LOANS AND ALLOWANCE FOR LOAN LOSSES | L OANS AND A LLOWANCE FOR L OAN L OSSES The following table summarizes the composition of the loan portfolio at September 30, 2015 and December 31, 2014 : (dollars in thousands) September 30, December 31, Commercial, financial and agricultural $ 747,144 695,267 Real estate construction and development 148,548 89,851 Real estate mortgage: One-to-four-family residential: Residential mortgage 705,377 621,168 Home equity 396,697 395,542 Multi-family residential 94,277 115,434 Commercial real estate 1,286,765 1,183,042 Consumer and installment 19,523 18,950 Net deferred loan fees (1,817 ) (1,422 ) Total loans held for portfolio 3,396,514 3,117,832 Loans held for sale 39,041 31,411 Total loans $ 3,435,555 3,149,243 Aging of Loans. The following table presents the aging of loans by loan classification at September 30, 2015 and December 31, 2014 : (dollars in thousands) 30-59 Days 60-89 Days Recorded Investment > 90 Days Accruing Nonaccrual Total Past Due Current Total Loans September 30, 2015: Commercial, financial and agricultural $ 55 161 — 5,402 5,618 741,526 747,144 Real estate construction and development — — — 3,214 3,214 145,334 148,548 Real estate mortgage: Residential mortgage 3,553 1,761 — 6,600 11,914 693,463 705,377 Home equity 1,509 380 67 4,602 6,558 390,139 396,697 Multi-family residential — — — 290 290 93,987 94,277 Commercial real estate 11 — — 4,361 4,372 1,282,393 1,286,765 Consumer and installment and net deferred loan fees 140 49 — 17 206 17,500 17,706 Loans held for sale — — — — — 39,041 39,041 Total loans $ 5,268 2,351 67 24,486 32,172 3,403,383 3,435,555 December 31, 2014: Commercial, financial and agricultural $ 132 430 54 9,486 10,102 685,165 695,267 Real estate construction and development 431 — — 3,393 3,824 86,027 89,851 Real estate mortgage: Residential mortgage 2,690 986 35 13,890 17,601 603,567 621,168 Home equity 1,857 334 72 6,831 9,094 386,448 395,542 Multi-family residential — — — 19,731 19,731 95,703 115,434 Commercial real estate 196 54 — 4,122 4,372 1,178,670 1,183,042 Consumer and installment and net deferred loan fees 136 33 2 23 194 17,334 17,528 Loans held for sale — — — — — 31,411 31,411 Total loans $ 5,442 1,837 163 57,476 64,918 3,084,325 3,149,243 Under the Company’s loan policy, loans are placed on nonaccrual status once principal or interest payments become 90 days past due. However, individual loan officers may submit written requests for approval to continue the accrual of interest on loans that become 90 days past due. These requests may be submitted for approval consistent with the authority levels provided in the Company’s credit approval policies, and they are only granted if an expected near term future event, such as a pending renewal or expected payoff, exists at the time the loan becomes 90 days past due. If the expected near term future event does not occur as anticipated, the loan is then placed on nonaccrual status. Credit Quality Indicators . The Company’s credit management policies and procedures focus on identifying, measuring and controlling credit exposure. These procedures employ a lender-initiated system of rating credits, which is ratified in the loan approval process and subsequently tested in internal credit reviews and regulatory bank examinations. The system requires the rating of all loans at the time they are originated or acquired, except for homogeneous categories of loans, such as residential real estate mortgage loans and consumer loans. These homogeneous loans are assigned an initial rating based on the Company’s experience with each type of loan. The Company adjusts the ratings of the homogeneous loans based on payment experience subsequent to their origination. The Company includes adversely rated credits, including loans requiring close monitoring that would not normally be considered classified credits by the Company’s regulators, on its monthly loan watch list. Loans may be added to the Company’s watch list for reasons that are temporary and correctable, such as the absence of current financial statements of the borrower or a deficiency in loan documentation. Loans may also be added to the Company’s watch list whenever any adverse circumstance is detected which might affect the borrower’s ability to comply with the contractual terms of the loan. The delinquency of a scheduled loan payment, deterioration in the borrower’s financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment within which the borrower operates could initiate the addition of a loan to the Company’s watch list. Loans on the Company’s watch list require periodic detailed loan status reports prepared by the responsible officer which are discussed in formal meetings with credit review and credit administration staff members. Upgrades and downgrades of loan risk ratings