Loans | Note 7 - Loans The following table presents the composition of the Company’s loan portfolio as of the dates indicated (dollars in thousands): June 30, December 31, Commercial and Industrial Loans: $ 505,931 $ 528,517 Loans Secured by Real Estate: Owner-Occupied Nonresidential Properties 380,867 339,309 Other Nonresidential Properties 520,568 481,517 Construction, Land Development and Other Land 76,318 72,223 1-4 Family Residential Properties 136,142 121,985 Multifamily Residential Properties 54,789 52,813 Total Loans Secured by Real Estate 1,168,684 1,067,847 Other Loans: 38,389 28,359 Total Loans $ 1,713,004 $ 1,624,723 The following table is a breakout of the Company’s loan portfolio stratified by the industry concentration of the borrower by their respective NAICS code as of the dates indicated (dollars in thousands): June 30, December 31, Real Estate $ 813,110 $ 744,663 Manufacturing 161,993 161,233 Wholesale 121,359 124,336 Construction 132,071 113,763 Finance 97,897 96,074 Hotel/Lodging 101,335 88,269 Professional Services 55,671 64,215 Other Services 41,439 45,781 Healthcare 47,277 43,917 Retail 37,439 35,503 Administrative Management 26,080 28,016 Restaurant/Food Service 27,808 24,525 Transportation 17,975 18,158 Information 10,126 15,457 Education 9,307 10,253 Entertainment 6,768 8,284 Other 5,349 2,276 Total $ 1,713,004 $ 1,624,723 SBA Loans As part of the acquisition of PC Bancorp, the Company acquired loans that were originated under the guidelines of the Small Business Administration (“SBA”) program. The total portfolio of the SBA contractual loan balances being serviced by the Company at June 30, 2015 was $105 million, of which $75 million has been sold. Of the $30 million remaining on the Company’s books, $24 million is un-guaranteed and $6 million is guaranteed by the SBA. For SBA guaranteed loans, a secondary market exists to purchase the guaranteed portion of these loans with the Company continuing to “service” the entire loan. The secondary market for guaranteed loans is comprised of investors seeking long term assets with yields that adapt to the prevailing interest rates. These investors are typically financial institutions, insurance companies, pension funds, and other types of investors specializing in the acquisition of this product. When a decision to sell the guaranteed portion of an SBA loan is made by the Company, bids are solicited from secondary market investors and the loan is normally sold to the highest bidder. At June 30, 2015, there were no loans classified as held for sale. At June 30, 2015, the Company does not have any unsold SBA 7a loans. Allowance for Loan Loss The following table is a summary of the activity for the allowance for loan loss for the periods indicated (dollars in thousands): Three Months Ended Six Months Ended 2015 2014 2015 2014 Allowance for loan loss at beginning of period $ 13,247 $ 10,823 $ 12,610 $ 10,603 Provision for loan losses 683 408 2,126 483 Net (charge-offs) recoveries: Charge-offs (1 ) (157 ) (891 ) (157 ) Recoveries 195 210 279 355 Net (charge-offs) recoveries 194 53 (612 ) 198 Allowance for loan loss at end of period $ 14,124 $ 11,284 $ 14,124 $ 11,284 Net (charge-offs) recoveries to average loans 0.01 % 0.00 % (0.04 )% 0.02 % June 30, December 30, Allowance for loan loss to total loans 0.82 % 0.78 % Allowance for loan loss to total loans accounted for at historical cost, which excludes loans and the related allowance for loans acquired through acquisition 1.33 % 1.39 % The allowance for losses on unfunded loan commitments to extend credit is primarily related to commercial lines of credit and construction loans. The amount of unfunded loan commitments at June 30, 2015 and December 31, 2014 was $756 million and $720 million, respectively. The inherent risk associated with a loan is evaluated at the same time the credit is extended. However, the allowance held for the commitments is reported in other liabilities within the accompanying balance sheets and not as part of the allowance for loan loss in the above table. The allowance for losses on unfunded loan commitments to extend credit was $558,000 and $471,000 at June 30, 2015 and December 31, 2014, respectively. The following tables present, by portfolio segment, the changes in the allowance for loan loss and the recorded investment in loans as of the dates and for the periods indicated (dollars in thousands): Commercial Construction, Other Land Commercial Other Real Estate Other Total Three Months Ended June 30, 2015 Allowance for loan loss – Beginning balance $ 5,737 $ 1,763 $ 5,439 $ 308 $ 13,247 Provision for loan losses 314 (156 ) 359 166 683 Net (charge-offs) recoveries: Charge-offs (1 ) — — — (1 ) Recoveries 194 — 1 — 195 Net recoveries 193 — 1 — 194 Ending