Loans and Allowance for Loan Losses

Credit Quality of Loans

Outstanding loans by class and payment aging as of June 30, 2015 and December 31, 2014 are as follows:



Loan Aging Analysis by Class as of June 30, 2015 and December 31, 2014
(dollars in thousands; 2015 unaudited)	Commercial and industrial			Commercial real estate, owner-occupied			Commercial real estate, investor			Construction			Home equity			Other residential ¹			Installment and other consumer			Total
June 30, 2015
30-59 days past due	$	—		$	—		$	—		$	—		$	999		$	—		$	148		$	1,147
60-89 days past due	—			—			—			—			—			—			4			4
Greater than 90 days past due (non-accrual) ²	347			1,403			2,278			2,733			265			—			42			7,068
Total past due	347			1,403			2,278			2,733			1,264			—			194			8,219
Current	184,673			233,718			661,079			46,021			114,229			73,721			17,545			1,330,986
Total loans ³	$	185,020		$	235,121		$	663,357		$	48,754		$	115,493		$	73,721		$	17,739		$	1,339,205
Non-accrual loans to total loans	0.2		%	0.6		%	0.3		%	5.6		%	0.2		%	—		%	0.2		%	0.5		%
December 31, 2014
30-59 days past due	$	183		$	—		$	—		$	—		$	646		$	—		$	180		$	1,009
60-89 days past due	—			—			—			—			—			—			—			—
Greater than 90 days past due (non-accrual) ²	—			1,403			2,429			5,134			280			—			104			9,350
Total past due	183			1,403			2,429			5,134			926			—			284			10,359
Current	210,040			229,202			671,070			43,279			109,862			73,035			16,504			1,352,992
Total loans ³	$	210,223		$	230,605		$	673,499		$	48,413		$	110,788		$	73,035		$	16,788		$	1,363,351
Non-accrual loans to total loans	—		%	0.6		%	0.4		%	10.6		%	0.3		%	—		%	0.6		%	0.7		%

¹ Our residential loan portfolio does not include sub-prime loans, nor is it our practice to underwrite loans commonly referred to as "Alt-A mortgages", the characteristics of which are loans lacking full documentation, borrowers having low FICO scores or higher loan-to-value ratios.

² Amounts include $1.4 million of Purchased Credit Impaired ("PCI") loans that had stopped accreting interest at both June 30, 2015 and December 31, 2014. Amounts exclude accreting PCI loans of $3.7 million and $3.8 million at June 30, 2015 and December 31, 2014, respectively, as we have a reasonable expectation about future cash flows to be collected and we continue to recognize accretable yield on these loans in interest income. There were no accruing loans past due more than ninety days at June 30, 2015 or December 31, 2014.

³ Amounts include net deferred loan costs of $781 thousand and $487 thousand at June 30, 2015 and December 31, 2014, respectively. Amounts are also net of unaccreted purchase discounts on non-PCI loans of $3.7 million and $4.4 million at June 30, 2015 and December 31, 2014, respectively.

Our commercial loans are generally made to established small and mid-sized businesses to provide financing for their working capital needs, equipment purchases and/or acquisitions. Management examines historical, current, and projected cash flows to determine the ability of the borrower to repay obligations as agreed. Commercial loans are made based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral and/or guarantor support. The cash flows of borrowers, however, may not occur as expected, and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed, such as accounts receivable and/or inventory, and typically include a personal guarantee. We target stable businesses with guarantors that have proven to be resilient in periods of economic stress. Typically, the guarantors provide an additional source of repayment for most of our credit extensions.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans discussed above. We underwrite these loans to be repaid from cash flow and to be supported by real property collateral. Underwriting standards for commercial real estate loans include, but are not limited to, debt coverage and loan-to-value ratios. Furthermore, substantially all of our loans are guaranteed by the owners of the properties. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. In the event of a vacancy, guarantors are expected to carry the loans until a replacement tenant can be found. The owner's substantial equity investment provides a strong economic incentive to continue to support the commercial real estate projects. As such, we have generally experienced a relatively low level of loss and delinquencies in this portfolio.

Construction loans are generally made to developers and builders to finance construction, renovation and occasionally land acquisitions. These loans are underwritten after evaluation of the borrower's financial strength, reputation, prior track record, and independent appraisals. The construction industry can be impacted by significant events, including: the inherent volatility of real estate markets and vulnerability to delays due to weather, change orders, inability to obtain construction permits, labor or material shortages, and price changes. Estimates of construction costs and value associated with the complete project may be inaccurate. Repayment of construction loans is largely dependent on the ultimate success of the project.

