8,672 ) — — (540 ) (9,212 ) Recoveries 777 1 — 7 785 Provision 9,959 (1,282 ) (56 ) 519 9,140 Balance at end of period $ 8,703 $ 3,828 $ 226 $ 672 $ 13,429 ALLL in the three months ended June 30, 2015: Balance at beginning of period $ 7,353 $ 4,287 $ 120 $ 879 $ 12,639 Charge offs (730 ) — — (151 ) (881 ) Recoveries 582 1 — 2 585 Provision (724 ) 601 (76 ) 199 — Balance at end of period $ 6,481 $ 4,889 $ 44 $ 929 $ 12,343 ALLL in the six months ended June 30, 2015: Balance at beginning of period $ 7,670 $ 5,133 $ 296 $ 734 $ 13,833 Charge offs $ (2,117 ) $ — $ (85 ) $ (151 ) $ (2,353 ) Recoveries 857 2 — 4 863 Provision 71 (246 ) (167 ) 342 — Balance at end of period $ 6,481 $ 4,889 $ 44 $ 929 $ 12,343 Set forth below is information regarding loan balances and the related ALLL, by portfolio type, as of June 30, 2016 and December 31, 2015 . (Dollars in thousands) Commercial Real Estate Land Development Consumer and Single Family Mortgages Total ALLL balance at June 30, 2016 related to: Loans individually evaluated for impairment $ — $ 485 $ — $ — $ 485 Loans collectively evaluated for impairment 8,703 3,343 226 672 12,944 Total $ 8,703 $ 3,828 $ 226 $ 672 $ 13,429 Loans balance at June 30, 2016 related to: Loans individually evaluated for impairment $ 14,908 $ 10,151 $ 1,140 $ 304 $ 26,503 Loans collectively evaluated for impairment 327,671 440,678 11,422 78,153 857,924 Total $ 342,579 $ 450,829 $ 12,562 $ 78,457 $ 884,427 ALLL balance at December 31, 2015 related to: Loans individually evaluated for impairment $ — $ 484 $ — $ — $ 484 Loans collectively evaluated for impairment 6,639 4,625 282 686 12,232 Total $ 6,639 $ 5,109 $ 282 $ 686 $ 12,716 Loans balance at December 31, 2015 related to: Loans individually evaluated for impairment $ 12,431 $ 11,107 $ 1,618 $ 701 $ 25,857 Loans collectively evaluated for impairment 334,869 412,575 8,383 80,034 835,861 Total $ 347,300 $ 423,682 $ 10,001 $ 80,735 $ 861,718 Credit Quality The amounts of nonperforming assets and delinquencies that occur within our loan portfolio factor into our evaluation of the adequacy of the ALLL. The following table provides a summary of the delinquency status of loans by portfolio type at June 30, 2016 and December 31, 2015 : (Dollars in thousands) 30-59 Days Past Due 60-89 Days Past Due 90 Days and Greater Total Past Due Current Total Loans Outstanding Loans >90 Days and Accruing At June 30, 2016 Commercial loans $ 3,145 $ 70 $ 6,910 $ 10,125 $ 332,454 $ 342,579 $ — Commercial real estate loans – owner-occupied — — 1,016 1,016 215,829 216,845 — Commercial real estate loans – all other — — 5,060 5,060 136,823 141,883 — Residential mortgage loans – multi-family 2,364 — — 2,364 89,737 92,101 — Residential mortgage loans – single family — — — — 39,823 39,823 — Land development loans — — 1,140 1,140 11,422 12,562 — Consumer loans 115 — — 115 38,519 38,634 — Total $ 5,624 $ 70 $ 14,126 $ 19,820 $ 864,607 $ 884,427 $ — At December 31, 2015 Commercial loans $ 2,010 $ 1,008 $ 8,766 $ 11,784 $ 335,516 $ 347,300 $ — Commercial real estate loans – owner-occupied — — 797 797 194,757 195,554 — Commercial real estate loans – all other 316 — 5,207 5,523 141,118 146,641 — Residential mortgage loans – multi-family — — — — 81,487 81,487 — Residential mortgage loans – single family — — 535 535 51,537 52,072 — Land development loans — — 1,618 1,618 8,383 10,001 — Consumer loans — — — — 28,663 28,663 — Total (1) $ 2,326 $ 1,008 $ 16,923 $ 20,257 $ 841,461 $ 861,718 $ — (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 was in the process of foreclosure at December 31, 2015. Generally, the accrual of interest on a loan is discontinued when principal or interest payments become more than 90 days past due, unless we believe that the loan is adequately collateralized and it is in the process of collection. There were no loans 90 days or more past due and still accruing interest at June 30, 2016 or December 31, 2015 . 