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Allowance for Loan Losses and Reserve for Unfunded Loan Commitments
6 Months Ended
Jun. 30, 2016
Financing Receivable, Allowance for Credit Loss, Additional Information [Abstract]  
Allowance for Loan Losses and Reserve for Unfunded Loan Commitments
Allowance for Loan Losses and Reserve for Unfunded Loan Commitments

Allowance for Loan Losses

The Company has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio.  At a minimum, the adequacy of the allowance for loan losses is reviewed by management on a quarterly basis.  For purposes of determining the allowance for loan losses, the Company has segmented the loans in its portfolio by loan type.  Loans are segmented into the following pools: SBA 7(a), SBA 504, commercial, residential mortgages, and consumer loans.  Certain portfolio segments are further broken down into classes based on the associated risks within those segments and the type of collateral underlying each loan.  Commercial loans are divided into the following four classes: commercial real estate, commercial real estate construction, unsecured business line of credit and commercial other.  Consumer loans are divided into two classes as follows:  Home equity and other.

The standardized methodology used to assess the adequacy of the allowance includes the allocation of specific and general reserves.  The same standard methodology is used, regardless of loan type.  Specific reserves are made to individual impaired loans and TDRs (see Note 1 for additional information on this term).  The general reserve is set based upon a representative average historical net charge-off rate adjusted for the following environmental factors: delinquency and impairment trends, charge-off and recovery trends, changes in the volume of restructured loans, volume and loan term trends, changes in risk and underwriting policy trends, staffing and experience changes, national and local economic trends, industry conditions and credit concentration changes.  Within the five-year historical net charge-off rate, the Company weights the past three years more heavily as it believes it is more indicative of future charge-offs.  All of the environmental factors are ranked and assigned a basis points value based on the following scale: low, low moderate, moderate, high moderate and high risk.  Each environmental factor is evaluated separately for each class of loans and risk weighted based on its individual characteristics. 
For SBA 7(a), SBA 504 and commercial loans, the estimate of loss based on pools of loans with similar characteristics is made through the use of a standardized loan grading system that is applied on an individual loan level and updated on a continuous basis.  The loan grading system incorporates reviews of the financial performance of the borrower, including cash flow, debt-service coverage ratio, earnings power, debt level and equity position, in conjunction with an assessment of the borrower's industry and future prospects.  It also incorporates analysis of the type of collateral and the relative loan to value ratio.
For residential mortgage and consumer loans, the estimate of loss is based on pools of loans with similar characteristics.  Factors such as credit score, delinquency status and type of collateral are evaluated.  Factors are updated frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in loss mitigation or credit origination strategies, and adjustments to the reserve factors are made as needed.

According to the Company’s policy, a loss (“charge-off”) is to be recognized and charged to the allowance for loan losses as soon as a loan is recognized as uncollectable.  All credits which are 90 days past due must be analyzed for the Company’s ability to collect on the credit.  Once a loss is known to exist, the charge-off approval process is immediately expedited.  This charge-off policy is followed for all loan types.

The allocated allowance is the total of identified specific and general reserves by loan category.  The allocation is not necessarily indicative of the categories in which future losses may occur.  The total allowance is available to absorb losses from any segment of the portfolio.  An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in methodologies for estimating allocated and general reserves in the portfolio.  The unallocated portion of the allowance decreased during the quarter ended June 30, 2016, to $149 thousand from $162 thousand at December 31, 2015

The following tables detail the activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2016 and 2015:
 
 
For the three months ended June 30, 2016
(In thousands)
 
SBA held for investment
 
SBA 504
 
Commercial
 
Residential
 
Consumer
 
Unallocated
 
Total
Balance, beginning of period
 
$
1,713

 
$
598

 
$
6,312

 
$
2,892

 
$
836

 
$
283

 
$
12,634

Charge-offs
 
(142
)
 

 
(152
)
 

 

 


 
(294
)
Recoveries
 
4

 

 
13

 

 
1

 


 
18

Net (charge-offs) recoveries
 
(138
)
 

 
(139
)
 

 
1

 

 
(276
)
Provision for loan losses charged to expense
 
55

 
(10
)
 
393

 
72

 
24

 
(134
)
 
400

Balance, end of period
 
$
1,630

 
$
588

 
$
6,566

 
$
2,964

 
$
861

 
$
149

 
$
12,758


 
 
For the three months ended June 30, 2015
(In thousands)
 
SBA held for investment
 
SBA 504
 
Commercial
 
Residential
 
Consumer
 
Unallocated
 
Total
Balance, beginning of period
 
$
1,873

 
$
1,162

 
$
5,624

 
$
2,341

 
$
710

 
$
471

 
$
12,181

Charge-offs
 
(6
)
 

 
(147
)
 

 
(7
)
 


 
(160
)
Recoveries
 
2

 

 
370

 
10

 
1

 


 
383

Net (charge-offs) recoveries
 
(4
)
 

