ALLOWANCE FOR LOAN LOSSES | ALLOWANCE FOR LOAN LOSSES Our allowance for loan losses represents our estimate of probable loan losses inherent in the loan portfolio at a specific point in time. This estimate includes losses associated with specifically identified loans, as well as estimated probable credit losses inherent in the remainder of the loan portfolio. Additions are made to the allowance through both periodic provisions charged to income and recoveries of losses previously incurred. Reductions to the allowance occur as loans are charged off or when the credit history of any of the three loan portfolios improves . Management evaluates the adequacy of the allowance at least quarterly, and in doing so relies on various factors including, but not limited to, assessment of historical loss experience, delinquency and non-accrual trends, portfolio growth, underlying collateral coverage and current economic conditions. This evaluation is subjective and requires material estimates that may change over time. In addition, management evaluates the overall methodology for the allowance for loan losses on an annual basis. During the year ended December 31, 2015, management made enhancements to the look-back period and loss emergence period used in the allowance for loan losses calculation to account for changes in the Company’s portfolio and related historical loss experience. The calculation of the allowance for loan losses takes into consideration the inherent risk identified within each of the Company’s three primary loan portfolios, commercial and industrial, commercial real estate and private banking. In addition, management takes into account the historical loss experience of each loan portfolio, to ensure that the resultant allowance for loan losses is sufficient to cover probable losses inherent in such loan portfolios. Refer to Note 1 , Summary of Significant Accounting Policies , for more details on the Company’s allowance for loan losses policy. The following discusses key characteristics and risks within each primary loan portfolio: Middle-Market Banking: Commercial and Industrial Loans. This loan portfolio primarily includes loans made to service companies or manufacturers generally for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing, acquisitions and recapitalizations. Cash flow from the borrower’s operations is the primary source of repayment for these loans, except for certain commercial loans that are secured by cash and marketable securities. The industry of the borrower is an important indicator of risk, but there are also more specific risks depending on the condition of the local/regional economy. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. Any C&I loans collateralized by cash and marketable securities are treated the same as private banking loans for purposes of the allowance for loan loss calculation. In addition, shared national credit loans which also involve a private equity sponsor are combined as a homogeneous group and evaluated separately based on the historical loss trend of such loans. Middle-Market Banking: Commercial Real Estate Loans. This loan portfolio includes loans secured by commercial purpose real estate, including both owner occupied properties and investment properties for various purposes including office, retail, industrial, multifamily and hospitality. Individual project cash flows as well as global cash flows from the developer are the primary sources of repayment for these loans. Also included are commercial construction loans to finance the construction or renovation of structures as well as to finance the acquisition and development of raw land for various purposes. The increased level of risk of these loans is generally confined to the construction period. If there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The underlying purpose/collateral of the loans is an important indicator of risk for this loan portfolio. Additional risks exist and are dependent on several factors such as the condition of the local/regional economy, whether or not the project is owner occupied, and the type of project and the experience and resources of the developer. Private Banking Loans. Our private banking lending activities are conducted on a national basis. This loan portfolio primarily includes loans made