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. The following table provides information with respect to loans on nonaccrual status, by portfolio type, as of June 30, 2016 and December 31, 2015 : June 30, 2016 December 31, 2015 (Dollars in thousands) Nonaccrual loans: Commercial loans $ 14,840 $ 12,284 Commercial real estate loans – owner occupied 3,940 3,815 Commercial real estate loans – all other 5,777 6,268 Residential mortgage loans – multi-family 434 447 Residential mortgage loans – single family — 701 Land development loans 1,140 1,618 Consumer 189 — Total (1) $ 26,320 $ 25,133 (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 June 30, 2016 and December 31, 2015 : June 30, 2016 December 31, 2015 (Dollars in thousands) Pass: Commercial loans $ 318,015 $ 329,192 Commercial real estate loans – owner occupied 210,907 189,944 Commercial real estate loans – all other 127,491 127,702 Residential mortgage loans – multi family 91,667 81,040 Residential mortgage loans – single family 39,823 51,371 Land development loans 11,422 8,383 Consumer loans 38,331 28,663 Total pass loans $ 837,656 $ 816,295 Special Mention: Commercial loans $ 9,656 $ 5,626 Commercial real estate loans – owner occupied 649 177 Commercial real estate loans – all other 8,615 9,452 Total special mention loans $ 18,920 $ 15,255 Substandard: Commercial loans $ 13,348 $ 12,482 Commercial real estate loans – owner occupied 5,289 5,433 Commercial real estate loans – all other 5,777 9,487 Residential mortgage loans – multi family 434 447 Residential mortgage loans – single family — 701 Land development loans 1,140 1,618 Consumer loans 303 — Total substandard loans $ 26,291 $ 30,168 Doubtful: Commercial loans $ 1,560 $ — Total doubtful loans $ 1,560 $ — Total Loans: $ 884,427 $ 861,718 Impaired Loans A loan generally is classified as impaired when, in our opinion, principal or interest is not likely to be collected in accordance with the contractual terms of the loan agreement. We measure for impairments on a loan-by-loan basis, using either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. The following table sets forth information regarding impaired loans, at June 30, 2016 and December 31, 2015 : June 30, 2016 December 31, 2015 (Dollars in thousands) Impaired loans: Nonaccruing loans $ 10,901 $ 5,063 Nonaccruing restructured loans 15,419 20,070 Accruing restructured loans (1) 183 724 Accruing impaired loans — — Total impaired loans $ 26,503 $ 25,857 Impaired loans less than 90 days delinquent and included in total impaired loans $ — $ 6,584 (1) See "Troubled Debt Restructurings" below for a description of accruing restructured loans at June 30, 2016 and December 31, 2015 . The table below contains additional information with respect to impaired loans, by portfolio type, as of June 30, 2016 and December 31, 2015 : June 30, 2016 December 31, 2015 Recorded Investment Unpaid Principal Balance Related Allowance (1) Recorded Investment Unpaid Principal Balance Related Allowance (1) (Dollars in thousands) No allowance recorded: Commercial loans $ 14,908 $ 23,520 $ — $ 12,431 $ 14,137 $ — Commercial real estate loans – owner occupied 2,350 2,573 — 2,371 2,515 — Commercial real estate loans – all other 5,778 6,061 — 6,668 6,806 — Residential mortgage loans – multi-family 434 446 — 447 450 — Residential mortgage loans – single family — — — 701 1,037 — Land development loans 1,140 1,362 — 1,618 1,732 — Consumer loans 304 304 — — — — Total 24,914 34,266 — 24,236 26,677 — With allowance recorded: Commercial real estate loans – owner occupied 1,589 1,872 485 1,621 1,872 484 Total 1,589 1,872 485 1,621 1,872 484 Total Commercial loans $ 14,908 $ 23,520 $ — $ 12,431 $ 14,137 $ — Commercial real estate loans – owner occupied 3,939 4,445 485 3,992 4,387 484 Commercial real estate loans – all other 5,778 6,061 — 6,668 6,806 — Residential mortgage loans – multi-family 434 446 — 447 450 — Residential mortgage loans – single family — — — 701 1,037 — Land development loans 1,140 1,362 — 1,618 1,732 — Consumer loans 304 304 — — — — Total 26,503 36,138 485 25,857 28,549 484 (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 June 30, 2016 and December 31, 2015 , there were $24.9 million and $24.2 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 June 30, 2016 for which no specific