Loans | Note 7 - Loans The following table presents the composition of the Company’s loan portfolio as of the dates indicated (dollars in thousands): September 30, 2015 December 31, Commercial and Industrial Loans: $ 556,462 $ 528,517 Loans Secured by Real Estate: Owner-Occupied Nonresidential Properties 376,579 339,309 Other Nonresidential Properties 515,402 481,517 Construction, Land Development and Other Land 94,353 72,223 1-4 Family Residential Properties 125,635 121,985 Multifamily Residential Properties 65,275 52,813 Total Loans Secured by Real Estate 1,177,244 1,067,847 Other Loans: 37,641 28,359 Total Loans $ 1,771,347 $ 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): September 30, December 31, Real Estate $ 811,868 $ 744,663 Manufacturing 167,152 161,233 Wholesale 129,952 124,336 Construction 154,085 113,763 Finance 113,956 96,074 Hotel/Lodging 101,239 88,269 Professional Services 53,147 64,215 Other Services 47,041 45,781 Healthcare 47,359 43,917 Retail 36,777 35,503 Administrative Management 26,164 28,016 Restaurant/Food Service 31,884 24,525 Transportation 21,596 18,158 Information 8,756 15,457 Education 9,192 10,253 Entertainment 5,610 8,284 Other 5,569 2,276 Total $ 1,771,347 $ 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 September 30, 2015 was $109 million, of which $77 million has been sold. Of the $32 million remaining on the Company’s books, $25 million is un-guaranteed and $7 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 September 30, 2015, there were no loans classified as held for sale. At September 30, 2015, the balance of SBA 7a loans originated during the quarter is $2 million, of which $1 million is guaranteed by the SBA. The Company does not currently plan on selling these loans, but it may choose to do so in the future. 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 September 30, Nine Months Ended September 30, 2015 2014 2015 2014 Allowance for loan loss at beginning of period $ 14,124 $ 11,284 $ 12,610 $ 10,603 Provision for loan losses 705 35 2,831 518 Net (charge-offs) recoveries: Charge-offs (42 ) (8 ) (933 ) (165 ) Recoveries 178 37 457 392 Net (charge-offs) recoveries 136 29 (476 ) 227 Allowance for loan loss at end of period $ 14,965 $ 11,348 $ 14,965 $ 11,348 Net (charge-offs) recoveries to average loans 0.01 % 0.00 % (0.03 )% (0.02 )% September 30, 2015 December 31, 2014 Allowance for loan loss to total loans 0.84 % 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 1.30 % 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 September 30, 2015 and December 31, 2014 was $765 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 consolidated 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 $561,000 and $471,000 at September 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 and Industrial Construction, Land Development and Other Land Commercial and Other Real Estate Other Total Three Months Ended September 30, 2015 Allowance for loan loss – Beginning balance $ 6,244 $ 1,607 $ 5,799 $ 474 $ 14,124 Provision for loan losses 181 371 143 10 705 Net (charge-offs) recoveries: Charge-offs — — (42 ) — (42 ) Recoveries 177 — 1 — 178 Net (charge offs) recoveries 177 — (41 ) — 136 Ending balance $ 6,602 $ 1,978 $ 5,901 $ 484 $ 14,965 Three Months Ended September 30, 2014 Allowance for loan loss – Beginning balance $ 5,385 $ 1,422 $ 4,426 $ 51 $ 11,284 Provision for loan losses 333 (205 ) (429 ) 336 35 Net (charge-offs) recoveries: Charge-offs — — (8 ) — (8 ) Recoveries 36 — 1 — 37 Net (charge-offs) recoveries 36 — (7 ) — 29 Ending balance $ 5,754 $ 1,217 $ 3,990 $ 387 $ 11,348 Commercial and Industrial Construction, Land Development and Other Land