| Allowance for Loan Loss | Allowance for Loan Loss While the Company manages its loan portfolio to avoid concentration by industry and loan size to lessen its credit risk exposure, inherent in the lending process is the risk of loss due to customer non-payment, or "credit risk." The Company endeavors to minimize this risk through sound underwriting practices and the risk management function; however, management recognizes that loan losses will occur and that the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio and economic conditions. The allowance for loan losses is an estimate of probable credit risk inherent in the loan portfolio as of the specified balance sheet dates. The Company maintains the allowance at a level that it deems adequate to absorb all reasonably anticipated losses from specifically known and other credit risks associated with the portfolio. In making its assessment on the adequacy of the allowance, management considers several quantitative and qualitative factors that could have an effect on the credit quality of the portfolio, including individual assessment of larger and high risk credits, delinquency trends and the level of non-performing loans, impaired and restructured loans, net charge-offs, the growth and composition of the loan portfolio, expansion in the geographic market area and the strength of the local and national economies, among other factors. Allowance for probable loan losses methodology On a quarterly basis, management prepares an estimate of the allowance necessary to cover estimated credit losses. The Company uses a systematic methodology to measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology makes use of specific reserves for loans individually evaluated and deemed impaired, and general reserves for larger groups of homogeneous loans, which are collectively evaluated relying on a combination of qualitative and quantitative factors that may affect credit quality of the pool. There have been no material changes to the Company's underwriting practices, credit risk management system, or to the allowance assessment methodology used to estimate loan loss exposure as reported in the 2014 Annual Report on Form 10-K. Refer to heading "Allowance for probable loan losses methodology" contained in Note 4 "Allowance For Loan Losses," to the Company's consolidated financial statements contained in the 2014 Annual Report on Form 10-K for further discussion of management's methodology used to estimate the loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance. The balances of loans as of June 30, 2015 by segment and evaluation method are summarized as follows: (Dollars in thousands) Loans individually evaluated for impairment Loans collectively evaluated for impairment Total Loans Commercial real estate $ 13,719 $ 874,554 $ 888,273 Commercial and industrial 8,799 419,319 428,118 Commercial construction 1,995 169,395 171,390 Residential 445 159,016 159,461 Home equity 175 80,842 81,017 Consumer 45 9,874 9,919 Deferred Fees — (1,632 ) (1,632 ) Total loans $ 25,178 $ 1,711,368 $ 1,736,546 The balances of loans as of December 31, 2014 by segment and evaluation method are summarized as follows: (Dollars in thousands) Loans individually evaluated for impairment Loans collectively evaluated for impairment Total Loans Commercial real estate $ 15,003 $ 847,744 $ 862,747 Commercial and industrial 10,901 392,093 402,994 Commercial construction 2,675 165,369 168,044 Residential 465 149,494 149,959 Home equity 180 79,838 80,018 Consumer 28 10,680 10,708 Deferred Fees — (1,866 ) (1,866 ) Total loans $ 29,252 $ 1,643,352 $ 1,672,604 Credit quality indicators Early detection of credit issues is critical to minimize credit losses. Accordingly, management regularly monitors internal credit quality indicators such as the risk classification of individual loans, adversely classified loans, past due and non-accrual loans, impaired and restructured loans, and the level of foreclosure activity, as well as trends in the general levels of these indicators. However, despite prudent loan underwriting and ongoing credit risk management, adverse changes within the Company's market area or deterioration in the local, regional or national economic conditions could negatively impact the portfolio's credit risk profile and the Company's asset quality in the future. Adversely classified loans The Company's loan risk rating system classifies loans depending on risk of