Loans and Allowance for Loan and Lease Losses | Loans and Allowance for Loan and Lease Losses The loan portfolio consisted of the following at: September 30, 2018 December 31, 2017 (Dollars in thousands) Amount Percent Amount Percent Commercial loans $ 414,995 38.4 % $ 394,493 37.1 % Commercial real estate loans – owner occupied 226,861 21.0 % 214,365 20.1 % Commercial real estate loans – all other 232,316 21.5 % 228,090 21.4 % Residential mortgage loans – multi-family 88,563 8.2 % 114,302 10.7 % Residential mortgage loans – single family 21,634 2.0 % 24,848 2.3 % Construction and land development loans 36,961 3.4 % 34,614 3.3 % Consumer loans 59,585 5.5 % 53,918 5.1 % Gross loans 1,080,915 100.0 % 1,064,630 100.0 % Deferred fee (income) costs, net 3,299 2,767 Allowance for loan and lease losses (13,463 ) (14,196 ) Loans, net $ 1,070,751 $ 1,053,201 At September 30, 2018 and December 31, 2017 , real estate loans of approximately $772 million and $669 million , respectively, were pledged to secure borrowings obtained from the FHLB and to support our unfunded borrowing capacity. During the nine months ended September 30, 2018 , we sold $15.1 million of commercial real estate loans - all other at par value. No loans were sold during the three months ended September 30, 2018 and the three and nine months ended September 30, 2017. During the three and nine months ended September 30, 2018 and the three months ended September 30, 2017, we purchased no loans. During the nine months ended September 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 nine months ended September 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 September 30, 2018: Balance at beginning of period $ 7,493 $ 2,953 $ 327 $ 1,578 $ 1,018 $ 13,369 Charge offs (416 ) — — (3 ) — (419 ) Recoveries 448 60 — 5 — 513 Provision (229 ) 664 81 (21 ) (495 ) — Balance at end of period $ 7,296 $ 3,677 $ 408 $ 1,559 $ 523 $ 13,463 ALLL in the nine months ended September 30, 2018: Balance at beginning of period $ 9,155 $ 2,906 $ 650 $ 1,043 $ 442 $ 14,196 Charge offs (1,840 ) — — (3 ) — (1,843 ) Recoveries 1,009 60 — 41 — 1,110 Provision (1,028 ) 711 (242 ) 478 81 — Balance at end of period $ 7,296 $ 3,677 $ 408 $ 1,559 $ 523 $ 13,463 ALLL in the three months ended September 30, 2017: Balance at beginning of period $ 10,113 $ 4,657 $ 157 $ 1,123 $ 1,128 $ 17,178 Charge offs (2,228 ) — — (47 ) — (2,275 ) Recoveries 140 — — 5 — 145 Provision 1,140 (615 ) 189 (89 ) (625 ) — Balance at end of period $ 9,165 $ 4,042 $ 346 $ 992 $ 503 $ 15,048 ALLL in the nine months ended September 30, 2017: Balance at beginning of period $ 11,276 $ 4,226 $ 343 $ 642 $ 314 $ 16,801 Charge offs (2,694 ) (432 ) — (161 ) — (3,287 ) Recoveries 1,334 — 27 173 — 1,534 Provision (751 ) 248 (24 ) 338 189 — Balance at end of period $ 9,165 $ 4,042 $ 346 $ 992 $ 503 $ 15,048 Set forth below is information regarding loan balances and the related ALLL, by portfolio type, as of September 30, 2018 and December 31, 2017 . (Dollars in thousands) Commercial Real Estate Construction and Land Consumer Unallocated Total ALLL balance at September 30, 2018 related to: Loans individually evaluated for impairment $ — $ — $ — $ — $ — $ — Loans collectively evaluated for impairment 7,296 3,677 408 1,559 523 13,463 Total $ 7,296 $ 3,677 $ 408 $ 1,559 $ 523 $ 13,463 Loans balance at September 30, 2018 related to: Loans individually evaluated for impairment $ 4,985 $ 850 $ — $ 46 $ — $ 5,881 Loans collectively evaluated for impairment 410,010 546,890 36,961 81,173 — 1,075,034 Total $ 414,995 $ 547,740 $ 36,961 $ 81,219 $ — $ 1,080,915 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 September 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 September 30, 2018 Commercial loans $ 813 $ 5,544 $ 2,669 $ 9,026 $ 405,969 $ 414,995 $ — Commercial real estate loans – owner-occupied 3,870 850 — 4,720 222,141 226,861 — Commercial real estate loans – all other — — — — 232,316 232,316 — Residential mortgage loans – multi-family — — — — 88,563 88,563 — Residential mortgage loans – single family — — — — 21,634 21,634 — Construction and land development loans — — — — 36,961 36,961 — Consumer loans — — — — 59,585 59,585 — Total $ 4,683 $ 6,394 $ 2,669 $ 13,746 $ 1,067,169 $ 1,080,915 $ — 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 September 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 September 30, 2018 and December 31, 2017 : September 30, 2018 December 31, 2017 (Dollars in thousands) Nonaccrual loans: Commercial loans $ 4,985 $ 3,222 Commercial real estate loans – owner occupied 850 893 Commercial real estate loans – all other — 1,568 Residential mortgage loans – single family — 171 Consumer 46 56 Total (1) $ 5,881 $ 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 September 30, 2018 and December 31, 2017 : September 30, 2018 December 31, 2017 (Dollars in thousands) Pass: Commercial loans $ 394,807 $ 375,024 Commercial real estate loans – owner occupied 217,085 207,094 Commercial real estate loans – all other 221,816 226,522 Residential mortgage loans – multi family 88,563 114,302 