Loans and Allowance for Loan Losses | LOANS AND ALLOWANCE FOR LOAN LOSSES Major categories of loans are presented below: December 31, 2016 2015 Originated Acquired (1) Total Originated Acquired (1) Total (Dollars in thousands) Commercial real estate $ 2,076,834 $ 820,886 $ 2,897,720 $ 1,575,555 $ 670,460 $ 2,246,015 Commercial construction 459,398 103,821 563,219 281,591 83,418 365,009 Commercial and industrial 369,287 131,974 501,261 279,495 139,621 419,116 Leases 29,529 — 29,529 26,773 — 26,773 Total commercial 2,935,048 1,056,681 3,991,729 2,163,414 893,499 3,056,913 Residential construction 93,202 21,613 114,815 59,937 16,084 76,021 Residential mortgage 599,666 725,774 1,325,440 484,895 563,563 1,048,458 Consumer and other 17,771 5,955 23,726 12,970 5,509 18,479 Total portfolio loans $ 3,645,687 $ 1,810,023 $ 5,455,710 $ 2,721,216 $ 1,478,655 $ 4,199,871 (1) Amount includes $0 and $40.9 million of acquired loans covered under FDIC loss-share agreements at December 31, 2016 and 2015, respectively. The unpaid principal balance for acquired loans covered under FDIC loss-share agreements was $0 and $41.4 million at December 31, 2016 and 2015, respectively. Unearned income and net deferred loan fees totaled $0.6 million and $0.9 million at December 31, 2016 and 2015, respectively. On May 2, 2016, the Bank entered into an agreement with the FDIC to terminate all existing loss-share agreements with the FDIC. All rights and obligations of the Bank and the FDIC under the FDIC loss share agreements, including the clawback provisions and the settlement of loss share and expense reimbursement claims, were resolved and terminated under such agreement. 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, 2016, at acquisition date, accounted for under ASC 310-30: (Dollars in thousands) Contractually required payments receivable $ 30,484 Contractual cash flows not expected to be collected (non-accretable) (4,927 ) Expected cash flows 25,557 Interest component of expected cash flows (1,110 ) Fair value of loans acquired $ 24,447 The acquisition date unpaid balance of loans acquired during the year ended December 31, 2016 that did not have credit deterioration was $808.5 million with an estimated fair value of $791.1 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: Year Ended December 31, 2016 2015 (Dollars in thousands) Balance at beginning of period $ 142,671 $ 150,382 Purchased loans acquired 24,447 28,803 Accretion 4,394 5,311 Transfer to other real estate owned (3,254 ) (2,455 ) Net payments received (40,460 ) (36,359 ) Net charge-offs (574 ) (781 ) Other activity, net 335 (2,230 ) Balance at end of period $ 127,559 $ 142,671 The following table presents a summary of changes in accretable difference on purchased loans accounted for under ASC 310-30: Year Ended December 31, 2016 2015 (Dollars in thousands) Balance at beginning of period $ 2,853 $ 4,418 Accretion (4,394 ) (5,311 ) Accretable difference acquired 1,110 601 Adjustments to accretable difference due to: Loans sold — (483 ) Changes in expected future cash flows 3,491 3,628 Balance at end of period $ 3,060 $ 2,853 The Company has the ability to borrow funds from the Federal Home Loan Bank of Atlanta ("FHLB") and from the Federal Reserve Bank of Richmond (the "Federal Reserve"). At December 31, 2016 and 2015, real estate loans with carrying values of $2.25 billion and $1.68 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 2016 was as follows: (Dollars in thousands) Balance at beginning of year $ 18,059 Additional borrowings 41,428 Loan repayments (32,423) Balance at end of year $ 27,064 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, 2016 Commercial real estate Commercial construction Commercial and industrial Leases Residential construction Residential mortgage Consumer and other Total (Dollars in thousands) Balance December 31, 2015 $ 13,471 $ 4,525 $ 4,586 $ 78 $ 466 $ 8,201 $ 320 $ 31,647 Charge-offs (969 ) (89 ) (1,400 ) — — (722 ) (147 ) (3,327 ) Recoveries 768 1,049 852 — 53 1,645 97 4,464 Provision (1) 2,375 542 1,483 177 248 (217 ) 57 4,665 Change in FDIC indemnification asset (1) (4 ) (106 ) (31 ) — — 216 (23 ) 52 Balance