loss characteristics. The classifications range from "substantially risk free" for the highest quality loans and loans that are secured by cash collateral, to the more severe adverse classifications of "substandard," "doubtful" and "loss" based on criteria established under banking regulations. Loans classified as substandard include those loans characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected. These loans are inadequately protected by the sound net worth and paying capacity of the borrower; repayment has become increasingly reliant on collateral liquidation or reliance on guarantees; credit weaknesses are well-defined; and borrower cash flow is insufficient to meet required debt service specified in loan terms and to meet other obligations, such as trade debt and tax payments. Loans classified as doubtful have all the weaknesses inherent in a substandard rated loan with the added characteristic that the weaknesses make collection or full payment from liquidation, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The probability of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until more exact status may be determined. Loans classified as loss are generally considered uncollectible at present, although long-term recovery of part or all of loan proceeds may be possible. These "loss" loans would require a specific loss reserve or charge-off. Adversely classified loans may be accruing or in non-accrual status and may be additionally designated as impaired or restructured, or some combination thereof. Loans which are evaluated to be of weaker credit quality are reviewed on a more frequent basis by management. The following tables present the Company's credit risk profile for each class of loan in its portfolio by internally assigned risk rating category at the periods indicated. June 30, 2015 Adversely Classified Not Adversely (Dollars in thousands) Substandard Doubtful Loss Classified Gross Loans Commercial real estate $ 11,963 $ 1,159 $ 19 $ 875,132 $ 888,273 Commercial and industrial 9,072 — 48 418,998 428,118 Commercial construction 2,078 — — 169,312 171,390 Residential 808 — — 158,653 159,461 Home equity 445 — — 80,572 81,017 Consumer 56 14 — 9,849 9,919 Total gross loans $ 24,422 $ 1,173 $ 67 $ 1,712,516 $ 1,738,178 December 31, 2014 Adversely Classified Not Adversely (Dollars in thousands) Substandard Doubtful Loss Classified Gross Loans Commercial real estate $ 11,409 $ 1,188 $ 19 $ 850,131 $ 862,747 Commercial and industrial 11,298 51 57 391,588 402,994 Commercial construction 2,759 — — 165,285 168,044 Residential 1,133 — — 148,826 149,959 Home equity 464 — — 79,554 80,018 Consumer 48 — — 10,660 10,708 Total gross loans $ 27,111 $ 1,239 $ 76 $ 1,646,044 $ 1,674,470 Total adversely classified loans amounted to 1.48% of total loans at June 30, 2015 , as compared to 1.70% at December 31, 2014 . At June 30, 2015 , as compared to December 31, 2014 , adversely classified balances decreased, primarily due to several larger commercial loan payoffs, charge-offs and principal payments, partially offset by additional credit downgrades during the period. Past due and non-accrual loans Loans on which the accrual of interest has been discontinued are designated as non-accrual and are credit downgraded to one of the adversely classified categories noted above. Accrual of interest on loans is generally discontinued when a loan becomes contractually past due, with respect to interest or principal, by 90 days, or when reasonable doubt exists as to the full and timely collection of interest or principal. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest payments received on loans in a non-accrual status are generally applied to principal on the books of the Company. Interest accruals are resumed on such loans only when payments are brought current and have remained current for a period of 180 days and when, in the judgment of management, the collectability of both principal and interest is reasonably assured. Additionally, deposit accounts overdrawn for 90 or more days are included in the consumer non-accrual balances below. The following tables present age analysis of past due loans as of the dates indicated. Balance at June 30, 2015 (Dollars in thousands) Loans 30-59 Days Past Due Loans 60-89 Days Past Due Loans 90 or More Days Past Due (non- accrual) Total Past Due Loans Current Loans Gross Loans Commercial real estate $ 3,181 $ 701 $ 9,214 $ 13,096 $ 875,177 $ 