Allowance for Loan Losses | (6) Allowance for Loan Losses Changes in the allowance for loan losses were as follows: Allowance for Loan Losses and Recorded Investment in Financing Receivables For the Six Months Ended June 30, 2017 Commercial Residential and Commercial Land & Home Real Industrial Real Estate Development Equity (1) Estate Other (2) Total Allowance for loan losses: Beginning balance $ 2,153 $ 7,550 $ 604 $ 2,349 $ 2,648 $ 237 $ 15,541 Charge-offs — — — (220 ) (222 ) (21 ) $ (463 ) Recoveries 127 153 201 173 7 36 697 Net recoveries (charge-offs) 127 153 201 (47 ) (215 ) 15 234 (Recovery of) provision for loan losses 71 (29 ) (220 ) (639 ) (206 ) 193 (831 ) Ending balance $ 2,351 $ 7,674 $ 585 $ 1,663 $ 2,227 $ 445 $ 14,945 Ending balance: individually evaluated for impairment $ — $ — $ — $ — $ — $ — $ — Ending balance: collectively evaluated for impairment $ 2,351 $ 7,674 $ 585 $ 1,663 $ 2,227 $ 445 $ 14,945 Financing Receivables: Ending balance $ 251,346 $ 960,995 $ 67,042 $ 111,721 $ 196,157 $ 1,851 $ 1,589,112 Ending balance: individually evaluated for impairment $ 75 $ 894 $ — $ 66 $ 3,400 $ — $ 4,435 Ending balance: collectively evaluated for impairment $ 251,271 $ 960,101 $ 67,042 $ 111,655 $ 192,757 $ 1,851 $ 1,584,677 (1) Amount includes both home equity lines of credit and term loans. (2) Includes the unallocated portion of the allowance for loan losses. For the Six Months Ended June 30, 2016 Commercial Residential and Commercial Land & Home Real Industrial Real Estate Development Equity (1) Estate Other (2) Total Allowance for loan losses: Beginning balance $ 2,761 $ 8,142 $ 1,058 $ 2,816 $ 3,029 $ 202 $ 18,008 Charge-offs (256 ) (74 ) — (354 ) (391 ) (234 ) $ (1,309 ) Recoveries 145 74 319 228 29 79 874 Net charge-offs (111 ) — 319 (126 ) (362 ) (155 ) (435 ) (Recovery of) provision for loan losses (641 ) (660 ) (548 ) (118 ) 147 138 (1,682 ) Ending balance $ 2,009 $ 7,482 $ 829 $ 2,572 $ 2,814 $ 185 $ 15,891 Ending balance: individually evaluated for impairment $ — $ — $ — $ — $ — $ — $ — Ending balance: collectively evaluated for impairment $ 2,009 $ 7,482 $ 829 $ 2,572 $ 2,814 $ 185 $ 15,891 Financing Receivables: Ending balance $ 220,609 $ 891,864 $ 82,018 $ 130,221 $ 237,080 $ 2,691 $ 1,564,483 Ending balance: individually evaluated for impairment $ 2,241 $ 425 $ — $ 80 $ 2,660 $ 92 $ 5,498 Ending balance: collectively evaluated for impairment $ 218,368 $ 891,439 $ 82,018 $ 130,141 $ 234,420 $ 2,599 $ 1,558,985 (1) Amount includes both home equity lines of credit and term loans. (2) Includes the unallocated portion of the allowance for loan losses. Risk Characteristics Commercial and Industrial Loans. Many of the Company’s commercial and industrial loans have a real estate component as part of the collateral securing the loan. Commercial and industrial loans are primarily secured by assets of the business, such as accounts receivable and inventory. Due to the nature of the collateral securing these loans, the liquidation of these assets may be problematic and costly. Commercial Real Estate Loans. Commercial real estate owner occupied loans rely on the cash flow from the successful operation of the borrower’s business to make repayment. If the operating company experiences difficulties in terms of sales volume and/or profitability, the borrower’s ability to repay the loan may be impaired. Commercial real estate non-owner occupied loans rely on the payment of rent by third party tenants. The borrower’s ability to repay the loan or sell the property may be impacted by loss of tenants, lower lease rates needed to attract new tenants or the inability to sell a completed project in a timely fashion and at a profit. Commercial real estate owner occupied and non-owner occupied loans are secured by the underlying properties. The local economy and real estate market affect the appraised value of these properties which may impact the ultimate repayment of these loans. Land and Development Loans. Land and development loans are primarily repaid by the sale of the developed properties or by conversion to a permanent term loan. These loans are dependent upon the completion of the project on time and within budget, which may be impacted by general economic conditions. The Company requires cash collateral in an interest reserve in order to extend credit on construction projects to mitigate the credit risk. Home Equity Loans. This segment consists of both home equity lines of credit and home equity term loans on single family residences. These loans rely on the personal income of the borrower for repayment which may be impacted by economic conditions, such as unemployment levels, interest rates and the housing market. These loans are primarily secured by a second liens on the property, which serves as the secondary source of repayment. The secondary source of repayment may be impaired by the real estate market and local regulations. The Company no longer originates home equity lines of credit or home equity term loans. Residential Real Estate