Loans and Allowance for Loan and Lease Losses

The loan portfolio consisted of the following at:



	June 30, 2016					December 31, 2015
(Dollars in thousands)	Amount			Percent		Amount			Percent
Commercial loans	$	342,579		38.7	%	$	347,300		40.3	%
Commercial real estate loans – owner occupied	216,845			24.5	%	195,554			22.7	%
Commercial real estate loans – all other	141,883			16.0	%	146,641			17.0	%
Residential mortgage loans – multi-family	92,101			10.4	%	81,487			9.5	%
Residential mortgage loans – single family	39,823			4.5	%	52,072			6.0	%
Land development loans	12,562			1.4	%	10,001			1.2	%
Consumer loans	38,634			4.4	%	28,663			3.3	%
Total loans	884,427			100.0	%	861,718			100.0	%
Deferred loan origination costs, net	1,200					731
Allowance for loan and lease losses	(13,429		)			(12,716		)
Loans, net	$	872,198				$	849,733

At June 30, 2016 and December 31, 2015, loans of approximately $510 million and $523 million, respectively, were pledged to secure borrowings obtained from the FHLB and to support our unfunded borrowing capacity. During the three and six months ended June 30, 2016, we purchased $29.9 million of performing residential multi-family mortgage loans. No loans were purchased during the three and six months ended June 30, 2015.

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 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 during the three and six months ended June 30, 2016 and 2015:



(Dollars in thousands)	Commercial			Real Estate			Land Development			Consumer and Single Family Mortgages			Total
ALLL in the three months ended June 30, 2016:
Balance at beginning of period	$	8,059		$	4,069		$	203		$	698		$	13,029
Charge offs	(8,509		)	—			—			(540		)	(9,049		)
Recoveries	724			—			—			5			729
Provision	8,429			(241		)	23			509			8,720
Balance at end of period	$	8,703		$	3,828		$	226		$	672		$	13,429
ALLL in the six months ended June 30, 2016:
Balance at beginning of period	$	6,639		$	5,109		$	282		$	686		$	12,716
Charge offs	(8,672		)	—			—			(540		)	(9,212		)
Recoveries	777			1			—			7			785
Provision	9,959			(1,282		)	(56		)	519			9,140
Balance at end of period	$	8,703		$	3,828		$	226		$	672		$	13,429
ALLL in the three months ended June 30, 2015:
Balance at beginning of period	$	7,353		$	4,287		$	120		$	879		$	12,639
Charge offs	(730		)	—			—			(151		)	(881		)
Recoveries	582			1			—			2			585
Provision	(724		)	601			(76		)	199			—
Balance at end of period	$	6,481		$	4,889		$	44		$	929		$	12,343
ALLL in the six months ended June 30, 2015:
Balance at beginning of period	$	7,670		$	5,133		$	296		$	734		$	13,833
Charge offs	$	(2,117	)	$	—		$	(85	)	$	(151	)	$	(2,353	)
Recoveries	857			2			—			4			863
Provision	71			(246		)	(167		)	342			—
Balance at end of period	$	6,481		$	4,889		$	44		$	929		$	12,343

Set forth below is information regarding loan balances and the related ALLL, by portfolio type, as of June 30, 2016 and December 31, 2015.



(Dollars in thousands)	Commercial		Real Estate		Land Development		Consumer and Single Family Mortgages		Total
ALLL balance at June 30, 2016 related to:
Loans individually evaluated for impairment	$	—	$	485	$	—	$	—	$	485
Loans collectively evaluated for impairment	8,703		3,343		226		672		12,944
Total	$	8,703	$	3,828	$	226	$	672	$	13,429
Loans balance at June 30, 2016 related to:
Loans individually evaluated for impairment	$	14,908	$	10,151	$	1,140	$	304	$	26,503
Loans collectively evaluated for impairment	327,671		440,678		11,422		78,153		857,924
Total	$	342,579	$	450,829	$	12,562	$	78,457	$	884,427
ALLL balance at December 31, 2015 related to:
Loans individually evaluated for impairment	$	—	$	484	$	—	$	—	$	484
Loans collectively evaluated for impairment	6,639		4,625		282		686		12,232
Total	$	6,639	$	5,109	$	282	$	686	$	12,716
Loans balance at December 31, 2015 related to:
Loans individually evaluated for impairment	$	12,431	$	11,107	$	1,618	$	701	$	25,857
Loans collectively evaluated for impairment	334,869		412,575		8,383		80,034		835,861
Total	$	347,300	$	423,682	$	10,001	$	80,735	$	861,718

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 June 30, 2016 and December 31, 2015:



(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 June 30, 2016
Commercial loans	$	3,145	$	70	$	6,910	$	10,125	$	332,454	$	342,579	$	—
Commercial real estate loans – owner-occupied	—		—		1,016		1,016		215,829		216,845		—
Commercial real estate loans – all other	—		—		5,060		5,060		136,823		141,883		—
Residential mortgage loans – multi-family	2,364		—		—		2,364		89,737		92,101		—
Residential mortgage loans – single family	—		—		—		—		39,823		39,823		—
Land development loans	—		—		1,140		1,140		11,422		12,562		—
Consumer loans	115		—		—		115		38,519		38,634		—
Total	$	5,624	$	70	$	14,126	$	19,820	$	864,607	$	884,427	$	—
At December 31, 2015
Commercial loans	$	2,010	$	1,008	$	8,766	$	11,784	$	335,516	$	347,300	$	—
Commercial real estate loans – owner-occupied	—		—		797		797		194,757		195,554		—
Commercial real estate loans – all other	316		—		5,207		5,523		141,118		146,641		—
Residential mortgage loans – multi-family	—		—		—		—		81,487		81,487		—
Residential mortgage loans – single family	—		—		535		535		51,537		52,072		—
Land development loans	—		—		1,618		1,618		8,383		10,001		—
Consumer loans	—		—		—		—		28,663		28,663		—
Total⁽¹⁾	$	2,326	$	1,008	$	16,923	$	20,257	$	841,461	$	861,718	$	—

(1) Loans 90 days or more past due included one consumer mortgage loan collateralized by residential real estate with a recorded investment of $535 thousand which was in the process of foreclosure at December 31, 2015.

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 June 30, 2016 or December 31, 2015. 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 (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). 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 June 30, 2016 and December 31, 2015:



	June 30, 2016		December 31, 2015
	(Dollars in thousands)
Nonaccrual loans:
Commercial loans	$	14,840	$	12,284
Commercial real estate loans – owner occupied	3,940		3,815
Commercial real estate loans – all other	5,777		6,268
Residential mortgage loans – multi-family	434		447
Residential mortgage loans – single family	—		701
Land development loans	1,140		1,618
Consumer	189		—
Total⁽¹⁾	$	26,320	$	25,133

(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 June 30, 2016 and December 31, 2015:



	June 30, 2016		December 31, 2015
	(Dollars in thousands)
Pass:
Commercial loans	$	318,015	$	329,192
Commercial real estate loans – owner occupied	210,907		189,944
Commercial real estate loans – all other	127,491		127,702
Residential mortgage loans – multi family	91,667		81,040
Residential mortgage loans – single family	39,823		51,371
Land development loans	11,422		8,383
Consumer loans	38,331		28,663
Total pass loans	$	837,656	$	816,295
Special Mention:
Commercial loans	$	9,656	$	5,626
Commercial real estate loans – owner occupied	649		177
Commercial real estate loans – all other	8,615		9,452
Total special mention loans	$	18,920	$	15,255
Substandard:
Commercial loans	$	13,348	$	12,482
Commercial real estate loans – owner occupied	5,289		5,433
Commercial real estate loans – all other	5,777		9,487
Residential mortgage loans – multi family	434		447
Residential mortgage loans – single family	—		701
Land development loans	1,140		1,618
Consumer loans	303		—
Total substandard loans	$	26,291	$	30,168
Doubtful:
Commercial loans	$	1,560	$	—
Total doubtful loans	$	1,560	$	—
Total Loans:	$	884,427	$	861,718

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 June 30, 2016 and December 31, 2015:



	June 30, 2016		December 31, 2015
	(Dollars in thousands)
Impaired loans:
Nonaccruing loans	$	10,901	$	5,063
Nonaccruing restructured loans	15,419		20,070
Accruing restructured loans ⁽¹⁾	183		724
Accruing impaired loans	—		—
Total impaired loans	$	26,503	$	25,857
Impaired loans less than 90 days delinquent and included in total impaired loans	$	—	$	6,584


(1)	See "Troubled Debt Restructurings" below for a description of accruing restructured loans at June 30, 2016 and December 31, 2015.

The table below contains additional information with respect to impaired loans, by portfolio type, as of June 30, 2016 and December 31, 2015:



	June 30, 2016						December 31, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance (1)		Recorded Investment		Unpaid Principal Balance		Related Allowance (1)
	(Dollars in thousands)
No allowance recorded:
Commercial loans	$	14,908	$	23,520	$	—	$	12,431	$	14,137	$	—
Commercial real estate loans – owner occupied	2,350		2,573		—		2,371		2,515		—
Commercial real estate loans – all other	5,778		6,061		—		6,668		6,806		—
Residential mortgage loans – multi-family	434		446		—		447		450		—
Residential mortgage loans – single family	—		—		—		701		1,037		—
Land development loans	1,140		1,362		—		1,618		1,732		—
Consumer loans	304		304		—		—		—		—
Total	24,914		34,266		—		24,236		26,677		—
With allowance recorded:
Commercial real estate loans – owner occupied	1,589		1,872		485		1,621		1,872		484
Total	1,589		1,872		485		1,621		1,872		484
Total
Commercial loans	$	14,908	$	23,520	$	—	$	12,431	$	14,137	$	—
Commercial real estate loans – owner occupied	3,939		4,445		485		3,992		4,387		484
Commercial real estate loans – all other	5,778		6,061		—		6,668		6,806		—
Residential mortgage loans – multi-family	434		446		—		447		450		—
Residential mortgage loans – single family	—		—		—		701		1,037		—
Land development loans	1,140		1,362		—		1,618		1,732		—
Consumer loans	304		304		—		—		—		—
Total	26,503		36,138		485		25,857		28,549		484


