Loans, Allowance for Loan Losses, and Credit Quality Indicators | NOTE 4 - LOANS, ALLOWANCE FOR LOAN LOSSES, AND CREDIT QUALITY INDICATORS Loans are stated at the amount of unpaid principal net of loan premiums or discounts for purchased loans, net of deferred loan origination fees, discounts associated with retained portions of loans sold, and an allowance for loan losses. Interest on loans is calculated using the simple-interest method on daily balances of the principal amount outstanding. Loan origination fees, net of origination costs and discounts, are amortized over the lives of the loans as adjustments to yield. Major classifications of period-end loans are as follows: September 30, % of Gross December 31, % of Gross 2016 Loans 2015 Loans Real estate loans Multi-family residential $ 79,126 4.37 % $ 66,445 4.73 % Residential 1-4 family 61,498 3.40 % 53,776 3.82 % Owner-occupied commercial 425,879 23.55 % 364,742 25.94 % Nonowner-occupied commercial 431,119 23.84 % 300,774 21.39 % Total permanent real estate loans 997,622 55.16 % 785,737 55.88 % Construction loans Multi-family residential 24,567 1.36 % 7,027 0.50 % Residential 1-4 family 42,130 2.33 % 30,856 2.19 % Commercial real estate 78,369 4.33 % 42,680 3.04 % Commercial bare land and acquisition & development 19,050 1.05 % 20,537 1.46 % Residential bare land and acquisition & development 8,852 0.49 % 7,268 0.52 % Total construction real estate loans 172,968 9.56 % 108,368 7.71 % Total real estate loans 1,170,590 64.72 % 894,105 63.59 % Commercial loans 630,091 34.84 % 501,976 35.70 % Consumer loans 3,201 0.18 % 3,351 0.24 % Other loans 4,764 0.26 % 6,580 0.47 % Gross loans 1,808,646 100.00 % 1,406,012 100.00 % Deferred loan origination fees (1,910 ) (1,530 ) 1,806,736 1,404,482 Allowance for loan losses (20,531 ) (17,301 ) Total loans, net of allowance for $ 1,786,205 $ 1,387,181 At September 30, 2016, outstanding loans to dental professionals totaled $370,135 and represented 20.46% of total outstanding loan principal balances compared to dental professional loans of $340,162 or 24.19% of total outstanding loan principal balance at December 31, 2015. Additional information about the Company’s dental portfolio can be found in Note 5. There are no other industry concentrations in excess of 10% of the total loan portfolio. However, as of September 30, 2016, 64.72% of the Company’s loan portfolio was collateralized by real estate and is, therefore, susceptible to changes in local market conditions. While appropriate action is taken to manage identified concentration risks, management believes that the loan portfolio is well diversified by geographic location and among industry groups. Purchased Credit Impaired Loans The following table represents the contractually required principal balance of purchased credit impaired loans and the carrying balance at September 30, 2016 and December 31, 2015: September 30, December 31, 2016 2015 Contractually required principal payments for purchase credit impaired loans $ 27,668 $ 11,528 Accretable yield (1,696 ) (1,070 ) Nonaccretable yield (919 ) (378 ) Balance of purchased credit impaired loans $ 25,053 $ 10,080 The following tables summarize the changes in the accretable yield for purchased credit impaired loans for the periods ended September 30, 2016 and 2015: Three months ended September 30, 2016 2015 Century Capital Foundation Total Century Capital Total Balance, beginning of period $ — $ 860 $ — $ 860 $ 96 $ 1,364 $ 1,460 Additions — — 908 908 — — — Accretion to interest income — (49 ) (22 ) (71 ) (28 ) (114 ) (142 ) Balance, end of period $ — $ 811 $ 886 $ 1,697 $ 68 $ 1,250 $ 1,318 Nine months ended September 30, 2016 2015 Century Capital Foundation Total Century Capital Total Balance, beginning of period $ 39 $ 1,031 $ — $ 1,070 $ 151 $ — $ 151 Additions — — 908 908 — 1,569 1,569 Accretion to interest income (39 ) (220 ) (22 ) (281 ) (83 ) (319 ) (402 ) Balance, end of period $ — $ 811 $ 886 $ 1,697 $ 68 $ 1,250 $ 1,318 Allowance for Loan Losses The allowance