Loans and Allowance for Loan and Lease Losses | Loans and Allowance for Loan and Lease Losses The loan portfolio consisted of the following at: December 31, 2017 December 31, 2016 (Dollars in thousands) Amount Percent Amount Percent Commercial loans $ 394,493 37.1 % $ 333,376 35.2 % Commercial real estate loans – owner occupied 214,365 20.1 % 214,420 22.7 % Commercial real estate loans – all other 228,090 21.4 % 173,223 18.3 % Residential mortgage loans – multi-family 114,302 10.7 % 130,930 13.8 % Residential mortgage loans – single family 24,848 2.3 % 34,527 3.6 % Construction and land development loans 34,614 3.3 % 18,485 2.0 % Consumer loans 53,918 5.1 % 41,563 4.4 % Gross loans 1,064,630 100.0 % 946,524 100.0 % Deferred fee (income) costs, net 2,767 1,802 Allowance for loan and lease losses (14,196 ) (16,801 ) Loans, net $ 1,053,201 $ 931,525 At December 31, 2017 and 2016 , real estate loans of approximately $669 million and $527 million , respectively, were pledged to secure borrowings obtained from the FHLB. During the year ended December 31, 2017 , we purchased $30.1 million of performing commercial real estate - owner occupied and commercial real estate - all other loans. We purchased $85.8 million of performing residential multi-family mortgage and commercial real estate - all other loans during the year ended December 31, 2016 . No loans were purchased during the year ended December 31, 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, by portfolio type, during the years ended December 31, 2017 , 2016 and 2015 . (Dollars in thousands) Commercial Real Estate Construction and Land Development Consumer and Single Family Mortgages Unallocated Total ALLL in the year ended December 31, 2017: Balance at beginning of year $ 11,276 $ 4,226 $ 343 $ 642 $ 314 $ 16,801 Charge offs (4,124 ) (432 ) — (179 ) — (4,735 ) Recoveries 1,852 72 27 179 — 2,130 Provision 151 (960 ) 280 401 128 — Balance at end of year $ 9,155 $ 2,906 $ 650 $ 1,043 $ 442 $ 14,196 ALLL in the year ended December 31, 2016: Balance at beginning of year $ 6,639 $ 5,109 $ 282 $ 686 $ — $ 12,716 Charge offs (15,390 ) (1,119 ) — (540 ) — (17,049 ) Recoveries 1,189 1 57 17 — 1,264 Provision 18,838 235 4 479 314 19,870 Balance at end of year $ 11,276 $ 4,226 $ 343 $ 642 $ 314 $ 16,801 ALLL in the year ended December 31, 2015: Balance at beginning of year $ 7,670 $ 5,133 $ 296 $ 734 $ — $ 13,833 Charge offs (2,643 ) — (85 ) (199 ) — (2,927 ) Recoveries 1,798 4 — 8 — 1,810 Provision (186 ) (28 ) 71 143 — — Balance at end of year $ 6,639 $ 5,109 $ 282 $ 686 $ — $ 12,716 Set forth below is information regarding loan balances and the related ALLL, by portfolio type, as of December 31, 2017 and December 31, 2016 . (Dollars in thousands) Commercial Real Estate Land Development Consumer and Single Family Mortgages Unallocated Total ALLL balance at December 31, 2017 related to: Loans individually evaluated for impairment $ 7 $ — $ — $ — $ — $ 7 Loans collectively evaluated for impairment $ 9,148 $ 2,906 $ 650 $ 1,043 $ 442 $ 14,189 Total $ 9,155 $ 2,906 $ 650 $ 1,043 $ 442 $ 14,196 Loans balance at December 31, 2017 related to: Loans individually evaluated for impairment $ 3,672 $ 2,461 $ — $ 227 $ — $ 6,360 Loans collectively evaluated for impairment 390,821 554,296 34,614 78,539 — 1,058,270 Total $ 394,493 $ 556,757 $ 34,614 $ 78,766 $ — $ 1,064,630 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 factors in our evaluation of the adequacy of the ALLL. The following table provides a summary of the delinquency status of loans by portfolio type at December 31, 2017 and 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 December 31, 2017 Commercial loans $ 1,387 $ — $ 2,125 $ 3,512 $ 390,981 $ 394,493 $ — Commercial real estate loans – owner-occupied — — — — 214,365 214,365 — Commercial real estate loans – all other — 936 — 936 227,154 228,090 — Residential mortgage loans – multi-family — — — — 114,302 114,302 — Residential mortgage loans – single family — — — — 24,848 24,848 — Land development loans — — — — 34,614 34,614 — Consumer loans — — — — 53,918 53,918 — Total $ 1,387 $ 936 $ 2,125 $ 4,448 $ 1,060,182 $ 1,064,630 $ — 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 December 31, 2017 or December 31, 2016 . 