888,273 Commercial and industrial 957 2 5,539 6,498 421,620 428,118 Commercial construction 318 — 543 861 170,529 171,390 Residential — 182 445 627 158,834 159,461 Home equity 101 — 225 326 80,691 81,017 Consumer 42 9 38 89 9,830 9,919 Total gross loans $ 4,599 $ 894 $ 16,004 $ 21,497 $ 1,716,681 $ 1,738,178 Balance at December 31, 2014 (Dollars in thousands) Loans 30-59 Days Past Due Loans 60-89 Days Past Due Loans 90 or More Days Past Due (non- accrual) Total Past Due Loans Current Loans Gross Loans Commercial real estate $ 1,471 $ 1,235 $ 9,714 $ 12,420 $ 850,327 $ 862,747 Commercial and industrial 1,184 101 5,950 7,235 395,759 402,994 Commercial construction — — 447 447 167,597 168,044 Residential 1,328 370 763 2,461 147,498 149,959 Home equity 29 — 245 274 79,744 80,018 Consumer 94 1 17 112 10,596 10,708 Total gross loans $ 4,106 $ 1,707 $ 17,136 $ 22,949 $ 1,651,521 $ 1,674,470 At June 30, 2015 and December 31, 2014 , all loans 90 days or more past due were carried as non-accrual. Non-accrual loans which were not adversely classified amounted to $142 thousand at June 30, 2015 and $211 thousand at December 31, 2014 . These balances primarily represented the guaranteed portions of non-performing SBA loans. The majority of the non-accrual loan balances were also carried as impaired loans during the periods noted, and are discussed further below. The ratio of non-accrual loans to total loans amounted to 0.92% at June 30, 2015 , 1.02% at December 31, 2014 , and 1.13% at June 30, 2014 . At June 30, 2015 , additional funding commitments for loans on non-accrual status totaled $111 thousand . The Company's obligation to fulfill the additional funding commitments on non-accrual loans is generally contingent on the borrower's compliance with the terms of the credit agreement. If the borrower is not in compliance, additional funding commitments may or may not be made at the Company's discretion. Impaired loans Impaired loans are individually significant loans for which management considers it probable that not all amounts due (principal and interest) in accordance with the original contractual terms will be collected. The majority of impaired loans are included within the non-accrual balances; however, not every loan on non-accrual status has been designated as impaired. Impaired loans include loans that have been modified in a troubled debt restructuring ("TDR") loans. Impaired loans exclude large groups of smaller-balance homogeneous loans, such as residential mortgage loans and consumer loans, which are collectively evaluated for impairment, and loans that are measured at fair value, unless the loan is amended in a TDR. Management does not set any minimum delay of payments as a factor in reviewing for impaired classification. Management considers the individual payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. An impaired or TDR loan classification will be considered for upgrade based on the borrower's sustained performance over time and their improving financial condition. Consistent with the criteria for returning non-accrual loans to accrual status, the borrower must demonstrate the ability to continue to service the loan in accordance with the original or modified terms and, in the judgment of management, the collectability of the remaining balances, both principal and interest, are reasonably assured. In the case of TDR loans having had a modified interest rate, that rate must be at, or greater than, a market rate for a similar credit at the time of modification for an upgrade to be considered. Impaired loans are individually evaluated for credit loss and a specific allowance reserve is assigned for the amount of the estimated credit loss. Refer to heading "Allowance for probable loan losses methodology" contained in Note 4 "Allowance For Loan Losses," to the Company's consolidated financial statements contained in the 2014 Annual Report on Form 10-K for further discussion of management's methodology used to estimate specific reserves for impaired loans. The carrying value of impaired loans amounted to $25.2 million and $29.3 million at June 30, 2015 and December 31, 2014 , respectively. Total accruing impaired loans amounted to $9.3 million and $12.5 million at June 30, 2015 and December 31, 2014 , respectively, while non-accrual impaired loans amounted to $15.9 million and $16.7 million as of June 30, 2015 and December 31, 2014 , respectively. The following tables set