Consumer loans primarily consist of home equity lines of credit, other residential (tenancy-in-common, or “TIC”) loans, and installment and other consumer loans. We originate consumer loans utilizing credit score information, debt-to-income ratio and loan-to-value ratio analysis. Diversification, coupled with relatively small loan amounts that are spread across many individual borrowers, mitigates risk. Additionally, trend reports are reviewed by Management on a regular basis. Underwriting standards for home equity lines of credit include, but are not limited to, a conservative loan-to-value ratio, the number of such loans a borrower can have at one time, and documentation requirements. Our residential loan portfolio includes TIC units in San Francisco. These loans tend to have more equity in their properties than conventional residential mortgages, which mitigates risk. Installment and other consumer loans include mostly loans for floating homes and mobile homes along with a small number of installment loans.

We use a risk rating system to evaluate asset quality, and to identify and monitor credit risk in individual loans, and ultimately in the portfolio. Definitions of loans that are risk graded “Special Mention” or worse are consistent with those used by the Federal Deposit Insurance Corporation ("FDIC"). Our internally assigned grades are as follows:

Pass – Loans to borrowers of acceptable or better credit quality. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Bank’s policy regarding debt service coverage ratios. These borrowers are capable of sustaining normal economic, market or operational setbacks without significant financial impacts. Negative external industry factors are generally not present. The loan may be secured, unsecured or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain. This category also includes “Watch” loans, where the primary source of repayment has been delayed. “Watch” is intended to be a transitional grade, with either an upgrade or downgrade within a reasonable period.

Special Mention - Potential weaknesses that deserve close attention. If left uncorrected, those potential weaknesses may result in deterioration of the payment prospects for the asset. Special Mention assets do not present sufficient risk to warrant adverse classification.

Substandard - Inadequately protected by either the current sound worth and paying capacity of the obligor or the collateral pledged, if any. A Substandard asset has a well-defined weakness or weaknesses that jeopardize(s) the liquidation of the debt. Substandard assets are characterized by the distinct possibility that we will sustain some loss if such weaknesses or deficiencies are not corrected. Well-defined weaknesses include adverse trends or developments of the borrower’s financial condition, managerial weaknesses and/or significant collateral deficiencies.

Doubtful - Critical weaknesses that make collection or liquidation in full improbable. There may be specific pending events that work to strengthen the asset; however, the amount or timing of the loss may not be determinable. Pending events generally occur within one year of the asset being classified as Doubtful. Examples include: merger, acquisition, or liquidation; capital injection; guarantee; perfecting liens on additional collateral; and refinancing. Such loans are placed on nonaccrual status and usually are collateral-dependent.

We regularly review our credits for accuracy of risk grades whenever new information is received. Borrowers are required to submit financial information at regular intervals:


•	Generally, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk and complexity.


•	Investor commercial real estate borrowers are generally required to submit rent rolls or property income statements at least annually.


•	Construction loans are monitored monthly, and reviewed on an ongoing basis.


•	Home equity and other consumer loans are reviewed based on delinquency.


•	Loans graded “Watch” or more severe, regardless of loan type, are reviewed no less than quarterly.

The following table represents an analysis of loans by internally assigned grades, including the PCI loans, at June 30, 2015 and December 31, 2014:



(in thousands; 2015 unaudited)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor		Construction		Home equity		Other residential		Installment and other consumer		Purchased credit-impaired		Total
Credit Risk Profile by Internally Assigned Grade:
June 30, 2015
Pass	$	171,350	$	210,225	$	654,056	$	45,471	$	113,616	$	72,123	$	17,439	$	2,211	$	1,286,491
Special Mention	10,334		11,004		2,116		—		428		—		—		1,027		24,909
Substandard	3,145		10,820		5,450		3,277		1,382		1,598		300		1,833		27,805
Total loans	$	184,829	$	232,049	$	661,622	$	48,748	$	115,426	$	73,721	$	17,739	$	5,071	$	1,339,205

December 31, 2014
Pass	$	197,659	$	205,820	$	651,548	$	41,710	$	107,933	$	70,987	$	16,101	$	2,210	$	1,293,968
Special Mention	6,776		10,406		13,304		1,008		322		—		190		1,140		33,146
Substandard	5,464		11,763		6,473		5,684		2,466		2,048		497		1,842		36,237
Total loans	$	209,899	$	227,989	$	671,325	$	48,402	$	110,721	$	73,035	$	16,788	$	5,192	$	1,363,351

Troubled Debt Restructuring

Our loan portfolio includes certain loans that have been modified in a Troubled Debt Restructuring (“TDR”), where economic concessions have been granted to borrowers experiencing financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs on nonaccrual status at the time of restructure may be returned to accruing status after Management considers the borrower’s sustained repayment performance for a reasonable period, generally six months, and obtains reasonable assurance of repayment and performance.