balance $ 6,244 $ 1,607 $ 5,799 $ 474 $ 14,124 Three Months Ended June 30, 2014 Allowance for loan loss – Beginning balance $ 5,278 $ 1,334 $ 4,161 $ 50 $ 10,823 Provision for loan losses 91 88 228 1 408 Net (charge-offs) recoveries: Charge-offs (93 ) — (64 ) — (157 ) Recoveries 109 — 101 — 210 Net recoveries 16 — 37 — 53 Ending balance $ 5,385 $ 1,422 $ 4,426 $ 51 $ 11,284 Commercial Construction, Other Land Commercial Other Real Estate Other Total Six Months Ended June 30, 2015 Allowance for loan loss – Beginning balance $ 5,864 $ 1,684 $ 4,802 $ 260 $ 12,610 Provision for loan losses 995 (77 ) 994 214 2,126 Net (charge-offs) recoveries: Charge-offs (891 ) — — — (891 ) Recoveries 276 — 3 — 279 Net (charge-offs) recoveries (615 ) — 3 — (612 ) Ending balance $ 6,244 $ 1,607 $ 5,799 $ 474 $ 14,124 Six Months Ended June 30, 2014 Allowance for loan loss – Beginning balance $ 5,534 $ 1,120 $ 3,886 $ 63 $ 10,603 Provision for loan losses (308 ) 302 501 (12 ) 483 Net (charge-offs) recoveries: Charge-offs (93 ) — (64 ) — (157 ) Recoveries 252 — 103 — 355 Net recoveries 159 — 39 — 198 Ending balance $ 5,385 $ 1,422 $ 4,426 $ 51 $ 11,284 The following tables present both the allowance for loan loss and the associated loan balance classified by loan portfolio segment and by credit evaluation methodology (dollars in thousands): Commercial Industrial Construction, Other Land Commercial Other Real Estate Other Total June 30, 2015 Allowance for loan loss: Individually evaluated for impairment $ 624 $ — $ 52 $ — $ 676 Collectively evaluated for impairment 5,620 1,607 5,747 474 13,448 Purchased credit impaired (loans acquired with deteriorated credit quality) — — — — — Total Allowance for Loan Loss $ 6,244 $ 1,607 $ 5,799 $ 474 $ 14,124 Loans receivable: Individually evaluated for impairment $ 3,470 $ — $ 722 $ — $ 4,192 Collectively evaluated for impairment 502,058 76,318 1,090,110 38,389 1,706,875 Purchased credit impaired (loans acquired with deteriorated credit quality) 403 — 1,534 — 1,937 Total Loans Receivable $ 505,931 $ 76,318 $ 1,092,366 $ 38,389 $ 1,713,004 Commercial Industrial Construction, Other Land Commercial Other Real Estate Other Total December 31, 2014 Allowance for loan loss: Individually evaluated for impairment $ 222 $ — $ — $ — $ 222 Collectively evaluated for impairment 5,642 1,684 4,802 260 12,388 Purchased credit impaired (loans acquired with deteriorated credit quality) — — — — — Total Allowance for Loan Loss $ 5,864 $ 1,684 $ 4,802 $ 260 $ 12,610 Loans receivable: Individually evaluated for impairment $ 1,914 $ — $ 737 $ — $ 2,651 Collectively evaluated for impairment 525,910 72,223 993,195 28,359 1,619,687 Purchased credit impaired (loans acquired with deteriorated credit quality) 693 — 1,692 — 2,385 Total Loans Receivable $ 528,517 $ 72,223 $ 995,624 $ 28,359 $ 1,624,723 Credit Quality of Loans The Company utilizes an internal loan classification system as a means of reporting problem and potential problem loans. Under the Company’s loan risk rating system, loans are classified as “Pass,” with problem and potential problem loans as “Special Mention,” “Substandard,” “Doubtful” and “Loss”. Individual loan risk ratings are updated continuously or at any time the situation warrants. In addition, management regularly reviews problem loans to determine whether any loan requires a classification change, in accordance with the Company’s policy and applicable regulations. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The internal loan classification risk grading system is based on experiences with similarly graded loans. The Company’s internally assigned grades are as follows: • Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. There are several different levels of Pass rated credits, including “Watch” which is considered a transitory grade for pass rated loans that require greater monitoring. Loans not meeting the criteria of special mention, substandard, doubtful or loss that have been analyzed individually as part of the above described process are considered to be pass-rated loans. • Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected. Special Mention loans do not currently expose the Company to sufficient risk to warrant classification as a Substandard, Doubtful or Loss classification, but possess weaknesses that deserve management’s close attention. • Substandard – loans that have a well-defined weakness based on objective evidence and can be characterized by the distinct possibility that the Company 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 present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. • Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted. The following tables present the risk category of loans by class of loans based on the most recent