Loans and Allowance for Loan and Lease Losses | Loans and Allowance for Loan and Lease Losses The loan portfolio consisted of the following at: March 31, 2019 December 31, 2018 (Dollars in thousands) Amount Percent Amount Percent Commercial loans $ 448,021 41.8 % $ 444,441 40.6 % Commercial real estate loans – owner occupied 213,334 19.9 % 211,645 19.3 % Commercial real estate loans – all other 220,106 20.5 % 226,441 20.7 % Residential mortgage loans – multi-family 91,856 8.6 % 97,173 8.9 % Residential mortgage loans – single family 19,776 1.8 % 21,176 1.9 % Construction and land development loans 29,261 2.7 % 38,496 3.5 % Consumer loans 49,549 4.6 % 54,514 5.0 % Gross loans 1,071,903 100.0 % 1,093,886 100.0 % Deferred fee (income) costs, net 2,608 2,860 Allowance for loan and lease losses (11,514 ) (13,506 ) Loans, net $ 1,062,997 $ 1,083,240 At March 31, 2019 and December 31, 2018 , real estate loans of approximately $847 million and $807 million , respectively, were pledged to secure borrowings obtained from the FHLB and to support our unfunded borrowing capacity. At March 31, 2019 and December 31, 2018 , real estate and consumer loans of $228 million and $51 million , respectively, were pledged to secure borrowings from the FRB to support our unfunded borrowing capacity. No loans were sold during either the three months ended March 31, 2019 or March 31, 2018. During the three months ended March 31, 2019 and March 31, 2018, we purchased no loans. 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 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 three months ended March 31, 2019 and 2018: (Dollars in thousands) Commercial Real Estate Construction and Land Development Consumer and Single Family Mortgages Unallocated Total ALLL in the three months ended March 31, 2019: Balance at beginning of period $ 8,071 $ 3,643 $ 426 $ 1,290 $ 76 $ 13,506 Charge offs (5,669 ) — — (29 ) — (5,698 ) Recoveries 401 — — 5 — 406 Provision 4,092 (934 ) (131 ) 220 53 3,300 Balance at end of period $ 6,895 $ 2,709 $ 295 $ 1,486 $ 129 $ 11,514 ALLL in the three months ended March 31, 2018: Balance at beginning of period $ 9,155 $ 2,906 $ 650 $ 1,043 $ 442 $ 14,196 Charge offs (1,068 ) — — — — (1,068 ) Recoveries 272 — — 5 — 277 Provision (725 ) 349 238 64 74 — Balance at end of period $ 7,634 $ 3,255 $ 888 $ 1,112 $ 516 $ 13,405 Set forth below is information regarding loan balances and the related ALLL, by portfolio type, as of March 31, 2019 and December 31, 2018 . (Dollars in thousands) Commercial Real Estate Construction and Land Consumer Unallocated Total ALLL balance at March 31, 2019 related to: Loans individually evaluated for impairment $ — $ — $ — $ — $ — $ — Loans collectively evaluated for impairment 6,895 2,709 295 1,486 129 11,514 Total $ 6,895 $ 2,709 $ 295 $ 1,486 $ 129 $ 11,514 Loans balance at March 31, 2019 related to: Loans individually evaluated for impairment $ 351 $ 807 $ — $ — $ — $ 1,158 Loans collectively evaluated for impairment 447,670 524,489 29,261 69,325 — 1,070,745 Total $ 448,021 $ 525,296 $ 29,261 $ 69,325 $ — $ 1,071,903 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 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 March 31, 2019 and December 31, 2018 : (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 March 31, 2019 Commercial loans $ 351 $ — $ — $ 351 $ 447,670 $ 448,021 $ — Commercial real estate loans – owner-occupied 807 — — 807 212,527 213,334 — Commercial real estate loans – all other — — — — 220,106 220,106 — Residential mortgage loans – multi-family — — — — 91,856 91,856 — Residential mortgage loans – single family — — — — 19,776 19,776 — Construction and land development loans — — — — 29,261 29,261 — Consumer loans — — — — 49,549 49,549 — Total $ 1,158 $ — $ — $ 1,158 $ 1,070,745 $ 1,071,903 $ — 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 — Construction and 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 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 March 31, 2019 . There were $1.3 million of loans 90 days or more past due and still accruing interest at December 31, 2018 . 