| LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES | LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES The Company’s loan portfolio is broken down into segments to an appropriate level of disaggregation to allow management to monitor the performance by the borrower and to monitor the yield on the portfolio. Consistent with ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Loan Losses, the segments were further broken down into classes, to allow for differing risk characteristics within a segment. The risks associated with lending activities differ among the various loan classes, and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. All of these factors may adversely impact the borrower’s ability to repay its loans, and impact the associated collateral. The Company has various types of commercial real estate loans which have differing levels of credit risk associated with them. Owner-occupied commercial real estate loans are generally dependent upon the successful operation of the borrower’s business, with the cash flows generated from the business being the primary source of repayment of the loan. If the business suffers a downturn in sales or profitability, the borrower’s ability to repay the loan could be in jeopardy. Non-owner occupied and multi-family commercial real estate loans and non-owner occupied residential loans present a different credit risk to the Company than owner-occupied commercial real estate loans, as the repayment of the loan is dependent upon the borrower’s ability to generate a sufficient level of occupancy to produce rental income that exceeds debt service requirements and operating expenses. Lower occupancy or lease rates may result in a reduction in cash flows, which hinders the ability of the borrower to meet debt service requirements, and may result in lower collateral values. The Company generally recognizes that greater risk is inherent in these credit relationships as compared to owner occupied loans mentioned above in its loan pricing. Acquisition and development loans consist of 1-4 family residential construction and commercial and land development loans. The risk of loss on these loans is largely dependent on the Company’s ability to assess the property’s value at the completion of the project, which should exceed the property’s construction costs. During the construction phase, a number of factors could potentially negatively impact the collateral value, including cost overruns, delays in completing the project, competition, and real estate market conditions which may change based on the supply of similar properties in the area. In the event the collateral value at the completion of the project is not sufficient to cover the outstanding loan balance, the Company must rely upon other repayment sources, including the guarantors of the project or other collateral securing the loan. Commercial and industrial loans include advances to local and regional businesses for general commercial purposes and include permanent and short-term working capital, machinery and equipment financing, and may be either in the form of lines of credit or term loans. Although commercial and industrial loans may be unsecured to our highest rated borrowers, the majority of these loans are secured by the borrower’s accounts receivable, inventory and machinery and equipment. In a significant number of these loans, the collateral also includes the business, real estate or the business owner’s personal real estate or assets. Commercial and industrial loans present credit exposure to the Company, as they are more susceptible to risk of loss during a downturn in the economy, as borrowers may have greater difficulty in meeting their debt service requirements and the value of the collateral may decline. The Company attempts to mitigate this risk through its underwriting standards, including evaluating the credit worthiness of the borrower and to the extent available, credit ratings on the business. Additionally, monitoring of the loans through annual renewals and meetings with the borrowers are typical. However, these procedures cannot eliminate the risk of loss associated with commercial and industrial lending. Municipal loans consist of extensions of credit to municipalities and school districts within the Company’s market area. These loans generally present a lower risk than commercial and industrial loans, as they are generally secured by the municipality’s full taxing authority, by revenue obligations, or by its ability to raise assessments on its customers for a specific utility. The Company originates loans to its retail customers, including fixed-rate and adjustable first lien mortgage loans with the underlying 1-4 family owner-occupied residential property securing the loan. The Company’s risk exposure is minimized in these types of loans through the evaluation of the credit worthiness of the borrower, including credit scores and debt-to-income ratios, and underwriting standards which limit the loan-to-value ratio to generally no more than 80% upon loan origination, unless the