A loan may no longer be reported as a TDR if all of the following conditions are met:


•	The loan is subsequently refinanced or restructured at current market interest rates and the new terms are consistent with the treatment of creditworthy borrowers under regular underwriting standards;


•	The borrower is no longer considered to be in financial difficulty;


•	Performance on the loan is reasonably assured; and;


•	Existing loan did not have any forgiveness of principal or interest.

The removal of TDR status must be approved by the same management level that approved the upgrading of the loan classification.

During the first half of 2015, three loans with a recorded investment totaling $396 thousand were removed from TDR designation. There were no loans removed from TDR designation during 2014.

The table below summarizes outstanding TDR loans by loan class as of June 30, 2015 and December 31, 2014. The summary includes both TDRs that are on non-accrual status and those that continue to accrue interest.



(in thousands; 2015 unaudited)	As of
Recorded investment in Troubled Debt Restructurings ¹	June 30, 2015		December 31, 2014

Commercial and industrial	$	4,149	$	3,584
Commercial real estate, owner-occupied	8,396		8,459
Commercial real estate, investor	740		524
Construction ²	3,277		5,684
Home equity	558		694
Other residential	2,029		2,045
Installment and other consumer	1,400		1,713
Total	$	20,549	$	22,703

¹Includes $16.1 million and $15.9 million of TDR loans that were accruing interest as of June 30, 2015 and December 31, 2014, respectively. Includes $1.6 million and $1.8 million of acquired loans at June 30, 2015 and December 31, 2014, respectively.

²In June 2015, one TDR loan was transferred to loans held-for-sale at fair value totaling $1.5 million, net of an $839 thousand charge-off to the allowance for loan losses. The loan was subsequently sold in June 2015 for no gain or loss.

The table below presents the following information for loans modified in a TDR during the presented periods: number of contracts modified, the recorded investment in the loans prior to modification, and the recorded investment in the loans after the loans were restructured. The table below excludes fully paid-off and fully charged-off TDR loans.



(dollars in thousands; unaudited)	Number of Contracts Modified	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment at period end
Troubled Debt Restructurings during the three months ended June 30, 2015:
Commercial and industrial	4	$	782	$	882	$	882
Commercial real estate, investor	1	222		221		221
Total	5	$	1,004	$	1,103	$	1,103

Troubled Debt Restructurings during the three months ended June 30, 2014:
Commercial and industrial	3	$	308	$	354	$	354
Installment and other consumer	3	111		110		109
Total	6	$	419	$	464	$	463




Troubled Debt Restructurings during the six months ended June 30, 2015:
Commercial and industrial	4	$	782	$	882	$	882
Commercial real estate, investor	1	222		221		221
Total	5	$	1,004	$	1,103	$	1,103

Troubled Debt Restructurings during the six months ended June 30, 2014:
Commercial and industrial	6	$	1,728	$	1,759	$	1,471
Home equity	1	150		150		149
Installment and other consumer	6	281		278		276
Total	13	$	2,159	$	2,187	$	1,896

Modifications during the six months ended June 30, 2015 primarily involved maturity extensions and renewals, while modifications during the six months ended June 30, 2014 primarily involved maturity extensions. During the first six months of 2015 and 2014, there were no defaults on loans that had been modified in a TDR within the prior twelve-month period. We report defaulted TDRs based on a payment default definition of more than ninety days past due.

Impaired Loan Balances and Their Related Allowance by Major Classes of Loans

The tables below summarize information on impaired loans and their related allowance. Total impaired loans include non-accrual loans, accruing TDR loans and accreting PCI loans that have experienced post-acquisition declines in cash flows expected to be collected.



