Note 6 - Loans

9 Months Ended

Sep. 30, 2015

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE 6. LOANS

Outstanding loan balances consist of the following at September 30, 2015, and December 31, 2014.

	September 30,			December 31,
(Amounts in thousands)	2015			2014
Commercial	$	144,749		$	150,253
Commercial real estate:
Real estate - construction and land development		29,701			30,099
Real estate - commercial non-owner occupied		237,597			213,883
Real estate - commercial owner occupied		151,762			120,324
Residential real estate:
Real estate - residential - ITIN		50,162			52,830
Real estate - residential - 1-4 family mortgage		12,185			13,156
Real estate - residential - equity lines		45,733			44,981
Consumer and other		46,644			35,372
Gross loans		718,533			660,898
Deferred fees and costs, net		718			157
Loans, net of deferred fees and costs		719,251			661,055
Allowance for loan and lease losses		(10,891	)		(10,820	)
Net loans	$	708,360		$	650,235

Gross loan balances in the table above include net purchase discounts of $2.0 million and $998 thousand as of September 30, 2015, and December 31, 2014, respectively.

Loans are reported as past due when any portion of the principal and interest are not received by the due date. The days past due will continue to increase for each day until full principal and interest are received (i.e. if payment is not received within 30 days of the due date, the loan will be considered 30 days past due; if payment is not received within 60 days of the due date, the loan will be considered 60 days past due, etc.). Loans that become 90 days past due will be placed in nonaccrual status unless well secured and in the process of collection.

Age analysis of gross loan balances for past due loans, segregated by class of loans, as of September 30, 2015, and December 31, 2014, was as follows.

					Greater								Recorded
	30-59		60-89		Than 90								Investment >
(Amounts in thousands)	Days Past		Days Past		Days Past		Total Past						90 Days and
September 30, 2015	Due		Due		Due		Due		Current		Total		Accruing
Commercial	$	346	$	171	$	606	$	1,123	$	143,626	$	144,749	$	—
Commercial real estate:
Real estate - construction and land development		—		—		—		—		29,701		29,701		—
Real estate - commercial non-owner occupied		1,262		—		5,330		6,592		231,005		237,597		—
Real estate - commercial owner occupied		15		—		1,928		1,943		149,819		151,762		—
Residential real estate:
Real estate - residential - ITIN		971		104		1,221		2,296		47,866		50,162		—
Real estate - residential - 1-4 family mortgage		—		394		665		1,059		11,126		12,185		—
Real estate - residential - equity lines		82		98		23		203		45,530		45,733		—
Consumer and other		133		42		52		227		46,417		46,644		52
Total gross loans	$	2,809	$	809	$	9,825	$	13,443	$	705,090	$	718,533	$	52

					Greater								Recorded
	30-59		60-89		Than 90								Investment >
(Amounts in thousands)	Days Past		Days Past		Days Past		Total Past						90 Days and
December 31, 2014	Due		Due		Due		Due		Current		Total		Accruing
Commercial	$	2,421	$	301	$	2,161	$	4,883	$	145,370	$	150,253	$	—
Commercial real estate:
Real estate - construction and land development		—		—		—		—		30,099		30,099		—
Real estate - commercial non-owner occupied		—		—		7,086		7,086		206,797		213,883		—
Real estate - commercial owner occupied		—		—		1,378		1,378		118,946		120,324		—
Residential real estate:
Real estate - residential - ITIN		1,080		122		2,017		3,219		49,611		52,830		—
Real estate - residential - 1-4 family mortgage		—		—		1,580		1,580		11,576		13,156		—
Real estate - residential - equity lines		145		99		24		268		44,713		44,981		—
Consumer and other		158		57		23		238		35,134		35,372		23
Total gross loans	$	3,804	$	579	$	14,269	$	18,652	$	642,246	$	660,898	$	23

A loan is considered impaired when based on current information and events the Company determines it is probable that it will not be able to collect all amounts due according to the original loan contract, including scheduled interest payments. Generally, when the Company identifies a loan as impaired, it measures the loan for potential impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, the current fair value of collateral is used, less selling costs.

The starting point for determining the fair value of collateral is through obtaining external appraisals. Generally, external appraisals are updated every six to twelve months. The Company obtains appraisals from a pre-approved list of independent, third party, local appraisal firms. Approval and addition to the list is based on experience, reputation, character, consistency and knowledge of the respective real estate market. At a minimum, it is ascertained that the appraiser is: (1) currently licensed in the state in which the property is located, (2) is experienced in the appraisal of properties similar to the property being appraised, (3) is actively engaged in the appraisal work, (4) has knowledge of current real estate market conditions and financing trends, (5) is reputable, and (6) is not on Freddie Mac’s nor the Bank’s Exclusionary List of appraisers and brokers. In certain cases appraisals will be reviewed by another independent third party to ensure the quality of the appraisal and the expertise and independence of the appraiser.