Residential mortgage loans – single family 21,634 24,677 Construction and land development loans 36,961 34,614 Consumer loans 59,539 53,862 Total pass loans $ 1,040,405 $ 1,036,095 Special Mention: Commercial loans $ 12,692 $ 11,009 Commercial real estate loans – owner occupied 5,056 6,378 Commercial real estate loans – all other 10,500 — Total special mention loans $ 28,248 $ 17,387 Substandard: Commercial loans $ 7,496 $ 8,094 Commercial real estate loans – owner occupied 4,720 893 Commercial real estate loans – all other — 1,568 Residential mortgage loans – single family — 171 Consumer loans 46 56 Total substandard loans $ 12,262 $ 10,782 Doubtful: Commercial loans $ — $ 366 Total doubtful loans $ — $ 366 Total Loans: $ 1,080,915 $ 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 September 30, 2018 and December 31, 2017 : September 30, 2018 December 31, 2017 (Dollars in thousands) Impaired loans: Nonaccruing loans $ 5,881 $ 5,101 Nonaccruing restructured loans (1) — 809 Accruing restructured loans (1)(2) — 450 Total impaired loans $ 5,881 $ 6,360 Impaired loans less than 90 days delinquent and included in total impaired loans $ 3,212 $ 3,994 (1) As of September 30, 2018, we had no restructured loans. (2) See “ Troubled Debt Restructurings ” below for a description of accruing restructured loans at September 30, 2018 and December 31, 2017. The table below contains additional information with respect to impaired loans, by portfolio type, as of September 30, 2018 and December 31, 2017 : September 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 $ 4,985 $ 5,821 $ — $ 3,222 $ 5,910 $ — Commercial real estate loans – owner occupied 850 933 — 893 945 — Commercial real estate loans – all other — — — 1,568 1,965 — Residential mortgage loans – single family — — — 171 185 — Consumer loans 46 67 — 56 73 — Total 5,881 6,821 — 5,910 9,078 — With allowance recorded: Commercial loans $ — $ — $ — $ 450 $ 450 $ 7 Total — — — 450 450 7 Total Commercial loans $ 4,985 $ 5,821 $ — $ 3,672 $ 6,360 $ 7 Commercial real estate loans – owner occupied 850 933 — 893 945 — Commercial real estate loans – all other — — — 1,568 1,965 — Residential mortgage loans – single family — — — 171 185 — Consumer loans 46 67 — 56 73 — Total 5,881 6,821 — 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 September 30, 2018 and December 31, 2017 , there were $5.9 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 September 30, 2018 for which no specific reserves were allocated, $1.6 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 nine months ended September 30, 2018 and 2017 were as follows: Three Months Ended September 30, Nine Months Ended September 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 $ 4,700 $ 39 $ 8,547 $ 19 $ 4,256 $ 101 $ 13,628 $ 89 Commercial real estate loans – owner occupied 856 — 1,164 — 871 — 1,653 — Commercial real estate loans – all other — — 1,613 — 762 — 1,650 — Residential mortgage loans – single family — — 180 — 43 — 196 — Consumer loans 48 — 18 — 51 — 66 1 Total 5,604 39 11,522 19 5,983 101 17,193 90 With allowance recorded: Commercial loans — — 5,314 8 209 — 3,865 24 Total — — 5,314 8 209 — 3,865 24 Total Commercial loans 4,700 39 13,861 27 4,465 101 17,493 113 Commercial real estate loans – owner occupied 856 — 1,164 — 871 — 1,653 — Commercial real estate loans – all other — — 1,613 — 762 — 1,650 — Residential mortgage loans – single family — — 180 — 43 — 196 — Consumer loans 48 — 18 — 51 — 66 1 Total $ 5,604 $ 39 $ 16,836 $ 27 $ 6,192 $ 101 $ 21,058 $ 114 The interest that would have been earned had the impaired loans remained current in accordance with their original terms was $131 thousand and $210 thousand during the three months ended September 30, 2018 and 2017 , respectively, and $293 thousand and $563 thousand during the nine months ended September 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 September 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 nine months ended September 30, 2018 and 2017 : Three Months Ended September 30, 2018 September 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 — $ — $ — — $ — $ — — — — — — — Nonperforming Commercial loans — — — — — — — — — — — — Total Troubled Debt Restructurings (1) — $ — $ — — $ — $ — Nine Months Ended September 30, 2018 September 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 $ 489 $ 489 — — — 1 489 489 Nonperforming Commercial loans — — — 2 1,739 1,101 — — — 2 1,739 1,101 Total Troubled Debt Restructurings (1) — $ — $ — 3 $ 2,228 $ 1,590 (1) No outstanding loans were restructured during the three and nine months ended September 30, 2018. During the three and nine months ended September 30, 2018 and 2017 , TDRs that were modified within the preceding 12-month period which subsequently defaulted were as follows: Three Months Ended Nine Months Ended September 30, 2018 September 30, 2017 September 30, 2018 September 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 nine months ended September 30, 2018 and 2017, there were no TDRs that were modified within the preceding 12-month period which subsequently defaulted. |