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, 2018 December 31, 2017 (Dollars in thousands) Amount Percent Amount Percent Commercial loans $ 444,441 40.6 % $ 394,493 37.1 % Commercial real estate loans – owner occupied 211,645 19.3 % 214,365 20.1 % Commercial real estate loans – all other 226,441 20.7 % 228,090 21.4 % Residential mortgage loans – multi-family 97,173 8.9 % 114,302 10.7 % Residential mortgage loans – single family 21,176 1.9 % 24,848 2.3 % Construction and land development loans 38,496 3.5 % 34,614 3.3 % Consumer loans 54,514 5.0 % 53,918 5.1 % Gross loans 1,093,886 100.0 % 1,064,630 100.0 % Deferred fee (income) costs, net 2,860 2,767 Allowance for loan and lease losses (13,506 ) (14,196 ) Loans, net $ 1,083,240 $ 1,053,201 At December 31, 2018 and 2017 , real estate loans of approximately $807 million and $669 million , respectively, were pledged to secure borrowings obtained from the FHLB. During the year ended December 31, 2018 , we sold $15.1 million of commercial real estate loans - all other at par value. No loans were sold during the years ended December 31, 2017 or 2016 . We purchased $10.0 million of performing commercial real estate - owner occupied, commercial real estate - all other and residential mortgage - multifamily loans during the year ended December 31, 2018 , $30.1 million of performing commercial real estate - owner occupied and commercial real estate - all other loans during the year ended December 31, 2017 and $85.8 million of performing residential multi-family mortgage and commercial real estate - all other loans during the year ended December 31, 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 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 utilizes a series of nineteen staggered 16-quarter migration periods 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, 2018 , 2017 and 2016 . (Dollars in thousands) Commercial Real Estate Construction and Land Development Consumer and Single Family Mortgages Unallocated Total ALLL in the year ended December 31, 2018: Balance at beginning of year $ 9,155 $ 2,906 $ 650 $ 1,043 $ 442 $ 14,196 Charge offs (2,757 ) — — (8 ) — (2,765 ) Recoveries 1,959 69 — 47 — 2,075 Provision (286 ) 668 (224 ) 208 (366 ) — Balance at end of year $ 8,071 $ 3,643 $ 426 $ 1,290 $ 76 $ 13,506 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 Set forth below is information regarding loan balances and the related ALLL, by portfolio type, as of December 31, 2018 and December 31, 2017 . (Dollars in thousands) Commercial Real Estate Land Development Consumer and Single Family Mortgages Unallocated Total ALLL balance at December 31, 2018 related to: Loans individually evaluated for impairment $ — $ — $ — $ — $ — $ — Loans collectively evaluated for impairment $ 8,071 $ 3,643 $ 426 $ 1,290 $ 76 $ 13,506 Total $ 8,071 $ 3,643 $ 426 $ 1,290 $ 76 $ 13,506 Loans balance at December 31, 2018 related to: Loans individually evaluated for impairment $ 3,352 $ 831 $ — $ 43 $ — $ 4,226 Loans collectively evaluated for impairment 441,089 534,428 38,496 75,647 — 1,089,660 Total $ 444,441 $ 535,259 $ 38,496 $ 75,690 $ — $ 1,093,886 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 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, 2018 and 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 December 31, 2018 Commercial loans $ — $ 3,705 $ 4,273 $ 7,978 $ 436,463 $ 444,441 $ 1,278 Commercial real estate loans – owner-occupied — 831 — 831 210,814 211,645 — Commercial real estate loans – all other — — — — 226,441 226,441 — Residential mortgage loans – multi-family — — — — 97,173 97,173 — Residential mortgage loans – single family — — — — 21,176 21,176 — Land development loans — — — — 38,496 38,496 — Consumer loans 13 — — 13 54,501 54,514 — Total $ 13 $ 4,536 $ 4,273 $ 8,822 $ 1,085,064 $ 1,093,886 $ 1,278 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 $ — 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 $1.3 million loans 90 days or more past due and still accruing interest at December 31, 2018 and none outstanding at December 31, 2017 . 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, 2018 and 2017 : December 31, 2018 2017 (Dollars in thousands) Nonaccrual loans: Commercial loans $ 3,352 $ 3,222 Commercial real estate loans – owner occupied 831 893 Commercial real estate loans – all other — 1,568 Residential mortgage loans – single family — 171 Consumer loans 43 56 Total (1) $ 4,226 $ 5,910 (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, 2018 and 2017 , respectively. December 31, (Dollars in thousands) 2018 2017 Increase (Decrease) Pass: Commercial loans $ 428,287 $ 375,024 $ 53,263 Commercial real estate loans – owner occupied 205,914 207,094 (1,180 ) Commercial real estate loans – all other 226,441 226,522 (81 ) Residential mortgage loans – multi family 97,173 114,302 (17,129 ) Residential mortgage loans – single family 21,176 24,677 (3,501 ) Construction and land development loans 38,496 34,614 3,882 Consumer loans 54,415 53,862 553 Total pass