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 March 31, 2019 and December 31, 2018 : March 31, 2019 December 31, 2018 (Dollars in thousands) Nonaccrual loans: Commercial loans $ 475 $ 3,352 Commercial real estate loans – owner occupied 807 831 Consumer 39 43 Total (1) $ 1,321 $ 4,226 (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 March 31, 2019 and December 31, 2018 : March 31, 2019 December 31, 2018 (Dollars in thousands) Pass: Commercial loans $ 429,800 $ 428,287 Commercial real estate loans – owner occupied 207,659 205,914 Commercial real estate loans – all other 220,106 226,441 Residential mortgage loans – multi family 91,856 97,173 Residential mortgage loans – single family 19,776 21,176 Construction and land development loans 29,261 38,496 Consumer loans 49,441 54,415 Total pass loans $ 1,047,899 $ 1,071,902 Special Mention: Commercial loans $ 15,152 $ 10,411 Commercial real estate loans – owner occupied 4,869 4,900 Total special mention loans $ 20,021 $ 15,311 Substandard: Commercial loans $ 3,069 $ 5,743 Commercial real estate loans – owner occupied 806 831 Consumer loans 108 99 Total substandard loans $ 3,983 $ 6,673 Doubtful: Total doubtful loans $ — $ — Total Loans: $ 1,071,903 $ 1,093,886 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 March 31, 2019 and December 31, 2018 : March 31, 2019 December 31, 2018 (Dollars in thousands) Impaired loans: Nonaccruing loans $ 1,321 $ 4,226 Nonaccruing restructured loans (1) — — Accruing restructured loans (1)(2) — — Total impaired loans $ 1,321 $ 4,226 Impaired loans less than 90 days delinquent and included in total impaired loans $ 1,321 $ 1,232 (1) As of March 31, 2019 and December 31, 2018, we had no restructured loans. (2) See “ Troubled Debt Restructurings ” below for a description of accruing restructured loans at March 31, 2019 and December 31, 2018. The table below contains additional information with respect to impaired loans, by portfolio type, as of March 31, 2019 and December 31, 2018 : March 31, 2019 December 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance (1) Recorded Investment Unpaid Principal Balance Related Allowance (1) (Dollars in thousands) No allowance recorded: Commercial loans $ 475 $ 654 $ — $ 3,352 $ 4,516 $ — Commercial real estate loans – owner occupied 807 912 — 831 925 — Consumer loans 39 62 — 43 65 — Total 1,321 1,628 — 4,226 5,506 — With allowance recorded: Total — — — — — — Total Commercial loans $ 475 $ 654 $ — $ 3,352 $ 4,516 $ — Commercial real estate loans – owner occupied 807 912 — 831 925 — Consumer loans 39 62 — 43 65 — Total 1,321 1,628 — 4,226 5,506 — (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 March 31, 2019 and December 31, 2018 , there were $1.3 million and $4.2 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 March 31, 2019 for which no specific reserves were allocated, $1.3 million had been deemed impaired in the prior year. Average balances and interest income recognized on impaired loans, by portfolio type, for the three months ended March 31, 2019 and 2018 were as follows: Three Months Ended March 31, 2019 2018 Average Balance Interest Income Recognized Average Balance Interest Income Recognized (Dollars in thousands) No allowance recorded: Commercial loans $ 1,914 $ — $ 3,813 $ 62 Commercial real estate loans – owner occupied 819 — 887 — Commercial real estate loans – all other — — 1,523 — Residential mortgage loans – single family — — 85 — Consumer loans 41 — 55 — Total 2,774 — 6,363 62 With allowance recorded: Commercial loans — — 418 9 Total — — 418 9 Total Commercial loans 1,914 — 4,231 71 Commercial real estate loans – owner occupied 819 — 887 — Commercial real estate loans – all other — — 1,523 — Residential mortgage loans – single family — — 85 — Consumer loans 41 — 55 — Total $ 2,774 $ — $ 6,781 $ 71 The interest that would have been earned had the impaired loans remained current in accordance with their original terms was $28 thousand and $187 thousand during the three months ended March 31, 2019 and 2018 , 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 at both March 31, 2019 and December 31, 2018 . 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. There were no loans restructured as TDRs during the three months ended March 31, 2019 or 2018. |