Allowance for Loan and Lease Losses | NOTE 4. ALLOWANCE FOR LOAN AND LEASE LOSSES The allowance for loan and lease losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The methodology is based on historical loss experience by type of credit and internal risk grade, changes in the composition and volume of the portfolio, and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of the allowance for loan and lease losses is designated to account for credit deterioration as it occurs. During 2017, the Company refined its allowance for loan loss methodology based upon management’s judgment and applicable regulatory guidance. The calculation of reserves on loans collectively evaluated for impairment was altered to reflect five years of historical loss experience which more appropriately matches the weighted average life of loans in the portfolio. Additionally, the calculated historical loss experience is now allocated across the portfolio’s risk rates using a probability of default curve constructed from the Bank’s historical default data. Management also updated the qualitative component of the reserve on loans collectively evaluated for impairment to allow for a greater sensitivity to current trends. Prior to the second quarter of 2018, the Company was utilizing a peer bank allowance coverage ratio in the qualitative reserve calculation, as the Company did not have enough historical defaults to rely on its own loss factors. As of September 30, 2018, the Company had a sufficient amount of defaults over the five year lookback period to transition over to relying more on its own historical loss data versus peer data. While this did not result in a significant change to the allowance for loan and lease losses as a whole, it continues to impact the provision for certain loan categories in which the Company had experienced more historical defaults. The following tables present information related to allowance for loan and lease losses for the periods presented: Allowance Rollforward Three Months Ended September 30, 2018 Beginning Balance Charge-offs Recoveries Provision Ending Balance (Dollars in thousands) Commercial and industrial loans $ 4,886 $ (275 ) $ 4 $ 76 $ 4,691 Real estate: 1-4 single family residential loans 318 — — (216 ) 102 Construction, land and development loans 195 — — 256 451 Commercial real estate loans (including multifamily) 233 — — 495 728 Consumer loans and leases 346 (74 ) — (90 ) 182 Municipal and other loans 37 — — (35 ) 2 Ending allowance balance $ 6,015 $ (349 ) $ 4 $ 486 $ 6,156 Allowance Rollforward Three Months Ended September 30, 2017 Beginning Balance Charge-offs Recoveries Provision Ending Balance (Dollars in thousands) Commercial and industrial loans $ 2,582 $ (15 ) $ — $ 20 $ 2,587 Real estate: 1-4 single family residential loans 732 — — 201 933 Construction, land and development loans 412 — — 103 515 Commercial real estate loans (including multifamily) 800 — — 255 1,055 Consumer loans and leases 204 (16 ) — (15 ) 173 Municipal and other loans 161 — — 40 201 Ending allowance balance $ 4,891 $ (31 ) $ — $ 604 $ 5,464 Allowance Rollforward Nine Months Ended September 30, 2018 Beginning Balance Charge-offs Recoveries Provision Ending Balance (Dollars in thousands) Commercial and industrial loans $ 3,046 $ (920 ) $ 73 $ 2,492 $ 4,691 Real estate: 1-4 single family residential loans 902 (5 ) — (795 ) 102 Construction, land and development loans 441 — — 10 451 Commercial real estate loans (including multifamily) 898 — — (170 ) 728 Consumer loans and leases 198 (104 ) — 88 182 Municipal and other loans 167 — — (165 ) 2 Ending allowance balance $ 5,652 $ (1,029 ) $ 73 $ 1,460 $ 6,156 Allowance Rollforward Nine Months Ended September 30, 2017 Beginning Balance Charge-offs Recoveries Provision Ending Balance (Dollars in thousands) Commercial and industrial loans $ 2,347 $ (555 ) $ 2 $ 793 $ 2,587 Real estate: 1-4 single family residential loans 647 — — 286 933 Construction, land and development loans 364 — — 151 515 Commercial real estate loans (including multifamily) 667 (15 ) — 403 1,055 Consumer loans and leases 186 (129 ) — 116 173 Municipal and other loans 146 — — 55 201 Ending allowance balance $ 4,357 $ (699 ) $ 2 $ 1,804 $ 5,464 Credit Quality Indicators In evaluating credit risk, the Company looks at multiple factors; however, management considers delinquency status to be the most meaningful indicator of the credit quality of 1-4 single family residential, home equity loans and lines of credit and consumer loans. Delinquency statistics are updated at least monthly. Internal risk ratings are considered the most meaningful indicator of credit quality for commercial, construction, land and development and commercial real estate loans. Internal risk ratings are updated on a continuous basis. The following tables present an aging analysis of the recorded investment for delinquent loans by portfolio and segment: Accruing September 30, 2018 