for loan losses is established as an amount that management considers adequate to absorb possible losses on existing loans within the portfolio. The allowance consists of general, specific and unallocated components. The general component is based upon all loans collectively evaluated for impairment. The specific component is based upon all loans individually evaluated for impairment. The unallocated component represents credit losses inherent in the loan portfolio that may not have been contemplated in the general risk factors or the specific allowance analysis. Loans are charged against the allowance when management believes the collection of principal and interest is unlikely. The Company performs regular credit reviews of the loan portfolio to determine the credit quality and adherence to underwriting standards. When loans are originated, they are assigned a risk rating that is reassessed periodically during the term of the loan through the credit review process. The Company’s internal risk rating methodology assigns risk ratings ranging from one to ten, where a higher rating represents higher risk. The ten-point risk rating categories are a primary factor in determining an appropriate amount for the allowance for loan losses. Estimated credit losses reflect consideration of all significant factors that affect the collectability of the loan portfolio. The historical loss rate for each group of loans with similar risk characteristics is determined based on the Company’s own loss experience in that group. Historical loss experience and recent trends in losses provide a reasonable starting point for analysis, however, they do not by themselves form a sufficient basis to determine the appropriate level for the allowance for loan losses. Qualitative or environmental factors that are likely to cause estimated credit losses to differ from historical losses are also considered, including but not limited to: • Changes in international, regional and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments, • Changes in the nature and volume of the portfolio and in the terms of loans, • Changes in the volume and severity of past due loans, the volume of nonaccrual loans and the volume and severity of adversely classified or graded loans, • Changes in the quality of the institution’s loan review system, • Changes in the value of underlying collateral for collateral-dependent loans, • The existence and effect of any concentrations of credit, and changes in the level of such concentrations, • The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio, • Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses, and • Changes in the current and future U.S. political environment, including debt ceiling negotiations, government shutdown and healthcare reform that may affect national, regional and local economic conditions, taxation, or disruption of national or global financial markets. The adequacy of the allowance for loan losses and the reserve for unfunded commitments is determined using a consistent, systematic methodology and is monitored regularly based on management’s evaluation of numerous factors. For each portfolio segment, these factors include: • The quality of the current loan portfolio, • The trend in the migration of the loan portfolio’s risk ratings, • The velocity of migration of losses and potential losses, • Current economic conditions, • Loan concentrations, • Loan growth rates, • Past-due and nonperforming trends, • Evaluation of specific loss estimates for all significant problem loans, • Recovery experience, and • Peer comparison loss rates. A summary of the activity in the allowance for loan losses by major loan classification follows: For the three months ended September 30, 2016 Commercial Real Estate Construction Consumer Unallocated Total Beginning balance $ 7,391 $ 9,137 $ 1,341 $ 46 $ 1,212 $ 19,127 Charge-offs (43 ) — — (1 ) — (44 ) Recoveries 57 9 1 1 — 68 Provision (reclassification) 896 339 312 (4 ) (163 ) 1,380 Ending balance $ 8,301 $ 