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, 2018 December 31, 2017 (Dollars in thousands) Amount Percent Amount Percent Commercial loans $ 403,152 38.1 % $ 394,493 37.1 % Commercial real estate loans – owner occupied 225,018 21.2 % 214,365 20.1 % Commercial real estate loans – all other 224,555 21.2 % 228,090 21.4 % Residential mortgage loans – multi-family 90,270 8.5 % 114,302 10.7 % Residential mortgage loans – single family 24,583 2.3 % 24,848 2.3 % Construction and land development loans 30,395 2.9 % 34,614 3.3 % Consumer loans 61,084 5.8 % 53,918 5.1 % Gross loans 1,059,057 100.0 % 1,064,630 100.0 % Deferred fee (income) costs, net 3,315 2,767 Allowance for loan and lease losses (13,369 ) (14,196 ) Loans, net $ 1,049,003 $ 1,053,201 At June 30, 2018 and December 31, 2017 , real estate loans of approximately $800 million and $669 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, 2018 , we sold $15.1 million of commercial real estate loans - all other at par value. No loans were sold during the three and six months ended June 30, 2017. During the three and six months ended June 30, 2018 , we purchased no loans. During the three and six months ended June 30, 2017, we purchased $30.1 million of performing commercial real estate loans - owner occupied and commercial real estate loans - all other. 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, by portfolio type, during the three and six months ended June 30, 2018 and 2017: (Dollars in thousands) Commercial Real Estate Construction and Land Development Consumer and Single Family Mortgages Unallocated Total ALLL in the three months ended June 30, 2018: Balance at beginning of period $ 7,634 $ 3,255 $ 888 $ 1,112 $ 516 $ 13,405 Charge offs (355 ) — — — — (355 ) Recoveries 288 — — 31 — 319 Provision (74 ) (302 ) (561 ) 435 502 — Balance at end of period $ 7,493 $ 2,953 $ 327 $ 1,578 $ 1,018 $ 13,369 ALLL in the six months ended June 30, 2018: Balance at beginning of period $ 9,155 $ 2,906 $ 650 $ 1,043 $ 442 $ 14,196 Charge offs (1,423 ) — — — — (1,423 ) Recoveries 560 — — 36 — 596 Provision (799 ) 47 (323 ) 499 576 — Balance at end of period $ 7,493 $ 2,953 $ 327 $ 1,578 $ 1,018 $ 13,369 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 Set forth below is information regarding loan balances and the related ALLL, by portfolio type, as of June 30, 2018 and December 31, 2017 . (Dollars in thousands) Commercial Real Estate Construction and Land Consumer Unallocated Total ALLL balance at June 30, 2018 related to: Loans individually evaluated for impairment $ — $ — $ — $ — $ — $ — Loans collectively evaluated for impairment 7,493 2,953 327 1,578 1,018 13,369 Total $ 7,493 $ 2,953 $ 327 $ 1,578 $ 1,018 $ 13,369 Loans balance at June 30, 2018 related to: Loans individually evaluated for impairment $ 4,413 $ 862 $ — $ 50 $ — $ 5,325 Loans collectively evaluated for impairment 398,739 538,981 30,395 85,617 — 1,053,732 Total $ 403,152 $ 539,843 $ 30,395 $ 85,667 $ — $ 1,059,057 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 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, 2018 and December 31, 2017 : (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, 2018 Commercial loans $ 553 $ 6,245 $ 2,669 $ 9,467 $ 393,685 $ 403,152 $ — Commercial real estate loans – owner-occupied — 3,870 — 3,870 221,148 225,018 — Commercial real estate loans – all other — — — — 224,555 224,555 — Residential mortgage loans – multi-family — — — — 90,270 90,270 — Residential mortgage loans – single family — — — — 24,583 24,583 — Construction and land development loans — — — — 30,395 30,395 — Consumer loans — — — — 61,084 61,084 — Total $ 553 $ 10,115 $ 2,669 $ 13,337 $ 1,045,720 $ 1,059,057 $ — 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 — Construction and 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 $ — 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, 2018 or December 31, 2017 . 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). Nonaccrual 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, 2018 and December 31, 2017 : June 30, 2018 December 31, 2017 (Dollars in thousands) Nonaccrual loans: Commercial loans $ 4,413 $ 3,222 Commercial real estate loans – owner occupied 862 893 Commercial real estate loans – all other — 1,568 Residential mortgage loans – single family — 171 Consumer 50 56 Total (1) $ 5,325 $ 5,910 (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, 2018 and December 31, 2017 : June 30, 2018 December 31, 2017 (Dollars in thousands) Pass: Commercial loans $ 385,462 $ 375,024 Commercial real estate loans – owner occupied 217,697 207,094 Commercial real estate loans – all other 214,055 226,522 Residential mortgage loans – multi family 90,270 114,302 Residential mortgage loans – single family 24,583 24,677 Construction and land development loans 30,395 34,614 Consumer loans 61,034 53,862 Total pass loans $ 1,023,496 $ 1,036,095 Special Mention: Commercial loans $ 9,788 $ 11,009 Commercial real estate loans – owner occupied 2,589 6,378 Commercial real estate loans – all other 10,500 — Total special