Loans and Allowance for Loan Losses | LOANS AND ALLOWANCE FOR LOAN LOSSES Major categories of loans are presented below: December 31, 2015 2014 Originated Acquired (1) Total Originated Acquired (1) Total (Dollars in thousands) Commercial real estate $ 1,575,555 $ 670,460 $ 2,246,015 $ 1,181,492 $ 403,672 $ 1,585,164 Commercial construction 281,591 83,418 365,009 265,968 48,668 314,636 Commercial and industrial 279,495 139,621 419,116 154,132 38,200 192,332 Leases 26,773 — 26,773 21,100 — 21,100 Total commercial 2,163,414 893,499 3,056,913 1,622,692 490,540 2,113,232 Residential construction 59,937 16,084 76,021 43,298 29,854 73,152 Residential mortgage 484,895 563,563 1,048,458 439,600 432,818 872,418 Consumer and other 12,970 5,509 18,479 10,851 5,445 16,296 Total portfolio loans $ 2,721,216 $ 1,478,655 $ 4,199,871 $ 2,116,441 $ 958,657 $ 3,075,098 (1) Amount includes $40.9 million and $137.5 million of acquired loans covered under FDIC loss-share agreements at December 31, 2015 and 2014, respectively. The unpaid principal balance for acquired loans covered under FDIC loss-share agreements was $41.4 million and $140.4 million at December 31, 2015 and 2014, respectively. Unearned income and net deferred loan fees totaled $0.9 million at December 31, 2015 and 2014, respectively. The Company evaluates loans acquired with evidence of credit deterioration in accordance with the provisions of ASC 310-30. Credit-impaired loans are those loans showing evidence of credit deterioration since origination and it is probable, at the date of acquisition, the Company will not collect all contractually required principal and interest payments. Generally, the acquired loans that meet the Company’s definition for substandard status fall within the definition of credit-impaired covered loans. The following table presents loans acquired during the year ended December 31, 2015, at acquisition date, accounted for under ASC 310-30: (Dollars in thousands) Contractually required payments receivable $ 35,772 Contractual cash flows not expected to be collected (non-accretable) (6,368 ) Expected cash flows 29,404 Interest component of expected cash flows (480 ) Fair value of loans acquired $ 28,924 The acquisition date unpaid balance of loans acquired during the year ended December 31, 2015 that did not have credit deterioration was $774.7 million with an estimated fair value of $758.7 million . The discount will be amortized on a level-yield basis over the economic life of the loans. The following table presents a summary of the activity of the Company's loans accounted for under ASC 310-30: 2015 2014 (Dollars in thousands) Balance at beginning of year $ 150,382 $ 178,157 Accretion 5,311 7,474 Purchased loans acquired 28,924 32,745 Transfer to OREO (2,455 ) (7,985 ) Net payments received (36,479 ) (57,118 ) Net charge-offs (781 ) (2,936 ) Other activity, net (2,231 ) 45 Balance at end of year $ 142,671 $ 150,382 The following table presents a summary of changes in accretable difference on purchased loans accounted for under ASC 310-30: 2015 2014 (Dollars in thousands) Balance at beginning of year $ 4,418 $ 7,670 Accretion (5,311 ) (7,474 ) Accretable difference acquired 601 1,603 Adjustments to accretable difference due to: Loans sold (483 ) (1,151 ) Changes in expected future cash flows 3,628 3,770 Balance at end of year $ 2,853 $ 4,418 The Company has the ability to borrow funds from the FHLB and from the Federal Reserve Bank. At December 31, 2015 and 2014, real estate loans with carrying values of $1.68 billion and $1.10 billion , respectively, were pledged to secure borrowing facilities from these institutions. The Company has loan relationships with its directors, executive officers, or their related interests. These loans were made on substantially the same terms, including rates and collateral, as those prevailing at the time for comparable transactions with other unrelated customers, and do not involve more than a normal risk of collection. Loan activity with principal officers, directors, and their affiliates during 2015 was as follows: (Dollars in thousands) Balance at beginning of year $ 5,296 Additional borrowings 35,754 Loan repayments (22,991) Balance at end of year $ 18,059 A summary of the changes to the allowance for loan losses, by class of financing receivable, is presented below: For the year ended December 31, 2015 Commercial real estate Commercial construction