Allowance for Loan Losses and Credit Quality Information | 6. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY INFORMATION Allowance for Loan Losses We maintain an allowance for loan losses and charge losses to this allowance when such losses are realized. We established our allowance for loan losses in accordance with guidance provided in the SEC’s Staff Accounting Bulletin 102 (SAB 102) and FASB ASC 450, Contingencies • Specific reserves for impaired loans • An allowance for each pool of homogenous loans based on historical loss experience • Adjustments for qualitative and environmental factors allocated to pools of homogenous loans • Allowance for model estimation and complexity risk When it is probable that the Bank will be unable to collect all amounts due (interest and principal) in accordance with the contractual terms of the loan agreement, it assigns a specific reserve to that loan, if necessary. Unless loans are well-secured and collection is imminent, loans greater than 90 days past due are deemed impaired and their respective reserves are generally charged-off once the loss has been confirmed. Estimated specific reserves are based on collateral values, estimates of future cash flows or market valuations. We charge loans off when they are deemed to be uncollectible. During the nine months ended September 30, 2015, net charge-offs totaled $9.0 million or 0.27% of average loans, compared to $4.7 million, or 0.21% of average loans annualized, during the nine months ended September 30, 2014. A significant portion of the net charge-offs in 2015 was the result of one $9.1 million substandard C&I relationship previously classified as an accruing TDR that was placed in nonaccrual status during the second quarter of 2015. This relationship included a net charge-off of $5.7 million during the nine months ending September 30, 2015. Allowances for pooled homogeneous loans, that are not deemed impaired, are based on historical net loss experience. Estimated losses for pooled portfolios are determined differently for commercial loan pools and retail loan pools. Commercial loans are pooled into the following segments: commercial, owner-occupied, commercial real estate and construction. Each pool is further segmented by internally assessed risk ratings. Loan losses for commercial loans are estimated by determining the probability of default and expected loss severity upon default. During the nine months ended September 30, 2015, we increased the look-back period to 19 quarters from the 16 quarters used at December 31, 2014 and prior periods. This change in the look-back period resulted in an increase of $1.3 million to the total allowance at September 30, 2015. Loss severity upon default is calculated as the actual loan losses (net of recoveries) on impaired loans in their respective pool during the same time frame. Retail loans are pooled into the following segments: residential mortgage, consumer secured and consumer unsecured loans. Pooled reserves for retail loans are calculated based solely on average net loss rates over the same 19 quarter look-back period. Qualitative adjustment factors consider various current internal and external conditions which are allocated among loan types and take into consideration the following: • Current underwriting policies, staff, and portfolio mix • Internal trends of delinquency, nonaccrual and criticized loans by segment • Risk rating accuracy, control and regulatory assessments/environment • General economic conditions - locally and nationally • Market trends impacting collateral values • A competitive environment as it could impact loan structure and underwriting The above factors are based on their relative standing compared to the period in which historic losses are used in core reserve estimates and current directional trends. Qualitative factors in our model can add or subtract to core reserves. Continued economic improvement and