Loans. Included in this segment are residential mortgages on single family residences. These loans rely on the personal income of the borrower for repayment which may be impacted by economic conditions, such as unemployment levels, interest rates and the housing market. These loans are primarily secured by a lien on the underlying property, which serves as the secondary source of repayment. The secondary source of repayment may be impaired by the real estate market and local regulations. The Company no longer originates residential real estate loans on single family residences. Other Loans . Other loans consist of personal credit lines, mobile home loans and consumer installment loans. These loans rely on the borrowers’ personal income for repayment and are either unsecured or secured by personal use assets and mobile homes. These loans may be impacted by economic conditions such as unemployment levels. The liquidation of the assets securing these loans may be difficult and costly. The allowance for loan losses was $14.9 million and $15.5 million at June 30, 2017 and December 31, 2016, respectively. The ratio of allowance for loan losses to gross loans held-for-investment was 0.94% at June 30, 2017 and 0.97% at December 31, 2016. The provision for loan losses charged to expense is based upon historical loan loss and recovery experience, a series of qualitative factors and an evaluation of incurred losses in the current loan portfolio, including the evaluation of impaired loans under FASB ASC 310. Values assigned to the qualitative factors and those developed from historic loss and recovery experience provide a dynamic basis for the calculation of reserve factors for both pass-rated loans (general pooled allowance) and those criticized and classified loans that continue to perform. A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay in payment or insignificant shortfall in amount of payments received does not necessarily result in a loan being identified as impaired. For this purpose, delays less than 90 days are considered to be insignificant. Impairment losses are included in the provision for loan losses in the unaudited condensed consolidated statements of operations. Loans not individually reviewed are evaluated as a group using reserve factor percentages based on historical loss and recovery experience and qualitative factors. Such loans generally include consumer loans, residential real estate loans and small business loans. In determining the appropriate level of the general pooled allowance, management makes estimates based on internal risk ratings, which take into account such factors as debt service coverage, loan-to-value ratios, management’s abilities and external factors. The following table presents the Company’s components of impaired loans receivable, segregated by class of loans. Commercial and consumer loans that were collectively evaluated for impairment are not included in the data that follows: Impaired Loans As of June 30, 2017 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Accrued Interest Income Recognized Cash Interest Income Recognized For the Six Months Ended June 30, 2017 With no related allowance: Commercial: Commercial & industrial $ 74 $ 84 $ — $ 77 $ — $ — CRE owner occupied 410 558 — 396 — — CRE non-owner occupied 485 494 — 496 — — Consumer: Residential real estate 3,400 3,702 — 3,449 — — Home equity term loans 66 82 — 67 — — With an allowance recorded: N/A Total commercial $ 969 $ 1,136 $ — $ 969 $ — $ — Total consumer $ 3,466 $ 3,784 $ — $ 3,516 $ — $ — Impaired Loans As of June 30, 2016 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Accrued Interest Income Recognized Cash Interest Income Recognized For the Six Months Ended June 30, 2016 With no related allowance: Commercial: Commercial & industral $ 2,241 $ 2,486 $ — $ 2,429 $ — $ — CRE non-owner occupied 425 602 — 434 — — Consumer: Residential real estate 2,660 2,806 — 2,674 — — Home equity term loans 80 91 — 81 — — Other 92 96 — 95 — — Consumer held for sale: Residential real estate, held-for-sale 314 648 — 523 — — Home equity term loans, held-for-sale 18 52 — 38 — — With an allowance recorded: N/A Total commercial $ 2,666 $ 3,088 $ — $ 2,863 $ — $ — Total consumer $ 3,164 $ 3,693 $ — $ 3,411 $ — $ — In accordance with FASB ASC 310, those impaired loans for which the collateral is sufficient to support the outstanding principal do not result in a specific allowance for loan losses. Included in impaired loans at June 30, 2017 were fifteen TDRs totaling $2.2 million, for which the collateral is sufficient to support the outstanding principal, four of which were in accruing status. There were no TDRs at June 30, 2017 that included a commitment to lend additional funds as of June 30, 2017. There was one TDR agreement entered into during the six months ended June 30, 2017 and three TDR agreements entered into during the six months ended June 30, 2016. Troubled Debt Restructurings For the Six Months Ended June 30, 2017 Number of Contracts