to high-net-worth individuals, trusts and businesses that may be secured by cash, marketable securities, residential property or other financial assets, as well as unsecured loans and lines of credit. The primary sources of repayment for these loans are the income and/or assets of the borrower. The underlying collateral is the most important indicator of risk for this loan portfolio. The overall lower risk profile of this portfolio is driven by loans secured by cash and marketable securities, which was 87.8% and 81.2% of total private banking loans as of December 31, 2015 and 2014 , respectively. Management further assesses risk within each loan portfolio using key inherent risk differentiators. The components of the allowance for loan losses represent estimates based upon ASC Topic 450, Contingencies, and ASC Topic 310, Receivables. ASC Topic 450 applies to homogeneous loan pools such as consumer installment, residential mortgages and consumer lines of credit, as well as commercial loans that are not individually evaluated for impairment under ASC Topic 310. Impaired loans are individually evaluated for impairment under ASC Topic 310. On a monthly basis, management monitors various credit quality indicators for both the commercial and consumer loan portfolios, including delinquency, non-performing status, changes in risk ratings, changes in the underlying performance of the borrowers and other relevant factors. On a daily basis, the Company prices and monitors the collateral of margin loans secured by cash and marketable securities within the private banking portfolio which further reduces the risk profile of that portfolio. Refer to Note 1 , Summary of Significant Accounting Policies , for the Company’s policy for determining past due status of loans. Management continually monitors the loan portfolio through its internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and, for our loans secured by marketable securities, the quality of the collateral. Loan risk ratings are reviewed on an ongoing basis according to internal policies. Loans within the pass rating are believed to have a lower risk of loss than loans risk rated as special mention, substandard and doubtful, which are believed to have an increasing risk of loss. The Company’s risk ratings are consistent with regulatory guidance and are as follows: Non-Rated – Loans to individuals and trusts are not individually risk rated, unless they are fully secured by liquid assets or cash, or have an exposure of $250,000 or greater and have certain actionable covenants, such as a liquidity covenant or a financial reporting covenant. In addition, commercial loans with an exposure of less than $500,000 are not required to be individually risk rated. Any loan, regardless of size, is risk rated if it is secured by marketable securities or if it becomes a criticized loan. The majority of the private banking loans that are not risk rated are residential mortgages and home equity loans. We monitor the performance of non-rated loans through ongoing reviews of payment delinquencies. These loans comprised 3.0% and 4.3% of loans held-for-investment, as of December 31, 2015 and 2014 , respectively. For loans that are not risk-rated, the most important indicators of risk are the existence of collateral, the type of collateral, and for consumer real estate loans, whether the Bank has a first or second lien position. Pass – The loan is currently performing in accordance with its contractual terms. Special Mention – A special mention loan has potential weaknesses that warrant management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects or in our credit position at some future date. Economic and market conditions, beyond the customer’s control, may in the future necessitate this classification. Substandard – A substandard loan is not adequately protected by the net worth and/or paying capacity of the obligor or by the collateral pledged, if any. Substandard loans have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful – A doubtful loan has all the weaknesses inherent in a loan categorized 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. The following tables present the recorded investment in loans by credit quality indicator: December 31, 2015 (Dollars in thousands) Commercial Commercial Private