borrower obtains private mortgage insurance. Home equity loans, including term loans and lines of credit, present a slightly higher risk to the Company than 1-4 family first liens, as these loans can be first or second liens on 1-4 family owner occupied residential property, but can have loan-to-value ratios of no greater than 90% of the value of the real estate taken as collateral. The credit worthiness of the borrower is considered including credit scores and debt-to-income ratios, which generally cannot exceed 43% . Installment and other loans’ credit risk are mitigated through conservative underwriting standards, including the evaluation of the credit worthiness of the borrower through credit scores and debt-to-income ratios, and if secured, the collateral value of the assets. As these loans can be unsecured or secured by assets the value of which may depreciate quickly or may fluctuate, they typically present a greater risk to the Company than 1-4 family residential loans. The loan portfolio, excluding residential loans held for sale, broken out by classes, as of June 30, 2015 and December 31, 2014 was as follows: (Dollars in thousands) June 30, 2015 December 31, 2014 Commercial real estate: Owner-occupied $ 112,419 $ 100,859 Non-owner occupied 149,022 144,301 Multi-family 25,376 27,531 Non-owner occupied residential 51,585 49,315 Acquisition and development: 1-4 family residential construction 6,961 5,924 Commercial and land development 33,721 24,237 Commercial and industrial 60,286 48,995 Municipal 59,366 61,191 Residential mortgage: First lien 123,775 126,491 Home equity - term 18,952 20,845 Home equity - lines of credit 103,187 89,366 Installment and other loans 6,880 5,891 $ 751,530 $ 704,946 In order to monitor ongoing risk associated with its loan portfolio and specific loans within the segments, management uses an internal grading system. The first several rating categories, representing the lowest risk to the Bank, are combined and given a “Pass” rating. Management generally follows regulatory definitions in assigning criticized ratings to loans, including special mention, substandard, doubtful or loss. The “Special Mention” category includes loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Bank’s position at some future date. These assets pose elevated risk, but their weakness does not yet justify a more severe, or classified rating. “Substandard” loans are classified as they have a well-defined weakness, or weaknesses that jeopardize liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. “Substandard” loans include loans that management has determined not to be impaired, as well as loans considered to be impaired. A “Doubtful” loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification of loss is deferred. “Loss” assets are considered uncollectible, as the underlying borrowers are often in bankruptcy, have suspended debt repayments, or have ceased business operations. Once a loan is classified as “Loss,” there is little prospect of collecting the loan’s principal or interest and it is generally written off. The Bank has a loan review policy and program which is designed to identify and manage risk in the lending function. The Enterprise Risk Management (“ERM”) Committee, comprised of senior officers and credit department personnel, is charged with the oversight of overall credit quality and risk exposure of the Bank’s loan portfolio. This includes the monitoring of the lending activities of all Bank personnel with respect to underwriting and processing new loans and the timely follow-up and corrective action for loans showing signs of deterioration in quality. The loan review program provides the Bank with an independent review of the Bank’s loan portfolio on an ongoing basis. Generally, consumer and residential mortgage loans are included in the “Pass” categories unless a specific action, such as extended delinquencies, bankruptcy, repossession or death of the borrower occurs, which heightens awareness as to a possible credit event. Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $1,000,000 , which includes confirmation of risk rating by the Credit Administration department. In addition, all relationships greater than $250,000 rated Substandard, Doubtful or Loss are reviewed by the ERM Committee on a quarterly basis, with reaffirmation of the rating as approved by the Bank’s Problem Loan Committee. The following summarizes the Bank’s ratings based on its internal risk rating system as of June 30, 2015 and December 31, 2014 : (Dollars in thousands) Pass Special Mention Non-Impaired Substandard Impaired - Substandard Doubtful Total June 30, 2015 Commercial real estate: Owner-occupied $ 103,197 $ 1,233 $ 5,551 $ 2,438 $ 0 $ 112,419 Non-owner occupied 128,046 12,616 7,356 1,004 0 149,022 Multi-family 22,085 1,524 1,295 472 0 25,376 Non-owner occupied residential 47,019 1,853 1,875 838 0 51,585 Acquisition and development: 1-4 family residential construction 6,961 0 0 0 0 6,961 Commercial and land development 31,924 228 1,327 242 0 33,721 Commercial and industrial 57,495 933 1,050 