may be initiated by the responsible loan officer. However, upgrades of risk ratings associated with significant credit relationships and/or problem credit relationships may only be made with the concurrence of appropriate regional credit officers. Under the Company’s risk rating system, special mention loans are those loans that do not currently expose the Company to sufficient risk to warrant classification as substandard, troubled debt restructuring (“TDR”) or nonaccrual, but possess weaknesses that deserve management’s close attention. Substandard loans include those loans characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. A loan is classified as a TDR when a borrower is experiencing financial difficulties that lead to the restructuring of a loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. Loans classified as TDRs that are accruing interest are classified as performing TDRs. Loans classified as TDRs that are not accruing interest are classified as nonperforming TDRs and are included with all other nonaccrual loans for presentation purposes. Loans classified as nonaccrual have all the weaknesses inherent in those loans classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. The following tables present the credit exposure of loans held for portfolio by internally assigned credit grade and payment activity as of September 30, 2015 and December 31, 2014 : Commercial Loan Portfolio Credit Exposure by Internally Assigned Credit Grade (dollars in thousands) Commercial and Industrial Real Estate Construction and Development Multi-family Commercial Real Estate Total September 30, 2015: Pass $ 708,534 140,553 87,738 1,262,093 2,198,918 Special mention 25,884 4,781 5,612 16,736 53,013 Substandard 7,324 — 637 3,575 11,536 Performing troubled debt restructuring — — — — — Nonaccrual 5,402 3,214 290 4,361 13,267 Total $ 747,144 148,548 94,277 1,286,765 2,276,734 December 31, 2014: Pass $ 653,951 85,973 89,148 1,147,824 1,976,896 Special mention 18,713 143 5,945 20,691 45,492 Substandard 12,833 — 610 6,640 20,083 Performing troubled debt restructuring 284 342 — 3,765 4,391 Nonaccrual 9,486 3,393 19,731 4,122 36,732 Total $ 695,267 89,851 115,434 1,183,042 2,083,594 Consumer Loan Portfolio Credit Exposure by Payment Activity (dollars in thousands) Residential Mortgage Home Equity Consumer and Installment and Net Deferred Loan Fees Total September 30, 2015: Pass $ 619,646 390,139 17,500 1,027,285 Substandard 2,641 1,956 189 4,786 Performing troubled debt restructuring 76,490 — — 76,490 Nonaccrual 6,600 4,602 17 11,219 Total $ 705,377 396,697 17,706 1,119,780 December 31, 2014: Pass $ 528,388 386,448 17,334 932,170 Substandard 2,662 2,263 171 5,096 Performing troubled debt restructuring 76,228 — — 76,228 Nonaccrual 13,890 6,831 23 20,744 Total $ 621,168 395,542 17,528 1,034,238 Impaired Loans . Loans deemed to be impaired include performing TDRs and nonaccrual loans. Impaired loans with outstanding balances equal to or greater than $250,000 are evaluated individually for impairment. For these loans, the Company measures the level of impairment based on the present value of the estimated projected cash flows, or if the impaired loans are collateral dependent, the estimated value of the collateral, less applicable selling costs. If the current valuation is lower than the current book balance of the loan, the amount of the difference is evaluated for possible charge-off. In instances where management determines that a charge-off is not appropriate, a specific reserve is established for the individual loan in question. This specific reserve is included as a part of the overall allowance for loan losses. The following tables present the recorded investment, unpaid principal balance, related allowance for loan losses, average recorded investment and interest income recognized while on impaired status for impaired loans without a related allowance for loan losses and for impaired loans with a related allowance for loan losses by loan classification at September 30, 2015 and December 31, 2014 : (dollars in thousands) Recorded Investment Unpaid Principal Balance Related Allowance for Loan Losses Average Recorded Investment Interest Income Recognized (1) September 30, 2015: With No Related Allowance Recorded: Commercial, financial and agricultural $ 2,265 3,226 — 3,003 — Real estate construction and development 2,615 12,318 — 2,792 — Real estate mortgage: Residential mortgage — — — — — Home equity 1,037 1,123 — 1,322 — Multi-family residential — — — — — Commercial real estate 2,515 2,793 — 2,757 — Consumer and installment — — — — — 8,432 19,460 — 9,874 — With A Related Allowance Recorded: Commercial, financial and agricultural 3,137 5,491 336 4,160 8 Real estate construction and development 599 2,530 200 640 8 Real estate mortgage: Residential mortgage 