Current 30 to 59 Days Past Due 60 to 89 Days Past Due 90 Days or More Past Due Non- Accrual Total (Dollars in thousands) Commercial and industrial loans $ 155,996 $ 1,246 $ 113 $ — $ 2,421 $ 159,776 Real estate: 1-4 single family residential loans 242,606 776 — 426 825 244,633 Construction, land and development 155,767 11 — — — 155,778 Commercial real estate loans (including multifamily) 324,212 — — — — 324,212 Consumer loans and leases 18,051 37 14 — 72 18,174 Municipal and other loans 51,501 — — — — 51,501 Total loans $ 948,133 $ 2,070 $ 127 $ 426 $ 3,318 $ 954,074 Accruing December 31, 2017 Current 30 to 59 Days Past Due 60 to 89 Days Past Due 90 Days or More Past Due Non- Accrual Total (Dollars in thousands) Commercial and industrial loans $ 132,775 $ 302 $ 3 $ 33 $ 1,927 $ 135,040 Real estate: 1-4 single family residential loans 230,738 637 — — 1,135 232,510 Construction, land and development 139,470 — — — — 139,470 Commercial real estate loans (including multifamily) 284,869 415 — — 447 285,731 Consumer loans and leases 22,538 98 47 — 53 22,736 Municipal and other loans 53,632 — — — — 53,632 Total loans $ 864,022 $ 1,452 $ 50 $ 33 $ 3,562 $ 869,119 There was one loan 90 days or more past due and still accruing at September 30, 2018 with a recorded investment of $426 thousand. There was one loan 90 days or more past due and still accruing at December 31, 2017 with a recorded investment of $33 thousand. At September 30, 2018, non-accrual loans that were 30 to 59 days past due were $355 thousand, non-accrual loans that were 60 to 89 days past due were $337 thousand, and non-accrual loans that were 90 days or more past due were $917 thousand. At December 31, 2017, non-accrual loans that were 30 to 59 days past due were $209 thousand, non-accrual loans that were 60 to 89 days past due were $57 thousand, and non-accrual loans that were 90 days or more past due were $427 thousand. Loans exhibiting potential credit weaknesses that deserve management’s close attention and that if left uncorrected may result in deterioration of the repayment capacity of the borrower are categorized as special mention. Loans with well-defined credit weaknesses including payment defaults, declining collateral values, frequent overdrafts, operating losses, increasing balance sheet leverage, inadequate cash flow, project cost overruns, unreasonable construction delays, past due real estate taxes or exhausted interest reserves are assigned an internal risk rating of substandard. Loans classified as substandard can be on an accrual or non-accrual basis, as determined by its unique characteristics. A loan with a weakness so severe that collection in full is highly questionable or improbable will be assigned an internal risk rating of doubtful. The following table summarizes the Company’s loans by key indicators of credit quality: September 30, 2018 Pass Special Mention Substandard Doubtful (Dollars in thousands) Commercial and industrial loans $ 151,088 $ 2,904 $ 5,597 $ 187 Real estate: 1-4 single family residential loans 240,081 — 4,552 — Construction, land and development 154,305 315 1,158 — Commercial real estate loans (including multifamily) 312,574 9,786 1,852 — Consumer loans and leases 18,046 — 128 — Municipal and other loans 51,501 — — — Total loans $ 927,595 $ 13,005 $ 13,287 $ 187 December 31, 2017 Pass Special Mention Substandard Doubtful (Dollars in thousands) Commercial and industrial loans $ 129,288 $ 2,331 $ 3,421 $ — Real estate: 1-4 single family residential loans 228,450 1,090 2,970 — Construction, land and development 137,760 1,403 307 — Commercial real estate loans (including multifamily) 276,096 5,877 3,758 — Consumer loans and leases 22,528 — 208 — Municipal and other loans 53,632 — — — Total loans $ 847,754 $ 10,701 $ 10,664 $ — Internal risk ratings and other credit metrics are key factors in identifying loans to be individually evaluated for impairment and impact management’s estimates of loss factors used in determining the amount of the allowance for loan and lease losses. The following table shows the Company’s investment in loans disaggregated based on the method of evaluating impairment: Loans - Recorded Investment Allowance for Credit Loss September 30, 2018 Individually Evaluated for Impairment Collectively Evaluated for Impairment Individually Evaluated for Impairment Collectively Evaluated for Impairment (Dollars in thousands) Commercial and industrial loans $ 2,494 $ 157,282 $ 1,085 $ 3,606 Real estate: 1-4 single family residential loans 970 243,663 — 102 Construction, land and development — 155,778 — 451 Commercial real estate loans (including multifamily) — 324,212 — 728 Consumer loans and leases 72 18,102 24 158 Municipal and other loans — 51,501 — 2 Total loans $ 3,536 $ 950,538 $ 1,109 $ 5,047 Loans - Recorded Investment Allowance for Credit Loss December 31, 2017 Individually Evaluated for Impairment Collectively Evaluated for Impairment Individually