Total Non-rated $ 2,017 $ — $ 83,513 $ 85,530 Pass 583,544 858,396 1,259,300 2,701,240 Special mention 31,863 880 — 32,743 Substandard 15,835 2,912 2,051 20,798 Doubtful 973 — — 973 Loans held-for-investment $ 634,232 $ 862,188 $ 1,344,864 $ 2,841,284 December 31, 2014 (Dollars in thousands) Commercial Commercial Private Total Non-rated $ 129 $ — $ 104,228 $ 104,357 Pass 617,396 729,066 881,235 2,227,697 Special mention 26,105 693 1,667 28,465 Substandard 28,916 3,498 2,172 34,586 Doubtful 4,947 — — 4,947 Loans held-for-investment $ 677,493 $ 733,257 $ 989,302 $ 2,400,052 Changes in the allowance for loan losses were as follows for the years ended December 31, 2015 , 2014 and 2013 : Year Ended December 31, 2015 (Dollars in thousands) Commercial Commercial Private Total Balance, beginning of period $ 13,501 $ 4,755 $ 2,017 $ 20,273 Provision (credit) for loan losses (112 ) 589 (464 ) 13 Charge-offs (3,353 ) — — (3,353 ) Recoveries 1,028 — 13 1,041 Balance, end of period $ 11,064 $ 5,344 $ 1,566 $ 17,974 Year Ended December 31, 2014 (Dollars in thousands) Commercial Commercial Private Total Balance, beginning of period $ 11,881 $ 5,104 $ 2,011 $ 18,996 Provision (credit) for loan losses 10,596 (349 ) (88 ) 10,159 Charge-offs (9,521 ) — — (9,521 ) Recoveries 545 — 94 639 Balance, end of period $ 13,501 $ 4,755 $ 2,017 $ 20,273 Year Ended December 31, 2013 (Dollars in thousands) Commercial Commercial Private Total Balance, beginning of period $ 9,950 $ 5,120 $ 2,804 $ 17,874 Provision (credit) for loan losses 7,325 1,642 (780 ) 8,187 Charge-offs (5,508 ) (1,936 ) (13 ) (7,457 ) Recoveries 114 278 — 392 Balance, end of period $ 11,881 $ 5,104 $ 2,011 $ 18,996 Charge-offs of $3.4 million for the year ended December 31, 2015 , included one C&I loan, which were partially offset by recoveries of $1.0 million on four C&I loans and one private banking loan. Charge-offs of $9.5 million for the year ended December 31, 2014 , included six C&I loans, which were partially offset by recoveries of $639,000 on three C&I loans and one private banking loan. Charge-offs of $7.5 million for the year ended December 31, 2013 , included three C&I loans, one CRE loan and one private banking loan, which were partially offset by recoveries of $392,000 on three C&I loans and three CRE loans. The following tables present the age analysis of past due loans segregated by class of loan: December 31, 2015 (Dollars in thousands) 30-59 Days 60-89 Days Loans Past Total Current Total Commercial and industrial $ — $ — $ 976 $ 976 $ 633,256 $ 634,232 Commercial real estate — — 2,912 2,912 859,276 862,188 Private banking — — 1,431 1,431 1,343,433 1,344,864 Loans held-for-investment $ — $ — $ 5,319 $ 5,319 $ 2,835,965 $ 2,841,284 December 31, 2014 (Dollars in thousands) 30-59 Days 60-89 Days Loans Past Total Current Total Commercial and industrial $ 547 $ 524 $ 263 $ 1,334 $ 676,159 $ 677,493 Commercial real estate — — 3,498 3,498 729,759 733,257 Private banking — 1,775 109 1,884 987,418 989,302 Loans held-for-investment $ 547 $ 2,299 $ 3,870 $ 6,716 $ 2,393,336 $ 2,400,052 Non-Performing and Impaired Loans Management monitors the delinquency status of the loan portfolio on a monthly basis. Loans were considered non-performing when interest and principal were 90 days or more past due or management has determined that it is probable the borrower is unable to meet payments as they become due. The risk of loss is generally highest for non-performing loans. Management determines loans to be impaired when, based upon current information and events, it is probable that the loan will not be repaid according to the original contractual terms of the loan agreement, including both principal and interest, or if a loan is designated as a TDR. Refer to Note 1 , Summary of Significant Accounting Policies , for the Company’s policy on evaluating loans for impairment and interest income. The following tables present the Company’s investment in loans considered to be impaired and related information on those impaired loans: As of and for the Year Ended December 31, 2015 (Dollars in thousands) Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With a related allowance recorded: Commercial and industrial $ 11,797 $ 19,204 $ 3,800 $ 15,331 $ — Commercial real estate — — — — — Private banking 745 864 745 824 — Total