(in thousands; unaudited)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor		Construction		Home equity		Other residential		Installment and other consumer		Total
June 30, 2015
Recorded investment in impaired loans:
With no specific allowance recorded	$	1,903	$	5,514	$	3,018	$	2,727	$	265	$	1,022	$	281	$	14,730
With a specific allowance recorded	2,592		2,882		—		556		393		1,007		1,139		8,569
Total recorded investment in impaired loans	$	4,495	$	8,396	$	3,018	$	3,283	$	658	$	2,029	$	1,420	$	23,299
Unpaid principal balance of impaired loans:
With no specific allowance recorded	$	1,899	$	6,514	$	5,010	$	2,727	$	265	$	1,022	$	281	$	17,718
With a specific allowance recorded	2,656		2,882		—		741		393		1,007		1,139		8,818
Total unpaid principal balance of impaired loans	$	4,555	$	9,396	$	5,010	$	3,468	$	658	$	2,029	$	1,420	$	26,536
Specific allowance	$	772	$	70	$	—	$	6	$	3	$	79	$	149	$	1,079

Average recorded investment in impaired loans during the quarter ended June 30, 2015	$	4,173	$	8,412	$	2,947	$	4,475	$	610	$	2,033	$	1,557	$	24,207
Interest income recognized on impaired loans during the quarter ended June 30, 2015	$	56	$	78	$	8	$	9	$	4	$	23	$	17	$	195
Average recorded investment in impaired loans during the six months ended June 30, 2015	$	3,946	$	8,427	$	2,931	$	5,078	$	618	$	2,037	$	1,650	$	24,687
Interest income recognized on impaired loans during the six months ended June 30, 2015	$	118	$	144	$	14	$	18	$	9	$	46	$	36	$	385
Average recorded investment in impaired loans during the quarter ended June 30, 2014	$	6,217	$	5,476	$	3,186	$	6,503	$	755	$	1,686	$	1,898	$	25,721
Interest income recognized on impaired loans during the quarter ended June 30, 2014	$	103	$	83	$	7	$	23	$	5	$	19	$	19	$	259
Average recorded investment in impaired loans during the six months ended June 30, 2014	$	6,081	$	5,480	$	3,235	$	6,513	$	666	$	1,870	$	1,891	$	25,736
Interest income recognized on impaired loans during the six months ended June 30, 2014	$	221	$	166	$	14	$	44	$	9	$	42	$	37	$	533



(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor		Construction		Home equity		Other residential		Installment and other consumer		Total

December 31, 2014
Recorded investment in impaired loans:
With no specific allowance recorded	$	1,141	$	5,577	$	2,954	$	5,134	$	393	$	1,026	$	239	$	16,464
With a specific allowance recorded	2,443		2,882		—		561		300		1,019		1,554		$	8,759
Total recorded investment in impaired loans	$	3,584	$	8,459	$	2,954	$	5,695	$	693	$	2,045	$	1,793	$	25,223
Unpaid principal balance of impaired loans:
With no specific allowance recorded	$	1,186	$	6,577	$	4,945	$	7,824	$	880	$	1,026	$	239	$	22,677
With a specific allowance recorded	2,524		2,882		—		749		300		1,019		1,554		9,028
Total unpaid principal balance of impaired loans	$	3,710	$	9,459	$	4,945	$	8,573	$	1,180	$	2,045	$	1,793	$	31,705
Specific allowance	$	694	$	65	$	—	$	3	$	—	$	92	$	284	$	1,138
Average recorded investment in impaired loans during 2014	5,354		6,604		3,138		6,471		741		1,744		1,857		25,909
Interest income recognized on impaired loans during 2014	378		288		28		85		19		74		76		948

Management monitors delinquent loans continuously and identifies problem loans, generally loans graded substandard or worse, to be evaluated individually for impairment testing. Generally, the recorded investment in impaired loans is net of any charge-offs from estimated losses related to specifically-identified impaired loans when they are deemed uncollectible. The charged-off portion of impaired loans outstanding at June 30, 2015 totaled approximately $2.7 million. In addition, the recorded investment in impaired loans is net of purchase discounts or premiums on acquired loans. At June 30, 2015, there were $767 thousand outstanding commitments to extend credit on impaired loans, including loans to borrowers whose terms have been modified in TDRs.

The following tables disclose loans by major portfolio category and activity in the ALLL, as well as the related ALLL disaggregated by impairment evaluation method.