forth the recorded investment in impaired loans and the related specific allowance allocated as of the dated indicated. Balance at June 30, 2015 (Dollars in thousands) Unpaid contractual principal balance Total recorded investment in impaired loans Recorded investment with no allowance Recorded investment with allowance Related specific allowance Commercial real estate $ 16,157 $ 13,719 $ 13,306 $ 413 $ 200 Commercial and industrial 10,562 8,799 3,129 5,670 1,822 Commercial construction 2,099 1,995 434 1,561 524 Residential 528 445 445 — — Home equity 345 175 44 131 19 Consumer 47 45 — 45 45 Total $ 29,738 $ 25,178 $ 17,358 $ 7,820 $ 2,610 Balance at December 31, 2014 (Dollars in thousands) Unpaid contractual principal balance Total recorded investment in impaired loans Recorded investment with no allowance Recorded investment with allowance Related specific allowance Commercial real estate $ 17,182 $ 15,003 $ 14,800 $ 203 $ 68 Commercial and industrial 11,991 10,901 5,461 5,440 1,516 Commercial construction 2,862 2,675 1,150 1,525 519 Residential 537 465 465 — — Home equity 183 180 — 180 26 Consumer 28 28 — 28 28 Total $ 32,783 $ 29,252 $ 21,876 $ 7,376 $ 2,157 The following table presents the average recorded investment in impaired loans and the related interest recognized during the three month periods indicated. Three Months Ended June 30, 2015 Three Months Ended June 30, 2014 (Dollars in thousands) Average recorded investment Interest income recognized Average recorded investment Interest income recognized Commercial real estate $ 13,992 $ 52 $ 13,357 $ 44 Commercial and industrial 9,819 24 10,337 42 Commercial construction 1,968 16 3,249 26 Residential 445 — 1,043 3 Home equity 178 — 294 — Consumer 48 — 27 — Total $ 26,450 $ 92 $ 28,307 $ 115 The following table presents the average recorded investment in impaired loans and the related interest recognized during the six month periods indicated. Six Months Ended June 30, 2015 Six Months Ended June 30, 2014 (Dollars in thousands) Average recorded investment Interest income recognized Average recorded investment Interest income recognized Commercial real estate $ 14,735 $ 97 $ 13,758 $ 94 Commercial and industrial 10,537 58 10,583 80 Commercial construction 2,296 42 3,277 52 Residential 453 — 901 3 Home equity 178 1 201 — Consumer 48 — 25 — Total $ 28,247 $ 198 $ 28,745 $ 229 At June 30, 2015 , additional funding commitments for impaired loans totaled $111 thousand . The Company's obligation to fulfill the additional funding commitments on impaired loans is generally contingent on the borrower's compliance with the terms of the credit agreement. If the borrower is not in compliance, additional funding commitments may or may not be made at the Company's discretion. Troubled debt restructures Loans are designated as a TDR when, as part of an agreement to modify the original contractual terms of the loan as a result of financial difficulties of the borrower, the Bank grants the borrower a concession on the terms, that would not otherwise be considered. Typically, such concessions may consist of a reduction in interest rate to a below market rate, taking into account the credit quality of the note, or a deferment or reduction of payments (principal or interest) which materially alters the Bank's position or significantly extends the note's maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loan's origination. All loans that are modified are reviewed by the Company to identify if a TDR has occurred. TDR loans are included in the impaired loan category and, as such, these loans are individually evaluated and a specific reserve is assigned for the amount of the estimated credit loss. Total TDR loans, included in the impaired loan balances above, as of June 30, 2015 and December 31, 2014 , were $17.1 million and $19.5 million , respectively. TDR loans on accrual status amounted to $8.8 million and $11.9 million at June 30, 2015 and December 31, 2014 , respectively. TDR loans included in non-performing loans amounted to $8.3 million and $7.5 million at June 30, 2015 and December 31, 2014 , respectively. The Company continues to work with commercial relationships and enters into loan modifications to the extent deemed to be necessary or appropriate while attempting to achieve the best mutual outcome given the current economic environment. At June 30, 2015 , additional funding commitments for TDR loans totaled $9 thousand . The Company's