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, 2017 December 31, 2016 (Dollars in thousands) Amount Percent Amount Percent Commercial loans $ 366,259 35.1 % $ 333,376 35.2 % Commercial real estate loans – owner occupied 209,724 20.1 % 214,420 22.7 % Commercial real estate loans – all other 240,653 23.1 % 173,223 18.3 % Residential mortgage loans – multi-family 126,061 12.1 % 130,930 13.8 % Residential mortgage loans – single family 30,678 2.9 % 34,527 3.6 % Land development loans 21,601 2.1 % 18,485 2.0 % Consumer loans 47,243 4.5 % 41,563 4.4 % Total loans 1,042,219 100.0 % 946,524 100.0 % Deferred loan origination costs, net 2,849 1,802 Allowance for loan and lease losses (17,178 ) (16,801 ) Loans, net $ 1,027,890 $ 931,525 At June 30, 2017 and December 31, 2016 , loans of approximately $595 million and $527 million , respectively, were pledged to secure borrowings obtained from the FHLB and to support our unfunded borrowing capacity. During both the three and six months ended June 30, 2017, we purchased $30.1 million of performing commercial real estate - owner occupied and commercial real estate - all other loans. No loans were purchased during the three and six months ended June 30, 2016. Allowance for Loan and Lease Losses The ALLL represents our estimate of credit losses in our loan and lease portfolio that are probable and estimable at the balance sheet date. We employ economic models that are based on bank regulatory guidelines, industry standards and our own historical loan loss experience, as well as a number of more subjective qualitative factors, to determine both the sufficiency of the ALLL and the amount of the provisions that are required to increase or replenish the ALLL. The ALLL is first determined by (i) analyzing all classified loans (graded as “Substandard” or “Doubtful” under our internal asset quality grading parameters) on nonaccrual status for loss exposure and (ii) establishing specific reserves as needed. ASC 310-10 defines loan impairment as the existence of uncertainty concerning collection of all principal and interest in accordance with the contractual terms of a loan. For collateral dependent loans, impairment is typically measured by comparing the loan amount to the fair value of collateral, less estimated costs to sell, with any “shortfall” amount charged off. Other methods can be used in estimating impairment, including market price and the present value of expected future cash flows discounted at the loan’s original interest rate. We are an active lender with the U.S. Small Business Administration and collection of a percentage of the loan balance of many of the loans originated is guaranteed. The ALLL reserves are calculated against the non-guaranteed loan balances. On a quarterly basis, we utilize a classification based loan loss migration model as well as review individual loans in determining the adequacy of the ALLL for homogenous pools of loans that are not subject to specific reserve allocations. Our loss migration analysis 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, 2017 and 2016: (Dollars in thousands) Commercial Real Estate Land Development Consumer and Single Family Mortgages Unallocated Total ALLL in the three months ended June 30, 2017: Balance at beginning of period $ 10,234 $ 3,857 $ 116 $ 806 $ 1,781 $ 16,794 Charge offs (19 ) (432 ) — (105 ) — (556 ) Recoveries 934 — — 6 — 940 Provision (1,036 ) 1,232 41 416 (653 ) — Balance at end of period $ 10,113 $ 4,657 $ 157 $ 1,123 $ 1,128 $ 17,178 ALLL in the six months ended June 30, 2017: Balance at beginning of period $ 11,276 $ 4,226 $ 343 $ 642 $ 314 $ 16,801 Charge offs (465 ) (432 ) — (114 ) — (1,011 ) Recoveries 1,194 — 27 167 — 1,388 Provision (1,892 ) 863 (213 ) 428 814 — Balance at end of period $ 10,113 $ 4,657 $ 157 $ 1,123 $ 1,128 $ 17,178 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 Set forth below is information regarding loan balances and the related ALLL, by portfolio type, as of June 30, 2017 and December 31, 2016 . (Dollars in thousands) Commercial Real Estate Land Development Consumer Unallocated Total ALLL balance at June 30, 2017 related to: Loans individually evaluated for impairment $ 2,188 $ — $ — $ — $ — $ 2,188 Loans collectively evaluated for impairment 7,925 4,657 157 1,123 1,128 14,990 Total $ 10,113 $ 4,657 $ 157 $ 1,123 $ 1,128 $ 17,178 Loans balance at June 30, 2017 related to: Loans individually evaluated for impairment $ 19,875 $ 2,805 $ — $ 223 $ — $ 22,903 