Upon receipt and review, an external appraisal is utilized to measure a loan for potential impairment. The Company’s impairment analysis documents the date of the appraisal used in the analysis, whether the officer preparing the report deems it current, and, if not, allows for internal valuation adjustments with justification. Typical justified adjustments might include discounts for continued market deterioration subsequent to appraisal date, adjustments for the release of collateral contemplated in the appraisal, or the value of other collateral or consideration not contemplated in the appraisal. An appraisal over one year old in most cases will be considered stale dated and an updated or new appraisal will be required. Any adjustments from appraised value to net realizable value are detailed and justified in the impairment analysis, which is reviewed and approved by the Company’s Chief Credit Officer.

Although an external appraisal is the primary source to value collateral dependent loans, the Company may also utilize values obtained through purchase and sale agreements, negotiated short sales, broker price opinions, or the sales price of the note. These alternative sources of value are used only if deemed to be more representative of value based on updated information regarding collateral resolution. Impairment analyses are updated, reviewed and approved on a quarterly basis at or near the end of each reporting period. Based on these processes, the Company does not believe there are significant time lapses for the recognition of additional losses on collateral dependent loans.

The following tables summarize impaired loans by loan class as of September 30, 2015, and December 31, 2014.

	As of September 30, 2015
			Unpaid
	Recorded		Principal		Related
(Amounts in thousands)	Investment		Balance		Allowance
With no related allowance recorded:
Commercial	$	1,772	$	2,349	$	—
Commercial real estate:
Real estate - commercial non-owner occupied		5,154		6,157		—
Real estate - commercial owner occupied		1,928		2,651		—
Residential real estate:
Real estate - residential - ITIN		7,874		9,555		—
Real estate - residential - 1-4 family mortgage		1,669		2,629		—
Real estate - residential - equity lines		165		167		—
Total with no related allowance recorded	$	18,562	$	23,508	$	—
With an allowance recorded:
Commercial	$	790	$	838	$	134
Commercial real estate:
Real estate - commercial non-owner occupied		828		828		39
Real estate - commercial owner occupied		352		352		20
Residential real estate:
Real estate - residential - ITIN		1,777		1,791		301
Real estate - residential - equity lines		563		564		282
Consumer and other		33		33		13
Total with an allowance recorded	$	4,343	$	4,406	$	789
Subtotal:
Commercial	$	2,562	$	3,187	$	134
Commercial real estate		8,262		9,988		59
Residential real estate		12,048		14,706		583
Consumer and other		33		33		13
Total impaired loans	$	22,905	$	27,914	$	789

	As of December 31, 2014
	Recorded		Principal		Related
(Amounts in thousands)	Investment		Balance		Allowance
With no related allowance recorded:
Commercial	$	4,298	$	8,461	$	—
Commercial real estate:
Real estate - commercial non-owner occupied		6,909		10,207		—
Real estate - commercial owner occupied		1,378		2,102		—
Residential real estate:
Real estate - residential - ITIN		7,106		8,803		—
Real estate - residential - 1-4 family mortgage		1,608		2,578		—
Real estate - residential - equity lines		201		202		—
Total with no related allowance recorded	$	21,500	$	32,353	$	—
With an allowance recorded:
Commercial	$	2,299	$	2,317	$	314
Commercial real estate:
Real estate - commercial non-owner occupied		2,248		2,846		411
Real estate - commercial owner occupied		1,218		1,218		21
Residential real estate:
Real estate - residential - ITIN		3,002		3,103		503
Real estate - residential - 1-4 family mortgage		527		537		3
Real estate - residential - equity lines		579		579		289
Consumer and other		35		35		15
Total with an allowance recorded	$	9,908	$	10,635	$	1,556
Subtotal:
Commercial	$	6,597	$	10,778	$	314
Commercial real estate		11,753		16,373		432
Residential real estate		13,023		15,802		795
Consumer and other		35		35		15
Total impaired loans	$	31,408	$	42,988	$	1,556

Had nonaccrual loans performed in accordance with their contractual terms, the Company would have recognized additional interest income, net of tax, of approximately $127 thousand and $212 thousand for the three months ended September 30, 2015 and 2014, respectively. The Company would have recognized additional interest income, net of tax, of approximately $287 thousand and $541 thousand for the nine months ended September 30, 2015 and 2014, respectively.

Nonaccrual loans, segregated by loan class, were as follows as of September 30, 2015, and December 31, 2014.