reserves were allocated, $19.5 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 six months ended June 30, 2016 and 2015 were as follows: Three Months Ended June 30, Six Months Ended June 30, 2016 2015 2016 2015 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 $ 12,388 $ 51 $ 14,533 $ 25 $ 12,402 $ 247 $ 15,876 $ 99 Commercial real estate loans – owner occupied 2,249 3 3,492 81 2,290 3 3,051 81 Commercial real estate loans – all other 5,977 — 5,812 201 6,208 — 5,663 201 Residential mortgage loans – multi-family 438 — 454 4 441 — 303 9 Residential mortgage loans – single family 267 — 4,143 29 412 — 4,220 58 Land development loans 1,368 — 1,701 7 1,451 — 1,838 7 Consumer loans 433 11 — — 288 19 — — Total 23,120 65 30,135 347 23,492 269 30,951 455 With allowance recorded: Commercial loans 6,280 — 1,057 6 4,186 — 1,556 6 Commercial real estate loans – owner occupied 1,595 — — — 1,604 — — — Total 7,875 — 1,057 6 5,790 — 1,556 6 Total Commercial loans 18,668 51 15,590 31 16,588 247 17,432 105 Commercial real estate loans – owner occupied 3,844 3 3,492 81 3,894 3 3,051 81 Commercial real estate loans – all other 5,977 — 5,812 201 6,208 — 5,663 201 Residential mortgage loans – multi-family 438 — 454 4 441 — 303 9 Residential mortgage loans – single family 267 — 4,143 29 412 — 4,220 58 Land development loans 1,368 — 1,701 7 1,451 — 1,838 7 Consumer loans 433 11 — — 288 19 — — Total $ 30,995 $ 65 $ 31,192 $ 353 $ 29,282 $ 269 $ 32,507 $ 461 The interest that would have been earned had the impaired loans remained current in accordance with their original terms was $393 thousand and $304 thousand during the three months ended June 30, 2016 and 2015 , respectively. The interest that would have been earned had the impaired loans remained current in accordance with their original terms was $775 thousand and $508 thousand during the six months ended June 30, 2016 and 2015 , 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 $15.6 million and $20.8 million at June 30, 2016 and December 31, 2015 , 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 $15.6 million of TDRs outstanding at June 30, 2016 , $183 thousand were performing in accordance with their terms and accruing interest, and $15.4 million were not. Our impairment analysis determined $485 thousand of specific reserves were required on the TDR balances outstanding at June 30, 2016 . The following table presents loans restructured as TDRs during the three and six months ended June 30, 2016 and 2015 : Three Months Ended June 30, 2016 June 30, 2015 (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 — $ — $ — 1 $ 94 $ 94 Commercial real estate – owner occupied — — — 1 2,741 2,741 Commercial real estate – all other — — — 1 4,158 4,158 — — — 3 6,993 6,993 Nonperforming Commercial loans — — — 1 250 250 — — — 1 250 250 Total Troubled Debt Restructurings (1) — $ — $ — 4 $ 7,243 $ 7,243 Six Months Ended June 30, 2016 June 30, 2015 (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 — $ — $ — 1 $ 94 $ 94 Commercial real estate – owner occupied — — — 1 2,741 2,741 Commercial real estate – all other — — — 1 4,158 4,158 Consumer loans 1 562 115 — — — 1 562 115 3 6,993 6,993 Nonperforming Commercial loans — — — 1 250 250 — — — 1 250 250 Total Troubled Debt Restructurings 1 $ 562 $ 115 4 $ 7,243 $ 7,243 (1) No loans were restructured during the three months ended June 30, 2016. During the three and six months ended June 30, 2016 and 2015 , TDRs that were modified within the preceding 12-month period which subsequently defaulted were as follows: Three Months Ended Six Months Ended June 30, 2016 June 30, 2015 June 30, 2016 June 30, 2015 Number of loans Recorded Investment Number of loans Recorded Investment Number of loans Recorded Investment Number of loans Recorded Investment (Dollars in thousands) Commercial loans — $ — — $ — 1 $ 60 — $ — Commercial real estate - owner occupied 1 $ 770 — $ — 1 $ 770 — $ — Total (1) 1 $ 770 — $ — 2 $ 830 — $ — (1) During the three and six months ended June 30, 2015, there were no TDRs that were modified within the preceding 12-month period which subsequently defaulted. |