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, 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. 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 December 31, 2017 and 2016 : December 31, 2017 2016 (Dollars in thousands) Nonaccrual loans: Commercial loans $ 3,222 $ 20,330 Commercial real estate loans – owner occupied 893 2,643 Commercial real estate loans – all other 1,568 1,703 Residential mortgage loans – single family 171 221 Consumer loans 56 — Total (1) $ 5,910 $ 24,897 (1) Nonaccrual loans may include loans that are currently considered performing loans. We classify our loan portfolio using internal credit quality ratings. The following table provides a summary of loans by portfolio type and our internal credit quality ratings as of December 31, 2017 and 2016 , respectively. December 31, (Dollars in thousands) 2017 2016 Increase (Decrease) Pass: Commercial loans $ 375,024 $ 287,717 $ 87,307 Commercial real estate loans – owner occupied 207,094 197,497 9,597 Commercial real estate loans – all other 226,522 169,292 57,230 Residential mortgage loans – multi family 114,302 130,930 (16,628 ) Residential mortgage loans – single family 24,677 34,306 (9,629 ) Construction and land development loans 34,614 18,485 16,129 Consumer loans 53,862 41,563 12,299 Total pass loans $ 1,036,095 $ 879,790 $ 156,305 Special Mention: Commercial loans $ 11,009 $ 4,672 $ 6,337 Commercial real estate loans – owner occupied 6,378 7,834 (1,456 ) Commercial real estate loans – all other — 2,228 (2,228 ) Total special mention loans $ 17,387 $ 14,734 $ 2,653 Substandard: Commercial loans $ 8,094 $ 37,668 $ (29,574 ) Commercial real estate loans – owner occupied 893 9,089 (8,196 ) Commercial real estate loans – all other 1,568 1,703 (135 ) Residential mortgage loans – single family 171 221 (50 ) Consumer loans 56 — 56 Total substandard loans $ 10,782 $ 48,681 $ (37,899 ) Doubtful: Commercial loans $ 366 $ 3,319 $ (2,953 ) Total doubtful loans $ 366 $ 3,319 $ (2,953 ) Total Loans: $ 1,064,630 $ 946,524 $ 118,106 Impaired Loans A loan generally is classified as impaired and placed on nonaccrual status 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 December 31, 2017 and December 31, 2016 : December 31, (Dollars in thousands) 2017 2016 Impaired loans: Nonaccruing loans $ 5,101 $ 15,966 Nonaccruing restructured loans 809 8,931 Accruing restructured loans (1) 450 — Total impaired loans $ 6,360 $ 24,897 Impaired loans less than 90 days delinquent and included in total impaired loans $ 3,994 $ 9,948 (1) See "Troubled Debt Restructurings" below for a description of accruing restructured loans at December 31, 2017 and December 31, 2016 . The table below contains additional information with respect to impaired loans, by portfolio type, as of December 31, 2017 and 2016 : December 31, 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 $ 3,222 $ 5,910 $ — $ 17,021 $ 19,048 $ — Commercial real estate loans – owner occupied 893 945 — 2,643 4,335 — Commercial real estate loans – all other 1,568 1,965 — 1,703 1,965 — Residential mortgage loans – single family 171 185 — 221 225 — Consumer loans 56 73 — — — — Total 5,910 9,078 — 21,588 25,573 — With allowance recorded: Commercial loans $ 450 $ 450 $ 7 $ 3,309 $ 4,764 $ 2,042 Total 450 450 7 3,309 4,764 2,042 Total Commercial loans $ 3,672 $ 6,360 $ 7 $ 20,330 $ 23,812 $ 2,042 Commercial real estate loans – owner occupied 893 945 — 2,643 4,335 — Commercial real estate loans – all other 1,568 1,965 — 1,703 1,965 — Residential mortgage loans – single family 171 