9,485 $ 1,654 $ 42 $ 1,049 $ 20,531 For the nine months ended September 30, 2016 Commercial Real Estate Construction Consumer Unallocated Total Beginning balance $ 6,349 $ 8,297 $ 1,258 $ 46 $ 1,351 $ 17,301 Charge-offs (708 ) — — (4 ) — (712 ) Recoveries 159 44 162 2 — 367 Provision (reclassification) 2,501 1,144 234 (2 ) (302 ) 3,575 Ending balance $ 8,301 $ 9,485 $ 1,654 $ 42 $ 1,049 $ 20,531 At September 30, 2016, the allowance for loan losses on dental loans was $4,798, compared to $4,022 at December 31, 2015. See Note 5 for additional information on the dental loan portfolio. The following table presents the allowance and recorded investment in loans by major loan classification at September 30, 2016 and December 31, 2015: Balances as of September 30, 2016 Commercial Real Estate Construction Consumer Unallocated Total Ending allowance: collectively evaluated for impairment $ 7,567 $ 9,481 $ 1,654 $ 42 $ 1,049 $ 19,793 Ending allowance: individually evaluated for impairment 734 4 — — — 738 Ending allowance: loans acquired with deteriorated credit quality — — — — — — Total ending allowance $ 8,301 $ 9,485 $ 1,654 $ 42 $ 1,049 $ 20,531 Ending loan balance: collectively evaluated for impairment $ 620,997 $ 978,030 $ 170,816 $ 3,201 $ — $ 1,773,044 Ending loan balance: individually evaluated for impairment 4,463 3,934 2,152 — 10,549 Ending loan balance: loans acquired with deteriorated credit quality 9,395 15,658 — — — 25,053 Total ending loan balance $ 634,855 $ 997,622 $ 172,968 $ 3,201 $ — $ 1,808,646 Balances as of December 31, 2015 Commercial Real Estate Construction Consumer Unallocated Total Ending allowance: collectively evaluated for impairment $ 6,303 $ 8,267 $ 1,159 $ 46 $ 1,351 $ 17,126 Ending allowance: individually evaluated for impairment 46 30 99 — — 175 Ending allowance: loans acquired with deteriorated credit quality — — — — — — Total ending allowance $ 6,349 $ 8,297 $ 1,258 $ 46 $ 1,351 $ 17,301 Ending loan balance: collectively evaluated for impairment $ 504,261 $ 771,543 $ 107,977 $ 3,351 $ — $ 1,387,132 Ending loan balance: individually evaluated for impairment 2,627 5,782 391 — — 8,800 Ending loan balance: loans acquired with deteriorated credit quality 1,668 8,412 — — — 10,080 Total ending loan balance $ 508,556 $ 785,737 $ 108,368 $ 3,351 $ — $ 1,406,012 The September 30, 2016, ending allowance includes $738 in specific allowance for $10,549 of impaired loans ($9,551 net of government guarantees). At December 31, 2015, the Company had $8,800 of impaired loans ($7,527 net of government guarantees) with a specific allowance of $175 assigned. Management believes that the allowance for loan losses was adequate as of September 30, 2016. However, future loan losses may exceed the levels provided for in the allowance for loan losses and could possibly result in additional charges to the provision for loan losses. Credit Quality Indicators The Company uses the following loan grades, which are also often used by regulators when assessing the credit quality of a loan portfolio. Pass Special Mention Substandard Doubtful Management strives to consistently apply these definitions when allocating its loans by loan grade. The loan portfolio is continuously monitored for changes in credit quality and management takes appropriate action to update the loan risk ratings accordingly. Management has not changed the Company’s policy towards its use of credit quality indicators during the periods reported. The following tables present the Company’s loan portfolio information by loan type and credit grade at September 30, 2016 and December 31, 2015: Credit Quality Indicators As of September 30, 2016 Loan Grade Pass Special Mention Substandard Doubtful Totals Real estate loans Multi-family residential $ 79,126 $ — $ — $ — $ 79,126 Residential 1-4 family 57,629 — 3,869 — 61,498 Owner-occupied commercial 413,835 — 12,044 — 425,879 Nonowner-occupied commercial 424,397 — 6,722 — 431,119 Total real estate loans 974,987 — 22,635 — 997,622 Construction Multi-family