Loans | Note 6 - Loans The following table presents the composition of the Company’s loan portfolio as of the dates indicated (dollars in thousands): March 31, December 31, Commercial and Industrial Loans: $ 496,301 $ 537,368 Loans Secured by Real Estate: Owner-Occupied Nonresidential Properties 423,370 407,979 Other Nonresidential Properties 562,871 533,168 Construction, Land Development and Other Land 156,731 125,832 1-4 Family Residential Properties 122,408 114,525 Multifamily Residential Properties 70,423 71,179 Total Loans Secured by Real Estate 1,335,803 1,252,683 Other Loans: 37,074 43,112 Total Loans $ 1,869,178 $ 1,833,163 Loan balances in the table above include net deferred fees and net discounts for a total of $19 million and $22 million as of March 31, 2016 and December 31, 2015 respectively. 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): March 31, December 31, Real Estate $ 905,848 $ 857,021 Manufacturing 162,129 174,773 Construction 180,255 161,618 Wholesale 118,845 134,093 Hotel/Lodging 108,816 105,741 Finance 80,947 87,734 Professional Services 59,724 60,952 Healthcare 48,256 47,293 Other Services 52,695 45,002 Retail 37,388 38,928 Restaurant/Food Service 25,017 26,226 Administrative Management 20,997 23,736 Transportation 22,219 22,237 Information 20,970 20,171 Education 8,955 9,244 Management 7,304 8,137 Entertainment 4,382 6,188 Other 4,431 4,069 Total $ 1,869,178 $ 1,833,163 Small Business Administration Loans Included in the loan portfolio is $36 million in loans that were originated under the guidelines of the Small Business Administration (“SBA”) program of which $9 million is guaranteed. The total portfolio of the SBA contractual loan balances being serviced by the Company at March 31, 2016 was $117 million, of which $81 million has been sold. At March 31, 2016, there were no loans classified as held for sale. At March 31, 2016, the balance of SBA 7a loans originated during the quarter is $3.2 million, of which $2.4 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 2016 2015 Allowance for loan loss at beginning of the period $ 15,682 $ 12,610 Provision for loan losses 622 1,443 Net (charge-offs) recoveries: Charge-offs — (890 ) Recoveries 241 84 Net (charge-offs) recoveries 241 (806 ) Allowance for loan loss at end of period $ 16,545 $ 13,247 Net (charge-offs) recoveries to average loans 0.01 % (0.05 )% Allowance for loan loss to total loans 0.89 % 0.80 % Allowance for loan loss to total loans accounted for at historical cost, which excludes loans acquired by acquisition 1.23 % 1.36 % 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 March 31, 2016 Allowance for loan loss – Beginning balance $ 5,924 $ 2,076 $ 6,821 $ 861 $ 15,682 Provision for loan losses 561 635 (448 ) (126 ) 622 Net (charge-offs) recoveries: Charge-offs — — — — — Recoveries 240 — 1 — 241 Net (charge-offs) recoveries 240 — 1 — 241 Ending balance $ 6,725 $ 2,711 $ 6,374 $ 735 $ 16,545 Three Months Ended March 31, 2015 Allowance for loan loss – Beginning balance $ 5,864 $ 1,684 $ 4,802 $ 260 $ 12,610 Provision for loan losses 681 79 635 48 1,443 Net (charge-offs) recoveries: Charge-offs (890 ) — — — (890 ) Recoveries 82 — 2 — 84 Net (charge-offs) recoveries (808 ) — 2 — (806 ) Ending balance $ 5,737 $ 1,763 $ 5,439 $ 308 $ 13,247 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 March 31, 2016 Allowance for loan loss: Individually evaluated for impairment $ — $ — $ — $ — $ — Collectively evaluated for impairment 6,725 2,711 6,374 735 16,545 Purchased credit impaired (loans acquired with deteriorated credit quality) — — — — — Total Allowance for Loan Loss $ 6,725 $ 2,711 $ 6,374 $ 735 $ 16,545 Loans receivable: Individually evaluated for impairment $ 256 $ — $ 871 $ — $ 1,127 Collectively evaluated for impairment 495,710 156,731 1,176,669 37,074 1,866,184 Purchased credit impaired (loans acquired with deteriorated credit quality) 335 — 1,532 — 1,867 Total Loans Receivable $ 496,301 $ 156,731 $ 1,179,072 $ 37,074 $ 1,869,178 Commercial Industrial Construction, Other Land Commercial Other Real Estate Other Total December 31, 2015 Allowance for loan loss: Individually evaluated for impairment $ — $ — $ — $ — $ — Collectively evaluated for impairment 5,924 2,076 6,821 861 15,682 Purchased credit impaired (loans acquired with deteriorated credit quality) — — — — — Total Allowance for Loan Loss $ 5,924 $ 2,076 $ 6,821 $ 861 $ 15,682 Loans receivable: Individually evaluated for impairment $ 558 $ — $ 649 $ — $ 1,207 Collectively evaluated for impairment 536,333 125,832 1,124,667 43,112 1,829,944 Purchased credit impaired (loans acquired with deteriorated credit quality) 477 — 1,535 — 2,012 Total Loans Receivable $ 537,368 $ 125,832 $ 1,126,851 $ 43,112 $ 1,833,163 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, Other Land Commercial Other Real Estate Other Total March 31, 2016 Pass $ 462,898 $ 156,731 $ 1,154,374 $ 34,116 $ 1,808,119 Special Mention 2,648 — 3,084 — 5,732 Substandard 30,755 — 21,614 2,958 55,327 Doubtful — — — — — Total $ 496,301 $ 156,731 $ 1,179,072 $ 37,074 $ 1,869,178 December 31, 2015 Pass $ 503,006 $ 125,832 $ 1,101,548 $ 40,132 $ 1,770,518 Special Mention 16,041 — 6,494 43 22,578 Substandard 18,321 — 18,809 2,937 40,067 Doubtful — — — — — Total $ 537,368 $ 125,832 $ 1,126,851 $ 43,112 $ 1,833,163 Aging 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 March 31, 2016 Commercial and Industrial $ 9 $ — $ — $ 9 $ 589 $ 495,703 $ 496,301 Construction, Land Development and Other Land — — — — — 156,731 156,731 Commercial and Other Real Estate 800 — — 800 1,226 1,177,046 1,179,072 Other — — — — — 37,074 37,074 Total $ 809 $ — $ — $ 809 $ 1,815 $ 1,866,554 $ 1,869,178 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, 2015 Commercial and Industrial $ — $ — $ — $ — $ 1,032 $ 536,336 $ 537,368 Construction, Land Development and Other Land — — — — — 125,832 125,832 Commercial and Other Real Estate — — — — 1,019 1,125,832 1,126,851 Other — — — — — 43,112 43,112 Total $ — $ — $ — $ — $ 2,051 $ 1,831,112 $ 1,833,163 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 March 31, 2016 and December 31, 2015. The following tables present, by loan portfolio segment, 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 $2.0 million at March 31, 2016 and December 31, 2015, respectively. March 31, 2016 December 31, 2015 Recorded Unpaid Related Recorded Unpaid Related With no specific allowance recorded: Commercial and Industrial $ 256 $ 652 $ — $ 558 $ 1,027 $ — Commercial and Other Real Estate 871 911 — 649 692 — With an allowance recorded: Commercial and Industrial — — — — — — Total Commercial and Industrial 256 652 — 558 1,027 — Commercial and Other Real Estate 871 911 — 649 692 — Total $ 1,127 $ 1,563 $ — $ 1,207 $ 1,719 $ — Three Months Ended March 31, 2016 2015 Average Interest Average Interest With no specific allowance recorded: Commercial and Industrial $ 256 $ — $ 1,025 $ — Commercial and Other Real Estate 666 — 728 — With a specific allowance recorded: Commercial and Industrial — — 1,374 — Total: Commercial and Industrial 256 — 2,399 — Commercial and Other Real Estate 666 — 728 — Total $ 922 $ — 3,127 $ — The following is a summary of additional information pertaining to impaired loans for the periods indicated (dollars in thousands): Three Months Ended 2016 2015 Average recorded investment in impaired loans $ 922 $ 3,127 Interest foregone on impaired loans $ 25 $ 69 Cash collections applied to reduce principal balance $ 24 $ 144 Interest income recognized on cash collections $ — $ — 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 stated interest rate, payment extensions, principal forgiveness 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 March 31, 2016 and December 31, 2015. These tables include TDR loans that were purchased credit impaired (“PCI”). TDR loans that are non-PCI loans are included in the Impaired Loans tables above. As of March 31, 2016, there were two PCI loans that are considered to be TDR loans with a recorded investment of $131 thousand and unpaid principal balances of $316 thousand. Recorded Unpaid Interest (Dollars in thousands) As of and for the three months ended March 31, 2016 Commercial and Industrial $ 393 $ 615 $ — Total $ 393 $ 615 $ — Recorded Unpaid Interest As of and for the twelve months ended December 31, 2015 Commercial and Industrial $ 627 $ 1,363 $ — Total $ 627 $ 1,363 $ — Recorded Unpaid Interest As of and for the three months ended March 31, 2015 Commercial and Industrial $ 500 $ 704 $ — Commercial and Other Real Estate 110 112 — Total $ 610 $ 816 $ — There were no loans modified or restructured during the three months ended March 31, 2016 or March 31, 2015. There have been no payment defaults in the three months ended March 31, 2016 or March 31, 2015 subsequent to modification on troubled debt restructured loans that have been modified within the last twelve months. 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 were no commitments to lend additional funds to borrowers whose terms have been modified in troubled debt restructurings at March 31, 2016 and December 31, 2015. Loans Acquired Through Acquisition The following table reflects the accretable net discount for acquired loans for the periods indicated (dollars in thousands): Three Months Ended 2016 2015 Balance, beginning of period $ 14,610 $ 21,402 Accretion, included in interest income (1,133 ) (1,216 ) Reclassifications to non-accretable yield (7 ) (109 ) Balance, end of period $ 13,470 $ 20,077 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): March 31, 2016 December 31, 2015 Unpaid Carrying Value Unpaid Carrying Value Commercial and Industrial $ 675 $ 335 $ 2,331 $ 477 Commercial and Other Real Estate 2,233 1,532 2,250 1,535 Other — — 61 — Total $ 2,908 $ 1,867 $ 4,642 $ 2,012 The following table reflects the activities in the accretable net discount for PCI loans for the period indicated (dollars in thousands): Three Months Ended 2016 2015 Balance, beginning of period $ 246 $ 324 Accretion, included in interest income (20 ) (19 ) Reclassifications from non-accretable yield — — Balance, end of period $ 226 $ 305 |