	September 30,		December 31,
(Amounts in thousands)	2015		2014
Commercial	$	2,506	$	5,112
Commercial real estate:
Real estate - commercial non-owner occupied		5,154		8,318
Real estate - commercial owner occupied		1,928		1,378
Residential real estate:
Real estate - residential - ITIN		4,228		4,647
Real estate - residential - 1-4 family mortgage		1,669		2,135
Real estate - residential - equity lines		23		24
Consumer and other		33		35
Total	$	15,541	$	21,649

The following table summarizes average recorded investment and interest income recognized on impaired loans by loan class for the three and nine months ended September 30, 2015 and 2014.

	Three Months Ended				Three Months Ended
	September 30, 2015				September 30, 2014
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Amounts in thousands)	Investment		Recognized		Investment		Recognized
Commercial	$	2,885	$	—	$	6,511	$	13
Commercial real estate:
Real estate - commercial non-owner occupied		6,874		12		10,055		11
Real estate - commercial owner occupied		2,281		15		5,271		20
Residential real estate:
Real estate - residential - ITIN		9,616		36		—		—
Real estate - residential - 1-4 family mortgage		1,677		—		12,197		30
Real estate - residential - equity lines		742		6		1,155		8
Consumer and other		33		—		29		—
Total	$	24,108	$	69	$	35,218	$	82

	Nine Months Ended				Nine Months Ended
	September 30, 2015				September 30, 2014
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Amounts in thousands)	Investment		Recognized		Investment		Recognized
Commercial	$	3,919	$	22	$	5,848	$	15
Commercial real estate:
Real estate - commercial non-owner occupied		7,767		37		11,948		155
Real estate - commercial owner occupied		2,286		52		6,112		58
Residential real estate:
Real estate - residential - ITIN		9,819		102		—		—
Real estate - residential - 1-4 family mortgage		1,790		—		12,179		83
Real estate - residential - equity lines		763		20		1,238		25
Consumer and other		34		—		19		—
Total	$	26,378	$	233	$	37,344	$	336

The impaired loans for which these interest income amounts were recognized primarily relate to accruing restructured loans. Loans are reported as troubled debt restructurings when the Bank grants a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include a reduction in the loan rate, forgiveness of principal or accrued interest, extending the maturity date(s) significantly, or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as the Bank will not collect all amounts due, either principal or interest, in accordance with the terms of the original loan agreement.

At September 30, 2015 and December 31, 2014, impaired loans of $6.9 million and $9.2 million were classified as performing restructured loans, respectively. The restructurings were granted in response to borrower financial difficulty, and generally provide for a temporary modification of loan repayment terms.

In order for a restructured loan to be on accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must demonstrate the ability to make payments from a verified source of cash flow. The Company had no obligations to lend additional funds on the restructured loans as of September 30, 2015 or December 31, 2014.

As of September 30, 2015, the Company had $18.0 million in troubled debt restructurings compared to $23.5 million as of December 31, 2014. As of September 30, 2015, the Company had 121 loans that qualified as troubled debt restructurings, of which 102 loans were performing according to their restructured terms. Troubled debt restructurings represented 2.51% of gross loans as of September 30, 2015, compared with 3.55% at December 31, 2014.

The types of modifications offered can generally be described in the following categories:

Rate – A modification in which the interest rate is modified.

Maturity – A modification in which the maturity date, timing of payments or frequency of payments is modified.

Payment deferral – A modification in which a portion of the principal is deferred.

The following tables present the period ended balances of newly restructured loans and the types of modifications that occurred during the three and nine months ended September 30, 2015 and 2014, respectively.

	For the Three Months Ended September 30, 2015										For the Three Months Ended September 30, 2014
					Rate &										Rate &
			Rate &		Payment		Payment						Rate &		Payment
(Amounts in thousands)	Rate		Maturity		Deferral		Deferral		Total		Rate		Maturity		Deferral		Total
Commercial	$	—	$	45	$	—	$	—	$	45	$	—	$	5,165	$	—	$	5,165
Residential real estate:
Real estate - residential - ITIN		—		—		—		103		103		57		—		38		95
Total	$	—	$	45	$	—	$	103	$	148	$	57	$	5,165	$	38	$	5,260

	For the Nine Months Ended September 30, 2015										For the Nine Months Ended September 30, 2014
					Rate &										Rate &
			Rate &		Payment		Payment						Rate &		Payment
(Amounts in thousands)	Rate		Maturity		Deferral		Deferral		Total		Rate		Maturity		Deferral		Total
Commercial	$	—	$	45	$	—	$	734	$	779	$	—	$	5,165	$	—	$	5,165
Residential real estate:
Real estate - residential - ITIN		115		—		266		206		587		209		—		39		248
Total	$	115	$	45	$	266	$	940	$	1,366	$	209	$	5,165	$	39	$	5,413

The tables below provide information regarding the number of loans where the contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties for the three and nine months ended September 30, 2015 and 2014.