Commercial and Other Real Estate Other Total Nine Months Ended September 30, 2015 Allowance for loan loss – Beginning balance $ 5,864 $ 1,684 $ 4,802 $ 260 $ 12,610 Provision for loan losses 1,176 294 1,137 224 2,831 Net (charge-offs) recoveries: Charge-offs (891 ) — (42 ) — (933 ) Recoveries 453 — 4 — 457 Net (charge-offs) recoveries (438 ) — (38 ) — (476 ) Ending balance $ 6,602 $ 1,978 $ 5,901 $ 484 $ 14,965 Nine Months Ended September 30, 2014 Allowance for loan loss – Beginning balance $ 5,534 $ 1,120 $ 3,886 $ 63 $ 10,603 Provision for loan losses 25 97 72 324 518 Net (charge-offs) recoveries: Charge-offs (93 ) — (72 ) — (165 ) Recoveries 288 — 104 — 392 Net (charge-offs) recoveries 195 — 32 — 227 Ending balance $ 5,754 $ 1,217 $ 3,990 $ 387 $ 11,348 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 September 30, 2015 Allowance for loan loss: Individually evaluated for impairment $ 577 $ — $ — $ — $ 577 Collectively evaluated for impairment 6,025 1,978 5,901 484 14,388 Purchased credit impaired (loans acquired with deteriorated credit quality) — — — — — Total Allowance for Loan Loss $ 6,602 $ 1,978 $ 5,901 $ 484 $ 14,965 Loans receivable: Individually evaluated for impairment $ 3,446 $ — $ 99 $ — $ 3,545 Collectively evaluated for impairment 552,634 94,353 1,081,258 37,641 1,765,886 Purchased credit impaired (loans acquired with deteriorated credit quality) 382 — 1,534 — 1,916 Total Loans Receivable $ 556,462 $ 94,353 $ 1,082,891 $ 37,641 $ 1,771,347 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 Industrial Construction, Land Development and Other Land Commercial and Other Real Estate Other Total September 30, 2015 Pass $ 527,311 $ 94,353 $ 1,054,807 $ 37,640 $ 1,714,111 Special Mention 11,862 — 8,103 — 19,965 Substandard 17,289 — 19,981 1 37,271 Doubtful — — — — — Total $ 556,462 $ 94,353 $ 1,082,891 $ 37,641 $ 1,771,347 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- Accrual Current Total Loans September 30, 2015 Commercial and Industrial $ 85 $ 11 $ — $ 96 $ 3,826 $ 552,540 $ 556,462 Construction, Land Development and Other Land — — — — — 94,353 94,353 Commercial and Other Real Estate — 391 — 391 478 1,082,022 1,082,891 Other — — — — — 37,641 37,641 Total $ 85 $ 402 $ — $ 487 $ 4,304 $ 1,766,556 $ 1,771,347 31-60 Days Past Due 61-90 Days Past Due Greater 90 Days Past Due and Total Past Due and Total Non- Accrual 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 realizable 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 September 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 $3 million and $2 million at September 30, 2015 and December 31, 2014, respectively. September 30, 2015 December 31, 2014 Recorded Unpaid Related Recorded Unpaid Related With no specific allowance recorded: Commercial and Industrial $ 2,118 $ 3,629 $ — $ 520 $ 609 $ — Commercial and Other Real Estate 99 105 — 737 739 — — With a specific allowance recorded: Commercial and Industrial 1,328 1,479 577 1,394 1,546 222 Total Commercial and Industrial 3,446 5,108 577 1,914 2,155 222 Commercial and Other Real Estate 99 105 — 737 739 — Total $ 3,545 $ 5,213 $ 577 $ 2,651 $ 2,894 $ 222 Three Months Ended September 30, Nine Months Ended September 30, 2015 2014 2015 2014 Average Interest Average Interest Average Interest Average Interest With no specific allowance recorded: Commercial and Industrial $ 2,118 $ — $ 1,051 $ — $ 1,757 $ — $ 1,035 $ 34 Commercial and Other Real Estate 99 — 2,960 — 104 — 3,207 — With a specific allowance recorded: Commercial and Industrial 1,328 — 1,494 — 1,328 — 1,533 — Commercial and Other Real Estate 413 — — 550 — — Total: Commercial and Industrial 3,446 — 2,545 — 3,085 — 2,568 34 