Allowance for Loan Losses Rollforward for the Period
(in thousands; unaudited)	Commercial and industrial			Commercial real estate, owner-occupied			Commercial real estate, investor			Construction			Home equity			Other residential		Installment and other consumer			Unallocated		Total

For the three months ended June 30, 2015
Allowance for loan losses:
Beginning balance	$	2,620		$	2,094		$	6,292		$	778		$	923		$	430	$	462		$	1,557	$	15,156
Provision (reversal)	(117		)	(42		)	(351		)	596			(81		)	5		(14		)	4		—
Charge-offs	(1		)	—			—			(839		)	—			—		(5		)	—		(845		)
Recoveries	38			—			3			—			1			—		1			—		43
Ending balance	$	2,540		$	2,052		$	5,944		$	535		$	843		$	435	$	444		$	1,561	$	14,354

For the six months ended June 30, 2015
Allowance for loan losses:
Beginning balance	$	2,837		$	1,924		$	6,672		$	839		$	859		$	433	$	566		$	969	$	15,099
Provision (reversal)	(392		)	128			(734		)	535			(18		)	2		(113		)	592		—
Charge-offs	(3		)	—			—			(839		)	—			—		(11		)	—		(853		)
Recoveries	98			—			6			—			2			—		2			—		108
Ending balance	$	2,540		$	2,052		$	5,944		$	535		$	843		$	435	$	444		$	1,561	$	14,354



Allowance for Loan Losses Rollforward for the Period
(in thousands; unaudited)	Commercial and industrial			Commercial real estate, owner-occupied			Commercial real estate, investor		Construction			Home equity		Other residential		Installment and other consumer			Unallocated		Total

For the three months ended June 30, 2014
Allowance for loan losses:
Beginning balance	$	2,772		$	1,985		$	6,469	$	536		$	887	$	409	$	565		$	609	$	14,232
Provision (reversal)	310			(6		)	213		42			56		45		(84		)	24		600
Charge-offs	(5		)	—			—		(7		)	—		—		(1		)	—		(13		)
Recoveries	48			—			31		—			1		—		1			—		81
Ending balance	$	3,125		$	1,979		$	6,713	$	571		$	944	$	454	$	481		$	633	$	14,900

For the six months ended June 30, 2014
Allowance for loan losses:
Beginning balance	$	3,056		$	2,012		$	6,196	$	633		$	875	$	317	$	629		$	506	$	14,224
Provision (reversal)	55			(33		)	481		142			67		137		(226		)	127		750
Charge-offs	(66		)	—			—		(204		)	—		—		(4		)	—		(274		)
Recoveries	80			—			36		—			2		—		82			—		200
Ending balance	$	3,125		$	1,979		$	6,713	$	571		$	944	$	454	$	481		$	633	$	14,900



Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands; unaudited)	Commercial and industrial			Commercial real estate, owner-occupied			Commercial real estate, investor			Construction			Home equity			Other residential			Installment and other consumer			Unallocated		Total

As of June 30, 2015:
Ending ALLL related to loans collectively evaluated for impairment	$	1,768		$	1,982		$	5,944		$	529		$	840		$	356		$	295		$	1,561	$	13,275
Ending ALLL related to loans individually evaluated for impairment	$	771		$	70		$	—		$	—		$	3		$	79		$	149		$	—	$	1,072
Ending ALLL related to purchased credit-impaired loans	$	1		$	—		$	—		$	6		$	—		$	—		$	—		$	—	$	7
Total	$	2,540		$	2,052		$	5,944		$	535		$	843		$	435		$	444		$	1,561	$	14,354

Loans outstanding:
Collectively evaluated for impairment	$	180,489		$	225,057		$	658,604		$	45,471		$	114,768		$	71,692		$	16,319		$	—	$	1,312,400
Individually evaluated for impairment¹	4,340			6,993			3,018			3,277			657			2,029			1,420			—		21,734
Purchased credit-impaired	191			3,071			1,735			6			68			—			—			—		5,071
Total	$	185,020		$	235,121		$	663,357		$	48,754		$	115,493		$	73,721		$	17,739		$	—	$	1,339,205
Ratio of allowance for loan losses to total loans	1.37		%	0.87		%	0.90		%	1.10		%	0.73		%	0.59		%	2.50		%	NM		1.07		%
Allowance for loan losses to non-accrual loans	732		%	146		%	261		%	20		%	318		%	—		%	1,057		%	NM		203		%

¹ Total excludes $1.6 million of PCI loans that have experienced post-acquisition declines in cash flows expected to be collected. These loans are included in the "purchased credit-impaired" amount in the next line below.