Loans collectively evaluated for impairment 346,384 573,633 21,601 77,698 — 1,019,316 Total $ 366,259 $ 576,438 $ 21,601 $ 77,921 $ — $ 1,042,219 ALLL balance at December 31, 2016 related to: Loans individually evaluated for impairment $ 2,042 $ — $ — $ — $ — $ 2,042 Loans collectively evaluated for impairment 9,234 4,226 343 642 314 14,759 Total $ 11,276 $ 4,226 $ 343 $ 642 $ 314 $ 16,801 Loans balance at December 31, 2016 related to: Loans individually evaluated for impairment $ 20,330 $ 4,346 $ — $ 221 $ — $ 24,897 Loans collectively evaluated for impairment 313,046 514,227 18,485 75,869 — 921,627 Total $ 333,376 $ 518,573 $ 18,485 $ 76,090 $ — $ 946,524 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, 2017 and December 31, 2016 : (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, 2017 Commercial loans $ 4,129 $ — $ 12,261 $ 16,390 $ 349,869 $ 366,259 $ — Commercial real estate loans – owner-occupied — — — — 209,724 209,724 — Commercial real estate loans – all other 968 — — 968 239,685 240,653 — Residential mortgage loans – multi-family — — — — 126,061 126,061 — Residential mortgage loans – single family — — — — 30,678 30,678 — Land development loans — — — — 21,601 21,601 — Consumer loans — — — — 47,243 47,243 — Total $ 5,097 $ — $ 12,261 $ 17,358 $ 1,024,861 $ 1,042,219 $ — At December 31, 2016 Commercial loans $ 7,055 $ — $ 13,946 $ 21,001 $ 312,375 $ 333,376 $ — Commercial real estate loans – owner-occupied 275 2,341 1,003 3,619 210,801 214,420 — Commercial real estate loans – all other 512 1,014 — 1,526 171,697 173,223 — Residential mortgage loans – multi-family — — — — 130,930 130,930 — Residential mortgage loans – single family — — — — 34,527 34,527 — Land development loans — — — — 18,485 18,485 — Consumer loans 38 — — 38 41,525 41,563 — Total $ 7,880 $ 3,355 $ 14,949 $ 26,184 $ 920,340 $ 946,524 $ — 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, 2017 or December 31, 2016 . In certain instances, when a loan is placed on nonaccrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received (referred to as full nonaccrual basis of accounting), except when the ultimate collectability of principal is probable, in which case such payments are applied to accrued and unpaid interest, which is credited to income (referred to as nonaccrual cash basis of accounting). 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, 2017 and December 31, 2016 : June 30, 2017 December 31, 2016 (Dollars in thousands) Nonaccrual loans: Commercial loans $ 19,365 $ 20,330 Commercial real estate loans – owner occupied 1,181 2,643 Commercial real estate loans – all other 1,624 1,703 Residential mortgage loans – single family 186 221 Consumer 37 — Total (1) $ 22,393 $ 24,897 (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, 2017 and December 31, 2016 : June 30, 2017 December 31, 2016 (Dollars in thousands) Pass: Commercial loans $ 334,972 $ 287,717 Commercial real estate loans – owner occupied 194,720 197,497 Commercial real estate loans – all other 239,029 169,292 Residential mortgage loans – multi family 126,061 130,930 Residential mortgage loans – single family 30,492 34,306 Land development loans 21,601 18,485 Consumer loans 47,206 41,563 Total pass loans $ 994,081 $ 879,790 Special Mention: Commercial loans $ 8,499 $ 4,672 Commercial real estate loans – owner occupied 10,205 7,834 Commercial real estate loans – all other — 2,228 Total special mention loans $ 18,704 $ 14,734 Substandard: Commercial loans $ 21,390 $ 37,668 Commercial real estate loans – owner occupied 4,799 9,089 Commercial real estate loans – all other 1,624 1,703 Residential mortgage loans – single family 186 221 Total substandard loans $ 27,999 $ 48,681 Doubtful: Commercial loans $ 1,398 $ 3,319 Consumer loans 37 — Total doubtful loans $ 1,435 $ 3,319 Total Loans: $ 1,042,219 $ 946,524 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, 2017 and December 31, 2016 : June 30, 2017 December 31, 2016 (Dollars in thousands) Impaired loans: Nonaccruing loans $ 14,471 $ 15,966 Nonaccruing restructured loans 7,922 8,931 Accruing restructured loans (1) 510 — Total impaired loans $ 22,903 $ 24,897 Impaired loans less than 90 days delinquent and included in total impaired loans $ 10,642 $ 9,948 The table below contains additional information with respect to impaired loans, by portfolio type, as of June 30, 2017 and December 31, 2016 : June 30, 2017 December 31, 2016 Recorded Investment Unpaid Principal Balance Related Allowance (1) Recorded Investment