Commercial and industrial Leases Residential construction Residential mortgage Consumer and other Total (Dollars in thousands) Balance December 31, 2014 $ 12,685 $ 4,311 $ 3,226 $ 103 $ 570 $ 9,313 $ 191 $ 30,399 Charge-offs (2,366 ) (127 ) (285 ) — — (2,228 ) (362 ) (5,368 ) Recoveries 1,013 1,859 1,339 — 117 1,234 232 5,794 Provision (1) 2,087 (1,220 ) 486 (25 ) (224 ) 543 249 1,896 Change in FDIC indemnification asset (1) 52 (298 ) (180 ) — 3 (661 ) 10 (1,074 ) Balance December 31, 2015 $ 13,471 $ 4,525 $ 4,586 $ 78 $ 466 $ 8,201 $ 320 $ 31,647 For the year ended December 31, 2014 Commercial real estate Commercial construction Commercial and industrial Leases Residential construction Residential mortgage Consumer and other Total (Dollars in thousands) Balance December 31, 2013 $ 14,752 $ 6,738 $ 3,137 $ 56 $ 213 $ 7,730 $ 249 $ 32,875 Charge-offs (3,339 ) (3,483 ) (3,279 ) — — (4,344 ) (191 ) (14,636 ) Recoveries 1,289 1,830 1,205 — 70 2,196 139 6,729 Provision (2) 412 (155 ) 2,281 47 293 4,161 (33 ) 7,006 Change in FDIC indemnification asset (2) (429 ) (619 ) (118 ) — (6 ) (430 ) 27 (1,575 ) Balance December 31, 2014 $ 12,685 $ 4,311 $ 3,226 $ 103 $ 570 $ 9,313 $ 191 $ 30,399 (1) The provision for loan losses includes the "net" provision on covered loans after coverage provided by FDIC loss-share agreements, which totaled $(0.4) million for the year ended December 31, 2015. This resulted in a decrease in the FDIC indemnification asset of $1.1 million , which is the difference between the net provision on covered loans and the total reduction to the allowance for loan losses allocable to the covered loan portfolio of $1.5 million . (2) The provision for loan losses includes the "net" provision on covered loans after coverage provided by FDIC loss-share agreements, which totaled $(0.6) million for the year ended December 31, 2014 . This resulted in a decrease in the FDIC indemnification asset of $1.6 million , which is the difference between the net provision on covered loans and the total reduction to the allowance for loan losses allocable to the covered loan portfolio of $2.2 million . The following table provides a breakdown of the recorded investment in loans and the allowance for loan losses based on the method of determining the allowance: Commercial real estate Commercial construction Commercial and industrial Leases Residential construction Residential mortgage Consumer and other Total Balances at December 31, 2015: (Dollars in thousands) Specific reserves: Impaired loans $ 2,166 $ 182 $ 646 $ — $ 53 $ 1,562 $ 49 $ 4,658 Purchase credit impaired loans 1,176 354 47 — 5 971 6 2,559 Total specific reserves 3,342 536 693 — 58 2,533 55 7,217 General reserves 10,129 3,989 3,893 78 408 5,668 265 24,430 Total $ 13,471 $ 4,525 $ 4,586 $ 78 $ 466 $ 8,201 $ 320 $ 31,647 Loans: Individually evaluated for impairment $ 26,498 $ 3,223 $ 1,687 $ — $ 825 $ 18,158 $ 129 $ 50,520 Purchase credit impaired loans 85,213 12,497 2,717 — 709 41,336 199 142,671 Loans collectively evaluated for impairment 2,134,304 349,289 414,712 26,773 74,487 988,964 18,151 4,006,680 Total $ 2,246,015 $ 365,009 $ 419,116 $ 26,773 $ 76,021 $ 1,048,458 $ 18,479 $ 4,199,871 Balances at December 31, 2014: Specific reserves: Impaired loans $ 1,614 $ 118 $ 42 $ — $ 230 $ 972 $ 13 $ 2,989 Purchase credit impaired loans 1,727 424 152 — — 1,556 11 3,870 Total specific reserves 3,341 542 194 — 230 2,528 24 6,859 General reserves 9,344 3,769 3,032 103 340 6,785 167 23,540 Total $ 12,685 $ 4,311 $ 3,226 $ 103 $ 570 $ 9,313 $ 191 $ 30,399 Loans: Individually evaluated for impairment $ 27,578 $ 4,080 $ 1,264 $ — $ 657 $ 13,019 $ 126 $ 46,724 Purchase credit impaired loans 82,477 11,326 4,591 — 952 50,164 872 150,382 Loans collectively evaluated for impairment 1,475,109 299,230 186,477 21,100 71,543 809,235 15,298 2,877,992 Total $ 1,585,164 $ 314,636 $ 192,332 $ 21,100 $ 73,152 $ 872,418 $ 16,296 $ 3,075,098 The following tables present information related to impaired loans, excluding purchased impaired loans: Impaired Loans - With Allowance Impaired Loans - With No Allowance Recorded Investment Unpaid Principal Balance Allowances for Loan Losses Allocated Recorded Investment Unpaid Principal Balance December 31, 2015 (Dollars in thousands) Originated: Commercial real estate $ 11,750 $ 11,736 $ 1,990 $ 13,099 $ 13,068 Commercial construction 1,537 1,533 123 1,325 1,320 Commercial and industrial 