NM - Not Meaningful



Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)	Commercial and industrial			Commercial real estate, owner-occupied			Commercial real estate, investor			Construction			Home equity			Other residential			Installment and other consumer			Unallocated		Total

As of December 31, 2014:
Ending ALLL related to loans collectively evaluated for impairment	$	2,143		$	1,859		$	6,672		$	836		$	859		$	341		$	282		$	969	$	13,961
Ending ALLL related to loans individually evaluated for impairment	$	690		$	65		$	—		$	—		$	—		$	92		$	284		$	—	$	1,131
Ending ALLL related to purchased credit-impaired loans	$	4		$	—		$	—		$	3		$	—		$	—		$	—		$	—	$	7
Total	$	2,837		$	1,924		$	6,672		$	839		$	859		$	433		$	566		$	969	$	15,099

Loans outstanding:
Collectively evaluated for impairment	$	206,603		$	220,933		$	668,371		$	42,718		$	110,028		$	70,990		$	14,995		$	—	$	1,334,638
Individually evaluated for impairment¹	3,296			7,056			2,954			5,684			693			2,045			1,793			—		23,521
Purchased credit-impaired	324			2,616			2,174			11			67			—			—			—		5,192
Total	$	210,223		$	230,605		$	673,499		$	48,413		$	110,788		$	73,035		$	16,788		$	—	$	1,363,351
Ratio of allowance for loan losses to total loans	1.35		%	0.83		%	0.99		%	1.73		%	0.78		%	0.59		%	3.37		%	NM		1.11		%
Allowance for loan losses to non-accrual loans	NM			137		%	275		%	16		%	307		%	NM			544		%	NM		161		%

¹ Total excludes $1.7 million PCI loans that have experienced credit deterioration post-acquisition, which are included in the "purchased credit-impaired" amount in the next line below.

NM - Not Meaningful

Purchased Credit-Impaired Loans

We evaluated loans purchased in acquisitions in accordance with accounting guidance in ASC 310-30 related to loans acquired with deteriorated credit quality. Acquired loans are considered credit-impaired if there is evidence of deterioration of credit quality since origination and it is probable, at the acquisition date, that we will be unable to collect all contractually required payments receivable. Management has determined certain loans purchased in our two acquisitions to be PCI loans based on credit indicators such as nonaccrual status, past due status, loan risk grade, loan-to-value ratio, etc. Revolving credit agreements (e.g., home equity lines of credit and revolving commercial loans) are not considered PCI loans as cash flows cannot be reasonably estimated.

The following table reflects the outstanding balance and related carrying value of PCI loans as of June 30, 2015 and December 31, 2014.



	June 30, 2015				December 31, 2014
PCI Loans (in thousands; 2015 unaudited)	Unpaid principal balance		Carrying value		Unpaid principal balance		Carrying value
Commercial and industrial	$	280	$	191	$	479	$	324
Commercial real estate	6,782		4,806		6,831		4,790
Construction	128		6		136		11
Home equity	228		68		232		67
Total purchased credit-impaired loans	$	7,418	$	5,071	$	7,678	$	5,192

The activities in the accretable yield, or income expected to be earned, for PCI loans were as follows:



Accretable Yield	Three months ended						Six months ended
(dollars in thousands, unaudited)	June 30, 2015			June 30, 2014			June 30, 2015			June 30, 2014
Balance at beginning of period	$	3,831		$	5,301		$	4,027		$	3,649
Removals ¹	—			(273		)	(77		)	(273		)
Accretion	(120		)	(187		)	(239		)	(367		)
Reclassifications from nonaccretable difference ²	—			(327		)	—			1,505
Balance at end of period	$	3,711		$	4,514		$	3,711		$	4,514

¹ Represents the accretable difference that is relieved when a loan exits the PCI population due to pay-off, full charge-off, or transfer to repossessed assets, etc.

²Primarily relates to changes in expected credit performance and changes in expected timing of cash flows.

Pledged Loans

Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans with an unpaid principal balance of $827.5 million and $868.1 million at June 30, 2015 and December 31, 2014, respectively. In addition, we pledge a certain residential loan portfolio, which totaled $41.1 million and $34.0 million at June 30, 2015 and December 31, 2014, respectively, to secure our borrowing capacity with the Federal Reserve Bank (“FRB”). Also see Note 6 below.