Loans Receivable and Allowance for Loan Losses | Loans Receivable and Allowance for Loan Losses Loans receivable that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are stated at their outstanding unpaid principal balances, net of an allowance for loan losses (allowance or ALL) and any deferred fees and costs. Interest income is accrued on the unpaid principal balance. Loan origination fees and costs are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the loan or to the first review date if the loan is on demand. Certain qualifying loans of the Bank totaling $574.9 million at June 30, 2015 , collateralize a letter of credit, a line of credit commitment and borrowings the Bank has with the Federal Home Loan Bank (FHLB). A summary of the Bank's loans receivable is as follows: (in thousands) June 30, 2015 December 31, 2014 Commercial and industrial $ 591,860 $ 525,127 Commercial tax-exempt 58,319 71,151 Owner occupied real estate 313,377 332,070 Commercial construction and land development 136,354 138,064 Commercial real estate 625,344 594,276 Residential 122,838 110,951 Consumer 222,349 226,895 Gross loans receivable 2,070,441 1,998,534 Less: allowance for loan losses 25,871 24,998 Net loans receivable $ 2,044,570 $ 1,973,536 The following table summarizes nonaccrual loans by loan type: (in thousands) June 30, 2015 December 31, 2014 Nonaccrual loans: Commercial and industrial $ 11,985 $ 11,634 Commercial tax-exempt — — Owner occupied real estate 7,720 7,416 Commercial construction and land development 3,226 3,228 Commercial real estate 6,384 5,824 Residential 5,336 4,987 Consumer 1,177 1,877 Total nonaccrual loans $ 35,828 $ 34,966 Generally, the Bank's policy is to move a loan to nonaccrual status when it becomes 90 days past due or when the Bank does not believe it will collect all of the contractual principal and interest payments. In addition, when a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the ALL. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of principal. If a loan is substandard and accruing, accrued interest is recognized as income. Once a loan is on nonaccrual status, it is not returned to accrual status unless loan payments have been current for at least six consecutive months and the borrower and/or any guarantors demonstrate the ability to repay the loan in accordance with its contractual terms. Under certain circumstances such as bankruptcy, if a loan is under collateralized, or if the borrower and/or guarantors do not show evidence of the ability to pay, the loan may be placed on nonaccrual status even though it is not past due by 90 days or more. The total nonaccrual loan balance of $35.8 million exceeds the $22.6 million balance of total loans that are 90 days past due at June 30, 2015 , as presented in the aging analysis tables that follow. No additional funds were committed on nonaccrual loans including restructured loans that were nonaccruing. Typically, commitments are canceled and no additional advances are made when a loan is placed on nonaccrual. The following tables present an aging analysis of loans receivable: Past Due Loans Recorded Investment in Loans 90 Days and Greater and Still Accruing (in thousands) Current 30-59 Days Past Due 60-89 Days Past Due 90 Days Past Due and Greater Total Past Due Total Loans Receivable June 30, 2015 Commercial and industrial $ 582,420 $ 919 $ 685 $ 7,836 $ 9,440 $ 591,860 $ — Commercial tax-exempt 58,319 — — — — 58,319 — Owner occupied real estate 303,563 1,734 1,913 6,167 9,814 313,377 — Commercial construction and 135,927 200 197 30 427 136,354 — Commercial real estate 618,125 883 1,572 4,764 7,219 625,344 — Residential 117,689 468 1,583 3,098 5,149 122,838 — Consumer 218,915 2,510 240 684 3,434 222,349 — Total $ 2,034,958 $ 6,714 $ 6,190 $ 22,579 $ 35,483 $ 2,070,441 $ — Past Due Loans Recorded Investment in Loans 90 Days and Greater and Still Accruing (in thousands) Current 30-59 Days Past Due 60-89 Days Past Due 90 Days Past Due and Greater Total Past Due Total Loans Receivable December 31, 2014 Commercial and industrial $ 514,428 $ 1,574 $ 3,398 $ 5,727 $ 10,699 $ 525,127 $ — Commercial tax-exempt 71,151 — — — — 71,151 — Owner occupied real estate 325,681 606 44 5,739 6,389 332,070 445 Commercial construction and 137,263 611 190 — 801 138,064 — Commercial real estate 591,383 1,104 175 1,614 2,893 594,276 — Residential 101,233 5,067 1,900 2,751 9,718 110,951 — Consumer 222,767 2,650 437 1,041 4,128 226,895 — Total $ 1,963,906 $ 11,612 $ 6,144 $ 16,872 $ 34,628 $ 1,998,534 $ 