obligation to fulfill the additional funding commitments on TDR loans is generally contingent on the borrower's compliance with the terms of the credit agreement. If the borrower is not in compliance, additional funding commitments may or may not be made at the Company's discretion. Loans modified as troubled debt restructurings during the three month period ended June 30, 2015 are detailed below. Three months ended June 30, 2015 (Dollars in thousands) Number of restructurings Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Commercial real estate 3 $ 269 $ 319 Commercial and industrial — — — Commercial construction — — — Residential — — — Home equity — — — Consumer 1 4 4 Total 4 $ 273 $ 323 Loans modified as troubled debt restructurings during the six month period ended June 30, 2015 are detailed below. Six months ended June 30, 2015 (Dollars in thousands) Number of restructurings Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Commercial real estate 3 $ 269 $ 319 Commercial and industrial 4 869 854 Commercial construction — — — Residential — — — Home equity — — — Consumer 1 4 4 Total 8 $ 1,142 $ 1,177 There were no subsequent charge-offs associated with the TDRs noted in the table above during the six months ended June 30, 2015 . At June 30, 2015 , there were specific reserves of $88 thousand allocated to the TDRs entered into during the 2015 period as management considered it likely that the majority of principal would ultimately be collected. Interest payments received on non-accruing TDRs in the table above which were applied to principal and not recognized in interest income during the six months ended June 30, 2015 amounted to $11 thousand . There were no loans modified as TDRs within the 12 month period previous to June 30, 2015 for which there was a subsequent payment default during the six month period ended June 30, 2015 Loans modified as troubled debt restructurings during the three month period ended June 30, 2014 are detailed below. Three months ended June 30, 2014 (Dollars in thousands) Number of restructurings Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Commercial real estate — $ — $ — Commercial and industrial 4 159 157 Commercial construction — — — Residential 1 125 124 Home equity 1 73 73 Consumer — — — Total 6 $ 357 $ 354 Loans modified as troubled debt restructurings within the preceding twelve month period for which there was a subsequent payment default during the period noted are detailed below. Three months ended June 30, 2014 (Dollars in thousands) Number of TDRs that defaulted Post- modification outstanding recorded investment Commercial real estate — $ — Commercial and industrial 1 66 Commercial construction — — Residential — — Home Equity — — Consumer — — Total 1 $ 66 Loans modified as troubled debt restructurings during the six month period ended June 30, 2014 are detailed below. Six months ended June 30, 2014 (Dollars in thousands) Number of restructurings Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Commercial real estate 1 $ 450 $ 434 Commercial and industrial 6 226 222 Commercial construction — — — Residential 1 125 124 Home equity 1 73 73 Consumer — — — Total 9 $ 874 $ 853 Loans modified as troubled debt restructurings within the preceding twelve month period for which there was a subsequent payment default during the period noted are detailed below. Six months ended June 30, 2014 (Dollars in thousands) Number of TDRs that defaulted Post- modification outstanding recorded investment Commercial real estate — $ — Commercial and industrial 1 66 Commercial construction — — Residential — — Home Equity — — Consumer — — Total 1 $ 66 At June 30, 2014 , there were specific reserves of $24 thousand allocated to the TDRs entered into during the 2014 period as management considered it likely the majority of principal would ultimately be collected. Interest payments received on non-accruing TDRs in the table above which were applied to principal and not recognized in interest income during the six months ended amounted to $21 thousand . There were subsequent charge-offs of $66 thousand associated with the TDRs noted in the table above during the six months ended June 30, 2014 . Other real estate owned ( " OREO " ) Real estate acquired by the Company through foreclosure proceedings or the acceptance of a deed in lieu of foreclosure is classified as OREO. When property is acquired, it is generally recorded at the lesser of the loan's remaining