83,090 95,993 6,894 86,834 1,782 Home equity 3,565 4,278 974 4,545 — Multi-family residential 290 468 18 9,834 — Commercial real estate 1,846 3,484 271 2,024 5 Consumer and installment 17 17 1 13 — 92,544 112,261 8,694 108,050 1,803 Total: Commercial, financial and agricultural 5,402 8,717 336 7,163 8 Real estate construction and development 3,214 14,848 200 3,432 8 Real estate mortgage: Residential mortgage 83,090 95,993 6,894 86,834 1,782 Home equity 4,602 5,401 974 5,867 — Multi-family residential 290 468 18 9,834 — Commercial real estate 4,361 6,277 271 4,781 5 Consumer and installment 17 17 1 13 — $ 100,976 131,721 8,694 117,924 1,803 ____________________ (1) Interest income on impaired loans recognized while on impaired status was $662,000 for the three months ended September 30, 2015. (dollars in thousands) Recorded Investment Unpaid Principal Balance Related Allowance for Loan Losses Average Recorded Investment Interest Income Recognized December 31, 2014: With No Related Allowance Recorded: Commercial, financial and agricultural $ 1,937 2,911 — 2,278 — Real estate construction and development 2,626 12,333 — 3,106 — Real estate mortgage: Residential mortgage — — — — — Home equity — — — — — Multi-family residential 19,050 24,759 — 25,234 959 Commercial real estate 4,119 4,190 — 6,063 116 Consumer and installment — — — — — 27,732 44,193 — 36,681 1,075 With A Related Allowance Recorded: Commercial, financial and agricultural 7,833 22,089 1,626 9,212 6 Real estate construction and development 1,109 3,403 219 1,312 17 Real estate mortgage: Residential mortgage 90,118 106,163 7,639 94,835 2,082 Home equity 6,831 7,988 1,366 7,056 — Multi-family residential 681 3,581 1,157 902 — Commercial real estate 3,768 5,619 463 5,546 21 Consumer and installment 23 23 1 14 — 110,363 148,866 12,471 118,877 2,126 Total: Commercial, financial and agricultural 9,770 25,000 1,626 11,490 6 Real estate construction and development 3,735 15,736 219 4,418 17 Real estate mortgage: Residential mortgage 90,118 106,163 7,639 94,835 2,082 Home equity 6,831 7,988 1,366 7,056 — Multi-family residential 19,731 28,340 1,157 26,136 959 Commercial real estate 7,887 9,809 463 11,609 137 Consumer and installment 23 23 1 14 — $ 138,095 193,059 12,471 155,558 3,201 Recorded investment represents the Company’s investment in its impaired loans (excluding accrued interest receivable and fees) reduced by cumulative charge-offs recorded against the allowance for loan losses on these same loans. At September 30, 2015 and December 31, 2014 , the Company had recorded charge-offs of $30.7 million and $55.0 million , respectively, on its impaired loans, representing the difference between the unpaid principal balance and the recorded investment reflected in the tables above. The unpaid principal balance represents the principal amount contractually owed to the Company by the borrowers on the impaired loans. Troubled Debt Restructurings . In the ordinary course of business, the Company modifies loan terms across loan types, including both consumer and commercial loans, for a variety of reasons. Modifications to consumer loans may include, but are not limited to, changes in interest rate, maturity, amortization and financial covenants. In the original underwriting, loan terms are established that represent the then current and projected financial condition of the borrower. Over any period of time, modifications to these loan terms may be required due to changes in the original underwriting assumptions. These changes may include the financial covenants of the borrower as well as underwriting standards. Loan modifications are generally performed at the request of the borrower, whether commercial or consumer, and may include reductions in interest rates, changes in payments and maturity date extensions. Although the Company does not have formal, standardized loan modification programs for its commercial or consumer loan portfolios, it addresses loan modifications on a case-by-case basis and also participates in the United States Department of the Treasury’s (“U.S. Treasury”) Home Affordable Modification Program (“HAMP”). HAMP gives qualifying homeowners an opportunity to refinance into more affordable monthly payments, with the U.S. Treasury compensating the Company for a portion of the reduction in monthly amounts due from borrowers participating in this program. At September 30, 2015 and December 31, 2014 , the Company had $70.8 million and $72.7 million , respectively, of modified loans in the HAMP program. For a loan modification to be classified as a TDR, all of the following conditions must be present: (1) the borrower is experiencing financial difficulty, (2) the Company makes a concession to the original contractual loan terms and (3) the Company would not consider the concessions but for economic