(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 June 30, 2016 and December 31, 2015, there were $24.9 million and $24.2 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 June 30, 2016 for which no specific reserves were allocated, $19.5 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 six months ended June 30, 2016 and 2015 were as follows:



	Three Months Ended June 30,								Six Months Ended June 30,
	2016				2015				2016				2015
	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	$	12,388	$	51	$	14,533	$	25	$	12,402	$	247	$	15,876	$	99
Commercial real estate loans – owner occupied	2,249		3		3,492		81		2,290		3		3,051		81
Commercial real estate loans – all other	5,977		—		5,812		201		6,208		—		5,663		201
Residential mortgage loans – multi-family	438		—		454		4		441		—		303		9
Residential mortgage loans – single family	267		—		4,143		29		412		—		4,220		58
Land development loans	1,368		—		1,701		7		1,451		—		1,838		7
Consumer loans	433		11		—		—		288		19		—		—
Total	23,120		65		30,135		347		23,492		269		30,951		455
With allowance recorded:
Commercial loans	6,280		—		1,057		6		4,186		—		1,556		6
Commercial real estate loans – owner occupied	1,595		—		—		—		1,604		—		—		—
Total	7,875		—		1,057		6		5,790		—		1,556		6
Total
Commercial loans	18,668		51		15,590		31		16,588		247		17,432		105
Commercial real estate loans – owner occupied	3,844		3		3,492		81		3,894		3		3,051		81
Commercial real estate loans – all other	5,977		—		5,812		201		6,208		—		5,663		201
Residential mortgage loans – multi-family	438		—		454		4		441		—		303		9
Residential mortgage loans – single family	267		—		4,143		29		412		—		4,220		58
Land development loans	1,368		—		1,701		7		1,451		—		1,838		7
Consumer loans	433		11		—		—		288		19		—		—
Total	$	30,995	$	65	$	31,192	$	353	$	29,282	$	269	$	32,507	$	461

The interest that would have been earned had the impaired loans remained current in accordance with their original terms was $393 thousand and $304 thousand during the three months ended June 30, 2016 and 2015, respectively. The interest that would have been earned had the impaired loans remained current in accordance with their original terms was $775 thousand and $508 thousand during the six months ended June 30, 2016 and 2015, 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 $15.6 million and $20.8 million at June 30, 2016 and December 31, 2015, 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.

Of the $15.6 million of TDRs outstanding at June 30, 2016, $183 thousand were performing in accordance with their terms and accruing interest, and $15.4 million were not. Our impairment analysis determined $485 thousand of specific reserves were required on the TDR balances outstanding at June 30, 2016.

The following table presents loans restructured as TDRs during the three and six months ended June 30, 2016 and 2015:



	Three Months Ended
	June 30, 2016					June 30, 2015
(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	$	94	$	94
Commercial real estate – owner occupied	—	—		—		1	2,741		2,741
Commercial real estate – all other	—	—		—		1	4,158		4,158
	—	—		—		3	6,993		6,993
Nonperforming
Commercial loans	—	—		—		1	250		250
	—	—		—		1	250		250
Total Troubled Debt Restructurings⁽¹⁾	—	$	—	$	—	4	$	7,243	$	7,243
	Six Months Ended
	June 30, 2016					June 30, 2015
(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	$	94	$	94
Commercial real estate – owner occupied	—	—		—		1	2,741		2,741
Commercial real estate – all other	—	—		—		1	4,158		4,158
Consumer loans	1	562		115		—	—		—
	1	562		115		3	6,993		6,993
Nonperforming
Commercial loans	—	—		—		1	250		250
	—	—		—		1	250		250
Total Troubled Debt Restructurings	1	$	562	$	115	4	$	7,243	$	7,243


(1)	No loans were restructured during the three months ended June 30, 2016.

During the three and six months ended June 30, 2016 and 2015, TDRs that were modified within the preceding 12-month period which subsequently defaulted were as follows:



	Three Months Ended						Six Months Ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
	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	—	$	—	—	$	—	1	$	60	—	$	—
Commercial real estate - owner occupied	1	$	770	—	$	—	1	$	770	—	$	—
Total⁽¹⁾	1	$	770	—	$	—	2	$	830	—	$	—


(1)	During the three and six months ended June 30, 2015, there were no TDRs that were modified within the preceding 12-month period which subsequently defaulted.