	For the Three Months Ended September 30, 2015						For the Three Months Ended September 30, 2014
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
(Amounts in thousands)	Number of		Recorded		Recorded		Number of		Recorded		Recorded
Troubled Debt Restructurings	Contracts		Investment		Investment		Contracts		Investment		Investment
Commercial		1	$	49	$	49		2	$	9,070	$	9,070
Residential real estate:
Real estate - residential - ITIN		2		225		193		2		113		113
Total		3	$	274	$	242		4	$	9,183	$	9,183

	For the Nine Months Ended September 30, 2015						For the Nine Months Ended September 30, 2014
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
(Amounts in thousands)	Number of		Recorded		Recorded		Number of		Recorded		Recorded
Troubled Debt Restructurings	Contracts		Investment		Investment		Contracts		Investment		Investment
Commercial		2	$	872	$	872		2	$	9,070	$	9,070
Residential real estate:
Real estate - residential - ITIN		8		747		678		4		263		267
Total		10	$	1,619	$	1,550		6	$	9,333	$	9,337

The following tables present loans modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the three and nine months ended September 30, 2015 and 2014.

	For the Three Months Ended				For the Three Months Ended
	September 30, 2015				September 30, 2014
(Amounts in thousands)	Number of		Recorded		Number of		Recorded
Troubled Debt Restructurings That Subsequently Defaulted	Contracts		Investment		Contracts		Investment
Residential real estate:
Real estate - residential - ITIN		—	$	—		1	$	53
Total		—	$	—		1	$	53

	For the Nine Months Ended				For the Nine Months Ended
	September 30, 2015				September 30, 2014
(Amounts in thousands)	Number of		Recorded		Number of		Recorded
Troubled Debt Restructurings That Subsequently Defaulted	Contracts		Investment		Contracts		Investment
Residential real estate:
Real estate - residential - ITIN		—	$	—		2	$	139
Total		—	$	—		2	$	139

The Company defines a performing loan as a loan where any installment of principal or interest is not 90 days or more past due, and management believes the ultimate collection of original contractual principal and interest is likely. The Company defines a nonperforming loan as an impaired loan which may be on nonaccrual, 90 days past due and still accruing, or has been restructured and is not in compliance with its modified terms, and our ultimate collection of original contractual principal and interest is uncertain. The foundation or primary factor in determining the appropriate credit quality indicators is the degree of a debtor’s willingness and ability to perform as agreed.

Performing and nonperforming loans, segregated by class of loans, are as follows at September 30, 2015 and December 31, 2014.

	September 30, 2015
(Amounts in thousands)	Performing		Nonperforming		Total
Commercial	$	142,243	$	2,506	$	144,749
Commercial real estate:
Real estate - construction and land development		29,701		—		29,701
Real estate - commercial non-owner occupied		232,443		5,154		237,597
Real estate - commercial owner occupied		149,834		1,928		151,762
Residential real estate:
Real estate - residential - ITIN		45,934		4,228		50,162
Real estate - residential - 1-4 family mortgage		10,516		1,669		12,185
Real estate - residential - equity lines		45,710		23		45,733
Consumer and other		46,559		85		46,644
Total gross loans	$	702,940	$	15,593	$	718,533

	December 31, 2014
(Amounts in thousands)	Performing		Nonperforming		Total
Commercial	$	145,141	$	5,112	$	150,253
Commercial real estate:
Real estate - construction and land development		30,099		—		30,099
Real estate - commercial non-owner occupied		205,565		8,318		213,883
Real estate - commercial owner occupied		118,946		1,378		120,324
Residential real estate:
Real estate - residential - ITIN		48,183		4,647		52,830
Real estate - residential - 1-4 family mortgage		11,021		2,135		13,156
Real estate - residential - equity lines		44,957		24		44,981
Consumer and other		35,314		58		35,372
Total gross loans	$	639,226	$	21,672	$	660,898

In conjunction with evaluating the performing versus nonperforming nature of the Company’s loan portfolio, management evaluates the following credit risk and other relevant factors in determining the appropriate credit quality indicator (grade) for each loan class:

Pass Grade - Borrowers classified as Pass Grades specifically demonstrate:

● Strong Cash Flows – borrower’s cash flows must meet or exceed the Company’s minimum debt service coverage ratio.

● Collateral Margin – generally, the borrower must have pledged an acceptable collateral class with an adequate collateral margin.

● Qualitative Factors – in addition to meeting the Company’s minimum cash flow and collateral requirements, a number of other qualitative factors are also factored into assigning a pass grade including the borrower’s level of leverage (debt to equity), prospects, history and experience in their industry, credit history, and any other relevant factors including a borrower’s character.

Those borrowers who qualify for unsecured loans must fully demonstrate above average cash flows and strong secondary sources of repayment to mitigate the lack of unpledged collateral.