445 A summary of the ALL and balance of loans receivable by loan class and by impairment method is presented in the tables that follow: (in thousands) Comm. and industrial Comm. tax-exempt Owner occupied real estate Comm. construction and land development Comm. real estate Residen-tial Con- sumer Unallo-cated Total June 30, 2015 Allowance for loan losses: Individually evaluated $ 3,521 $ — $ 1,315 $ — $ — $ — $ — $ — $ 4,836 Collectively evaluated 8,517 45 619 4,476 5,178 855 959 386 21,035 Total ALL $ 12,038 $ 45 $ 1,934 $ 4,476 $ 5,178 $ 855 $ 959 $ 386 $ 25,871 Loans receivable: Loans evaluated individually $ 16,609 $ — $ 7,759 $ 3,829 $ 10,529 $ 6,642 $ 1,827 $ — $ 47,195 Loans evaluated collectively 575,251 58,319 305,618 132,525 614,815 116,196 220,522 — 2,023,246 Total loans receivable $ 591,860 $ 58,319 $ 313,377 $ 136,354 $ 625,344 $ 122,838 $ 222,349 $ — $ 2,070,441 (in thousands) Comm. and industrial Comm. tax-exempt Owner occupied real estate Comm. construction and land development Comm. real estate Residen-tial Con- sumer Unallo-cated Total December 31, 2014 Allowance for loan losses: Individually evaluated $ 4,401 $ — $ 1,242 $ — $ — $ — $ — $ — $ 5,643 Collectively evaluated 7,313 55 689 4,242 4,707 796 931 622 19,355 Total ALL $ 11,714 $ 55 $ 1,931 $ 4,242 $ 4,707 $ 796 $ 931 $ 622 $ 24,998 Loans receivable: Loans evaluated individually $ 16,982 $ — $ 7,464 $ 3,810 $ 9,976 $ 5,657 $ 2,433 $ — $ 46,322 Loans evaluated collectively 508,145 71,151 324,606 134,254 584,300 105,294 224,462 — 1,952,212 Total loans receivable $ 525,127 $ 71,151 $ 332,070 $ 138,064 $ 594,276 $ 110,951 $ 226,895 $ — $ 1,998,534 The Bank may create a specific allowance for all of or a part of a particular loan in lieu of a charge-off or charge-down as a result of management's evaluation of impaired loans. In these instances, the Bank has determined that a loss is not imminent based upon available information surrounding the credit at the time of the analysis including, but not limited to, unresolved legal matters; however, management believes an allowance is appropriate to acknowledge the probable risk of loss. Typically, commercial construction and land development and commercial real estate loans present a greater risk of nonpayment by a borrower than other types of loans. The market value of and cash flow from real estate, particularly real estate held for investment, can fluctuate significantly in a relatively short period of time. Commercial and industrial, tax exempt and owner occupied real estate loans are generally of comparatively lower risk because the repayment of these loans relies primarily on the cash flow from a business which is typically more stable and predictable. Consumer loan collections are dependent on the borrower's continued financial stability and thus are more likely to be affected by adverse personal circumstances. Consumer and residential loans are also impacted by the market value of real estate. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. The risk of nonpayment is affected by changes in economic conditions, the credit risks of a particular borrower, the term of the loan and, in the case of a collateralized loan, the value of the collateral and other factors. Management bases its quantitative analysis of probable future loan losses (when determining the ALL) on those loans collectively reviewed for impairment on a two -year period of actual historical losses. Management continuously assesses the quality of the Company's loan portfolio in conjunction with the current state of the economy and its impact on our borrowers repayment ability and on loan collateral values in order to determine the appropriate historical loss period to use in our quantitative analysis. Management may increase or decrease the historical loss period at some point in the future based on the state of the local, regional and national economies and other factors. The qualitative factors such as changes in levels and trends of charge-offs and delinquencies; material changes in the mix, volume or duration of the loan portfolio; changes in lending policies and procedures including underwriting standards; changes in the experience, ability and depth of lending management and other relevant staff; the existence and effect of any concentrations of credit; changes in the overall values of collateral; changes in the quality of the loan review program and changes in national and local economic trends and conditions among other things, are factors which have not been identified