 
223

 
10

 
(6
)
 

 
223

Provision for loan losses charged to expense
 
129

 
(283
)
 
212

 
194

 
52

 
(304
)
 

Balance, end of period
 
$
1,998

 
$
879

 
$
6,059

 
$
2,545

 
$
756

 
$
167

 
$
12,404



The following tables detail the activity in the allowance for loan losses portfolio segment for the six months ended June 30, 2016 and 2015:
 
 
For the six months ended June 30, 2016
(In thousands)
 
SBA held for investment
 
SBA 504
 
Commercial
 
Residential
 
Consumer
 
Unallocated
 
Total
Balance, beginning of period
 
$
1,961

 
$
741

 
$
6,309

 
$
2,769

 
$
817

 
$
162

 
$
12,759

Charge-offs
 
(228
)
 

 
(380
)
 

 
(28
)
 
 
 
(636
)
Recoveries
 
15

 

 
19

 

 
1

 
 
 
35

Net (charge-offs) recoveries
 
(213
)
 

 
(361
)
 

 
(27
)
 

 
(601
)
Provision for loan losses charged to expense
 
(118
)
 
(153
)
 
618

 
195

 
71

 
(13
)
 
600

Balance, end of period
 
$
1,630

 
$
588

 
$
6,566

 
$
2,964

 
$
861

 
$
149

 
$
12,758


 
 
For the six months ended June 30, 2015
(In thousands)
 
SBA held for investment
 
SBA 504
 
Commercial
 
Residential
 
Consumer
 
Unallocated
 
Total
Balance, beginning of period
 
$
1,883

 
$
1,337

 
$
6,270

 
$
2,289

 
$
667

 
$
105

 
$
12,551

Charge-offs
 
(135
)
 
(589
)
 
(247
)
 

 
(37
)
 
 
 
(1,008
)
Recoveries
 
40

 

 
571

 
49

 
1

 
 
 
661

Net (charge-offs) recoveries
 
(95
)
 
(589
)
 
324

 
49

 
(36
)
 

 
(347
)
Provision for loan losses charged to expense
 
210

 
131

 
(535
)
 
207

 
125

 
62

 
200

Balance, end of period
 
$
1,998

 
$
879

 
$
6,059

 
$
2,545

 
$
756

 
$
167

 
$
12,404


The following tables present loans and their related allowance for loan losses, by portfolio segment, as of June 30, 2016 and December 31, 2015:
 
 
June 30, 2016
(In thousands)
 
SBA held for investment
 
SBA 504
 
Commercial
 
Residential
 
Consumer
 
Unallocated
 
Total
Allowance for loan losses ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
415

 
$

 
$
274

 
$

 
$

 
$

 
$
689

Collectively evaluated for impairment
 
1,215

 
588

 
6,292

 
2,964

 
861

 
149

 
12,069

Total
 
$
1,630

 
$
588

 
$
6,566

 
$
2,964

 
$
861

 
$
149

 
$
12,758

Loan ending balances:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
1,517

 
$
513

 
$
3,061

 
$

 
$

 
$

 
$
5,091

Collectively evaluated for impairment
 
38,489

 
26,525

 
478,652

 
268,774

 
84,267

 

 
896,707

Total
 
$
40,006

 
$
27,038

 
$
481,713

 
$
268,774

 
$
84,267

 
$

 
$
901,798


 
 
December 31, 2015
(In thousands)
 
SBA held for investment
 
SBA 504
 
Commercial
 
Residential
 
Consumer
 
Unallocated
 
Total
Allowance for loan losses ending balance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
705

 
$

 
$
137

 
$

 
$

 
$

 
$
842

Collectively evaluated for impairment
 
1,256

 
741

 
6,172

 
2,769

 
817

 
162

 
11,917

Total
 
$
1,961

 
$
741

 
$
6,309

 
$
2,769

 
$
817

 
$
162

 
$
12,759

Loan ending balances:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
1,907

 
$
2,226

 
$
3,040

 
$

 
$

 
$

 
$
7,173

Collectively evaluated for impairment
 
37,486

 
27,127

 
462,478

 
264,523

 
77,057

 

 
868,671

Total
 
$
39,393

 
$
29,353

 
$
465,518

 
$
264,523

 
$
77,057

 
$

 
$
875,844



Changes in Methodology:
The Company did not make any changes to its allowance for loan losses methodology in the current period.

Reserve for Unfunded Loan Commitments

In addition to the allowance for loan losses, the Company maintains a reserve for unfunded loan commitments at a level that management believes is adequate to absorb estimated probable losses.  Adjustments to the reserve are made through other expense and applied to the reserve which is classified as other liabilities.  At June 30, 2016, a $183 thousand commitment reserve was reported on the balance sheet as an “other liability”, compared to a $138 thousand commitment reserve at December 31, 2015, due to a larger loan portfolio requiring a larger general reserve.