808 0 60,286 Municipal 59,366 0 0 0 0 59,366 Residential mortgage: First lien 119,111 0 0 4,664 0 123,775 Home equity - term 18,775 0 0 177 0 18,952 Home equity - lines of credit 102,170 275 141 601 0 103,187 Installment and other loans 6,859 0 0 21 0 6,880 $ 703,008 $ 18,662 $ 18,595 $ 11,265 $ 0 $ 751,530 December 31, 2014 Commercial real estate: Owner-occupied $ 89,815 $ 2,686 $ 5,070 $ 3,288 $ 0 $ 100,859 Non-owner occupied 120,829 20,661 1,131 1,680 0 144,301 Multi-family 24,803 1,086 1,322 320 0 27,531 Non-owner occupied residential 43,020 2,968 1,827 1,500 0 49,315 Acquisition and development: 1-4 family residential construction 5,924 0 0 0 0 5,924 Commercial and land development 22,261 233 1,333 410 0 24,237 Commercial and industrial 43,794 850 1,914 2,437 0 48,995 Municipal 61,191 0 0 0 0 61,191 Residential mortgage: First lien 121,160 9 0 5,290 32 126,491 Home equity - term 20,775 0 0 70 0 20,845 Home equity - lines of credit 88,164 630 93 479 0 89,366 Installment and other loans 5,865 0 0 26 0 5,891 $ 647,601 $ 29,123 $ 12,690 $ 15,500 $ 32 $ 704,946 Classified loans may also be evaluated for impairment. For commercial real estate, acquisition and development and commercial and industrial loans, a loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Generally, loans that are more than 90 days past due are deemed impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed to determine if the loan should be placed on nonaccrual status. Nonaccrual loans in the commercial and commercial real estate portfolios and any TDRs are, by definition, deemed to be impaired. Impairment is measured on a loan-by-loan basis for commercial, construction and restructured loans by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. For loans that are deemed to be impaired for extended periods of time, periodic updates on fair values are obtained, which may include updated appraisals. The updated fair values are incorporated into the impairment analysis as of the next reporting period. Loan charge-offs, which may include partial charge-offs, are taken on an impaired loan that is collateral dependent if the loan’s carrying balance exceeds its collateral’s appraised value; the loan has been identified as uncollectible; and it is deemed to be a confirmed loss. Typically, impaired loans with a charge-off or partial charge-off will continue to be considered impaired, unless the note is split into two, and management expects the performing note to continue to perform and is adequately secured. The second, or non-performing note, would be charged-off. Generally, an impaired loan with a partial charge-off may continue to have an impairment reserve on it after the partial charge-off, if factors warrant. As of June 30, 2015 and December 31, 2014 , nearly all of the Company’s impaired loans’ extent of impairment was measured based on the estimated fair value of the collateral securing the loan, except for TDRs. By definition, TDRs are considered impaired. All restructured loan impairments were determined based on discounted cash flows for those loans classified as TDRs and still accruing interest. For real estate loans, collateral generally consists of commercial real estate, but in the case of commercial and industrial loans, it would also consist of accounts receivable, inventory, equipment or other business assets. Commercial and industrial loans may also have real estate collateral. According to policy, updated appraisals are required annually for classified loans in excess of $250,000. The “as is value” provided in the appraisal is often used as the fair value of the collateral in determining impairment, unless circumstances, such as subsequent improvements, approvals, or other circumstances dictate that another value provided by the appraiser is more appropriate. Generally, impaired loans secured by real estate are measured at fair value using certified real estate appraisals that had been completed within the last year. Appraised values are further discounted for estimated costs to sell the property and other selling considerations to arrive at the property’s fair value. In those situations in which it is determined an updated appraisal is not required for loans individually evaluated for impairment, fair values are based on one or a combination of the following approaches. In those situations in which a combination of approaches is considered, the factor that carries the most consideration will be the one management believes is warranted. The approaches are as follows: • Original appraisal – if the original appraisal provides a strong loan-to-value ratio (generally 70% or lower) and, after consideration of market conditions and knowledge of the property and area, it is determined by the Credit Administration staff that there has not been a significant deterioration in the collateral value, the original certified appraised value may be used. Discounts as deemed appropriate for selling costs are factored into the appraised value in arriving at fair value. • Discounted cash flows – in limited cases, discounted cash flows