mention loans $ 22,877 $ 17,387 Substandard: Commercial loans $ 7,902 $ 8,094 Commercial real estate loans – owner occupied 4,732 893 Commercial real estate loans – all other — 1,568 Residential mortgage loans – single family — 171 Consumer loans 50 56 Total substandard loans $ 12,684 $ 10,782 Doubtful: Commercial loans $ — $ 366 Total doubtful loans $ — $ 366 Total Loans: $ 1,059,057 $ 1,064,630 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, 2018 and December 31, 2017 : June 30, 2018 December 31, 2017 (Dollars in thousands) Impaired loans: Nonaccruing loans $ 5,325 $ 5,101 Nonaccruing restructured loans (1) — 809 Accruing restructured loans (1)(2) — 450 Total impaired loans $ 5,325 $ 6,360 Impaired loans less than 90 days delinquent and included in total impaired loans $ 2,656 $ 3,994 (1) As of June 30, 2018, we had no restructured loans. (2) See “ Troubled Debt Restructurings ” below for a description of accruing restructured loans at June 30, 2018 and December 31, 2017. The table below contains additional information with respect to impaired loans, by portfolio type, as of June 30, 2018 and December 31, 2017 : June 30, 2018 December 31, 2017 Recorded Investment Unpaid Principal Balance Related Allowance (1) Recorded Investment Unpaid Principal Balance Related Allowance (1) (Dollars in thousands) No allowance recorded: Commercial loans $ 4,413 $ 5,268 $ — $ 3,222 $ 5,910 $ — Commercial real estate loans – owner occupied 862 933 — 893 945 — Commercial real estate loans – all other — — — 1,568 1,965 — Residential mortgage loans – single family — — — 171 185 — Consumer loans 50 70 — 56 73 — Total 5,325 6,271 — 5,910 9,078 — With allowance recorded: Commercial loans $ — $ — $ — $ 450 $ 450 $ 7 Total — — — 450 450 7 Total Commercial loans $ 4,413 $ 5,268 $ — $ 3,672 $ 6,360 $ 7 Commercial real estate loans – owner occupied 862 933 — 893 945 — Commercial real estate loans – all other — — — 1,568 1,965 — Residential mortgage loans – single family — — — 171 185 — Consumer loans 50 70 — 56 73 — Total 5,325 6,271 — 6,360 9,528 7 (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, 2018 and December 31, 2017 , there were $5.3 million and $5.9 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, 2018 for which no specific reserves were allocated, $1.7 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, 2018 and 2017 were as follows: Three Months Ended June 30, Six Months Ended June 30, 2018 2017 2018 2017 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 $ 4,408 $ — $ 17,312 $ 10 $ 4,013 $ 62 $ 16,462 $ 39 Commercial real estate loans – owner occupied 871 — 1,411 — 879 — 2,057 — Commercial real estate loans – all other 739 — 1,647 — 1,016 — 1,683 — Residential mortgage loans – multi-family — — — — — — 107 — Residential mortgage loans – single family — — 195 — 57 — 212 — Consumer loans 52 — 133 — 53 — 66 1 Total 6,070 — 20,698 10 6,018 62 20,587 40 With allowance recorded: Commercial loans 193 — 3,584 8 279 — 4,562 15 Total 193 — 3,584 8 279 — 4,562 15 Total Commercial loans 4,601 — 20,896 18 4,292 62 21,024 54 Commercial real estate loans – owner occupied 871 — 1,411 — 879 — 2,057 — Commercial real estate loans – all other 739 — 1,647 — 1,016 — 1,683 — Residential mortgage loans – multi-family — — — — — — 107 — Residential mortgage loans – single family — — 195 — 57 — 212 — Consumer loans 52 — 133 — 53 — 66 1 Total $ 6,263 $ — $ 24,282 $ 18 $ 6,297 $ 62 $ 25,149 $ 55 The interest that would have been earned had the impaired loans remained current in accordance with their original terms was $101 thousand and $429 thousand during the three months ended June 30, 2018 and 2017 , respectively, and $206 thousand and $836 thousand during the six months ended June 30, 2018 and 2017 , 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 $0 and $1.3 million at June 30, 2018 and December 31, 2017 , 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 form 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. The following table presents loans restructured as TDRs during the three and six months ended June 30, 2018 and 2017 : Three Months Ended June 30, 2018 June 30, 2017 (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, 2018 June 30, 2017 (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 — — — 2 1,819 1,526 — — — 2 1,819 1,526 Total Troubled Debt Restructurings (1) — $ — $ — 3 $ 2,329 $ 2,036 (1) No outstanding loans were restructured during the three and six months ended June 30, 2018. During the three and six months ended June 30, 2018 and 2017 , TDRs that were modified within the preceding 12-month period which subsequently defaulted were as follows: Three Months Ended Six Months Ended June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017 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 — $ — — $ — — $ — — $ — Commercial real estate - owner occupied — $ — — $ — — $ — — $ — Total (1) — $ — — $ — — $ — — $ — (1) During the three and six months ended June 30, 2018 and 2017, there were no TDRs that were modified within the preceding 12-month period which subsequently defaulted. |