with a related allowance recorded 12,542 20,068 4,545 16,155 — Without a related allowance recorded: Commercial and industrial 513 1,789 — 838 29 Commercial real estate 2,912 9,067 — 3,108 — Private banking 1,203 1,448 — 1,202 — Total without a related allowance recorded 4,628 12,304 — 5,148 29 Total: Commercial and industrial 12,310 20,993 3,800 16,169 29 Commercial real estate 2,912 9,067 — 3,108 — Private banking 1,948 2,312 745 2,026 — Total $ 17,170 $ 32,372 $ 4,545 $ 21,303 $ 29 As of and for the Year Ended December 31, 2014 (Dollars in thousands) Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With a related allowance recorded: Commercial and industrial $ 24,402 $ 34,459 $ 4,902 $ 27,014 $ — Commercial real estate — — — — — Private banking 681 767 681 746 — Total with a related allowance recorded 25,083 35,226 5,583 27,760 — Without a related allowance recorded: Commercial and industrial 791 2,013 — 953 27 Commercial real estate 3,498 9,705 — 3,498 — Private banking 1,388 1,632 — 1,444 — Total without a related allowance recorded 5,677 13,350 — 5,895 27 Total: Commercial and industrial 25,193 36,472 4,902 27,967 27 Commercial real estate 3,498 9,705 — 3,498 — Private banking 2,069 2,399 681 2,190 — Total $ 30,760 $ 48,576 $ 5,583 $ 33,655 $ 27 As of and for the Year Ended December 31, 2013 (Dollars in thousands) Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With a related allowance recorded: Commercial and industrial $ 15,157 $ 23,126 $ 4,658 $ 13,261 $ — Commercial real estate — — — — — Private banking 814 869 814 874 — Total with a related allowance recorded 15,971 23,995 5,472 14,135 — Without a related allowance recorded: Commercial and industrial 1,046 2,264 — 1,473 6 Commercial real estate 3,498 9,705 — 4,170 — Private banking 305 295 — 25 — Total without a related allowance recorded 4,849 12,264 — 5,668 6 Total: Commercial and industrial 16,203 25,390 4,658 14,734 6 Commercial real estate 3,498 9,705 — 4,170 — Private banking 1,119 1,164 814 899 — Total $ 20,820 $ 36,259 $ 5,472 $ 19,803 $ 6 Impaired loans as of December 31, 2015 and December 31, 2014 , were $17.2 million and $30.8 million , respectively. There was no interest income recognized while these loans were on non-accrual status for the years ended December 31, 2015 , 2014 and 2013 . As of December 31, 2015 and December 31, 2014 , there were no loans 90 days or more past due and still accruing interest income. Impaired loans were evaluated using a discounted cash flow method or based on the fair value of the collateral less estimated selling costs. Based on those evaluations, as of December 31, 2015 , there were specific reserves totaling $4.5 million , which were included in the $18.0 million allowance for loan losses. Also included in impaired loans were three C&I loans, one CRE loan and two private banking loans with a combined balance of $4.6 million as of December 31, 2015 , with no corresponding specific reserve since these loans had a net realizable value which management believes will be recovered from the borrower. As of December 31, 2014 , there were specific reserves totaling $5.6 million , which were included in the $20.3 million allowance for loan losses. Also included in impaired loans were two C&I loans, two CRE loans and three private banking loans with a combined balance of $5.7 million as of December 31, 2014 , with no corresponding specific reserve since these loans had a net realizable value which management believes will be recovered from the borrower. The following tables present the allowance for loan losses and recorded investment in loans by class: December 31, 2015 (Dollars in thousands) Commercial Commercial Private Total Allowance for loan losses: Individually evaluated for impairment $ 3,800 $ — $ 745 $ 4,545 Collectively evaluated for impairment 7,264 5,344 821 13,429 Total allowance for loan losses $ 11,064 $ 5,344 $ 1,566 $ 17,974 Loans held-for-investment: Individually evaluated for impairment $ 12,310 $ 2,912 $ 1,948 $ 17,170 Collectively evaluated for impairment 621,922 859,276 1,342,916 2,824,114 Loans held-for-investment $ 634,232 $ 862,188 $ 1,344,864 $ 2,841,284 December 31, 2014 (Dollars in thousands) Commercial Commercial Private Total Allowance for loan losses: Individually evaluated for impairment $ 4,902 $ — $ 681 $ 5,583 