185 — 221 225 — Consumer loans 56 73 — — — — Total 6,360 9,528 7 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 December 31, 2017 and December 31, 2016 , there were $5.9 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 December 31, 2017 for which no specific reserves were allocated, $3.1 million had been deemed impaired in the prior year. Average balances and interest income recognized on impaired loans, by portfolio type, for the year ended December 31, 2017 , 2016 and 2015 were as follows: Year Ended December 31, 2017 2016 2015 Average Balance Interest Income Recognized Average Balance Interest Income Recognized Average Balance Interest Income Recognized No allowance recorded: Commercial loans $ 10,178 $ 128 $ 13,686 $ 437 $ 13,455 $ 178 Commercial real estate loans – owner occupied 1,215 — 2,455 3 2,494 115 Commercial real estate loans – all other 1,616 — 4,413 — 6,256 337 Residential mortgage loans – multi-family — — 350 — 451 13 Residential mortgage loans – single family 183 — 339 9 3,137 — Construction and land development loans — — 871 — 1,665 7 Consumer loans 80 5 173 — — — Total 13,272 133 22,287 449 27,458 650 With allowance recorded: Commercial loans 3,150 33 4,728 457 528 — Commercial real estate loans – owner occupied — — 962 — 815 — Total 3,150 33 5,690 457 1,343 — Total Commercial loans 13,328 161 18,414 894 13,983 178 Commercial real estate loans – owner occupied 1,215 — 3,417 3 3,309 115 Commercial real estate loans – all other 1,616 — 4,413 — 6,256 337 Residential mortgage loans – multi-family — — 350 — 451 13 Residential mortgage loans – single family 183 — 339 9 3,137 — Construction and land development loans — — 871 — 1,665 7 Consumer loans 80 5 173 — — — Total $ 16,422 $ 166 $ 27,977 $ 906 $ 28,801 $ 650 The interest that would have been earned had the impaired loans remained current in accordance with their original terms was $462 thousand in 2017 , $1.2 million in 2016 and $899 thousand in 2015 . Troubled Debt Restructurings Pursuant to the FASB's ASU No. 2011-2, A Creditor's Determination of whether a Restructuring is a Troubled Debt Restructuring , the Company's TDRs totaled $1.3 million and $8.9 million at December 31, 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 $1.3 million of TDRs outstanding at December 31, 2017 , $450 thousand were performing in accordance with their terms and accruing interest. Our impairment analysis determined $7 thousand of specific reserves were required on the TDR balances outstanding at December 31, 2017 . The following table presents loans restructured as TDRs during the years ended December 31, 2017 , 2016 and 2015 : Year Ended December 31, 2017 2016 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 Number of loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Performing Commercial loans 1 $ 450 $ 450 — $ — $ — 2 $ 147 $ 147 Commercial real estate - owner occupied — — — — — — 1 177 177 Commercial real estate – all other — — — — — — 1 400 400 1 450 450 — — — 4 724 724 Nonperforming Commercial loans 1 1,329 809 — — — 3 2,634 2,634 Commercial real estate – owner occupied — — — — — — 2 1,778 1,778 Commercial real estate – all other — — — — — — 1 4,114 4,114 1 1,329 809 — — — 6 8,526 8,526 Total troubled debt restructurings (1) 2 $ 1,779 $ 1,259 — $ — $ — 10 $ 9,250 $ 9,250 (1) No loans were restructured during the year ended December 31, 2016. During the years ended December 31, 2017 , 2016 and 2015 , TDRs that were modified within the preceding 12-month period which subsequently defaulted were as follows: Year Ended December 31, 2017 2016 2015 Number of loans Recorded Investment Number of loans Recorded Investment Number of loans Recorded Investment (Dollars in thousands) Commercial real estate - owner occupied (1) — $ — 1 $ 753 1 $ 4,114 (1) As of December 31, 2017, no TDRs were modified within the preceding 12-month period which subsequently defaulted. |