Pre-Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Residential real estate 1 $ 153 $ 124 Troubled Debt Restructurings For the Six Months Ended June 30, 2016 Number of Contracts Pre-Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Commercial & industrial 2 $ 2,468 $ 2,237 Residential real estate 1 13 13 The following table presents information regarding the types of concessions granted on loans that were restructured during the six months ended June 30, 2017 and 2016: Troubled Debt Restructurings For the Six Months Ended June 30, 2017 Number of Contracts Concession Granted Residential real estate 1 Principal repayment terms Troubled Debt Restructurings For the Six Months Ended June 30, 2016 Number of Contracts Concession Granted Commercial & industrial 2 Rate reduction Residential real estate 1 Forgiveness of debt During the six months ended June 30, 2017 and 2016, the Company did not have any TDR agreements that had subsequently defaulted that were entered into within the respective preceding twelve months. The following table presents the Company’s distribution of risk ratings within the Company’s loan portfolio, segregated by class, as of June 30, 2017 and December 31, 2016: Credit Quality Indicators by Internally Assigned Grade Commercial & industrial Commercial real estate owner occupied Commercial real estate non- owner occupied Land and development Home Equity Lines of Credit Home Equity Term Loans Residential Real Estate Other Total As of June 30, 2017 Grade: Pass $ 249,378 $ 248,448 $ 710,346 $ 67,042 $ 103,731 $ 7,924 $ 192,433 $ 1,851 $ 1,581,153 Special Mention — — — — — — — — — Substandard 1,968 1,716 485 — — 66 3,724 — 7,959 Doubtful — — — — — — — — — Total $ 251,346 $ 250,164 $ 710,831 $ 67,042 $ 103,731 $ 7,990 $ 196,157 $ 1,851 $ 1,589,112 As of December 31, 2016 Grade: Pass $ 233,907 $ 229,635 $ 742,146 $ 67,165 $ 110,377 $ 9,032 $ 208,460 $ 2,357 $ 1,603,079 Special Mention — — — — — — — — — Substandard 2,039 1,713 516 — — 72 2,414 85 6,839 Doubtful — — — — — — — — — Total $ 235,946 $ 231,348 $ 742,662 $ 67,165 $ 110,377 $ 9,104 $ 210,874 $ 2,442 $ 1,609,918 The Company’s primary tool for assessing risk when evaluating a credit in terms of its underwriting, structure, documentation and eventual collectability is a risk rating system in which the loan is assigned a numeric value. Behind each numeric category is a defined set of characteristics reflective of the particular level of risk. The risk rating system is based on a 10-point grade. The upper six grades are for “pass” categories, the seventh grade is for the “criticized” category, the eighth grade represents “classified” categories which are equivalent to the guidelines utilized by the OCC and the final two grades are for “doubtful” and “loss” categories. The portfolio manager is responsible for assigning, maintaining, and documenting accurate risk ratings for all commercial loans and commercial real estate loans. The portfolio manager assigns a risk rating at the inception of the loan, reaffirms it annually, and adjusts the rating based on the performance of the loan. As part of the loan review process, the Chief Credit Officer or Deputy Chief Credit Officer will review risk ratings for accuracy. The portfolio manager’s risk rating will also be reviewed periodically by the third-party loan review function and the Bank’s regulators. To calculate risk ratings in a consistent fashion, the Company uses a Risk Rating Methodology that assesses quantitative and qualitative components which include elements of the Company’s financial condition, abilities of management, position in the market, collateral and guarantor support and the impact of changing conditions. When combined with professional judgment, an overall risk rating is assigned. The following table presents the Company’s analysis of past due loans, segregated by class of loans, as of June 30, 2017 and December 31, 2016: Aging of Receivables 30-59 Days Past Due 60-89 Days Past Due 90 Days Past Due Total Past Due Current Total Financing Receivables As of June 30, 2017 Commercial: Commercial and industrial $ — $ — $ — $ — $ 251,346 $ 251,346 CRE owner occupied 333 — 1,088 1,421 248,743 250,164 CRE non-owner occupied 41 — 315 356 710,475 710,831 Land and development — — — — 67,042 67,042 Consumer: Home equity lines of credit 168 — — 168 103,563 103,731 Home equity term loans 94 2 — 96 7,894 7,990 Residential real estate 2,710 681 464 3,855 192,302 196,157 Other — — — — 1,851 1,851 Total $ 3,346 $ 683 $ 1,867 $ 5,896 $ 1,583,216 $ 1,589,112 As of December 31, 2016 Commercial: Commercial and industrial $ — $ — $ — — $ 235,946 $ 235,946 CRE owner occupied — — 269 269 231,079 231,348 CRE non-owner occupied 331 — 185 516 742,146 742,662 Land and development — — — — 67,165 67,165 Consumer: Home equity lines of credit 367 — — 367 110,010 110,377 Home equity term loans 121 — — 121 8,983 9,104 Residential real estate 4,020 851 744 5,615 205,259 210,874 Other 59 7 85 151 2,291 2,442 Total $ 4,898 $ 858 $ 1,283 $ 7,039 $ 1,602,879 $ 1,609,918 |