Collectively evaluated for impairment 8,599 4,755 1,336 14,690 Total allowance for loan losses $ 13,501 $ 4,755 $ 2,017 $ 20,273 Loans held-for-investment: Individually evaluated for impairment $ 25,193 $ 3,498 $ 2,069 $ 30,760 Collectively evaluated for impairment 652,300 729,759 987,233 2,369,292 Loans held-for-investment $ 677,493 $ 733,257 $ 989,302 $ 2,400,052 Troubled Debt Restructuring The following table provides additional information on the Company’s loans designated as troubled debt restructurings: (Dollars in thousands) December 31, December 31, Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring: Accruing interest $ 510 $ 528 Non-accrual 12,894 14,107 Total troubled debt restructurings $ 13,404 $ 14,635 Of the non-accrual loans as of December 31, 2015 , five C&I loans and one residential mortgage loan were designated by the Company as TDRs. There was also one C&I loan that was still accruing interest and designated by the Company as a performing TDR as of December 31, 2015 . The aggregate recorded investment of these loans was $13.4 million . There were unused commitments of $1.7 million on these loans as of December 31, 2015 , of which $39,000 was related to an accruing TDR. Of the non-accrual loans as of December 31, 2014 , three C&I loans, one CRE loan and two residential mortgage loans were designated by the Company as TDRs. There was also one C&I loan that was still accruing interest and designated by the Company as a performing TDR as of December 31, 2014 . The aggregate recorded investment of these loans was $14.6 million . There were unused commitments of $175,000 on these loans as of December 31, 2014 , of which $54,000 was related to an accruing TDR. The modifications made to restructured loans typically consist of an extension or reduction of the payment terms, or the deferral of principal payments. There was one loan for $973,000 that was modified as a TDR within twelve months of the corresponding balance sheet date with a payment default during the year ended December 31, 2015 . This loan was already on non-accrual status and adequately reserved as of December 31, 2015 . There were no payment defaults, during the years ended December 31, 2014 and 2013 , for loans modified as TDRs within twelve months of the corresponding balance sheet dates. The financial effects of our modifications made during the years ended December 31, 2015 , 2014 and 2013 , were as follows: Year Ended December 31, 2015 (Dollars in thousands) Count Recorded Investment at the time of Modification Current Recorded Investment Allowance for Loan Losses at the time of Modification Current Allowance for Loan Losses Commercial and industrial: Change in interest terms 1 $ 4,064 $ — $ 400 $ — Extended term and deferred principal 1 433 — 433 — Deferred principal 2 6,849 973 1,500 172 Total 4 $ 11,346 $ 973 $ 2,333 $ 172 Year Ended December 31, 2014 (Dollars in thousands) Count Recorded Investment at the time of Modification Current Recorded Investment Allowance for Loan Losses at the time of Modification Current Allowance for Loan Losses Commercial and industrial: Extended term, advanced additional funds, forgave principal 1 $ 5,218 $ 4,620 $ 1,968 $ 1,120 Private Banking: Extended term, reduced interest rate 1 1,266 1,094 100 — Total 2 $ 6,484 $ 5,714 $ 2,068 $ 1,120 Year Ended December 31, 2013 (Dollars in thousands) Count Recorded Investment at the time of Modification Current Recorded Investment Allowance for Loan Losses at the time of Modification Current Allowance for Loan Losses Commercial and industrial: Extended term 1 $ 2,691 $ 2,347 $ 1,100 $ 1,100 Advanced additional funds 2 6,957 8,120 2,000 1,357 Private Banking: Forgave principal 1 210 197 — — Total 4 $ 9,858 $ 10,664 $ 3,100 $ 2,457 Other Real Estate Owned During the year ended December 31, 2015 , we acquired a property related to an impaired loan for $360,000 based on the appraised value, less estimated selling costs. For the years ended December 31, 2015 and December 31, 2014 , the balance of the other real estate owned portfolio was $1.7 million and $1.4 million , respectively. There were two residential mortgage loans totaling $1.2 million that were in the process of foreclosure as of December 31, 2015 , and no residential mortgage loans in the process of foreclosure as of December 31, 2014 . |