may be used on projects in which the collateral is liquidated to reduce the borrowings outstanding, and is used to validate collateral values derived from other approaches. Collateral on certain impaired loans is not limited to real estate, and may consist of accounts receivable, inventory, equipment or other business assets. Estimated fair values are determined based on borrowers’ financial statements, inventory ledgers, accounts receivable agings or appraisals from individuals with knowledge in the business. Stated balances are generally discounted for the age of the financial information or the quality of the assets. In determining fair value, liquidation discounts are applied to this collateral based on existing loan evaluation policies. The Company distinguishes substandard loans on both an impaired and non-impaired basis, as it places less emphasis on a loan’s classification, and increased reliance on whether the loan was performing in accordance with the contractual terms. A “Substandard” classification does not automatically meet the definition of “impaired.” A substandard loan is one that is inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledged, if any. Extensions of credit so classified have well-defined weaknesses which may jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual extensions of credit classified as "Substandard." As a result, the Company’s methodology includes an evaluation of certain accruing commercial real estate, acquisition and development and commercial and industrial loans rated “Substandard” to be collectively evaluated for impairment as opposed to evaluating these loans individually for impairment. Although we believe these loans have well defined weaknesses and meet the definition of “Substandard,” they are generally performing and management has concluded that it is likely it will be able to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment. Generally, the Bank does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower. The following table summarizes impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required as of June 30, 2015 and December 31, 2014 . The recorded investment in loans excludes accrued interest receivable due to insignificance. Allowances established generally pertain to those loans in which loan forbearance agreements were in the process of being negotiated or updated appraisals were pending, and the partial charge-off will be recorded when final information is received. Impaired Loans with a Specific Allowance Impaired Loans with No Specific Allowance (Dollars in thousands) Recorded Investment (Book Balance) Unpaid Principal Balance (Legal Balance) Related Allowance Recorded Investment (Book Balance) Unpaid Principal Balance (Legal Balance) June 30, 2015 Commercial real estate: Owner-occupied $ 0 $ 0 $ 0 $ 2,438 $ 3,647 Non-owner occupied 0 0 0 1,004 3,251 Multi-family 385 394 144 87 122 Non-owner occupied residential 0 0 0 838 1,044 Acquisition and development: Commercial and land development 0 0 0 242 871 Commercial and industrial 0 0 0 808 883 Residential mortgage: First lien 1,129 1,157 117 3,535 4,180 Home equity - term 0 0 0 177 178 Home equity - lines of credit 0 0 0 601 711 Installment and other loans 9 10 9 12 36 $ 1,523 $ 1,561 $ 270 $ 9,742 $ 14,923 December 31, 2014 Commercial real estate: Owner-occupied $ 0 $ 0 $ 0 $ 3,288 $ 4,558 Non-owner occupied 0 0 0 1,680 3,420 Multi-family 0 0 0 320 356 Non-owner occupied residential 198 203 2 1,302 1,570 Acquisition and development: Commercial and land development 0 0 0 410 1,077 Commercial and industrial 0 0 0 2,437 2,500 Residential mortgage: First lien 982 982 149 4,340 4,968 Home equity - term 0 0 0 70 71 Home equity - lines of credit 24 40 24 455 655 Installment and other loans 13 13 13 13 36 $ 1,217 $ 1,238 $ 188 $ 14,315 $ 19,211 The following tables summarize the average recorded investment in impaired loans and related interest income recognized on loans deemed impaired, generally on a cash basis, for the three and six months ended June 30, 2015 and 2014 : Three Months Ended June 30, 2015 2014 (Dollars in thousands) Average Impaired Balance Interest Income Recognized Average Impaired Balance Interest Income Recognized Commercial real estate: Owner-occupied $ 2,793 $ 0 $ 4,069 $ 8 Non-owner occupied 1,403 0 9,641 91 Multi-family 537 0 260 0 Non-owner occupied residential 919 0 2,139 2 Acquisition and development: Commercial and land development 313 3 1,360 11 Commercial and industrial 978 0 2,004 2 Residential mortgage: First lien 4,856 9 3,964 30 Home equity - term 164 0 90 0 Home equity - lines of credit 587 0 59 0 Installment and other loans 22 0 2 0 $ 12,572 $ 12 $ 23,588 $ 144 Six Months Ended June 30, 2015 2014 (Dollars in thousands) Average Impaired Balance Interest Income Recognized Average Impaired Balance Interest Income Recognized Commercial real estate: Owner-occupied $ 2,941 $ 0 $ 4,233 $ 18 Non-owner occupied 1,515 0 8,800 95 Multi-family 502 0 280 1 Non-owner occupied residential 1,132 0 2,923 10 Acquisition and development: Commercial and land development 