continued refinement of the quantitative model have driven an overall reduction in qualitative factors during the period. The allowance methodology uses a loss emergence period (LEP), which is the period of time between an event that triggers the probability of a loss and the confirmation of the loss. We estimate the commercial LEP to be 8 quarters as of September 30, 2015. Further, our residential mortgage and consumer LEP remained at four quarters as of September 30, 2015. We evaluate LEP quarterly for reasonableness and complete a detailed historical analysis of our LEP by commercial and retail portfolios at least annually. The final component of the allowance is a reserve for model estimation and complexity risk. The calculation of this reserve is generally quantitative; however, qualitative estimates of valuations and risk assessment, and methodology judgments are necessary. We review the qualitative estimates of valuation factors quarterly and management uses its judgment to make adjustments based on current trends. The model complexity risk factor remained at 3 basis points of total loans for September 30, 2015. Our loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with individual problem loans. In addition, various regulatory agencies periodically review our loan ratings and allowance for loan losses and the Bank’s internal loan review department performs loan reviews. The following tables provide the activity of our allowance for loan losses and loan balances for three and nine months ended September 30, 2015: (In Thousands) Commercial Owner- Commercial Construction Residential Consumer Complexity (1) Total Three months ended September 30, 2015 Allowance for loan losses Beginning balance $ 14,512 $ 6,733 $ 6,831 $ 3,313 $ 2,709 $ 5,788 $ 959 $ 40,845 Charge-offs (4,147 ) (26 ) (804 ) — (130 ) (1,499 ) — (6,606 ) Recoveries 84 40 14 19 158 405 — 720 Provision (credit) 303 (62 ) 231 306 (362 ) 1,086 11 1,513 Provision for acquired loans — — (71 ) 104 (92 ) (1 ) — (60 ) Ending balance $ 10,752 $ 6,685 $ 6,201 $ 3,742 $ 2,283 $ 5,779 $ 970 $ 36,412 Nine months ended September 30, 2015 Allowance for loan losses Beginning balance $ 12,837 $ 6,643 $ 7,266 $ 2,596 $ 2,523 $ 6,041 $ 1,520 $ 39,426 Charge-offs (6,184 ) (623 ) (808 ) — (397 ) (2,570 ) — (10,582 ) Recoveries 198 62 83 179 195 839 — 1,556 Provision (credit) 3,485 574 (508 ) 863 50 1,460 (550 ) $ 5,374 Provision for acquired loans 416 29 168 104 (88 ) 9 — 638 Ending balance $ 10,752 $ 6,685 $ 6,201 $ 3,742 $ 2,283 $ 5,779 $ 970 $ 36,412 Period-end allowance allocated to: Loans individually evaluated for impairment $ 993 $ — $ 241 $ 214 $ 934 $ 202 $ — $ 2,584 Loans collectively evaluated for impairment 9,406 6,657 5,907 3,527 1,348 5,577 970 33,392 Acquired loans evaluated for impairment 353 28 53 1 1 — — 436 Ending balance $ 10,752 $ 6,685 $ 6,201 $ 3,742 $ 2,283 $ 5,779 $ 970 $ 36,412 Period-end loan balances evaluated for: Loans individually evaluated for impairment $ 5,775 $ 1,170 $ 6,805 $ 1,419 $ 14,613 $ 7,749 $ — $ 37,531 (2) Loans collectively evaluated for impairment 900,660 770,246 836,556 190,925 169,566 327,524 — 3,195,477 Acquired nonimpaired loans 28,998 37,937 25,555 8,223 15,137 5,930 — 121,780 Acquired impaired loans 2,627 2,195 5,400 2,594 380 7 — 13,203 Ending balance $ 938,060 $ 811,548 $ 874,316 $ 203,161 $ 199,696 $ 341,210 $ — $ 3,367,991 (3) The following table provides the activity of the allowance for loan losses and loan balances for the three and nine months ended September 30, 2014: (In Thousands) Commercial Owner Occupied Commercial Mortgages Construction Residential Consumer Complexity (1) Total Three months ended September 30, 2014 Allowance for loan losses Beginning balance $ 13,346 $ 7,986 $ 7,617 $ 2,319 $ 2,759 $ 6,299 $ 1,055 $ 41,381 Charge-offs (1,840 ) (272 ) (101 ) — (147 ) (372 ) — (2,732 ) Recoveries 66 77 4 8 86 261 — 502 Provision (credit) 1,833 454 (1,097 ) (897 ) (6 ) 