residential 24,567 — — — 24,567 Residential 1-4 family 42,130 — — — 42,130 Commercial real estate 78,369 — — — 78,369 Commercial bare land and acquisition & development 19,050 — — — 19,050 Residential bare land and acquisition & development 6,630 — 2,222 — 8,852 Total construction loans 170,746 — 2,222 — 172,968 Commercial and other 613,144 20,050 1,661 634,855 Consumer 3,201 — — — 3,201 Totals $ 1,762,078 $ — $ 44,907 $ 1,661 $ 1,808,646 Percentage of portfolio 97.43 % 0.00 % 2.48 % 0.09 % 100.00 % Credit Quality Indicators As of December 31, 2015 Loan Grade Pass Special Mention Substandard Doubtful Totals Real estate loans Multi-family residential $ 66,208 $ — $ 237 $ — $ 66,445 Residential 1-4 family 49,077 — 4,699 — 53,776 Owner-occupied commercial 353,249 — 11,493 — 364,742 Nonowner-occupied commercial 296,528 — 4,246 — 300,774 Total real estate loans 765,062 — 20,675 — 785,737 Construction Multi-family residential 7,027 — — — 7,027 Residential 1-4 family 30,803 — 53 — 30,856 Commercial real estate 42,580 — 100 — 42,680 Commercial bare land and acquisition & development 20,265 — 272 — 20,537 Residential bare land and acquisition & development 4,969 — 2,299 — 7,268 Total construction loans 105,644 — 2,724 — 108,368 Commercial and other 494,267 — 14,289 — 508,556 Consumer 3,350 — 1 — 3,351 Totals $ 1,368,323 $ — $ 37,689 $ — $ 1,406,012 Percentage of portfolio 97.32 % 0.00 % 2.68 % 0.00 % 100.00 % At September 30, 2016 and December 31, 2015, the Company had $3,370, and $360, respectively, in unfunded commitments on its classified loans, which amounts are included in the calculation of our classified asset ratio. Past Due and Nonaccrual Loans The Company uses the terms “past due” and “delinquent” interchangeably. Amortizing loans are considered past due or delinquent based upon the number of contractually required payments not made. Delinquency status for all contractually matured loans, commercial and commercial real estate loans with non-monthly amortization, and all other extensions of credit is determined based upon the number of calendar months past due. The following tables present an aging analysis of past due and nonaccrual loans at September 30, 2016 and December 31, 2015: Age Analysis of Loans Receivable As of September 30, 2016 30-59 Days 60-89 Days Greater Nonaccrual Total Past Total Total Loans Real estate loans Multi-family residential $ — $ — $ — $ — $ — $ 79,126 $ 79,126 Residential 1-4 family 23 — — 162 185 58,634 58,819 Owner-occupied commercial — — — — — 416,118 416,118 Nonowner-occupied commercial — — — 663 663 427,238 427,901 Total real estate loans 23 — — 825 848 981,116 981,964 Construction Multi-family residential — — — — — 24,567 24,567 Residential 1-4 family — — — — — 42,130 42,130 Commercial real estate — — — — — 78,369 78,369 Commercial bare land and acquisition & development — — — — — 19,050 19,050 Residential bare land and acquisition & development — — — — — 8,852 8,852 Total construction loans — — — — — 172,968 172,968 Commercial and other 149 — — 2,847 2,996 622,464 625,460 Consumer — — — — — 3,201 3,201 Total $ 172 $ — $ — $ 3,672 $ 3,844 $ 1,779,749 $ 1,783,593 Percentage of portfolio 0.01 % 0.00 % 0.00 % 0.21 % 0.22 % 99.78 % 100.00 % Age Analysis of Loans Receivable As of December 31, 2015 30-59 Days 60-89 Days Greater Nonaccrual Total Past Total Total Loans Real estate loans Multi-family residential $ — $ — $ — $ — $ — $ 66,445 $ 66,445 Residential 1-4 family — — — 374 374 51,578 51,952 Owner-occupied commercial — — — — — 359,065 359,065 Nonowner-occupied commercial — — — 750 750 299,486 300,236 Total real estate loans — — — 1,124 1,124 776,574 777,698 Construction Multi-family residential — — — — — 7,027 7,027 Residential 1-4 family 480 — — 53 533 30,323 30,856 Commercial real estate — — — — — 42,580 42,580 Commercial bare land and acquisition & development — — — — — 20,265 20,265 Residential bare land and acquisition & development — — — — — 7,268 7,268 Total construction loans 480 — — 53 533 107,463 107,996 Commercial and