or legal reasons related to the borrower’s financial difficulty. Modifications of loan terms to borrowers experiencing financial difficulty are made in an attempt to protect as much of the investment in the loan as possible. These modifications are generally made to either prevent a loan from becoming nonaccrual or to return a nonaccrual loan to performing status based on the expectations that the borrower can adequately perform in accordance with the modified terms. The determination of whether a modification should be classified as a TDR requires significant judgment after taking into consideration all facts and circumstances surrounding the transaction. No single characteristic or factor, taken alone, is determinative of whether a modification should be classified as a TDR. The fact that a single characteristic is present is not considered sufficient to overcome the preponderance of contrary evidence. Assuming all of the TDR criteria are met, the Company considers one or more of the following concessions to the loan terms to represent a TDR: (1) a reduction of the stated interest rate, (2) an extension of the maturity date or dates at a stated interest rate lower than the current market rate for a new loan with similar terms or (3) forgiveness of principal or accrued interest. Loans renegotiated at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified are excluded from TDR classification in the calendar years subsequent to the renegotiation if the loan is in compliance with the modified terms for at least six months. The Company does not accrue interest on any TDRs unless it believes collection of all principal and interest under the modified terms is reasonably assured. Generally, six months of consecutive payment performance by the borrower under the restructured terms is required before a TDR is returned to accrual status. However, the period could vary depending upon the individual facts and circumstances of the loan. TDRs accruing interest are classified as performing TDRs. The following table presents the categories of performing TDRs as of September 30, 2015 and December 31, 2014 : (dollars in thousands) September 30, December 31, Performing Troubled Debt Restructurings: Commercial, financial and agricultural $ — 284 Real estate construction and development — 342 Real estate mortgage: One-to-four-family residential 76,490 76,228 Commercial real estate — 3,765 Total performing troubled debt restructurings $ 76,490 80,619 The Company does not accrue interest on TDRs which have been modified for a period less than six months or are not in compliance with the modified terms. These loans are considered nonperforming TDRs and are included with other nonaccrual loans for classification purposes. The following table presents the categories of loans considered nonperforming TDRs as of September 30, 2015 and December 31, 2014 : (dollars in thousands) September 30, December 31, Nonperforming Troubled Debt Restructurings: Commercial, financial and agricultural $ 35 243 Real estate construction and development 2,777 2,788 Real estate mortgage: One-to-four-family residential 2,059 4,003 Multi-family residential — 19,050 Commercial real estate — 371 Total nonperforming troubled debt restructurings $ 4,871 26,455 Both performing and nonperforming TDRs are considered to be impaired loans. When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs. The impairment amount is either charged off as a reduction to the allowance for loan losses or provided for as a specific reserve within the allowance for loan losses. The allowance for loan losses allocated to TDRs was $6.1 million at September 30, 2015 and December 31, 2014 . The following tables present loans classified as TDRs that were modified during the three and nine months ended September 30, 2015 and 2014 : Three Months Ended September 30, 2015 Three Months Ended September 30, 2014 (dollars in thousands) Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Loan Modifications Classified as Troubled Debt Restructurings: Commercial, financial and agricultural — $ — $ — 1 $ 287 $ 287 Real estate mortgage: One-to-four-family residential 4 550 522 14 2,167 2,095 Nine Months Ended September 30, 2015 Nine Months Ended September 30, 2014 (dollars in thousands) Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Loan Modifications Classified as Troubled Debt Restructurings: Commercial, financial and agricultural — $ — $ — 1 $ 287 $ 287 Real estate mortgage: One-to-four-family residential 16 2,942 2,788 41 6,214 5,429 The following tables present TDRs that defaulted within 12 months of modification during the three and nine months ended September 30, 2015 and 2014 : Three Months Ended Three Months Ended September 30, 2015 September 30, 2014 (dollars in thousands) Number of Contracts Recorded Investment Number of