by the quantitative analysis. The determination of qualitative factors inherently involves a higher degree of subjectivity and considers risk factors that may not have yet manifested themselves in historical loss experience. The following tables summarize the transactions in the ALL: (in thousands) Comm. and industrial Comm. tax-exempt Owner occupied real estate Comm. construction and land development Comm. real estate Residen- tial Consumer Unallo-cated Total 2015 Balance at April 1 $ 12,019 $ 52 $ 1,944 $ 4,529 $ 4,945 $ 803 $ 870 $ 593 $ 25,755 Provision charged to operating expenses 1,612 (7 ) 52 (53 ) 461 120 622 (207 ) 2,600 Recoveries of loans previously charged-off 53 — 3 — 10 1 15 — 82 Loans charged-off (1,646 ) — (65 ) — (238 ) (69 ) (548 ) — (2,566 ) Balance at June 30 $ 12,038 $ 45 $ 1,934 $ 4,476 $ 5,178 $ 855 $ 959 $ 386 $ 25,871 (in thousands) Comm. and industrial Comm. tax-exempt Owner occupied real estate Comm. construction and land development Comm. real estate Residen-tial Consumer Unallo-cated Total 2015 Balance at January 1 $ 11,714 $ 55 $ 1,931 $ 4,242 $ 4,707 $ 796 $ 931 $ 622 $ 24,998 Provision charged to operating expenses 2,142 (10 ) 118 232 1,149 140 565 (236 ) 4,100 Recoveries of loans previously charged-off 107 — 3 2 17 2 27 — 158 Loans charged-off (1,925 ) — (118 ) — (695 ) (83 ) (564 ) — (3,385 ) Balance at June 30 $ 12,038 $ 45 $ 1,934 $ 4,476 $ 5,178 $ 855 $ 959 $ 386 $ 25,871 (in thousands) Comm. and industrial Comm. tax-exempt Owner occupied real estate Comm. construction and land development Comm. real estate Residen-tial Consumer Unallo-cated Total 2014 Balance at April 1 $ 7,914 $ 68 $ 2,236 $ 5,842 $ 4,640 $ 1,023 $ 1,329 $ 882 $ 23,934 Provision charged to operating expenses (557 ) (1 ) 125 1,270 99 37 68 59 1,100 Recoveries of loans previously charged-off 244 — 43 111 101 20 16 — 535 Loans charged-off (501 ) — (171 ) (527 ) — (19 ) (80 ) — (1,298 ) Balance at June 30 $ 7,100 $ 67 $ 2,233 $ 6,696 $ 4,840 $ 1,061 $ 1,333 $ 941 $ 24,271 (in thousands) Comm. and industrial Comm. tax-exempt Owner occupied real estate Comm. construction and land development Comm. real estate Residential Consumer Unallo-cated Total 2014 Balance at January 1 $ 8,178 $ 72 $ 2,180 $ 5,559 $ 4,161 $ 960 $ 1,303 $ 697 $ 23,110 Provision charged to operating expenses (1,472 ) (5 ) (37 ) 1,465 1,221 383 201 244 2,000 Recoveries of loans previously charged-off 1,249 — 286 211 174 20 39 — 1,979 Loans charged-off (855 ) — (196 ) (539 ) (716 ) (302 ) (210 ) — (2,818 ) Balance at June 30 $ 7,100 $ 67 $ 2,233 $ 6,696 $ 4,840 $ 1,061 $ 1,333 $ 941 $ 24,271 The following table presents information regarding the Company's impaired loans. The recorded investment represents the contractual obligation less any charged off principal. June 30, 2015 December 31, 2014 (in thousands) Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance Impaired loans with no related allowance: Commercial and industrial $ 8,359 $ 10,575 $ — $ 8,766 $ 9,437 $ — Commercial tax-exempt — — — — — — Owner occupied real estate 5,042 5,533 — 6,155 6,636 — Commercial construction and land development 3,829 3,829 — 3,810 3,810 — Commercial real estate 10,529 10,638 — 9,976 10,097 — Residential 6,642 7,917 — 5,657 7,011 — Consumer 1,827 2,021 — 2,433 2,686 — Total impaired loans with no related allowance 36,228 40,513 — 36,797 39,677 — Impaired loans with an allowance recorded: Commercial and industrial 8,250 8,250 3,521 8,216 8,216 4,401 Owner occupied real estate 2,717 2,717 1,315 1,309 1,309 1,242 Total impaired loans with an allowance recorded 10,967 10,967 4,836 9,525 9,525 5,643 Total impaired loans: Commercial and industrial 16,609 18,825 3,521 16,982 17,653 4,401 Commercial tax-exempt — — — — — — Owner occupied real estate 7,759 8,250 1,315 7,464 7,945 1,242 Commercial construction and land development 3,829 3,829 — 3,810 3,810 — Commercial real estate 10,529 10,638 — 9,976 10,097 — Residential 6,642 7,917 — 5,657 7,011 — Consumer 1,827 2,021 — 2,433 2,686 — Total impaired loans $ 47,195 $ 51,480 $ 4,836 $ 46,322 $ 49,202 $ 5,643 The following table presents additional information regarding the Company's impaired loans: Three months ended June 30, Six months ended June 30, 2015 2015 2014 2014 2015 2015 2014 2014 (in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Impaired loans with no related allowance: Commercial and industrial $ 8,129 $ 58 $ 8,079 $ 36 $ 8,489 $ 128 $ 7,985 $ 76 Commercial tax-exempt — — — — — — — — Owner occupied real estate 5,108 — 3,896 — 5,284 — 4,341 10 