Watch Grade – Generally, borrowers classified as Watch exhibit some level of deterioration in one or more of the following:

● Adequate Cash Flows – borrowers in this category demonstrate adequate cash flows and debt service coverage ratios, but also exhibit one or more less than positive conditions such as declining trends in the level of cash flows, increasing or sole reliance on secondary sources of cash flows, and/or do not meet the Company’s minimum debt service coverage ratio. However, cash flow remains at acceptable levels to meet debt service requirements.

● Adequate Collateral Margin – the collateral securing the debt remains adequate but also exhibits a declining trend in value or expected volatility due to macro or industry specific conditions. The current collateral value, less selling costs, remains adequate to cover the outstanding debt under a liquidation scenario.

● Qualitative Factors – while the borrower’s cash flow and collateral margin generally remain adequate, one or more quantitative and qualitative factors may also factor into assigning a Watch Grade including the borrower’s level of leverage (debt to equity), deterioration in prospects, limited experience in their industry, newly formed company, overall deterioration in the industry, negative trends or recent events in a borrower’s credit history, deviation from core business, and any other relevant factors.

Special Mention Grade – Generally, borrowers classified as Special Mention exhibit a greater level of deterioration than Watch graded loans and warrant management’s close attention. If left uncorrected, the potential weaknesses could threaten repayment prospects in the future. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant an adverse risk grade.

The following represents potential characteristics of a Special Mention Grade but do not necessarily generate automatic reclassification into this loan grade:

● Adequate Cash Flows – borrowers in this category demonstrate adequate cash flows and debt service coverage ratios, but also reflect adverse trends in operations or continuing financial deterioration that, if it does not stabilize and reverse in a reasonable timeframe, retirement of the debt may be jeopardized.

● Adequate Collateral Margin – the collateral securing the debt remains adequate but also exhibits a continuing declining trend in value or volatility due to macro or industry specific conditions. The current collateral value, less selling costs, remains adequate, but should the negative collateral trend continue, the full recovery of the outstanding debt under a liquidation scenario could be jeopardized.

● Qualitative Factors – while the borrower’s cash flow and/or collateral margin continue to deteriorate but generally remain adequate, one or more quantitative and qualitative factors may also be factoring into assigning a Special Mention Grade including inadequate or incomplete loan documentation, perfection of collateral, inadequate credit structure, borrower unable or unwilling to produce current and adequate financial information, and any other relevant factors.

Substandard Grade – A Substandard credit is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard credits have a well-defined weakness or weaknesses that jeopardize the liquidation or timely collection of the debt. Substandard credits are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. However, a potential loss does not have to be recognizable in an individual credit for it to be considered a substandard credit. As such, substandard credits may or may not be classified as impaired.

The following represents, but is not limited to, the potential characteristics of a Substandard Grade and do not necessarily generate automatic reclassification into this loan grade:

● Sustained or substantial deteriorating financial trends,

● Unresolved management problems,

● Collateral is insufficient to repay debt; collateral is not sufficiently supported by independent sources, such as asset-based financial audits, appraisals, or equipment evaluations,

● Improper perfection of lien position, which is not readily correctable,

● Unanticipated and severe decline in market values,

● High reliance on secondary source of repayment,

● Legal proceedings, such as bankruptcy or a divorce, which has substantially decreased the borrower’s capacity to repay the debt,

● Fraud committed by the borrower,

● IRS liens that take precedence,

● Forfeiture statutes for assets involved in criminal activities,

● Protracted repayment terms outside of policy that are for longer than the same type of credit in the Company portfolio,

● Any other relevant quantitative or qualitative factor that negatively affects the current net worth and paying capacity of the borrower or of the collateral pledged, if any.

Doubtful Grade – A credit risk rated as Doubtful has all the weaknesses inherent in a credit classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. As such, all doubtful loans are considered impaired. The possibility of loss is extremely high, but because of certain pending factors that may work to the advantage and strengthening of the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include, but are not limited to:

● Proposed merger(s),

● Acquisition or liquidation procedures,

● Capital injection,

● Perfecting liens on additional collateral,

● Refinancing plans.

Generally, a Doubtful grade does not remain outstanding for a period greater than six months. After six months, the pending events should have either occurred or not occurred. The credit grade should have improved or the principal balance charged against the ALLL.

Credit grade definitions, including qualitative factors, for all credit grades are reviewed and approved annually by the Company’s Loan Committee. During the current year, the Company determined that certain amounts in the “pass” and “watch” classifications disclosed in the internal risk ratings table included in the Company’s 2014 annual consolidated financial statements were incorrect. Accordingly, $46.9 million have been reclassified from “watch” to “pass” in the December 31, 2014 table below. The following table summarizes internal risk rating by loan class as of September 30, 2015, and December 31, 2014.