loans $ 1,071,902 $ 1,036,095 $ 35,807 Special Mention: Commercial loans $ 10,411 $ 11,009 $ (598 ) Commercial real estate loans – owner occupied 4,900 6,378 (1,478 ) Total special mention loans $ 15,311 $ 17,387 $ (2,076 ) Substandard: Commercial loans $ 5,743 $ 8,094 $ (2,351 ) Commercial real estate loans – owner occupied 831 893 (62 ) Commercial real estate loans – all other — 1,568 (1,568 ) Residential mortgage loans – single family — 171 (171 ) Consumer loans 99 56 43 Total substandard loans $ 6,673 $ 10,782 $ (4,109 ) Doubtful: Commercial loans $ — $ 366 $ (366 ) Total doubtful loans $ — $ 366 $ (366 ) Total Loans: $ 1,093,886 $ 1,064,630 $ 29,256 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, 2018 and December 31, 2017 : December 31, (Dollars in thousands) 2018 2017 Impaired loans: Nonaccruing loans $ 4,226 $ 5,101 Nonaccruing restructured loans — 809 Accruing restructured loans (1) — 450 Total impaired loans $ 4,226 $ 6,360 Impaired loans less than 90 days delinquent and included in total impaired loans $ 1,359 $ 3,994 (1) See "Troubled Debt Restructurings" below for a description of accruing restructured loans at December 31, 2018 and December 31, 2017 . The table below contains additional information with respect to impaired loans, by portfolio type, as of December 31, 2018 and 2017 : December 31, 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 $ 3,352 $ 4,516 $ — $ 3,222 $ 5,910 $ — Commercial real estate loans – owner occupied 831 925 — 893 945 — Commercial real estate loans – all other — — — 1,568 1,965 — Residential mortgage loans – single family — — — 171 185 — Consumer loans 43 65 — 56 73 — Total 4,226 5,506 — 5,910 9,078 — With allowance recorded: Commercial loans $ — $ — $ — $ 450 $ 450 $ 7 Total — — — 450 450 7 Total Commercial loans $ 3,352 $ 4,516 $ — $ 3,672 $ 6,360 $ 7 Commercial real estate loans – owner occupied 831 925 — 893 945 — Commercial real estate loans – all other — — — 1,568 1,965 — Residential mortgage loans – single family — — — 171 185 — Consumer loans 43 65 — 56 73 — Total 4,226 5,506 — 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 December 31, 2018 and December 31, 2017 , there were $4.2 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 December 31, 2018 for which no specific reserves were allocated, $874 thousand 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, 2018 , 2017 and 2016 were as follows: Year Ended December 31, 2018 2017 2016 Average Balance Interest Income Recognized Average Balance Interest Income Recognized Average Balance Interest Income Recognized No allowance recorded: Commercial loans $ 4,289 $ 101 $ 10,178 $ 128 $ 13,686 $ 437 Commercial real estate loans – owner occupied 856 — 1,215 — 2,455 3 Commercial real estate loans – all other 370 — 1,616 — 4,413 — Residential mortgage loans – multi-family — — — — 350 — Residential mortgage loans – single family — — 183 — 339 9 Construction and land development loans — — — — 871 — Consumer loans 48 — 80 5 173 — Total 5,563 101 13,272 133 22,287 449 With allowance recorded: Commercial loans 96 — 3,150 33 4,728 457 Commercial real estate loans – owner occupied — — — — 962 — Total 96 — 3,150 33 5,690 457 Total Commercial loans 4,385 101 13,328 161 18,414 894 Commercial real estate loans – owner occupied 856 — 1,215 — 3,417 3 Commercial real estate loans – all other 370 — 1,616 — 4,413 — Residential mortgage loans – multi-family — — — — 350 — Residential mortgage loans – single family — — 183 — 339 9 Construction and land development loans — — — — 871 — Consumer loans 48 — 80 5 173 — Total $ 5,659 $ 101 $ 16,422 $ 166 $ 27,977 $ 906 The interest that would have been earned had the impaired loans remained current in accordance with their original terms was $362 thousand in 2018 , $462 thousand in 2017 and $1.2 million in 2016 . 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 $0 and $1.3 million at December 31, 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 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. The following table presents loans restructured as TDRs during the years ended December 31, 2018 , 2017 and 2016 : Year Ended December 31, 2018 2017 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 Number of loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Performing Commercial loans — $ — $ — 1 $ 450 $ 450 — $ — $ — — — — 1 450 450 — — — Nonperforming Commercial loans — — — 1 1,329 809 — — — — — — 1 1,329 809 — — — Total troubled debt restructurings (1) — $ — $ — 2 $ 1,779 $ 1,259 — $ — $ — (1) No loans were restructured during the years ended December 31, 2018 or December 31, 2016. During the years ended December 31, 2018 , 2017 and 2016 , TDRs that were modified within the preceding 12-month period which subsequently defaulted were as follows: Year Ended December 31, 2018 2017 2016 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) During the years ended December 31, 2018 or December 31, 2017, no TDRs were modified within the preceding 12-month period which subsequently defaulted. |