Evaluated for Impairment Collectively Evaluated for Impairment (Dollars in thousands) Commercial and industrial loans $ 2,194 $ 132,846 $ 1,226 $ 1,820 Real estate: 1-4 single family residential loans 1,292 231,218 119 783 Construction, land and development — 139,470 — 441 Commercial real estate loans (including multifamily) 447 285,284 — 898 Consumer loans and leases 53 22,683 16 182 Municipal and other loans — 53,632 — 167 Total loans $ 3,986 $ 865,133 $ 1,361 $ 4,291 The following tables set forth certain information regarding the Company’s impaired loans that were evaluated for specific reserves: Impaired Loans - With Allowance Impaired Loans - With no Allowance September 30, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance (Dollars in thousands) Commercial and industrial loans $ 1,784 $ 6,159 $ 1,085 $ 710 $ 1,514 Real estate: 1-4 single family residential loans — — — 970 1,000 Construction, land and development — — — — — Commercial real estate loans (including multifamily) — — — — — Consumer loans and leases 54 55 24 18 18 Municipal and other loans — — — — — Total loans $ 1,838 $ 6,214 $ 1,109 $ 1,698 $ 2,532 Impaired Loans - With Allowance Impaired Loans - With no Allowance December 31, 2017 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance (Dollars in thousands) Commercial and industrial loans $ 1,811 $ 1,850 $ 1,226 $ 383 $ 386 Real estate: 1-4 single family residential loans 119 119 119 1,173 1,174 Construction, land and development — — — — — Commercial real estate loans (including multifamily) — — — 447 447 Consumer loans and leases 53 52 16 — — Municipal and other loans — — — — — Total loans $ 1,983 $ 2,021 $ 1,361 $ 2,003 $ 2,007 Three Months Ended September 30, 2018 2017 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (Dollars in thousands) Commercial and industrial loans $ 2,571 $ — $ 2,220 $ — Real estate: 1-4 single family residential loans 975 — 750 — Construction, land and development — — 312 — Commercial real estate loans (including multifamily) — — 1,997 — Consumer loans and leases 72 — 55 — Municipal and other loans — — — — Total loans $ 3,618 $ — $ 5,334 $ — Nine Months Ended September 30, 2018 2017 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (Dollars in thousands) Commercial and industrial loans $ 2,774 $ — $ 2,363 $ — Real estate: 1-4 single family residential loans 990 — 756 — Construction, land and development — — 316 — Commercial real estate loans (including multifamily) — — 1,983 — Consumer loans and leases 76 — 56 — Municipal and other loans — — — — Total loans $ 3,840 $ — $ 5,474 $ — Troubled Debt Restructurings: The following table provides a summary of troubled debt restructurings (“TDRs”) based upon delinquency status, all of which are considered impaired: September 30, 2018 December 31, 2017 Number of contracts Recorded Investment Number of contracts Recorded Investment (Dollars in thousands) Performing TDRs: Commercial and industrial loans 4 $ 73 5 $ 270 Real estate: 1-4 single family residential loans 2 145 — — Construction, land and development — — — — Commercial real estate loans (including multifamily) — — — — Consumer loans and leases — — — — Municipal and other loans — — — — Total performing TDRs 6 218 5 270 Nonperforming TDRs 5 470 10 651 Total TDRs 11 $ 688 15 $ 921 Allowance attributable to TDRs $ 113 $ 411 The following table summarizes TDRs and includes newly designated TDRs as well as modifications made to existing TDRs. Modifications may include, but are not limited to, granting a material extension of time, entering into a forbearance agreement, adjusting the interest rate, accepting interest only payments for an extended period of time, a change in the amortization period or a combination of any of these. Post-modification balances represent the recorded investment at the end of Day 2 in which the modification was made: Three Months Ended September 30, 2018 2017 Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Related Allowance Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Related Allowance (Dollars in thousands) Commercial and industrial loans — $ — $ — $ — 2 $ 38 $ 38 $ — Real estate: 1-4 single family residential loans — — — — — — — — Construction, land and development — — — — — — — — Commercial real estate loans (including multifamily) — — — — — — — — Consumer loans and leases — — — — — — — — Municipal and other loans — — — — — — — — Nine Months Ended September 30, 2018 2017 Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Related Allowance Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Related Allowance (Dollars in thousands) Commercial and industrial loans 7 $ 442 $ 442 $ 113 10 $ 465 $ 465 $ 126 Real estate: 1-4 single family residential loans 1 34 34 — — — — — Construction, land and development — — — — — — — — Commercial real estate loans (including multifamily) — — — — — — — — Consumer loans and leases — — — — — — — — Municipal and other loans — — — — — — — — |