	As of September 30, 2015
					Special
(Amounts in thousands)	Pass		Watch		Mention		Substandard		Doubtful		Total
Commercial	$	119,969	$	11,330	$	6,644	$	6,806	$	—	$	144,749
Commercial real estate:
Real estate - construction and land development		29,669		32		—		—		—		29,701
Real estate - commercial non-owner occupied		227,725		694		2,827		6,351		—		237,597
Real estate - commercial owner occupied		143,882		3,752		1,848		2,280		—		151,762
Residential real estate:
Real estate - residential - ITIN		41,908		—		—		8,254		—		50,162
Real estate - residential - 1-4 family mortgage		9,694		—		576		1,915		—		12,185
Real estate - residential - equity lines		41,416		1,724		1,683		910		—		45,733
Consumer and other		46,307		—		269		68		—		46,644
Total gross loans	$	660,570	$	17,532	$	13,847	$	26,584	$	—	$	718,533

	As of December 31, 2014
	Pass		Watch		Special
(Amounts in thousands)	(Restated)		(Restated)		Mention		Substandard		Doubtful		Total
Commercial	$	121,282	$	14,116	$	4,018	$	10,837	$	—	$	150,253
Commercial real estate:
Real estate - construction and land development		30,056		43		—		—		—		30,099
Real estate - commercial non-owner occupied		201,155		1,953		869		9,906		—		213,883
Real estate - commercial owner occupied		111,689		5,864		—		2,771		—		120,324
Residential real estate:
Real estate - residential - ITIN		42,721		—		—		10,109		—		52,830
Real estate - residential - 1-4 family mortgage		10,769		—		—		2,387		—		13,156
Real estate - residential - equity lines		41,624		2,380		—		977		—		44,981
Consumer and other		35,279		3		18		72		—		35,372
Total gross loans	$	594,575	$	24,359	$	4,905	$	37,059	$	—	$	660,898

The following tables summarize the ALLL by portfolio for the three and nine months ended September 30, 2015 and 2014.

	For the Three Months Ended September 30, 2015
				Commercial			Residential
(Amounts in thousands)	Commercial			Real Estate			Real Estate			Consumer			Unallocated			Total
ALLL:
Beginning balance	$	3,389		$	5,447		$	1,480		$	583		$	503		$	11,402
Charge offs		—			(289	)		(309	)		(181	)		—			(779	)
Recoveries		121			1			139			7			—			268
Provision		(91	)		64			(45	)		194			(122	)		—
Ending balance	$	3,419		$	5,223		$	1,265		$	603		$	381		$	10,891

	For the Three Months Ended September 30, 2014
				Commercial			Residential
(Amounts in thousands)	Commercial			Real Estate			Real Estate			Consumer			Unallocated		Total
ALLL:
Beginning balance	$	3,331		$	3,870		$	2,333		$	238		$	110	$	9,882
Charge offs		(299	)		(241	)		(44	)		(1	)		—		(585	)
Recoveries		43			1			9			—			—		53
Provision		364			625			(95	)		124			32		1,050
Ending balance	$	3,439		$	4,255		$	2,203		$	361		$	142	$	10,400

	For the Nine Months Ended September 30, 2015
				Commercial			Residential
(Amounts in thousands)	Commercial			Real Estate			Real Estate			Consumer			Unallocated		Total
ALLL:
Beginning balance	$	3,503		$	4,875		$	1,671		$	449		$	322	$	10,820
Charge offs		(406	)		(428	)		(450	)		(385	)		—		(1,669	)
Recoveries		869			669			202			—			—		1,740
Provision		(547	)		107			(158	)		539			59		—
Ending balance	$	3,419		$	5,223		$	1,265		$	603		$	381	$	10,891

	For the Nine Months Ended September 30, 2014
				Commercial			Residential
(Amounts in thousands)	Commercial			Real Estate			Real Estate			Consumer			Unallocated			Total
ALLL:
Beginning balance	$	7,057		$	2,784		$	2,493		$	35		$	1,803		$	14,172
Charge offs		(4,105	)		(2,525	)		(313	)		(1	)		—			(6,944	)
Recoveries		500			1			171			—			—			672
Provision		(13	)		3,995			(148	)		327			(1,661	)		2,500
Ending balance	$	3,439		$	4,255		$	2,203		$	361		$	142		$	10,400

The following tables summarize the ALLL and the recorded investment in loans and leases as of September 30, 2015 and December 31, 2014.