principal balance, net of any unamortized deferred fees, or the estimated fair value of the property acquired, less estimated costs to sell. The estimated fair value is based on market appraisals and the Company's internal analysis. Any loan balance in excess of the estimated realizable fair value on the date of transfer is charged to the allowance for loan losses on that date. All costs incurred thereafter in maintaining the property, as well as subsequent declines in fair value, are charged to non-interest expense. The Company carried no OREO at June 30, 2015 compared to $861 thousand at December 31, 2014 . During the six months ended June 30, 2015 , the Company sold the three properties held at December 31, 2014 , recognizing net gains on OREO sales of $154 thousand ; there were no additions to OREO, or subsequent impairment write-downs during the period. During the six months ended June 30, 2014 , there were no sales or subsequent impairment write-downs on OREO. Allowance for loan loss activity The allowance for loan losses is established through a provision for loan losses, a direct charge to earnings. Loan losses are charged against the allowance when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged-off are credited to the allowance. The allowance for loan losses amounted to $28.2 million at June 30, 2015 , compared to $27.1 million at December 31, 2014 , and $26.5 million at June 30, 2014 . The allowance for loan losses to total loans ratio was 1.62% at both June 30, 2015 and December 31, 2014 and 1.67% at June 30, 2014 . Based on management's judgment as to the existing credit risks inherent in the loan portfolio, as discussed above under the heading "Credit Quality Indicators," management believes that the Company's allowance for loan losses is adequate to absorb probable losses from specifically known and other credit risks associated with the portfolio as of June 30, 2015 . Changes in the allowance for loan losses by portfolio segment for the three months ended June 30, 2015 are presented below: (Dollars in thousands) Cmml Real Estate Cmml and Industrial Cmml Constr Resid. Mortgage Home Equity Consumer Total Beginning Balance at March 31, 2015 $ 12,747 $ 9,842 $ 3,408 $ 960 $ 615 $ 231 $ 27,803 Provision 117 1,049 27 62 (54 ) 24 1,225 Recoveries — 83 12 — 14 4 113 Less: Charge offs — 952 — — — 27 979 Ending Balance at June 30, 2015 $ 12,864 $ 10,022 $ 3,447 $ 1,022 $ 575 $ 232 $ 28,162 Changes in the allowance for loan losses by segment for the six months ended June 30, 2015 are presented below: (Dollars in thousands) Cmml Real Estate Cmml and Industrial Cmml Constr Resid. Mortgage Home Equity Consumer Total Beginning Balance at December 31, 2014 $ 12,664 $ 9,245 $ 3,384 $ 989 $ 608 $ 231 $ 27,121 Provision 195 1,579 38 33 (47 ) 52 1,850 Recoveries 5 167 25 — 14 12 223 Less: Charge offs — 969 — — — 63 1,032 Ending Balance at June 30, 2015 $ 12,864 $ 10,022 $ 3,447 $ 1,022 $ 575 $ 232 $ 28,162 Ending allowance balance: Allotted to loans individually evaluated for impairment $ 200 $ 1,822 $ 524 $ — $ 19 $ 45 $ 2,610 Allotted to loans collectively evaluated for impairment $ 12,664 $ 8,200 $ 2,923 $ 1,022 $ 556 $ 187 $ 25,552 Changes in the allowance for loan losses by segment for the three months ended June 30, 2014 are presented below: (Dollars in thousands) Cmml Real Estate Cmml and Industrial Cmml Constr Resid. Mortgage Home Equity Consumer Total Beginning Balance at March 31, 2014 $ 12,870 $ 7,697 $ 3,589 $ 1,176 $ 634 $ 206 $ 26,172 Provision 195 (270 ) 122 90 51 12 200 Recoveries — 198 30 — — 10 238 Less: Charge offs — 75 — — — 7 82 Ending Balance at June 30, 2014 $ 13,065 $ 7,550 $ 3,741 $ 1,266 $ 685 $ 221 $ 26,528 Changes in the allowance for loan losses by segment for the six months ended June 30, 2014 are presented below: (Dollars in thousands) Cmml Real Estate Cmml and Industrial Cmml Constr Resid. Mortgage Home Equity Consumer Total Beginning Balance at December 31, 2013 $ 13,174 $ 8,365 $ 3,493 $ 1,057 $ 653 $ 225 $ 26,967 Provision 94 (152 ) 218 209 32 (1 ) 400 Recoveries — 224 30 — — 22 276 Less: Charge offs 203 887 — — — 25 1,115 Ending Balance at June 30, 2014 $ 13,065 $ 7,550 $ 3,741 $ 1,266 $ 685 $ 221 $ 26,528 Ending allowance balance: Allotted to loans individually evaluated for impairment $ 191 $ 1,632 $ 827 $ 171 $ 52 $ 27 $ 2,900 Allotted to loans collectively evaluated for impairment $ 12,874 $ 5,918 $ 2,914 $ 1,095 $ 633 $ 194 $ 23,628 |
