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 recorded in the consolidated statements of 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 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. 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: private banking, commercial and industrial, and commercial real estate. In addition, management takes into account the historical loss experience of each loan portfolio, to ensure that the 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: 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 are typically secured by cash, marketable securities or cash value life insurance. This portfolio also has some loans that are secured by residential real estate or other financial assets, lines of credit and unsecured loans. 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, marketable securities or cash value life insurance, which were 95.7% and 94.6% of total private banking loans as of June 30, 2018 and December 31, 2017 , respectively. Middle-Market Banking: Commercial and Industrial Loans This loan portfolio primarily includes loans made to service companies or manufacturers generally for the purposes of financing production, operating capacity, accounts receivable, inventory, equipment, acquisitions and recapitalizations. Cash flow from the borrower’s operations is the primary source of repayment for these loans. The borrower’s industry and local and regional economic conditions are important indicators of risk for this loan portfolio. Collateral for these types of loans at times does not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. C&I loans collateralized by marketable securities are treated the same as private banking loans for purposes of the allowance for loan loss calculation. 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, industrial, multifamily, retail, hospitality, healthcare and self-storage. The primary source of repayment for commercial real estate loans secured by owner-occupied properties is cash flow from the borrower’s operations. Individual project cash flows, global cash flows and liquidity from the developer, or the sale of the property are the primary sources of repayment for commercial real estate loans secured by investment properties. 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 for 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 and collateral of the loans are important indicators of risk for this loan portfolio. Additional risks exist and are dependent on several factors such as the condition of the local and regional economies, whether or not the project is owner-occupied, the type of project, and the experience and resources of the developer. On a monthly basis, management monitors various credit quality indicators for the loan portfolio, 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 monitors the collateral of loans secured by cash, marketable securities or cash value life insurance 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. Loan risk ratings are assigned based upon the creditworthiness of the borrower and the quality of the collateral for loans secured by marketable securities. 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 that are risk rated as special mention, substandard and doubtful, which are believed to have an increasing risk of loss. Our internal risk ratings are consistent with regulatory guidance. Management also monitors the loan portfolio through a formal periodic review process. All non-pass rated loans are reviewed monthly and higher risk-rated loans within the pass category are reviewed three times a year. The Company’s risk ratings are consistent with regulatory guidance and are as follows: 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: June 30, 2018 (Dollars in thousands) Private Commercial Commercial Total Pass $ 2,487,864 $ 714,039 $ 1,321,015 $ 4,522,918 Special mention — 22,506 1,850 24,356 Substandard 298 5,356 — 5,654 Loans held-for-investment $ 2,488,162 $ 741,901 $ 1,322,865 $ 4,552,928 December 31, 2017 (Dollars in thousands) Private Commercial Commercial Total Pass $ 2,265,369 $ 639,987 $ 1,248,972 $ 4,154,328 Special mention — 24,882 1,851 26,733 Substandard 368 2,815 — 3,183 Loans held-for-investment $ 2,265,737 $ 667,684 $ 1,250,823 $ 4,184,244 Changes in the allowance for loan losses were as follows for the three months ended June 30, 2018 and 2017 : Three Months Ended June 30, 2018 (Dollars in thousands) Private Commercial Commercial Total Balance, beginning of period $ 1,556 $ 8,466 $ 4,796 $ 14,818 Provision for loan losses 1 232 182 415 Charge-offs — — — — Recoveries — 88 — 88 Balance, end of period $ 1,557 $ 8,786 $ 4,978 $ 15,321 Three Months Ended June 30, 2017 (Dollars in thousands) Private Commercial Commercial Total Balance, beginning of period $ 1,421 $ 10,436 $ 4,328 $ 16,185 Provision for loan losses 27 198 291 516 Charge-offs — (1,000 ) — (1,000 ) Recoveries — 267 — 267 Balance, end of period $ 1,448 $ 9,901 $ 4,619 $ 15,968 Changes in the allowance for loan losses were as follows for the six months ended June 30, 2018 and 2017 : Six Months Ended June 30, 2018 (Dollars in thousands) Private Commercial Commercial Total Balance, beginning of period $ 1,577 $ 8,043 $ 4,797 $ 14,417 Provision (credit) for loan losses (20 ) 449 181 610 Charge-offs — — — — Recoveries — 294 — 294 Balance, end of period $ 1,557 $ 8,786 $ 4,978 $ 15,321 Six Months Ended June 30, 2017 (Dollars in thousands) Private Commercial Commercial Total Balance, beginning of period $ 1,424 $ 12,326 $ 5,012 $ 18,762 Provision (credit) for loan losses 24 1,128 (393 ) 759 Charge-offs — (3,889 ) — (3,889 ) Recoveries — 336 — 336 Balance, end of period $ 1,448 $ 9,901 $ 4,619 $ 15,968 The following tables present the age analysis of past due loans segregated by class of loan: June 30, 2018 (Dollars in thousands) 30-59 Days Past Due 60-89 Days Past Due Loans Past Due 90 Days or More Total Past Due Current Total Private banking $ 280 $ 90 $ — $ 370 $ 2,487,792 $ 2,488,162 Commercial and industrial — — 2,139 2,139 739,762 741,901 Commercial real estate — — — — 1,322,865 1,322,865 Loans held-for-investment $ 280 $ 90 $ 2,139 $ 2,509 $ 4,550,419 $ 4,552,928 December 31, 2017 (Dollars in thousands) 30-59 Days Past Due 60-89 Days Past Due Loans Past Due 90 Days or More Total Past Due Current Total Private banking $ 1,266 $ — $ — $ 1,266 $ 2,264,471 $ 2,265,737 Commercial and industrial — — — — 667,684 667,684 Commercial real estate 1,849 — — 1,849 1,248,974 1,250,823 Loans held-for-investment $ 3,115 $ — $ — $ 3,115 $ 4,181,129 $ 4,184,244 Non-Performing and Impaired Loans Management monitors the delinquency status of the loan portfolio on a monthly basis. Loans are 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 Six Months Ended June 30, 2018 (Dollars in thousands) Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With a related allowance recorded: Private banking $ 298 $ 477 $ 298 $ 328 $ — Commercial and industrial 2,139 2,485 2,139 2,139 — Commercial real estate — — — — — Total with a related allowance recorded 2,437 2,962 2,437 2,467 — Without a related allowance recorded: Private banking — — — — — Commercial and industrial 3,217 5,072 — 3,321 112 Commercial real estate — — — — — Total without a related allowance recorded 3,217 5,072 — 3,321 112 Total: Private banking 298 477 298 328 — Commercial and industrial 5,356 7,557 2,139 5,460 112 Commercial real estate — — — — — Total $ 5,654 $ 8,034 $ 2,437 $ 5,788 $ 112 As of and for the Twelve Months Ended December 31, 2017 (Dollars in thousands) Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With a related allowance recorded: Private banking $ 368 $ 541 $ 368 $ 438 $ — Commercial and industrial 2,815 3,135 2,139 3,067 — Commercial real estate — — — — — Total with a related allowance recorded 3,183 3,676 2,507 3,505 — Without a related allowance recorded: Private banking — — — — — Commercial and industrial 3,371 5,330 — 4,224 146 Commercial real estate — — — — — Total without a related allowance recorded 3,371 5,330 — 4,224 146 Total: Private banking 368 541 368 438 — Commercial and industrial 6,186 8,465 2,139 7,291 146 Commercial real estate — — — — — Total $ 6,554 $ 9,006 $ 2,507 $ 7,729 $ 146 Impaired loans as of June 30, 2018 and December 31, 2017 , were $5.7 million and $6.6 million , respectively. There was no interest income recognized on impaired loans that were also on non-accrual status for the six months ended June 30, 2018 , and the twelve months ended December 31, 2017 . As of June 30, 2018 and December 31, 2017 , 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 there were specific reserves totaling $2.4 million and $2.5 million as of June 30, 2018 and December 31, 2017 . The following tables present the allowance for loan losses and recorded investment in loans by class: June 30, 2018 (Dollars in thousands) Private Commercial Commercial Total Allowance for loan losses: Individually evaluated for impairment $ 298 $ 2,139 $ — $ 2,437 Collectively evaluated for impairment 1,259 6,647 4,978 12,884 Total allowance for loan losses $ 1,557 $ 8,786 $ 4,978 $ 15,321 Loans held-for-investment: Individually evaluated for impairment $ 298 $ 5,356 $ — $ 5,654 Collectively evaluated for impairment 2,487,864 736,545 1,322,865 4,547,274 Loans held-for-investment $ 2,488,162 $ 741,901 $ 1,322,865 $ 4,552,928 December 31, 2017 (Dollars in thousands) Private Commercial Commercial Total Allowance for loan losses: Individually evaluated for impairment $ 368 $ 2,139 $ — $ 2,507 Collectively evaluated for impairment 1,209 5,904 4,797 11,910 Total allowance for loan losses $ 1,577 $ 8,043 $ 4,797 $ 14,417 Loans held-for-investment: Individually evaluated for impairment $ 368 $ 6,186 $ — $ 6,554 Collectively evaluated for impairment 2,265,369 661,498 1,250,823 4,177,690 Loans held-for-investment $ 2,265,737 $ 667,684 $ 1,250,823 $ 4,184,244 Troubled Debt Restructuring The following table provides additional information on the Company’s loans designated as troubled debt restructurings: (Dollars in thousands) June 30, December 31, Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring: Performing loans accruing interest $ 3,217 $ 3,371 Non-accrual loans 2,437 3,183 Total troubled debt restructurings $ 5,654 $ 6,554 There were unused commitments of $706,000 and $708,000 on loans designated as troubled debt restructurings as of June 30, 2018 and December 31, 2017 , respectively. The modifications made to restructured loans typically consist of an extension of the payment terms or the deferral of principal payments. There was a loan totaling $186,000 modified as a TDR within twelve months of the corresponding balance sheet date with a payment default during the six months ended June 30, 2018 , and no loans modified as a TDR within twelve months of the corresponding balance sheet date with a payment default during the six months ended June 30, 2017 . There were no loans newly designated as TDRs during six months ended June 30, 2018 and 2017 . Other Real Estate Owned As of June 30, 2018 and December 31, 2017 , the balance of the other real estate owned portfolio was $3.6 million and $3.6 million , respectively. There were no residential mortgage loans in the process of foreclosure as of June 30, 2018 . |