	As of September 30, 2015
			Commercial		Residential
(Amounts in thousands)	Commercial		Real Estate		Real Estate		Consumer		Unallocated		Total
ALLL:
Individually evaluated for impairment	$	134	$	59	$	583	$	13	$	—	$	789
Collectively evaluated for impairment		3,285		5,164		682		590		381		10,102
Total	$	3,419	$	5,223	$	1,265	$	603	$	381	$	10,891
Gross loans:
Individually evaluated for impairment	$	2,562	$	8,262	$	12,048	$	33	$	—	$	22,905
Collectively evaluated for impairment		142,187		410,798		96,032		46,611		—		695,628
Total gross loans	$	144,749	$	419,060	$	108,080	$	46,644	$	—	$	718,533

	As of December 31, 2014
			Commercial		Residential
(Amounts in thousands)	Commercial		Real Estate		Real Estate		Consumer		Unallocated		Total
ALLL:
Individually evaluated for impairment	$	314	$	432	$	795	$	15	$	—	$	1,556
Collectively evaluated for impairment		3,189		4,443		875		435		322		9,264
Total	$	3,503	$	4,875	$	1,670	$	450	$	322	$	10,820
Gross loans:
Individually evaluated for impairment	$	6,597	$	11,753	$	13,023	$	35	$	—	$	31,408
Collectively evaluated for impairment		143,656		352,553		97,944		35,337		—		629,490
Total gross loans	$	150,253	$	364,306	$	110,967	$	35,372	$	—	$	660,898

The ALLL totaled $10.9 million or 1.52% of total gross loans at September 30, 2015 and $10.8 million or 1.64% at December 31, 2014. As of September 30, 2015, the Company had $203.9 million in commitments to extend credit, and recorded a reserve for unfunded commitments of $695 thousand in other liabilities in the Consolidated Balance Sheets.

The ALLL is based upon estimates of loan and lease losses and is maintained at a level considered adequate to provide for probable losses inherent in the outstanding loan portfolio. The Company’s ALLL methodology significantly incorporates management’s current judgments, and reflects the reserve amount that is necessary for estimated loan and lease losses and risks inherent in the loan portfolio in accordance with ASC Topic 450 Contingencies and ASC Topic 310 Receivables.

The allowance is increased by provisions charged to expense and reduced by net charge offs. In periodic evaluations of the adequacy of the allowance balance, management considers past loan and lease loss experience by type of credit, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors. We formally assess the adequacy of the ALLL on a monthly basis. These assessments include the periodic re-grading of classified loans based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment and other factors as warranted. Loans are initially graded when originated. They are reviewed as they are renewed, when there is a new loan to the same borrower and/or when identified facts demonstrate heightened risk of default. Confirmation of the quality of our grading process is obtained by independent reviews conducted by outside consultants specifically hired for this purpose and by periodic examination by various bank regulatory agencies.

Management monitors delinquent loans continuously and identifies problem loans to be evaluated individually for impairment testing. For loans that are determined impaired, a formal impairment measurement is performed at least quarterly on a loan-by-loan basis.

Our method for assessing the appropriateness of the allowance includes specific allowances for identified problem loans, an allowance factor for categories of credits and allowances for changing environmental factors (e.g., portfolio trends, concentration of credit, growth, economic factors). Allowances for identified problem loans are based on specific analysis of individual credits. Loss estimation factors for loan categories are based on analysis of local economic factors applicable to each loan category. Allowances for changing environmental factors are management’s best estimate of the probable impact these changes have had on the loan portfolio as a whole.

Management believes that the ALLL was adequate as of September 30, 2015. There is, however, no assurance that future loan and lease losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review.

As of September 30, 2015, approximately 74% of our gross loan portfolio is secured by real estate, and a significant decline in real estate market values may require an increase in the ALLL. The U.S. recession, the housing market downturn, and low real estate values in our markets have negatively impacted aspects of our residential development, commercial real estate, commercial construction and commercial loan portfolios. Deterioration in our markets may adversely affect our loan portfolio and may lead to additional charges to the provision for loan and lease losses.

All impaired loans are individually evaluated for impairment. If the measurement of each impaired loans’ value is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the ALLL. For collateral dependent loans, this can be accomplished by charging off the impaired portion of the loan based on the underlying value of the collateral. For non collateral dependent loans the Company establishes a specific component within the ALLL based on the present value of the future cash flows. If the Bank determines the sources of repayment will not result in a reasonable probability that the carrying value of a loan can be recovered, the amount of a loan’s specific impairment is charged off against the ALLL. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the ALLL.

The unallocated portion of ALLL provides for coverage of credit losses inherent in the loan portfolio but not captured in the credit loss factors that are utilized in the risk rating-based component, or in the specific impairment reserve component of the ALLL, and acknowledges the inherent imprecision of all loss prediction models. As of September 30, 2015, the unallocated allowance amount represented 3% of the ALLL, compared to 3% at December 31, 2014. The ALLL composition should not be interpreted as an indication of specific amounts or loan categories in which future charge offs may occur.

The Company has lending policies and procedures in place with the objective of optimizing loan income within an accepted risk tolerance level. Management reviews and approves these policies and procedures annually. Monitoring and reporting systems supplement the review process with regular frequency as related to loan production, loan quality, concentrations of credit, potential problem loans, loan delinquencies, and nonperforming loans.