December 31, 2016 $ 15,641 $ 5,921 $ 5,490 $ 255 $ 767 $ 9,123 $ 304 $ 37,501 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 (2) 2,087 (1,220 ) 486 (25 ) (224 ) 543 249 1,896 Change in FDIC indemnification asset (2) 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 (1) The provision for loan losses includes the "net" provision on covered loans after coverage provided by FDIC loss-share agreements, which totaled $(0.5) million for the year ended December 31, 2016. For the year ended December 31, 2016, this resulted in an increase in the FDIC indemnification asset of $0.1 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 $0.6 million . (2) The provision for loan losses includes the "net" provision on covered loans after coverage provided by FDIC loss-share agreements, which totaled $(0.4) million for the year ended December 31, 2015 . 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 . 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, 2016: (Dollars in thousands) Specific reserves: Impaired loans $ 607 $ 147 $ 365 $ — $ — $ 1,255 $ 1 $ 2,375 Purchase credit impaired loans 811 321 37 — 146 1,084 2 2,401 Total specific reserves 1,418 468 402 — 146 2,339 3 4,776 General reserves 14,223 5,453 5,088 255 621 6,784 301 32,725 Total $ 15,641 $ 5,921 $ 5,490 $ 255 $ 767 $ 9,123 $ 304 $ 37,501 Loans: Individually evaluated for impairment $ 19,602 $ 3,145 $ 1,844 $ — $ — $ 14,738 $ 9 $ 39,338 Purchase credit impaired loans 73,515 11,556 1,999 — 501 39,881 107 127,559 Loans collectively evaluated for impairment 2,804,603 548,518 497,418 29,529 114,314 1,270,821 23,610 5,288,813 Total $ 2,897,720 $ 563,219 $ 501,261 $ 29,529 $ 114,815 $ 1,325,440 $ 23,726 $ 5,455,710 Balances at December 31, 2015: 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 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, 2016 (Dollars in thousands) Originated: Commercial real estate $ 7,230 $ 7,208 $ 448 $ 10,040 $ 9,993 Commercial construction 1,247 1,244 102 1,295 1,293 Commercial and industrial 1,214 1,209 265 397 396 Residential mortgage 4,921 4,885 482 4,275 4,271 Consumer and other 8 8 1 — — Total originated 14,620 14,554 1,298 16,007 15,953 Acquired: Commercial real estate 1,179 1,192 159 1,224 1,236 Commercial construction 264 278 45 343 343 Commercial and industrial 235 392 100 1 — Residential mortgage 3,913 4,396 773 1,649 1,677 Consumer and other — 6 — — — Total acquired 5,591 6,264 1,077 3,217 3,256 Total impaired loans $ 20,211 $ 20,818 $ 2,375 $ 19,224 $ 19,209 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 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, 2016 2015 Average Recorded Investment Interest Income Average Recorded Investment Interest Income Impaired loans with allowance: (Dollars in thousands) Commercial real estate $ 10,356 $ 357 $ 12,060 $ 395 Commercial construction 1,494 43 1,765 71 Commercial and industrial 1,679 56 1,405 58 Residential construction 369 5 415 14 Residential mortgage 10,988 248 9,477 186 Consumer and other 28 — 51 — Total impaired loans with allowance $ 24,914 $ 709 $ 25,173 $ 724 Impaired loans with no allowance: Commercial real estate $ 13,887 $ 428 $ 18,477 $ 524 Commercial construction 1,820 562 2,111 59 Commercial and industrial 464 — 509 — Residential construction 68 — 118 33 Residential mortgage 6,041 42 10,262 47 Consumer and other 20 — 44 — Total impaired loans with no allowance $ 22,300 $ 1,032 $ 31,521 $ 663 For the years ended December 31, 2016 and 2015 , the amount of interest income recognized within the period that the loans were impaired was primarily related to loans modified as a troubled debt restructuring ("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, 2016 and 2015, respectively, the Company had $1.3 million and $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: Current 30-59 Days Past Due 60-89 Days Past Due Greater than 90 Days Past Due Non-Accrual Total Loans December 31, 2016 (Dollars in thousands) Originated: Commercial real estate $ 2,074,100 $ 573 $ 504 $ — $ 1,657 $ 2,076,834 Commercial construction 458,576 387 — — 435 459,398 Commercial and industrial 368,025 490 — — 772 369,287 Leases 29,529 — — — — 29,529 