other — — — 1,495 1,495 505,392 506,887 Consumer 1 3 — — 4 3,347 3,351 Total $ 481 $ 3 $ — $ 2,672 $ 3,156 $ 1,392,776 $ 1,395,932 Percentage of portfolio 0.03 % 0.00 % 0.00 % 0.19 % 0.23 % 99.77 % 100.00 % Impaired Loans Regular credit reviews of the portfolio are performed to identify loans that are considered potentially impaired. Potentially impaired loans are referred to the Asset-Liability Committee “ALCO” for review and are included in the specific calculation of allowance for loan losses. A loan is considered impaired when, based on current information and events, the Company is unlikely to collect all principal and interest due according to the terms of the loan agreement. When the amount of the impairment represents a confirmed loss, it is charged off against the allowance for loan losses. Impaired loans are often reported net of government guarantees to the extent that the guarantees are expected to be collected. Impaired loans generally include all loans classified as nonaccrual and troubled debt restructurings. Accrual of interest is discontinued on impaired loans when management believes that, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of principal or interest is doubtful. Accrued, but uncollected, interest is generally reversed when loans are placed on nonaccrual status. Interest income is subsequently recognized only to the extent cash payments are received satisfying all delinquent principal and interest amounts, and the prospects for future payments in accordance with the loan agreement appear relatively certain. In accordance with GAAP, payments received on nonaccrual loans are applied to the principal balance and no interest income is recognized. Interest income may be recognized on impaired loans that are not on nonaccrual status. The following tables display an analysis of the Company’s impaired loans at September 30, 2016, and December 31, 2015: Impaired Loan Analysis As of September 30, 2016 Recorded Recorded Total Unpaid Average Related Real estate Multi-family residential $ — $ — $ — $ — $ — $ — Residential 1-4 family 461 303 764 785 606 3 Owner-occupied commercial 104 874 978 978 1,192 1 Nonowner-occupied commercial 2,192 — 2,192 2,254 2,249 — Total real estate loans 2,757 1,177 3,934 4,017 4,047 4 Construction Multi-family residential — — — — — — Residential 1-4 family — — — — 50 — Commercial real estate — — — — — — Commercial bare land and acquisition & development — — — — — — Residential bare land and acquisition & development 2,152 — 2,152 2,151 1,764 — Total construction loans 2,152 — 2,152 2,151 1,814 — Commercial and other 2,305 2,158 4,463 4,834 3,215 734 Consumer — — — — — — Total impaired loans $ 7,214 $ 3,335 $ 10,549 $ 11,002 $ 9,076 $ 738 Impaired Loan Analysis As of December 31, 2015 Recorded Recorded Total Unpaid Average Related Real estate Multi-family residential $ — $ — $ — $ — $ — $ — Residential 1-4 family 374 308 682 911 766 5 Owner-occupied commercial 2,788 — 2,788 2,788 1,177 — Nonowner-occupied commercial 2,287 25 2,312 2,374 2,395 25 Total real estate loans 5,449 333 5,782 6,073 4,338 30 Construction Multi-family residential — — — — — — Residential 1-4 family 53 — 53 72 32 — Commercial real estate — — — — — — Commercial bare land and acquisition & development — — — — — — Residential bare land and acquisition & development — 338 338 338 347 99 Total construction loans 53 338 391 410 379 99 Commercial and other 2,091 536 2,627 3,018 2,404 46 Consumer — — — — — — Total impaired loans $ 7,593 $ 1,207 $ 8,800 $ 9,501 $ 7,121 $ 175 The impaired balances reported above are not adjusted for government guarantees of $998, and $1,273 at September 30, 2016 and December 31, 2015, respectively. The recorded investment in impaired loans, net of government guarantees, totaled $9,551 and $7,527 at September 30, 2016, and December 31, 2015, respectively. Troubled Debt Restructurings In the normal course of business, the Company may modify the terms of certain loans, attempting to protect as much of its investment as