1,459 1,451 575 — — Residential construction 343 342 42 306 306 Residential mortgage 8,159 8,141 860 2,154 2,145 Consumer and other 10 10 1 — — Total originated 23,258 23,213 3,591 16,884 16,839 Acquired: Commercial real estate 1,374 1,390 175 330 331 Commercial construction 369 370 59 — — Commercial and industrial 232 304 71 — — Residential construction 109 109 11 68 588 Residential mortgage 5,302 5,632 702 2,572 2,597 Consumer and other 119 119 49 — — Total acquired 7,505 7,924 1,067 2,970 3,516 Total impaired loans $ 30,763 $ 31,137 $ 4,658 $ 19,854 $ 20,355 Impaired Loans - With Allowance Impaired Loans - With No Allowance Recorded Investment Unpaid Principal Balance Allowances for Loan Losses Allocated Recorded Investment Unpaid Principal Balance December 31, 2014 (Dollars in thousands) Originated: Commercial real estate $ 10,110 $ 10,089 $ 1,571 $ 17,095 $ 17,071 Commercial construction 1,734 1,728 105 2,227 2,218 Commercial and industrial 798 790 26 268 271 Residential construction 350 349 44 — — Residential mortgage 6,278 6,260 694 5,057 5,045 Consumer and other 127 126 13 — — Total originated 19,397 19,342 2,453 24,647 24,605 Acquired: Commercial real estate 429 428 43 796 824 Commercial construction 133 132 13 469 467 Commercial and industrial 204 203 16 1 28 Residential construction 308 308 185 114 114 Residential mortgage 1,574 1,614 279 7,266 7,744 Total acquired 2,648 2,685 536 8,646 9,177 Total impaired loans $ 22,045 $ 22,027 $ 2,989 $ 33,293 $ 33,782 The following table presents information related to the average recorded investment and interest income recognized on impaired loans, excluding purchased impaired loans: Year Ended December 31, 2015 2014 Average Recorded Investment Interest Income Average Recorded Investment Interest Income Impaired loans with allowance: (Dollars in thousands) Commercial real estate $ 12,060 $ 395 $ 16,618 $ 584 Commercial construction 1,765 71 2,498 104 Commercial and industrial 1,405 58 1,190 23 Residential construction 415 14 407 26 Residential mortgage 9,477 186 7,119 102 Consumer and other 51 — 134 6 Total impaired loans with allowance $ 25,173 $ 724 $ 27,966 $ 845 Impaired loans with no allowance: Commercial real estate $ 18,477 $ 524 $ 15,658 $ 445 Commercial construction 2,111 59 6,266 275 Commercial and industrial 509 — 156 — Residential construction 118 33 113 6 Residential mortgage 10,262 47 12,376 481 Consumer and other 44 — 29 — Total impaired loans with no allowance $ 31,521 $ 663 $ 34,598 $ 1,207 For the years ended December 31, 2015 and 2014 , the amount of interest income recognized within the period that the loans were impaired was primarily related to loans modified as a TDR that remained on accrual status. The amount of interest income recognized using a cash-basis method of accounting during the period that the loans were impaired was not material. At December 31, 2015 and 2014, respectively, the Company had $2.5 million of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were in progress. The following tables present an aging analysis of the recorded investment in the Company's loans: 30-59 Days Past Due 60-89 Days Past Due Greater than 90 Days Past Due Non-Accrual Total Past Due Current Total Loans December 31, 2015 (Dollars in thousands) Originated: Commercial real estate $ 800 $ 564 $ — $ 3,157 $ 4,521 $ 1,571,034 $ 1,575,555 Commercial construction 82 — — 164 246 281,345 281,591 Commercial and industrial 89 21 — 269 379 279,116 279,495 Leases — — — — — 26,773 26,773 Residential construction — — — 306 306 59,631 59,937 Residential mortgage 1,714 203 — 2,727 4,644 480,251 484,895 Consumer and other 12 — — — 12 12,958 12,970 Total originated 2,697 788 — 6,623 10,108 2,711,108 2,721,216 Acquired: Commercial real estate 893 1,139 — 4,275 6,307 664,153 670,460 Commercial construction 10 20 — 394 424 82,994 83,418 Commercial and industrial 69 250 3 169 491 139,130 139,621 Residential construction — 16 — 177 193 15,891 16,084 Residential mortgage 3,266 1,010 — 6,939 11,215 552,348 563,563 Consumer and other 77 5 — 132 214 5,295 5,509 Total acquired 4,315 2,440 3 12,086 18,844 1,459,811 1,478,655 Total loans $ 7,012 $ 3,228 $ 3 $ 18,709 $ 28,952 $ 4,170,919 $ 4,199,871 30-59 Days Past Due 60-89 Days Past Due Greater than 90 Days Past Due Non-Accrual Total Past Due Current Total Loans December 31, 2014 (Dollars in thousands) Originated: Commercial real estate $ 1,974 $ — $ — $ 3,476 $ 5,450 $ 1,176,042 $ 1,181,492 Commercial construction 12 — — 1,084 1,096 264,872 265,968 Commercial and industrial 102 24 — 417 543 153,589 154,132 Leases — — — — — 21,100 21,100 Residential construction 200 — — — 200 43,098 43,298 Residential mortgage 1,508 1,268 — 3,498 6,274 433,326 439,600 Consumer and other 6 — — — 6 10,845 10,851 Total originated 3,802 1,292 — 8,475 13,569 2,102,872 2,116,441 Acquired: Commercial real estate 880 155 — 4,508 5,543 398,129 403,672 Commercial construction 230 67 — 779 1,076 47,592 48,668 Commercial and industrial 121 27 — 197 345 37,855 38,200 Residential construction — — — 422 422 29,432 29,854 Residential mortgage 2,200 848 — 10,312 13,360 419,458 432,818 Consumer and other 92 2 — 30 124 5,321 5,445 Total acquired 3,523 1,099 — 16,248 20,870 937,787 958,657 Total loans $ 7,325 $ 2,391 $ — $ 24,723 $ 34,439 $ 3,040,659 $ 3,075,098 Credit Quality Indicators The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company's primary credit quality indicators use an internal credit risk rating system that categorizes loans and leases into pass, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans and leases that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans and leases to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans and leases that are underwritten and structured using standardized criteria and characteristics are typically risk rated and monitored collectively. These are typically loans and leases to individuals in the classes which comprise the consumer portfolio segment. The Company uses the following definitions for risk ratings: Pass - Loans classified as pass are considered to be a satisfactory credit risk and generally considered to be collectible in full. Special Mention - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Substandard - Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loss - Loans classified as loss are considered uncollectable and are in the process of being charged-off, as soon as practicable, once so classified. The following tables present the recorded investment in the Company’s loans by credit quality indicator: Pass Special Mention Substandard Doubtful Loss Total December 31, 2015 (Dollars in thousands) Originated: Commercial real estate $ 1,499,554 $ 48,775 $ 27,226 $ — $ — $ 1,575,555 Commercial construction 272,960 6,434 2,197 — — 281,591 Commercial and industrial 270,116 4,855 4,524 — — 279,495 Leases 26,773 — — — — 26,773 Residential construction 59,265 24 648 — — 59,937 Residential mortgage 453,544 20,440 10,911 — — 484,895 Consumer and other 12,566 394 10 — — 12,970 Total originated 2,594,778 80,922 45,516 — — 2,721,216 Acquired: Commercial real estate 596,973 31,318 42,169 — — 670,460 Commercial construction 69,473 5,655 8,163 127 — 83,418 Commercial and industrial 127,911 3,273 8,437 — — 139,621 Residential construction 14,541 470 1,073 — — 16,084 Residential mortgage 504,836 38,763 19,716 248 — 563,563 Consumer and other 5,244 133 132 — — 5,509 Total acquired 1,318,978 79,612 79,690 375 — 1,478,655 Total loans $ 3,913,756 $ 160,534 $ 125,206 $ 375 $ — $ 4,199,871 Pass Special Mention Substandard Doubtful Loss Total December 31, 2014 (Dollars in thousands) Originated: Commercial real estate $ 1,100,361 $ 46,935 $ 34,196 $ — $ — $ 1,181,492 Commercial construction 256,987 5,530 3,451 — — 265,968 Commercial and industrial 145,722 3,980 4,430 — — 154,132 Leases 21,100 — — — — 21,100 Residential construction 42,806 143 349 — — 43,298 Residential mortgage 407,319 20,946 11,335 — — 439,600 Consumer and other 10,331 428 92 — — 10,851 Total originated 1,984,626 77,962 53,853 — — 2,116,441 Acquired: Commercial real estate 342,240 35,816 25,531 85 — 403,672 Commercial construction 36,346 5,910 6,320 92 — 48,668 Commercial and industrial 36,039 644 1,482 35 — 38,200 Residential construction 28,833 — 1,021 — — 29,854 Residential mortgage 370,523 36,098 24,616 1,581 — 432,818 Consumer and other 5,256 159 30 — — 5,445 Total acquired 819,237 78,627 59,000 1,793 — 958,657 Total loans $ 2,803,863 $ 156,589 $ 112,853 $ 1,793 $ — $ 3,075,098 Modifications Loan modifications are considered a TDR if concessions have been granted to borrowers that are experiencing financial difficulty. The concessions granted generally involve the modification of terms of the loan, such as changes in payment schedule or interest rate, which generally would not otherwise be considered. Restructured