354 5 1,966 13 Commercial and industrial 1,583 0 2,003 5 Residential mortgage: First lien 5,037 18 3,768 31 Home equity - term 124 0 96 0 Home equity - lines of credit 546 0 99 0 Installment and other loans 24 0 1 0 $ 13,758 $ 23 $ 24,169 $ 173 The following table presents impaired loans that are TDRs, with the recorded investment as of June 30, 2015 and December 31, 2014 . June 30, 2015 December 31, 2014 (Dollars in thousands) Number of Contracts Recorded Investment Number of Contracts Recorded Investment Accruing: Acquisition and development: Commercial and land development 1 $ 201 1 $ 287 Residential mortgage: First lien 8 803 8 813 9 1,004 9 1,100 Nonaccruing: Residential mortgage: First lien 14 1,627 13 1,715 Installment and other loans 1 11 1 13 15 1,638 14 1,728 24 $ 2,642 23 $ 2,828 The loans presented above were considered TDRs as the result of the Company agreeing to below market interest rates for the risk of the transaction, allowing the loan to remain on interest only status, or a reduction in interest rates, in order to give the borrowers an opportunity to improve their cash flows. For TDRs in default of their modified terms, impairment is generally determined on a collateral-dependent approach, except for accruing residential mortgage TDRs, which are generally on the discounted cash flow approach. The following table presents the number of loans modified, and their pre-modification and post-modification investment balances for the three and six months ended June 30, 2015 and 2014 : 2015 2014 (Dollars in thousands) Number of Contracts Pre- Modification Recorded Investment Post Modification Recorded Investment Number of Contracts Pre- Modification Recorded Investment Post Modification Recorded Investment Three Months Ended June 30, Residential mortgage: First lien 0 $ 0 $ 0 14 $ 1,523 $ 1,456 0 $ 0 $ 0 14 $ 1,523 $ 1,456 Six Months Ended June 30, Residential mortgage: First lien 1 $ 59 $ 59 14 $ 1,523 $ 1,456 1 $ 59 $ 59 14 $ 1,523 $ 1,456 The following table presents restructured loans, included in nonaccrual status, that were modified as TDRs within the previous 12 months and for which there was a payment default during the three and six months ended June 30, 2015 and 2014 : 2015 2014 (Dollars in thousands) Number of Contracts Recorded Investment Number of Contracts Recorded Investment Three Months Ended June 30, Commercial real estate: Non-owner occupied 0 $ 0 1 $ 3,495 Residential mortgage: First lien 3 249 1 111 3 $ 249 2 $ 3,606 Six Months Ended June 30, Commercial real estate: Non-owner occupied 0 $ 0 1 $ 3,495 Residential mortgage: First lien 4 308 1 111 4 $ 308 2 $ 3,606 No additional commitments have been made to borrowers whose loans are considered TDRs. Management further monitors the performance and credit quality of the loan portfolio by analyzing the average length of time a portfolio is past due, by aggregating loans based on its delinquencies. The following table presents the classes of the loan portfolio summarized by aging categories of performing loans and nonaccrual loans as of June 30, 2015 and December 31, 2014 : Days Past Due (Dollars in thousands) Current 30-59 60-89 90+ (still accruing) Total Past Due Non- Accrual Total Loans June 30, 2015 Commercial real estate: Owner-occupied $ 109,961 $ 20 $ 0 $ 0 $ 20 $ 2,438 $ 112,419 Non-owner occupied 148,018 0 0 0 0 1,004 149,022 Multi-family 24,904 0 0 0 0 472 25,376 Non-owner occupied residential 50,583 164 0 0 164 838 51,585 Acquisition and development: 1-4 family residential construction 6,961 0 0 0 0 0 6,961 Commercial and land development 33,660 20 0 0 20 41 33,721 Commercial and industrial 59,206 272 0 0 272 808 60,286 Municipal 59,366 0 0 0 0 0 59,366 Residential mortgage: First lien 118,874 869 0 171 1,040 3,861 123,775 Home equity - term 18,468 301 6 0 307 177 18,952 Home equity - lines of credit 102,277 309 0 0 309 601 103,187 Installment and other loans 6,836 14 9 0 23 21 6,880 $ 739,114 $ 1,969 $ 15 $ 171 $ 2,155 $ 10,261 $ 751,530 December 31, 2014 Commercial real estate: Owner-occupied $ 97,571 $ 0 $ 0 $ 0 $ 0 $ 3,288 $ 100,859 Non-owner occupied 142,621 0 0 0 0 1,680 144,301 Multi-family 27,211 0 0 0 0 320 27,531 Non-owner occupied residential 47,706 109 0 0 109 1,500 49,315 Acquisition and development: 1-4 family residential construction 5,924 0 0 0 0 0 5,924 Commercial and land development 24,114 0 0 0 0 123 24,237 Commercial and industrial 46,558 0 0 0 0 2,437 48,995 Municipal 61,191 0 0 0 0 0 61,191 Residential mortgage: First lien 120,806 776 400 0 1,176 4,509 126,491 Home equity - term 20,640 135 0 0 135 70 20,845 Home equity - lines of credit 88,745 142 0 0 142 479 89,366 Installment and other loans 5,815 41 9 0 50 26 5,891 $ 688,902 $ 1,203 $ 409 $ 0 $ 1,612 $ 14,432 $ 704,946 The Company maintains the allowance for loan losses at a level believed to be adequate by management for probable incurred credit losses. The allowance is established and maintained through a provision for loan losses charged to earnings. Quarterly, management assesses the adequacy of the allowance for loan losses utilizing a defined