internal loan classification as of the dates indicated (dollars in thousands): Commercial and Industrial Construction, Land Development and Other Land Commercial and Other Real Estate Other Total June 30, 2015 Pass $ 481,762 $ 76,318 $ 1,062,336 $ 38,338 $ 1,658,754 Special Mention 10,495 — 11,888 — 22,383 Substandard 13,674 — 18,142 51 31,867 Doubtful — — — — — Total $ 505,931 $ 76,318 $ 1,092,366 $ 38,389 $ 1,713,004 December 31, 2014 Pass $ 502,624 $ 72,223 $ 977,525 $ 28,358 $ 1,580,730 Special Mention 8,738 — 4,878 — 13,616 Substandard 17,155 — 13,221 1 30,377 Doubtful — — — — — Total $ 528,517 $ 72,223 $ 995,624 $ 28,359 $ 1,624,723 Age Analysis of Past Due and Non-Accrual Loans The following tables present an aging analysis of the recorded investment of past due loans and non-accrual loans as of the dates indicated (dollars in thousands): 31-60 Days Past Due 61-90 Days Past Due Greater 90 Days Past Due and Total Past Due and Total Non Current Total Loans June 30, 2015 Commercial and Industrial $ — $ — $ — $ — $ 3,870 $ 502,061 $ 505,931 Construction, Land Development and Other Land — — — — — 76,318 76,318 Commercial and Other Real Estate — — — — 1,112 1,091,254 1,092,366 Other — — — — — 38,389 38,389 Total $ — $ — $ — $ — $ 4,982 $ 1,708,022 $ 1,713,004 31-60 Days Past Due 61-90 Days Past Due Greater 90 Days Past Due and Total Past Due and Total Non Current Total Loans December 31, 2014 Commercial and Industrial $ 192 $ 233 $ — $ 425 $ 2,604 $ 525,488 $ 528,517 Construction, Land Development and Other Land — — — — — 72,223 72,223 Commercial and Other Real Estate 354 — — 354 1,305 993,965 995,624 Other — — — — — 28,359 28,359 Total $ 546 $ 233 $ — $ 779 $ 3,909 $ 1,620,035 $ 1,624,723 Impaired Loans Impaired loans are evaluated by comparing the fair value of the collateral, if the loan is collateral dependent, and the present value of the expected future cash flows discounted at the loan’s effective interest rate, if the loan is not collateral dependent. A valuation allowance is established for an impaired loan when the fair value of the loan is less than the recorded investment. In certain cases, portions of impaired loans are charged-off to realizable value instead of establishing a valuation allowance and are included, when applicable, in the table below as impaired loans “with no specific allowance recorded.” The valuation allowance disclosed below is included in the allowance for loan loss reported in the consolidated balance sheets as of June 30, 2015 and December 31, 2014. The following tables present, by loan category, the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable, for the dates and periods indicated (dollars in thousands). This table excludes purchased credit impaired loans (loans acquired in acquisitions with deteriorated credit quality) of $1.9 million and $2.4 million at June 30, 2015 and December 31, 2014, respectively. June 30, 2015 December 31, 2014 Recorded Unpaid Related Recorded Unpaid Related With no specific allowance recorded: Commercial and Industrial $ 2,053 $ 3,550 $ — $ 520 $ 609 $ — Commercial and Other Real Estate 103 107 — 737 739 — With a specific allowance recorded: Commercial and Industrial 1,417 1,569 624 1,394 1,546 222 Commercial and Other Real Estate 619 623 52 — — — Total Commercial and Industrial 3,470 5,119 624 1,914 2,155 222 Commercial and Other Real Estate 722 730 52 737 739 — Total $ 4,192 $ 5,849 $ 676 $ 2,651 $ 2,894 $ 222 Three Months Ended June 30, Six Months Ended June 30, 2015 2014 2015 2014 Average Interest Average Interest Average Interest Average Interest With no specific allowance recorded: Commercial and Industrial $ 2,053 $ — $ 1,008 $ 34 $ 1,562 $ — $ 1,027 $ 34 Commercial and Other Real Estate 103 — 2,981 — 106 — 3,325 — With a specific allowance recorded: Commercial and Industrial 1,357 — 1,535 — 1,342 — 1,553 — Commercial and Other Real Estate 619 — — — 619 — — — Total: Commercial and Industrial 3,410 — 2,543 34 2,904 — 2,580 34 Commercial and Other Real Estate 722 — 2,981 — 725 — 3,325 — Total $ 4,132 $ — $ 5,524 $ 34 $ 3,629 $ — $ 5,905 $ 34 The following is a summary of additional information pertaining to impaired loans for the periods indicated (dollars in thousands): Three Months Ended June 30, Six Months Ended June 30, 2015 2014 2015 2014 Interest foregone on impaired loans $ 88 $ 103 $ 138 $ 274 Cash collections applied to reduce principal balance $ 19 $ 2,763 $ 19 $ 2,871 Interest income recognized on cash collections $ — $ 34 $ — $ 34 Troubled Debt Restructuring The Company’s loan portfolio contains certain loans that have been modified in a Troubled Debt Restructuring (“TDR”), where economic concessions have been granted to borrowers experiencing financial difficulties. Loans are restructured in an effort to maximize collections. Economic concessions can include: reductions to the interest rate, payment extensions, forgiveness of principal or other actions. The modification process includes evaluation of impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the loan collateral. In these cases, management uses the current fair value of the collateral, less selling costs, to evaluate the loan for impairment. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs and unamortized premium or discount), impairment is recognized through a specific allowance or a charge-off. The following tables include the recorded investment and unpaid principal balances for troubled debt restructured loans for the periods ending June 30, 2015 and December 31, 2014 (dollars in thousands). These tables include two TDR loans that were purchased credit impaired. As of June 30, 2015, these loans had a recorded investment of $174,000 and unpaid principal balances of $357,000. As of and for the period ended June 30, 2015 Recorded Unpaid Interest Income Recognized Commercial and Industrial $ 474 $ 678 $ — Commercial and Other Real Estate 103 107 — Total $ 577 $ 785 $ — As of and for the year ended December 31, 2014 Recorded Unpaid Interest Income Recognized Commercial and Industrial $ 530 $ 719 $ — Commercial and Other Real Estate 114 115 — Total $ 644 $ 834 $ — There was no interest income recognized for the above troubled debt restructured loans during the three months and six months ended June 30, 2015 or June 30, 2014. There were no loans modified or restructured during the three months and six months ended June 30, 2015 or June 30, 2014. Loans are restructured in an effort to maximize collections. Impairment analyses are performed on the Company’s troubled debt restructured loans in conjunction with the normal allowance for loan loss process. The Company’s troubled debt restructured loans are analyzed to ensure adequate cash flow or collateral supports the outstanding loan balance. There have been no payment defaults in six months ended June 30, 2015 or June 30, 2014 subsequent to modification on troubled debt restructured loans that have been modified within the last twelve months. Loans Acquired Through Acquisition The following table reflects the accretable net discount for loans acquired through acquisition, for the periods indicated (dollars in thousands): Three Months Ended Six Months Ended 2015 2014 2015 2014 Balance, beginning of period $ 20,078 $ 7,350 $ 21,402 $ 7,912 Accretion, included in interest income (1,461 ) (889 ) (2,677 ) (1,451 ) Reclassifications to non-accretable yield (362 ) (49 ) (470 ) (49 ) Balance, end of period $ 18,255 $ 6,412 $ 18,255 $ 6,412 The above table reflects the fair value adjustment on the loans acquired from mergers that will be amortized to loan interest income based on the effective yield method over the remaining life of the loans. These amounts do not include the fair value adjustments on the purchased credit impaired loans acquired from mergers. Purchased Credit Impaired Loans Purchased Credit Impaired Loans (“PCI”) loans are acquired loans with evidence of deterioration of credit quality since origination and it is probable at the acquisition date, that the Company will not be able to collect all contractually required amounts. When the timing and/or amounts of expected cash flows on such loans are not reasonably estimable, no interest is accreted and the loan is reported as a non-accrual loan; otherwise, if the timing and amounts of expected cash flows for PCI loans are reasonably estimable, then interest is accreted and the loans are reported as accruing loans. The non-accretable difference represents the difference between the undiscounted contractual cash flows and the undiscounted expected cash flows, and also reflects the estimated credit losses in the acquired loan portfolio at the acquisition date and can fluctuate due to changes in expected cash flows during the life of the PCI loans. The following table reflects the outstanding balance and related carrying value of PCI loans as of the dates indicated (dollars in thousands): June 30, 2015 December 31, 2014 Unpaid Carrying Value Unpaid Carrying Value Commercial and Industrial $ 727 $ 403 $ 1,205 $ 693 Commercial and Other Real Estate 2,367 1,534 3,018 1,692 Other — — 62 — Total $ 3,094 $ 1,937 $ 4,285 $ 2,385 The following table reflects the activities in the accretable net discount for PCI loans for the period indicated (dollars in thousands): Three Months Ended Six Months Ended 2015 2014 2015 2014 Balance, beginning of period $ 305 $ 378 $ 324 $ 395 Accretion, included in interest income (19 ) (18 ) (38 ) (35 ) Reclassifications from non-accretable yield — — — — Balance, end of period $ 286 $ 360 $ 286 $ 360 |