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, 2017 Principal Net Unaccreted Net Deferred Fees Total Commercial and Industrial Loans: $ 486,646 $ (2,366 ) $ 484,280 Loans Secured by Real Estate: Owner-Occupied Nonresidential Properties 439,730 (3,461 ) 436,269 Other Nonresidential Properties 694,637 (5,622 ) 689,015 Construction, Land Development and Other Land 193,613 (1,041 ) 192,572 1-4 Family Residential Properties 119,853 (1,585 ) 118,268 Multifamily Residential Properties 95,854 (371 ) 95,483 Total Loans Secured by Real Estate 1,543,687 (12,080 ) 1,531,607 Other Loans: 30,451 (200 ) 30,251 Total Loans $ 2,060,784 $ (14,646 ) $ 2,046,138 December 31, 2016 Principal Net Unaccreted Net Deferred Fees Total Commercial and Industrial Loans: $ 505,374 $ (2,737 ) $ 502,637 Loans Secured by Real Estate: Owner-Occupied Nonresidential Properties 455,120 (3,798 ) 451,322 Other Nonresidential Properties 635,856 (5,693 ) 630,163 Construction, Land Development and Other Land 195,215 (1,156 ) 194,059 1-4 Family Residential Properties 129,261 (2,097 ) 127,164 Multifamily Residential Properties 110,336 (478 ) 109,858 Total Loans Secured by Real Estate 1,525,788 (13,222 ) 1,512,566 Other Loans: 35,246 (223 ) 35,023 Total Loans $ 2,066,408 $ (16,182 ) $ 2,050,226 Small Business Administration Loans Included in the loan portfolio is $29 million in loans that were originated under the guidelines of the Small Business Administration (“SBA”) program of which $5 million is guaranteed. The total portfolio of the SBA contractual loan balances serviced by the Company at March 31, 2017 was $102 million, of which $73 million has been sold. At March 31, 2017, there were no loans classified as held for sale. At March 31, 2017, the balance of SBA 7a loans originated during the quarter is $421 thousand, of which $316 thousand 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 March 31, 2017 2016 Allowance for loan loss at beginning of period $ 19,374 $ 15,682 Provision for loan losses — 622 Net (charge-offs) recoveries: Charge-offs — — Recoveries 231 241 Net (charge-offs) recoveries 231 241 Allowance for loan loss at end of period $ 19,605 $ 16,545 Net (charge-offs) recoveries to average loans 0.01 % 0.01 % March 31, 2017 December 31, 2016 Allowance for loan loss to total loans 0.96 % 0.94 % 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, 2017 Allowance for loan loss – Beginning balance $ 7,130 $ 3,084 $ 8,487 $ 673 $ 19,374 Provision for loan losses (497 ) 63 739 (305 ) — Net (charge-offs) recoveries: Charge-offs — — — — — Recoveries 229 — 2 — 231 Net (charge-offs) recoveries 229 — 2 — 231 Ending balance $ 6,862 $ 3,147 $ 9,228 $ 368 $ 19,605 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 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, Commercial and Other Real Estate Other Total March 31, 2017 Allowance for loan loss: Individually evaluated for impairment $ — $ — $ — $ — $ — Collectively evaluated for impairment 6,862 3,147 9,228 368 19,605 Purchased credit impaired (loans acquired with deteriorated credit quality) — — — — — Total Allowance for Loan Loss $ 6,862 $ 3,147 $ 9,228 $ 368 $ 19,605 Loans receivable: Individually evaluated for impairment $ 243 $ — $ 239 $ — $ 482 Collectively evaluated for impairment 483,758 192,572 1,337,572 30,251 2,044,153 Purchased credit impaired (loans acquired with deteriorated credit quality) 279 — 1,224 — 1,503 Total Loans Receivable $ 484,280 $ 192,572 $ 1,339,035 $ 30,251 $ 2,046,138 Commercial Industrial Construction, Commercial and Other Real Estate Other Total December 31, 2016 Allowance for loan loss: Individually evaluated for impairment $ — $ — $ — $ — $ — Collectively evaluated for impairment 7,130 3,084 8,487 673 19,374 Purchased credit impaired (loans acquired with deteriorated credit quality) — — — — — Total Allowance for Loan Loss $ 7,130 $ 3,084 $ 8,487 $ 673 $ 19,374 Loans receivable: Individually evaluated for impairment $ 378 $ — $ 245 $ — $ 623 Collectively evaluated for impairment 501,960 194,059 1,316,849 35,023 2,047,891 Purchased credit impaired (loans acquired with deteriorated credit quality) 299 — 1,413 — 1,712 Total Loans Receivable $ 502,637 $ 194,059 $ 1,318,507 $ 35,023 $ 2,050,226 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 March 31, 2017 Pass $ 438,605 $ 192,572 $ 1,315,830 $ 30,124 $ 1,977,131 Special Mention 20,672 — 7,028 38 27,738 Substandard 25,003 — 16,177 89 41,269 Doubtful — — — — — Total $ 484,280 $ 192,572 $ 1,339,035 $ 30,251 $ 2,046,138 Commercial and Industrial Construction, Land Development and Other Land Commercial and Other Real Estate Other Total December 31, 2016 Pass $ 456,885 $ 194,059 $ 1,288,154 $ 32,128 $ 1,971,226 Special Mention 12,774 — 7,557 — 20,331 Substandard 32,978 — 22,796 2,895 58,669 Doubtful — — — — — Total $ 502,637 $ 194,059 $ 1,318,507 $ 35,023 $ 2,050,226 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, 2017 Commercial and Industrial $ 86 $ — $ — $ 86 $ 521 $ 483,673 $ 484,280 Construction, Land Development and Other Land — — — — — 192,572 192,572 Commercial and Other Real Estate 209 — — 209 239 1,338,587 1,339,035 Other — — — — — 30,251 30,251 Total $ 295 $ 0 $ — $ 295 $ 760 $ 2,045,083 $ 2,046,138 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, 2016 Commercial and Industrial $ — $ — $ — $ — $ 675 $ 501,962 $ 502,637 Construction, Land Development and Other Land — — — — — 194,059 194,059 Commercial and Other Real Estate 212 — — 212 447 1,317,848 1,318,507 Other — — — — — 35,023 35,023 Total $ 212 $ — $ — $ 212 $ 1,122 $ 2,048,892 $ 2,050,226 Impaired Loans A loan is identified as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the original loan agreement. Generally, these loans are rated substandard or worse. Most impaired loans are classified as nonaccrual. However, there are some loans that are designated impaired due to doubt regarding collectability according to contractual terms, but are both fully secured by collateral and are current in their interest and principal payments. These impaired loans that are not classified as nonaccrual continue to pay as agreed. Impaired loans are measured for allowance requirements based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of an impairment allowance, if any and any subsequent changes are charged against the allowance for loan loss. 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 the fair value of the loan 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, 2017 and December 31, 2016. 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 $1.5 million and $1.7 million at March 31, 2017 and December 31, 2016, respectively. March 31, 2017 December 31, 2016 Recorded Unpaid Related Recorded Unpaid Related With no specific allowance recorded: Commercial and Industrial $ 243 $ 639 $ — $ 378 $ 1,383 $ — Commercial and Other Real Estate 239 277 — 245 282 — With an allowance recorded: Commercial and Industrial — — — — — — Total Commercial and Industrial 243 639 — 378 1,383 — Commercial and Other Real Estate 239 277 — 245 282 — Total $ 482 $ 916 $ — $ 623 $ 1,665 $ — Three Months Ended March 31, 2017 2016 Average Interest Average Interest With no specific allowance recorded: Commercial and Industrial $ 245 $ — $ 256 $ — Commercial and Other Real Estate 242 — 666 — With a specific allowance recorded: Commercial and Industrial — — — — Total: Commercial and Industrial 245 — 256 — Commercial and Other Real Estate 242 — 666 — Total $ 487 $ — $ 922 $ — The following is a summary of additional information pertaining to impaired loans for the periods indicated (dollars in thousands): Three Months Ended March 31, 2017 2016 Interest foregone on impaired loans $ 13 $ 25 Cash collections applied to reduce principal balance $ 21 $ 24 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, 2017 and March 31, 2016 (dollars in thousands). 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, 2017, there were two PCI loans that are considered to be TDR loans with a recorded investment of $92 thousand and unpaid principal balances of $258 thousand. As of and for the Three Months Ended March 31, 2017 Recorded Unpaid Interest Income Commercial and Industrial $ 319 $ 534 $ — Total $ 319 $ 534 $ — As of and for the Three Months Ended March 31, 2016 Recorded Unpaid Interest Commercial and Industrial $ 393 $ 615 $ — Total $ 393 $ 615 $ — There were no loans restructured during the three months ended March 31, 2017 or March 31, 2016. There have been no defaulted restructured loans during the three months ended March 31, 2017 or March 31, 2016 for loans that were restructured in the preceding 12-month periods. 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, 2017. 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 March 31, 2017 2016 Balance, beginning of period $ 9,611 $ 14,610 Accretion, included in interest income (1,115 ) (1,133 ) Reclassifications to non-accretable yield — (7 ) Balance, end of period $ 8,496 $ 13,470 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, 2017 December 31, 2016 Unpaid Principal Carrying Value Unpaid Principal Carrying Value Commercial and Industrial $ 594 $ 279 $ 622 $ 299 Commercial and Other Real Estate 1,596 1,224 1,997 1,413 Total $ 2,190 $ 1,503 $ 2,619 $ 1,712 The following table reflects the activities in the accretable net discount for PCI loans for the period indicated (dollars in thousands): Three Months Ended March 31, 2017 2016 Balance, beginning of period $ 161 $ 246 Accretion, included in interest income (23 ) (20 ) Reclassifications from non-accretable yield — — Balance, end of period $ 138 $ 226 |