methodology, which considers specific credit evaluation of impaired loans as discussed above, past loan loss historical experience, and qualitative factors. Management believes the approach properly addresses the requirements of ASC Subtopic 310-10-35 for loans individually identified as impaired, and ASC Subtopic 450-20 for loans collectively evaluated for impairment, and other bank regulatory guidance. In connection with its quarterly evaluation of the adequacy of the allowance for loan losses, management continually reviews its methodology to determine if it continues to properly address the risk in the loan portfolio. For each loan class presented above, general allowances are provided for loans that are collectively evaluated for impairment, which is based on quantitative factors, principally historical loss trends for the respective loan class, adjusted for qualitative factors. In addition, an adjustment to the historical loss factors is made to account for delinquency and other potential risk not elsewhere defined within the Allowance for Loan and Lease Loss methodology. The look-back period for historical losses is 12 quarters, weighted one-half for the most recent four quarters, and one quarter for each of the two previous four quarter periods in order to appropriately capture the loss history in the loan segment. Management considers current economic and real estate conditions, and the trends in historical charge-off percentages that resulted from applying partial charge-offs to impaired loans, and the impact of distressed loan sales during the year in determining the look back period. In addition to the quantitative analysis, adjustments to the reserve requirements are allocated on loans collectively evaluated for impairment based on additional qualitative factors. As of June 30, 2015 and December 31, 2014 , the qualitative factors used by management to adjust the historical loss percentage to the anticipated loss allocation, which may range from a minus 150 basis points to a positive 150 basis points per factor, include: Nature and Volume of Loans – Loan growth in the current and subsequent quarters based on the Bank’s targeted growth and strategic plan, coupled with the types of loans booked based on risk management and credit culture, and the number of exceptions to loan policy and supervisory loan to value exceptions, etc. Concentrations of Credit and Changes within Credit Concentrations – Factors considered include the composition of the Bank’s overall portfolio and management’s evaluation related to concentration risk management and the inherent risk associated with the concentrations identified. Underwriting Standards and Recovery Practices – Factors considered include changes to underwriting standards and perceived impact on anticipated losses, trends in the number of exceptions to loan policy; supervisory loan to value exceptions; and administration of loan recovery practices. Delinquency Trends – Factors considered include the delinquency percentages noted in the portfolio relative to economic conditions, severity of the delinquencies, and whether the ratios are trending upwards or downwards. Classified Loans Trends – Factors considered include the internal loan ratings of the portfolio, the severity of the ratings, and whether the loan segment’s ratings show a more favorable or less favorable trend, and underlying market conditions and their impact on the collateral values securing the loans. Experience, Ability and Depth of Management/Lending staff – Factors considered include the years of experience of senior and middle management and the lending staff and turnover of the staff, and instances of repeat criticisms of ratings. Quality of Loan Review – Factors include the years of experience of the loan review staff, in-house versus outsourced provider of review, turnover of staff and the perceived quality of their work in relation to other external information. National and Local Economic Conditions – Ratios and factors considered include trends in the consumer price index (CPI), unemployment rates, housing price index, housing statistics compared to the prior year, bankruptcy rates, regulatory and legal environment risks and competition. Activity in the allowance for loan losses for the three months ended June 30, 2015 and 2014 was as follows: Commercial Consumer (Dollars in thousands) Commercial Real Estate Acquisition and Development Commercial and Industrial Municipal Total Residential Mortgage Installment and Other Total Unallocated Total June 30, 2015 Balance, beginning of period $ 9,346 $ 588 $ 665 $ 121 $ 10,720 $ 2,567 $ 116 $ 2,683 $ 1,058 $ 14,461 Provision for loan losses (750 ) 132 188 (2 ) (432 ) 479 74 553 (121 ) 0 Charge-offs (475 ) 0 (24 ) 0 (499 ) (151 ) (9 ) (160 ) 0 (659 ) Recoveries 11 0 15 0 26 23 1 24 0 50 Balance, end of period $ 8,132 $ 720 $ 844 $ 119 $ 9,815 $ 2,918 $ 182 $ 3,100 $ 937 $ 13,852 June 30, 2014 Balance, beginning of period $ 13,719 $ 474 $ 919 $ 244 $ 15,356 $ 3,112 $ 126 $ 3,238 $ 1,903 $ 20,497 Provision for loan losses 645 407 (224 ) (66 ) |