Commercial and Other Real Estate 512 — 2,960 — 654 — 3,207 — Total $ 3,958 $ — $ 5,505 $ — $ 3,739 $ — $ 5,775 $ 34 The following is a summary of additional information pertaining to impaired loans for the periods indicated (dollars in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2015 2014 2015 2014 Interest foregone on impaired loans $ 81 $ 72 $ 238 $ 346 Cash collections applied to reduce principal balance $ 23 $ 18 $ 186 $ 2,889 Interest income recognized on cash collections $ — $ — $ — $ 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 effective 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 at September 30, 2015 and December 31, 2014 (dollars in thousands). These tables include TDR loans that were purchased credit impaired (“PCI”). As of September 30, 2015, there were two PCI loans that are considered to be TDR loans with a recorded investment of $161,000 and unpaid principal balances of $344,000. Recorded Unpaid Interest Income Recognized As of and for the period ended September 30, 2015 Commercial and Industrial $ 1,780 $ 2,385 $ — Commercial and Other Real Estate 99 105 — Total $ 1,879 $ 2,490 $ — Recorded Unpaid Interest Income Recognized As of and for the year ended December 31, 2014 Commercial and Industrial $ 530 $ 719 $ — Commercial and Other Real Estate 114 115 — Total $ 644 $ 834 $ — The following table shows the pre- and post-modification recorded investment in TDR loans by loan segment that have occurred during the periods indicated (dollars in thousands): Three Months Ended September 30, 2015 2014 Number Loans Pre- Modification Post- Number Loans Pre-Modification Post- Troubled Debt Restructured Loans: Commercial and Industrial 3 $ 1,335 $ 1,335 — $ — $ — Total 3 $ 1,335 $ 1,335 — $ — $ — Nine Months Ended September 30, 2015 2014 Number Loans Pre-Modification Post- Number Loans Pre-Modification Post- Troubled Debt Restructured Loans: Commercial and Industrial 3 $ 1,335 $ 1,335 1 $ 224 $ 224 Total 3 $ 1,335 $ 1,335 1 $ 224 $ 224 There was no interest income recognized for the above troubled debt restructured loans during the three months and nine months ended September 30, 2015 or September 30, 2014. Three loans were modified or restructured during the three and nine months ended September 30, 2015. There were no loans restructured during the three months ended September 30, 2014. One loan was modified or restructured during the nine months ended September 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 nine months ended September 30, 2015 or September 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 September 30, Nine Months Ended September 30, 2015 2014 2015 2014 Balance, beginning of period $ 18,255 $ 6,412 $ 21,402 $ 7,912 Accretion, included in interest income (1,463 ) (813 ) (4,140 ) (2,264 ) Reclassifications (to) from non-accretable yield (5 ) — (475 ) (49 ) Balance, end of period $ 16,787 $ 5,599 $ 16,787 $ 5,599 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 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): September 30, 2015 December 31, 2014 Unpaid Carrying Value Unpaid Carrying Value Commercial and Industrial $ 710 $ 382 $ 1,205 $ 693 Commercial and Other Real Estate 2,262 1,534 3,018 1,692 Other — — 62 — Total $ 2,972 $ 1,916 $ 4,285 $ 2,385 The following table reflects the activities in the accretable net discount for PCI loans for the periods indicated (dollars in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2015 2014 2015 2014 Balance, beginning of period $ 286 $ 360 $ 324 $ 395 Accretion, included in interest income (20 ) (18 ) (58 ) (53 ) Reclassifications from non-accretable yield — — — — Balance, end of period $ 266 $ 342 $ 266 $ 342 |