possible. Management evaluates the circumstances surrounding each modification to determine whether it is a troubled debt restructuring (“TDR”). TDRs exist when 1) the restructuring constitutes a concession, and 2) the debtor is experiencing financial difficulties. The following table displays the Company’s TDRs by class at September 30, 2016 and December 31, 2015: Troubled Debt Restructurings as of September 30, 2016 December 31, 2015 Number of Post-Modification Number of Post-Modification Real estate Multifamily residential — $ — — $ — Residential 1-4 family 4 764 6 682 Owner-occupied commercial 3 1,421 3 2,788 Non owner-occupied commercial 6 2,192 7 2,312 Total real estate loans 13 4,377 16 5,782 Construction Multifamily residential — — — — Residential 1-4 family — — — — Commercial real estate — — — — Commercial bare land and acquisition & development — — — — Residential bare land and acquisition & development 2 1,827 — — Total construction loans 2 1,827 — — Commercial and other 14 2,883 11 2,170 Consumer — — — — Total 29 $ 9,087 27 $ 7,952 The recorded investment in TDRs on nonaccrual status totaled $2,228, and $1,807 at September 30, 2016 and December 31, 2015, respectively. The Company’s policy is that loans placed on nonaccrual will typically remain on nonaccrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appears relatively certain. The Company’s policy generally refers to a minimum of six months of payment performance as sufficient to warrant a return to accrual status. For the nine months ended September 30, 2016, the Company restructured 9 loans into TDRs for which impairment was previously measured under the Company’s general loan loss allowance methodology. The types of modifications offered can generally be described in the following categories: • Rate Modification • Term Modification • Interest-only Modification • Combination Modification Below is a table of the newly restructured loans identified in the nine months ended September 30, 2016. Troubled Debt Restructurings Identified During the nine months ended September 30, 2016 Rate Term Interest-only Combination Real estate Multi-family residential $ — $ — $ — $ — Residential 1-4 family — — — 299 Owner-occupied commercial — — 444 — Nonowner-occupied commercial — — — — Total real estate loans — — 444 299 Construction Multi-family residential — — — — Residential 1-4 family — — — — Commercial real estate — — — — Commercial bare land and acquisition & development — — — — Residential bare land and acquisition & development — — — 1,827 Total construction loans — — — 1,827 Commercial and other — — 363 673 Consumer — — — — Total $ — $ — $ 807 $ 2,799 Subsequent to a loan being classified as a TDR, a borrower may become unwilling or unable to abide by the terms of the modified agreement. In such cases of default, the Company takes appropriate action to recover principal and interest payments including the use of foreclosure proceedings. The following table represents loans receivable modified as TDRs that subsequently defaulted within the first twelve months of restructure during the period. Troubled Debt Restructurings that Subsequently Defaulted During the nine months ended September 30, 2016 2015 Number of Contracts Recorded Investment Number of Contracts Recorded Investment Real estate Multi-family residential — $ — — $ — Residential 1-4 family — — — — Owner-occupied commercial 1 444 — — Nonowner-occupied commercial — — — — Total real estate loans 1 444 — — Construction Multi-family residential — — — — Residential 1-4 family — — — — Commercial real estate — — — — Commercial bare land and acquisition & development — — — — Residential bare land and acquisition & development — — — — Total construction loans — — — — Commercial and other — — — — Consumer — — — — Total $ 1 $ 444 $ — $ — No TDRs subsequently defaulted during the three months ended September 30, 2016 and 2015. At September 30, 2016 and December 31, 2015, the Company had no commitments to lend additional funds on loans restructured as TDRs. |