Contracts Recorded Investment Troubled Debt Restructurings That Subsequently Defaulted: Real estate mortgage: One-to-four-family residential — $ — 2 $ 183 Nine Months Ended Nine Months Ended September 30, 2015 September 30, 2014 (dollars in thousands) Number of Contracts Recorded Investment Number of Contracts Recorded Investment Troubled Debt Restructurings That Subsequently Defaulted: Real estate mortgage: One-to-four-family residential — $ — 8 $ 1,385 Upon default of a TDR, which is considered to be 90 days or more past due under the modified terms, impairment is measured based on the fair value of the underlying collateral less applicable selling costs. The impairment amount is either charged off as a reduction to the allowance for loan losses or provided for as a specific reserve within the allowance for loan losses. Allowance for Loan Losses . The following tables represent a summary of changes in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2015 and 2014 : (dollars in thousands) Commercial and Industrial Real Estate Construction and Development One-to- Four-Family Residential Multi- Family Residential Commercial Real Estate Consumer and Installment Total Three Months Ended September 30, 2015: Allowance for loan losses: Beginning balance $ 11,321 2,231 22,403 3,430 19,349 82 58,816 Charge-offs (888 ) — (172 ) (29 ) (73 ) (27 ) (1,189 ) Recoveries 1,095 383 544 3 56 61 2,142 Provision (benefit) for loan losses (539 ) (247 ) (1,764 ) (29 ) 2,621 (42 ) — Ending balance $ 10,989 2,367 21,011 3,375 21,953 74 59,769 Three Months Ended September 30, 2014: Allowance for loan losses: Beginning balance $ 13,731 6,600 29,145 7,374 20,820 348 78,018 Charge-offs (399 ) (2 ) (1,316 ) (71 ) (436 ) (10 ) (2,234 ) Recoveries 1,763 114 938 114 946 35 3,910 Provision (benefit) for loan losses (1,236 ) (3,979 ) 335 340 (415 ) (45 ) (5,000 ) Ending balance $ 13,859 2,733 29,102 7,757 20,915 328 74,694 (dollars in thousands) Commercial and Industrial Real Estate Construction and Development One-to- Four-Family Residential Multi- Family Residential Commercial Real Estate Consumer and Installment Total Nine months ended September 30, 2015: Allowance for loan losses: Beginning balance $ 12,574 3,490 24,055 5,630 20,983 142 66,874 Charge-offs (4,992 ) (178 ) (1,899 ) (227 ) (918 ) (70 ) (8,284 ) Recoveries 3,520 685 1,957 2,236 177 104 8,679 Provision (benefit) for loan losses (113 ) (1,630 ) (3,102 ) (4,264 ) 1,711 (102 ) (7,500 ) Ending balance $ 10,989 2,367 21,011 3,375 21,953 74 59,769 Nine months ended September 30, 2014: Allowance for loan losses: Beginning balance $ 13,401 7,407 32,619 5,249 22,052 305 81,033 Charge-offs (3,015 ) (67 ) (4,943 ) (3,155 ) (645 ) (96 ) (11,921 ) Recoveries 3,778 1,470 3,207 123 1,918 86 10,582 Provision (benefit) for loan losses (305 ) (6,077 ) (1,781 ) 5,540 (2,410 ) 33 (5,000 ) Ending balance $ 13,859 2,733 29,102 7,757 20,915 328 74,694 The following table represents a summary of the impairment method used by loan category at September 30, 2015 and December 31, 2014 : (dollars in thousands) Commercial and Industrial Real Estate Construction and Development One-to- Four-Family Residential Multi- Family Residential Commercial Real Estate Consumer and Installment and Net Deferred Loan Fees Total September 30, 2015: Allowance for loan losses: Impaired loans individually evaluated for impairment $ — — 3,468 — — — 3,468 Impaired loans collectively evaluated for impairment 336 200 4,400 18 271 1 5,226 All other loans collectively evaluated for impairment 10,653 2,167 13,143 3,357 21,682 73 51,075 Total allowance for loan losses $ 10,989 2,367 21,011 3,375 21,953 74 59,769 Loans: Impaired loans individually evaluated for impairment $ 2,210 2,615 39,901 — 2,570 — 47,296 Impaired loans collectively evaluated for impairment 3,192 599 47,791 290 1,791 17 53,680 All other loans collectively evaluated for impairment 741,742 145,334 1,014,382 93,987 1,282,404 17,689 3,295,538 Total loans held for portfolio $ 747,144 148,548 1,102,074 94,277 1,286,765 17,706 3,396,514 December 31, 2014: Allowance for loan losses: Impaired loans individually evaluated for impairment $ 1,053 — 1,184 — — — 2,237 Impaired loans collectively evaluated for impairment 573 219 7,821 1,157 463 1 10,234 All other loans collectively evaluated for impairment 10,948 3,271 15,050 4,473 20,520 141 54,403 Total allowance for loan losses $ 12,574 3,490 24,055 5,630 20,983 142 66,874 Loans: Impaired loans individually evaluated for impairment $ 4,712 2,626 7,388 19,050 3,765 — 37,541 Impaired loans collectively evaluated for impairment 5,058 1,109 89,561 681 4,122 23 100,554 All other loans collectively evaluated for impairment 685,497 86,116 919,761 95,703 1,175,155 17,505 2,979,737 Total loans held for portfolio $ 695,267 89,851 1,016,710 115,434 1,183,042 17,528 3,117,832 |