Commercial construction and land development 3,776 7 4,133 14 3,727 13 6,187 31 Commercial real estate 10,736 39 10,035 40 10,699 78 10,403 88 Residential 5,915 12 4,218 14 5,792 20 4,353 27 Consumer 1,992 8 2,796 10 2,165 15 2,715 17 Total impaired loans with no related allowance 35,656 124 33,157 114 36,156 254 35,984 249 Impaired loans with an allowance recorded: Commercial and industrial 8,338 — 2,341 — 8,455 — 2,793 — Owner occupied real estate 2,734 — 2,325 — 2,260 — 2,006 — Commercial construction and land development — — 6,148 — — — 4,813 — Residential — — 3,069 — — — 3,074 — Consumer — — 465 — — — 471 — Total impaired loans with an allowance recorded 11,072 — 14,348 — 10,715 — 13,157 — Total impaired loans: Commercial and industrial 16,467 58 10,420 36 16,944 128 10,778 76 Commercial tax-exempt — — — — — — — — Owner occupied real estate 7,842 — 6,221 — 7,544 — 6,347 10 Commercial construction and land development 3,776 7 10,281 14 3,727 13 11,000 31 Commercial real estate 10,736 39 10,035 40 10,699 78 10,403 88 Residential 5,915 12 7,287 14 5,792 20 7,427 27 Consumer 1,992 8 3,261 10 2,165 15 3,186 17 Total impaired loans $ 46,728 $ 124 $ 47,505 $ 114 $ 46,871 $ 254 $ 49,141 $ 249 Impaired loans averaged approximately $46.9 million and $49.1 million for the six months ended June 30, 2015 and 2014 , respectively. All nonaccrual loans are considered impaired and interest income is handled as discussed earlier in the nonaccrual section of this Note 4. Interest income totaling $254,000 and $249,000 continued to accrue on certain impaired loans for the six months ended June 30, 2015 and 2014 , respectively. The Bank assigns the following loan risk ratings to commercial loans as credit quality indicators of its loan portfolio: pass, special mention, substandard accrual, substandard nonaccrual and doubtful. Monthly, management tracks loans that are no longer pass rated. We review the cash flow, operating results and financial condition of the borrower and any guarantors, as well as the collateral position against established policy guidelines as a means of providing a targeted list of loans and loan relationships that require additional attention. Special mention loans are those loans that are currently adequately protected, but potentially weak. The potential weaknesses may, if not corrected, weaken the loan's credit quality or inadvertently jeopardize the Bank's credit position in the future. Substandard accrual and substandard nonaccrual assets are characterized by well-defined weaknesses that jeopardize the liquidation of the debt and by the possibility that the Bank will sustain some loss if the weaknesses are not corrected. Substandard accrual loans would move from accrual to nonaccrual when the Bank does not believe it will collect all of its contractual principal and interest payments. Some identifiers used to assess collectibility are as follows: when the loan is 90 days past due in principal or interest, there are triggering events in the borrower's or any guarantor's financial statements that show continuing deterioration, the borrower's or any guarantor's source of repayment is depleting, or if bankruptcy or other legal matters are present, regardless if the loan is 90 days past due or not. Doubtful loans have all of the weaknesses inherent in those classified as substandard accrual and substandard nonaccrual with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. Pass rated loans are reviewed throughout the year through the recurring review process of an independent loan review function and through the application of other credit metrics. Credit quality indicators for commercial loans broken out by loan type at period end are presented in the following tables. There were no loans classified as doubtful for the periods ended June 30, 2015 or December 31, 2014 . June 30, 2015 (in thousands) Pass Special Mention Substandard Accrual Substandard Nonaccrual Total Commercial credit exposure: Commercial and industrial $ 552,444 $ 13,920 $ 13,511 $ 11,985 $ 591,860 Commercial tax-exempt 58,319 — — — 58,319 Owner occupied real estate 292,344 4,394 8,919 7,720 313,377 Commercial construction and land development 132,826 — 302 3,226 136,354 Commercial real estate 616,263 2,176 521 6,384 625,344 Total $ 1,652,196 $ 20,490 $ 23,253 $ 29,315 $ 1,725,254 December 31, 2014 (in thousands) Pass Special Mention Substandard Accrual Substandard Nonaccrual Total Commercial credit exposure: Commercial and industrial $ 473,984 $ 20,785 $ 18,724 $ 11,634 $ 525,127 Commercial