56 (10 ) 333 Ending balance $ 13,405 $ 8,245 $ 6,423 $ 1,430 $ 2,692 $ 6,244 $ 1,045 $ 39,484 Nine months ended September 30, 2014 Allowance for loan losses Beginning balance $ 12,751 $ 7,638 $ 6,932 $ 3,326 $ 3,078 $ 6,494 $ 1,025 $ 41,244 Charge-offs (3,335 ) (593 ) (261 ) (88 ) (674 ) (2,095 ) — (7,046 ) Recoveries 873 244 43 192 129 792 — 2,273 Provision (credit) 3,116 956 (291 ) (2,000 ) 159 1,053 20 3,013 Ending balance $ 13,405 $ 8,245 $ 6,423 $ 1,430 $ 2,692 $ 6,244 $ 1,045 $ 39,484 Period-end allowance allocated to: Loans individually evaluated for impairment $ 1,573 $ 993 $ 240 $ — $ 850 $ 211 $ — $ 3,867 Loans collectively evaluated for impairment 11,832 7,252 6,183 1,430 1,842 6,033 1,045 35,617 Ending balance $ 13,405 $ 8,245 $ 6,423 $ 1,430 $ 2,692 $ 6,244 $ 1,045 $ 39,484 Period-end loan balances evaluated for: Loans individually evaluated for impairment $ 3,683 $ 3,390 $ 8,760 $ 1,419 $ 16,807 $ 6,610 $ — $ 40,669 (2) Loans collectively evaluated for impairment 839,753 760,680 737,394 131,996 193,792 309,478 — 2,973,093 Acquired nonimpaired loans 35,300 41,858 41,071 10,666 18,105 9,671 — 156,671 Acquired impaired loans 3,534 2,329 6,687 4,135 517 27 — 17,229 Ending balance $ 882,270 $ 808,257 $ 793,912 $ 148,216 $ 229,221 $ 325,786 $ — $ 3,187,662 (3) (1) Represents the portion of the allowance for loan losses established to account for the inherent complexity and uncertainty of estimates. (2) The difference between this amount and nonaccruing loans represents accruing troubled debt restructured loans of $13.6 million and $11.8 million for the periods ending September 30, 2015 and 2014, respectively. Accruing troubled debt restructured loans are considered impaired loans. (3) Ending loan balances do not include deferred costs. Nonaccrual and Past Due Loans Nonaccruing loans are those on which the accrual of interest has ceased. We discontinue accrual of interest on originated loans after payments become more than 90 days past due or earlier if we do not expect the full collection of principal or interest in accordance with the terms of the loan agreement. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the accretion of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on our assessment of the ultimate collectability of principal and interest. Loans greater than 90 days past due and still accruing are defined as loans contractually past due 90 days or more as to principal or interest payments, but remain in accrual status because they are considered well secured and in the process of collection. The following tables show our nonaccrual and past due loans at the dates indicated: September 30, 2015 (In Thousands) 30–59 Days 60–89 Days Past Due and Still Accruing Greater Than 90 Days Past Due and Total Past Due And Still Accruing Current Acquired Impaired Loans Nonaccrual Loans Total Loans Commercial $ 587 $ — $ — $ 587 $ 929,432 $ 2,627 $ 5,414 $ 938,060 Owner-Occupied commercial 1,300 — — 1,300 806,883 2,195 1,170 811,548 Commercial mortgages — — — — 862,196 5,400 6,720 874,316 Construction — — — — 200,567 2,594 — 203,161 Residential 4,436 1,081 423 5,940 186,788 380 6,588 199,696 Consumer 1,034 245 495 1,774 335,405 7 4,024 341,210 Total (1) $ 7,357 $ 1,326 $ 918 $ 9,601 $ 3,321,271 $ 13,203 $ 23,916 $ 3,367,991 % of Total Loans 0.22 % 0.04 % 0.03 % 0.29 % 98.61 % 0.39 % 0.71 % 100 % (1) The balances of above include $121.8 million of acquired nonimpaired loans. December 31, 2014 (In Thousands) 30–59 Days 60–89 Days Greater Than Total Past Accruing Acquired Nonaccrual Total Commercial $ 715 $ — $ — $ 715 $ 913,382 $ 3,269 $ 2,706 $ 920,072 Owner-occupied commercial 393 — — 393 783,466 2,264 2,475 788,598 Commercial mortgages 203 — — 203 791,035 5,976 8,245 805,459 Construction — — — — 138,634 3,863 — 142,497 Residential 3,879 604 — 4,483 206,266 512 7,068 218,329 Consumer 1,241 342 4 1,587 322,390 9 3,557 327,543 Total (1) $ 6,431 $ 946 $ 4 $ 7,381 $ 3,155,173 $ 15,893 $ 24,051 $ 3,202,498 % of Total Loans 0.20 % 0.03 % 0.00 % 0.23 % 98.52 % 0.50 % 0.75 % 100 % (1) The balances of above include $145.8 million of acquired nonimpaired loans Impaired Loans Loans for which it is probable we will not collect all principal and interest due according to their contractual terms, which is assessed based on the credit characteristics of the loan and/or payment status, are measured for impairment in accordance with the provisions of SAB 102 and FASB ASC 310, Receivables The following tables provide an analysis of our impaired loans at September 30, 2015 and December 31, 2014: September 30, 2015 (In Thousands) Ending Loan Balances Loans with (1) Loans with Related Contractual Principal Balances Average Loan Balances Commercial $ 6,138 $ 3,783 $ 2,355 $ 1,346 $ 12,836 $ 8,900 Owner-occupied commercial 2,090 1,170 920 28 2,468 2,364 Commercial mortgages 7,896 3,524 4,372 294 11,269 8,361 Construction 1,492 — 1,492 215 1,520 1,448 Residential 14,711 8,185 6,526 935 17,187 15,483 Consumer 7,749 6,575 1,174 202 9,290 6,590 Total (2) $ 40,076 $ 23,237 $ 16,839 $ 3,020 $ 54,570 $ 43,146 December 31, 2014 (In Thousands) Ending Loans with (1) Loans with Related Contractual Average Commercial $ 12,381 $ 580 $ 11,801 $ 3,034 $ 20,924 $ 5,952 Owner-occupied commercial 2,474 1,865 609 609 3,708 4,461 Commercial mortgages 8,335 4,732 3,603 319 14,383 11,005 Construction 1,419 — 1,419 334 1,419 1,013 Residential 15,666 7,068 8,598 790 18,967 17,296 Consumer 6,376 3,557 2,819 231 7,162 5,902 Total $ 46,651 $ 17,802 $ 28,849 $ 5,317 $ 66,563 $ 45,629 (1) Reflects loan balances at or written down to their remaining book balance. (2) The above includes acquired impaired loans totaling $2.5 million in the ending loan balance and $3.3 million in the contractual principal balance. Interest income of $372,000 and $1.3 million was recognized on impaired loans during the three and nine months ended September 30, 2015, respectively. Interest income of $401,000 and $1.1 million was recognized on impaired loans during the three and nine months ended September 30, 2014. As of September 30, 2015, there were 37 residential loans and 13 commercial loans in the process of foreclosure. The total outstanding balance on the loans was $4.3 million and $2.2 million, respectively. As of December 31, 2014, there were 36 residential loans and 12 commercial loans in the process of foreclosure. The total outstanding balance on the loans was $4.4 million and $1.1 million, respectively. Reserves on Acquired Nonimpaired Loans In accordance with FASB ASC 310, loans acquired by the Bank through its merger with FNBW are required to be reflected on the balance sheet at their fair values on the date of acquisition as opposed to their contractual values. Therefore, on the date of acquisition establishing an allowance for acquired loans is prohibited. After the acquisition date the Bank performs a separate allowance analysis on a quarterly basis to determine if an allowance for loan loss is necessary. Should the credit risk calculated exceed the purchased loan portfolio’s remaining credit mark, additional reserves will be added to the Bank’s allowance. When a purchased loan becomes impaired after its acquisition, it is evaluated as part of the Bank’s reserve analysis and a specific reserve is established to be included in the Bank’s allowance. Credit Quality Indicators Below is a description of each of our risk ratings for all commercial loans: Pass Special Mention. Substandard. Doubtful. Loss. Residential and Consumer Loans The residential and consumer loan portfolios are monitored on an ongoing basis using delinquency information and loan type as credit quality indicators. These credit quality indicators are assessed in the aggregate in these relatively homogeneous portfolios. Loans that are greater than 90 days past due are generally considered nonperforming and placed on nonaccrual status. The