The following is a brief summary, by loan type, of management’s evaluation of the general risk characteristics and underwriting standards:

Commercial Loans – Commercial loans are underwritten after evaluating the borrower’s financial ability to maintain profitability including future expansion objectives. In addition, the borrower’s qualitative qualities are evaluated, such as management skills and experience, ethical traits, and overall business acumen. Commercial loans are primarily extended based on the cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The borrower’s cash flow may deviate from initial projections, and the value of collateral securing these loans may vary.

Most commercial loans are generally secured by the assets being financed and other business assets such as accounts receivable or inventory. Management may also incorporate a personal guarantee; however, some short term loans may be extended on an unsecured basis. Repayment of commercial loans secured by accounts receivable may be substantially dependent on the ability of the borrower to collect amounts due from its customers. In addition, the Company maintains a commercial loan with its former mortgage subsidiary in which mortgage loans are pledged as collateral.

Commercial Real Estate (“CRE”) Loans – CRE loans are subject to similar underwriting standards and processes as commercial loans. CRE loans are viewed predominantly as cash flow loans and secondarily as loans collateralized by real estate. Generally, CRE lending involves larger principal amounts with repayment largely dependent on the successful operation of the property securing the loan or the business conducted on the collateralized property. CRE loans tend to be more adversely affected by conditions in the real estate markets or by general economic conditions.

The properties securing the Company’s CRE portfolio are diverse in terms of type and primary source of repayment. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single industry. Management monitors and evaluates CRE loans based on occupancy status (investor versus owner occupied), collateral, geography, and risk grade criteria.

Generally, CRE loans to developers and builders that are secured by non owner occupied properties require the borrower to have had an existing relationship with the Company and a proven record of success. Construction loans are underwritten utilizing feasibility studies, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of cost and value associated with the complete project (as-is value). These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment largely dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long term lenders, sales of developed property, or an interim loan commitment from the Company until permanent financing is secured. These loans are closely monitored by on-site inspections, and are considered to have higher inherent risks than other CRE loans due to their ultimate repayment sensitivity to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long term financing.

Consumer Loans – The Company’s consumer loan originations are generally limited to home equity loans with nominal originations in unsecured personal loans. The portfolio also includes unsecured consumer home improvement loans with an ongoing purchase commitment and residential solar panel loans secured by UCC filing purchased during 2014 The Company is highly dependent on third party credit scoring analysis to supplement the internal underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by management and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements.

The Company maintains an independent loan review program that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to the Board of Directors and Audit Committee. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Management’s continuing evaluation of all known relevant quantitative and qualitative internal and external risk factors provide the foundation for the three major components of the Company’s ALLL: (1) historical valuation allowances established in accordance with ASC 450, Contingencies (“ASC 450”) for groups of similarly situated loan pools; (2) general valuation allowances established in accordance with ASC 450 and based on qualitative credit risk factors; and (3) specific valuation allowances established in accordance with ASC 310, Receivables (“ASC 310”) and based on estimated probable losses on specific impaired loans. All three components are aggregated and constitute the Company’s ALLL; while portions of the allowance may be allocated to specific credits, the allowance net of specific reserves is available for the remaining credits that management deems as “loss.” It is the Company’s policy to classify a credit as loss with a concurrent charge off when management considers the credit uncollectible and of such little value that its continuance as a bankable asset is not warranted. A loss classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer recognizing the likely credit loss of a valueless asset even though partial recovery may occur in the future.

In accordance with ASC 450, historical valuation allowances are established for loan pools with similar risk characteristics common to each loan grouping. The Company’s loan portfolio is evaluated by general loan class including commercial, commercial real estate (which includes construction and other real estate), residential real estate (which includes 1-4 family and home equity loans), consumer and other loans.

These loan pools are similarly risk-graded and each portfolio is evaluated by identifying all relevant risk characteristics that are common to these segmented groups of loans. These characteristics include a significant emphasis on historical losses within each loan group, inherent risks for each, and specific loan class characteristics such as trends related to nonaccrual loans, past due loans, criticized loans, net charge offs or recoveries, among other relevant credit risk factors. Management periodically reviews and updates its historical loss ratios based on net charge off experience for each loan class. Other credit risk factors are also reviewed periodically and adjusted as necessary to account for any changes in potential loss exposure.

General valuation allowances, as prescribed by ASC 450, are based on qualitative factors such as changes in asset quality trends, concentrations of credit or changes in concentrations of credit, changes in underwriting standards, changes in experience or depth of lending staff or management, the effectiveness of loan grading and the internal loan review function, and any other relevant factors. Management evaluates each qualitative component quarterly to determine the associated risks to the quality of the Company’s loan portfolio.