Residential construction 92,784 418 — — — 93,202 Residential mortgage 592,975 2,368 425 115 3,783 599,666 Consumer and other 17,644 102 25 — — 17,771 Total originated 3,633,633 4,338 954 115 6,647 3,645,687 Acquired: Commercial real estate 814,277 2,816 1,556 — 2,237 820,886 Commercial construction 102,727 294 90 — 710 103,821 Commercial and industrial 130,937 713 161 — 163 131,974 Residential construction 21,613 — — — — 21,613 Residential mortgage 714,386 5,473 1,036 — 4,879 725,774 Consumer and other 5,903 47 5 — — 5,955 Total acquired 1,789,843 9,343 2,848 — 7,989 1,810,023 Total loans $ 5,423,476 $ 13,681 $ 3,802 $ 115 $ 14,636 $ 5,455,710 Current 30-59 Days Past Due 60-89 Days Past Due Greater than 90 Days Past Due Non-Accrual Total Loans December 31, 2015 (Dollars in thousands) Originated: Commercial real estate $ 1,571,034 $ 800 $ 564 $ — $ 3,157 $ 1,575,555 Commercial construction 281,345 82 — — 164 281,591 Commercial and industrial 279,116 89 21 — 269 279,495 Leases 26,773 — — — — 26,773 Residential construction 59,631 — — — 306 59,937 Residential mortgage 480,251 1,714 203 — 2,727 484,895 Consumer and other 12,958 12 — — — 12,970 Total originated 2,711,108 2,697 788 — 6,623 2,721,216 Acquired: Commercial real estate 664,153 893 1,139 — 4,275 670,460 Commercial construction 82,994 10 20 — 394 83,418 Commercial and industrial 139,130 69 250 3 169 139,621 Residential construction 15,891 — 16 — 177 16,084 Residential mortgage 552,348 3,266 1,010 — 6,939 563,563 Consumer and other 5,295 77 5 — 132 5,509 Total acquired 1,459,811 4,315 2,440 3 12,086 1,478,655 Total loans $ 4,170,919 $ 7,012 $ 3,228 $ 3 $ 18,709 $ 4,199,871 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, 2016 (Dollars in thousands) Originated: Commercial real estate $ 2,004,386 $ 55,028 $ 17,420 $ — $ — $ 2,076,834 Commercial construction 451,314 5,354 2,730 — — 459,398 Commercial and industrial 363,028 3,209 3,050 — — 369,287 Leases 29,486 43 — — — 29,529 Residential construction 92,831 371 — — — 93,202 Residential mortgage 568,875 21,669 9,122 — — 599,666 Consumer and other 17,426 336 9 — — 17,771 Total originated 3,527,346 86,010 32,331 — — 3,645,687 Acquired: Commercial real estate 755,908 31,145 33,629 204 — 820,886 Commercial construction 87,857 6,867 8,994 103 — 103,821 Commercial and industrial 122,637 3,170 6,167 — — 131,974 Residential construction 20,912 — 701 — — 21,613 Residential mortgage 670,683 37,181 17,747 163 — 725,774 Consumer and other 5,875 80 — — — 5,955 Total acquired 1,663,872 78,443 67,238 470 — 1,810,023 Total loans $ 5,191,218 $ 164,453 $ 99,569 $ 470 $ — $ 5,455,710 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 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, 2016 (Dollars in thousands) Commercial real estate $ 2,048 $ 173 $ 2,221 $ 125 Commercial construction 765 — 765 — Commercial and industrial 379 — 379 37 Residential mortgage 4,492 — 4,492 286 Consumer and other 9 — 9 1 Total modifications $ 7,693 $ 173 $ 7,866 $ 449 Number of contracts 25 4 29 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 At December 31, 2016 and 2015, respectively, 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, 2016 2015 Term Payment Interest Only Total Term Payment Interest Only Combination Total (Dollars in thousands) Commercial real estate $ — $ 314 $ 261 $ 575 $ 1,820 $ — $ 358 $ 863 $ 3,041 Commercial and industrial 433 — — 433 93 419 231 — 743 Residential mortgage — — 271 271 149 — — — 149 Total modifications $ 433 $ 314 $ 532 $ 1,279 $ 2,062 $ 419 $ 589 $ 863 $ 3,933 The amount of loans modified and classified as TDRs in the previous twelve months that defaulted during the years ended December 31, 2016 and 2015, respectively, were immaterial. The Company defines payment default as movement of the restructuring to nonaccrual status, foreclosure or charge-off, whichever occurs first. 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, 2016 2015 2014 (Dollars in thousands) Loans held for sale at period end $ 43,731 $ 39,470 $ 37,280 Proceeds from sales of mortgage loans originated for sale 359,613 367,959 292,845 Gain on sales of mortgage loans originated for sale 10,506 9,825 8,037 |