loans can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Nonaccrual restructured loans are included and treated with all other nonaccrual loans. In addition, all accruing restructured loans are reported as TDRs, which are considered and accounted for as impaired loans. Generally, restructured loans remain on nonaccrual until the customer has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months). However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to or maintained on accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains on nonaccrual status. Loans modified in a TDR are, in many cases, already on nonaccrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates. Once we classify a loan as a TDR, the loan is only removed from TDR classification under three circumstances: (1) the loan is paid off, (2) the loan is charged off or (3) if, at the beginning of the current fiscal year, the loan has performed in accordance with the modified terms for a minimum of six consecutive months and at the time of modification the loan’s interest rate represented a then current market interest rate for a loan of similar risk. The following tables provide a summary of loans modified as TDRs: Accrual Nonaccrual Total TDRs Allowance for Loan Losses Allocated December 31, 2015 (Dollars in thousands) Commercial real estate $ 5,938 $ 720 $ 6,658 $ 331 Commercial construction 893 46 939 16 Commercial and industrial 1,186 — 1,186 484 Residential mortgage 6,691 14 6,705 1 Consumer and other 10 — 10 564 Total modifications $ 14,718 $ 780 $ 15,498 $ 1,396 Number of contracts 35 3 38 Accrual Nonaccrual Total TDRs Allowance for Loan Losses Allocated December 31, 2014 (Dollars in thousands) Commercial real estate $ 3,835 $ — $ 3,835 $ 165 Commercial construction 1,341 50 1,391 16 Commercial and industrial 651 — 651 25 Residential mortgage 7,625 16 7,641 592 Consumer and other 126 — 126 13 Total modifications $ 13,578 $ 66 $ 13,644 $ 811 Number of contracts 33 2 35 At December 31, 2015 and 2014, the Company had no available commitments outstanding on TDRs. The Company offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories: Rate modification - A modification in which the interest rate is changed. Term modification - A modification in which the maturity date, timing of payments or frequency of payments is changed. Payment modification – A modification in which the principal and interest payment are lowered from the original contractual terms. Interest only modification – A modification in which the loan is converted to interest only payments for a period of time. Combination modification – Any other type of modification, including the use of multiple categories above. The following tables present new TDRs by modification category. All balances represent the recorded investment at the end of the period in which the modification was made. Year Ended December 31, 2015 Term Payment Interest Only Combination Total (Dollars in thousands) Commercial real estate $ 1,820 $ — $ 358 $ 863 $ 3,041 Commercial and industrial 93 419 231 — 743 Residential mortgage 149 — — — 149 Total modifications $ 2,062 $ 419 $ 589 $ 863 $ 3,933 Year Ended December 31, 2014 Term Payment Interest Only Combination Total (Dollars in thousands) Commercial real estate $ — $ 1,300 $ — $ — $ 1,300 Commercial construction — — 447 — 447 Commercial and industrial 153 — — — 153 Residential mortgage — — 479 755 1,234 Consumer and other — 10 — — 10 Total modifications $ 153 $ 1,310 $ 926 $ 755 $ 3,144 The following tables summarize the period-end balance for loans modified and classified as TDRs in the previous 12 months for which a payment default has occurred. The Company defines payment default as movement of the restructuring to nonaccrual status, foreclosure or charge-off, whichever occurs first. Year Ended December 31, 2015 2014 (Dollars in thousands) Commercial real estate $ — $ 1,210 Commercial construction — 1,245 Residential mortgage — 129 Consumer and other 34 — Loans Held for Sale The Company originates certain single family, residential first mortgage loans for sale on a presold basis. Loan sale activity is summarized below: Year Ended December 31, 2015 2014 2013 (Dollars in thousands) Loans held for sale at period end $ 39,470 $ 37,280 $ 30,899 Proceeds from sales of loans originated for sale 367,959 292,845 351,304 Gain on sales of loans originated for sale 9,825 8,037 8,153 |