Unpaid Principal Balance Related Allowance (1) (Dollars in thousands) No allowance recorded: Commercial loans $ 14,228 $ 17,382 $ — $ 17,021 $ 19,048 $ — Commercial real estate loans – owner occupied 1,181 1,402 — 2,643 4,335 — Commercial real estate loans – all other 1,624 1,965 — 1,703 1,965 — Residential mortgage loans – single family 186 195 — 221 225 — Consumer loans 37 37 — — — — Total 17,256 20,981 — 21,588 25,573 — With allowance recorded: Commercial loans $ 5,647 $ 5,849 $ 2,188 $ 3,309 $ 4,764 $ 2,042 Total 5,647 5,849 2,188 3,309 4,764 2,042 Total Commercial loans $ 19,875 $ 23,231 $ 2,188 $ 20,330 $ 23,812 $ 2,042 Commercial real estate loans – owner occupied 1,181 1,402 — 2,643 4,335 — Commercial real estate loans – all other 1,624 1,965 — 1,703 1,965 — Residential mortgage loans – single family 186 195 — 221 225 — Consumer loans 37 37 — — — — Total 22,903 26,830 2,188 24,897 30,337 2,042 (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, 2017 and December 31, 2016 , there were $17.3 million and $21.6 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 June 30, 2017 for which no specific reserves were allocated, $15.5 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, 2017 and 2016 were as follows: Three Months Ended June 30, Six Months Ended June 30, 2017 2016 2017 2016 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 $ 17,312 $ 10 $ 12,388 $ 51 $ 16,462 $ 39 $ 12,402 $ 247 Commercial real estate loans – owner occupied 1,411 — 2,249 3 2,057 — 2,290 3 Commercial real estate loans – all other 1,647 — 5,977 — 1,683 — 6,208 — Residential mortgage loans – multi-family — — 438 — 107 — 441 — Residential mortgage loans – single family 195 — 267 — 212 — 412 — Land development loans — — 1,368 — — — 1,451 — Consumer loans 133 — 433 11 66 1 288 19 Total 20,698 10 23,120 65 20,587 40 23,492 269 With allowance recorded: Commercial loans 3,584 8 6,280 — 4,562 15 4,186 — Commercial real estate loans – owner occupied — — 1,595 — — — 1,604 — Total 3,584 8 7,875 — 4,562 15 5,790 — Total Commercial loans 20,896 18 18,668 51 21,024 54 16,588 247 Commercial real estate loans – owner occupied 1,411 — 3,844 3 2,057 — 3,894 3 Commercial real estate loans – all other 1,647 — 5,977 — 1,683 — 6,208 — Residential mortgage loans – multi-family — — 438 — 107 — 441 — Residential mortgage loans – single family 195 — 267 — 212 — 412 — Land development loans — — 1,368 — — — 1,451 — Consumer loans 133 — 433 11 66 1 288 19 Total $ 24,282 $ 18 $ 30,995 $ 65 $ 25,149 $ 55 $ 29,282 $ 269 The interest that would have been earned had the impaired loans remained current in accordance with their original terms was $429 thousand and $393 thousand during the three months ended June 30, 2017 and 2016 , respectively, and $836 thousand and $775 thousand during the six months ended June 30, 2017 and 2016 , 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 $8.4 million and $8.9 million at June 30, 2017 and December 31, 2016 , 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 $8.4 million of TDRs outstanding at June 30, 2017 , $510 thousand were performing in accordance with their terms and accruing interest. Our impairment analysis determined no specific reserves were required on the TDR balances outstanding at June 30, 2017 . The following table presents loans restructured as TDRs during the three and six months ended June 30, 2017 and 2016 : Three Months Ended June 30, 2017 June 30, 2016 (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 $ 510 $ 510 — $ — $ — 1 510 510 — — — Nonperforming Commercial loans 1 1,416 1,416 — — — 1 1,416 1,416 — — — Total Troubled Debt Restructurings (1) 2 $ 1,926 $ 1,926 — $ — $ — Six Months Ended June 30, 2017 June 30, 2016 (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 $ 510 $ 510 — $ — $ — Consumer loans — — — 1 562 115 1 510 510 1 562 115 Nonperforming Commercial loans 2 1,819 1,526 — — — 2 1,819 1,526 — — — Total Troubled Debt Restructurings 3 $ 2,329 $ 2,036 1 $ 562 $ 115 (1) No outstanding loans were restructured during the three months ended June 30, 2016. During the three and six months ended June 30, 2017 and 2016 , TDRs that were modified within the preceding 12-month period which subsequently defaulted were as follows: Three Months Ended Six Months Ended June 30, 2017 June 30, 2016 June 30, 2017 June 30, 2016 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, 2017, there were no TDRs that were modified within the preceding 12-month period which subsequently defaulted. |