tax-exempt 71,151 — — — 71,151 Owner occupied real estate 311,668 4,268 8,718 7,416 332,070 Commercial construction and land development 133,033 190 1,613 3,228 138,064 Commercial real estate 584,239 1,584 2,629 5,824 594,276 Total $ 1,574,075 $ 26,827 $ 31,684 $ 28,102 $ 1,660,688 Consumer loan credit exposures are rated either performing or nonperforming as detailed below: June 30, 2015 (in thousands) Performing Nonperforming Total Consumer credit exposure: Residential $ 117,502 $ 5,336 $ 122,838 Consumer 221,172 1,177 222,349 Total $ 338,674 $ 6,513 $ 345,187 December 31, 2014 (in thousands) Performing Nonperforming Total Consumer credit exposure: Residential $ 105,964 $ 4,987 $ 110,951 Consumer 225,018 1,877 226,895 Total $ 330,982 $ 6,864 $ 337,846 A troubled debt restructuring (TDR) is a loan in which the contractual terms have been modified, resulting in the Bank granting a concession to a borrower which is experiencing financial difficulties, in order for the Bank to have a greater chance of collecting the indebtedness from the borrower. An additional benefit to the Bank in granting a concession is to possibly avoid foreclosure or repossession of loan collateral at a time when collateral values are low. The following table presents the recorded investment at the time of restructure of new TDRs and their concession, modified during the three and six month periods ended June 30, 2015 and 2014 . The recorded investment at the time of restructure was the same pre-modification and post-modification, therefore, there was no financial effect of the modification on the recorded investment. The loans included are considered TDRs as a result of the Bank implementing one or more of the following concessions: granting a material extension of time, entering into a forbearance agreement, adjusting the interest rate, accepting interest only payments for an extended period of time, a change in the amortization period or a combination of any of these concessions. New TDRs with Concession Type: Three months ended June 30, Six months ended June 30, 2015 2015 2014 2014 2015 2015 2014 2014 (dollars in thousands) Number of Contracts Recorded Investment at Time of Restructure Number of Contracts Recorded Investment at Time of Restructure Number of Contracts Recorded Investment at Time of Restructure Number of Contracts Recorded Investment at Time of Restructure Commercial and industrial: Forbearance agreement — $ — 1 $ 229 1 $ 3,307 1 $ 229 Accepting interest only for 1 43 — — 1 43 — — Change in amortization — — — — — — 3 261 Combination of concessions — — — — — — 1 30 Owner occupied real estate: Accepting interest only for 1 407 3 1,601 1 407 3 1,601 Change in amortization — — — — — — 1 128 Commercial construction Material extension of time 1 186 — — 1 186 1 242 Forbearance agreement — — 3 2,185 — — 3 2,185 Change in amortization — — — — — — 1 214 Commercial real estate: Change in amortization — — — — — — 14 1,893 Residential: Interest rate adjustment — — — — — — 1 143 Combination of concessions 1 592 — — 1 592 — — Total 4 $ 1,228 7 $ 4,015 5 $ 4,535 29 $ 6,926 The following table represents loans receivable modified as TDRs within the 12 months previous to June 30, 2015 and 2014 , respectively, and that subsequently defaulted during the three and six month periods ended June 30, 2015 and 2014 , respectively. The Bank's policy is to consider a loan past due and in default if payment is not received on or before the due date. TDRs That Subsequently Payment Defaulted: Three months ended June 30, Six months ended June 30, 2015 2015 2014 2014 2015 2015 2014 2014 (dollars in thousands) Number of Contracts Recorded Investment Number of Contracts Recorded Investment Number of Contracts Recorded Investment Number of Contracts Recorded Investment Commercial and industrial 3 $ 524 — $ — 3 $ 524 7 $ 1,288 Owner occupied real estate 1 326 1 871 3 1,057 4 1,792 Commercial construction and land development — — — — 1 236 2 1,930 Commercial real estate — — — — 3 2,667 — — Residential — — 1 258 — — 3 3,470 Consumer — — — — — — 1 476 Total 4 $ 850 2 $ 1,129 10 $ 4,484 17 $ 8,956 Of the ten contracts that subsequently payment defaulted during the six month period ended June 30, 2015 , five were still in payment default at June 30, 2015 . All TDRs are considered impaired and, therefore, are individually evaluated for impairment in the calculation of the ALL. Prior to their classification as TDRs, certain of these loans had been collectively evaluated for impairment in the calculation of the ALL. |