tables below provide information about the credit quality of loans in our commercial and residential and consumer portfolios. Commercial Credit Exposure (In Thousands) Commercial Owner-Occupied Commercial Construction Total Commercial (1) September 30, Dec. 31, Sept. 30, Dec. 31 Sept. 30, Dec. 31 Sept. 30, Dec. 31 Sept. 30, Dec. 31 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 Amount % Amount % Risk Rating: Special mention $ 13,759 $ 4,744 $ 16,048 $ 6,989 $ 10,239 $ 9,065 $ — $ — $ 40,046 $ 20,798 Substandard: Accrual 36,048 42,377 14,348 14,436 1,252 9,167 8,194 1,085 59,842 67,065 Nonaccrual 4,426 1,225 1,170 1,865 6,479 7,927 — 12,075 11,017 Doubtful 988 3,034 — 609 241 319 — 334 1,229 4,296 Total Special and Substandard 55,221 51,380 31,566 23,899 18,211 26,478 8,194 1,419 113,192 4 % 103,176 4 % Acquired impaired 2,627 3,269 2,195 2,264 5,400 5,976 2,594 3,863 12,816 0 15,372 — Pass 880,212 865,423 777,787 762,435 850,705 773,005 192,373 137,215 2,701,077 96 2,538,078 96 Total $ 938,060 $ 920,072 $ 811,548 $ 788,598 $ 874,316 $ 805,459 $ 203,161 $ 142,497 $ 2,827,085 100 % $ 2,656,626 100 % (1) Table includes $100.7 million and $119.8 million of acquired nonimpaired loans as of September 30, 2015 and December 31, 2014, respectively. Residential and Consumer Credit Exposure (In Thousands) Residential Consumer Total Residential and Consumer (2) Sept. 30, Dec. 31 Sept. 30, Dec. 31 30-Sep-15 Dec. 31, 2014 2015 2014 2015 2014 Amount Percent Amount Percent Nonperforming (1) $ 14,613 $ 15,666 $ 7,749 $ 6,376 $ 22,362 4 % $ 22,042 4 % Acquired impaired loans 380 512 7 9 387 — 521 — Performing 184,703 202,151 333,454 321,158 518,157 96 523,309 96 Total $ 199,696 $ 218,329 $ 341,210 $ 327,543 $ 540,906 100 % $ 545,872 100 % (1) Includes $11.8 million as of September 30, 2015 and $11.4 million as of December 31, 2014 of troubled debt restructured mortgages and home equity installment loans that are performing in accordance with the loans’ modified terms and are accruing interest. (2) Total includes $21.1 million and $26.0 million in acquired nonimpaired loans as of September 30, 2015 and December 31, 2014, respectively. Troubled Debt Restructurings (TDR) TDRs are recorded in accordance with FASB ASC 310-40, Troubled Debt Restructuring by Creditors (ASC 310-40) During the nine months ended September 30, 2015, the terms of 23 loans were modified in TDRs. Sixteen modifications were for consumer loans in which seven had their maturity dates extended, six were discharged bankruptcies, one was a rate concession and two were HELOC conversions. Six were residential mortgages in which three were discharged bankruptcies, two were maturity date extensions and one was a forbearance agreement. One commercial loan received a maturity date extension. Our concessions on restructured loans typically consist of forbearance agreements, reduction in interest rates or extensions of maturities. Principal balances are generally not forgiven when a loan is modified as a TDR. Nonaccruing restructured loans remain in nonaccrual status until there has been a period of sustained repayment performance, typically six months and payment is reasonably assured. The following table presents loans identified as TDRs during the three and nine months ended September 30, 2015 and 2014. (In Thousands) Three Months Ended September 30, 2015 Three Nine Months Ended September 30, 2015 Nine Commercial $ — $ 88 $ — $ 209 Owner Occupied Commercial — — 577 — Commercial mortgages — 3,430 — 3,430 Construction — 1,419 — 1,419 Residential 38 72 447 1,916 Consumer 643 1,097 1,306 1,612 Total $ 681 $ 6,106 $ 2,330 $ 8,586 During the nine months ended September 30, 2015, the TDRs set forth in the table above increased our allowance $23,000 through the allocation of a related reserve, and resulted in charge-offs of $69,000 compared to an increase in our allowance of $395,000 and charge-offs of $49,000 for the same period of 2014. |